Hello, for the like 9 of you who are subscribed, I figured I should give some form of update. For the few who will stumble on this, I thought I should give a quick update on a few of the companies that I have written about.
Originally, I had planned to do about 2 write ups per month, but I set that goal during the Summer. Then September came and I realized how much of a fool I was. School started and sucked the free time out of my life, so that left no time for write ups. Well, there is time, but it wouldn’t be productive and I also don’t hate myself. I need a break here and there. As to when I will do an actual write up again, the holidays are coming up, so perhaps a few around then. There are quite a few interesting ideas, especially in foreign markets (non-US). Liz Truss provided a wonderful buying opportunity for British equities which I exploited, but in hindsight, not as much as I should. Ok well anyway onto some company specific updates to give me satisfaction that I actually posted something.
BBQ Holdings:
Well, no one really read this one and I don’t suggest you go back and read it. It was my first attempt, so naturally it was quite terrible. Luckily, the investment turned out quite well. During July, the company was trading below $10 per share, which provided a compelling opportunity, so I scooped up shares. One month later, BBQ Holdings was acquired by MTY Food Group for $17.24 per share. That was not something I had planned for, but it provided some outstanding returns. In my infinite wisdom, I somehow made a mistake even with this. Instead of trusting myself and backing up the truck, I backed up the backpack and made it a 1% position. Hardly moving the needle. Conviction is something I personally struggle with, and something that I will be constantly working on. BBQ provided a nice insight into the benefits of trusting yourself and all the work you did during research.
Spotify:
Spotify continues to growth rather quickly even in the face of some headwinds and harsh competition. I will be very interested to see how the coming year goes with Amazon Music increasing their offering and the huge growth from Youtube Premium. Gross margins continue to be an issue as well.
MAU’s is still growing fast
“Total MAUs grew 20% Y/Y to 456 million, up from 433 million last quarter and above our guidance by 6 million”
This is most likely from the low cost of Spotify relative to many other entertainment companies. I for one, would much rather have a Spotify subscription than a Netflix one.
Marketplace is zooming
“During the quarter, Sponsored Recommendations continued to exhibit strength with triple digit Y/Y growth in total campaign volume and in Q3 we saw the largest campaign to date for the service”
That growth is just astounding to me. Perhaps it’s a testament to the value that artists and labels see in this platform. It has even helped me get concert tickets.
Why are gross margins not improving?
“offset by non-music content spend and product enhancement spend, increased publishing rates and the change in accruals.”
Thats the explanation they gave. Basically they are stilling investing for growth, which I think is the right thing to do. Amazon, Apple and Google are all tough competition, so really any incremental improvements to Spotify’s platform is a good thing. Ek did say that:
“we expect this drag on margins to start to reverse in 2023”
So that is a very good sign.
Spotify’s capital allocation seems to be stellar.
“But I also want to reiterate that we're keenly aware that this is an uncertain time and the cost of capital has increased. So inevitably, you should expect our hurdle rate for new investments to be higher. And consequently, you should also take this to mean that we will be more selective with our overall spending moving forward”
Daniel Ek doesn’t get enough credit. Very rarely do you see a CEO state that their hurdle rate has moved or that they even have one at all.
On price increases
“In the last 2 years, we've actually done more than 46 price increases in markets around the world”
“We believe we have significant pricing power on this, and we're offering an amazing consumer value proposition. So I think when our competitors are increasing their prices, that's really good for us because, again, with our deep engagement that we have and the lowest churn of any competitor, we will likely fare better.”
“So we're set up super well for the coming years.”
I really couldn’t be happier with this response from Ek. I may be becoming an Ek fanboy.
Spotify has launched their own site to sell concert tickets from. I must say I love this. I think we can all agree fuck ticketmaster.
“We feel really good separately to that of the Live business, although it's very early days. So lots of experimentation of just enabling more ticketing to be available across Spotify.”
On Tiktok:
“When they've taken share -- they haven't taken share from us. It's been from others”
Audiobooks are going inline with expecations:
“It's early but good engagement overall. We see it being additive to all the other engagement that's happening on the platform, which was our hope, ambition. So it's nice to see that being played out.”
Overall I am quite happy with the Spotify results. I do think its still too early to say definitely how this investment will make out, but there are a lot of things to look forward to.
Amerco (Now U-Haul Holdings Company):
Uncharacteristically, Amerco has done quite a lot in the last few months. As the heading suggests, they have changed their name from Amerco to U-Haul Holdings Company to “broaden awareness of the Company with the investing public.”
They also did a 9-1 stock split with a class B non voting stock. For each share of UHAL 0.00%↑ , you keep that share of UHAL 0.00%↑ and then are given 9 shares of UHALB 0.00%↑ , which have no voting rights. The idea was to increase liquidity or some stupid reason like that. To me it just seems like management wanted to act like they were doing something to please shareholders, while really just spending needless cash.
