Monthly Archives: August 2012

Why is Michael Kors (KORS) so succesful ?

In this post I identified Michael Kors as a “Tier 2” luxury stock with a really high valuation which might be an interesting stock to short based on my underlying thesis.

So justa few days later, Michael Kors reported a blow out performance, among oters:

Sales including licensing revenue rose 71 percent to $414.9 million in the first quarter ended June 30, driven by comparable-store sales and shops within department stores, the company said.

Retail net sales rose 76 percent to $215 million in the quarter, driven by a 37 percent increase in sales at stores open for at least a year, or comparable-store sales. The company opened 76 stores from the same period last year and operated 253 retail stores as of June 30.
First-quarter net income more than doubled to $68.6 million, or 34 cents a share, from $24.1 million, or 13 cents a year earlier.

First-quarter net income more than doubled to $68.6 million, or 34 cents a share, from $24.1 million, or 13 cents a year earlier.

So a doubling net income, 76% sales growth and a 37% yoy same store sales growth is really amazing if we look at how other upscale retailers do.

Interestingly enough, Michael Kors is not yet present in Asia, despite having the shares listed in Hongkong.

So the question is clear: Why is Michael Kors so successful (at the moment) ?

I guess one of the reasons is hs involvement in the US “Project Runway” designer casting show as a judge. However, the 10th series seems not to be too successful right now with viewers down 25%.

Kors’ Fashion is often described as the “Jet Set style”, whatever that means. His bio is not without bumps, for instance he went bankrupt in 1993 according to this article.

Michael Kor watches and jewelry are actually made by Fossil, which seems to have its own problems.

But still, why are they so successful ? I browsed around a little bit and among others I found statements

here:

What is the deal with the Michael Kors watch phenomenon? Everywhere I look there’s another small wrist encircled by an oversized gold Kors disc. Beauty PRs and fashion assistants absolutely love them, as do twenty-something city girls. “Girls that work in the city who want a Rolex. They might not know who Michael Kors is but they know they like shiny things,” tweeted @WhistlesPR in reply to my ‘who’s buying all the Kors watches’ tweet. “It’s chunky and looks expensive but it’s waaay cheaper than my dream Rolex! It has that magpie effect on everyone who clocks it,” confirmed @saraheangus.

With prices for Kors watches hovering around the £250 mark, they’re an easy entry-level accessory to buy into if you’re not in a position to spend £600+ on the bag or shoes. Clearly, plenty of people aren’t; according to the New York Times, sales of Kors watches went up 142% in the first quarter of this year. And good news for Mr Kors, his customers don’t just settle for one.

If one googles around, it seem to be really the relatively cheap watches which are extremely popular at the moment.

Balance sheet

Looking in the 2011/2012 annual report one can see that comparable sales growth per store have been 39% last year and even 48% the year before.

A quick check of the annual report showed nothing unusual in the accounts. Free cashflow generated is positive but relatively low due to large investments and the high growth rate. That’s normal. Also, goodwill is low and almost no financial debt.

Operating lease liabilities are around~ 560 mn and increasing due to the new stores.

Summary:

I am not sure why Michael Kors is so successful at the moment. This might be just a consumer fad which according to Jim Chanos might be a good short opportunity. On the other hand, the accounts look OK and currently in a “new normal” world, people pay up for growth.

So for the time being I will sit on the sideline and watch.

Some thoughts on utility stocks (Fortum, EVN)

In my portfolio, I have 2 utility stocks, Fortum OY from Finland and EVN AG from Austria. Both are part of the portfolio since the beginning.

The idea behind those two investments were the following:

1. utility stocks in general looked cheap and relatively save at that point in time
2. both, EVN and Fortum had a large share of non-carbon electricity generation capacity. “Fossil fuel” burners were expected to suffer as they need to pay more for the carbon emissions in the future
3. both companies are located in countries which are not directly impacted from the EUR crisis, so the risk of special taxes etc. should have been low

So far the investment thesis didn’t really work out.

First, the utility index underperformed with -8% the corresponding full index (Stoxx Europe 600) by a whopping 11%.

