Value Investing Such a simple interview, yet such a great reminder of what truly matters |
- Such a simple interview, yet such a great reminder of what truly matters
- Other People’s Money
- The Warren Buffett way revisited
- Betterware de Mexico: SaaS growth @ automotive (ICE lol) valuation
- Third Point Capital Q1 2021 Letter
- EHTH Thesis - Undervalued Stock with a potentially speculative play!
| Such a simple interview, yet such a great reminder of what truly matters Posted: 08 May 2021 03:15 AM PDT |
| Posted: 07 May 2021 01:51 PM PDT |
| The Warren Buffett way revisited Posted: 07 May 2021 09:25 AM PDT |
| Betterware de Mexico: SaaS growth @ automotive (ICE lol) valuation Posted: 07 May 2021 12:51 PM PDT - Company & Investment Overview - Betterware de Mexico is a leading direct-to-consumer marketplace and platform business in Mexico that sells home organization and cleaning products. It is the first Mexican company to ever directly list on the NASDAQ. Betterware's product portfolio falls under 6 categories (ranked according to % of sales): kitchen (35%), home (20%), bathroom (12%), laundry & cleaning (11%), commuting (11%), and bedroom (11%). The company sells its products through a unique two-tier sales model that consists of 59,700+ distributors and 1.2+ million associates with a 20% household penetration across Mexico. Betterware has 60% gross margins and returns on tangible capital, generates abundant free cash flow, and pays a 4% dividend. The business grew at over 50% annualized over the last 5 years and generated $350 million in revenue and $77 million in net income in 2020. The founding family oversees operations and owns half of the company, a stake worth over $750 million USD. The company is expected to continue growing well above 40% a year for the next several years thanks to a long growth runway remaining in Mexico and nearby Latin American countries. The stock trades at a very undervalued 14x earnings at a $1.7 billion market cap due to lack of investor awareness. We believe the company is worth at least 100% to 150% more. - Business History - Betterware began as the Mexican subsidiary of the British company Betterware Limited. Betterware Limited sold a variety of household products in the UK and decided to expand into Latin America. Unfortunately, the venture performed poorly because the British parent did not tailor the business model to fit Latin America's unique cultural and demographic characteristics (which will be explained later). This created the opportunity that led to Luis Campos, Betterware de Mexico's current chairman and 50% owner, acquiring this subsidiary and establishing it as Betterware de Mexico. Mr. Campos was uniquely positioned to revitalize this distressed company due to his extensive background in consumer goods businesses in Latin America. His storied career included being the former chairman at various multinational corporations, including Hasbro Mexico, Sara Lee Mexico, and Tupperware Americas. Mr. Campos completely reshaped the business to fit Latin American culture and laid the groundwork that enabled the company to achieve its spectacular future results. Under his leadership, Betterware's revenue and EBITDA grew over 60-fold and 120-fold, respectively, over the last twenty years (23%+ annualized). In addition, the company's distribution network grew from 200 distributors to over 59,000 and from 5,000 associates to over 1.2 million. In March 2020, the company went public via SPAC. Dr. Martin Werner, the former head of Goldman Sachs's LatAm investment banking division, led the deal. In its first calendar year as a public company (2020), Betterware grew revenues by 130% and EBITDA by 147%. The business's growth, profitability, and execution have been stellar under Campos's oversight. Looking ahead, Betterware is aiming to expand globally, starting with other Latin American countries, including Costa Rica, Panama, Peru, and Colombia. - Business Model & Competitive Advantages - As mentioned earlier, Betterware employs a direct-to-consumer sales strategy. In contrast, in traditional retail, products move in the following sequence: manufacturer → wholesaler → distributor → retailer → customer. Betterware's model involves none of these middlemen or external parties between the company and its customers. As a result, the company is able to offer extremely affordable prices across its product portfolio (average item price is $5). Customers order products, and Betterware controls the entire process ranging from manufacturing to distribution (via the distributors and associates) to the final product sale. Betterware designs products in-house, manufactures them in Asia, and delivers them to distributors. Both distributors and associates deliver the products directly to the customer. This allows the company to minimize its shipping and last-mile delivery costs. Betterware sells its products through 9 catalogs a year that are published roughly every 6 weeks. The catalog is accessible via a 100-page physical booklet, the e-commerce site (https://www.betterware.com.mx/mx/es/), and the iOS/Android app. The firm is constantly innovating and introduces around 300 new products each year while replacing underperforming