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Geoff Gannon June 23, 2019

Tailored Brands (TLRD): Operating at the Focal-Point of the Retail Apocalypse and the Hedge Fund Armageddon, TLRD is a Stable Company With a P/E of 3



Tailored Brands is the company behind the brand names Men’s Wearhouse (MW) and Jos. A Bank (JOSB). As you can probably guess, Tailored Brands operates in the specialty retail industry. More specifically, they provide the younger-to-older middle-class male demographic with suitwear. Broadly speaking, their portfolio of clothing includes suits, sport coats, slacks, business casual, outerwear, dress shirts, shoes and accessories.


I don’t want readers to be misled by the title of this article since I labeled the company as “stable”: Tailored Brands is a high-risk stock. I classify Tailored Brands as a stable company because if you take a look at the company’s stock chart, you’ll see that over the course of the past year TLRD is about 85% off its highs. The stock was trading at $30/share as recently as June of last year. It’s at $5/share now. With a drop that dramatic you would usually expect to find one or more of a few things going on with the company. You would probably expect sales or earnings to be down quite materially. Or you’d expect to find impending liquidity issues. But that’s not necessarily what we find here. Top-line consolidated sales since 2015 are basically flat. Operating income is up 20% since then. Whether or not these are good numbers doesn’t matter right now. At least initially, the business doesn’t seem to have fallen off a cliff; yet the stock certainly has. So why is the stock high-risk? Well, a lot of reasons. One factor that adds to the riskiness of the situation also makes the stock look cheaper. All of you reading this can probably guess what I’m referring to: leverage. Despite aggressively paying down debt over the previous few years the company is still saddled with debt that equates to 3x EBITDA. Anytime you have a business where the popular sentiment is that the business is possibly facing a secular decline (i.e. the market is not too hot about the company’s growth prospects) and you add a highly-levered balance sheet to the mix you tend to get a stock that looks ridiculously “cheap” on standard valuation metrics. These dynamics make the stock high-risk.


Geoff recently wrote-up Farmer Mac (Ticker: AGM) on this site. If you haven’t read that post yet, you should go do it before reading on. In his write up of the Company he said, “An investor interested in Farmer Mac should spend 95%+ of his time worrying about the risks.” And why is that? Why spend so much time pondering the risks of the stock? Because, in his case, the stock he was evaluating was far, far too cheap for the quality of the business. So the only question relevant to investors is: what are the potential catastrophic risks? Will the company survive? If the Company survives then the stock should be a homerun.


I think Tailored Brands is very much the same. It’s not that I’m not making the argument that a specialty retailer is …

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Geoff Gannon June 16, 2019

NACCO (NC): A Contract Coal Miner with Stable Inflation Linked Profit Per Ton, a P/E of 10, a Strong Moat, and No Leverage




NACCO is primarily a services company, in the guise of a coal mining company, deriving all of its revenues from its US operations. It provides the service of managing mines and delivering raw materials – coal and limestone – to several large customers on a cost-plus basis on long term contracts. It has mines in several southern US states, HQ in Texas, and its two largest coal mines by coal volume, are in North Dakota. In the Q1 19 earnings call, it changed its reporting structure, to now report its business in three segments:

  1. Coal Mining (coal extraction)
  2. North American Mining (limestone extraction, and one sand/gravel mine just opened)
  3. Minerals Management (oil and gas royalties)

Coal and limestone/limestone are mined in two distinct ways: Consolidated mining means that NACCO owns the mine, pays all the costs, assumes the liability for reclamation, and sells the coal on the open market and so is subject to the coal spot price. There is now only one consolidated coal mine: the Mississippi Lignite Mining Company (MLMC), after the shutdown of various mines under the Centennial Natural Resources subsidiary at the end of 2015. Unconsolidated mining means that NACCO operates the mine, and is paid a fee per tonne of coal/cubic yard of limestone mined, under cost-plus, inflation-linked long term contracts. The customers assume most of the risks and the long-term obligations of operating the mines, paying for equipment, mine reclamation responsibilities, and all other costs. Therefore, NACCO is not exposed to the coal spot price or the price of limestone under these contracts. The gross profit/tonne for these mines is very stable – less than a standard deviation of 6% over the last seven years. Most of NACCO’s profits come from unconsolidated mining, and most of these from coal mining rather than limestone mining. Other coal companies may hedge their exposure to the coal spot price: instead NACCO avoids this risk by selling to the customer for an agreed profit margin. This also reduces the price variations for NACCO’s customers. The image above shows the gross profit/ton of unconsolidated coal over the last seven years, and also the tons of unconsolidated coal mined/share, which has been increasing due to an expansion in unconsolidated coal mining.

