The Intelligent Investing Podcast

#74: Christian Olesen | Cambria Automobiles Update (CAMB)

Watch The Video!

It's been a while since we've talked about Cambria Automobiles on the Intelligent Investing Podcast. You can hear the original episode we did on Cambria, here.

Update

Cambria Automobiles came out with earnings around the end of November. The stock was up ~15% on that news. The company increased earnings by ~25% over the previous year whereas the rest of the car dealership industry was down because of poor new car sales in the UK.

Cambria is up mostly because of new dealerships and startup losses are not turning into profits.

There are three categories of profits for car dealerships:

1. New Car Sales (NCS)
2. Used Car Sales (UCS)-used car
3. After Sales (Parts & Service)

All three categories for Cambria were up which is an amazing accomplishment. It's even more incredible for NCS because that's the number one driver for the industry being down this year.

Why Is Cambria Different?

Because the company started fibve luxury dealerships around 18-24 months ago. Luxury dealerships have more profit contribution when they mature than non-luxury which is what most of the industry is.

#72: Jeremy Raper | Credit-Based Equity Investing | Japanese Stocks | Shinoken | Gan | Nio

Summary

 

In this episode of The Intelligent Investing Podcast, Eric Schleien and Jeremy Raper sit down to discuss everything from Jeremy's personal growth into a 'credit-based equity investor' to specific long (Shinoken, Gan) and short (Nio) ideas and how he generates ideas like these.

 

Discussion of investment philosophy

- Pursue a methodology I term 'credit-based equity investing, or 'thinking like a creditor but applied to stocks'

- It means using the skeptical, 'downside before upside' mentality of a creditor to pick stocks, rather than the typical equity mindset (which emphasises growth/blue sky/optimism)

- Method derives from time spent in Japan, where due to decades of low rates/QE the fundamental discipline of credit analysis structurally disappeared from the market

- This created an opportunity to identify investment ideas using a credit skill-set

- However, the true opportunity lay not in applying those tools to fixed income/bond markets but to equity markets, given the excess liquidity in the system provided by QE/central banks meant typical bankruptcy restructurings were not common

- Instead, the equity market was serially used to recapitalize troubled/distressed issuers

- This pattern is now being replicated, to an extent, in other markets like Europe and the US (since these markets are, from a monetary perspective, looking more and more like Japan)

 

 

Stocks we discussed

Shinoken (Tokyo listed, 8909)

 

- Small cap Japanese part real estate developer, part RE management/recurring revenue stream business unfairly sold down last year t0 <4x EPS due to temporary dislocation just in the development segment

- Business has since stabilized and RE development likely returns to growth next year; the recurring rev segments are still growing strongly

- Business has rerated to 6.5x EPS but fair value on a sum of the parts basis is closer to 11x EPS, so still a near double

- Aligned management (30% ownership), do occasional buybacks, pay a decent div

- Japanese small cap with v limited English disclosures so not for everyone!

 

Full writeup here: https://rapercapital.com/2019/08/19/shinoken-this-is-what-value-looks-like/

 

Gan Plc (London listed, GAN)

 

- Small cap and listed on the AIM junior exchange, so caveat emptor :)

- Provider of B2B software for internet gambling providers. Historically all in Europe but major client now is Fanduel in the US and so they are plugged in to the structural multi-year growth runway in US legalized sports betting

- They get royalty fees based on users and engagement thus as ARPDAU grows, margins should scale, like a SaaS business

- revenues will double this year and no reason they won't keep growing aggressively as sports betting growth continues

- Available today at <4x FY20E revs and EBITDA positive (maybe <15x EV/EBITDA) for a business growing triple digits. Highly unusual

- Only this cheap because its not on a major exchange but this will change from next year with NASDAQ relisting

- Manager, Dermot Smurfit's family owns ~30% of the company and is highly aligned

- This is an atypical opportunity for me but highly interesting given the valuation/setup

 

 

Nio (New York listed, NIO)

- One of the most anomalous mispricings of a security Jeremy has ever seen in his career

- Chinese EV player that is likely structurally unprofitable and unable to scale, burning tons of cash, all the key executives have left, took on a ton of debt, and no update on two emergency financing transactions

- The company has essentially 'gone dark' (stopped reporting material information) - peculiarly a perk only available to Foreign Private Issuers (FPIs) despite being listed on the NYSE

- In any case they likely run out of cash in the very near term, or do an emergency financing transaction that wipes out the ADR equity

- Bonds trade at 30c on the dollar implying an EV for the whole company of <$500mm while the stock market cap ($2.3bn) implies an EV for the company >$4bn, or 9x that implied by the bonds

- Highest conviction short on his books at the moment

 

Full writeups here:

https://rapercapital.com/2019/03/27/nio-this-will-end-in-tears/

https://rapercapital.com/2019/10/08/capital-structure-arbitrage-part-deux-the-curious-case-of-nio-inc/

#71: Brian Langis; Brookfield Asset Management; Why The Modern Shareholder Activist Is Inferior To Cultural Activism

Show Summary

Happy day before Halloween! This is a very special episode of The Intelligent Investing Podcast. I bring Brian Langis back on the show to discuss Brookfield Asset Management which we have discussed before. We go into some of the slides from Brookfield Investor Day 2019 on both Brookfield Asset Management and also some of their subs such as Brookfield Business Partners. We discuss larger trends, low and negative interest rates, valuations, and culture.

