Value Investing How to construct an Org Chart? |
- How to construct an Org Chart?
- Long Idea - Envista Holdings
- RE: The Bull Case for Barrett (BBSI)
- Massif Capital - Uranium Market Q&A
- JCapital Research - Short Thesis on NovaGold
| How to construct an Org Chart? Posted: 01 Jun 2020 06:35 PM PDT Can anyone provide a robust way to construct an Org Chart? I'm not analyzing a specific company, but rather I want to learn how to do this in general. I've searched several subreddits, google, read through books, and asked some distressed guys, but I still can't get a straight answer. I want a method that doesn't involve third-party providers; I want to construct the Org Chart myself. For those familiar, I'm trying to construct the Org Chart that's included in a First Day Motion, long before that doc comes out. So far, I've tried the following:
Maybe bond prospectuses? Are those always public? Thanks in advance. [link] [comments]  | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Posted: 02 Jun 2020 04:28 AM PDT Hello Reddit, As part of my Corona resolution I wanted to start writing some equity researches and post them online. This is the first one so far, so I would be very thankful for any feedback or criticism! I wrote this analysis about two weeks ago whe the stock price was at about 16 USD, unfortunately since then the price has appreciated to almost 22 USD, vastly decreasing the risk profile of the investment. Despite that I still believe there is some value to be squeezed out. Research: https://docdro.id/uEQy9lj Thank you and sorry for any headache caused by reading the research... [link] [comments]  | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RE: The Bull Case for Barrett (BBSI) Posted: 01 Jun 2020 06:51 AM PDT This is a follow up post to my previous analysis of BBSI prior to the release of their Q1'20 Earnings. As previously stated, we are living in a time of great uncertainty, which is reflected in any projections/modeling presented in this post. Note: All price information is as of 5/28/20. Any links are to images that will provide additional color to the section they're located in.
Previous post: https://www.reddit.com/r/SecurityAnalysis/comments/gdzpl5/the_bull_case_for_barrett_bbsi/
Disclaimer: This is not investment or financial advice and the above thesis is predicated on my opinion & interpretation of the facts mentioned. I am currently long BBSI in my personal portfolio.
Barrett Overview Barrett Business Services, Inc. (BBSI) is a PEO firm offering management solutions to small business across the country. They enter co-employment contracts with their clients and manage their payroll and workers compensation claims businesses, saving them money and saving management time. Barrett utilizes a professional referral network that they develop geographically to source new clients cheaply. Upwards of 90% of their new clients are from their professional referral network, with many of them being converted from in-house HR management teams. Barrett is often the first PEO firm that many of their clients have worked with, allowing them to not sacrifice on pricing through fierce competition with other firms. Their clients are typically small blue and gray collar business, averaging just 30 employees per client. When looking at their financials, the first thing that seems off is their PNL appears to be a very low margin business. Operating margins in 2019 were just 5.8%, but the numbers can be deceiving. BBSI bills their clients every pay cycle, and within their billing are included some of their major expenses that show up on their own PNL. Accounting rules stipulate that even though some of the expenses, such as Payroll taxes and benefits and Workers' compensation, are billed directly to the clients for 100% of the expense, BBSI must still show this on their own PNL with top line revenue gross of these costs. Barrett's operating income can be boiled down to the service fee they charge less their own corporate SG&A expenses. BBSI EBITDA and Operating Margins Working with insurance requires that Barrett hold a significant amount of cash on their balance sheet. They keep reserves of restricted cash and investments which are used to fund future workers' compensation claims as they arise. The net debt position when only considering the unrestricted cash is still negative, showing Barrett's strong current financial strength. Unfortunately, being in a low interest rate environment typically hurts insurers like Barrett, where investment income can make up a significant portion of net income. Their average yield on investments in the past has been above 2%, but with the recent market turbulence it is expected to be just 1.5% for the full year 2020. For the modeling done for this report, EBITDA or FCFF have been used as the cash flow figure of choice. Both metrics exclude investment income, as modeling out the values and returns of their investment portfolios would be done with too much uncertainty to have significant value. One of the main differentiating factors for Barrett from other PEO servicers are their focus on branch strategy. Many of the other PEO firms opt to use a SaaS model, which does not require the same type of geographic footprint that a branch strategy does. They have created a strong professional referral network which allows them to source new clients from in-house HR systems more cheaply than having to lure clients away from other PEO servicers. Barrett can then utilize more aggressive pricing practices as their retention stays high and most of their clients have never used a PEO firm before. While this would indicate a negative effect on client attrition, they have quarterly net new clients going back over 5 years running. Pricing can be one of the main factors that client's site when they leave Barrett, but their retention rate remains above 97%. By keeping branch growth in geographic locations with an existing referral network they can leverage business connections with each new branch opening. Barrett currently has 57 branches open, and sees branches mature to profit margins in the ~60% range after roughly 5 years. This type of growth with the small investment it requires to get a branch started creates impressive operating leverage down the stretch. The branch model has another attribute, in that it focuses on small businesses. Relative to some of the other major PEO firms, Barrett's average client size is on the small side at just 30 employees per client.
