RMR Group (RMR)

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Key Statistics

Enterprise Value = $634.49 million

Operating Income = $205.54 million

EV/Operating Income = 3.08x

Earnings Yield = 10%

Price/Revenue = 1.04x

Debt/Equity = 0%

Free Cash Flow/EV = 27%

The Company

RMR Group is a property management company. They manage properties for REIT’s and and other real estate companies. They have been operating since 1986 (under a different name – REIT Management & Research) and manage properties in 48 states throughout the continental US.

Four of RMR’s REIT clients are: Industrial Logistics Property Trust (ILPT), Office Properties Income Trust (OPI), Senior Housing Property Trust (SNH), and Service Properties Trust (SVC). ILPT manages industrial & logistics properties, SNH manages elder care facilities (a growth industry based on US demographic makeup), SVC manages hotels.

Other clients include Travel Centers of America, a company with $6 billion in revenue operating truck stops throughout the United States. Five Star Senior Living is another client which operates elder care facilities.

My Take

The nice thing about all of RMR’s clients is that they are unlikely to be disrupted. The elder population is growing in the United States and they are all going to need medical care and housing, no matter what happens to the US economy. Truck stops and industrial parks might decline with an economic downturn, but they aren’t going away. Office properties are probably the most prone to disruption with the expansion of remote work, but that’s not going away entirely.

Not only are RMR’s clients unlikely to be disrupted, but RMR has *20-year contracts* in place to manage them. I believe a 20 year contract can be categorized as a moat. The key base management fee that they earn is .5%, which is based on market cap plus the value of the real estate. On top of that, RMR earns an incentive fee which is tied to the 3-year stock performance of the companies that it services. The management fee is steady and isn’t going anywhere. Meanwhile, when the stocks of the underlying REITs outperform, RMR earns an incentive fee on top of that.

Quantitatively, this is as good as it gets and it checks all of my boxes. It’s selling at an EV multiple of 3x, a 27% free cash flow yield, and at annual sales. The operating cash flow is $198 million, which compares favorably to the enterprise value of $635 million.

They post high returns on capital. The return on equity is 28%, and that appears to be sustainable based on the consistency of the management fees.

The balance sheet is in impeccable shape. Out of the current $46 price, $22.20 is cash. They have zero long term debt. The Altman Z-Score is 6.4, which implies a zero chance of bankruptcy.

The base case is that RMR itself has 20-year contracts in place with their key clients and they will continue to earn the base management fee. The potential upside is that the stocks of the managed companies wind up outperforming. In this situation, RMR earns more incentive fees.

The stock is currently cheap due to concerns about the REITs that it manages. The REITs have a lot of debt. OPI has a debt/equity ratio of 164%, SNH is 127%, SVC is 180%, ILPT is 97%. A few of these companies lost money in the last year and the stocks underperformed. Leverage isn’t uncommon in the REIT industry and cash flows are fairly predictable, so I am not overly concerned.Meanwhile, much of RMR’s earnings are tied up in the performance of these stocks. When those stocks underperform, it weighs down RMR with it.

Something else that probably weighs down the stock is the control of a single individual, Adam Portnoy, who controls a majority of the company’s voting stock. Not only does Adam Portnoy have total control over the company, he also serves as managing director and CEO. Investors can look at this in two ways: you have an owner-operator committed to increasing the stock price as much as possible, or you have an owner-operator who has more power than shareholders. The concerns likely weigh on the stock.

RMR has only been trading since 2015, but it is at a discount to its history and its competitors. It is currently the cheapest it has ever been. As recently as 2018, the stock traded at 3.5x sales and it currently trades at 1x sales.

Overall, this looks to me like a compelling bargain with a predictable business. The potential upside far outweighs the downside, which I think is further limited by the company’s strong balance sheet.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

NEAR

My CD’s that I bought earlier this year have all matured. There are less bargains now than there were when I bought the CD’s, unfortunately. I need an interest-bearing home for my cash while I wait for better opportunities, so I decided to go with the short term bond ETF, NEAR.

I bought 221 shares of NEAR as a cash alternative @ $50.22.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Principal Financial Group (PFG)

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Key Statistics

Enterprise Value = $13.1 billion

Operating Income = $1.725 billion

EV/Operating Income = 7.59x

Earnings Yield = 9%

Price/Revenue = .95x

Debt/Equity = 28%

Price/Book = 1.02x

The Company

Principal Financial Group is an Iowa based asset manager and insurance company. Their current AUM is over $700 million. They company has grown premiums and AUM (along with fee income) rapidly over the last decade, with revenue rising from $8 billion in 2009 to $14 billion today.

