Posts In:

Geoff Gannon January 26, 2019

Resideo Technologies (REZI): A Somewhat Cheap, But Also Somewhat Unsafe Spin-off from Honeywell

This is a revisit of Resideo Technologies (REZI). My initial write-up of Resideo was done before the stock was spun off from Honeywell. Three things have changed since that initial interest post.

One: Honeywell spun-off Resideo. So, we now have a price on Resideo.

Two: I’ve created a five part scoring system – a checklist of sorts – for the stocks I write up here at Focused Compounding. This helps me more systematically order what stocks I should be writing up for the first time, re-visiting, etc. and what stock ideas I should make less of a priority. I’ll score Resideo using this 5-point checklist later in this article.

Three: Resideo released its first quarterly earnings as a public company. Management hosted an earnings call where they took analyst questions. They put out some earnings slides with that call as well. So, we have a bit of an update since last time.

I can tell you now that this third event is the least interesting. It’s the one I’ll spend the least time talking about. What matters most here is that we now have a price on Resideo stock and I can now score Resideo on my 5-point checklist. Let’s start with the checklist.

The 5 questions I’ll be asking are:

1)      Is Resideo stock overlooked?

2)      Do I understand the business?

3)      Is this a safe stock?

4)      Is this a good business?

5)      Is this a cheap stock?

I score each question on a scale that goes: -1 (“no), 0 (“maybe”), +1 (“yes”).

Is Resideo stock overlooked? – Maybe (0). The answer can’t be a straight “no”, because this is a spin-off. Spin-offs, in general, lead to stocks being overlooked – at least at first – because shareholders of the bigger company (in this case, the very big company Honeywell) get shares in this much smaller company without doing anything. They may sell the stock without giving it a lot of thought. Also, this spin-off didn’t seem to be a huge focus for value investors and what I did read online from value investors often treated it as something of a throwaway by Honeywell. Basically, not a lot of people are writing about how this is a high quality business. They are writing about how this company is slow growing, fully mature, and includes the burden of paying Honeywell indefinitely to cover environmental liabilities. So, this isn’t a particularly focused on spin-off. But, it’s still a stock with a market cap over $2 billion. It’s listed on a major exchange. It did an earnings call with analysts. I didn’t hear questions from analysts at especially big firms. This is probably a pretty overlooked stock for a $2 billion to $3 billion market cap. But, in the world of the kind of stocks I often look at – it wouldn’t count as overlooked at all. I’ll split the difference and say Resideo “maybe” overlooked (0 points).

Do I understand the business? – Yes (+1). I owned a stock –

Read more
Geoff Gannon January 18, 2019

Vertu Motors: A Cheap and Safe U.K. Car Dealer

Vertu Motors owns more than a hundred car dealerships in the United Kingdom. About half of the time – so, at 50+ locations – Vertu Motors also owns the land on which the dealership is built. They lease the other half of their locations. The stock trades on the London Stock Exchange (the AIM market, specifically) under the ticker “VTU”.

Back on November 14th, 2017 Focused Compounding member Kevin Wilde sort of wrote up Vertu Motors. He did an idea exchange post on U.K. car dealers. The stock he focused most on was Vertu Motors.


Why focus on Vertu Motors specifically?

And why focus on U.K. car dealers generally?

Publicly traded U.K. car dealers seem to trade at lower prices than their U.S. peers. In the U.S., car dealerships are usually sold at a premium to tangible book value. Car dealer stocks tend to trade at a premium to tangible book value. In the U.K., some publicly traded car dealers – like Vertu Motors – have shares that can be bought below tangible book value.

