In today’s post, you will find advice from one of our late sages, plus a look at an unusual stock buyback and the curious valuation of Air Lease. Finally, why having no competition may be a bad thing…
Presumptuous title isn’t it? Well, it was one of Neil Postman’s most enduring lectures when he taught at New York University. (You may recall, I’ve written about Postman before.) Recently, I came across a reprint of his famous lecture reconstructed by Janet Sternberg.
The advice consists of 22 points. Some of them seem silly or are offered tongue-in-cheek. (“Do not go to live in California.”) But some of them are very good.
I liked, for example, #7: “Regularize the trivial to cope with the significant.” The idea is to reduce the number of decisions you have to make about trivial matters to leave more energy for the significant questions.
Or #16: “Weingartner’s Law: 95% of everything is nonsense.” He advises: “Above all, do not become an ist: a socialist, a feminist, a capitalist, etc. This will help you avoid hardenings of the categories and help you keep your sense of humor.”
Or #19: “Divest yourself of your belief in the magical powers of numbers.” Good to keep in mind as investors. Numbers never tell the whole story.
That's just a sample. There's plenty more to get you thinking in the full speech. You can find Postman’s lecture here.
*** Unifirst Corp’s Unusual Buyback
A tip of the cap to my friends at Boyar Research, who wrote about this recently…
You don’t see buybacks like this very often. In March of 2018, Unifirst (UNF) bought 6% of its outstanding shares from the controlling Croatti family. The impetus was the death of CEO Ronald Croatti, who was the son of the founder. Post-buyback, the family would still own about 21% of the shares.
But what’s most interesting is Unifirst bought the stock at $124 per share, a 17% discount to the prevailing share price at the time. The new CEO said “based on the Croatti’s family’s continued involvement with the company, including several family members that maintain high-level leadership positions, they were highly motivated in ensuring this was a positive transaction for the company.”
I suppose you could read this differently, but I look at it as a feather in the cap of the Croatti family. Those are the kinds of people you’d want to partner with.
I have UNF on my watch list. It fits many of the things I look for. UNF has a strong balance sheet with no debt. I like the family ownership, which ensures someone with skin in the game is minding the store. And I like the simplicity of the business (laundry and uniforms). I’m not sure about the price.
The company has some margin pressure and capex will be elevated this year and next. Meanwhile, the valuation is on the high-end of its own history and doesn’t seem cheap in absolute terms. But, on the other hand, it is well below prices paid by acquirers Cintas and Aramark for similar businesses. EV/EBITDA for UNF is about 9 today versus 14x for those deals. And it trades well below peers Cintas and Aramark.
One to keep an eye on…
*** Air Lease Earnings and Global Comps
Air Lease reported earnings a couple of weeks ago and I thought they were good. And 2019 should be a strong year of growth as the company takes delivery of 80 aircraft. At the time of my write-up, the company had 336 owned and managed aircraft.
The stock got no real bump on these earnings and remains as cheap as ever. In fact, the stock is lower. It’s still sitting here at 8x earnings and 85% of book value. (And as we talked about it in the piece, it’s cheaper than that because AL doesn’t pay cash taxes). Compared to other financials and the quality of AL’s business, the stock seems too cheap.
A friend of mine, Shree at SVN Capital, writes to point out that even compared to other global aircraft lessors, AL’s stock is too cheap:
“BOC Aviation trades in Hong Kong. Profile similar to AL, except the order book is much smaller vis-à-vis AL. BOC is 70% owned by Bank of China. It has a P/E of 9.2x and P/B of 1.5x.
“Another small aircraft leasing, Avation Plc (sic) (AVAP) which trades on the LSE. It has 41 planes, a 4.9% cost of debt and only 14 customers in 11 countries. But, these include Air India (in trouble for ever) at 4% and Flybe (which just shut down) at 4%. Yet, the valuation is 1.1x book value and 9.3x earnings! Obviously, it’s frustrating to compare this to AL.”
Air Lease executives recently attended JP Morgan’s Aviation conference. JPM’s Aircraft Leasing analyst asked:
“I know, this is an area of frustration for me and I'm sure for the management team. But your equity continues to trade with a degree of fear, I guess, that I would view as unjustified. $1 of Air Lease cash generation is simply not trading with the same amount of respect as cash elsewhere in the market is trading. I think about a little under 0.8x book, around 6x [pre-tax] earnings... Is there a recessionary test that you feel that you have to pass through? I mean, what solution, if any, can you identify?”
I liked the answer by Greg Willis, the CFO:
“The book value analysis totally ignores the long-term cash flows that we already have locked in. Almost $25 billion of future rentals that are already contracted for. And so, if you NPV our future business, we should be selling at 1.6x or 1.7x book, but I think, people like just John said, they worry about external events, China, oil prices, recession, Russia, there's always some excuse. And if you look back over time, none of those have affected our business.”
I think of Tom Russo’s comment about how good investors have to have the capacity to suffer. Nothing to do but wait…
*** No Competition Can be a Bad Thing
“The message is clear: If you’re investing in a business with competition, you’re doing it wrong.”
- Barron’s
Not so fast…
I remember sitting in a sweltering café in a small country in Southeast Asia and an investor explained to me why he was there. “No competition,” he said.
No competition. Or at least very little of the sharp competition he’d see if he was trying to make a buck on the New York Stock Exchange. In theory, he’d have more profits for himself out here. While most saw a primitive market economy and a tough place to do business, he saw instead an unspoiled landscape ripe for capitalistic harvest.
It seemed an appealing theory at the time. But the real world doesn’t care about theory. As I found out much later, years in fact: The reason he had no competition was because there wasn’t much in the way of profits. He and his team worked very hard trying to make good investments for his fund and its partners. But in the end, they would’ve saved themselves a lot of bother (and made a lot more money) by putting their money in listed businesses in more competitive markets.
Sometimes a lack of competition can mean there isn’t much of an opportunity to start.
Thanks for reading. Send me mail at info [at] woodlockhousefamilycapital.com.
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Published March 7, 2019
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