Transcript Notes: August 2022
After 50+ years, founder Fred Smith transitioned out of day-to-day leadership of the company. Raj Subramaniam, the new CEO, intends to improve revenue quality and capital efficiency to drive high-teens returns. At 10x earnings the market isn’t giving the company much credit for its targets.
Our leadership in revenue quality will continue. We will deliver double-digit operating margins. Efficient and responsible allocation of capital will fuel it all as we lower our capital intensity and increase our return on invested capital. We grow our capacity utilization, moderate aircraft fleet investment and drive a 200 basis point improvement in ROIC. These efforts combine to deliver 18% to 22% total shareholder return through fiscal year '25.
Cash is still an important payment method and cash in circulation continues to grow.
E-commerce sales are expected to be less than 25% of all U.S. retail sales by 2025. That means about 75% of retail transactions will still be in person, where cash is a preferred payment method. Further, according to the Federal Reserve, even during the pandemic, more than 1/4 of all in-person transactions in the U.S. were in cash.
And that number is much higher in many of the markets we serve around the world. For example, cash accounts for more than half of in-person payments in many markets throughout Latin America, Europe and Asia.
In the U.S., according to the Federal Reserve, currency in circulation was up 9% year-over-year in the third quarter of 2021. The 30-year historical compound annual growth rate is 6%. In the eurozone, currency in circulation continue to grow in a similar fashion, reflecting a 9% CAGR since the inception nearly 20 years ago.
It's clear that both recently and over the long term, the amount of physical cash in these major economies consistently grew faster than GDP. And as I just mentioned, over 1/4 of in-person transactions here in the U.S. are in cash. These trends indicate that cash will remain an integral part of the U.S. and global economies for decades to come.
Ally is expecting used car prices to drop precipitously.
We are modeling a 30% point-to-point reduction linearly in used vehicle values from the end of 2021 to 2023. So it's a precipitous drop.
Richard Kinder (chairman of the board) thinks KMI is too cheap.
In my judgment, market pricing has disconnected from the fundamentals of the midstream energy business, resulting in a KMI yield — dividend yield approaching 7%, which seems ludicrous for a company with the stable assets of Kinder Morgan and the robust coverage of our dividend.
Greenlight Capital — August 1, 2022
David Einhorn thinks Delaware will make Musk buy Twitter.
We purchased a position in TWTR at an average of $37.24 per share. At this price there is $17 per share of upside if TWTR prevails in court and we believe about $17 per share of downside, if the deal breaks. So, we are getting 50-50 odds on something that should happen 95%+ of the time.
Or maybe he wants revenge from that time Elon Musk shipped him a box of short shorts.
Marathon Petroleum — August 2, 2022
Marathon is using the proceeds of its Speedway sale to buy back shares at a torrid pace. For reference, MPC has a $49 billion market cap.
We have repurchased $4.1 billion of shares since our last earnings call.
Our objective has been to complete the $15 billion repurchase program no later than the end of this year.
Since the launch of this program in May 2021, we have repurchased approximately 12.1 billion shares at an average share price of approximately $74 per share. Over this time, we have reduced MPC share count by approximately 162 million shares or over 24%. We've received the Board's approval for a separate and incremental $5 billion share repurchase authorization.
McKesson is repurchasing a lot of shares as it redeploys the proceeds of European divestitures.
First quarter diluted weighted average shares outstanding were 145.9 million, a decrease of 8% year-over-year, resulting from share repurchases throughout fiscal 2022 and the first quarter of fiscal 2023.
Our fiscal 2023 outlook incorporates plan to repurchase approximately $3.5 billion of shares. A significant portion of the share buyback assumption is associated with mitigating the year-over-year impact of European divestitures.
$3.5 billion is 7% of McKesson’s current market cap.
The California Department of Insurance has not approved any auto insurance rate increases since the beginning of the pandemic in March 2020. That has prompted GEICO to pull out of the state and Progressive to scale back.
Unfortunately, right now, we don't -- we aren't able to get adequate rates. And once we're able to do that, we are open for business and we'll write as much as we can. Right now, there's about 30 auto programs representing close to half the California market that have rate increases pending. We have 1 pending in one of our auto programs from January, we'll likely have at least another one in the near future.
Valvoline sold its Global Products business to Saudi Aramco for $2.25 billion, cash The RemainCo will be a pure-play automotive services business with higher, more stable margins, and higher growth. VVV will use some of the proceeds to retire its 2030 bonds ($600 million outstanding). The rest (after tax) will be used to repurchase stock.