The company is global in scope and operates all over the world. The business is split up into four segments: (1) Retirement & income solutions, (2) Principal Global Investors, (3) Principal International, and (4) US Insurance (life insurance is a key focus).

The valuation is likely depressed over concerns about fee income, along with the general gloom around the financial industry as the market expects interest rates to decline and there are jitters about a recession which I wrote about here.

My Take

PFG currently has a dividend yield of 4.1% and the share count has declined by 2.67% in the last year.

PFG is cheap relative to its history and its peers. It currently trades slightly below sales, which is where it was around nadirs in the valuation such as when it was emerging from the financial crisis. It is also trading at book value for the first time since 2013. The 5-year average price/book ratio for the stock is 1.41 and the average price/sales ratio is 1.25.

Like the other financials that I own, my expectation is that the valuation gap will eventually close and while I wait for that to happen, I’ll earn a decent shareholder yield.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Prudential (PRU)

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Key Statistics

Enterprise Value = $55.73 billion

Operating Income = $6.51 billion

EV/Operating Income = 8.56x

Earnings Yield = 10%

Price/Revenue = .59x

Debt/Equity = 48%

Price/Book = .57x

The Company

Prudential is one of the largest insurance companies and asset managers in the world. They currently manage over $1.377 trillion in assets. Areas of focus include: life insurance, annuities, retirement-related products and services, mutual funds and investment management. These are all brutally competitive industries in terms of pricing, but Prudential is one of the biggest firms in the market and can effectively compete in these hostile waters.

Insurance is the company’s biggest source of revenue. Premiums represent 56% of total revenue. Investment income (such as interest income) is 25% of revenue. Asset management fees at 6.5% of all revenue. Net gains from investments represent 3% of all revenue.

The financial sector has been under pressure over the last year due to concerns about an emerging US recession and the Fed’s moves to bring down interest rates.

My Take

Naturally, with the financial industry under pressure and cheap valuations available, I am drawn to it.

I currently own a variety of insurance and financial companies that are currently trading like a financial crisis and recession have already happened. The memories are fresh from the last financial crisis, which is why investors have been so quick to react to the potential of another one happening soon. In particular, everyone remembers the way that seemingly “stable” insurance companies (like AIG) performed terribly during the crisis and risks were lurking inside the balance sheet that couldn’t be gleamed from reading a 10-k and doing my kind of armchair Saturday morning analysis. With that said, my investment in these companies is an implicit bet that a financial crisis like the last one won’t be a part of the next recession, whenever that might come.

What I like about the company: Prudential is a stable company and ROE is usually around 8%, which also matches the long-term CAGR of the stock of 8.5%. Buried in that 8.5% CAGR is a face-ripping 80% drawdown during the financial crisis. Obviously, my hope is that kind of drawdown won’t happen again if we have another recession. Recessions rarely repeat and I think the financial sector is in much better shape than it was going into the last crisis. Prudential has been reducing debt over the last decade, cutting the debt/equity ratio in half over the last 5 years. This implies that it is risk averse and avoiding the gun slinging of the 2000s.

The best part: Prudential has a juicy shareholder yield. The dividend yield is currently 4.33% and the total share count has been reduced by 3.36% over the last year.

The stock is currently absurdly cheap, with another crisis baked into it. Throughout the history of the stock, the company normally trades around book value and dips below that during times of crises. The fact that it currently trades at 57% of book value suggests to me that the worst case scenario for this company is already priced into the stock.

Prudential is one of the cheapest stocks in the S&P 500 and trades at a discount to its competitors and its history. The current P/E of 9.86 compares to an industry average of of 19.7. PRU currently trades at 57% of book value, and the 5-year average is 82%. The industry average is 120%. The stock also trades at 59% of revenue, compared to an average of 130% for the industry and a 5-year average of 70%.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

National General Holdings (NGHC)

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Key Statistics

Enterprise Value = $2.982 billion

Operating Income = $375 million

EV/Operating Income = 7.95x

Earnings Yield = 9%

Price/Revenue = .48x

Debt/Equity = 38%

The Company

National General Holdings is an insurance company. The company traces its origins back to a company called Integon, which was specialized in auto and life insurance. Integon was acquired by General Motor’s insurance arm in the ’90s. For a few years after GM’s demise, the company was held by a private equity firm. It was then spun out as an independent company in 2014.