In the last seven years, an average 76% of profits came from long term contracts for mining principally coal and limestone (unconsolidated mines), 15% of its profits from royalties for oil/gas extraction on land it leases/owns, and 9% of profits from consolidated coal mines. There are various types of coal: NACCO almost exclusively mines lignite, which is the lowest quality coal, with a low energy density per ton. Therefore, it does not pay to transport it any significant distance, so coal fired power stations tend to be co-located with the lignite mines. This is the case for most of the mines that NACCO operates. Coal is mined exclusively from surface strip mines – this creates large open scars in the landscape that have to …

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miguelneto June 11, 2019

Highly Cash Generative Aquarium Operator

By: Miguel Neto

  • Ticker: S85
  • Straco Corporation Limited, quoted on the Singapore Exchange (SGX)


Straco Corporation develops and acquires assets in touristic locations, and the founder and his wife collectively own 55% of the shares, with the other big shareholder being a state-owned enterprise. As of today, they own and run two aquariums in China (Shanghai Ocean Aquarium and Underwater World Xiamen), a cable car in Lintong Mountain and a giant flywheel in Singapore. In 2018, they received 4.98mn visitors with the majority being foreigners.

Together these assets cost S$226mn, some were acquired, and some were developed. Last year they generated S$64.9mn in pre-tax profit. In the past Straco’s management – which is nimble because of the large stake the founder has – has acted opportunistically by buying or developing assets in Asia, with a focus on China. The two aquariums, SOA and UWX, help bring the point forward. If these two assets were valued as separate entities, they’d both be worth ~8 times what they cost Straco. If I take what they paid for UWX in 2007, S$12.7mn, and what it’s worth today considering it generates S$9.8mn in pre-tax profit, I get a CAGR of 20.9% on the investment.

Most of Straco’s costs are fixed by nature, about S$53mn. That means that if we take revenue per visitor of S$25, we can see that they could have much less visitors and still not lose money.

The group’s increase in revenue and profit over the last 10 years, was driven in part by the 10.7% growth p.a. in visitors, an increase in ticket prices and a higher margin on incremental revenues. Straco’s EBITDA margin per visitor has averaged 61% over the last five years, substantially higher than the 53% margin over the previous four-year period for which I have data. Further evidence of the value of the incremental revenues is shown by the fact that revenue per visitor has compounded at 2.7% p.a. since 2008, whilst profit per visitor compounded at 6.8% p.a. from S$5 to S$9 over the same period.


Straco’s main assets are the aquariums that account for 66% of revenue and 88% of profits, so that’s what we’ll focus on first.

SOA opened to the public in 2002 and it’s located near Shanghai’s financial center, where it was developed for S$55mn. The company secured this prime piece of real estate land with a 40-year lease, with an option to renew. The government collects rent in the order of 6.5% of revenue, even though this means rent is scales proportionately with revenue growth, it also means that if the government is making good money there isn’t much incentive to not renew the lease.

SOA has capacity for about 5.7mn people a year, yet it “only” boasts ~2.2mn visitors a year, mostly free individual travelers. Generally, the bigger the aquarium the more visitors it attracts, but only up to a certain point. SOA has a turnover of S$65mn, which is 80% of aquarium revenues, and a pre-tax

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Geoff Gannon June 10, 2019

ServiceMaster (SERV): Terminix is a Wide Moat Serial Acquirer of Pest Control Companies That’s Well Worth Adding to Your Watchlist



ServiceMaster spun-off their home warranty segment, principally the American Home Shield brand, under the new corporate guise “frontdoor, inc.” back in October of 2018. This spin did not garner a lot of attention from the value investing community as both the RemainCo (SERV) and the NewCo (FTDR) were easily discernible high-quality businesses and both parts were going to be about the same size business at about $1.5 – $2 billion in revenue. In other words, not particularly fertile grounds for a mispricing and not what most event-driven value investors look for. Now that we’re about 7 months post-spin, with both entities trading at high-teens EBITDA multiples, they both appear fully valued by my eye. There was quite a bit of volatility in between, as Q4 proved to be a particularly hostile environment for spin-offs of all shapes and sizes so it was possible to pick both up at bargain prices (for the quality of the businesses) if you were paying close enough attention – not so much at today’s prices.


