I bought 31 shares of Oshkosh Corp @ $63.519.
Enterprise Value = $7.281 billion
Operating Income = $968.3 million
EV/Operating Income = 7.52x
Price/Revenue = .47x
Earnings Yield = 16%
Debt/Equity = 41%
Reliance Steel & Aluminum is a Los Angeles based metals company. They are the largest metal service center operator in North America. Metal service centers take raw metals and convert them into products that meet customer specified products. They currently have 125,000 customers across a wide range of industries. They distribute 100,000 metals products including stainless and special steel, aluminum, brass, copper products, etc. While it has only been a public company since 1994, they have been in business since 1939 and have grown through the growth of the US economy and acquisitions.
Sentiment against the stock isn’t quite in the realm of hatred. It is more like mild reluctance. Year to date, the stock is down 15.9% mostly due to jitters about Tariff Man raising metals prices and dampening demand.
I believe this is a situation where macro worries are dampening enthusiasm for the stock and these worries aren’t showing up in the actual performance of the business. The company is still delivering solid returns on capital, currently boasting an 18% return on equity. Its size and breadth of the customer base is also a significant strength.
If the steel industry does enter a downturn, Reliance Steel & Aluminum is actually in a great position to strengthen its competitive position through the acquisition of smaller competitors. Their financial situation is impeccable, with an F-Score of 9 and a debt to equity ratio of 41%.
From a valuation standpoint, the company is at a significant discount to its history and industry averages. The current P/E of 6 (forward P/E is 9). This compares to an industry average of 13. The 5-year average for the company is a P/E of 14.77. An increase from the forward P/E of 9 to its historical average would be an increase of 64%. The enterprise multiple of 7.52 compares to a 5-year average of 11, a 45% discount. On a price/revenue basis, it currently trades at 47% compared to an industry average of 162%.
Overall, Reliance Steel & Aluminum is in a strong financial position with a dominant position in a competitive business. It trades at a significant discount to its intrinsic value, providing an ample margin of safety.
Enterprise Value = $1.83 billion
Operating Income = $196 million
EV/Operating Income = 9.33x
Price/Revenue = .36x
Earnings Yield = 9%
Debt/Equity = 20%
Universal Forest Products (UFPI) designs, manufactures and markets wood products around the world. They supply lumber directly, while also supplying lumber products for everything from wooden crates to wood products used in manufactured homes and RV’s. While they have a global footprint, their focus is in the United States. A major source of business is their supply of lumber to Home Depot, which accounted for 19% of their total revenue in 2017.
UFPI grows organically with the economy. Growth over the last ten years has been steady with the US economic expansion.
Market sentiment is against this stock despite its rapid growth over the last few years. The stock is down 29% over the previous year while earnings in the most recent quarter were up 20% during the last year. Fear is being driven by the slowdown in the US real estate market and current market fears that the US economy is headed for a recession. The housing market has slowed down recently, bringing up fresh doubts about the lumber business and fueling concerns that UFPI’s earnings are at a cyclical peak.
This is a cyclical stock, and I am buying it based on my belief that the US will not go into recession over the next year. The short end of the yield curve inverted, the long end hasn’t yet, and we typically have 2 years after inversion in the long end before we actually have a recession. What’s a more reliable forecasting tool? Mr. Market’s freak out over the last couple of months, or the yield curve?
Worries over housing are actually worries over a redux of the 2008 housing meltdown. Even if we do experience a slowdown in housing, I don’t think it will be anything like that meltdown. The quality of borrowers is significantly better than it was last decade. Credit scores for first-time homebuyers, for instance, are up significantly over the mid-2000s euphoric Red bull and Vodka soaked housing bubble that left the US in financial ruin. I also think there is plenty of pent-up demand for housing from Millennials. Mortgage debt service payments as a percent of disposable income are also at the lowest levels since we started tracking it. In short: I think worries about a housing slowdown are overblown.
The stock has been punished in the previous year over macro worries that aren’t showing up in the actual results from the business. The most recent Q3 earnings were up 20% over the last year and profits were up 14.7% while the stock is down 29%. What is more real? What is more reliable? The actual performance of the business or the market’s speculation about macroeconomics? I know where I would prefer to place my bets.
