Transcript Notes: January 2024
Hertz’s big push into Tesla ownership has not been easy, or profitable.
First, while conventional maintenance on electric vehicles remained lower relative to comparable ICE vehicles in Q3, higher collision and damage repairs on EVs continue to weigh on our results and negatively impacted EBITDA. For context, collision and damage repairs on an EV can often run about twice that associated with a comparable combustion engine vehicle.
… we estimate that had our fleet in Q3 been similarly sized but comprised solely of ICE vehicles our EBITDA margin would have been several margin points higher.
This bodes well for auto parts shops, mechanics, and salvagers.
On January 11th Hertz announced that they will sell 1/3rd of their EV fleet and reinvest a portion of the proceeds into ICE vehicle. As a result Hertz will write down its EVs by $245 million, about 7% of book value.
The Company expects this action to better balance supply against expected demand of EVs. This will position the Company to eliminate a disproportionate number of lower margin rentals and reduce damage expense associated with EVs.
Andrew Walker wrote a good two-part post on this situation: Part 1 and Part 2.
Pershing Square Holdings - November 16, 2023
Hilton’s capital-light growth algorithm is showing no signs of slowing down.
So when you think about a capital-light business like Hilton, that can add 6% to 7% growth to its units, which is effectively going to be growing its revenue in its earnings stream without any capital. That's a very, very strong driver over the long term in really any economic environment.
And then the second thing is, typically, the way we think about the company's business is, it's RevPAR growth plus its net unit growth, should be roughly what its fee growth is.
But the company has pointed out that one of the things they're experiencing that they think will be a sustainable trend is they're actually growing fee growth a little bit in excess of that algorithm, if you will, because of 2 factors.
The first is that the franchise fees that they're getting today are higher than the average in-place franchise fees they've had historically because the value of the brand has grown so much over the last 20 years that some of the people who used to have a franchise fee at a lower rate when they re-up or they roll-off, people come in at a higher one, that allowed them to grow even more quickly on the fee side.
Pershing Square loves “growth annuity” businesses. You can’t blame them.
Our kind of favorite businesses in the world are what we call growth annuity. growth royalty-type businesses, Hilton, of course, a royalty on hotel rooms and F&B and hotels. Restaurant Brands a royalty on the underlying brands, 5% gross revenue royalty. Alphabet, Google is basically a royalty on advertising spend, they are sort of capital light and then universal, of course, a royalty on music streaming. Those are our favorite kinds of businesses, and they tend to be our larger positions.
Do you have a “stranded” 401k from a past job that is neglected and unmanaged? Eagle Point manages separately manage accounts for retail investors and these accounts are often an excellent fit for our long-term investment approach. If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com.
American Express - December 5, 2023
Amex has significantly improved its funding base.
We're now funding about 70% of our receivables through -- in the U.S. through deposits versus about 50% when you went back to 2019.
Amex’s balance sheet has several counter-cyclical characteristics which allow the business to outperform in a downturn.
But I think 1 thing that's really important to understand about premium cardholders, they self-regulate. And so when they feel stressed or when they feel in trouble, they spend less. They still pay you, but they spend less.
And our business has natural hedges in it normally, what those natural hedges are rewards cost and marketing and so forth. And those hedges have gotten bigger. And what it's done, it's created tremendous earnings power for the company.
We wrote about more Amex’s counter-cyclical traits here.
AutoZone is returning to its long-term growth algorithm after a growth spur during the pandemic.
As we move forward, we would expect to see slightly declining transaction counts, offset by low to mid-single-digit ticket growth, in line with the long-term historical trends for the business, driven by changes in technology and the durability of new parts.
We expect our ticket growth will return to more normalized levels in the 3% to 4% range as we get further removed from the large increases from last year due to significant inflation, particularly due to freight costs.
What we've seen over a very significant periods of time is DIY usually grows 3% to 4%, and commercial grows 0.5 point to 1 point faster. I think if you rolled out the next 3 years, unless there's some big economic shock or something like COVID, that will probably continue to be the case.
We've had lots of periods of time where we grow in the 0% to 2% kind of range. We're coming off a period of time in the pandemic where our retail volumes went up 25% to 30%. And we are, frankly, tickled to death to still be holding on to those retail volumes, and we believe we've retained about 85% of the share that we gained during that 3-year period of time.
AutoZone continues to annihilate its share count.
Our diluted share count of 18.2 million was 7.2% lower than last year's first quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $32.55, up 18.6% for the quarter.
Philip Morris - December 5, 2023
PM continues to innovate.
We are launching this very exciting innovation of a stick that look like a cigarette, but without tobacco. The brand is called Livia, and that's [where] heat-not-burn is meeting vaping to some extent.
