value and opportunity

A quick “post mortem” on three stocks that I recently exited: Expedia, Cars.com & Record Plc. All three were disappointing in absolute or relative terms and especially in two cases I really made mistakes.

Expedia:

Some days ago, I sold my Expedia shares with a small ~10% profit, although the stock dropped by almost -30% in one day after the Q3 result announcement.

What happened ? Well, Google travel seems to have taken a big dent out of Expedia’s business. I even wrote about Google travel some months ago but didn’t actually do anything. This was my takeaway back then:

I am not 100% sure, but I think this  is maybe a defensive move from Google. The big online travel companies are still the biggest clients of Google but as outlined above they are cutting online budgets and therefore Google needs to do something in order to increase revenues.

It still needs to be seen how well this would work. Google for instance also try to go into insurance comparison but failed to achieve any results.

Summary:

Although the travel space is clearly one of the earliest sectors that went digital, the market is still very dynamic and competitive. So far, Expedia is doing well and seems to be one of the winners, so I will keep the stock for the time being.

However one needs to clearly pay attention to Google and AirBnB. In my opinion, the typical aggregator models like Trivago and Tripadvisor are clearly doomed and will be hurt most especially by the new Google offerings

In perfect hindsight, I should have taken action directly. Once Google enforces its “special tax” on businesses, the future for any business acquiring customers over the web might look very different from the past.  Especially Internet 1.0 aggregators are easy prey for Google. However also other businesses need to be very careful, despite the fact that not every attempt of Google works out (insurance comparison being one of them). As a take-away, i will need to be extra careful with any business model that relies on online perfomance marketing (note to myself: Naked Wines !!). Booking.com interestingly has been relatively resilient but overall travel stocks ar still trading below 2017 levels which clearly shows that the times of fast growth are over.

Cars.com

My Cars.com spin-off special situation resulted in a -44% loss when I sold it a few weeks ago and is actually number 2 on my all time “flop 10” list now.

The idea 2 years ago was that once spun-off, Cars.com would get rid off the legacy indirect business and eventually an activist would come in or be taken over. Cars.com was relatively cheap at that time. Of course it came different. Yes, an activist came in and the stock went up but operationally things went south. The wholesale business via the old owners seemed to have been hard to replace.

Yes, Truecars did even worse as predicted but Cargurus did much better. Overall my main mistake was that I underestimated the competition compared to other markets where there are only 1 or 2 dominating platforms.

Similar to Expedia, I actually wrote about the operating issues at Cars.com in Junebut again, didn’t do anything:

However the underlying performance of the company was quite disappointing. The 2018 earnings presentation contains a lot of positive spin on nonsense KPIs like website traffic, however costs increased far quicker than revenue and income dropped significantly. The acquisition clearly did not add anything to profitability and organically most likely Cars.com would have shown declining revenues in 2018 already.

Q1 results 2019 were even worse. Besides the nonsense KPIs, the presentation clearly shows that sales are declining and cost is still increasing. Debt has increase to around 700 mn USD. Looking into the details, the main issue seems that they cannot convert the old wholesale model (sales of ads via media partners) into direct sales. The wholesale segment is breaking away but the direct business is not catching up fast enough which results in a loss for the quarter,

and:

In cars.com’s case I think there is still some chance for a shorter term catalyst. So I will not throw in the towel yet but keep the position for the time being and review by the end of Q3.

Lessons learned here: Don’t do spin-offs (or do them more professionally) and sell when the fundamentals are deteriorating, despite the hope for “short term catalysts”.

Record Plc

This was my most recent exit, including dividends and a currency gain, I more or less broke even (-1,3%). The initial idea was that Record is cheap, management owns a significant share, the business is capital light and there might be tailwinds from MIFID.

However comparing the 6M report 2019 and the 6M 2017, we can see the following:

AuM are 59,9 compared to 61,2 and management fees are 11,1 compared to 12,0 in 2017. So AuM is declining (despite overall positive markets) and fees are shrinking. However what really made me pull the trigger is this passage from the 6M 2019 report:

Administrative expenses include Record’s principal variable
remuneration scheme, known as the Group Profit Share (GPS).
This period saw the first implementation of the changes to GPS
described in Record’s Annual Report 2019, intended to better
balance rewarding individual contribution as well as firm-wide
performance. As a result the GPS pool has been determined
as 31.1% of operating profits, within the established 25% to
35% range, with the increase above 30% largely recognising
progress in generating new business and strengthening
prospective client relationships. The total cost of the GPS
payments, at £1.4 million, is 17% less than for the first half of
last year, and 15% less than for the second half, in line with the
decline in operating profit.

So in short: business is shrinking, but the relative bonus participation is increasing. Yes, MDs got a -17% allocation compared to last year but shareholders are down -21% in EPS. To me such behavior is unacceptable and clearly shows that there is no real alignment between management and shareholders, despite the relatively high ownership rate. I guess the current management wants to eat some of Neil Record’s cake….