Sunday, May 17, 2009
Tuesday, May 12, 2009
Wednesday, May 6, 2009
Monday, May 4, 2009
I mentioned last week that Sysco Corporation is my favorite stock. They reported quarterly earnings today, and I listened to the conference call. Some thoughts:
1) Sysco dominates its industry (Institutional Foodservice Distribution). There are two principal nationwide competitors, dozens of regionals, and literally thousands of local distributors. Both of the national competitors (U.S. Foodservice and Performance Food Group) are owned by private equity firms. This isn’t a great industry for private equity investment, and I’m sure that the PE firms are looking to exit at the very first opportunity. Why is this important? Because you run a business differently if you’re looking to maximize near-term profitability. Sysco can afford to make longer-term business investments and plans.
2) In difficult economic times, small competitors get squeezed hard. This is a scale business—bigger is better. Sysco is much better positioned to ride out the recession. Meanwhile, many smaller competitors fold or look to merge with a stronger partner. Sysco has traditionally grown through acquisition, and they’re seeing a significant pickup in acquisition opportunities, presumably at attractive prices.
3) Few investors and analysts really understand Sysco. It’s covered by 10 sell-side analysts. Two have “buy” ratings, the rest are “neutral” (that in itself is a positive sign). The analysts are typically specialists in the food industry (Heinz, General Mills, Kraft) or the retailing industry (Safeway, Walgreen, Costco). But Sysco is really a transportation logistics company. Their essential function is to manage the movement of millions of cases of merchandise from thousands of SKUs to tens of thousands of customer locations. They buy, pick up, store, assemble orders, load and route trucks, deliver, invoice and collect. It’s not a retailer, and they don’t make food. It really should be covered by transportation analysts. Lucky for us that it’s not.
4) Thirty years ago, as large mainframe computers were becoming widespread in local distribution centers, an industry executive predicted that the company with the best information technology would dominate the industry. This business has billions of discrete bits of data, from individual case costs and prices to truck routing, freight consolidation, and inventory management. Superior IT can squeeze costs, and in a low margin business like this every basis point counts. Sysco is well ahead of all competitors on this measure. It's a difficult task in the industry, particularly for companies built by acquisitions. Interestingly, Sysco alluded on the today’s conference call to some future announcements about benefits from the integration of its software systems.
5) Inflation generally helps Sysco’s margins. A 10% markup on a $20 case of product remains 10% if the product’s price goes up to $21, but the gross profit dollars increase by 10 cents/case. I don’t want to overemphasize this point, but it seems as if the disinflationary environment that has prevailed in the past few years has flattened out and might start to provide an additional tailwind.
6) The stock is cheap at 12 times next year’s estimated earnings. Because of their record of stable growth, it has often sold at 20 to 30 times future earnings. By most measures (price to cashflow, price to sales, price to book, etc) it’s at the lowest level in at least 20 years. Yet the competitive environment has never been more opportune. Solid balance sheet, A1/A+ credit rating, and a 4% dividend.
This is an investment, not a trade. If the economy remains weak, the restaurant industry will continue to suffer. However, as things recover I believe that Sysco is very well positioned deliver improving business results and a higher stock price.
Thursday, April 30, 2009
Wednesday, April 29, 2009
Tuesday, April 28, 2009
Wednesday, April 22, 2009
Wednesday, April 15, 2009
Thursday, April 9, 2009
Friday, April 3, 2009
The burst of a major housing bubble
Excessive leverage pervaded the system
The dramatic growth of structural risks
Regulatory lapses and mistakes
The pro-cyclical nature of virtually all policies
The impact of huge trade and financing imbalances
Wednesday, April 1, 2009
Monday, March 30, 2009
- Don't use many financial ratios or formulas, and when you've picked the few that will actually tell you what you want to know, don't believe them very much (Prof. James T.S. Porterfield);
- Remember that any damn fool can compute an IRR or DCF. The trick is to find a business that can return 20% after tax, understand its critical indigenous and exogenous variables, and then run it so it meets its return target. (Prof. Alexander Robichek.)
- Always ask what can go wrong (Porterfield);
- Never extrapolate beyond the observed points of a distribution, you have absolutely no information outside the observed range (Prof. J. Michael Harrison);
- Remember that you can always break the bank at Monte Carlo by doubling your bet on red at the roulette table every time you lose. The problem is it will break you first; It's called "the takeout." Therefore, always manage your financial structure so that takeout is not an issue. (Porterfield.)
- Big M (today Nassim Taleb's Black Swan) is never a part of the optimal solution. If it shows up in the answer with any coefficient greater than zero, you have the wrong answer and have to continue to do program iterations. (Harrison.)
- There is never any excuse for looking through the substance of an economic transaction, whatever the accounting, and if the accounting permits you to do so, it's wrong (Prof. Charles T. Horngren.)
Sunday, March 29, 2009
I often don’t agree with columnists in the Sunday NYT Business section, but today three unrelated articles came together for me. I thought that they contained some good investment lessons. I’ll address the first two here, and leave the last for a subsequent article.
I may tend to run on here, so let me give you the conclusions first and you can decide whether to read more or save time and go about your business.
1) Everyone tries to use correlations and statistical analysis to predict the future, but it’s a very difficult if not useless endeavor.
2) Analysts focus on the things that they can analyze, but many other factors are more important but unanalyzable.
3) Times of extreme stress bring big changes. That’s the natural order of things, and while it can be painful, it’s usually necessary and good. (See next post).
Mark Hulbert writes about a recent study by two finance professors who challenge the conventional notion that long-term equity investments always produce superior returns Strategies - Now the Long Run Looks Riskier, Too, for Investors. Essentially, they endorse the old saw that past performance is no guarantee of future performance. Although we all nod our heads in agreement, most of what passes for equity investment research is based on the premise that past performance does indeed predict future performance.
The professors note that uncertainty increases with the holding period, and that the reason for the good historical equity record in the
Robert Schiller, another finance professor (wouldn’t all of our problems be solved if the world was run by finance professors?) addresses the field of social psychology in the investment world It Pays to Understand The Mind-Set. Professor Schiller explains social psychology as “a theory of mind—defined by cognitive scientists as humans’ innate ability… to judge others’ changing thinking… It is a judgment faculty, quite different from our quantitative faculties.”
“Of course, forecasts based on a theory of mind are subject to egregious error. They cannot accurately predict the future. But the uncomfortable truth has to be that such forecasts need to be respected alongside econometric forecasts, which cannot reliably predict the future, either.”
This is a very important point. Stock investments are like icebergs: only a small portion of the essential information is visible. There’s a vast mass of unknown and unpredictable information, including the changing motivations of customers, competitors, and other investors, beneath the surface. Yet rather than to acknowledge the huge inherent unknowns, analysts engage in silly exercises to micro analyze the small part that is visible and extend their conclusions to the whole. For the most part, they all have access to the same data, often provided to them by the company or the government. They produce surveys, and channel checks, and sophisticated models. They issue buy and sell opinions in an effort to distinguish their particular outlook. But in the end, they all have essentially the same understanding of the investment, and it’s a limited understanding.
I’m not trying to pick on analysts (buy side or sell side). My comments apply equally to most economists. It’s not that they aren’t smart, or hard-working, or experienced. But the nature of the job requires that they make predictions, and they almost never acknowledge the extremely high degree of randomness.
So what’s the bottom line? Be skeptical of anyone who offers investment predictions. But be particularly skeptical of investment predictions that are based on extensive and rigorous statistical analysis, because they’re probably based on only an obvious and small part of the whole.