Public Company Share Repurchase-Cannibals

[jouni1]

3 hours ago, schin said:

Does anyone have any examples of cannibals that didn't eventually increase in value?

Bed bath and beyond

[schin]

6 hours ago, jouni1 said:

Bed bath and beyond

True, once the business has negative earnings... the overpriced shares bought earlier becomes an anchor. 

[KPO]

CPRI repurchased ~45% of S/O in the last decade and almost 25% in the last three years. If the deal falls through I suspect management will fire the repurchases up again. 

[Kazid]

On 3/5/2024 at 8:52 PM, schin said:

Does anyone have any examples of cannibals that didn't eventually increase in value?

 

CAR has the possibility to be like Long-Term Capital. Good strategy until a Black Swan event takes them out.  I also like companies that address corporate debt first before buy backs. Little or no debt gives companies a lot of flexility in good and bad times.. I rather than build the ark waiting for the thousand year flood.

 

Otherwise, it's like picking nickels in front of a bull dozer.

 

BFH comes to mind. As someone noted, sometimes the story isn't over and it may yet work out, but BFH (old ADS) repurchased tons of stock vastly above the current share price, almost certainly value destructive in light of what's happened since. 

 

This approach can definitely fail epically in cases where a firm with rapidly falling earnings or a weakening financial structure dedicates cash to buybacks instead of strengthening the business and/or financial profile, so as is always the case the durability of the business must be considered.

 

I love cannibals, and repurchasing stock takes 1 variable (capital allocation) out of the equation...but it requires we be right on the durability of that earnings stream because if we're wrong not only do we have falling earnings, but also a situation with potential business underinvestment and more debt/less cash than otherwise.

[Jaygo]

In about 10 Days DOO.to or BRP will report earnings and id suspect another huge reduction in shares outstanding. The results are sure to be terrible as the covid bump is dead and dusted and they are experiencing slower than normal sales since dept financing is critical for these toys to be sold. Who has 20 k for a damn ATV  laying around

 

They are on a pace of 3.5 million shares per year for a 76 million share outstanding company.

 

They were a major benefactor of covid then a major loser of supply chains troubles as they had a boom in sales and bust in supply of critical chips for their instrument panels. The last 4 years have been a real difficult time for them and guess what. They bought back over 25% of shares outstanding, entered the motorcycle market with the tesla of 2 wheels (see reviews) and released the most incredible offroad racing machine ever in the Can AM Maverick R SXS https://www.youtube.com/watch?v=c_zY_QYKIYE 

 

 

You wont find better capital allocation of a high tech R&D powerhouse than this. Id put them up with General Dynamics of the era that Buffett was a buyer. But and a big but is they are cyclical, they are Canadian and even worse they are Quebecois and nobody seems to give a shit so they trade at 6-10 times earnings. I think we are going to run into a cyclical low now and for the next 18 months ( PE could rise to 30 from TTM 7 PE ) and these guys are going gobble up millions of shares at a cyclical low and come out on the other side stronger and more profitable than ever. I wont be shocked to see the share count in the 50 million range in a few years.

 

 

[Dinar]

27 minutes ago, Jaygo said:

In about 10 Days DOO.to or BRP will report earnings and id suspect another huge reduction in shares outstanding. The results are sure to be terrible as the covid bump is dead and dusted and they are experiencing slower than normal sales since dept financing is critical for these toys to be sold. Who has 20 k for a damn ATV  laying around

 

They are on a pace of 3.5 million shares per year for a 76 million share outstanding company.

 

They were a major benefactor of covid then a major loser of supply chains troubles as they had a boom in sales and bust in supply of critical chips for their instrument panels. The last 4 years have been a real difficult time for them and guess what. They bought back over 25% of shares outstanding, entered the motorcycle market with the tesla of 2 wheels (see reviews) and released the most incredible offroad racing machine ever in the Can AM Maverick R SXS https://www.youtube.com/watch?v=c_zY_QYKIYE 

 

 

You wont find better capital allocation of a high tech R&D powerhouse than this. Id put them up with General Dynamics of the era that Buffett was a buyer. But and a big but is they are cyclical, they are Canadian and even worse they are Quebecois and nobody seems to give a shit so they trade at 6-10 times earnings. I think we are going to run into a cyclical low now and for the next 18 months ( PE could rise to 30 from TTM 7 PE ) and these guys are going gobble up millions of shares at a cyclical low and come out on the other side stronger and more profitable than ever. I wont be shocked to see the share count in the 50 million range in a few years.

