KCLarkin
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Posts posted by KCLarkin
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why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records
Not many of the people on this board need to file a 13F. They also tend to be more deep value and risk tolerant than I am.
WEB and tepper have too much money.
I like small, concentrated, quality-focussed portfolios.
KCLarkin- which other investors do you follow that fit your criteria? I follow Pabrai and Ted Weschler at Berk.
Unfortunately, not many fit the size criteria. I like Ted and Todd but they are hard to follow due to the commingled portfolio. I like Eric Khrom but I don't think he is big enough to file a 13F and doesn't seem to disclose positions in his letter anymore.
In Canada, I follow Jason Donville and Mawer New Canada.
I am in awe of Munger's 13F. Pabrai would be higher on my list if he hadn't experimented with diversification after the crash but I should probably take him out of the penalty box. His 13F is a thing of beauty too.
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why is everyone so interested in this guy? humble origin? not to mention tepper and WEB, a lot people on this board have better records
Not many of the people on this board need to file a 13F. They also tend to be more deep value and risk tolerant than I am.
WEB and tepper have too much money.
I like small, concentrated, quality-focussed portfolios.
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Does anyone have any insight into why he is buying Alleghany now? He must be seeing some hidden value that I can't see.
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If they had such a great low cost model why would they be changing there model to go after larger companies? The reason is there is little profit with the small guys and competition can match your prices with many desperate printers out there will take any job just to keep the capacity up. VPRT has no lock-in and desperate competitors not a very good mix.
This assumes that price is the key competitive dimension. I would argue that for many customers who are spending $100/year on printing, pricing is mostly irrelevant. They will go with the company they have heard of. Vistaprint's scale let's them outspend their competitors on advertising and marketing.
I suspect that this realization is what caused VPRT to shift their strategy. Shipping out crappy, free business cards gets you scale but doesn't build your brand. The key metric I'm watching is Net Promoter Score. Customer satisfaction is going up, which should be a leading indicator.
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At one point they were the low cost producer for business cards and other low quantity print jobs but a quick search for business cards indicates there are many similarly priced alternatives now.
Don't confuse cost with price. They are still the low cost producer IMO. Because of their margins and scale, they can outspend their competitors on marketing and service.
One final observation: the greatest low cost producers (Borsheims, Nebraska Furniture Mart, Wal-Mart, GEICO, etc) had one strategy- provide the lowest possible price to customers. Imagine Sam Walton hiring a firm to analyze his customers, looking at the data, and concluding that what he should really do is shift his primary focus away from price in order to attract a specific subset of customers that the data says will be likely to spend more money in his stores. Walton would have tossed out any such strategy immediately. Is this strategy really one that makes sense for VPRT?
I think GEICO is probably a better comparable than WMT. GEICO uses some of its cost advantage on advertising their lovable Gecko. GEICO got into real trouble when it shifted it's focus from it's highly profitable target niche of safe drivers and started underpricing insurance for all comers. Buffett had to bail them out...
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The issue here is these guys are not exceptional printers. I'll address the major points to why you think it is good investment:
All printers have high ROE look at RR Donnelly and the other printers. Why is this the case? From what I see the technology becomes obsolete and there a huge amounts of overcapacity in the industry. This overcapacity leads to price competition (just look at Vistaprint's margins going from 25% to 11% - more in line with the industry average). The only way Vistaprint was able to grow was to accept lower margin jobs. Why do think these jobs will all of sudden become higher margin jobs? The printing business does not have many long term contracts so you are competing job to job. They say reduced margins say it is due to temporary higher costs (I think this is bogus because I see the increased costs as a cost of doing more business. If you stop spending then business will go elsewhere where others are will to spend.)
The moat you mention has no profitability associated with it. The reason Vistaprint can make a profit is you can't change anything as a customer for your job or you get charged to print it again. This is a terrible way to build customer loyalty. The customers are so small with no lock-in, I doubt they make much money on them. If you look at the turnover stats, the retention is terrible, there repeat customer count is only 42%. The incremental revenue they have acquired since 2009 has resulted in negative OCF growth so I am not sure low cost matters if you are incrementally losing free cash flow.
VPRT sells at a premium multiple to other mainline printers like RR Donnelly (6x EBITDA) when they are smaller and less profitable. I just think the price includes a rosy outlook (11x EBITDA is not a bargain price to me) and if the only way you get to a lower multiple is to assume some costs away (which I questions they can remove and keep the same level of revenues) then that adds additional risk. I could never figure out why some value guys liked this company. BTW my dad owns a short run digital printing company so he is very familiar with the printing business so we have some insight some outside the industry may not.
Packer
Looking at Ycharts, RRD has had ROE pretty close to zero over the last five years. RRD also has a lot of debt, which would also artificially inflate ROE. RRD is facing major headwinds. A big portion of their revenue is for catalogs, etc. I used to run a digital catalog business and I can tell you the big catalogs (Crate and Barrel, Restoration Hardware,etc) are cutting back on their mailings.
RRD has 21% gross profit margin versus 65% for VPRT. VPRT is forecasted to grow EPS at 20%. I think it is pretty obvious that VPRT deserves a significant valuation premium to RRD.
But for a value guy, the bet is that current earnings aren't normal and that they will revert to historical trend. I am very comfortable with this bet and I like the widespread scepticism. If I am wrong, I won't lose much.
As a long-term investor, I am very concerned about the capital intensity of the business though.
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Also, some of the stocks such as DFZ, CHRW, CPRT, and VPRT are trading at a significant premium to book value (excluding intangibles). For Mecham, does the staying power, Porter's Five Forces model, and management support buying at this premium? Or does he somehow look at the past relationships between P/BV and create some sort of range? I'm just trying to grasp his investment method. I understand that stock price fluctuates much more than BV but what justifies a company as being too cheap or too expensive when paying such a premium to BV?
