Ideas for a 10 year + holding period?

[Xerxes]

This a good article that summarizes Sir John Rose’ legacy at RR. A former banker at the helm of an aerospace firm = you get an aftermarket business turned into annuities to pad and smooth out the earning. 

 

https://amp.ft.com/content/6b861958-a56a-11e5-97e1-a754d5d9538c

[Spekulatius]

24 minutes ago, Xerxes said:

This a good article that summarizes Sir John Rose’ legacy at RR. A former banker at the helm of an aerospace firm = you get an aftermarket business turned into annuities to pad and smooth out the earning. 

 

https://amp.ft.com/content/6b861958-a56a-11e5-97e1-a754d5d9538c

Yes, RR was too aggressive, but even GE engine business has the same issue: When a new generation of aircraft engines is developed, there is a huge drag on cash flow and elevated manufacturing and operational risk for a few years. Cash flow tends to be weak because it is backloaded (cash comes in as engines start to operate and get through their scheduled maintenance cycles) and the accrual accounting lends itself to frontload earning recognition years before the cash comes in. These are not hallmarks of a great business and there are similarities to running an insurance business with long tail exposure.

 

Huge barriers of entry alone do not always make a great business model.

[elliott]

it would be interesting to read a similar discussion from 5-10 years ago

 

additionally, have you considered how many of us here are long term investors? from the people posting in the threads I follow I tend to think that few, very few (this is ONLY my gut feeling - not to mention that we all may have our own definition of what a long term investor is). the thing is that while short term investors may give you good long term advice, you may stil want to bear the fact in mind

 

 

[Dinar]

3 hours ago, KPO said:

I’ve always approached these “if you could only love one” questions through the lens of identifying a company that can’t be displaced. It seems like every start-up is a tech company these days, so I don’t know if I’d fish in those waters. If you think in terms of a company that has little emerging competition, geographic diversity, product diversity, and customer diversity, the one I’d go with is IFF. Their products are also a small component of their customer’s end product cost structure, so they should be less impacted by inflation than most companies. It does have a modest dividend and it’s a bit pricey at the moment, but you could buy a starter position and add over time on dips.  I honestly think the only way to screw up this company is through bad balance sheet management, which does happen from time to time.
 

Much of what I said about IFF applies to WM & RSG, which I also like, but probably wouldn’t buy at the current quote.

IFF has no growth.  If you want to fish in those waters, than Symrise, Givaudan, Robertet and CHR Hansen are much better.  

[Dinar]

3 hours ago, RiskAdjReturn said:

thanks...did you mean to say 2025 ? or 2022

Two thousand twenty five.

[KPO]

4 hours ago, Dinar said:

IFF has no growth.  If you want to fish in those waters, than Symrise, Givaudan, Robertet and CHR Hansen are much better.  

I suppose disagreement is what makes markets as I thought several on your list were borderline laughable for various reasons for a 10 year holding period. For example, why does Floor & Decor have a sustainable competitive advantage? Where I live most buy their products cheaper at NFM. And what is your edge relative to other investors on Alphabet & Microsoft? These are two of the most obvious investments in the world. Rather than these two, I’d go with @Spekulatius on the index reference if your going to go with these options since they’re around 10% of the S&P 500. CP I bought over 20 years ago before they split into several companies, but I scratch my head as to why it’s now a buy as I don’t recall anyone writing about it in early 2001 yet it’s up multi-fold.  Maybe I value safety of principle and predictable returns too much. Best of luck though. 

[Dinar]

30 minutes ago, KPO said:

I suppose disagreement is what makes markets as I thought several on your list were borderline laughable for various reasons for a 10 year holding period. For example, why does Floor & Decor have a sustainable competitive advantage? Where I live most buy their products cheaper at NFM. And what is your edge relative to other investors on Alphabet & Microsoft? These are two of the most obvious investments in the world. Rather than these two, I’d go with @Spekulatius on the index reference if your going to go with these options since they’re around 10% of the S&P 500. CP I bought over 20 years ago before they split into several companies, but I scratch my head as to why it’s now a buy as I don’t recall anyone writing about it in early 2001 yet it’s up multi-fold.  Maybe I value safety of principle and predictable returns too much. Best of luck though. 

