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    February 12, 2017
    TransUnion Earnings are Accelerating

    TransUnion’s stock jumped 10% yesterday as the company reported strong earnings and guidance.

    The firm is one of three major credit rating agencies that offer decision making solutions to businesses around the world.

    Alongside Experian and Equifax, TransUrban operates in what is effectively an oligopolistic industry with strong pricing power. The firm has developed a powerful database over the past 48 years that would, to say the least, be difficult and costly for any potential new entrant to replicate.

    To put it into context TransUrban database contains 40 petabytes of data with each petabyte being one million gigabytes.  TransUrban uses its database to provide financial information on over 1 billion consumers worldwide with clients from the healthcare, insurance and financial industries using its services to generate accurate credit information and models to manage their own exposures.

    The credit ratings industry has seen a significant ramping up of growth in recent years as big data has seen significant advances in processing power while end users have seen increasing demand due to new banking regulations, new lending platforms (such as peer to peer lending and pay day loans) as well as increasing growth from emerging markets.

    The figures announced yesterday strongly support the growth stock thesis. Fourth quarter revenue rose 13% while adjusted EPS grew 45% and the company beat consensus forecasts by 7.6% and 25.7% respectively. Full year adjusted EPS grew 38% to $1.50 and follows average annual growth over the past three years of 13% for revenues and 40% for earnings.

    With guidance the company was more conservative in its forecasts for 8 to 9% revenue growth and 14 to 17% adjusted EPS growth. However we note TransUnion’s track record of significant top and bottom line beats and also note third party forecasts, by external providers such as International Data Forecasts, that estimate 15% growth through to 2019 for big data and analytics.

    The stock jumped 10% following the news and is not cheap with a valuation of 25 times earnings. But with strong growth, secular tailwinds and strong pricing power the stock seems deserving of a large premium.

     

    February 12, 2017
    Skechers is still growing

    Skecher’s growth rate has dropped dramatically over the past year but it is still a rapidly growing company that report a 10% increase in Q3 sales to $942 millionand 8.1% of operating income as the companies international wholesale business increase by 40%.

    The market was spooked by an earnings miss of 9% and poor Q4 outlook but, as was explained, the Q3 numbers were impacted by a higher tax rate and negative currency impact on foreign sales of $15.9 million. Additionally the outlook was not that bad and what appeared to be a dip in forecast sales was actually caused by the transtioning of several international business from a whole sale operation to a joint venture – with wholesale revenues realised on shipping and JV revenues realised on final sale – as a result sales should bounce back again in Q1.

    All this confusion has led to a 50% drop of the stock price to $24.73 over the past 18 months while the stock trades on a PE of 14.36.

    With a strong balance sheet, net cash position of $600 million compared to a market cap of $4 billion and consensus forecasts still expecting annual EPS growth of 9% investors may well be tempted.

     

    February 11, 2017

    Market reaction to Alphabet’s earnings was too harsh

    Alphabet (GOOG) closed down a little over 1% at $823.31 on Friday after the market was disappointed by forth quarter EPS figures which came in at $9.36 compare to expectations of $9.64 and last years result of $8.67. Revenues beat guidance and grew a record 22%.
    The reaction seems harsh for 8% EPS growth given Amazon explained that a one time tax adjustment was responsible for its earnings shortfall as stock based compensation rose to $586 million compareed to $316 million a year ago. Overall revenue growth appears to be very healthy.

    Throughout 2016 paid clicks has increase at a high double digit rates that have been more than enough to offset declining cost per clicck cost per click rates and allowing strong revenue growth whicch accelerated on a constant currenccy basisfrom 21% to 23% as revenue was boosted by “very significant” growth at YouTube.

    The companyis priced on a next year PE of 19.9 but if ths is adjusted for the huge level of cash on the balance sheet ($82 billion) the ratio improves to 17.05. If you adjust for the annualised moonshot losses then the adjusted PE improves further to 15.36.
    Google looks set to continue to benefit from positive trends in monetising search and social videos.  Its PE ratio looks appealing.

     

    February 10, 2017
    Massive revenue growth at Cogint

    First up this is a small cap with a market cap of just over $200 million so its high risk, low liquidity and not appropriate for many investors. But for those who want exposure to a pure play “Big Data” company it might just be the ticket.

    Cogint is a big data and analystics company that has grown quickly to become the main provider in the complex field of data fusion. The company has been aggregating massive data sets and building a comprehensive data base that includes a high level view of 95% of the US population using 120 million self reported profiles and 700,000 daily survey respondents.

    The company has recently seen huge increasing customer spend across its product lines demonstrating strong demand for its services. Q3 revenues were $ 52.2 million compared to $41.04 million in Q2. Full year forecasts are for revenues of $186 million compared to $14 million last year. But the stock has traded lower and dropped sharply after Q3 results reported lower margin and higher losses despite increasing revenues. Q3 net loss was $9.7 million versus $7.2 million in Q2.