Branch Stratification:
PEO Industry While the PEO industry has a couple major players with significant market shares (ADP and PAYX), the overall market is quite fragmented. The entire PEO industry serves roughly 4 million employees in the country, with about 35-40 million estimated to have use for a PEO plan. This leads to significant market fragmentation with the substitute good for PEO services (in-house HR and insurance) as one of the largest holders of market share. Firms like ADP and PAYX are mostly non-PEO services, but they still compete directly in the same markets. Typically, clients will use all of a single servicers' offerings. For example, rather than using ADP's Payroll services and Barrett's PEO services, firms will typically opt to use a single servicer for all related functions. The high degree of market fragmentation has not significantly hurt the retention rates of PEO firms, often averaging above 95%. Switching costs are apparent even in systems like these, which companies can be weary of changing due to the time it takes to learn new services and programs. The stickiness of customers alone is not enough for most firms to have any level of sustainable competitive advantage, however ADP and PAYX have been able to achieve some level of economies of scale through their sheer size. Spreading out their fixed cost investments across a higher number of Worksite Employees/Sales allows them to generally outperform their peers, explaining their much larger multiples relative to the rest of the peer group. The PNL of firms that are predominantly PEO can be tricky as their revenues include costs that are directly billed to their clients under their co-employment arrangement. The main financial outcomes of the industry are low capital investments and high cash returns on those investments. Insurance is a cash heavy business, leading to significant levels of excess cash on all of their balance sheets, lowering their overall capital investment. Relative to income metrics such as EBIT, EBITDA, and FCFF, the return on invested capital metrics generally look very strong.
With the current COVID pandemic, the labor market shock has been significant and hit PEO firms particularly hard. PEO's charge a service fee based on the amount of wages billed for. A decrease in workers or a decrease in wages would lead to lower revenues for the industry. Such a strong tie to labor market health will inevitably see their valuations hurt as they see revenues and profits fall for the whole year 2020. A slower recovery will also lead to these effects bleeding into 2021. With such low multiples relative to historical averages, the industry poses some opportunities for investors with a longer time horizon who will hold through the recovery.
Graphs: PEO Peer group Weekly EV/EBITDA
Thesis for Barrett I laid out my thesis in my previous post, and after an additional month of research it has been cemented. One additional point as been added to my original thesis. My thesis points have been recreated below. • Barrett is trading at a significant discount to their historical trading valuations, as well as at discounts relative to their PEO peers. After Q4'19, they reduced 2020 guidance on the eve of the full COVID pandemic, leading to a cool reception from the street. Alone, this would not be enough to feel it as a discount considering the significant impact COVID will have on their business. However, they also trade at a significant discount to their PEO peers while simultaneously leading their PEO peer group along metrics such as FCF yield and EV/EBITDA. They currently trade 2.1 standard deviations below their 3-year average EV/EBITDA ratio, a greater discount than any of their peers in PEO peer group. • Barrett has a strong balance sheet consisting of a negative net debt position, giving them significant leeway in weathering the COVID pandemic storm. Less than 10% of their TEV being made up of interest-bearing debt, they are sitting pretty when it comes to weathering this storm. At some points during the business cycle it feels silly to start financial analysis at the balance sheet, but during a recession is not one of those times. With so few financial obligations, they are expected to trim corporate SG&A and investment in their new technology platform to keep more cash within the firm. Barrett stands a high chance of making it out the other side with a low chance of bankruptcy. • The PEO industry is currently trading at a discount to mid-business cycle values, leading to investors with a longer time horizon an attractive return potential. Barrett is not the only PEO firm trading at a significant discount to their historical values. The entire PEO industry is being hit hard by this pandemic, but it creates an attractive bet as the industry takes advantage of the fall in unemployment. Across the major PEO players, April was viewed as the low point in employment data, leading to a rough Q2'20, but strong financials in the quarters following. • Focusing on growth from a geographical perspective, Barrett's management has carved out a small business niche that has seen success in their ability to open new branches. Focusing on small businesses (average client firm size is ~30 employees) gives them an edge over some of the larger payroll companies in the market. Clients typically find BBSI through a strong referral network of both existing clients and external referral partners. Most of BBSI's new clients are converting from internal HR/admin staff, which allows BBSI to provide a powerful value proposition. They turn small businesses' fixed cost employee salaries into a variable cost based on total employee wages. • Quality branch economics shows a model with strong operating leverage and marginal ROIC. New branches take roughly a 500k investment and take about 5 years to become a mature branch. To be expected, more mature branches have more billing generation and more profit margin contribution. Barrett grows new branches geographically, allowing it to maintain high concentrations in local markets, ramp up the speeds of growth, and reduce fixed costs associated with new regions. Their strategies in opening new branches culminate in an ROIC in 2019 of 30.6%. The IRR on new branches that take 7 years to reach maturity is still more than 150%.
