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

by JONATHAN DANIELSON

 

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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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

WRITE-UP BY PHILIP HUTCHINSON

 

Overview

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 www.games-workshop.com, www.warhammer-community.com and www.forgeworld.com. 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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Parkit Enterprise: Activist Controlled Parking Lot Owner Looking to Monetize Holdings, Trading at a Discount to Net Asset Value

WRITE-UP BY THOMAS NIEL

(Image Created by the Author; Data via Parkit Investor Relations Page and Author’s Calculations)

 

Parkit Enterprise is a Canadian-domiciled owner of parking lots in the United States.

Investors have forgotten about Parkit, pushing the stock to trade well below its underlying value.

 

But one investor saw opportunity and has taken the reins to realize the company’s underlying value. Leonite Capital, a family office led by Avi Geller, has acquired a large position, and last year took control of the board.

 

Following this proxy-fight win, Leonite is looking to extract full value out of the company. But can they achieve what its prior management presumably failed to accomplish? Will realization of full value occur within an attractive timeframe (2-3 years?).

 

Let’s take at Parkit and see if the current discount to NAV is justified or presents a strong investment opportunity.

 

Background

 

Parkit Enterprise, Inc. (TSX.V: PKT; OTCQX: PKTEF) is a Canadian-domiciled owner of parking lots in Colorado, Connecticut, and Tennessee. The stock trades on the Toronto Venture Exchange, as well on the US OTC markets.

 

Parkit started out as Greenscape Capital Group, a holding company engaged in various “green”-related businesses. After developing the Canopy Airport parking facility, the company decided to sell off its non-core holdings and focus entirely on parking.

 

The company renamed itself Parkit Enterprise in 2013. Starting in the mid 2010s, Parkit formed a partnership with parking lot management company Propark America to acquire additional properties.

 

This resulted in Parkit becoming a major investor in two partnerships:

 

• OP Holdings JV, LLC. This partnership was formed in 2015 with Och-Ziff Real Estate as the primary investor. In 2015, OP acquired Parkit’s Colorado property, as well as properties in California, Connecticut, and Florida.
• PAVe Nashville, LLC. a 50/50 partnership with Propark. This vehicle acquired an airport parking facility in Nashville, TN in 2015.

 

This opaque ownership structure is part of the reason why investors have overlooked Parkit. Like with other similar vehicles (such as Regency Affiliates), there is the added risk of being a “passive investor in a passive investment”.

OP Holdings JV

The bulk of Parkit’s investments are held through OP Holdings JV, a partnership with Och-Ziff Real Estate and Propark formed in 2015.

 

Parkit owns an 82.83% interest in Parking Acquisition Ventures, LLC (PAVe). Due to the success of two divestitures, Parkit has fulfilled the 15% IRR hurdle due to Och-Ziff. As per the terms of the operating agreement, proceeds from asset sales will now begin to flow to PAVe.

 

As per the operating agreement, PAVe is now entitled to distributions until it realizes a 15% IRR on its initial capital contributions.

 

Through OP, Parkit holds interests in 4 properties:

 

• Canopy Airport Parking Facility (nearby Denver International Airport)
• Riccio Lot Hospital Parking (New Haven, CT)
• Chapel Square Lot (New Haven, CT)
• Z-Parking (East Granby, CT)

 

Canopy Airport Parking Facility

(Source: Parkit Investor Presentation, April …

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Nuvera Communications (NUVR): A Microcap Telecom Company in Rural Minnesota With Stable Earnings and Effective Management That Is Trading At A Cheap Price to Free Cash Flow