Livia [is] launching for the time being in Czech Republic. So it's really the first weeks of the launch.
Margins are likely to go up as IQOS matures.
When you launch a new product, not everything is optimized in terms of cost because the productivity is a ramp-up through the lifetime of a product. We were at the most negative part. We start to have a positive ramp up as expected. So we think that this is behind us.
Flavor bans have not slowed Zyn down.
If you look at what happened at the time of the flavor ban in May 2020 on combustible cigarettes, the impact remains extremely limited. If you look at the flavor ban in California at the end of 2022, there was a blip of a few weeks, and we've been experiencing that within. And then the growth resume within more speed and today, we are north of 30% above where we were before the ban in California.
ZYN has been growing more than 50% consistently over the last quarters. I'm happy to repeat that we are far above any expectation we had at the time of the Swedish Match acquisition.
Restaurant Brands International — December 5, 2023
RBI is a platform business. They started with a single brand and now have 3. They have well-capitalized and experience franchisees in 120 countries who are eager to grow new brands.
The interesting thing is outside of the U.S., it is only subway today. So we think there is an opportunity, and it's a unique strength of the RBI model being multi-brand we're in 120 countries. We do business -- I think the number is between 3,000 and 4,000 supply partners around the world. So we take we take Firehouse into a new market.
Number one, we already know who the 3 or 4 or 5 best potential operators are. It's easy for us to get to them, talk to them because we're operating there already with Burger King. We already have relationships, doing inspections, quality control with the suppliers who are going to potentially be our partners in those markets.
And we've got a terrific scale team in our international business based out of Switzerland that know how to bring new brands into new markets. And it is a real strength. It is a reason to look at the RBI model and the business with these 4 brands, to believe, yes, there is more value that can be created here because of the multi-brand concept.
Burger King’s scale gives RBI critical mass in most countries and makes growth highly incremental.
So there are some things you can do centrally, talent, but you've got to have visibility on talent and be able to move talent amongst the different businesses. centrally. Procurement is clearly a big opportunity. The international growth and the platform we have there, we can grow faster with these -- the 3 other brands kind of then because we've got the scale business with Burger King, that is a huge advantage for us.
Look, as we grow, we ought to be able to leverage the scale of the business.
RBI plans to lower their leverage because they’re approaching the liquidity limits of the high yield bond market.
I mean for RBI, I think it's pretty simple, just because the scale of our business, we've reached the point where moving leverage down some, and we put some guidance out there around what we're going to do on that, we kind of need to because the depth of the high-yield market is just not big enough if we grow a bunch more for us to maintain that, it's going to make sense for us to get down to leverage somewhat. And so that's what we're doing. When you're a smaller business, then I think the math may work a little differently.
Starbucks is bullish on China.
I heard people talk about how the next China is China. We actually subscribe to that view. And so if you look at where you've gotten after 24 years, we've gotten them to 12 cups per capita. Japan is at 280, which has a big history of coffee drinking over the years, and the U.S. is at 380. So it's still in early days.
Our plan is to open close to 1,000 net new stores a year, driving strong returns on top of our existing locations, which continue to deliver strong profitability. And we're on track to operate 9,000 stores in China by 2025.
Most of Starbuck’s store growth will come from abroad.
We will expand our footprint to 35,000 stores by 2030 outside of North America.
Overall, we plan to expand our global store footprint to 55,000 by 2030, growing on average 8 stores per day with nearly 1/3 of the future earnings coming from international.
Starbuck’s management think about their value creation algorithm exactly as we do. Businesses like these are simple and predictable.
Our reinvention was designed to reaccelerate growth through focus on 4 key building blocks: comp stores growth; store growth; margin expansion; and finally, disciplined capital execution allocation to collectively establish a more durable business model.
ETFs continue to take share from mutual funds.
What's interesting to me in the last year has been that the ETF market is showing a lot of resilience even against some softer flows, like gross sales in mutual funds, if you look at the Broadridge data, the ICI data, the Ecoflex data, gross sales in mutual funds are off $1 trillion this year relative to the last 5 years. ETF flows are going to be -- ETF flows are about $800 billion globally, they're down 1% kind of year-on-year.
So continuing to show a lot of resilience. Again, they're structural growers.
Brookfield Asset Management - December 6, 2023
What do you get for $58 billion?
We have the cleanest structure of any alternative manager out there. We have no debt. We have $3 billion of cash. We generate $2.25 billion of earnings a year. It grows at 15% to 20%. It should grow in the next while at that. We pay out 85% of the earnings. It's a very simple clean story.
BAM has a competitive advantage in renewable energy.
The trick here is most people can't do what we do because they don't have the renewable power expertise. They don't have a power trading expertise, and they don't know how to build all of these things. That's what we have. You can raise money, but you don't know how to arbitrage power markets and build power plants. If you do, you can compete with us, but not many people do.
