Posts By: Geoff Gannon

Flanigan’s (BDL): A Cheap, Complicated Restaurant Chain Focused on South Florida

Flanigan’s (BDL) is a nano-cap full service restaurant and discount liquor store company. All of its locations are in Florida. And all but one of the locations are in South Florida. The company’s ticker – “BDL” – comes from the name of its liquor stores: Big Daddy’s Liquor. Meanwhile, the company’s name – Flanigan’s – comes from the name of its founding and still controlling family. One family member is directly involved in the business – as the Chairman and CEO for the last 18 years – and his brothers who serve on the board and also own entities connected to the company. There is a family trust as well. Altogether, insiders of some sort own about 50% of the company. Although I referred to this company as being both a full service restaurant chain and a chain of discount liquor stores – the discount liquor stores mean very little in an appraisal of the company. About 90% of the company’s EBIT comes from the restaurants. So, less than 10% of earning power comes from the liquor stores. Also, the returns on capital in the restaurant business are much higher than in the liquor stores. If you don’t adjust for leases – which changes the calculation of ROC with the new accounting rules adopted in the last few years – the restaurant chain’s returns on capital are probably around 25% pre-tax (so, high teens after-tax) while the liquor stores are more like 7% or so pre-tax and maybe 5% or worse after-tax and in cash. Restaurants are often valued on EBITDA or EBITDAR (EBITDA before rent) instead of EBIT. So, if anything, I’ve used a somewhat more conservative measure. Most importantly, though, is that the company says it doesn’t intend to open more liquor stores. It is going to use some space that had been planned for a restaurant expansion to instead do an additional liquor store. But, overall, the company doesn’t intend to put more capital into the liquor store business. Since the liquor store business is less than 10% of earning power here already and the company intends to re-invest free cash flow in additional restaurants, but not additional liquor stores – there’s really no point in an analyst wasting their time worrying about the value of the liquor stores, their competitive position, etc. I will just mention two synergies here. The liquor stores are often co-located with the restaurants. Not always. But, often enough to make it worth mentioning. And then the other synergy would be liquor sales at the restaurant. Flanigan’s restaurants get about 75% of revenue from food sales and about 25% from bar sales. Gross margins at the restaurants are very high (compared to other restaurants) at around 65%. The fact the company is buying so much alcohol so frequently from the same distributors in the same region of the same state suggests that ownership of the liquor stores may help increase buying power, lower costs, and thereby achieve higher margins at the …

Libsyn (LSYN): CEO’s Departure Makes this Stock Even More Interesting

This is a follow-up article on Libsyn (LSYN). In my initial interest post on the company I talked a little about the fact that company’s CEO was named in an SEC complaint. That complaint was directed at the former CFO of the company and the current CEO of the company. I can now say “former CEO” of the company. Libsyn announced that this CEO was resigning from his position as CEO and also from the board. This was – to me – a very big deal. To the market, it wasn’t. Libsyn stock barely moved on the news. That makes this stock a lot more interesting to me now.

However, the CEO was not the only issue I had with Libsyn. As discussed in my earlier article on Libsyn, I do have some concerns about the company’s level of technological sophistication versus some of its newer competitors. Libsyn has a business model that is probably – most of the other companies in this industry don’t really release any sort of financial info that can give me certainty on this – a lot more durable than competitors. Libsyn has two business segments. One is “Pair”. This hosts websites – especially WordPress websites. It also does domain registration. The other is the namesake Libsyn business. Libsyn’s business model consists almost entirely of collecting revenue in 3 forms: 1) Fees paid by podcast producers (people like me and Andrew), bandwidth fees (again paid by people like Andrew and me based on number and size of downloads of a podcast each month), and premium subscriptions (Libsyn takes a cut of the premium fee – for example the $7.95/month subscription service Andrew and I do – and the podcast producers take the remaining amount). These 3 things taken together account for virtually all of Libsyn’s revenue. It also has some ad revenue – but, this is small.

