Geoff Gannon July 15, 2019

Truxton (TRUX): A One-Branch Nashville Private Bank and Wealth Manager Growing 10% a Year and Trading at a P/E of 14

by GEOFF GANNON

Truxton (TRUX) is an illiquid, micro-cap bank stock. TRUX is not listed on any stock exchange. It trades “over-the-counter”. And it does not file with the SEC.

The bank has two locations (one in Nashville, Tennessee and one in Athens, Georgia). However, only one location (the Nashville HQ) is actually a bank branch. So, I’m going to be calling Truxton a “one branch” bank despite it having two wealth management locations.

The company doesn’t file with the SEC. But, it is not a true “dark” stock. It has a perfectly nice website with an “investor information” section that includes quarterly earnings releases.

Still, if Truxton doesn’t file with the SEC – how can I find enough information to write an article about it?

Truxton – as a U.S. bank – does file reports with the FDIC even though it doesn’t file with the SEC. So, some of the information in this article will be taken from the company’s own – very brief – releases to shareholders (which are not filed with the SEC) while other information is taken from the company’s reports to the FDIC. Truxton also puts out a quarterly newsletter that sometimes provides information I might talk about here. Those 3 sources taken together add up to the portrait of the company I’ll be painting here. Some other info is taken from Glassdoor, local press reports, etc. But, that’s mostly just color.

So, it is possible to research Truxton despite it being a stock that doesn’t file with the SEC.

But, is it possible to actually buy enough Truxton shares to make a difference to your portfolio?

It depends. Are you an individual investor or a fund manager? Do you have a big portfolio or a small portfolio? And – most importantly – are you willing to take a long time to build up a position in a stock and then hold that stock pretty much forever?

No shareholder of any size would have an easy time getting out of Truxton stock quickly. But, if you intended to stick with the company for the long haul – it is possible, if you take your time buying up the position, for individual investors to get enough TRUX shares.

The math works like this…

Truxton shares are illiquid but not un-investable. In an average month, there might be around $300,000 worth of shares trading hands. Let’s round that down to $250,000 to be conservative. Let’s say you can buy 20% of the total volume of shares traded in a stock without much disturbing the price. That’s one-fifth of $250,000 equals $50,000. So, let’s say you can put $50,000 a month into Truxton stock without anyone noticing. That’s $150,000 per quarter, $300,000 every six months, and $600,000 over a year. Most investors don’t put much more than 10% of their portfolio in a single stock. So, if you’re willing to take up to a year to buy it – Truxton is investable for anyone with an account of …

Geoff Gannon July 12, 2019

Jubilee Holdings Ltd: East Africa’s Largest and Most Profitable Insurer is Hidden Behind a Thinly Traded Stock

Jubilee Holdings Ltd: East Africa’s Largest and Most Profitable Insurance Company Is Hidden Behind a Thinly Traded Stock

By John M. Kamara

JUBI(Ticker Symbol – “JUBI” in Nairobi) is an insurance holding company listed on the Nairobi Stock Exchange since 1985 that owns and operates an 82 year old insurance operation across the East African region. As of June 28, 2019 the company has a market cap of US$290million (Ksh29 billion). In my view, the stock offers a decent investment opportunity for a buy-and-hold type investor because of the businesses quality combined with the discounted price the shares seem to trade at. I believe this price is available because of an “illiquidity discount”.

Incorporated in 1937, Jubilee Insurance was the first local Insurance Co set up as one of the initiatives by the then Imam of the Nizari Ismaili to revive the East African economies following the world recession of 1932. Sir Sultan Mohamed Shah Aga Khan III was the 48^th heteridtary Imam of the Nizari Ismaili which is a branch of the Islam faith commonly referred to as the Nizari’s. The “Nizari’s’’ are a global, multi-ethnic community whose members are citizens from many parts of the globe.

This ‘group’ is involved in development, social and economic work through the Aga Khan Development Network (AKDN) that in turn carries out its activities through a multiplicity of its agencies. Its agencies are involved in sectors ranging from education to health, finance and even investment.

