Merkur Bank (XETR: MBK)

Merkur Bank (MBK) is a small regional bank located in Munich, Germany. In 1986, MBK was acquired by a group of private investors led by Mr. Siegfried Lingel. At this time MBK had total assets of €14 million and 7 employees. Mr. Lingel refocused the bank’s business on financing residential real estate developers in Leipzig, Berlin and, to a lesser extent, Munich. In 1995, the bank extended its business to the financing of leasing companies and SMEs. In 1999, MBK went public on the Munich stock exchange. In 2002, Mr. Lingel’s son, Mr. Marcus Lingel, joined the company’s management team and, after a six-year transition phase, he finally became CEO. Mr. Lingel refocused MBK’s real estate business to Munich (beginning in 2002) and, in 2005, to Stuttgart. MBK operates five branch offices and since 2009 the company has also been offering online retail banking solutions to its clients. Currently, MBK has total assets of approximately €1 billion and 200 employees.

The following are the main arguments for investing in the company:

1. MBK’s business model is easy to understand.

MBK could serve as a text book example of how banks used (?!) to operate. MBK collects deposits from its clients and uses these funds to provide loans to real estate developers, leasing companies and SMEs. The difference between the cost of taking in clients’ deposits and the interest rate MBK demands from its borrowers is MBK’s most important revenue stream. The second revenue stream are commissions earned by providing various consulting services to clients and borrowers.

MBK is not engaged in any sort of proprietary trading or investment banking. This allowed MBK to survive the financial crisis of ’08-’09 and the “Euro crisis” unscathed because it did not have to record any write-downs. In fact, MBK has been profitable during these times of financial turmoil. MBK also refrains from performing maturity transformation as far as possible.

MBK’s business model, i.e. focusing on the “traditional” banking business, makes the bank quite insensitive to the prevailing low interest rate environment. From 2009 to 2016 the bank’s interest rate spread fluctuated between 3.24% (2010) and 2.78% (2016) and the average (= median) interest rate spread being 2.92%. The main factor affecting MBK’s profitability are competitive pressures, i.e. when its competitors demand lower interest rates on new loans to gain market share. These pressures have intensified in the last three years, as the interest rate spread declined from 2.94% to 2.78% (2016).

2. Focus on Munich’s housing market should provide potential for further growth.

MBK’s most important business segment is real estate financing and, here, the bank is particularly focused on Munich.

Munich is an attractive city for real estate developers because of a chronic scarcity in housing. This situation will probably not change as Munich’s population is likely to grow in the future, as it has done in the past. This is due to the high quality of living the city offers (it constantly ranks among the top ten cities in the world) and its …

Kroger (NYSE:KR): A Little Too Hard

On 16 June 2017, Amazon announced a $13.7 billion acquisition of Whole Foods. The announcement then engendered meaningful declines in stock prices of major grocers/supermarkets, not just in the US but also in Europe. Kroger, in particular, dropped as much as 17% that day. This brings its YTD performance to -31% as of 29^th June 2017.

Below, we take a brief look at Kroger to see if it is now the right time to consider an investment in it.

Introduction

Founded in 1883, Kroger is now one of the largest retailers in the world, with more than $115 billion in revenue in 2016, serving more than 8.5 million customers every day. As of January 28, 2017, Kroger operated, either directly or through its subsidiaries, 2,796 supermarkets under a variety of local banner names. 2,255 of them have pharmacies and 1,445 have fuel centers. They also offer ClickList™ and Harris Teeter ExpressLane— their personalized, order online, pick up at the store services — at 637 of the supermarkets. Approximately 48% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land.

Kroger also operates 784 convenience stores, either directly or through franchisees, 319 fine jewelry stores and an online retailer.

Several things stood out in the above description of Kroger:

1. With sales of $ 115 billion, Kroger is the third biggest retail chains in the world. It is also the largest traditional supermarket chain in the US.
2. Kroger’s 2,796 supermarkets are operated under a variety of local banner names.
3. Fuel is a significant contributor to Kroger’s revenue, generating almost $14 billion in 2016. More than 50% of Kroger’s stores have fuel centers.
4. 48% of Kroger’s supermarkets are operated in their own facilities.

We will come back to the above points below.

Durability and Moat

The durability of demand for food and groceries is very good. Most grocers do not experience significant fluctuations in real sales per square foot over time. This is especially true for a general food and grocery retailer like Kroger, whose store size is big enough for them to have room beyond providing traditional grocery to also sell items that are popular. In other words, they have more room to experiment and adapt according to the latest trends.