Competitors like Stitcher – which owns an ad company called Midroll – probably rely more heavily on a combination of ad revenue and premium subscription revenue. Libsyn also does not have a premium podcast network like some competitors. So, something like Stitcher – previously owned by E.W. Scripps, but recently announced to be sold to Sirius/XM – brings in revenue sort of like a hybrid TV broadcaster / cable channel. You pay a certain amount each month for a subscription to Disney Plus, HBO Max, etc. People pay for a “Stitcher Premium” subscription and get access to premium features (like behind a paywall episodes, etc.) of the various podcasts on the network. Libsyn’s tiny amount of “app” revenue (it’s like 3% of recent revenue, maybe as high as 5% in some quarters where ad revenue is real low) comes from specific show-by-show revenue. It comes from taking a cut of people who signed up just for the specific premium content of a podcast like Focused Compounding. So, it is single podcast specific revenue. There are reasons why I think that makes more sense than a paid network. Ad …

Libsyn (LSYN): A Pretty Cheap and Very Fast Growing Podcasting Company in an Industry with a Ton of Competition

This is a complicated one. So, I’m going to do my best to boil it down to the things that really matter. That’s a judgment call. And it means I may be focusing on the wrong things. I may not be telling you enough about some things that do matter a lot and fixating instead on some stuff that turns out not to matter as much as I think.

Libsyn is one of the biggest and oldest companies in podcasting. It has been there since the beginning of podcasting basically. And unlike almost every other company in the industry – it’s profitable. It’s been profitable for a while. And it’s likely to continue to stay profitable. This company (Liberated Syndication – ticker LSYN) also owns another Pittsburgh, PA company called “Pair”. Pair is a website host (and domain registrar) that is also very old and also profitable. Pair has been around since the mid-1990s. Libsyn has been around since the mid-2000s. Both have basically been there since the start of their respective industries. As I write this, Libsyn (the podcasting company) accounts for maybe 60% of the gross profit, EBITDA, etc. of the combined company and Pair for the other 40%. However, I’d personally appraise Libsyn as much more than 60% of the combined company’s intrinsic value, because I think it’s likely to be a fast grower.

Why?

Podcasting is a very, very fast growing industry. It’s hard for you to realize just how fast growing it is. As investors, we’re used to thinking in dollar terms. We look at revenue and gross profit and so on in terms of dollars. We aren’t managers and often don’t see the underlying unit growth. Unit growth is the physical – of course, in this case it’s actually intangible – growth in the industry. The number of podcasts, podcast episodes, monthly audience figures, etc. is the “unit growth” in this industry. It’s the growth independent of pricing. Most industries in the U.S. – if they are growing at about the same rate as the overall economy – only grow at a rate equal to population growth plus output per person. So, before inflation, an industry that’s growing at a healthy rate might be doing 3% unit growth a year. This means it will double in real size about every 25 years. A fast growing industry – something more like electric vehicles and hybrids and so on – might be growing at like 7% a year. This means it will double in real size about every 10 years. Podcasting is growing much, much faster than that. In recent years, most of the key metrics that Libsyn tracks have been growing at about 20% a year. This means it doubles in real terms about every 4 years. To put that in perspective, at the rate podcasting is growing in terms of number of shows, number of episodes, number of monthly listenership, etc. we are talking about something that will double in size by 2024, quadruple …

Avalon Holdings (AWX): An Unbelievably Cheap Controlled Company that Might Stay “Dead Money” For A Long Time

I’ll be doing write-ups on Focused Compounding more frequently now. This means that the quality of the ideas will be lower. Previously, I’d tried to focus on writing up just stocks that looked interesting enough to possibly qualify as some sort of “stock pick” from me. Now, I’m just going to write-up ideas I analyze whether or not they turn out to be anything approaching the level of an actual “stock pick”. So, keep that in mind. Some of these write-ups – and I’d say Avalon falls into this category – are going to be in more of the “not a stock pick” category. Actually, though, Avalon is a really interesting situation – just, a really interesting situation I’m not at all sure I’d actually recommend.

Avalon is a nano-cap stock. I’ve followed the company in some form for over a decade. It’s often been cheap. But, it’s rarely been as cheap as it is now. Avalon does a bunch of things. It owns some salt water injection wells. Those have been shut down and written off. There’s a ton of info about the court cases around these wells in the 10-Q, 10-K, etc. I’ll leave you to read those for yourself. I’m going to just say the wells are not worth anything positive or negative for the purposes of this write-up. Avalon has a waste management business. There are two parts to this. One is a “captive landfill” run for a customer (on that customer’s land) in Ohio. This is only about 5% of the waste management division’s revenue. And it is just one customer. There isn’t enough info given by the company to evaluate this captive landfill business in any depth. The other thing Avalon owns is a “waste brokerage” business. This is big. Revenue from this is like $45 million. It seems to be about 60% recurring revenue and 40% project revenue (in many years). This waste brokerage business is the source of Avalon’s earnings. In fact, earnings from the waste brokerage business often exceeds reported earnings of the entire company. This is due to losses in the other segments (salt-water injection wells and the “golf” business). Most of the company’s assets are in something it calls the “golf” business. This is potentially a bit of a misnomer. It should just be called “country club”. The company owns 3 golf courses and leases a fourth (Avalon has the right to exercise extensions on that leased property to keep it through 2053). The 4 golf courses are located in Northeastern Ohio and Pennsylvania. The towns they are in are: Warren, OH; Vienna, OH; Sharon, PA; and New Castle, PA. The sites at Warren and New Castle are being renovated right now. New Castle is a new acquisition and very run down. Warren is the company’s oldest location – it’s where the corporate HQ, the hotel, etc. are – and the renovations are to make the resort hotel even more impressive. To the extent Avalon is an asset play …