Second, both EVN and Fortum managed to underperform the utility index. EVN by -3.7%, Fortum by a dramatic 30.4% (including dividends)

If we look at the index constituents, we can see some interesting things:

Perf. 12/2010 –
   
DRAX GROUP PLC 41.2%
NATIONAL GRID PL 37.8%
UNITED UTILITIES 36.1%
SEVERN TRENT 34.5%
PENNON GRP PLC 28.7%
SSE PLC 18.2%
CENTRICA PLC 5.7%
ENAGAS SA -3.5%
RED ELECTRICA -11.6%
SNAM SPA -12.4%
TERNA SPA -12.8%
GAS NATURAL SDG -13.9%
ENEL GREEN POWER -20.7%
EDP -22.6%
E.ON AG -22.8%
GDF SUEZ -27.3%
ENDESA -29.8%
RWE AG -34.2%
ENEL SPA -34.3%
FORTUM OYJ -37.1%
VERBUND AG -42.2%
SUEZ ENVIRONNEME -42.6%
EDF -46.3%
IBERDROLA SA -47.0%
VEOLIA ENVIRONNE -62.8%

Frist thing to notice: “Renewables” really did badly, Mostly Iberdrola, Verbund and Fortum but also Enel Green Power. UK utilities did best. At least peripheral utilities did underperform as well, however French utilities were the worst (EDF, Suez, Veolia).

If we exclude UK and go for “EURO” utilities, the picture looks relatively speaking better, with a total return of -23.82%, this index performed really badly, EVN here (although not in the index) looks like a clear outperformer. Fortum still doesn’t look that good…

Perf. 12/2010-
   
ENAGAS SA -3.45%
RED ELECTRICA -11.56%
SNAM SPA -12.37%
TERNA SPA -12.85%
GAS NATURAL SDG -13.85%
ENEL GREEN POWER -20.37%
EDP -22.64%
E.ON AG -22.93%
GDF SUEZ -27.49%
ENDESA -29.75%
RWE AG -34.24%
ENEL SPA -34.39%
FORTUM OYJ -37.06%
VERBUND AG -42.23%
SUEZ ENVIRONNEME -42.67%
EDF -46.34%
IBERDROLA SA -46.95%
VEOLIA ENVIRONNE -62.76%

So looking back, what happened, especially to Fortum ?

– first of all, the Finish government introduced a special tax for Fortum although they didn’t need to. Bad luck
– secondly and more importantly, the price for carbon emission rights fell dramatically. As the following chart shows, CER prices fell a dramatic -75% from mid 2011 until now.

So the “Built in” (and as we know now “priced in”) competitive advantage of renewable power generators against “conventional” generators seems to have narrowed. Interestingly, the big divergence between Index and renewables opened up only in the last few months.

Additionally, the business model of electricity genrators in general seems to have eroded somehow, as it seems to be that they are on the worng side of the current political debates. Maybe not without their own fault.

If we look at the performance numbers above, we can see a second interesting detail:

Gas utilities (apart from the French) and grid operators do a lot better than electricity generators. The top 5 performers are either gas utilities (Enagas, Gas Natural) or Grid operators (Red, Snam, Terna).

A quick look on relative valuation shows that Fortum is still relatively expensive, as well as EVN, although EVN should be treated differently:

Name BEst P/E EV/BE EBITDA Curr Yr  
 
RWE AG 8.11 4.37 6.40%
EDF 8.07 4.80 6.28%
HERA SPA 10.49 5.16 2.12%
ENBW ENERGIE BADEN-WUERTTEMB 15.98 5.54 3.27%
GAS NATURAL SDG SA 7.68 5.67 2.58%
IBERDROLA SA 6.76 6.02 3.45%
GDF SUEZ 12.15 6.10 4.18%
E.ON AG 8.82 6.21 7.19%
REDES ENERGETICAS NACIONAIS 7.29 6.55 10.11%
A2A SPA 6.65 6.75 7.00%
ENAGAS SA 9.28 7.27 7.48%
ROMANDE ENERGIE HOLDING-REG 14.26 7.44 8.93%
ENERGIEDIENST HOLDING AG-REG 15.36 7.91 7.66%
FLUXYS BELGIUM 18.23 8.34 8.95%
FORTUM OYJ 10.16 8.36 6.21%
EVN AG 9.01 8.60 8.44%
SNAM SPA 11.73 8.74 7.75%
VERBUND AG 13.66 8.87 8.29%

So looking back, it was not a good idea to buy the “Carbon story” although I was lucky to a certain extent with EVN. However going forward I still have to find out what I am going to do. At the moment, Gas Natural does look quite attractive.