For example, 10 years ago natural and organic was not a central focus in their stores because it was not a central focus for customers. 5 years ago Kroger made a concerted effort to make natural and organic the “plus a little” part of their product strategy (Kroger wants their most loyal customers to say “At

Kroger, I get the products I want, plus a little”). Today, natural and organic foods are integral to their business, reaching $16 billion in annual sales in

2016. In fact, this makes Kroger a bigger organic food retailer than Whole Foods.

In terms of moat, supermarkets’ competitive advantage mostly stems from local economies of scale. Kroger uses a 2 to 2.5 mile radius to define its local market for each …

Protector Forsikring (OSLO: PRTOCT)

Ticker:                  PROTCT

Country:              Norway

Stock price:        71,75 NOK

Summary of the thesis:

• A fast-growing Norwegian insurer with higher than industry growth in premiums. Historically it has grown premiums at 20 %, achieving 92 in combined ratio and an investment return on the float of 5,5 %.
• A low-cost focused business model with industry leading expense ratios.
• Protector is trading at approximately 12x normal earnings, which is in line with what the Norwegian market has been priced at historically. This is cheap if the growth and the underwriting record can sustained.
• The risks involve an underwriting business with many moving parts in combination with rapid expansion in new markets. The company has experienced mispricing in its policies like worker’s compensation in Denmark causing the combined ratio to hit 98 for the fiscal year 2016. Furthermore, the investment portfolio consists of 80 % bonds which might not provide an adequate return.

Overview:

Protector is quite a new player in the Scandinavian insurance market. The company was established in 2004, and listed on the Norwegian stock exchange in 2007. It has 300 employees at offices in Oslo, Denmark, Stockholm, Helsinki and Manchester. In 2006, gross written premiums (GWP) was about 500 million NOK, while in 2016 it wrote 3,4 billion NOK in GWP. In other words, this has been a growth story.

Protector consists of three business segments:

• Selling insurance to companies
• Selling insurance to the public sector
• Ownership insurance

And as of today, 56 % of revenues comes from Norway, 24 % from Sweden, 19 % from Denmark, while others amount to 1 % of the business. It has just started expanding into the UK and Protector insures the London boroughs with Royal Borough of Kensington and Chelsea, City of Westminster and Fulham. You might have noticed the big fire in London recently, and the building Grenfell Tower was insured by Protector. The building lies in the west of Kensington and is a typical example of what kind of risks Protector takes on. At least 30 people were sent to hospital with injuries and several were wounded. This was a tragedy for the people, but most of the risks related to the fire was covered by reassurance. The UK market was chosen based on statistical analysis of the expense ratios and competitiveness of insurance markets across Europe.

The long-term financial goals of the company are the following:

• Growth rate of gross written premium: 15 %
• Combined ratio for own account: 92 %
• Return on equity: >20 %

Protector sells their insurance through insurance brokers. Historically, the focus of the company has been to sell insurance to companies in the segment from 100 thousand NOK up to 3 million NOK. In the commercial lines of business, they have 5 000 customers.

Historically, the company sprung out of ownership insurance. This is where Protector also has the strongest market presence, with more than 50 % market share in the Norwegian market. It is sold through lawyers and real estate brokers. However, today, this line …

Under Armour (NYSE:UA)

UPDATED: 20-JUN-2017

Athletic apparel manufacturers typically develop, market, and distribute their own branded apparel, footwear, and accessories for men, women, and youth.  Products are usually sold worldwide and worn by athletes, as well as by consumers of active lifestyles.  Products are most often marketed at multiple price levels with revenue generated from a combination of wholesale sales to independent and specialty retailers, as well as through direct consumer sales channels that include a company’s own stores and its ecommerce sites.

The key players in the industry are NIKE (includes Jordan & Converse which was acquired in 2003), Adidas (includes Reebok which was acquired in 2005), Under Armour, PUMA, and ASICS.  Below is my estimate of the market size and industry market shares:

The industry is currently benefiting from a number of consumer trends, including an ongoing shift towards living healthier, a shift to more casual work and everyday apparel, global growth in sports activity, and a growing middle class in China and other emerging markets.  Other trends that appear to be affecting the industry are growth in Direct-to-consumer sales and a tendency for consumers to develop brand loyalty at a young age.

The athletic apparel industry is very durable with athletics traced back to 2250 BC.  People often seek to belong to a group and are typically loyal to their favourite athletic brands.  Over the long-term, the industry should be capable of growing sales at rates at least as fast as the global GDP growth rate (ie. ~4.5%+), and faster, if the current trends discussed previously, endure. 

The economic moats of an athletic apparel company is based on its brand strength and how well it resonates with consumers.  Protecting a company’s brand and growing its appeal/popularity is crucial to mass-market success. Endorsement deals with popular sports teams and athletes are often critical to brand success.  NIKE dominates industry endorsement spending, sponsoring 70% of the most valuable sports teams and 45% of the top athletes.  Adidas has the second most top endorsement deals (~15-20%) followed by Under (~10-15%). 

In the past, the industry has offered good fundamentals and good stock returns.  Below is a table of the fundamental & price performances over the last 9 years for each of the industry’s key players:

Currently, within the industry, Under Armour appears to be the most likely candidate for mis-pricing.  The stock has dropped approximately 50% in the past year and is trading near its historical low EV/Sales ratio.  As part of the 3Q2016 earnings call, management warned investors that sales growth would slow over the next two years, and then, after 26 consecutive quarters of >20% sales growth, Under Armour’s streak ended in 4Q2016 with sales growing by 11%.  They followed up with 1Q2017 year-over-year sales growth of 6.6% (including North American sales dropping 1%, wholesale revenues increasing 3.8%, footwear sales up 2.0%, and Connected Fitness sales up 2.3%).  Meanwhile, SG&A expenses increased 11.7%.

So, the key questions are:  What has caused Under Armour’s recent struggles and are they temporary or permanent?  …