Dover Motorsports (DVD): Two Racetracks on 1,770 Acres and 65% of the TV Rights to 2 NASCAR Cup Series Races a Year for Just $60 million

I mentioned this stock on a recent podcast. This is more of an initial interest post than usual. It’s likely I’ll follow this post up with one that goes into more detail. Two things I don’t analyze in this write-up are: 1) What this company will look like now that it is once again hosting races at Nashville (in 2021) and cutting back races at Dover. 2) What the normal level of free cash flow is here. I discuss EBITDA. But, I think normalized free cash flow is the far better measure. And I don’t discuss that at all here. Finally, I haven’t dug deeply into NASCAR as a sport to get enough of a feel for whether it is durable and likely to increase or decrease in popularity in the years ahead. This is critical to analyzing the investment. And it’s the next logical step. But, this write-up was already getting long. So, better to do a deeper follow-up later and stay at the more superficial level for this first analysis.

Dover Motorsports is a $60 million market cap New York Stock Exchange listed company. It has two classes of stock. The super voting shares are owned by Henry B. Tippie (the now over 90-year old chairman). That leaves about $30 million worth of float in the common stock. Enterprise value is similar to – maybe a bit lower than – the $60 million market cap. As of March 31^st, 2020 – the company had $5 million in cash on hand. Liabilities are generally stuff like deferred revenue (cash received that’ll be earned when a race is hosted later this year). The one exception is a bond issue I’ll discuss in a minute. The balance sheet shows about $4 million in liability related to that bond issue. The reality is that there could be another $10 million owed on those bonds. Or – as seems more likely now – the company could invest in some cap-ex instead and even that $4 million liability might go away. Why is that?

The liability is tied to bonds issued by the Sports Authority of Wilson County, TN. These bonds were issued as part of the funding of the Nashville Superspeedway. It’s a racetrack about a 40-minute drive from Nashville that was built by Dover Motorsports 20 years ago. The racetrack is big. It was originally on 1,400 acres of owned land, now down to 1,000 acres of land that hasn’t been sold off. It’s also – if you look at a list of where NASCAR and non-NASCAR races are held – much more in line with NASCAR type tracks in terms of the construction of the track (concrete), its length (1.33 miles), and the amount of seating. However, the track had never held a NASCAR Cup Series (think of this as the “major leagues” of U.S. auto racing) race. Without hosting such a race, it never made money. And, in fact, it hasn’t been operated in any way for close …

Otis (OTIS): The World’s Largest Elevator Company Gets the Vast Majority of Its Earnings From Maintenance Contracts With a 93% Retention Rate

Otis Worldwide (OTIS) is the world’s biggest elevator and escalator company. Like Carrier (CARR) – which I wrote up two days ago – it was spun-off from United Technologies. However, shareholders of United Technologies received one share of Carrier for each share of United Technologies they had while they only received half a share of Otis for every one share of United Technologies they owned. As a result, the market caps of Carrier and Otis would be the same if the share price of Otis was twice the share price of Carrier. Otis isn’t trading at double Carrier’s stock price though. It’s at $47.85 versus $16.25 for Carrier. So, closer to three times the price of Carrier than two. Carrier, however, does have more debt than Otis. Nonetheless, as I’ll explain in this article – the bad news is that while I like Otis as a business a lot better than Carrier: Otis is the more expensive stock.