I think the Carbon Emission Right (CERs) might also be an interesting area to look at.

more to come…..

Boss Score Harvest part 5: – L.D.C. SA (ISIN FR0000053829)

In the fifth part of analysing the results of my Boss Score model, i want to look at the French company L.D.C. SA next.

The reason is not that LDC has the best score, but it is relativley comparable two 3 other companies I have analysed so far, Cranswick and French companies Tipiak & Toupargel.

According to Bloomberg,

L.D.C. SA processes and sells a wide range of specialty poultry products ranging from fresh prepackaged chicken to more elaborate prepared dishes. Those products are sold under brand names including “Loue,” “Bresse,” “Landes” and “Le Gaulois.”

So will French chicken be a good fit to British Pork ? Let’s look at traditional fundamentals:

Market Cap 690 mn EUR
P/E Trailing 12.2
P/B 1.1
P/S 0.2
EV/EBITDA 4.2
Debt/Assets 9.5%
ROE 9.5%
ROC 8.1%
Dividend yield 2.1%

At a first glance, relatively unspectacular. Not overly cheap but not expensive. EV/EBITDA looks attractive, almost no debt is normally a good sign. Market cap a little high but still ok.

What makes the company score quite well in my model is the very constant Comprehensive income yield on equity. This 10 year history:

12M EPS BV/share Div
31.12.2002 4.19 33.50 1.15
31.12.2003 4.11 36.05 1.23
31.12.2004 5.48 42.288 1.15
30.12.2005 5.76 47.4188 1.25
29.12.2006 5.30 51.8404 1.25
31.12.2007 6.63 56.4853 1.25
31.12.2008 5.29 60.7223 1.50
31.12.2009 7.83 67.144 1.30
31.12.2010 5.9 71.1595 1.93
30.12.2011 6.97 75.8072 1.80

creates an average 11.5% CI Yield on Equity with only a 3.2% standard deviation.

Looking at some further metrics we can see that unlike Tipiak and Toupargel, LDC is growling nicely however margins have been eroding somehow since 2009:

Sales p.s. NI margin  
31.12.2002 191.7 2.19% 10.69%
31.12.2003 186.4 2.21% 10.63%
31.12.2004 170.8 3.21% 19.07%
30.12.2005 193.2 2.98% 14.00%
29.12.2006 195.0 2.72% 11.43%
31.12.2007 226.8 2.92% 10.88%
31.12.2008 242.1 2.18% 9.36%
31.12.2009 256.6 3.05% 12.39%
31.12.2010 315.5 1.87% 7.69%
30.12.2011 342.7 2.03% 8.95%
       
avg   2.54% 11.51%

The stock chart shows a very boring but steady developement since 2004:

Beta to the French CAC40 is an incredibly low 0.46. 10 Year performance for the stock is 7.53% p.a. against 4.11 for the CAC

Business model:

Other than Cranswick, LDC is actually producing a significant part of their own poultry as we can read on their website:

Supply
The acquisition of Group Huttepain enabled the LDC Group to become closer to its farmers and make sure that they felt closer to the upstream part of the business. The companies belonging to Group Huttepain operate in cereal collection, feed manufacture and poultry farming (chicken, turkey and duck). This live poultry represents 55% of the group’s entire supply.

So as a first thesis compared to Cranswick I would argue that

– LDC should be more capital intensive
– more exposed to cost pressure (animal feeds)

than Cranswick.