Write-up by Carleton Hanson

Investment Thesis Summary

Nuvera Communications (NUVR) is a micro-cap regional telecommunications company that operates primarily in south-central Minnesota. The company has a long history of operating profitably and growing revenues with timely acquisitions, yet due to its small market cap, OTCPK listing, and limited share liquidity NUVR is trading at very reasonable levels. NUVR’s market cap currently sits at about $100 million, with $8 million in net income in 2018 and $10 million in free cash flow. During 2018, NUVR was able to simultaneously grow revenue 20% YoY and begin integrating a major new acquisition, Scott-Rice Telephone Company. The company also benefits from federal programs that pay telecom providers to install fiber data connections in rural and under-served areas. These incentives are guaranteed for 10-year periods and the terms have become even more favorable recently, with payments to NUVR from these programs rising 10% YoY in 2019. The full effects of the Scott-Rice acquisition and increased federal subsidies are becoming clearer as the company moves into 2019, with NUVR generating just over $4 million in FCF in Q1, putting it on track for a 14-16% FCF yield for the year. For reasons I will discuss, I don’t believe the market is keeping pace with the increased value of NUVR’s business and I think an opportunity exists to establish a long-term position in the company at these levels.

For me to get excited about establishing a long-term position in a company, there are a number of things that I look for. First, I want to make sure that the company has stable earnings and cash flow, which indicates that the core business model is healthy. I also want to make sure that the management is trustworthy and effective and that I feel comfortable investing with them for an extended period of time. Ideally, I would also like to see that the company has avenues to grow the underlying business, and if I can get this growth paired with stability at a reasonably cheap price I am comfortable establishing a position. I believe that NUVR meets all of these criteria and is worthy of investment consideration.

NUVR is Stable

One of the major appeals of NUVR is the stability of its core business. At the most basic level, NUVR provides phone, video, and internet service to its customers for recurring monthly fees. NUVR is responsible for keeping up the maintenance of their infrastructure and providing customer support, but if they can do that the company gets the benefit of steady cash flow coming in every month as customers pay their bills. As a value-add for customers, the fact that NUVR has voice, video, and data/internet options allows customers to bundle their telecom products together into one monthly bill, giving them one point of contact when they need support and a discount from NUVR for using multiple services. While there is competition from other companies offering individual services, few offer bundled services to their customers, making NUVR …

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DPI Holdings Berhad (KLSE:DPI): A Tiny Developing Market Aerosol Paint Manufacturer/Distributor with 16%+ Operating Margins, Wholesale Pricing Power and 12 to 15 Years of Growth Capex in the Bank

Write-up by Warwick Bagnall

DPI is a Malaysian manufacturer/distributor of aerosol paint and paint solvents.  It’s listed on the ACE market, a secondary board of Bursa Malaysia.  It listed in early 2019 and was heavily oversubscribed so it’s not exactly overlooked.  Market cap is around MYR 85 MM (one USD is a little over four MYR at the time of writing) so it is a microcap.  Normally I wouldn’t bother to look at a recent IPO but two things made me take a closer look – I think consumer paint businesses have significant pricing power and DPI reports margins that are higher than most paint businesses.  It doesn’t hurt that the share price is well below the IPO price of MYR 0.25.

 

The company segments total revenue into three product categories – aerosol paint (73%), industrial aerosols (8%) and solvents (19%).  It sells these products through three channels – 70 distributors within Malaysia, via DPI-owned distributor DPIC which has 630 sub-distributor and reseller customers within Malaysia and to eight private label customers, six of which are located outside Malaysia. Most of DPI’s business is in Malaysia but it has recently indicated that it intends to enter the Myanmar and Vietnamese markets.

 

Aerosol paint manufacture is not high-tech and for a manufacturing business it doesn’t require much capital.  I estimate you could set up a factory like DPI’s replacement cost of MYR 20 MM in the same location with similar input costs and start trying to sell to Malaysian distributors within 12 months.  You could also import similar products from suppliers in China, duty free and with a freight cost that would detract from your margin but not prevent you from making a decent profit at the same price DPI sells for.  At the very least, one of the other multinationals with factories in Malaysia such as Nippon Paints should have competed DPI’s margins away long ago.  But that hasn’t happened – DPI made an operating margin of 16 to 25% between 2016 and 2018.