products. The e-commerce site launched in December 2020 and helped accelerate sales that month by 301% YoY and EBITDA by 417% YoY. Products are delivered from the company's distribution center to the distributor through whom the order was placed. The distributor has groups of associates who work for them, and the associates deliver the products to the customer. Therefore, the company itself has 0 last mile delivery costs, as its distributors and associates deliver the products to the final consumers. This is one key competitive advantage in Mexico due to last-mile delivery costs being exorbitant, especially to rural areas. Four other factors further solidify Betterware's competitive position in the market: First, Betterware offers payment flexibility by accepting both cash and credit. 70% of transactions in Mexico are made in cash, while only 30% are made on credit. In addition, less than a third of Mexicans have a bank account and even less use a debit or credit card. This makes the ability to accept cash important, as well as problematic for many other e-commerce retailers who have attempted expansion in Mexico and Latin America. At the same time, the ability to pay via credit on Betterware's e-commerce site is also important because it allows the company to have direct exposure to the trend of financial transactions becoming increasingly digital around the world. Second, the company's platform continues to grow in its scale and reach over time. The firm has grown at over 20%+ annualized for 2 decades, with annual growth accelerating in the past 5 years in excess of 40%. With 1.3 million total distributors and associates, Betterware products are now sold by nearly 1.5% of Mexico's working population. As more people continue to buy products, the company is also able to better introduce new items that will be in demand thanks to the ability to analyze the millions of transactions taking place. Third, the business performs exceptionally well during economic downturns. Many Mexican residents become associates or distributors to earn additional income during a recession. Furthermore, due to the low average product sales price, customers are likely to cut other areas of spending from their budgets before reducing their Betterware purchases. As a result of these two attributes, the business model is extremely resilient to recessions. Last but not least, Betterware is run by a high quality founder-led management team. The Campos family owns 18,438,770 shares, a 50.1% stake worth over $700 million USD today. They have not sold a single share since the company went public, despite the value of their stake rising from ~$144 million. Additionally, the Campos family takes no compensation directly from the company. Instead, their entire $33 million USD annual income is derived from the company's dividends. Because of this, the Campos family is aligned with the interests of current shareholders. - Cultural & Geographic Relevance - Betterware's business model is tailored to perfectly fit Mexico's unique cultural and geographical dynamics. For starters, family is one of the most important elements in Mexican society and is an essential safety net of help and protection. Families are typically large, especially in the rural communities that dominate Mexico's population. Furthermore, decorating and maintaining a home is very important, as family gatherings are a large part of Mexican life. These characteristics point us back to the two reasons why the British sales model was ineffective. First, their approach was impersonal. Associates were assigned to specific residential neighborhoods and dropped off physical catalogs in every mailbox. Residents could write down their orders and leave it back in the mailbox. Since the associate had no personal connection with these potential customers, this was not an effective strategy. This is why the change in Betterware's sales model, implemented by Luis Campos, worked so well. As a result, a Betterware associate is usually a customer themselves first, then sells products to family, co-workers, and close friends. Given the strong family ties and loyalty among these groups, many people make a strong effort to order Betterware products through their friends or family members. Second, the original product catalog tailored more to the average British consumer rather than those in Mexico. To rectify this, Betterware focused its product portfolio on items that help organize, save space, or maintain a clean home because of the cultural importance of family and the home in Mexico and Latin America. Thus, Betterware succeeded where its British parent failed, by capitalizing on Mexico's family-oriented culture and creating a product line that focused on home organization and cleanliness. - Valuation - Betterware generated $350 million in revenue, $104 million in EBITDA, and $76.5 million in net income. The business also has 60% gross margins, 60% normalized returns on tangible capital, and net cash on the balance sheet. 