 

 

Thank you very much for a very interesting, name, what do you think is the average over cycle EBITDA less maintenance cap ex for this business?

Thank you.

[Jaygo]

5 minutes ago, Dinar said:

Thank you very much for a very interesting, name, what do you think is the average over cycle EBITDA less maintenance cap ex for this business?

Thank you.

Sorry but my understanding of accounting is pretty basic so your question leaves me baffled. If i can dumb it down I would say a cycle average net income would be $ 500-600 million on around $6-7 billion in sales. 

The margins have historically been around 8% and that is where they are now. I would imagine that with softer sales that margin will compress. 2023 had revenues of 10 billion CAD but that is an outlier year. I would say that we are just on the other side of an huge boost in demand from 2020 to current.

 

2023 was a big year for deliveries that were holdovers from 2022 supply chain issues and now they are experiencing a situation similar to other outdoor gear makers as demand has softened for most products. 

 

I understand competitive advantage more than anything and DOO is the market leader by far in both technology and reputation. They enter a segment and dominate it and end up with the superior economics vs competitors.

 

What is tough to forecast is the end demand and revenue over the next few years. Their innovation is really amazing so if they have a blockbuster like the SXS or the switch pontoon boats then maybe the $ 10 billion in sales is something that will continue.

 

 

[Xerxes]

1 hour ago, Jaygo said:

You wont find better capital allocation of a high tech R&D powerhouse than this. Id put them up with General Dynamics of the era that Buffett was a buyer. But and a big but is they are cyclical, they are Canadian and even worse they are Quebecois and nobody seems to give a shit so they trade at 6-10 times earnings. I think we are going to run into a cyclical low now and for the next 18 months ( PE could rise to 30 from TTM 7 PE ) and these guys are going gobble up millions of shares at a cyclical low and come out on the other side stronger and more profitable than ever. I wont be shocked to see the share count in the 50 million range in a few years.

 

 

 

i am guessing you are from Western Canada

 

 

 

[Jaygo]

3 minutes ago, Xerxes said:

 

i am guessing you are from Western Canada

 

 

 

Lol no i'm from Ontario. Just playing. I love Quebec (Old Quebec city and the Laurentians are awesome) and my portfolio is deep with Quebec companies like BRP, Couche -tard, CN  and TFII 

 

 

[Xerxes]

BRP (formally part of Bombardier Inc.) is controlled by the Bombardier and Beaudoin families. Eventually those large share repurchase might be prelude for a family buyout. Assuming the family is not tendering share pro-rata into buybacks ?

 

I own Bombardier Aerospace. Wont get to the history, as there is a lot of FOD from Canadians who are not familiar with the business or got burn by it, but suffice to say that my bet has always been that once BA puts itself on the right footing as it is doing now, the Bombardier and Beaudoin families would want to perform share repurchases to offset equity issuance in the late 2010s, and that a privatization end-game might be in play at some point (though this latter is far away). For all intent and purposes, Bombardier Aerospace had an "IPO" in 2020-21 as a luxury/business aviation maker as a standalone entity.

[Jaygo]

1 minute ago, Xerxes said:

BRP (formally part of Bombardier Inc.) is controlled by the Bombardier and Beaudoin families. Eventually those large share repurchase might be prelude for a family buyout. Assuming the family is not tendering share pro-rata into buybacks ?

This has defiantly been on my radar as a possibility. It is a 7 billion dollar company so not a small privatization by Canadian standards and surely there would be a premium.

 

One could argue what is the point of being public anyway if you dont use your shares as currency and dont go to the markets issuing new equity.