Reported revenues are unimportant at Otis. The company did $13 billion in sales. But, only about $7.4 billion of this comes from service revenue. Service revenue makes up 80% of EBIT while new equipment sales are just 20%. Service revenue is also less lumpy. A major reason for this is that more than $6 billion of the total service revenue is under maintenance contracts. This more than $6 billion in maintenance contracts has a 93% retention rate. The contracts don’t actually require much notice or much in the way of penalties to cancel. However, cancellation is rare. So, a very big portion of the economic value in Otis comes from the roughly 2 million elevators covered by maintenance contracts that bring in about $6 billon in revenue per year. My estimate is that the after-tax free cash flow contribution from these 2 million elevators under contract is anywhere from $1 billion to even as much as $1.2 billion. Basically, if we set aside these maintenance contracts – there is almost no free cash flow beyond the corporate costs etc. that need to be covered at Otis. There is an argument to be made that as much as 20% of the company’s economic value comes from new equipment sales. However, I think it’s trickier to value the company if you count those sales in the period in which they occur. Rather, I think it makes sense to look at the business the way you might a movie studio, book publisher, etc. with a substantial library. Or – if you’d prefer – the way you’d look at an insurer that usually has a combined ratio a bit below 100, but basically makes its money off the return on its “float”. Otis’s service business has very stable revenue, EBIT, and free cash flow from year-to-year. I expect it to rise at least in line with inflation (the company expects better than that). And there are some possible productivity gains here from digital initiatives. Smart elevators, technicians using iPhones, etc. could cut down on the number …

Carrier (CARR): A Big, Well-Known Business that Just Spun-off as a Cheap, Leveraged Stock

Carrier (CARR) is a recent spin-off from United Technologies. The company has leading brands in Heating, Ventilation, and Air Conditioning (HVAC), fire & safety, and refrigeration. The best known brand is the company’s namesake: “Carrier”. About 60% of profits come from HVAC. About 30% of  profits come from fire/safety. And about 20% of sales and profits come from refrigeration. Although you may be familiar with the Carrier name in terms of residential air conditioning – there are just under 30 million residential Carrier units in the U.S. right now – the company is skewed much more toward commercial, industrial, and transportation uses than some of its competitors. Carrier’s market position is strongest in “the Americas” where it gets over half of all sales (55%). About three-quarters (72%) of sales are for new equipment and the rest (28%) are some form of parts, maintenance, or other “after-market”. Gross margins for both sales and services are basically the same at around 29%. Gross margin variability seems very, very low here. Return on capital is high. If we use only tangible assets excluding joint ventures accounted for under the equity method of accounting – more on this later – Carrier’s pre-tax return on net tangible assets invested in the business would be greater than 100%. After fully taxing these results and then adjusting for a slightly less than 100% conversion (I’ll assume 90% conversion as the possible low-end of a normal 90-100% of EPS converting to FCF range for the company) you’d still be left with unleveraged cash returns on net tangible assets employed greater than 50%. By any measure, the business is incredibly profitable. But, does that matter?

Does Carrier grow?

The company’s investor relations team thinks it does. They explicitly model faster than the market organic growth. There is, however, no proof of this in the five years of financial data included in the spin-off documents. After adjusting for changes in currency, acquisitions, and one-time pick-ups and drop offs of big business in various units – I really can’t tell if this business was or wasn’t growing under United Technologies. Organically, it looks like it was flattish over the last 5 years. Earnings Before Interest and Taxes (EBIT) ranged from about $2.5 billion to $3.7 billion. The central tendency – to the extent there is one – seems like about $3 billion in EBIT. Just to keep us dealing with nice, round numbers I’ll assume Carrier as a spun-off entity will average about $3 billion in EBIT. Obviously, you shouldn’t expect $3 billion in EBIT during 2020 or 2021, because of the virus. Purchases of everything Carrier makes are very easy to defer. This is all cap-ex. If you don’t need a new refrigerated truck – you don’t need to buy from the refrigeration business unit this year. If you aren’t building new stand alone homes, new townhomes, etc. – you don’t need to put in residential Carrier units. Commercial customers who run everything from …

Mills Music Trust (MMTRS): A Pure Play Decades Long Stream of Future Royalties on Old-Timey Songs Available at More Than an 8% Pre-Tax Yield

Mills Music Trust (MMTRS) is an illiquid, over-the-counter stock. In fact, it’s not a stock at all. The security traded is a “trust certificate” that entitles the holder to quarterly distributions from the trust. These “dividends” are not dividends. The trust has not paid taxes on the income. So, you will be taxed on the income received. As a result, you’ll need to adjust the after-tax return on Mills Music Trust as compared to other stocks you might own. Since I don’t know your tax situation, I don’t have a way of doing that.