So let’s have a quick look at some capital metrics:

Cranswick LDC
  2010/2011 2011
Sales 758.3 2,774.0
NI 35.3 56.7
NI in % 4.7% 2.0%
 
Inventory 35.7 178.3
Receivables 78.7 343
Trade liabil- -84.9 -308
 
Net WC 29.5 213.3
In % of sales 3.9% 7.7%
 
PPE 123.3 421.6
in % of sales 16.3% 15.2%
Goodwill 127.8 164.1
 
Net WC+ PPE in % of sales 20.2% 22.9%
     
Net WC +PPE+GW in % of sales 37.0% 28.8%
 
 
 
Inventory / Sales 4.7% 6.4%
 
Depr. 12.44 80.9
Depr /Sales 1.6% 2.9%

So we can see that Cranswick is better in working capital management, whereas LDC has slightly less PPE than Cranwick. interestingly, LDC deprecates a lot faster than Cranswick, almost a fifth of their PPE whereas Cranswick deprecates a tenth of PPE.

This faster depreciation explains 1.3 % of the Margin difference.

Some other notable differences are:

– LDC has to spend ~22% of sales on salaries vs. 13% at Cranswick, so LDC’s business model is clearly more labour intensive.

Due to the significant depreciation, LDC’s Cashflow before investments is around 2.3 times net income compared to Cranswick’s 1.2 times. However LDC is investing back all the depreciation plus some into the business. This explains the tripling of sales over the last 10-12 years, however at a decreasing rate of return on capital.

Similar to Cranswick they move strongly into processed and packaged food.

Looking at the English language annual comments, the processed food part seems to be in difficulties (same as Tipiak and Toupargel), whereas the Poultry business itself seems to run quite well. Representing around 20% of sales, the convenience food actually produced a loss.

Unfortunately, they do not publish segment numbers, so we do not know how much capital is used by the convenience segment. However my assumption would be that the “pure” poultry business looks a lot better stand alone and might be comparable to Cranswick’s.

management & Shareholder structure

The company is majority owned by a couple of families, with the executive board recruiting only members form the different families. This is not necessarily bad, but implies that there will be no real change going forward.

Value Shop Sparinvest has a little position as well.

Summary:

LDC SA is a very steady company with a rock solid business model. Unfortunately,the convenience food business seems to be in some kind of trouble. Stand alone, the company looks interesting as a very defensive “Boss” investment, but in comparison to Cranswick it looks like the inferior business.

The company seems to “overinvest” especially looking at the diminishing returns on capital in the past few years.

For the time being, I will not invest but put it on my watch list. If they manage to turn around the convenience segment, I might consider an investment.

Weekly links

In case you need a name for your soon to be founded hedge fund, try the HedgefundNameGenerator

Second part of the Ibersol analysis from Stephan at Simple Value

Well structured analysis of Bank Of Ireland’s H1 results from Philip O’Sullivan. Could be used as a template for other banks as well.

Good overview of the current “craze” for dividend stocks

Deep thoughts from David Merkel about complexity in financial companies. This guy knows his stuff.

Manchester United IPO (MANU) – Prime short target ?

After unseccusfully trying Hongkong and Singapore, ManU Ipoed today on the US stock exchange. The IPO price was significantly below the initial range:

The IPO priced at $14, below the $16-20 range the club’s bankers had been seeking. It valued the 19-times English champions at only $2.3 billion and shaved as much as $100 million off the proceeds expected for the team and its owners.

Of course, the public shares have almost no voring rights and dividends should not be expected.

For anyone interested in stocks and football, the F-1 listing prospectus is really fun reading and should not be missed.

Valuation is relatively difficult to determine, but somewhere in the 20-25 EV/EBITDA range based on 2011 figures. Naturally, Manu has been pumped full with high yielding debt from its P/E owners and has additional “goodies” such as 140 mn USD “purchase obligations” etc.

Interestingly they file under the “Emerging Growth” company rule, which allows corporate governance similar to my beloved Italian highway operators….

A quick look at other listed Football clubs:

By the way, Porto could be bought for only 5 mn EUR…..