[Xerxes]

29 minutes ago, Jaygo said:

Lol no i'm from Ontario. Just playing. I love Quebec (Old Quebec city and the Laurentians are awesome) and my portfolio is deep with Quebec companies like BRP, Couche -tard, CN  and TFII 

 

 

 

Cheers. Agreed on the "separatist" and "orange cone" [as i call it .. lol] discounts on assets in Quebec. 

 

Almost all of near family are in Ontario.

Parents + sister in Ottawa & Brother in Toronto.

I am in Montreal.

 

[Spekulatius]

@Jaygo BOO looks very interesting to me- one of those cyclicals with a competitive advantage that are secular growers over the long term. Thanks for sharing. I put them on my watchlist.

[Jaygo]

9 hours ago, Spekulatius said:

@Jaygo BOO looks very interesting to me- one of those cyclicals with a competitive advantage that are secular growers over the long term. Thanks for sharing. I put them on my watchlist.

I'm hoping the expected poor winter results combined with a general softness allow for better entry prices for myself as well as the corporate buybacks. 

 

The one caveat is that as interest rates drop (if they doo) then sales may pick up again and the opportunity could disappear quickly. 

 

Their main competitor Polaris has been dead money for quite a long time and that could easily happen here too. Polaris simply does not have the buybacks running near as hot so it has stagnated.

[Saluki]

On 2/27/2024 at 11:20 PM, Spekulatius said:

SEB is not a great business, but they took at ~17% of outstanding shares buying back stock from a major shareholder group at a ~15% discount. Quite impressive. Shares when from ~1.16M to 0.97M in one scoop. Trading far below book value now.

 

 

I owned this more than 15 years ago and made some money on it, if I remember correctly.  If it's the same one that I'm thinking of, I was impressed with how they made money in commodities, which are generally a terrible low-margin business, and that they had their headquarters in a small unassuming two story building with no frills.  It reminded me of early Walmart or the stories about Tom Murphy of CapCities. 

 

Some things that made me uncomfortable was that it was hard to find information about them. They didn't do interviews or investor presentations, and the 10Ks put out the information that was required by the SEC and nothing more.  At the same time they were always buying back shares. I had the impression that eventually they would just take it private. But Buffett likes to put as much info as possible out there regarding berkshire so that if his shareholders/partners want to sell, they will do so making an informed choice, knowing that he might be the buyer, so he doesn't want them to feel cheated.  It always seemed to me that the Seaboard people didn't mind if you happened to make money, but they were looking out for themselves.   

[FCharlie]

GM has repurchased 17% of its shares since July (1.375 billion to 1.14 billion), largely through a $10 billion accelerated repurchase program. With that ASR now finalized, they continued buying in March through open market purchases. On the conference call the CEO mentioned they were on track to reduce shares outstanding to fewer than 1 billion, which would be a further 12% reduction. Interestingly, management said on the conference call that even though the stock price is up 50% since the ASR, the PE has only increased from 4 to 5. It's honestly remarkable that this stock trades at these levels when the buyback alone at 5X earnings has the potential to drive 15% annual eps growth.

[Xerxes]

10 hours ago, FCharlie said:

GM has repurchased 17% of its shares since July (1.375 billion to 1.14 billion), largely through a $10 billion accelerated repurchase program. With that ASR now finalized, they continued buying in March through open market purchases. On the conference call the CEO mentioned they were on track to reduce shares outstanding to fewer than 1 billion, which would be a further 12% reduction. Interestingly, management said on the conference call that even though the stock price is up 50% since the ASR, the PE has only increased from 4 to 5. It's honestly remarkable that this stock trades at these levels when the buyback alone at 5X earnings has the potential to drive 15% annual eps growth.

yeah. 
even if GM and Ford get left in the dust by Tesla on their EVs, they can create a lot of per share value by returning capital in a slow growing GDP ICE industry. 

I don’t know what the future will hold, but you don’t get to be a AutoZone by sporting high P/E as the share count goes down. 
 

And forget about Ford. With the family controlling 40% of stock, there is zero incentive for buyback. They prefer cash dividend. 
 