Base Case Model Management had conviction that April was the bottom of their gross billing cycle based on the entire month of April's billing and the first week of May's. This view was further supported by other PEO management teams indicating April as their bottom. My model includes all of the cost savings metrics announced thus far in the Q1'20 earnings call and includes projections they made for full year 2020 as well as projecting April as the low point. Management has projected that even in their most pessimistic scenarios that they will see positive net income in 2020. I have 2020 sales projected to be 11% below 2019, with a full year EBIT margin of 0.3%. Overall, my projections for 2020 are more conservative than the average of the 3 coverage analysts following BBSI. 2021 follows many of the similar patterns set in 2020, with a slow recovery to get back to normal. While sales growth looks big, the 2021 sales I have projected are still less than 2019 by 1.4%. Margins are beginning to normalize, but without the same scale and deferred branch openings, the operating margins will not fully come back until 2024. I view this assumption as conservative as their new technology platform should see increases SG&A efficiency once it is fully implemented as soon as Q3'20. The model ends by applying a multiple to terminal value based on their historical trading multiples as well as multiples from their small cap PEO peer group. While currently in the trough of their business cycle, BBSI will see multiple expansion as PEO becomes a higher demand service during and after the recovery. My time horizon on this investment is in the 3-5-year range as this will give enough time for the recovery efforts to take place allowing for proper multiple expansion towards their mid-business cycle levels. Rather than depending on an individual point estimate of BBSI's intrinsic value, I have decided to provide a two-way data table based on forward 5-year growth rates and ending multiples. The cross in the table corresponds to multiples not expanding and trailing 5-year revenue growth being applied to my model. While I believe this is generally conservative, it still provides a 58% upside over current prices. Seeing that we are in the trough of the PEO business cycle, I do expect multiples to expand from their current lows, leading to the base case having significantly more upside than the above PT implies. Overall, this provides BBSI with a strong upside opportunity for those who have the time horizon to take advantage. The core of any DCF performed during this crisis is that there is too much uncertainty to truly know what any stock should be "valued" at. I certainly do not know how the recovery will look, and it could vary greatly from the way I have laid it out in my current model. Rather than providing a point estimate of intrinsic value, I will provide two-way data tables showing ending multiples and forward 5-year growth rates. If you believe some of my assumptions are either too verbose or too conservative, the data table should provide you with enough of an idea of what other outcomes could look like.
Bear Case I have provided a bear case model as well, predicting slower growth rates coming out of recovery, as well as slower margin expansion across the entire 5-year period. This would imply a more structural shift away from small businesses that would be significant enough to harm the future of Barrett's new business even beyond the COVID pandemic itself. Revenue would not surpass 2019 levels until Q4'22, and EBITDA would not get back to pre COVID levels within the 5-year projection horizon. With the shift away from branches as a source of unit economics, Barrett's margins will be lower and take longer than my forecast period to return to pre-COVID levels. The 2020E financials would be worse than management predicts in their pessimistic scenarios, predicting negative income for 2020, which management has said would not occur even in their worst situations. I believe the probability of the base case is much higher than the bear case, but felt it was worth including to help frame some of the modeling assumptions I had to make in my base case model.
Why does this opportunity exist? There are 3 primary reasons why this opportunity exists for us as investors, but only time will tell how long it will last before the margin of safety shrinks too much. BBSI has risen 16% since my original write up on 5/6, slowly eroding the long-term margin of safety this investment has. • The COVID pandemic has caused a major disruption in labor markets across the world, including the US. With unemployment skyrocketing to nearly 20%, the PEO firms will see significant hits in their billing due to fewer workers and fewer hours worked. The combination of these two factors will lead to decreased revenues, which has also kept the stock prices low. • An unemployment shock is the trough of the business cycle for the PEO industry. With sales declining as the base case expectation, they face headwinds in the short term, but tail winds in the longer term. The recovery will see the firms begin to build their businesses again as unemployment falls and the economy opens more. More services will be in demand, such as staffing, allowing some of the ancillary offerings to provide additional revenue support. • Many investors do not have the time horizon to buy at this point, as there is significant uncertainty regarding when the trough would end. The shape of the recovery and the length of this period are heavy factors in the ability for investors to see BBSI as an advantageous long position. • This is a small cap company with little analyst coverage. Trading at below $500mil market cap since February has knocked many investors off the trail of this company as it is below their mandates. There are typically only 3-4 analysts asking questions on each call, with only 3 sell side analysts publishing opinions.
Sources: SEC Edgar 10-k's and 10-Q's [Tikr.com's](Tikr.com) Earnings Call Transcripts Price and share data from TIKR and Excel add-in feed "Competition Demystified" by Bruce Greenald & Judd Kahn for ROIC formula/concepts Numerous white papers and research from NAPEO [link] [comments]  | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Massif Capital - Uranium Market Q&A Posted: 01 Jun 2020 03:37 PM PDT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| JCapital Research - Short Thesis on NovaGold Posted: 01 Jun 2020 01:07 PM PDT |
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