We believe in the long-term value of our stock and will retire a substantial percentage of the shares outstanding to rightsize our capital structure and minimize earnings dilution from the separation.
The improved Valvoline corporate margin profile, coupled with optimized capital structure and capital allocation, is projected to drive 20% or more of EPS growth annually.
Perimeter Solutions - August 5th, 2022
Co-Chaired by Nick Howley of Transdrigm and The Outsiders author William Thorndike, Perimeter Solutions is re-running the Transdigm playbook by focusing on five key factors.
As you've heard from us before, our goal is to deliver private equity-like returns with the liquidity of a public market. We plan to attain this goal by owning, operating and growing uniquely high-quality businesses. We define uniquely high-quality businesses through the following 5 very specific economic criteria:
Recurring and predictable revenue streams;
Long-term secular growth tailwinds;
Products that account for critical but small portions of larger value streams;
Significant free cash flow generation with higher returns on tangible capital; and
The potential for opportunistic consolidation.
We believe that these economic criteria are present at Perimeter as described on Slide 4. And we also use these criteria to evaluate potential new acquisitions.
Lennox International — August 9, 2022
LII’s new CEO explains why he joined the company. He sees a path to doubling LII’s stock.
What I really liked was the nature of the industry, and it's a very disciplined industry. 4, 5 top players make up 80% of the share. It's great to be in an industry that's price disciplined. It's great to have macro tailwinds. I mean, every year, 70%, 80% of your sales are replacement sales. So it's great to have that steady piece. And I liked Lennox's position. We are direct to dealer in most cases.
And I like the productivity aspect. And I always believe 2% to 3% net productivity every year. And I think that was consistent with how Lennox has operated in the past. And Lennox talked about $20 million to $30 million of productivity. So I think putting the whole story together as like, hey, this is an opportunity for me be able to double the share price again. I mean that's what attracted me.
Despite the doom-and-gloom headlines, Home Depot has yet to see a pullback in its business.
The variability across our regions has been the lowest in markets, has been the lowest that we've seen in some time. So we all appreciate the headlines and follow those very closely. But we have not seen anything in our business yet from macro housing.
Maximizing return on invested capital is more important than maximizing margins.
Again, we think about dollar growth and we think about cash-on-cash returns, first and foremost. I think gross margin, in particular, is kind of a secondary metric. I'll give you an example. Over 10 years ago, we identified appliances as a category where we had a major competitor who is losing steam and where we thought we could make some inroads. The question at the time was that gross margin on appliances carried a gross margin that was below company average.
But the return on invested capital given that model, where we really don't own the inventory in the model, the return on invested capital was fantastic. And so as we look back, that appliances impact on our business, we would say we'd do that again every single time. We will look for opportunities to drive market share, drive operating profit dollar growth and drive return on invested capital.
John Huber recently tweeted about this.
Railroad service quality has significantly decreased since 2017 when Precision Scheduled Railroading (PSR) went mainstream.
So we certainly do measure our railroads. And we classify sort of the severity of rail service challenges based on the percent -- the number of hours needed to add to what we expected for the load to move in to reach 90% on time. And so typically, when the railroad is running very healthy, this would have been, I'll call it, back in 2017, probably, we saw high single digits, low teens in the number of hours you add. Today, it's significantly up from that.
…
we never saw numbers like this before the pandemic. So we continue to be optimistic about the plans and the identification of what the issue is, and it's really a labor and crew issue for our rail providers
Berkshire Hathaway’s BNSF is the only railroad that hasn’t implemented PSR. JB Hunt is working most closely with them.
They are doing things different. I mean when is the last time a railroad actually announced the opening of a new terminal for lift capacity?
JB Hunt has figured out how to do more with less. Growing while reducing asset intensity is wonderful and rare.
Well, we're doing basically more operating income today with, I'm going to say, 1,200-or-so company trucks than we did back in 2006 and '07 when we had 7,000. So you think about it, the asset intensity has come way down. Operating income has come up and so ROIC, given that's our North Star, and you think about.
The regulatory climate in China towards internet platforms seems to be normalizing.
Well, in terms of your first question on the regulatory front, I think we have given some of the highlights in our strategy section. But I think as you have observed, right, the recent regulatory direction is actually trending towards a more positive tone for platform economy and the key message is one to promote well-regulated, healthy, and sustainable development, two, to complete the ratification, and three, to carry out regular supervision. And that's reiterated in both the state council meetings as well as the politburo meetings in late July.
