Last weekend I spent some time reading Warren Buffet’s letter to shareholders. One of the things that struck me was his investment in airline companies. In August 2015, I added some shares of Southwest Airlines (LUV) to my fund at around $36.50. I noted this investment in my Caps page as well.
Under Armour is down about 30% since they announced earnings a couple of days ago. They are also down about 61% from their 52-week high. It’s been a tough year for the company, but this is looking like an overreaction.
There are a couple of things going on. The more minor portion of this is that the company has decided to invest more heavily in growth. This sounds great, and I love to hear this from management. They are looking to invest for the long term. What this means for the bottom line is diminished earnings. When I hear this, I think of Amazon. They have focused on gross margin for years, investing heavily in infrastructure, R&D, and people. Earnings have looked minuscule, but the company has crushed its competition and grown to a behemoth.
I’m still working on a long post on Starbucks and I can’t wait to dig in a bit more on Paypal. Both reported earnings last week. Some notes from the Paypal earnings report are noted below.
What appeals to me about Paypal (PYPL) is the consistency of earnings and the loads of cash flow that the business creates. They take a small cut from a consistent and growing financial network with the ability to expand into other financial services. It’s the same business model that Visa and Mastercard have. Last week’s earnings were also the end of their fiscal year. Top lines grew at 17% for both the quarter and the year. Operating cash flow was $923 million for the quarter, $3.2 billion for the year. Free cash flow was $771 million for the quarter and $2.5 billion for the year. Printing cash.
In the fourth quarter, payment transactions grew by 23% and total payment volume was up 22%. The platform is growing, though revenues aren’t growing as fast as volumes, the volume growth is impressive.
A couple of things that I note. There are a couple of earnings per share numbers per reporting period, GAAP and non-GAAP. The non-GAAP numbers back out stock-based compensation expenses. This is a little annoying as compensation is considered an expense most places. I understand that in the tech industry, options are commonplace. However, the numbers at Paypal are pretty significant. For the year, earnings per share were $1.15, but Paypal likes to note that non-GAAP eps was $1.50. 35 cents per share is a pretty significant number in my mind.
The other point that I think is important about this business is that because it produces quite a bit of cash flow, how it is allocated is very important. Part of this allocation is built in to expenses in the form of R&D. Part of it is used for acquisitions, and part is for share buybacks. The allocation of this cash flow will be important in generating future growth.
It’s been a while since my last post, but I think it is time to get back to writing.
I am working my way through an analysis of Starbucks. It is a great company at a fair price. To continue their growth where analysts expect and where they have been historically, they need to execute on their China expansion.
I have also been looking at Paypal. I like what I see so far. Their business generates lots of cash and I like what I’ve read about the CEO so far. More competition is coming in to their space, but Paypal continues to generate more user engagement and expand their customer base.
Another company that has caught my attention is Skyworks Solutions. They have been tied to Apple as they supply the connectivity chips to them. Because Apple’s growth has slowed, so has Skyworks, but Skyworks is tied in to the growing trend of the Internet of Things. They have a growing customer roster, good margins, and they generate a lot of cash flow.
My focus is on great companies at fair prices. I want to know the businesses I own really well and own them for a long time. I will try to share my discoveries as I make them and then make a longer, full analysis available occasionally as I build them.
I continue to think about Skechers. I updated my post to reflect some of my recent thoughts. I doubt that Skechers currently has a durable competitive advantage. The company was downgraded last week by an analyst who is concerned that fashion trends are headed in a different direction. This is a risk that I had not really focused on, but it is certainly reflected in the history of their earnings. They are either riding a wave of success or retooling their designs to catch the next trend. From this perspective, Skechers could be viewed as almost a cyclical stock.
In my last post, I created a shortlist of companies for further consideration. Near the top of that list was Skechers (NYSE: SKX). Skechers reports returns on equity in excess of 20% and analysts are projecting a 20% growth rate for the company for the next five years. The reason I am starting with Skechers is that the company looks to be trading at a significant discount to their intrinsic value. In this post, I’ll take a closer look at this business to determine if I can understand it, if management is capable, and if it is indeed trading at a significant discount.
In my last post, I focused on the companies that were likely to have the most sustainable competitive advantage by sorting a list of my favorite companies by return on equity. In this post, I will apply a few simple calculations to see which companies are likely to offer the best value and then create a short list for further analysis.
I spent a little bit of time filling in data points on my list. I gathered six data points:
- Return on Equity
- Trailing-twelve months earnings per share
- Current Price
- 52-week high
- 52-week low
- 5-year analyst estimate of projected growth
Return on equity is a quick measure of management effectiveness. I prefer return on invested capital, but return on equity can be found quickly on most financial websites. Trailing twelve months earnings per share will help determine some valuation metrics as will the current price. The 52-week highs and lows will give a good indication of the trading range for the companies. Finally, the 5-year analyst growth estimate lets me know what the general consensus is for the company’s longer term prospects.
Keep in mind, this is not the end of my research, it is just the beginning. I’m trying to get an idea of where to focus my time. Here are my results, sorted by return on equity.
I’ve spend a lot of time thinking about investing lately. My goal is to really develop a process for identifying good investments and then drilling down into a good analysis of each company. This reboot may help readers think about how they might begin investing if they are just getting started.
The first step in the process is to identify companies that are interesting to me. If they are not interesting, it will feel too much like work keeping track of them. I don’t want this to be work. That said, I probably have a higher tolerance for research than others. I actually find it enjoyable. I can also identify companies where I have better than average knowledge or expertise of the industry. These companies fall within my “circle of competence.”
So here goes. I am starting with a list of companies. This is a list of companies that I encounter on a regular basis or that I admire.
For those following along, I published a post on Lexington Realty Trust on March 9. I was late on the posting as the shares were mid-rally at around $8.30 per share. We are close to $8.50 per share today and the rally is looking a little worn out. Now is the time for me to take a little money off the table for Lexington. Better prices and yields should be available soon. My price for exiting it completely would be around $14.00. At some point, I will explain what I am looking at to make this determination.