Reporting season in Italy. Among my portfolio and watch list, several companies issued relevant material.
Piquadro had a sort of “trading update” which for some reason cannot be found on the homepage but for instance here.
Although sales went up 4.3%, Profits declined from 9.1 mn to 7.8 mn (0.18 EUR per share to 0.156 EUR per share). And they are cutting the dividend from 0.10 EUR per share to 0.06 EUR.
Based on my initial valuation, Piquadro is still within the base case (20% EBITDA margin). So for the time being no action, but a reminder to check the annual report how non-Italien sales and own shops performed against the other segment.
Watchlist stock Sol Spa has issued two interesting pieces of information. First of all, they were able to place a 12 year private placement bond at 4.75% in USD. With 12 year USD swap rates at around 2%, this represents a credit spread of around 2.75%. This is around 1.5% lower than Italy has to pay for the same duration. So we clearly see that a well managed Italian corporate can finance cheaper than the Italian Government !!!
Secondly, they have issued an investor presentation which shows that for some unkown reasons they are also investing in Hydro Power in Slovenia and Macedonia. I am not sure how this fits into the corporate strAtegy, but it explains part of the increase in Capex.
Q1 results are a mixed bag. Increasing sales but a reduction in margins. Capex still high as the aggressively move into Eastern Europe (Bulgaria, Albania).
Difficult stock. Still on watch.
Emak had issued Q1 numbers already a couple of weeks ago. Interestingly again the acquired companies dare doing relatively well. Based on the first quarter, Emac could earn around 0.08 EUR per share which would result in a 2012 P/E of around 6.
Just to summarize some recent portfolio transactions:
In the last few days, Praktiker came back below my limit at 41%. So in toatl I bough now 641.000 nominal bonds at a “dirty price” including accrued interest of 41.62%. Clean price would be around 40.50%.
As announced yesterday, I sold the Nestle shares at 54.47 CHF. Including 2 dividends, Nestle produced a positive performance of 24.17% for the portfolio.
I kept the CHF hedge, Vetropack is now 100% hedged.
Also yesterday, I “pre” invested the SIAS dividend back into SIAS shares. Ex date was April 23rd, however payment date is April 26th.
Piquadro fell back below my buying limit of 1,50 EUR, so I will increase the position of currently 1%. Howver, tarding volume is relatively small. As always, I will sell short 50% of the purchase value with FTSE MIB ETFs.
The TUMI IPO by the way has been a great succes. The stock increased from 18 USD to 26 USD in the frist few trading days. This gives TUMI a valuation of 1.8 bn USD, which translates into P/S of 6 and EV/EBITDA of 30. Cpompared to this, Piquadro is valued at EV/EBITDA of 7 and P/S of 1.
I had hoped that the IPO of TUMI would represent some kind of “catalyst” event for Piquadro, but I think at the moment Piuqadro is overwhelmed by the Euro Crisis 2.0.
Finally, the net cash position of the portfolio after those transactions is currently 11.8%.
I have mentioned Tumi several times as one of the major competitors of Piquadro in my small “series” about Piquadro.
Now it looks like that the Tumi IPO is finally happening . According to Bloomberg, they want to IPO on April 19th, with a quite optimistic valuation:
Demand for luxury goods is helping Doughty Hanson reduce its stake in Tumi, which it bought for $276 million eight years ago, longer than buyout firms typically hold investments. Tumi, whose backpacks retail for up to $595, is seeking a valuation of as much as 3.5 times 2011 sales, compared with the median of 0.6 times for a basket of peers, according to data compiled by Bloomberg.
I guess they are using P/S as a benchmark, because profits seem to be quite slim:
The luggage maker’s sales increased 31 percent to $330 million last year, while net income surged to $16.6 million from $104,000 in the same period, according to today’s filing. The company turned a profit for the first time in 2010 since at least 2007, the filing shows.
It is still amazing how the “pump and dump” strategy of those PE houses still work.
If we compare this to Piquadro, with multiples of 1.2 P/S and a P/E of 10, one can clearly see the impact of Anglo Saxon “financial magic”.
Piquadro itself seems to be reaching my threshold of 1.50 EUR again:
Below 1.50 EUR I will increase Piquadro to a half position (2.5%) of the portfolio, however in parallel I will increase the FTSE MIB hedge accordingly to hedge out my increasing Italian exposure.
Normally it is quite difficult for a private investor to get hold of comprehensive market information. One could try to google and try to collect some articles, but “hard data” is usually only available if you pay.
However, many listed companies include some market and competitor info in their analyst presentations. Piquadro provides us with a nice graphic of competitors in its 2011 April Analyst presentation:
Interestingly, in it’s own presentation one can see that the “Premium / Performance” segment is also the most crowded one.