Additionally, they will be registering on the NYSE effective December 19th, 2022. Overall if you believe that the increased liquidity and awareness will drive shareholder returns then maybe this one is for you.
Amerco is really investing quite heavily into real estate.
“For the first 6 months of this year, we've invested $584 million in real estate acquisitions along with self-storage and U-Box warehouse development”
“Over the last 12 months, we've added 70,000 new storage units which translates to about 5.4 million net rentable square feet. We currently have about 5.8 million new square feet being developed across 131 projects. And then we have an additional 146 or so projects where we own the land buildings but we haven't started the construction yet. I would expect these projects to result in approximately 8.7 million new net rentable square feet. And then we have close to 100 additional deals currently in escrow that we're evaluating."
Thats really a lot of developing going on. They’re investing almost 6% of the current market cap in real estate acquisitions in just 6 months. Either the market thinks they’re overpaying or the market is asleep at the wheel.
The slow down in revenue growth is not a cause for alarm.
“We've seen that when people in the country are less optimistic, they travel shorter distances… Instead of being a $400 rental from Phoenix to L.A. or something like that, it's a $100 rental just run side of Phoenix to (inaudible)”
Shoen makes sure to say this something that happens from time to time and for now the current is just moving in the opposite direction. Of course when optimistic picks up then there will be much nicer results.
U-Box is suffering from the same things.
"I believe it's the U-Box gets more long distance moves as a percentage of moves than the U-Haul business does, okay? So when U-Haul sees long one-way moves soften for U-Box, that's like almost all of their moves or these longer moves."
I’ll just pull your attention back to what I said before. This is just part of the cyclicality of the business. In my view, nothing has impaired the business in the slightest.
Overall, the results are nothing too interesting, which is what I like to see. Storage is growing 20% yoy and the rest of the business is just in a cyclical downturn. Basically, the thesis is still doing well.
Valvoline:
I love it when I get validation and luckily this quarter gave me a huge dose of it.
One of the bear points is that EV’s will destroy the business model, but management doesn’t seem to agree.
“It will take decades for electrics vehicles to represent a substantial portion of the car parc in North America”
Considering I do have an investment in VVV 0.00%↑ I agree, but this is something to continuously monitor none the less.
The comments on franchises were the most interesting by far. They’re giving me some Domino’s vibes. On a store level, each location gives about a 30% cash on cash return for the owners, which in itself is great. The amazing part is that the return on invested capital is upwards of 40%. Now thats quite the step up from the 16% of company owned stores. I think management has realized the benefits of a franchise model and are more aggressively growing the franchise base. They will try to grow franchise locations by 8%-11% per year for the next 5 years, which I think is rather prudent, and I look forward to seeing all the cash spewing off from these franchises.
The company owned locations aren’t as flashy in terms of financial numbers, but I do see the appeal. They provide 3x the EBITDA with 15% ROIC. Thats still a compelling ROIC and they’re using these company owned stores to test new technology before rolling it out to the franchisors. I don’t think they need as many company owned stores as they have right now to conduct this research, but my reference is Domino’s and Pizza is much simpler than cars. Vavoline expects company owned locations to grow at 6%-9% over the next 5 years, which is a tad bit slower than franchised locations.
Zooming out a bit to the whole company. Management is guiding for 22%-26% EPS growth from FY23 to FY27, which is incredible. I do have some doubts on them reaching these numbers, but damn it will be very impressive if they can. 7%-10% unit growth + 6%-9% SSSG does provide a nice floor though. It will come down to margin expansion, which they said will continue through next year as commodity prices stabilize, and share buybacks. Unfortunately, I don’t totally like what I am seeing.
Valvoline announced yesterday that they will be buying quite a bit of stock quite quickly.
“$1.6 billion share buyback with the goal to complete the share repurchases within 18 months” after the sale of Global Products to Aramco.
At first glance that is awesome, 25% of the market cap getting crushed in 18 months, can only be good right? Well I'm a bit more skeptical, the idea that they will get these buybacks done so quickly suggests they won’t care about the price they pay. This ties into my issues I wrote about previous. Management compensation is tied to EPS, thus they are incentivized to buyback stock at any price to drive EPS up. I sent an email to their IR department asking for some clarification, so hopefully I get a good response back, if not I will have to look at the opportunity cost of this holding, which is a bit annoying.
Black Knight
Honestly nothing to say here. The results were not the best, but thats only a quarter. Plus they just didn’t do a call due to the merger with ICE and it seems everything is going smoothly there. It will be very interesting to see if the deal does go through as I think it will be an interesting case study for other companies in this environment.
Alright well thats all for now. If I ever get around to it maybe expect a Domino’s Pizza write up or overview of the entire Domino’s ecosystem. Also, Teqnion if I can find a way to get an English annual report. Thank you.
i don't know how to read but fire nonetheless
amongus