2021 guidance points to $500 million in revenue, $148 million in EBITDA, and $112 million in net income. At a $1.4 billion market cap, the stock trades at 12.5x 2021 earnings. This is an incredibly low valuation for a company that has grown at 40%+ annualized for the last 5 years and 135% in 2020. Furthermore, the management team, which has a reputation for being conservative, has guided to 45% revenue growth for 2021. This is likely extremely understated as the business exited 2020 growing at over 300% YoY, and 3rd party sources indicate that growth has remained elevated. The company also announced its annual dividend for 2021 of ~$67 million USD, which is roughly 66% of 2021 free cash flow, based on management's guidance. With the business growing in excess of 40% a year, the dividend should keep growing annually. A 5% dividend yield is usually found in stable, mature, or distressed companies, not in asset-light platform businesses growing at high rates. Betterware also trades at 50% to 75%+ discounts to other Latin American platform and DTC businesses like MercadoLibre and Tupperware. Additionally, Betterware has a strong runway to maintain its growth. First, it only has 20% market share in Mexico and is expanding into surrounding Latin American countries including Guatemala, Panama, Costa Rica, Peru, and Colombia. Second, Betterware only has about 20% wallet share at the moment. The company expects to grow this by introducing new products into the catalog to capture more of a typical family's spending on home-related items. Asset-light platform businesses with high growth tend to trade at large multiples and often for good reason. Betterware has all of these characteristics and profitability. It is also returning cash to shareholders via the annual dividend. If we assign even a 30x earnings multiple on Betterware's 2021 earnings, it is over a $100 stock vs. $38 currently. Even ignoring the 135% revenue growth and even higher profitability growth in 2020, companies growing profitably at 45% a year tend to trade well above 50x earnings. At that price, BWMX is a $150 stock. To reiterate, all of these multiples are based on management's forward guidance, which is extremely conservative. We expect BWMX shares to increase from $45 to $100$120 in the next 6 to 18 months. If the market rewards BWMX in the same way it has other platform/marketplace companies, we can expect an upside target of over $200. Q1 report was last night....blowout numbers again....stock has barely yawned. Q1 2021 Financial Highlights ($USD):
FY2021 Guidance (+10% from last update)
- Guatemala expansion revenue up 382% YoY with 25% EBITDA - On track to expand into Peru and Colombia over next 2 years Majority of 2021 CAPEX is related to the new headquarters/distribution center and other technology growth investments tied to that. Normalized free cash flow would be at least $10 million higher than shown here. Here are some pics of the new facilities posted on the Twitter page of the governor of Jalisco (Mexican state where the new HQ/logistics operations are located): https://twitter.com/EnriqueAlfaroR/status/1390438262481858560 (hit Translate Tweet if you are not fluent in Spanish like me) Crazy that it continues trading at this valuation. At the current market cap of $1.7 billion, the stock trades at 14x 2021 earnings and will post at least 50%+ growth.. Happy to send you a much more detailed writeup if you DM me. [link] [comments]  |
| Third Point Capital Q1 2021 Letter Posted: 07 May 2021 01:52 PM PDT |
| EHTH Thesis - Undervalued Stock with a potentially speculative play! Posted: 07 May 2021 05:59 AM PDT I was hesitant to post this one here because of the speculative part of my thesis. But I feel like the thesis holds up even if you remove the speculative part. Anyways, here it is: At ~ $65 a share, eHealth (ticker: EHTH) , an insurance brokerage in the Medicare Space, represents an asymmetric risk/reward opportunity and represents an opportunity to buy shares that are possibly artificially depressed. On April 29th, EHTH had their earnings call and had overwhelmingly positive results. They are showing improving fundamentals, beat top line estimates, and beat earnings estimates. On April 30th, their price jump 10% and then on that same day, see their stock price drop back down to close to its open price. I believe that the stock price didn't stay up because:
Who is eHealth? eHealth is an insurance brokerage. Insurance companies use brokerages like eHealth and its competitors to sell insurance to individuals, families, and small businesses. As long as the people stay active (aka pay their premiums) to the insurance companies, the insurance companies pay a commission over to the brokerages. So the more people they enroll into a plan, and the longer they stay, the more they earn. eHealth operates their business in two segments: (1) Medicare, and (2) Individual, Family and Small Business. The Medicare segment represents the majority of the business and constituted approximately 89%, and 88% of revenue in 2020 and 2019 respectively. Medicare-related health insurance plans including medicare advantage, medicare supplement, and medicare part D prescription drug plans. The biggest bulk of their business is from the Medicare Advantage Insurance Plans so I'll talk about that market really quickly. Medicare Advantage is a health insurance alternative to the Original Medicare. These Plans may have