An even better source for market data are IPO filings. In an IPO prospectus, companies usually provide a lot more information than in annual reports, as they have to persuade new investors that this is a exciting market.
Luckily, competitor Samsonite actually was IPOed last year on the Hongkong stock exhange after filing bancruptcy in 2009 (and also in 2002 if I remember correctly). The Samsonite story also shows the biggest risk for those companies: Overexpansion and too much lease liabilites, in this case driven by a Private Equity owner.
Tumi, currently owned by PE firm Doughty Hanson is currently on the path to an IPO and has already filed its documents for an IPO. To make things more interesting, Samsonite already anounced its interest purchasing TUMI.
So we have to additional sources for market information in this case.
For Mandarina Duck, the other major competitor from the Piquadro Matrix, currently no financial information is available. It seems to be owned by a PE shop as well.
Let’s start with the “Competitor” section of the TUMI IPO prospectus:
We have a variety of competitors in the categories and geographic regions in which we operate. We believe that all of our products are in similar positions with respect to the number of competitors they face and the level of competition within each product category. Depending on the product category involved, we compete on the basis of a combination of design, quality, function, price point, distribution and brand positioning.
Our biggest global competitor in the travel goods category is Rimowa, a German company. We also compete with Samsonite in Europe, the Middle East, Africa and Asia-Pacific. In the premium luggage and business cases category, we compete with Bally, Dunhill, Ferragamo, Gucci, Louis Vuitton, Montblanc, Porsche and Prada. In the business case category, we also compete with smaller brands in specific markets. In the U.S., our main competitors are Victorinox and Briggs and Riley. In Europe, the Middle East and Africa, our key competitors are Mandarina Duck and Piquadro. In the Asia-Pacific region, competition is fragmented. In Japan, our two key competitors are Porter and Ace Brand. We also compete with Coach across the luggage, business cases and accessories categories.
We believe that our primary competitive advantages are favorable consumer recognition of our brand amongst our targeted demographic, consumer loyalty, product development expertise and widespread presence in premium venues through our multi-channel distribution. We may face new competitors and increased competition from existing competitors as we expand into new markets and increase our presence in existing markets.
So again, we do not see any “hard” moats but rather some fuzzy brand recognition and customer loyalty aspects.
Even more interesting is the very detailed IPO prospectus of Samsonite. This is a “treasue trove” of interesting market data.
The “1 million dollar quote” however can be found at page 95:
Barriers to Entry and Benefits of Scale and Leadership in the Luggage Market
Barriers to entry into the luggage market are generally low, which has contributed to the fragmented nature of the industry. Key challenges for an entrant or an existing company are investment in brand awarness, innovation in new products, access to quality producers, and developement of an effective national / local retail network.
So here the “market leader” tells us there are no barriers to entry. So no “moats”. Period.
The Industry overview section of the filing is really interesting and comprehensive (p-90).
The market itself is supposed to grow at quite an attractive overall rate:
Samsonite itself does not yet realise Piquadro as competitor, neither Mandarina Duck. Piquadro and Mandarina Duck are only mentioned among others which are shown having a combined market share of 74.5%.
Howver, Samsonite places itself directly into the “Premium” category in contrast to Piquadro and Tumi themselves:
Side remark: Anyone who had the problem at an Airport baggage claim to find out which of the 25 identical black Samsonites is the own bag knows that this is more “mass market” than anything else.
The luggage market according to Samsonite can be segmented into 3 product segments:
Samsonite also has an interesting “market share” slide for Europe which shows the high fragmentation:
So the big question is now: Should I stop now with analysing Piquadro because there is definitely no “objective” moat ? I would say, no, because for some reason, Piquadro has been able to grow, maintain high margins and produce free cashflow. When we continue to evaluate the company we should however incorporate a certain “normalisation” of returns anad margins.
Also the whole market segment seems to be quite attractive as even in “good old Europe” some nice growth is expected in the coming years as indicated before which can be incorporated int he valueation to a certain extent..
Tumi has a very interesting passage in its IPO filing regarding marketing:
We do not employ traditional advertising channels, and if we fail to adequately market our brand through product introductions and other means of promotion, our business could be adversely affected.
In 2010, we spent approximately 3% of our net sales on advertising and promotion expenses. Our marketing strategy depends on our ability to promote our brand’s message by using store window campaigns, product placements in editorial sections, social media to promote new product introductions in a cost effective manner and the use of catalog mailings. We do not employ traditional advertising channels such as newspapers, magazines, billboards, television and radio. If our marketing efforts are not successful at attracting new consumers and increasing purchasing frequency by our existing consumers, there may be no cost-effective marketing channels available to us for the promotion of our brand. If we increase our spending on advertising, or initiate spending on traditional advertising, our expenses will rise, and our advertising efforts may not be successful. In addition, if we are unable to successfully and cost-effectively employ advertising channels to promote our brand to new consumers and new markets, our growth strategy may be adversely affected.