 

Paint businesses such as Sherwin-Williams (NYSE:SHW) and RPM (NYSE:RPM) are generally known for having pricing power and steady operating margins in the low teens.  But DPI’s is exceptional.  I can find only one other paint businesses with similar profitability to DPI – Samurai 2K (SGX:13C) which is a direct competitor to DPI.  I don’t think this is a coincidence.

 

To value DPI at anything higher than liquidation value requires three things:

• Confidence that they can maintain market share and pricing power in Malaysia.
• Confidence that management and competitors won’t attempt to grow market share by cutting prices.
• Willingness to substitute transparent unit economics for a long term history of profitability under public ownership. The company has been listed less than one year.

I’m going to focus on the aerosol segment of DPI’s business.  DPI sells solvent at a gross margin around 3%.  There don’t appear to be any synergies between the solvent and aerosol businesses – DPI’s competitor achieves similar or better …

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GAP Inc. (GPS): A Market Leader in Apparel Retail Is Spinning Off Underperforming Assets Which Should Drive Shareholder Value, But Income Derived From a Third-Party Credit Card Agreement Overstates The Company’s Earning Power And Makes the Stock Too Risky

Write-Up by Jonathan Danielson

Gap Inc. (GPS) is a company everyone should be familiar with: they’re an apparel retailer that specializes in ‘casual classics’. Meaning, jeans, khakis, polos, button downs, etc. The Company is headquartered in San Francisco and was founded in 1969. Gap Inc. has acquired and launched several brands over the years, but its main ones currently are: Old Navy, Gap Brand, Banana Republic, Intermix, and Athleta. GPS has increasingly become an Old Navy company over the years as consumers have flocked towards value brands and have deserted higher end specialty brands so it wasn’t too terribly surprising when they announced at the end of last quarter their intentions of separating into two companies. Interestingly enough, Old Navy will be the RemainingCo operating as a stand-alone business while Gap Brand, Banana Republic, Athleta, and Intermix will be spun off.

 

Based on consolidated metrics, GPS appears to be an interesting situation. When I pull the company up on QuickFS.net I see a company that has 10 year averages of:

 

• Gross margins: 38%
• EBIT margins: 11%
• ROE: 29%
• ROIC: 34%

 

All for a P/E of 10 and an EV/EBITDA of 6-ish. Not bad for a retailer. In fact, I was expecting much, much worse. If you pull almost any of their peers up and measure them on the same metrics you get an entirely different picture. More specifically, I looked at Guess, American Eagle, and Abercrombie and Fitch. Let’s just say when you pull those company’s financials up it looks like they have been existing in an era where questions are being raised about the viability of the brick and mortar retail business models. So, perhaps there’s an interesting situation here after all. Gap Inc. only grew revenue at a 1.8% CAGR over the past 10 years. However these are consolidated numbers and Old Navy is being spun off, remember? And Old Navy has been growing faster than the rest of Gap. Inc’s brands. Additionally, the “peers” I listed above most likely aren’t peers – not for Old Navy at least. The companies I previously listed are closer to Gap Brand and Banana Republic. The closest peer for Old Navy is probably somewhere in between Ross and H&M. Ross has been able to maintain healthy margins and growth while it appears H&M has struggled of late. Nonetheless, both companies look much healthier than any of the specialty-type brands previously listed.

 

We might have a compelling thesis on our hands if Old Navy is all that management cracks it up to be. The answer, as typically the case, isn’t so clear as one would hope. After all, GPS is operating in an environment that’s been dubbed the retail apocalypse. We’re living in the age of Amazon, how is your classical brick and mortar retailer churning out 34% returns on capital? Is Old Navy really that good? Well, I have my suspicions that it might not be the case. I’ll walk you through the numbers, show you how …

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VieMed Healthcare (VMD): A Founder Led Canadian Listed U.S. Ventilator Company Faces the Risk of Competitive Bidding for its Medicare Patients Starting in 2021

Write-up by REID HUDSON

 

(Geoff’s note: VieMed trades under the symbol “VMD” in Canada and over-the-counter in the U.S. under the symbol “VIEMF”. The stock is a lot more liquid in Canada than in the U.S. However, the price difference between the shares in Canada and the U.S. doesn’t always perfectly reflect the U.S. Dollar to Canadian Dollar exchange rate.)