Key insurance products are standard auto insurance, nonstandard auto insurance (such as insuring high risk drivers), homeowner’s insurance, RV insurance, and small business auto insurance. They operate throughout the country, with large footprints in a handful of states, such as North Carolina, California, New York, Florida, Texas, New Jersey, Virginia, Louisiana, Michigan and Alabama. Revenues have steadily grown over the last 10 years, from $675 million in 2011 to $4.6 billion today. This has been through a combination of organic growth and acquisitions.

As a relatively small player in the insurance market, they focus in niche insurance products. Key niches include insurance for high risk drivers who have difficulty finding policies with other carriers (which are balanced by higher premiums charged to these drivers) and RV insurance.

The stock has been under pressure for the last year due to concerns about the wildfires in California. About 15% of NGHC’s premium volume is generated from the state of California.

My Take

National General is in my wheelhouse. It’s a cheap insurance company with little debt, consistent profitability, and the price is under some temporary pressure. I invest in these kind of situations all the time and NGHC is no different. Right now, on the basis of book value and revenue, NGHC is the cheapest it has ever been in its history.

The nice thing about insurance companies is that the market almost always overreacts to recent bad news, such as NGHC’s experience with the California wildfires. The truth is that the best time to buy an insurance company is after a big loss rather than after a tranquil period.

National General Holdings trades at a discount to its competitors and its history. The current P/E of of 10.6 compares to an industry average of 19.7. The 5-year average for the company is 18.76. The price/revenue ratio of .48x compares to a 5-year average of .72x and an industry average of 1.32x. Currently, the stock is the cheapest in its history, including where it traded post-GFC. On an EV/EBIT basis the stock trades at 7.95x, which compares to a 5-year average of 13.53x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Movado (MOV)

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Key Statistics

Enterprise Value = $471.43 million

Operating Income = $55.59 million

EV/Operating Income = 8.48x

Earnings Yield = 13%

Price/Revenue = .62x

Debt/Equity = 28%

The Company

Movado is a luxury watchmaker. In addition to selling watches via a large number of brands to various retailers, they also operate 44 retail stores. They can chart their origins as far back to 1881 when the firm was called LAI Ditescheim & Freres SA in Switzerland. The company changed its name to Movado in 1905.

Movado’s signature watch is the mid-century “Museum Watch,” which is noteworthy for its minimalist design. It is a simple black watch with one dot representing the 12, a design which is often duplicated into other watch designs.

They sell at a wide variety of price points and multiple brands. They sell everything from luxury watches that sell for over $10,000, to affordable luxury watches (selling under brands such as Hugo Boss) at a $75-$500 levels, and mass market watches that sell for less than $75.

My Take

Watch making is a hated industry. As cell phones grew in popularity, watch use declined. Watches are declining in popularity as they are no longer a go-to means to assess time. It’s much easier to look at a phone to tell time. Mechanical watches are also being crowded out by Fitbits and Apple Watches.

Even with the industry in decline, the industry isn’t going away. In particular, I don’t think that luxury watches are going away any time soon. People don’t wear luxury watches like Movado to tell time. They wear them for reasons of fashion and that market isn’t going to disappear.

Movado is priced like it is going out of business, but I don’t think that will ever happen. At some point, the market will stabilize. A good parallel to this is the predictions that e-readers would eliminate print books, a trend which never really materialized.

The fact that the watch industry is not going away is reflected in the Movado’s operating performance. 2019’s sales were actually the best on record at $680 million. Cash flows remain healthy and the balance sheet is robust. This looks to me like a situation where Mr. Market’s sentiment doesn’t reflect the true underlying reality of the business.

Movado has a high degree of financial quality. The debt/equity ratio is only 24%. There is a significant amount of cash on hand, at $5 per share and 13.42% of assets. The Altman Z-Score of 3.1 implies a low probability of bankruptcy risk.

Movado trades at a discount to its competitors and its history. The current P/E of 7.87 compares to an industry average of 20.03. It currently trades at 6x cash flow. The price/sales ratio of .62 compares to an industry average of .93. As recently as mid-2018, the stock traded at 2x sales. The stock is so cheap that the current price/sales level is near the lows reached at the nadir of the financial crisis in 2009. Price/book is also at a significantly cheap level, currently at .85x.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.