We can try to come up with arguments for why U.S. car dealers should be more expensive than U.K. car dealers. But, the math isn’t very convincing. For example, if we look at the rate of growth in Vertu Motors’ tangible net assets per share over the last 5 years – it isn’t lower than what U.S. car dealers would be able to achieve. At times, Vertu Motors stock has grown net tangible assets per share by 10% or more a year while also paying a dividend. The company was not very successful growing PER SHARE asset values in the years immediately after its founding (though it did increase the size of the company and improve its economics during this time). Since scaling up, the company seems capable of getting a 10% growth rate in net tangible assets without using leverage. Car dealers often use some leverage. And – as I said earlier – Vertu Motors stock can sometimes be bought below its tangible net assets. The company’s management includes their own 10-year calculation of free cash flow generated versus assets employed and comes up with a number around 10% a year. If I take the most recent half of the company’s existence and use the rate of compounding in net assets per share (instead of FCF like the company uses) I’d get a similar rate of value creation. Basically, I’m going to assume here that Vertu Motors can generate about 10% worth of “owner earnings” relative to its net tangible assets.

We can use that information to answer the question: “Is it cheap?”

When first looking at a stock, I often ask 5 questions: 1) Is this stock overlooked? 2) Can I understand this business? 3) Is the business safe? 4) Is the business good? 5) Is the stock cheap?

Because I started today’s discussion with the company’s ability to generate earnings relative to tangible equity – let’s start …

Read more
Geoff Gannon January 7, 2019

Green Brick Partners (GRBK): A Cheap, Complicated Homebuilder Focused on Dallas and Atlanta

I chose to write-up Green Brick Partners (GRBK) this week for a couple reasons. The first is the company’s headquarters: Plano, Texas. I live in Plano. And the company gets about half of its value from its Dallas-Fort Worth homebuilding operations. My “initial interest post” checklist goes something like this:

  • Do I understand the business?
  • Is it safe?
  • Is it good?
  • Is it cheap?

The single most important questions is number zero: “Do I understand the business?” Since I’ve lived for about seven years right by this company’s lots – I should understand it better than most homebuilders. The other half of the company, however, is in the Atlanta area. That is a place I know nothing about. So, the answer to question zero would be that I understand half the business here well.

The next easiest question to answer – after “do I understand the business?” – would be #3 “is it cheap?”.

So, we’ll skip right to that one. It is, after all, the other reason that put Green Brick Partners at the top of my research pipeline.

I have in front of me the balance sheet for Green Brick Partners dated September 30th, 2018. This is the last day of the most recent quarter the company has provided results for. Under “inventory” we see $648 million. Under “cash” we have $33 million. There’s another $12 million under “restricted cash”. The unrestricted part of cash is offset almost exactly with customer deposits. The restricted part of cash is just $12 million. Debt is about $200 million gross. So, that leaves about $188 million in net debt. If we netted out that inventory less that net debt we’d be left with $648 million in inventory less $188 million in net debt equals $460 million. The company has a little less than 51 million shares outstanding. So, $460 million in real estate free from debt divided by 51 million shares outstanding equals $9.02 a share. Let’s call that $9 a share. That’s very close to the company’s officially stated net tangible book value of $8.97 a share. Again, that’s basically $9 a share. We can compare this to the market price of $8.06 a share at which GRBK stock closed today. So, we have a stock with tangible book value – almost all land (about 50% in Dallas Fort-Worth and about 50% in the Atlanta area) – of $9 a share against a market price of $8 a share. Green Brick Partners is trading at about 90% of book value. So, a price-to-tangible-book ratio of 0.9 looks cheap.

However, this is where we start getting into the more complex aspects of Green Brick Partners. The company’s balance sheet shows only $15 million (about 29 cents a share) in “noncontrolling” interests. Green Brick, however, has only a 50% economic interest in its Dallas Fort-Worth and Atlanta homebuilders. The fair market value of the 50% owned by its partners – basically, the top management of these “controlled builders” – would …

