Value Investing 2H 2020 Security Analysis Questions and Discussion Thread |
- 2H 2020 Security Analysis Questions and Discussion Thread
- Harvard Business School Professor Clayton Christensen: Where Does Growth Come From?
- The Shyft Group: An Overlooked Beneficiary of E-Commerce Tailwinds
- How a Canadian Convenience Store Giant Built its Empire
- Hayden Capital Q2 2020 Letter
- Power REIT -- Stock analysis and Value Investors Club application
- Long thesis: Santova Limited - A tech-based, resilient South African supply chain manager operating in Africa, Asia and the UK. (includes an industry report).
- TikTok and the Sorting Hat
- Bad Ideas with Benn Eifert
| 2H 2020 Security Analysis Questions and Discussion Thread Posted: 11 Aug 2020 11:34 AM PDT Question and answer thread for SecurityAnalysis subreddit. [link] [comments]  |
| Harvard Business School Professor Clayton Christensen: Where Does Growth Come From? Posted: 12 Aug 2020 04:56 AM PDT |
| The Shyft Group: An Overlooked Beneficiary of E-Commerce Tailwinds Posted: 11 Aug 2020 06:39 PM PDT Key Points
Note: I cross-posted this analysis on wallstreetbets too, but it was too long for many of the readers. I'm practicing investment analysis for when I eventually apply to equity research roles, so I appreciate any criticism, but I also just thought this company was kind of interesting and wanted to do a write-up. The Company: The Shyft Group ($SHYF), formerly known as Spartan Motors, is a niche market leader in the specialty vehicle manufacturing for the commercial vehicle and recreational vehicle (RV) industries.1 Effective June 1, 2020, the Shyft Group completed a corporate reorganization in which they divested the loss generating Emergency Response Vehicles (EVS) business unit and retired the Spartan Motors brand, with the goal of pivoting the company towards the higher margin, higher demand delivery vehicle market. The company was founded in 1975 and is headquartered in Novi, MI. The company's operations are split between two business units: The Fleet Vehicles & Services (FVS) business unit, which manufactures walk-in vans and truck bodies2 used in last-mile e-commerce & parcel delivery; equipment upfitting for commercial vehicles and trucks, with an emphasis on vehicles in the mobile retail and utility industries; and other aftermarket services. The FVS business unit operates under the Utilimaster brand. The Specialty Chassis & Vehicles (SCV) business unit, which manufactures chassis units for motor homes, defense vehicles, and other specialty chassis, as well as aftermarket distribution of parts and accessories. For the purposes of this post, Shyft, Utilimaster, and Spartan may be used interchangeably. Market: It's without a doubt that the COVID-19 pandemic has fundamentally changed the way organizations do business. The retail industry, which already faced unprecedented competitive pressure from e-commerce giants like Amazon ($AMZN) and Shopify ($SHOP), is now navigating an uncertain future in the wake of forced shutdowns of physical stores and consumer aversion to in-store shopping. Omni-channel retailers and other digitally-native companies have been best positioned to weather this pandemic, while retailers that prioritize in-store experiences have struggled.