    However the increased losses were largely due to a one off charge of $4.1 million in Q3 and management signalled a brighter outlook with forecast margins expected to increase again to 28% in Q4.

    CEO Derek Dubner has said ” we are sitting in an amazing position” and “we’re swimming in opportunity”.

    Insider Ryan Schulke has been buying up stock aggressively and now holds 2.5 million.
    Trading on a price to sales ratio of just over 1.0 other investors may want to follow.

     

    February 9, 2017
    Auto Parts motoring on

    Aftermarket auto parts companies took a hit on Monday after reports that Amazon had struck a deal with some of the US’ largest autoparts dealers to sell their products directly through Amazon.

    AutoZone, Advance Auto Parts and O’Reilly Automotive were all down around 3-4% at some stage during the day.

    The report seems credible as the aftermarket autosales market would be an attractive target market for Amazon. Aftersales have seen remarkable growth in recent years, as the average age of cars has increased, and now revenues total almost $70 billion.

    However, mail order and online auto parts retailers are not a new development and there are several compelling reasons why bricks and mortar retailers have continued to thrive and online sales still only account for about 5% of total. Firstly, most customers need some advice (even DIY enthusiasts) and, secondly, most customers need the part immediately.
    These two factors combined provide a powerful moat for the autoparts industry. Amazon can currently provide same day delivery to 40 cities but this probably still isnt sufficient. Instore customers receive a high level of service as assistants can advise on the problem, investigate other possible issues, recommend the correct product and usually provide it immediately.

    The development is negative and the retailers can expect to lose some sales but the business model of autopart retailers continues to appear resilient.

     

    February 8, 2017
    Potential Value at TopBuild

    TopBuild has had a few ups and downs since its spin off in 2015. First the stock raced ahead to around $38 before falling back to a low of almost $23 and then returning to $37 today. However in that time TopBuild has been able to establish a meaningful and growing level of profitability and on its current TTM PE of 12.6 looks good value.

    TopBuild is the largest distributer and installer of insulation in the US operating through two divisions Service Partners (distribution) with 70 branches and accounting for almost 40% of revenues and TruTeam (installation) with 175 branches and accounting for just over 60% of revenues.

    Being the largest distributor and installer with almost 250 branches brings cost benefits from scale for TopBuild as well as a higher level of service for customers and clients. TopBuild claims to be able to service 90% of all new builds Competitors such as Installed Building Products are significantly smaller with 100 locations nationally.

    Revenues have grown steadily from $1.2 billion in 2012 to $1.6 billion in 2015. However, after several years of losses, the company was able to report a profit in 2014 of $9.4 million and $79.12 million in 2015.

    With an improving outlook for the insulation industry driven by an improving housing market, positive economic outlook and increased regulatory requirements the growth has continued. Net sales increased 5.9% in the third quarter of 2016 and gross margin improved 190 basis points. For the first 9 months the company reported a profit of $51.3million and diluted EPS of $1.35 compared to $19.2 million and $0.51 for the same period in 2015. More recently, last week the Commerce Department reported an 11.3% jump in housing starts to a seasonally adjusted annual rate of 1.23 million units compared to 1.10 million units in November to finish what has been a fairly healthy year for the residential housing market.
    Looking ahead the future looks equallybright. The company has a strong balance sheet with net debt of $80 million compared to equity of $960 million so growth and even acquisitions should be easily funded. Even more promising is the potential for tax cuts under a Trump administration.

    With all these positives the current valuation looks appealing.

     

    February 7, 2017
    Shopify – Growth at a reasonable price?

    Yes Shopify (SHOP) is expensive in the same way that Alphabet, Facebook and Netflix have at some stage been called expensive. It is loss making and trades on a hefty multiple of over 7 times next years forecast revenues with a market cap of $4.3bn.

    However, similar to those internet giants, Shopify is the go to provider in its niche/sector and if it can win a decent share of the total addressable market of $120 billion (and growing) then the stock price could rise significantly.

    Shopify develops software for online stores and was established in 2004 after Tobias Lütke, Daniel Weinand, and Scott Lake tried to set up an online snowboarding store and found the existing e-commerce products were unsatisfactory. Originally the company set up an open source web platform for which Shopify would develop and sell applications to storeholders. However growth really took off after the company launched its first free mobile App in 2010.
    With excellent functionality, features and extremely positive customer feedback Shopify quickly became the go to provider for small online merchants. Financial expansion has been rapid with revenues increasing from $23 million in 2012 to $205 million in 2015. Then in September 2015 Amazon announced that it was withdrawing its own Webstore platform and that Shopify was to be its prefered partner for Amazon Merchants to migrate their online stores.