GM is the really story here 

 

Edited Thursday at 01:57 PM by Xerxes

[FCharlie]

AutoNation has repurchased about 4% of their shares YTD, if you annualize YTD they are on track for another year of buying about 12% of shares outstanding. Also they just authorized a new $1 billion buyback vs their $7 billion market cap. Stock nearing an all-time high and still trading at just 9X earnings. AutoNation has bought over half their shares in the last five years. 

 

https://investors.autonation.com/news-and-events/press-releases/press-release-details/2024/AutoNation-Reports-First-Quarter-2024-Results/default.aspx

[TwoCitiesCapital]

Should we add CLF to this list? 

 

$5 Billion of net debt reduction since 2020. Announced a $1 billion share repurchase program in 2022. Just announced another $1.5 billion for 2024. 

 

For comparison, current equity market cap is ~8.5 billion and rough EV is ~11.5 billion. 

 

Not an insignificant share count reduction/deleveraging that has occurred and will occur going forward.  

[FCharlie]

I think one by one these left for dead companies are figuring out that the playbook that is most likely to work for them in this investing environment is to pour all free cash flow into buybacks, or a combination of debt reduction and buybacks.  The math doesn't lie, if you trade for less than 10X earnings then you are essentially priced for a zero growth future. But because you are trading for less than 10X earnings you can create enormous growth just buying your stock. GM is a perfect example. Their stock is up 50% since November, eps estimates get revised higher every month, but it still trades for less than 5X earnings. If people will never value it higher than 5X, they don't need to do anything but buy every share they can afford and investors will do phenomenally well. 

[Sweet]

Whilst I agree that’s the strategy these companies should pursue, unless there is clear evidence companies are going to do this going forward it’s still a big risk to own them.  GM hasn’t done much in the past 15 years.  It’s up approx 50%, I know that doesn’t include the dividend, but that’s terrible under performance 

[Xerxes]

Sorry guys. 
 

but again GM had to spend better part of the last decade exiting its global footprint, and invest in its ultiim EV platform. 
 

These are done now, or at least the runway has been built. The shares that they are buying back are FAR more valuable than a decade ago. 
 

This is not some mindless steel, iron ore or coal company that wants to get some love by buying back. 

Edited 22 hours ago by Xerxes

[FCharlie]

Yes GM has been a lousy investment for so long that a lot of people won't even consider it. But price has a way of changing sentiment. If GM continues to sit here generating $10 billion of FCF annually and keeps buying this aggressively their share the price is going to keep going higher. The ASR was a massive win. Let's just say out of the 1.4 billion GM shares that existed a year ago, let's just suppose 400 million of them were owned by index funds. Then here comes GM trying to buy 400 million of the billion that aren't owned by index funds. That's an insane amount of buying pressure for a stock that no one loves and no one respects. And because GM executed the overwhelming amount of those buybacks at about 4X earnings with free cash flow and cash on hand their eps estimates have soared, matching most of the price rise. The PE is now 5X. They can keep doing this just like AutoNation and the coal companies and the oil companies and everyone else who's gotten the memo that this is how you win when no one loves your stock

[Whensthepaintdry?]

I think Arrow electronics should be on the list. 

[changegonnacome]

4 hours ago, FCharlie said:

If GM continues to sit here generating $10 billion of FCF annually and keeps buying this aggressively their share the price is going to keep going higher. The ASR was a massive win.

 

Yeah the P/E investor of the past in GM got taken to the woodshed....because although GM was generating earnings......they were required to then take those earnings & dump it back into the business just to standstill.....these were not 'owner earnings' they were business accounting earnings.......those earnings needed to be reinvested in the business to simply be a business five ten years out.

 

GM seems to be at inflection point....sufficient investment has occurred in its EV and autonomy portfolio such that they now have extinction insurance......and it appears that the transition to EVs & autonomy are going to be gentler incline which bodes well for the capital intensity here for the next few years.

 

A new metric in the auto industry should "EV FREE Cash flow".......Tesla's headwinds are good news for the owner earnings of OEM shareholders....hats off ultimately to Toyota who stuck to their guns on BEV adoption

 

They are however simply terrible businesses and any time I've made money owning a car company (FCA & GM for me) I try to forget about in case I might tempted to do it again...