 

VieMed Healthcare Inc. operates in the home health space and provides services and equipment to a variety of respiratory patients.  Its main market consists of stage 4 COPD patients who are in need of non-invasive ventilation (NIV) therapy to continue living without excessive time spent in a hospital.  VieMed also offers a range of sleep apnea, oxygen, and other respiratory solutions to patients.  VieMed employs Respiratory Therapists (RTs) to assist patients with the set-up of machines, education, continued monitoring, and other services included in respiratory treatment.  The company states that NIV treatment makes up roughly 90% of its business.  VieMed is a Canadian listed company that operates in the United States.  Its corporate structure consists of a Canadian parent company listed on the TSX called VieMed Healthcare Inc.  This parent company is the sole owner of a Delaware incorporated U.S. subsidiary called VieMed Inc. that owns two subsidiaries of its own.  The company operates through these two Louisiana based subsidiaries: one called Sleep Management, LLC and the other called Home Sleep Delivered, LLC.

As the graphic above shows, Sleep Management was founded in 2006 by its current CEO Casey Hoyt.  It got into the Non-Invasive Ventilator (NIV) market in 2012 and began to focus on COPD, changing its name to VieMed shortly thereafter.  After being acquired by PHM, VieMed completed a spin-out in 2017.  It was listed on the TSX Venture Exchange mainly because the company that it spun-off from was listed there.

VieMed claims that it cares for more patients with non-invasive ventilators than any other company in the United States.  NIVs are non-invasive machines that are used to lessen the effort required to breath.  They are primarily used by patients with late-stage COPD and neuromuscular diseases that both make it very difficult to breathe without assistance.  These machines are non-invasive as opposed to invasive ventilators that require insertion through the mouth, nose, or directly to the trachea by way of a tracheostomy tube.

Since entering the NIV market, VieMed has grown revenue and active vent patients at a fantastic rate.  Its revenue has grown at a CAGR 44% since 2010 and around 29% since its name change in 2014.  However, this number is weighed down by a negative year in 2016, when Medicare slashed reimbursement rates for NIVs.  Most recently, VieMed grew its top line number 39% in 2018 and around 50% in 2017.  The number of active ventilation patients that it serves grew to about 5,905 in 2018, representing a growth rate of about 35% for the year.  Active vent patients grew at almost 43% in 2017.   While this growth has been impressive, what …

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Sandridge Energy (SD): A Carl Icahn Controlled Post-Bankruptcy Oil Producer With 10-35 Years of Proved Reserves in Colorado, Oklahoma, and Kansas Trading at a Fraction of Net Asset Value

Write-up by JONATHAN DANIELSON

Sandridge Energy (SD) is an upstream oil and nat gas exploration and production company with operations primarily in the Mid-Continent and North Park Basin in Colorado. The Company is an onshore driller and owns three principle assets: Mississippi Lime, NW STACK, and the North Park Basin. The Miss Lime is a mature asset that will continue to decline in production, while the STACK and N Park assets are newer, higher growth, and more economically attractive.

I believe SD to be one of the most demonstrably mispriced and most compelling E&P play around for a multitude of reasons. SD is not a stock for a concentrated investor and extreme caution in trading the name is urged by your author.

Despite being in a tough industry, there is no reason for this valuation discrepancy and it is very unlikely to persist. SD has cleaned house with a new management team in place which has shed unproductive assets, implemented tighter cost controls and will invest future cash flows into their more productive assets.

 

Recent Events:

There are several factors at play as to why SD is currently trading so cheaply. For one, it’s a post-bankruptcy stock. With headquarters in Oklahoma City, Sandridge was founded by Tom Ward in 2006. Ward went on to accumulate over $10 billion from Wall Street investors and pursued strategies that entailed growing without regard to the underlying economics of the transaction in question (Empire building), leveraging the balance sheet with billions in debt, and subsequently entering Chapter 11.