Furthermore, McKinsey noted that the rapid adoption of digital infrastructure in all industries and sectors as a result of the COVID-19 pandemic has led United States e-commerce penetration, which was previously forecast to reach 24 percent by 2024 from 17 percent at the end 2019, to reach 33 percent in only two months. This sentiment is echoed by Goldman Sachs analysts, who recently revised their e-commerce growth estimate to a 19 percent CAGR, compared to the previous 16 percent, and expect e-commerce market penetration to reach 22 percent by 2023.3 Products: Given its significance to Shyft's sales mix, and the strong e-commerce tailwinds that benefit last-mile delivery, this post will focus on the FVS business unit. That isn't to say I'm not bullish when it comes to specialty vehicles; it just won't be the focus of this post. Utilimaster's walk-in vans and truck bodies are its bread and butter. Whenever you see a UPS, FedEx, or USPS truck delivering packages in your neighborhood, it's more than likely either a Utilimaster Aeromaster or Reach. The Aeromaster is your standard 12' to 30' walk-in van, while the Reach is its smaller, more nimble and fuel-efficient counterpart. Additionally, pursuant the company's goal to pivot operations towards e-commerce and last-mile delivery, the company unveiled the new Velocity M3 Class 3 van at the 2020 Work Truck Show in Indianapolis . Key takeaways are:
According to CEO Daryl Adams in the company's Q2 earnings call, the Velocity is currently being reviewed and tested by multiple customers, with full commercial production slated to begin in Q4 or early 2021. Furthermore, over the past several months the company completed testing for a fully electric Class 2 variant of the Velocity M3, built on an EV skateboard rather than the traditional ICE, which is currently being scheduled for delivery to customers for field testing. Customers and Go-to-Market Strategy: Shyft's vehicles are typically sold to three distinct groups of customers: Commercial business fleets, which typically purchase 100+ vehicles (or 1,000+ for national accounts); leasing companies, and original equipment manufacturers (OEM). Customer concentration is certainly a risk: According to the 2019 annual report, sales to the company's top 10 customers accounted for 68.1 percent of total sales, while sales to Amazon and USPS each accounted for 23 and 15 percent of total FVS sales, respectively. Competition: Morgan Olson (private), a subsidiary of J.B. Poindexter, is Utilimaster's direct competitor and owns the other ~50 percent of the FVS market. Despite their size, I don't believe MO exerts significant competitive pressure over Utilimaster for two main reasons:
Workhorse ($WKHS), is a new-ish (founded in 1998) company that, alongside industry titans like $NKLA and $NIO, has recently cashed in on the EV industry bubble. As of this this writing, Workhorse has closed at a market cap of $1.6bn, despite sales declining to $376,000 - a 50 percent fall - for the year-end 2019. Yup, you read that right. Workhorse only had $376k sales in FY 2019 and is valued at a $1.7bn market cap; that's a Price / Sales ratio of ~4,500. Regardless, analysis of Workhorse's 10-k reveals that the company only holds eight patents, five of which were granted over a decade ago, and the most recent of which relates to an onboard EV drive system and a package delivery method via drone. Most of their intellectual property is outdated and while their core product, the Workhorse C650 has certainly seen some customer adoption, I don't believe they pose a significant threat to industry incumbents. Rivian (private), is arguably the biggest threat to Utilimaster and (MO). The startup, which has raised $6bn in funding from sources that include Amazon, Cox Automotive, and T. Rowe Price, and Ford, is expected to deliver approximately 100,000 electric delivery trucks to Amazon by 2030. Due to the COVID-19 pandemic the company has delayed production of their R1T and R1S vans until 2021, but if Rivian does reach commercial viability within the next five years - which is likely given Amazon's support/influence - they could be a significant competitive threat. Valuation: This is where it gets a bit dicey. I won't bore you with a DCF or operating model with biased assumptions and Shyft doesn't really have any direct comparables; its biggest competitor is private and I don't think it would be appropriate to value the company at Workhorse's ~4,500 P/S. That being said, I think the quickest (and dirtiest) analysis would be a comparison of Shyft to its peers in the Construction Machinery and Heavy Trucks industry, which is exactly what Capital IQ's Quick Comp does. We can see that Shyft is already trading within a similar range to its peers. However, it should be noted that most of these companies are manufacturers of recreational vehicle ($WGO, $REVG, for ex.) or emergency vehicles ($FSS) and, in my opinion, don't reflect the impact of e-commerce tailwinds in their trading multiples. Shyft is trading at EV/TTM Sales and EV/TTM EBITDA multiples of 1.1x and 