    Patrick Gauthier, VP of Amazon Payments said “Shopify exemplifies the value of simplicity in an increasingly complex world of commerce services. We are excited to work together with Shopify to create best of class solutions that help merchants integrate Amazon offerings”
    Then in April 2016 Shopify added payment features for Apple Pay and last Fall it announced it was making commerce available for Facebook Messsenger platform.

    The most recent quarterly results (Q3 2016) were a blowout. Total revenue up 89%, gross profit up 82%, the volume of merchandis sold on its platform more than doubled and the number of merchants increased 60% to 325,000. The company reported a loss and probably will continue to do so. But with such a small company with such a strong product in such a large and growing market it is correct to continue to invest in growth. I personally think a price of ten times revenue ($4.3billion) looks pretty reasonable for a company that has nailed a $120billion market and is doubling its revenue each year.

     

    February 6, 2017
    Special Situation

    Paybox Corp is a microcap so lots of risk, highly illiquid and not suitable for many investors.
    However, in an interesting move on December 19th, the board approved a reverse stock split that will reduce the number of shareholders to below 300. The idea being to reduce the regulatory requirements on Paybox and save several hundred thousand Dollars a year (bear in mind this company’s profit before tax is typically a few hundred thousand Dollars).

    Under the deal, shareholders with less than 1,000 shares will be bought out at $0.80 even though the stock is currently trading at $0.58.

    This gives us the opportunity to net the 22 cents premium on 999 shares which is roughly equal to $220.

     

    February 4, 2017
    Mainstream Stock

    Amerco (UHAL) is North America’s largest do it yourself moving and storeage operator. The one that rents out the familiar U-Haul trucks and trailers for one way transportation.

    The stock rose sharply from 2012 to the end of 2015 as the company increased revenues by 30% and net income by 85% (FYE March 2013 to March 2016) but has since fallen back by around 16% and now trades on a PE of 15.8.

    However Amerco’s prospects remain strong with annual EPS growth of 15% forecast over the coming years and there are a number of reasons to believe these forecasts.

    Firstly, the truck rental business is a $19 billion industry with growth expected to accelerate as the economy picks up, millenials reach the peak moving age range of 18 to 35 and baby boomers reach retirement age.

    There is a growing amount of evidence that suggests millenials (typically born in 1990 and later) dont love urban living any more than other generations and have remained in urban centres due to the great recession and other factors. Now, as they approach their mid to late twenties, they are increasingly moving to suburbs as they become more established in their careers and start families.

    Similarly an increasing number of baby boomers say they intend to move house after they retire. Many say they intend to move to the sunbelt but even for the majority who prefer to remain close to family and friends the attraction is increasingly to downsize, to move out of urban centres or to move for a change of lifestyle. Many others are expected to relocate from the suburbs to more convenient city-living.

    Further, the percentage of Americans that rent their home has increased from 31% to 36% over the past ten years. Renters are more mobile and tend to move home more often than home-owners.

    Finally, Amerco’s leading position is supported by its huge network which dwarfs its rivals. The company has 21,000 locations compared to approximately 2,300 at rival Penske and 1,500 at Budget. The advantage of such a large network is that customers benefit from a better choice of origins and destinations while Amerco benefits from economies of scale that lower costs. Additionally competitors would face huge costs if they tried to replicate such a network.

    All of these trends bode well for the moving and self storeage business. The long term trends are positive and U Haul has a leading position that allows it to enjoy lower costs and greater profits than competitors.

     

    February 3, 2017
    Dividend Stock

    Senior Housing Trust’s stock closed down 40 cents on Friday after going ex dividend on its scheduled February payment of 39 cents. Nothing unusual about that except that the stock closed on Friday at $19.02 meaning this asset is yielding a fantastic 8.2%.

    The company is a Real Estate Investment Trust with a diversified $8.5 billion investment portfolio of senior housing and medical centres located across 42 states and 660 tenants. Government exposure is limited with 97% of net operating income coming from private pay properties.

    The dividend looks safe, having been maintained at $1.56 since 2012 even though the Normalized FFO has increased from $1.69 in 2013 to $1.84 in 2015. This number has improved further in 2016, rising 4 cents per share to $1.38 for the first nine months. Rising interest rates may become an issue if the company is unable to pass on rising costs but with $3.3 billion of debt fixed until 2018 and $1.5 billion fixed until at least 2020 the short term impact looks manageable.

    Longer term, with 10,000 baby boomers turning 65 every day, the number of seniors in the US is expected to grow steadily from 40 million in 2010 to 71 million in 2030. With the long term demand for senior housing exceeding supply the fundamentals are positive and growing.

     

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