Yes, ManU is a great Football club, but they cannot and will not defy gravity. So prime short candidate if borrowing is available. It is not yet oin the Interactive Broker US short list, but as soon as it is there, I wil establish a position.

Bad research example: FT’s John Dizard and the Greek GDP linker

I was quite surprised that my old Greek GDP warrant post got hit a lot in the last few days.

By coincidence I just saw that on Monday, a guy called John Dizard recommended the GDP linker as a “great bet on Greek long-term growth”.

You have to register in order to read the article online, but although its almost a half page in the print FFm supplement, the essence is the following:

– the Argentinian linkers were a great deal
– the Greek linkers are cheap (30 cents)

In my opinion, he makes some plain wrong statements like:

“The Greek GDP warrants could begin to pay out in 2015, based on the country having experienced a minimal recovery by then”

.

As I have mentioned in the post, Greece needs to hit the 2011 nominal GDP (in EUR) by 2014, to get any payout in 2015. In 2012, I think Greece is running at around -7%. So Greek needs nominal increases in GDP by at least north of 3.5% both in 2013 and 2014 to hit this trigger. I am not sure if this could be called a “minimal” recovery.

I am not sure what happens if Greece leaves the EUR, but I would assume that the Linkers would only pay if EUR GDP is triggered, not “new Drachma” GDP.

He then goes on and says the following:

“Right now they trade at about 32 or 33 cents, which means that is what you pay for the possibility of receiving one euro in 2015”.

Again, no points. The 33 cents represent the chance that you get any cash flow over the next 30 years. I am pretty sure that Mr. Dizard never really to bothered reading the prospectus, he will be busy writing his next “analysis”.

Finally he quotes a trader who says “the discount rate on future payments is just to high”. This is of course bullshit as well. Normal “non optional” Greek Government bonds trade at 20% yield p.a. If one discounts the cashlofs without taking the options into account, one ends up with a “bond equivalent” value of 3.28%. So you are paying at 33 cent an option premium” of 10% for the bond equivalent market value which is not cheap in my opinion.

Summary: So maybe it turns out that the Greek linker is a good investment. But if it does, it is certainly not for the reasons this genius has identified. My advice would be for people who want to speculate on Greece’s future to buy the GGBs instead. At 15% of nominal, they have enough “optionality” and upside in the good case. Or you buy shares like OPAP if you want to mitigate the Sovereign default risk. Optionality wherever you look.

Edit: At least the article moved the price up by 10-15% for the linker. This is the advantage of writing for the FT.

Draeger Genußscheine (ISIN DE0005550719) Update

No real news but a very interesting developement at my largest portfolio position, Draeger Genußscheine.

As a refresher: The “Genußscheine” include the right to receive 10 times the dividend of the pref shares (DRW3, ISIN DE0005550636). I started the position as a long Genußschein / Short pref shares “carry trade”. I decided to cover the short when Drager issued a EUR 210 offer and keep the Genußscheine as this put a floor under the price.

Now, in the last view days one can see something interesting happening: The Pref shares trade lower while the Genußscheine jumped.

If we look at the 10 year history of price of the Genußscheine divided by price of the prefs , we can see that the relation has increased significantly to a 10 year high at currently around 3.7 times.

I didn’t find any real news, however in some internet boards there is a speculation that either Draeger might increase the dividend or even come out with a higher offer. I am not sure about that if they will really do something.

Back then I wrote the following:

For the patient investor, I think the Genußscheine will be still an intersting medium term investment. For the portfolio I will hold them unless I find something better, there is no need to sell.

I think this is the same lesson as from the AIRE KGaA example as well as with the Bertelsmann Genußschein: If someone really wants to have a company or a certain share class / security , it usually pays off to wait and not jump on the first offer.

In the past, I often used to sell at the first offer, being happy to make a nice gain quickly. But as those two example show (so far), the risk /return relationship of just doing nothing and wait further seems to be quite good.

The only “problem” now is that the position is currently 10.2% of the portfolio. a ~10% is kind of the maximum I can stand for a single position, I will have to decide to sell if the Genußschein moves further.

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