Read more
Geoff Gannon January 5, 2019

Inseego (INSG): A Uniquely Positioned 5g Company

Write-Up by Long-Short Value

  • With ZTE and Huawei recently shut out of the US and Canadian Market and likely most European Markets, Inseego is uniquely positioned to take advantage and gain market share in mobile connectivity at a crucial time in the 5g cycle. This Chinese OEM ban has pushed several customers to recently sign design and development deals with Inseego.
  • Inseego’s new management has a depth of experience in telecommunications equipment and has positioned the company for both the 5g Hardware cycle and to expand its Telematics Business (CTrack) into new markets
  • Inseego’s customer relationships with Verizon and close ties with Qualcomm make it the premier connectivity partner in the US and Canada.
  • Inseego has recently signed all Tier 1 Carriers in the US and several other carriers in the US, Canada, Australia, and Europe for either their 4G LTE, Gigabit 4G LTE, or 5G products. Several of these recent contract wins have yet to begin producing any material revenues and are expected to ramp up in 2019 significantly.
  • Inseego’s Enterprise SaaS business (DMS and CTrack) operate in an extremely attractive high margin segment. Recent wins for CTrack in the Aviation space will help propel the segment to high teens to low twenties revenue growth over the next few years.
  • My base case valuation of Inseego is $7.80 a share, Upside Case could be well above $10 a share if Verizon 5g Fixed Wireless is a success.

Inseego Summary

Inseego is a Telecommunications Equipment and Enterprise SaaS design and development company with products focused on the Internet of Things (IoT) and Mobile Solutions.  Inseego is one of the few US based companies that makes Mobile Connectivity products like 4G Hotspots that traditionally compete with Chinese companies like ZTE and Huawei.  Inseego is closely aligned with Qualcomm and Verizon highlighted by the new design center they opened across the street from Qualcomm and the recent showcasing of the Verizon 5g NR utilizing the Qualcomm Snapdragon chipset.  Inseego has undergone several recent management changes and a restructuring which started with the hiring of Dan Mondor as the new CEO in June of 2017.  Dan has a very solid background in the Telecommunications Equipment space with experience as CEO of SpectraLink and as CEO of Concurrent Computer Corporation (CCUR).  Dan has assembled a stellar team to position Inseego for the coming 5g Telecommunications Cycle.

Here is a primer on 5g (Mckinsey Link) as it is a key component of the thesis around Inseego.  5g will bring not only faster speeds to wireless but also lower latency, which is important in applications like medicine, connected cars, and many IoT applications.  I have done an extensive amount of research on 5g and I believe it is a much larger step change from both a performance standpoint and an infrastructure investment standpoint than the transition from 3g to 4g.

Inseego has two businesses, Mobile Connectivity Solutions Hardware (Mobile Solutions) and SaaS, Software, and Services (Enterprise SaaS).  Mobile Solutions is a hardware business …

Read more
Geoff Gannon January 5, 2019

Future Bright: A Macau Restaurant Operator with Restructuring Potential

Member Write-up by André Kostolany

Future Bright is a Macau-based restaurant operator with a fascinating history of management missteps. Today, Future Bright’s main businesses are Food & Catering, Souvenirs and Property. The company is primarily owned and run by Chan Chak Mo, a local Macau legislator with deep roots in the region and connections to the casino operators. The company’s market cap is about 600MM HKD, it has 75MM of cash and about 350MM in debt. While some of my comments may seem offhand, I have been following this business for over five years.


Restaurant Business

In Macau, Future Bright runs an easy, toll-road like business built on cash flows from in-casino restaurants, university canteens and other near captive customers. During the good times in 2011, high-rollers easily spent >$200 for a quick meal in between gambling and the core business threw off >30% EBITDA margins. Then Xi Jinping came into power and the anti-corruption campaign happened in 2012. Less high-rollers frequented Macau, instead, they were replaced by tourists with more moderate budgets. In response, Macau attempted to transform itself to a more ‘family-friendly’ destination. While Macau visitor numbers have been consistently growing at a rate of ~7% per annum for the past 10 years, average meal spend per visitor has dropped below $100 due to the shift away from high-rollers, impacting restaurant margins.