The AKDN is currently under the leadership of His Highness Aga Khan IV, the 49^th Imam of the Ismaili Muslims who is the grandson of the Sultan.

The insurance company was one of the many business interests the AKDN would establish or invest in as part of their wider goal to improve the “quality of lives of the people/community” through its agency, the Aga Khan Fund for Economic Development (AKFED). This agency has been investing in for-profit businesses over the decades with potential to improve the lives of the members of the communities the businesses operate in. This type of investing has been more recently been termed Social Impact Investing (SII).

So in 1937, the Aga Khan called together a few prominent Ismailis from all over East Africa to join him start a local insurance company. The Company began with a small office in downtown Mombasa and today is now the largest composite insurer in East and Central Africa with annual premiums of $US 260million and $US670 million in float as of year 2018.

The listed company is an insurance holding company, Jubilee Holdings Limited (JUBI: NAI) which underwrites general, life and pension business through majority owned subsidiaries in Kenya, Uganda, Tanzania, Burundi and Mauritius. Its subsidiaries, whose businesses are split into General (what is more commonly referred to as Property & Casualty in many parts of the developed world) and Life Insurance companies, all rank in the top 3 or 4 in market share in their respective jurisdictions. In addition, JUBI began operations in …

Geoff Gannon July 1, 2019

United Plantations: A Low-Cost Palm Oil Producer with 11 to 17% Returns on Equity and Excellent Capital Allocation

by WARWICK BAGNALL

United Plantations Berhad (KLSE:UTDPLT, UP for the sake of brevity) is an integrated palm oil plantation, milling and refining company (plus a small coconut plantation). It’s currently too expensive for me to buy but it is a company that I would like to own if the price ever drops to an acceptable level.

Superficially, there are a lot of reasons why palm oil companies look like a bad investment. Like all agricultural commodities, the price of palm oil fluctuates a lot. There’s the risk of pests, disease or unfavourable weather events. A significant amount of palm oil is used for biofuel so there is some regulatory risk associated with reduction of biofuel subsidies or an outright ban of biofuel. Many people have concerns about the health impact of consuming palm oil. And the industry has had a lot of bad press regarding forest clearing, peat fires and loss of wildlife habitat.

I have some pretty strong views on these areas. For full disclosure I previously worked in the vegetable oil industry (including palm oil milling) and still do a small amount of work for a palm fruit milling machinery company. So you could say that I’m biased but I have at least seen what goes on at well managed mills in Malaysia, Indonesia and PNG. My opinion is that most of the bad publicity is undeserved and that unless people everywhere decide to accept a major downgrade in their diet and standard of living, palm oil is going to be part of our diet for the foreseeable future.

Previously, most of the hard fats in our diet came from animal fats such as tallow, lard and milk fat. Vegetarianism (and also halal and kosher requirements) made the first of those two unacceptable for many consumer products and veganism reduced the addressable market for the third. For a period, hydrogenated seed oil (mostly soy) provided an acceptable alternative. Unfortunately, health concerns regarding trans fat meant that hydrogenated oils became unpopular. That left palm. For a large food manufacturer or restaurant chain seeking an oil which makes baked goods fatty (but not oily) or fried food crispy, the oil which will offend the least number of customers from a dietary and religious point of view is palm.

Palm oil (and palm kernel oil) are also very versatile (compared to the main industrial oils) in terms of producing specialty products. The oil can be fractionated simply by chilling it until part of the fat solidifies and filtering the solids out from the liquid. The wide range of fatty acids in the oil make it useful for oleochemicals such as soaps and emulsifiers. It’s currently a very cheap oil – that might not continue in the future. But it will probably always be the easiest oil to manufacture many specialty products from.

In terms of the environmental impact, palm has much less impact than other oils when managed correctly. Palm oil uses a fraction of the area …

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

by JONATHAN DANIELSON

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 …

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

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 …

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

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. …

Geoff Gannon May 27, 2019

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 …

Geoff Gannon May 19, 2019

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 …

Geoff Gannon May 19, 2019

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 …

Geoff Gannon May 12, 2019

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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