We just have a head start. Others will come. They're coming. They always come. Where there's money, people come. That's not to say there won't be competition, but we just have a big head start, but we also have a bunch of ignite operating talents within our businesses. We have 3,000 operating people that run our business that work for Brookfield in power trading and development, and that gives us an edge that very few other people have.
BAM thinks there will be opportunities to buy good businesses with bad balance sheets over the next 2-3 years.
The easiest way to make money in real assets, especially in real estate is to buy great assets with bad capital structures. Fortunately, there will be a number of those situations, and they're not coming one day or there's not going to be just an event, but they're just going to be coming over the next 24-36 months. Hopefully, we can capture some of those opportunities to put into our portfolio.
Exxon Mobile — December 6, 2023
It is unusual for a business to increase its buybacks upon closing an acquisition. Occidental similarly raised its dividend as it announced an acquisition.
We obviously announced as part of the corporate plan that we intend to increase the pace of our share repurchase program once we close Pioneer. So as everybody knows, we've been on a pace of $17.5 billion in share repurchases, annually, we will get that done this year. But post closing Pioneer, we would expect that go-forward pace to increase to $20 billion annually.
McDonald’s added the equivalent of RBI’s market cap (the parent of Burger King) to its system-wide sales since 2019.
In 2019, we reached $100 billion in system-wide sales. This year, we expect to reach nearly $130 billion in system-wide sales. I'll let you do the math on how many of our competitors' entire businesses it would take to add up to $30 billion worth of dollar growth in our system-wide sales. But spoiler alert, it is a lot.
We anticipate the U.S. business will surpass $50 billion in system-wide sales this year, growing more than 30% when compared to 2019. So that's the big picture on the U.S. business.
McDonald’s benefits from scale advantages.
McDonald's unmatched size and scale gives us competitive advantage that no one else can match and in our rapidly evolving industry,
Every year, we buy over $50 billion of food packaging and services. Our buying scale means that McDonald's has the lowest cost and best quality in the industry, enabling us to offer customers superior value at attractive margins for our franchisees.
McDonald's invests over $4 billion every year marketing our brand. 3x to 4x more than our nearest branded competitor. Our marketing scale ensures that our brand maintains high top-of-mind awareness, which drives customer affinity and frequency.
With a $50 billion balance sheet and blue-chip credit rating, our financing scale means that McDonald's and our franchisees have the lowest borrowing costs in the industry.
We've built a sizable coffee business. and we now sell nearly 8 million cups of coffee per day. And that makes McDonald's obviously the #2 coffee player globally.
Scale was always Ray Kroc’s strategy.
When asked about the future of McDonald's in 1970, Ray said, "I don't know what we'll be selling in the year 2000, but I know that we'll be selling more of it than anybody else."
Strong brands give McDonal’s pricing power.
We don't just sell products. We sell brands. In fact, McDonald's menu now features an incredible $17 billion brands, rivaling the world's largest consumer companies. Now most of these billion-dollar brands are on our core menu, as you can imagine. This includes global brand items like the McMuffin, the McFlurry, Quarter pounder with cheese, Big Mac, Chicken McNuggets and of course, our world famous french fries, just to name a few.
These brands have superior pricing power above any other. And because for our consumers, there is no comparable situation and no comparable substitute. This also means they drive greater profitability. And what's more, our core menu items are significantly more efficient for our entire system that is from the start of our supply chain all the way through the prep line for our crew.
There is no substitute for a Big Mac. There is no substitute for McDonald's French fries, a McFlurry, et cetera. So it gives us pricing ability in that.
Dollar General - December 7, 2023
Dollar General is getting back to basics. There is no reason to believe that returning CEO Todd Vasos cannot return business to its historical levels of profitability after some basic blocking and tackling. It won’t, however, happen overnight.
We have already begun by allocating more labor to front-end activities and clearly communicating our expectations around the visible presence of an associate at the front of our stores.
Second, we are reemphasizing the role played by our store teams in our perpetual inventory management process, which we believe will positively impact our on-shelf availability as well as our customers' convenience perception in our sales.
And third, now that we're past the capacity constraints we experienced last year, we are reducing the number of temporary outside warehouse facilities being used to store product as inventory flows more effectively to and through our existing distribution centers.
Finally, I want to speak to our focus on fundamentals and merchandising. Once again, we reflected on our approach to the eyes of our customer. For our merchants, there is no greater priority than offering great value of the products our customers want and need. Our customers are offering living paycheck to paycheck and continually tell us that value is the most important factor in their shopping decisions. I am pleased to note that we are in good shape when it comes to our everyday pricing. And we are right where we want to be in our price gaps with our competitors and classes of trade.