lower out-of- pocket costs than Original Medicare, which is why people prefer this over the original. Generally, people aged 65 and older are eligible for Medicare. So how big is the total addressable market? Well, according to their annual report, there are "10,000 people on average turning 65 every day over the next ten years". This translates to approximately 3.65M new potential enrollees per year. eHealth and its competitors all claim that the market is growing quickly and that they've barely tapped the market. In 2020, eHealth approved only 387k members (approximately 1% of people eligible). Its direct competitors, GoHealth and SelectQuote, have made similar claims about the size of the market and have comparable market share. Additionally, eHealth has ecommerce platforms that organize and present health insurance information in various formats that enable individuals, families, and small businesses to research, analyze, compare, and purchase a range of health insurance plans. As each year passes, new annual cohorts of eligible seniors become more tech savvy. As the market transitions online, eHealth's cost of acquisitions decreases. So what is eHealth worth? As briefly mentioned eHealth spends money upfront to acquire a new member for Insurance Companies, and throughout the life of the policy, the insurance companies pay eHealth in the form of commissions. In light of the business model, the key metrics the company uses for each business segment is:
Using the averages for these metrics from 2017 to 2020, I do the sum of the parts valuation below: Valuation I think the valuation might be conservative because:
Why do I think HIG Capital is holding the stock down? Now we get to the speculative part. Since the stock's big drop in late January (missed Q4 earnings estimates), the stock has been trending upwards. Notable upward pricing movements have been caused by SEC filings revealing that some well -established activist value funds (Starboard Value and Hudson Executive Capital) have entered positions into EHTH. Then, on April 29, EHTH ended the day on $70 a share and released its Q1 earnings results after hours. It was overwhelmingly positive. EHTH outperformed and beat its top line and earnings estimates. So what happened on April 30th? The stock price started off strong and rose 10% to about $77 a share and then started cratering by 9:40, ending the day at $71 a share. Why? HIG Capital just so happens to finalize its $225 million investment of convertible stocks in EHTH on April 30th. See the filing date below: Reading the terms of the agreement, it looks beneficial for HIG to have EHTH's stock price be depressed until May 31st. The reason is because of the conversion terms. After May 31st, HIG gets to convert their investment of $225M preferred stock into equity based on the following formula: Shares of Equity = Accrued Value of Preferred Stock/Conversion Price Per the investment agreement, the conversion price is 125% X the Arithmetic Price Average for 120 days following January 29, 2021, subject to a max of $90 and a min of $50. So the lower the conversion price, the more shares of Equity they get. Conversely, the higher the conversion price, the less shares they get. Further evidence of this can be seen in abnormal trading volumes since the day of the earnings report: 4/30 9:35 – Volume 64.98k – Price $77– Money traded $5M 5/3 3:55 – Volume 33.55k– Price $67.25– Money traded $2.26M 5/4 3:55 – Volume 52.8k– Price $67.63– Money traded $3.57M 5/5 1:35 – Volume 53.37k – Price $66.55– Money traded $3.56M 5/5 3:45 – Volume 55.99k – Price $67.04– Money traded $3.75M 5/6 – Volume 16.83k– Price $65.72 – Money traded $1.1M I'm speculating that it's HIG doing it because there's no other noticeable market participant (other than MW) that would want to push the stock price down. Additionally, I think it's only one party than a coordinate group of individuals all coincidentally pushing trades at the same time to cause several Millions of dollars' worth of EHTH stock to be traded at any given time. I mean, the amount of money from these trades is almost $20M. So what? Anyone buying shares would be able to buy shares of EHTH at artificially depressed prices. Furthermore, if enough demand pushes the price high enough, then it could push HIG's conversion price to increase, causing less of the value to be accretive to HIG and more to common equity. So if the stock price goes up, equity investors gains on two fronts! Risks: Investing has risks and you can lose money. From a fundamentals standpoint, EHTH:
Additionally, HIG might be able to pull off a conversion that's value accretive from equity investors to them. Finally, my thesis on HIG is highly speculative and I could be completely off on this one. It really could be because there are other big investors that don't believe in EHTH anymore... Disclaimer: I may have made mistakes in my analysis or I might have missed information. You should do your own research. Nothing in this post should be construed as investment advice and is purely for entertainment purposes. I have call options in EHTH. Also, I'm not a great proofreader so I might have typos… TLDR:
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