The trust was created in 1964. Its life may extend till something like 2088. The way it’s written the trust will be dissolved at the end of the calendar year during which the last copyright expires and can not be renewed. Based on a table of the 50 top performing copyrights in the Mills Music Trust catalog – I believe this won’t happen before 2088. However, the trust renegotiated something important with EMI (the publisher that collects royalties on behalf of Mills) that makes the end date for the trust less important. The original trust arrangement required a minimum royalty payment of $167,500 per quarter. This is not a small number when you consider that there is a copyright that won’t expire till 2088. So, the contingent payment made to Mills would presumably have been $670,000 a year in 2087 (and for many, many years before that). Now, it’s likely the dollar will have depreciated quite a bit in the 67 years between today and 2087 – but, $670,000 a year is still a ton more than the songs in the Mills Music Trust catalog will be producing in royalties in that year. This is because the vast majority of the copyrights on valuable songs will expire in about 25-30 years. Mills provides information on when copyrights for songs may expire. But, as most of these songs are all governed by the same copyright law, a pretty good guess is simply date of creation plus 95 years. So, these valuable songs I expect to come off copyright (and go into the public domain) in the next 25-30 years were created in like the 1920s. Almost all of the royalty streams you’ll be getting here are derived from pre-1958 songs. And then, because of the general rule that a song will be off copyright after 95 years (no matter what is done to try to renew it) – we can assume that these songs don’t much pre-date the early 1900s. In fact, almost all the songs of value seem to date from 1922-1958. There’s about a 30-year period where many of these more valuable copyrights were created. And those were the roughly 30 years before the trust was created. Mills gives details on what these songs are. Some of the biggest royalty producing songs for Mills right now are:

Little Drummer Boy

Sleigh Ride

Lovesick Blues

Stardust

Hold Me, Thrill Me, Kiss Me

It Don’t Mean a …

Interpublic (IPG): An Ad Agency Holding Company Trading at 10 times Free Cash Flow and Paying a Nearly 7% Dividend Yield

Interpublic (IPG) is one of the big ad agency holding companies around the world. Other examples include Omnicom (also a U.S. company), WPP (a U.K. company), Publicis (a French company), and Dentsu (a Japanese company). There are countless other publicly traded advertising stocks. Some are affiliated with one of those big groups. Others aren’t. Interpublic might be the first real ad agency holding company. The name Interpublic dates back to 1961. If you read the 10-K, you’ll notice PriceWaterhouse has been auditing Interpublic’s financials since the 1950s. Before the name change in 1961, the company was called McCann-Erikson. Late in the TV series Mad Men this is the agency that buys up the company all the main characters work for. Mad Men ends with the “Hilltop ad” (I’d like to buy the world a Coke) for Coca-Cola. That’s not made up just for the show. McCann-Erikson did make that ad. The McCann-Erikson combination dates back to the 1930s. Each of those two agencies (McCann and Erikson) were founded in the first decade of the 1900s. Omnicom and other advertising agency holding companies that came later were probably based in part on Interpublic in the early 1960s. For decades now, it’s been a common strategy for publicly traded advertising companies to own different agencies and provide certain centralized functions (basic corporate functions, capital allocation, setting compensation of top executives at the agencies, managing conflicts of interest between agencies they own, etc.). To some extent the individual agencies are independent and run sort of like Berkshire Hathaway runs its subsidiaries. But, in other ways they aren’t very independent. For example, Interpublic explicitly says that corporate HQ provides guidance, advice, etc. on both certain human relations stuff and on real estate. The cost structure of ad agencies is very different from most companies. At Interpublic, close to 65% of revenues are spent on base salaries, benefits, rent and office expenses. A huge proportion of the company’s total cost structure is really just base salary and rent. These are both very fixed. This is a pure service business. It’s largely “cost plus” – though how that works is a bit complicated.

So, the actual way ad agencies bill can be pretty complicated. Interpublic gets 50-60% of its revenue from its top 100 clients. Usually, client retention rates among big accounts are incredibly high. This is not due to contracts. The industry standard is for all contracts to allow either the agency or the client to fire the other with 30-90 days’ notice. Each of the contracts are customized. So, in theory, profits could vary a lot relative to the amount of revenue booked depending on the client. But, in reality, this does not happen. The contract can be created to involve a lot of cost plus, a lot of commission, flat fees, incentives for hitting certain quantitative targets for the effectiveness of campaigns, etc. If you look at the long-term margins of all different ad agencies around the world that once took very simple …