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An interesting business. They have basically become a shadow lending bank. The challenge is that this requires a lot of CapX. The cheque that is written in exchange for the royalty has to be funded by shareholders. Prefers PrairieSky (PSK-T) instead, where you are essentially the government and you own the land and the mineral rights associated with it.
The challenge is that they are lending to what he would deem as stressed companies. These companies would source bank financing if they could, so that puts it in a higher risk camp. He couldn’t understand what their value add was. When he went through their struggles through the years, there was no consistency to their mistakes. One loss could wipe away 3 or 4 potential strong underlying opportunities, which was not a ratio he was comfortable with.
An interesting retail concept in the US, sort of focused in between more apparel than dollar stores, but more on apparel and consumables. At one point this was your highflying, high growth type business. What attracted him was that as the multiple de-rated, some of the drivers that were leading to the slowdown were not permanent structural issues at the time. They are caught between where people want to shop today and where they wanted to shop 5 years ago. Not cheap enough for him to want to take a position.
Not the most compelling across the Brookfield complex. Has a big UK exposure, which on a headline base really doesn’t bother him. However, anyone claiming to know what will happen over the next 5 years in the office market, doesn’t have the full picture yet. It has a reasonable multiple today, but not as compelling as some of the other areas.
The Golden ticket within this company is ESPN. We have seen the peak of franchise values, and a lot of that has to do with cord cutters. The recent franchises are able to be as valuable as they are today, has predominantly been driven by TV money, and TV money has been coming from the $6-$7 a month that ESPN subs are kicking up to Disney. When you share half your revenues with your players, and wage inflation is going to be somewhat sticky, so Disney is on the hook to write these bigger checks to keep the ESPN franchise growing, but their attrition from customers is increasing. People are finding other ways to watch sports. He worries that the engine that has fuelled business growth over the past 10 years, won’t be there over the next 10.
Has not been adding to his holdings. It has been expensive since it existed. Everyone has been focused on earnings, and not free cash flow. They started approving returns on CapX, and if the franchisees did not meet the return they were just not going to spend the money. This has been north of 20X earnings for the last 2 years, but as free cash flow it was 5%-6%.
Feels it is too late to be buying. The track record of the management team has been very shareholder oriented, and returns they have delivered have been nothing short of extraordinary. It is all a question of what you are willing to pay for those attributes. He would argue that the market is overpaying from what he sees for the next 1-3 years. The business is now $30 billion+ dollar market cap. He started buying it at a $2 billion market cap. Fuel margins are a big driver of their profits and they are getting $.18-$.19 a gallon, and a lot of that has to do with declining oil prices. Sold his holdings, and would like to buy it back, but at 18X.
Their value proposition to customers is not something he is particularly comfortable with. They provide you certainty on your cost of living, etc., but in exchange for a big certainty premium. He has not been able to figure out how that is a repeatable strategy over time. Also, it is a captive universe. Once you have knocked on every door, there is a lot of time before you can go back. Because of this, it is not a growth stock.
The commodity downturn we saw happen 1.5 years ago, had a big impact on volumes, not just oil, but a number of things that were shipped by rail. This, and Canadian Pacific (CP-T) have become phenomenal businesses over the last 15 years in terms of returns. Rails are businesses he wants to own at the right price, and the right price on this was a couple of months ago, so he has not been adding to it since. This represents good value today. Prefers Canadian Pacific even though it is more expensive.
This is an IT services company. Valuation is almost a 10% free cash flow yield. In May they announced they were acquiring HP Enterprises. Thinks people are underestimating the accretion and the synergies delivered from this merger. It is a very fragmented industry. They will be a multibillion-dollar company poised to continue making accretive acquisitions. Dividend yield of 1.18%.
They are extremely targeted and very focused on small/medium Enterprises, and the owner/entrepreneurs that run those businesses. A very conservative and well-run bank. They are carving out the top teens from all the top-performing bulge bracket banks. They come to Signature and get a P&L, so if they make a good loan, they participate in profits. If they make a bad loan, they have to wear the loss. BV multiple is about 1.8.
A really smart operator in a really bad industry. Trucking is not a good business, but their ability to basically outsource the trucks and trailers from Saputo (SAP-T) about 20 years ago, turned it into the business that we see today. Management has done a phenomenal job by running a slightly better business than everybody else, in a terrible industry. Today it is about an 11% free cash flow yield on 2017, with M&A potential. Good management.