When the anti-corruption campaign was announced, management began investing into opening up restaurants in competitive restaurant markets overseas. They have recently admitted failure in Mainland China and are closing down some of these restaurants. They are doing fine in Hong Kong and the judgement is still out whether their Taiwanese restaurants will perform. None of these new restaurants will, however, approach the economics of their existing core business in Macau.

The core restaurant business in Macau is mainly a good business because casinos need higher-end restaurants to accommodate their customers but have shown little willingness to fully manage and operate these themselves. With its experience in managing a wide range of Japanese, Chinese and Western Restaurant concepts Future Bright is a useful partner to the casino operators. Casino visitors are also relatively less price sensitive than your typical restaurant customers, which has led to Future Bright’s unusually high margins on its core business.

Future Bright currently runs 61 restaurants, 4 of which are food court counters. 16 of these restaurants have been opened in the past two years and they are currently planning on opening another 20 restaurants by the end of 2019. As restaurants take about 2 years to reach maturity, and as they are currently spending to shut down overseas restaurants, the restaurant divisions’ economics are currently somewhat obscured. Adjust for one-off charges and annualizing current numbers, one can see that the restaurant division has about 970MM in revenues and is producing an 8% cash margin. Macau restaurants have a cash margin of 14%, Hong Kong 6% and China -22%. While the division currently produces 80MM of cash flow, getting China …

Read more
Geoff Gannon January 5, 2019

Sonics & Materials (SIMA): A Profitable Net-Net Building A Cash Pile


Quote: $8.00   

Shares Outstanding: 3.4 million  

Market Cap: $27.2 million

Sonics and Materials Inc. (SIMA) is an American company that was founded in the late 1960’s based on the discovery and invention of ultrasonic welding by its CEO, Robert Soloff.  Mr. Soloff patented the technique, and several years later, opened Sonics and Materials.  Now, fifty years later, the company has grown from 1 employee to 70 and is still operating in the ultrasonic space.  The company stopped reporting to the SEC in 2002 due to the financial burden and is now dark, but financials from the years 1996-2002 are still publicly available.  Ownership is closely held with Mr. Soloff owning around 70% of the company and thus, the float is small.

The company mainly sells two types of products to two markets.  The first is ultrasonic liquid processors (typically referred to as Sonicators).  Sonicators are primarily sold to research institutions, hospitals, laboratories, and pharmaceutical companies, where they are used in a variety of processing applications.  Some of these include: reducing the size of particles in a liquid, soil testing, production of biofuels, cell lysis, and much more recently, for nanoparticle dispersion and cannabis extraction (for edibles).  The subsidiary that sells the Sonicator product line is called Qsonica.

The second product line is ultrasonic welding machines, which use sound waves to quickly weld components together.  Ultrasonic welding is used in more applications than can be listed.  The technology is typically used with plastics but can be used to weld metal as well (more common with electronics).  Think the wires in your phone, the cap on the back of your sharpie, car headlights, etc. You can also throw ultrasonic sealing machines in with this category.  The sealing machines are an area the company has been spending more time and focus on lately.

My best guess is that the company’s revenues are split about 50/50.  It could be 60/40 or whatever, but there is some evidence that leads me to believe it’s in that range. The main point to take away is that the company appears to be the largest player in the Sonicator business by a substantial margin, even with only $11M or so per year in sales. Back in 2009, the company acquired the “Ultrasonic Laboratory Products” division from Misonix (MSON) for $3.5M and the Vice President of SIMA (and CEO’s daughter) stated on the record that “acquiring our largest competitor has given us much greater market share.” Furthermore, before this acquisition, the 2002 10-K states, “In the ultrasonic liquid processor market, the Company’s principal competitors are Branson and Misonix Inc.  Management believes that Sonics has the largest share of this market.” Competitors in this space appear to all be small and private. This is a key element in understanding the company’s durability.

The ultrasonic welding business faces competition from much, much larger players. Emerson (EMR) is just one example.  Mr. Soloff is a true inventor, and between himself and SIMA, holds something to the …

Read more