10.8x, respectively, and I don't think it would be too far-fetched to expect these multiples to expand as the company experiences higher sales volume and better EBITDA margins due to e-commerce expansion and the pivot towards more profitable operations. Another useful indicator to gauge the company's performance is project backlog. While it isn't a perfect measurement of demand, Shyft typically converts FVS backlog to sales within 9-12 months and historically hasn't had an issue with rescheduling or cancelled orders. When comparing revenue to backlog over the prior two years, we can see that Shyft has maintained a nine-month forward revenue/backlog ratio of ~1.62, while revenue has trended upwards (excluding the COVID-related loss in the previous quarter). Generally, this is a positive indicator of customer demand since it means that unfulfilled (contracted) orders are increasing, but not at the expense of sales. (Alternatively, if backlog trends upwards while revenues decline, which has been the case since Q4 of last year, it could be indicative the company not being able to meet demand. I don't believe this is the case for Utilimaster, however, because the lower book-to-bill spread can be attributed to industry-wide chassis shortages in Q4 '19:
An important note: the wording in Shyft's backlog disclosure between Q1 and Q2 2020 has changed, indicating that the company probably faced order cancellations/changes in Q2 2020. This isn't surprising, since Shyft's products typically carry a hefty price-tag and many companies deferred capital expenditures during Q2. While I doubt this will be a major issue going forward, I'd be cautious if this disclosure continues to be omitted in the Q3 & Q4 reports, as it may signal lagging demand. Regardless, despite the impacts of the COVID-19 shutdown on the company's operations, order backlog has remained mostly unaffected, decreasing by only 5% compared to the previous quarter. Assuming Shyft executes projects on a FIFO basis and is able to convert 90% of current FVS backlog into revenue, we're looking at minimum quarterly revenues for the FVS segment of $86mm, or at an 89% 9M foreward book-to-bill: approximately 1.5 standard deviations below the historical 2 year average. I find this incredibly unlikely given the pent-up demand for fuel-efficient, highly maneuverable fleets in response to the e-commerce boom. Risks:
Catalysts:
As always, DYODD. These are just my thoughts and I'm interested in yours. References: 2 The Shyft Group June 2020 Investors Presentation 3 I don't actually have access to the report because I'm poor, but this was corroborated by multiple sources and cited on Shyft's Q2 2020 earnings conference call. 4 Q2 2020 earnings conference call. [link] [comments]  |
| How a Canadian Convenience Store Giant Built its Empire Posted: 12 Aug 2020 04:40 AM PDT |
| Posted: 12 Aug 2020 05:04 AM PDT |
| Power REIT -- Stock analysis and Value Investors Club application Posted: 11 Aug 2020 03:34 PM PDT This is my Value Investors Club application on Power REIT. Tell me what you think. Power REIT is a real estate trust with investments in solar, railroad, and newly in medical cannabis greenhouses. Thesis:Power REIT (PW) is the best way to invest in the cannabis area without the traditionally binary hit or miss nature of emerging industries.PW is anchored by a portfolio of traditional properties allowing it to more safely and at lower cost invest in cannabis assets.PW earns a return on invested capital (ROIC) in great excess of the cost of capital. Return of 12%-19% in new properties, recently issued bonds at 4.62%.PW is under valued despite a seemingly rich market price because of probable massive increase in revenue, earnings, and funds from operation (FFO).The margin of safety is significant. Significant Assets:6 Controlled Environment Agriculture greenhouse facilities aggregating over 131,00 square feet7 solar farm ground leases totaling 601 acres112 miles of railroad propertyApprox. $10 mil. cash Significant Liabilities:Approx. $24 mil. Long term debt at interest rates less than or equal to 5%Major debt: $15,500,000 at 4.62% fully amortizing, maturing in 2054Maturities as follows:2021 $635,5022022 $675,3742023 $1,168,2972024 $715,7772025+ $21,208,698Preferred stock: 144,636 shares of 7.75% Cumulative Redeemable Perpetual Preferred Stock, at $25. General info:Power REIT is currently pursuing investment in what they call controlled environment agriculture or CEA, essentially greenhouses. PW seeks out strictly medical cannabis producers who for whatever reason need additional financing, they then purchase the real estate they own and lease it back to them, and at times help with financing of construction. PW is one of the few ways for cannabis producing companies to get any sort of financing as federally it is still illegal and banks are weary. This gives PW lots of negotiating power in deal making, and that is why they can for example, buy and finance a 5.2 acre CEA property in southern Colorado for around $1 Mil. and get a straight lined rent of $192,000 equating to around