Based on his portfolio, I think Mecham is more focused on earning power than book value. He might be willing to pay a significant premium for a company with high ROE and promising reinvestment opportunities (AKA "compounder").
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+1 Don't see it either and didn't bother reading further after glancing over their latest quarter results.
:D
Glad to hear! (assuming you are referring to VPRT). This is why I like the stock so much. Superficially, it is terrible and I want all the bad news to be priced into the stock.
The bear case is pretty obvious (at least superficially):
- Broken growth story: Negative 76.60% Q/Q eps
- Expensive: PE = 30 (ttm), EV/EBIT = 11
- Terrible quarter: Huge earnings miss, revenue miss, big write-off, bad guidance
- No momentum: Stock has went sideways since 2007
- Horrible industry: Print is dying. Marketing is going online. Low margin. Capital intensive
- Bad execution
- No dividend
- Small cap, tech stock in the midst of a small cap, tech correction
- Poor sentiment: Most analysts rate it hold or underperform, huge short positions
- No moat: printing is a commodity business
Who would buy this dog? And if nobody is buying and everyone is shorting, wouldn't all of the above be priced into the stock?
But this idea is just baloney in my mind. The business is a terrible business and you can't change a terrible business into something good. They tried to go after the low-end of the market and got smoked. There is no profit at the low-end because customers make decisions based upon price. They have the same FCF as 2009 and CF margins that are down by over 50%. So growth took away value. Now they are trying to go up market. The only problem is profitable upmarket niches are already occupied by digital printers who have technology and customer requirement expertise and the larger profitable jobs are already dominated by salesfolks from the large printers. What is Vistaprint going to provide that everybody else doesn't already have? How is this anything but a printer valued at 11x EBITDA?
With the huge short position, it wouldn't take much for the stock to pop. So let's use some Howard Marks / Charlie Munger second level thinking to see if there is something we are missing:
Terrible business? Actually seems like a terrific business (if it weren't so capital intensive):
- ROE of 20% for most of the last five years.
- Operating EPS growth at 20% since going public
- 65% gross margins
- Have bought back 25% of stock since 2010
Expensive? Need to normalize earnings (this is where the J-curve comes in):
- Earnings temporarily depressed due to investments in product, service, pricing
- Earnings temporarily depressed due to investments in asian markets
- Revenue temporarily depressed due to shifts in pricing / marketing
- Net Income Margin fell from 10% to 2.5% due to these investments
- If NIM rebounded to historical 10%, 2014 normalized GAAP EPS would be $3.78, PE = 10.5
Broken growth story?
- Hard to tell, but results from Canada (where they tested the new strategy) are very promising
- Anecdotally, my wife works for one of Canada's largest hospitals. Their charitable foundation ($120M revenue) used Vistaprint for a recent small project (even though Vistaprint is targeted at much smaller companies). Seems like there is some combination of convenience / cost that current large printers aren't providing.
No Moat?
- Vistaprint specializes in low cost, small batch printing
- Traditional printers can't produce small batches cost effectively
- No other small batch printer has Vistaprint's scale (5.5 billion business cards per year, 90,000 orders per day)
- Vistaprint is the cost leader in small batch printing (each business card pack only takes 10 sec)
- Economies of scale allow VPRT to make investments that no other printer can make (e.g. national TV ads)
Gannon took a pretty good first stab at describing their moat:
http://www.gurufocus.com/news/161898/vistaprint-vprt-the-makings-of-a-moat
How is this anything but a printer valued at 11x EBITDA?How was Nucor anything but a steel company?
How was Southwest anything but an airline?
How was Amazon anything but a low margin book retailer?
Not saying that VPRT is in the same league but if you can find a misunderstood company in a terrible industry, the payoff can be huge. At 12x forward earnings, I'm willing to make the bet.
P.s. If Allan can lend his stock out at 10%, then the risk/reward becomes more compelling.
- Broken growth story: Negative 76.60% Q/Q eps
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I'd love to know what he's thinking on VPRT right now.
I suspect his thoughts on VPRT are similar to Eric Khrom's:
http://www.scribd.com/doc/148405390/Eric-Khrom-of-Khrom-Capital-2012-Q3-Letter
- J-Curve: VPRT is investing heavily in upgrading their products, service, and pricing to appeal to a larger, less price-sensitive market. This is temporarily suppressing both revenue and earnings.
- Stock Lending: Short sellers were paying double digit rates to borrow the stock (as of 2012)
Glenn Greenberg at Brave Warrior Advisors also has 6% of his portfolio in VPRT. I have 3% of my portfolio in VPRT.
- J-Curve: VPRT is investing heavily in upgrading their products, service, and pricing to appeal to a larger, less price-sensitive market. This is temporarily suppressing both revenue and earnings.
Compounder Growth Propspects
in General Discussion
Posted
MKL probably goes on the too hard pile. Operating earnings are highly volatile, so trying to normalize ROE is hazardous.
Compare MKL to BRK, which has relatively stable earnings and is also growing BVPS in low double digits. I KNOW BRK's BVPS is greatly understated. Partly because Buffett and Munger tell me so, but also because I know GEICO and BNSF are worth multiples of what they paid for them.
You could use Munger's valuation method. Is MKL a more compelling buy than your best idea? Is MKL at 1.25x better than BRK at 1.3x?
Disclaimer: MKL is on my too hard pile so the above is purely theoretical. I haven't done any in-depth research. Based on historical valuation, MKL looks compelling at less than 1.1x BV.