Cultural Activism

We spend quite a while on the cultural activism going on at Brookfield Business Partners led by their COO, Denis Turcotte. I had the pleasure of meeting him at the Brookfield Investor Day and noticed he wasn't just giving lip service to culture but actually doing it and knew he didn't learn this from business school. Many of you don't know this but I have a 10 year background in transformational coaching and a 7 year background specifically on organizational culture- not just understanding it but actually empowering organizations to elevate it. Brookfield Business Partners is actually working with businesses to elevate culture not just talk about it and no surprise, profits go up!

Better Culture Equals Greater Profits

One of the things I have discussed with my colleagues John King and Scott Forgey is that greater culture equates to greater profits. John King is the inventor of Tribal Leadership which is the most cutting edge and leading cultural transformation technology on the planet. Scott Forgey is working with me on empowering organizations to elevate their culture, except we are focusing on public companies. When an organization goes from what is known as Stage 2 to Stage 4, profits go up by an average of 300% - 500%.

Relevant Links For This Episode

1. Eric Schleien interviews John King on Tribal Leadership | Thrive Global
2. Cultural Activism: A New Model For Activism | The Intelligent Investing Podcast
3. Netflix, Sears, Tribal Leadership | The Intelligent Investing Podcast
4. How To Keep Large Companies Innovative | The Intelligent Investing Podcast
5. The Oaktree / Brookfield Transaction | The Intelligent Investing Podcast
6. 2019 Brookfield Investor Day Slides | Brookfield Asset Management Investor Relations
7. Getting Into The Weeds: Recap on Brookfield Asset Management | The Intelligent Investing Podcast

Connect With Eric Schleien

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Connect With Brian Langis

• Visit Brian Langis' BLOG
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#69: Braxton Gann; Shipping Companies; IMO 2020

In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Braxton Gann to discuss two shipping companies, Scorpio Tankers (STNG) and Diamond S Shipping Company (DSSI). 

Overview

A lot of managers are concerned about the "trade war" because less trade = less shipping. Braxton thinks that a trade war is a positive because the trade will be less efficient, increasing ton-miles.

 

Some investors also worry that a global recession will send these shipping companies into bankruptcy, forgetting that new supply would be cut off by a recession, and that obsolete vessels would be scrapped mercilessly.

 

There has been a lot of talk about OPEC cutting production being a negative for STNG, but STNG carries products, not crude. Saudi Arabia is adding refinery capacity, and the OPEC cuts will have to be renewed in March.

 

IMO 2020

Another puzzle is that shipping companies are downplaying the obvious effects of IMO 2020, which can easily be enforced by spot checks. Braxton thinks this is because most companies can't afford scrubbers, even though they offer payback times of 10 months or less.

 

Another factor that we didn't end up getting to on the show is that many shipyards are going bankrupt, and shippers will have to rebuild their balance sheets for a couple of quarters before ordering more product tankers, which can take a year and a half to build.

 

The Tanker Thesis

 

The main reason Braxton likes product tankers is due to the disruption that will occur from IMO 2020. Many ports don't have the low-sulfur fuels required for IMO 2020, and each low-sulfur blend must be carried in a different tank. Braxton started looking at product tankers when he realized they would be the ones carrying LSFO blends. Inventories of refined products and bunker fuels are surprisingly low, so you could get a double boost from normalizing inventories and arbitrages between ports. This could boost demand by 10% or more, excluding the effect of normal GDP growth.

 

Contact Eric Schleien

If you'd like to connect with me Eric directly, he always loves connecting with listeners of the Intelligent Investing Podcast on his personal Twitter.

You can also connect with Eric on Facebook, Instagram, or through his personal website.

To follow The Intelligent Investing Podcast, click here.

#68: Eric Schleien; Trupanion; Slowing Growth; Issues in California

In this episode of the Intelligent Investing Podcast, Eric Schleien discusses Trupanion (TRUP).

OVERVIEW

The price of Trupanion (TRUP) stock has recently declined from the mid 30’s/share to the low 20’s/share. Trupanion has high short interest due to claims of overvaluation on a price to book level and due to claims that the business model is flawed and unsustainable. Even some longs are selling the stock. For example, Todd Wenning of Ensemble Capital shared in a recent blog post from his online publication Intrinsic Investing that he has grown concerned with Trupanion’s ability to communicate their value proposition to pet owners and that Trupanion has trailed the industry growth rate as defined by the North American Pet Health Insurance Association (NAPHIA), after years of outperformance.