Interestingly, the “Market leader” Samsonite spent almost 9% of revenues on marketing in 2010(see IPO fact sheet), Piquadro around 5%.
Samsonite focuses basically to almost 100% on the wholesale sales channel, Tumi has reached a 50/50 split between wholesale and single brand stores.
Very interisting is the fact, that Piquadro just hired a seasoned TUMI executive for international brand expansion.
Peer Group comparison
Let’s just make a quick comparison with regard to profitability. As one could expect for PE owned companies, both TUMI and Samsonite show quite a messy capital structure and “real profits” don’t really exist. So let’s work with what they call “adjusted” EBITDA (Samsonite & Tumi in USD, Pqiadro in EUR):
This is really interesting. Piquadro is the most efficient and most profitable company of this “Peer group” based on “simple” metrics.
Summary: A quick view into the market and competitors show the following:
- the market is quite fragmented, no real barriers to entry exist and therefore no “classical” moats
- nevertheless all companies seem to be able to generate at least currently some decent returns on assets
- Picadro itself seems to be the most efficient of the 3 companies. It is therefore likely that no strong “economies of scale” exist in this market
I will follow up with a valuation approach in the next days.
After a first glance at Piquadro and many interesting comments from readers, I wanted to follow up un a couple of the points raised.
Return on Equity / Return on capital
One reader commented that Return on Equity (ROE) decreased significantly. This is correct. However, just looking at ROE ignores if the quality of the balance sheet has changed. Weiterlesen…
On my hunt for cheap PIIGS or GIPSI stocks, I basically “tripped” over Piquadro SpA. I wanted to share my first impressions while looking at the share:
The company produces and distributes travel and business luggage. According to the website, the comapny exists since 1987 and sells under the current brand since 1998.
In October 2007 the company went public at a share price of EUR 2,20.
Piquadro has exactly 50 mn shares outstanding, at the current price of EUR 1,24, the market cap is ~ 62 mn EUR.
Current multiples are:
Div. Yield 8.1%
So apart from P/E and dividend yield, the company looks expensive. Howver this can easily be explained by the profitability measures (FY 2011):
Pretax Margin 22.7%
So we can clearly see that the business at least up until recently is rather high margin, high return on capital business.
Despite the recently positive market trend, the stock price still drops like a stone:
Especially compared to example Tod’s it is interesting to see that since last November, the chart “decoupeled” from the market. One thing that one should keep in mind is: In “falling knife” situations, you will always invest too early in the short term !!!!
Shareholding / Management
CEO founder and main shareholder is Marco Palmieri with 67,0% shareholding, other big shareholders are Mediobanca (6%), Fidelity (5%), Cominvest 1.2%. Well known US value shop Royce has a tiny position which was slightly increased in Q3 2011.
According to the last annual report, Palmieri paid himself 407 k EUR, total board compensation incl. Directors was 1 mn EUR. This looks OK, Palmieri receives much more money through the dividend than through the salary, so incentives with shareholders should be aligned to a certain extent.
Cashflow generation and use
What attracted me immeadiately is the fact that free cashflow generation was excellent in the years since the IPO compared with earnings.
|EPS||FCF||Dividend||Net debt per share|
We can see that over the last 4 years, Free cashflow was 78% of reported earnings, which is pretty good for a growing company. 2/3 of the free cashflow was paid out as dividends, 1/3 to reduce debt. Net debt at 7 cent per share seems to be easily managable.
The cash generative structure of the business is also emphasised in the latest Investor presentation.
So far, everything looks almost to good to be true. One big issue however is obvious: Up until last year 75% of sales came from Italy, the international expansion is just starting. If Italy really goes into a deep recession, sales and profits in Italy could get hit hard. It would then be questionable if the international expansion could offset this.
I just saw that Piquadro issued a sales update for the 3rd quarter (financial year ends in March on January 10th. Sales ytd still show an increase of 5%. Howevr compared to the Q2 numbers this is definitely a pretty sharp contraction.
However I have to keep in mind that I already own Buzzi, EMAK and Austostrada. From a risk managament perspective I will have to think about some hedging against specific Italian risk.
Summary: On a first glance, the company looks extremely attractive: Good grwoth, high margin business, low capital requirements, excellent free cashflow and a conservative balance sheet at bargain prices. Howver the stock is tanking as I write. So I will have to dive deeper into the business model in order to identify potential hidden risks. But for now it looks like a potentially very attractive Core Value investment.