Pershing Square Holdings Letter to Investors - August 19th, 2022
Restaurant Brands International (QSR) enjoys an inflation-resistant, capital-light, growing business model and is returning significant capital to shareholders.
QSR’s franchised-based royalty model is particularly attractive in an inflationary environment. QSR’s revenues benefit when its franchisees increase prices, but its cost structure is not subject to the same inflationary pressures. QSR can continue to grow its business with minimal capital required as its franchisees open new units. Despite delayed permitting, higher material costs, and inflationary headwinds, QSR’s unit growth returned to its historic mid-single-digit growth rate last year. As a result of improving same-store sales growth coupled with strong unit growth, QSR’s earnings are now greater than prior to COVID and are growing at an attractive rate, in spite of significant industry-level inflation and same-store sales that are just now recovering to pre-COVID levels.
QSR continues to trade at a discount to its peers and its intrinsic value. The company has repurchased more than 3% of its shares outstanding over the last twelve months, which when coupled with its 4% dividend yield, enables QSR to return approximately 7% of its market capitalization to shareholders on an annual basis.
O’Reilly Automotive — August 23, 2022
O’Reilly’s customers need parts ASAP.
When you look at our retail website, as sales have continued to grow, 75% of those sales are picked up in a store. So again, it speaks to the fact that the customer can't wait on that part. They got to get their car back on the road.
CEO Gregory Johnson thinks EV adoption will be slower than expected.
I think the pace at which EVs are adapted or adopted is much lower than what a lot of people are expecting or projecting I mean, when most of the people in this room probably live in larger metro markets, that the EVs work pretty well in those markets. When you get out into rural America, out into the Midwest, where people are pulling boats to the leg, people are driving a lot of miles. The EVs are going to be more challenged in those markets.
Genuine Parts Company — August 23, 2022
O’Reilly’s price cuts have not affected GPC.
Look, if it's impacting someone, you would have to say that it's probably impacting the small and medium businesses, where there's a little bit less strength but we come from a place of having a great offering across 17,000 locations, the largest in the United States. And so we are -- we benet from that scale and an ability to continue to provide what our customers are really looking for, which is availability of part, great quality, somebody who knows what they are talking about, they can x the car and get it back on the road. And really in the equation on that side, price has seemed to be less of a driving factor for the consumer.
Inventories remain elevated industry-wide, pressuring prices.
During the quarter, we observed that all retailers were working to shed their excess inventory, setting the industry up for higher permanent markdowns and promotional levels.
Dollar General — August 25, 2022
Dollar General is beginning to see inflation force people to trade down. It is even happening to affluent customers.
As the quarter progressed, we saw additional signs of our core customers shopping more intentionally and closer to need, as well as an increase in trade down activity.
And that trade down is coming from income levels that are upwards of $100,000 which we really are encouraged in seeing a younger consumer, a little bit more affluent, and again, very digitally and tech savvy.
Federal Reserve Chairman Jerome Powell — August 26, 2022
The Fed can only affect aggregate demand.
It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand. None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability.
Labor is a huge component of the cost of dialysis.
Labor is clearly a challenge today. It's also historically, a very significant component of in-center dialysis treatment. It's about 40% of in-center costs.
Sportsman’s Warehouse — September 1, 2022
Sportsman’s Warehouse is buying back a lot of stock. We wrote more about it here.
The low stock price we purchased the shares at relative to the intrinsic value of this company resulted in approximately 12% of the shares outstanding being removed from the market.
Charter’s cable and mobile business is proving to be incredibly resilient and is unaffected by most exogenous factors. You wouldn’t know it by looking at the share price.
And so I knew coming in that this was a really resilient business, right? And I think, over the course of the year, even in the face of all the other stuff that's happening, you have -- whether it's interest rates or supply chain or labor or the overall broadband market, the thing that I continue to be impressed with is the resiliency of the business in the face of those things and the continued opportunity that we have even in what otherwise could be a sort of a stressed market.
…and the business is gaining significant market share in mobile offerings versus incumbent wireless competitors.
I don't want to set a ceiling on…mobile because I think that we have a really strong opportunity across that market. We're -- what I would -- right today, we take a much larger share of gross additions in our footprint than what -- than what we have in terms of shared total customers. And so even if you could only sort of -- even if you only move to that level, I think, that we would have a huge portion of our revenue coming from the mobile business.
T. Rowe Price — September 14, 2022
Over the long-term, a stock’s price follow’s its earnings. Note how TROW’s annualized total stock return has matched its Diluted EPS CAGR.
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