 

CONCERNS RAISED BY ENSEMBLE CAPITAL

In addition, Todd shares a few concerns on his blog:

1. Todd assumes that when there are industry tailwinds, most companies with what he refers to as “emerging moats” should be able to continue to gain market share and recently this hasn’t happened with Trupanion. He cites this as a red flag.

2. Todd also explains that Trupanion is often the first brand that vet customers hear from their vets yet Trupanion has a slowing growth rate and is not outpacing the industry recently

 

There have also been concerns raised on Seeking Alpha that California raised their prices by 150% in California since 2015 with an additional 20% price-hike this year. He has concerns that this will lead to adverse selection which is a worst nightmare scenario for any insurer: healthy pets leaving due to higher prices while the sick pets stay leading to unsustainable losses.

 

FAULTY ASSUMPTIONS

However, there are some faulty assumptions here. 

Yes, it’s true that Trupanion subscription growth only grew a bit over 15% compared to the industry’s 17% growth rate, but looking at this alone doesn’t tell the entire story. In reality, Trupanion is growing faster than the industry when you compare similar products in the marketplace. For example, there are lots of cheap products in the pet insurance marketplace that really aren’t comparable. In addition, some companies are underpricing during a period where the pet insurance category is gaining more awareness. We have seen this before.

 

COMPETITORS UNDERPRICING POLICIES

Trupanion competitors from time to time will grow faster than the category due to mis-priced policies. For example, Nationwide grew pretty quickly and grabbed market share two years ago. However, they had to pull back after a year because they couldn’t price their product properly Another example is Healthy Paws. If we look at Healthy Paws, they have grown pretty quickly. However, if you look at their pricing, they’re able to get away with it because they keep switching underwriters and they keep rolling over new pets to new books of business. Healthy Paws recently had to change their product by introducing caps, changing their deductible structure to longer having zero deductibles. In addition, we see pricing increases of 30% on top of natural age based pricing factors. The fact that they are mis-priced has now become a problem for Healthy Paws. In Washington, they can’t even underwrite policies anymore. 

 

THE CALIFORNIA FALLACY

California is getting a lot of attention for Trupanion. However, this concern is also totally unwarranted and blown completely out of proportion. Just like Trupanion, Healthy Paws also files in California and 34% of pets need more than a 50% pricing increase. That’s base rate increases + 15% = 65%. California, however, is capped at 50%.

The way you win your insurance category long-term is to price more accurately than your competition. Short-term this means you won’t always be growing faster due to the ebbing and flowing of the many other pet insurance competitors that underprice their policies. This has never been shown to be sustainable (obviously) and economic reality always settles in within a few years time. Trupanion is by far the best in the business when it comes to pricing policies accurately to get their 70% target as quickly as they can.

California is no different than what Trupanion has disclosed on their main book of business. Nothing would suggest that churn is different in California despite the massive pricing increases in recent years. One-third of Trupanion customers interact with the product in the first year. The company is processing 80,000 claims/month and the average claim is only a few hundred dollars. When rates increase, there is an increased churn of 20% across their entire book, California is no different. One of the biggest opportunities for Trupanion currently is their first year churn rate. 

The reality in California is that the greatest usage amongst Trupanion customers are specialty and referral hospitals (cancer centers, cardiologists, urologists, etc). This leads to greater Trupanion customer population density. The California market has seen large increases in these types of hospitals and the Trupanion customers are seeing value in them as can be seen through claims passing through those hospitals.

 

BUSINESS AS USUAL

The business model is not broken. None of this should be news. The panic ensues by those who can’t see the context behind the numbers. However, I’m happy to have the shorts keep shorting. Recently, the borrow rate on shares has climbed to nearly 10% meaning that through Interactive Brokers, myself and my investors through Granite State Capital Management are getting ~5% interest on our shares.

Disclosure: Granite State Capital Management manages SMA’s with positions Trupanion (TRUP). However, this could change at anytime without prior notice. This is not a buy or sell recommendation. I wrote this article myself, and I am expressing my own opinions. I am not receiving compensation for this post.

SHOW LINKS

• Why We Sold Trupanion (Intrinsic Investing Blog)

• Trupanion: $8 Price Target, Adverse Selection Exposed In Filings (Seeking Alpha)

• Trupanion: Downgrading To $1 As Rate Spiral Takes Hold (Seeking Alpha)

• TRUPANION: SLOWING GROWTH; ISSUES IN CALIFORNIA (Granite State Capital Management | Blog)

CONTACT ERIC SCHLEIEN

If you'd like to connect with me directly, I always love connecting with listeners of the Intelligent Investing Podcast on my personal Twitter.

You can also connect with me on Facebook, Instagram, or through my personal website.

To follow The Intelligent Investing Podcast, click here.