You could have said the same thing about MSFT & GOOG 3, 5, 10 and 15 years ago, and they worked out fine.  Sometimes the best bargains are hiding in plain sight rather than being obscure names on the other side of the world.  NFM has four stores, none in my area, but I appreciate the heads up and will take a look at their pricing.   I would greatly appreciate it if you could explain to me which of the names that I have suggested are borderline laughable and why in your opinion.   Why do I like CP here?  I am assuming that the merger goes through.  I think that the synergies that they outlined are on the low side, I think that KSU can be run much more efficiently.  I think the existing CP business can do CAD 4.25bn in EBIT in 2023, and real EBIT (adjusting for the fact that maintenance cap ex exceeds D&A) = CAD 3.55bn.  You may also want to penalize them for pension income.  I think that the existing KSU business can do USD 1.2bn in 2023 on an EBITDA - maintenance cap ex basis or CAD 1.5bn.  I am assuming CAD 2bn in synergies, for a total = CAD 7bn in unlevered pre-tax free cash flow in 2023.  Debt = CAD 25bn on 12/31/2021.  S/o = 935MM.  So, interest = CAD 1bn, pre-tax free cash flow = CAD 6bn and after-tax = CAD 4.5bn in 2023 or 4.8 CAD per share.  Stock is at 100 CAD.  So a 4.8% fully taxed free cash flow yield, and you get the following tailwinds: 1) running KSU much more efficiently; 2) getting OR down to 50% at existing CP; 3) rebound in North American industrial production driven by both on-shoring, and recovery in automobile manufacturing; 4) continuing to take share from truck; 5) price increases above inflation.  If you get KSU from 67% OR to 50% OR, that's USD 600MM more in EBIT in 2023 or CAD 569MM post tax assuming t = 25%, which works out to 0.6 CAD per share getting your fcf yield to 5.4%.  If existing CP goes to 50 OR (which it can thanks to technology driven cost cuts, et all), that boosts EBIT by CAD 700MM or CAD 531MM post tax or 0.57 CAD per share, and gets you to 6% fcf yield.   This is why I like it.  If you think that I am wrong, I gladly welcome your criticism.  

[Spooky]

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[KPO]

12 hours ago, Dinar said:

You could have said the same thing about MSFT & GOOG 3, 5, 10 and 15 years ago, and they worked out fine.  Sometimes the best bargains are hiding in plain sight rather than being obscure names on the other side of the world.  NFM has four stores, none in my area, but I appreciate the heads up and will take a look at their pricing.   I would greatly appreciate it if you could explain to me which of the names that I have suggested are borderline laughable and why in your opinion.   Why do I like CP here?  I am assuming that the merger goes through.  I think that the synergies that they outlined are on the low side, I think that KSU can be run much more efficiently.  I think the existing CP business can do CAD 4.25bn in EBIT in 2023, and real EBIT (adjusting for the fact that maintenance cap ex exceeds D&A) = CAD 3.55bn.  You may also want to penalize them for pension income.  I think that the existing KSU business can do USD 1.2bn in 2023 on an EBITDA - maintenance cap ex basis or CAD 1.5bn.  I am assuming CAD 2bn in synergies, for a total = CAD 7bn in unlevered pre-tax free cash flow in 2023.  Debt = CAD 25bn on 12/31/2021.  S/o = 935MM.  So, interest = CAD 1bn, pre-tax free cash flow = CAD 6bn and after-tax = CAD 4.5bn in 2023 or 4.8 CAD per share.  Stock is at 100 CAD.  So a 4.8% fully taxed free cash flow yield, and you get the following tailwinds: 1) running KSU much more efficiently; 2) getting OR down to 50% at existing CP; 3) rebound in North American industrial production driven by both on-shoring, and recovery in automobile manufacturing; 4) continuing to take share from truck; 5) price increases above inflation.  If you get KSU from 67% OR to 50% OR, that's USD 600MM more in EBIT in 2023 or CAD 569MM post tax assuming t = 25%, which works out to 0.6 CAD per share getting your fcf yield to 5.4%.  If existing CP goes to 50 OR (which it can thanks to technology driven cost cuts, et all), that boosts EBIT by CAD 700MM or CAD 531MM post tax or 0.57 CAD per share, and gets you to 6% fcf yield.   This is why I like it.  If you think that I am wrong, I gladly welcome your criticism.  

This post seems straight out of a sell side research report rather than demonstrating a unique understanding of CP and their strategy, risks, etc. I happen to be very familiar with the KCSouthern asset. How do you value KSU in light of not really having owners economics in Mexico? Do you adjust the terminal value for the concession potentially becoming non-exclusive in 2027 and eventually rolling off altogether? This is a different asset than UNP, BNSF, CSX…… or CP for that matter.  I wish you (and Ackman) luck though as I do think CP has an interesting history and some good assets, but they overpaid for KSU in my view. 

[Dinar]

5 hours ago, KPO said:

This post seems straight out of a sell side research report rather than demonstrating a unique understanding of CP and their strategy, risks, etc. I happen to be very familiar with the KCSouthern asset. How do you value KSU in light of not really having owners economics in Mexico? Do you adjust the terminal value for the concession potentially becoming non-exclusive in 2027 and eventually rolling off altogether? This is a different asset than UNP, BNSF, CSX…… or CP for that matter.  I wish you (and Ackman) luck though as I do think CP has an interesting history and some good assets, but they overpaid for KSU in my view. 

Thanks for the good wishes.  I have owned KSU for a while and owned it when it was bought out so I am somewhat familiar with the company, probably not to the extent that you are.   I do appreciate the fact that you brought up the exclusivity end and concession expiration, it is easy to forget about this.