So Why Am I Looking?


Despite ServiceMaster and frontdoor not appearing quantitatively cheap on valuation metrics, the reason I think it’s worth studying up on both companies is fairly simple. Both, at first glance, appear to be extremely attractive companies as they each dominate their respective markets and possess especially compelling corporate-level economics. I’ll go over the multitude of reasons it appears to me ServiceMaster is an above-average business in this write-up. Furthermore, it certainly does not take neck-breaking, earth-shattering primary analysis to ascertain that we’re in the late stages of the current cycle. As such, now seems as good a time as any to be adding quality-type businesses trading at quality-type business prices in order to capture the opportunity if a broader market sell-off emerges. As such, let’s start with ServiceMaster.


Overview – The Company Has Been Around A Long, Long Time


ServiceMaster has been around since the late 1930s. Granted, this is somewhat in name only as the company has acquired and divested many businesses over the ensuing decades; although, the business has always operated in the cleaning residential services industry. The company was originally founded as a mothproofing business by Marion Wade – a minor league baseball player at the time. The company quickly switched gears and got into the carpet cleaning business in the 1930s. ServiceMaster experienced a good deal of success throughout that decade and began franchising its brand in the 1940s for residential and on-site carpet cleaning. Throughout the 1960s and 1970s – the era which the ServiceMaster brand really become a household name – ServiceMaster expanded into hospital maintenance. By the mid-1970s ServiceMaster had sold in excess of 1,000 franchise licenses in its consumer cleaning division, and the Company’s health care division had won cleaning contracts with more than 460 hospitals and was growing rapidly. By the mid-1980s with hospitals reducing their budgets to implement cost controls as well as government regulations making it a continually less appealing …

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Geoff Gannon June 4, 2019

Games Workshop (GAW): The Wide Moat, Formerly Mismanaged Company Behind “Warhammer 40,000” Has Always Had Great IP And Now Finally Has the Right Strategy




Games Workshop Group plc (“GAW” or “GW”)  – which trades in London under the ticker “GAW” – is by far and away the dominant publisher of tabletop wargames and designer, producer and retailer of miniatures used in those wargames. The company itself would describe its business as the design, production and sale of model soldiers that serve the “hobby” of collecting, modelling, painting and gaming with model soldiers. This is strictly true, but does not do justice to the company’s products. This is because the “model soldiers” are based on the belligerents in the company’s two major fantasy settings, Warhammer Age of Sigmar (fantasy) and Warhammer 40,000 (science fiction).




It’s easiest to demonstrate this visually, with a photo of one of the miniatures from Games Workshop’s range:

This miniature is a Primaris Space Marine. Space Marines are GW’s single most iconic creations – armies of elite, genetically engineered superhumans wearing power armour and dedicated to defending humanity in a hostile galaxy filled with forces bent on humanity’s destruction. The full GW model range is simply vast though, which you can get an idea of by visiting the company’s web pages at, and The key point here is that GW’s “model soldiers” have much more in common with the kind of thing you’d find in a sci-fi franchise like Star Trek, Star Wars, or Alien, than they do with real life.


You should understand that if you went and bought the model above (or any of GW’s range), they would come unassembled and unpainted. (The model above was assembled and painted by a member of GW’s design studio.) Assembling and painting the models are key parts of the hobby. The other key part is using those models in tabletop wargames for which GW publishes and maintains rulesets.


GW earns revenue from selling models (such as those above – though its full range is absolutely vast), modelling tools, paints, boxed games, rules books and rules supplements, gaming accessories such as dice and templates, and scenery, all for games set in its two main fantasy settings. Sales are made through GW’s network of company stores, independent stockists, and online. GW also licences its IP to third parties to earn royalty income. The main source of royalty income is for video games set in GW’s fantasy settings. In addition, GW has a publishing arm that earns revenue from publishing novels and other fiction set in the Warhammer and Warhammer 40k universes.


The key thing to understand is that GW services the all-encompassing hobby of collecting, assembling, painting and then wargaming with miniature soldiers. There are no direct quoted peers. This is because GW is by far the biggest company in its industry. It dominates the industry the same way Tandy Leather Factory dominates leathercrafting (arguably more so, as GW is a global business). There are some peer companies out there – companies like Privateer, Battlefront, and Mantic. …

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