SD emerged from bankruptcy in late 2016 and has seen its share price slide ever since. The reasoning reorg stocks face selling pressure is well documented in Greenblatt’s Stock Market Genius book, so i’ll be brief – as former bondholders now become equity holders there’s a mismatch in owners of the capital structure. Entities who specialize in distressed debt now find themselves owning equity, which they likely have very little interest in. Thus, selling pressure ensues.

Second, the past 5 years have been brutal for all E&P companies with the collapse in oil prices. Many of whom have subsequently filed for Chapter 11. That’s what happens when you take a commodity business notorious for cyclicality and add leverage. Upstream producer’s woes were exacerbated in the second half of last year as oil was again hammered.

Third – and most importantly – SD was on the bidding block last year as part of their “strategic review” and bids came significantly lower than what was expected. I believe many special situation-type investors owned SD last year in hopes of participating in a quick asset sale. As these hopes failed to materialize these investors likely dumped their shares in droves, as they were now stuck with a mediocre oil producer at a time when crude was crashing.

These factors have culminated in a stock that I believe is too cheap to ignore.

 

Overview:

Upstream Oil & Gas producers represent the epitome of high risk business models – hundreds …

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Garrett Motion (GTX): Messy Financials, A Peculiar Indemnification Liability, & Typical Spin-off Dynamics Have Obfuscated Garrett Motion’s Attractive Underlying Economics

WRITE-UP BY JONATHAN DANIELSON

Overview – Recent Events and Thesis

Garrett Motion (GTX) was spun off of Honeywell in September of last year as part of Honeywell’s ongoing series of divestitures (REZI, GTX, & ASIX). GTX primarily is in the business of designing and manufacturing turbochargers for automotive OEMs. They also design and make E-boosters for hybrid vehicles. As part of the spin-off agreement, Honeywell dumped their Asbestos Indemnification Liabilities on the newly formed entity (approximately $1.4 billion in total liabilities) in addition to loading the newly formed company up with debt that was 3x EBITDA. These dynamics have most likely led the market to view Garrett as a “garbage barge” spin, designed to solely benefit the parent by improving its capital structure and allowing the parent to quietly remove toxic assets off their balance sheet.

Investors in the special situation arena must pay close attention to this possibility, as buying into a garbage barge spin can have devastating results on your portfolio. Nevertheless, assets that the market apparently view as being “garbage”, a closer examination reveals a company that’s an entrenched market leader, possesses a formidably wide moat, earns adequate returns on capital employed, has reasonable growth prospects over the coming years, and is trading at a ludicrous 25% Free Cash Flow yield.

In addition, the Company is inherently highly cash flow generative, with a proven management team in place, and a business model that lends to a good degree of top-line visibility as car/engine designs are started years in advance.

 

The Company – A Brief History

Founded in the 1930s by Clifford Garrett, GTX was originally an aviation company, supplying the industry with turboprop engines and turbochargers. It wasn’t until the post-war 50s that the Company first started supplying the auto industry with turbos. In 1954 Caterpillar selected Garrett’s T15 turbo for its D9 mining vehicle. Then in the 60s came the Oldsmobile Jetfire Turbo Rocket and the T04 turbo for Deere’s farm tractor. Garrett was gobbled up by Honeywell in the late 1990s and went on to play a significant role in the company’s Transportation Systems segment.

Now, if some of you reading this didn’t grow up with a ‘grease-monkey’ older brother, then you’ll be forgiven for being a bit fuzzy on the specifics the role turbochargers play in enhancing the performance of internal combustion engines. Essentially, in order to increase the power of an engine, you have to pump more air into it (not just more gas). There are really only two ways to do this: by increasing displacement of the engine (which has obvious limitations) or by making the engine more efficient. Here’s a fun video to give you an overview: Turbocharger Basics.

It’s important to note the differences between turbochargers and superchargers as they are very much competing products. The differences between the two products has led to a secular tailwind for the turbocharger market. The way turbochargers increase an engine’s efficiency is by using the engine’s unburned fuel (the exhaust) to …

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