I don't see anything that gets in the way longer term to getting back to some of our historical ways that we return to our shareholders and our customers. We feel that we're on the right track with our back to basic moves here, both in our labor investments, in our inventory investments as well as in our supply chain and merchandising.
If demand near seven-year highs isn’t enough to even earn your cost of capital, you are in a bad business.
“This industry has been through so much over the past eight years,” Tidewater chief executive Quintin Kneen said. “Demand is as high as it’s been in seven years. Hell, we might even get our cost of capital back for the next two years.”
Occidental Petroleum — December 11, 2023
Occidental expects the CrownRock acquisition to be immediately accretive to free cash flow per share and to enhance Oxy’s Permian competitive position.
The acquisition will also accelerate our value proposition for our investors through increased value per share, driven by the free cash flow accretion.
That will also enable us to step up our dividend in the near term, along with the addition of high-margin inventory that will support the sustainable growth of our dividend over time.
As Richard and Sunil will discuss, this transaction brings multiple operational and financial benefits to Oxy, including quality inventory, high margins and a low reinvestment rate.
Our purchase price of $12 billion emphasizes the expected high level of free cash flow generation.
In addition to high-margin production, the assets have significant and undeveloped potential with approximately 1,700 locations.
Supporting infrastructure is also largely in place for the undeveloped acreage, which is beneficial to capital efficiency and maintaining the assets low investment rate.
Oxy explained just how big the Permian is and where they’re concentration their resources.
The Permian Basin is massive. And so it's about the size of North Dakota. So when people think about the Permian, it's important -- more important to think about it as the sub basins we call them sub-basins.
But if they were anywhere else, they'd be their own stand-alone basin, and that's Midland Basin with the Central Basin platform to the west of the Midland Basin and the Delaware on the western side.
So the Central Basin platform is where we have our EOR assets or at least most of them. And the Midland Basin and Delaware basins are where we have our -- the bulk of our unconventional developments.
Casey's General Stores — December 12, 2023
Cigarettes demand is so weak that pricing cannot offset volume declines. Inflation is driving the dynamic, which means it’s probably temporary.
Combustible cigarettes were down about 4% in the quarter. And typically, what we've been able to do is pass on price and have that price flow through and with the unit decline offset and still stay relatively positive on the dollars and the category. That was not the case in this last quarter.
I think to a large extent, that's a reflection of where the consumer is right now. As you know, the cigarette consumer tends to be a lower income consumer generally. And so what we've seen is a bit of trade down from that consumer into either not buying cigarettes as frequently or trading down to lower-tier brands.
Casey’s under-indexes to cigarettes and over-indexes to prepared foods which gives it an advantage in the current environment.
They [sub-scale operators] don't have a choice. They're operating in survival mode right now. And so they're taking that higher [fuel] margin and willing to sacrifice those gallons to get it. And that's -- in the short term, that can work if you're trying to survive, in the long term is not sustainable.
For us, we're not in that position. We're not as exposed to the tobacco categories, as the others. And we benefit from keeping that traffic in the store because we have high-margin Prepared Foods to sell people and high-margin private label to sell people that a lot of those others don't have.
Domino’s Pizza — January 8, 2024
Domino’s and Uber Eat’s data shows only 35% overlap between their customers.
So Uber certainly is going to be a place for incremental customers, and we're -- our data shows probably 65% of those customers are going to be incremental.
Interactive Brokers — January 16, 2024
IB’s automation technology allow it to produce industry-leading margins.
Our pretax margin was 71% for the full year by far, the highest in the industry. In fact, very few public companies in any industry have that kind of profit margin. If market conditions continue as they are and with the 3 interest rate cuts being predicted, I see no reason why we wouldn't be able to maintain pretax margin at the 70% level.
The company is overcapitalized and considering its capital allocation options.
Our public float is small, so we are unlikely to buy back shares.
So as you know, we have significant cash reserves, significant amount of capital that we could deploy and would like to deploy. We have been looking for possible acquisition targets. They are all in our industry. They tend to be brokers who are less efficient than we are. We have closely looked at a number of them. We either find the price to be too high for acquisition or find that the acquisition would represent a very significant amount of work in terms of the integration. So, so far, we have not found any target that we would actively go after. But we hope that, that will change in the future.
Do you have a “stranded” 401k from a past job that is neglected and unmanaged? Eagle Point manages separately manage accounts for retail investors and these accounts are often an excellent fit for our long-term investment approach. If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com.
Disclosure: The author, Eagle Point Capital, or their affiliates may own the securities discussed. This blog is for informational purposes only. Nothing should be construed as investment advice. Please read our Terms and Conditions for further details.