a 19% FFO yield. These properties and tenants are of greater quality than the typical cannabis operation, remember they require tenants to maintain a medical cannabis producers license in the lease. That is a key for PW, this is not a speculative cannabis play that is dependent on federal legalization, on the contrary, a lease they have in a Maine property includes the clause that states that "After the deferred-rent period, rent is structured to provide a 12.9% return based on the original invested capital amount with annual rent increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return on the original invested capital amount and will increase at a 3% rate per annum based on a starting date of the start of year seven." PW is partly a play against the federal legalization. On the topic of debt:A company with a market cap of under $50 mil with about $24 mil in debt might seem a little risky, but here is where the stability from the solar and rail assets comes in. Their existing FFO from those two asset classes is a little over $1 mil while the debt payments with exception of 2023 don't exceed $1 mil for the foreseeable future. So as long as they don't issue new debt in an uncharacteristically bad way PW will have no solvency issues. Management:Management is skill-full. The CEO David Lesser is pretty much for all intents and purposes the whole company, he is the sole full time employee. He is excellent in terms of real estate expertise. It is very clear he knows his stuff. He has a long history in real estate and more specifically in renewable/clean energy real estate. Lesser is also the chairman of the board, and the largest shareholder. He gets paid exclusively in various forms of equity. His interests are aligned with owners interests. Insider ownership is around 30%, very high for a REIT. Lesser is also key on avoiding share dilution as stated, and in practice unlike many REITs. There have been no share dilutions besides management's compensation plan. The major recent financing was the 2019 bond issuance. Relative PricingFor this section I will refer to Innovative Industrial Properties (IIPR) another publicly listed REIT that invests in cannabis assets. IIPR invests in a wider range of assets like retail not just CEA. I am much more suspicious of IIPR's real estate and management. There have been many questions raised about the quality of real estate and solvency of tenants. The CEO seems sleazy and they constantly dilute shareholders. I think PW is superior in terms of intangibles and tangibles. IIPR is PW only publicly traded comparable. IIPR has grown FFO per share 133% for the MRQ YoY. PW has grown FFO per share 107% over the same time. PW only started investing in high return CEA in late 2019, and engage in more conservative financing, so the difference in growth rates is marginal. IIPR is currently being priced at around 19.1 times forward 12 months FFO.PW is priced at only 14 times forward 12 months FFO. (If management's most basic expectations are met)In terms of relative price PW, if it sold at the 19.1 multiple it would be selling for $32.4 which I still think could yield an above market rate of return over time. ValuationI believe PW to be the type of business that the market undervalues because of high uncertainty but low risk. The high uncertainty comes from not knowing how much management will want to grow and raise capital, will management continue to use safe amounts of leverage, will new financing options become available to cannabis companies etc. The low risk comes from the fact that PW has very low risk of going to 0 or even decreasing substantially in share price because of the current safety in investment return and diversification. I'll put a floor as to what I think a low risk price is. Let's say base case scenario over the next year PW invests the existing $10 mil. in cash at a yield of 12.5% (below the usual yield of around 18%), doesn't raise any additional capital, and lease payments are collected and debts paid as scheduled. PW FFO per share would be about $0.45 per quarter. If they trade at an P/FFO multiple of 20 (PW currently trades at 27) that makes the price $36 per share. However, I do think capital will be raised, management has expressed interest in doing so. In that case the strong ROIC and high cash flow would give PW a high ceiling to grow as far as macroeconomic and market conditions allow. CatalystShare price increases when new real estate acquisitions are announced. Eventual dividend. PW currently pays no dividend because the preferred has satisfied the REIT return of capital requirement recently, however with income rising 100%. It is likely a dividend will be coming soon and that will attract more attention. Continued performance and time. Edit: as a disclaimer, I am Obviously long PW [link] [comments]  |
| Posted: 11 Aug 2020 11:28 PM PDT |
| Posted: 11 Aug 2020 01:00 PM PDT
https://www.eugenewei.com/blog/2020/8/3/tiktok-and-the-sorting-hat [link] [comments]  |
| Posted: 12 Aug 2020 03:51 AM PDT |
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