This is a bucket I am going to focus more on. Namely, stocks that are getting punished over macro worries that aren’t actually showing up in the real performance of the business. It seems like an area that is ripe for mispricing.
From a relative valuation standpoint, UFPI’s valuation ratios compare favorably to its history and the industry averages. On a Price/Revenue basis, UFPI currently trades at 36% of revenue, compared to an industry average of 115%. UFPI currently has a P/E of 11, compared to an industry average of 17. Over the last 5 years, UFPI’s average P/E has been 19.5. A return to these levels would be an increase of 77%. On an EV/EBIT basis, UFPI currently trades at 9.33x compared to a 5-year average of 12.65.
Overall, UFPI currently trades at an attractive valuation, and it has been punished over macro worries that aren’t showing up in the actual business. For this reason, I have purchased a position.
I sold 86 shares of Cooper Tire (CTB) @ $31.1821.
I bought 26 shares of Reliance Steel & Aluminum (RS) @ $75.8354.
One of my favorite spots on a perfect fall day. Onto the analysis . . .
Enterprise Value = $27.791 billion
Operating Income = $4.283 billion
EV/Operating Income =6.48x
Price/Revenue = .73x
Earnings Yield = 12%
Debt/Equity = 27%
Allstate is the 4th biggest insurance company in the United States (as measured by market capitalization) and their main focus is automobile and homeowners insurance. Interesting bit of history: Allstate was established in 1931 by Sears. Allstate originally marketed policies via mail and the Sears catalog, which was revolutionary at the time. After 62 years of operating within Sears, it was spun off in 1993.
Market sentiment is relatively weak against Allstate. The stock is down 20% over the last year. The stock has been punished due to rising interest rates and various extreme weather events over the previous few years. There is also fear that the rise of autonomous vehicles will afflict Allstate’s insurance premiums in the long run.
From a quantitative perspective, Allstate appears to be an excellent company at a bargain price. At a P/E of 9, this compares to an industry average of 16.05. On a price/revenue basis, Allstate currently trades at 73% of revenue, compared to an industry average of 127%. The forward P/E is presently 9, implying that Allstate is expected to maintain its current level of profitability by most analyst estimates. Allstate’s present valuation also compares favorably to its history. Allstate’s average P/E over the last 5 years is 13, 44% higher than current levels. On an EV/EBIT basis, Allstate’s average multiple in the previous 5 years was 8.5, which is 31% higher than current levels.
Allstate is also a well-run company. The F-Score is presently 7, which places it at a high degree of financial quality. Allstate also achieves better results than its competitors, producing a return on assets of 3.31% compared to an industry average of 1.91%. It delivers these results without excessive leverage, with a debt/equity ratio of 27%.
Allstate also grows organically with the economy, with operating income and revenues steadily increasing over time. The share price has increased with the growth in business over time.
Regarding short-term risks, the Fed is signaling that the rate hikes will end, which ought to stop the pressure on its bond and loan portfolio. There is also the risk of extreme risk events, such as terrible weather events in the upcoming year. That is a constant risk for insurance companies that don’t vary much from year to year and is built into Allstate’s pricing models. With a history going back 87 years, I’m reasonably sure that Allstate can handle a bad hurricane season, for instance.
As for long-term risks, the fears about the rise of autonomous vehicles seem silly to me. We are a long way off from widespread adoption of autonomous cars, considering that most people keep their cars for 11 years. Even when autonomous vehicles are widely adopted, you will still need someone to sue when the car gets into an accident. Even if the car can drive itself, the driver’s insurance is still going to be held responsible when the car makes an error. I don’t think we’ll ever see a day when it will be legal for the driver to hang out in the back seat drinking whiskey while the car whisks away to its destination with the driver completely free of responsibility.
In short, Allstate is a well run, defensive pick that is experiencing organic growth and currently trades at an attractive discount to average valuations within the industry and Allstate’s history.
Enterprise Value = $5.113 billion
Operating Income = $856.8 million
EV/Operating Income = 5.96x
Price/Revenue = .21x
Earnings Yield = 13%
Debt/Equity = 40%
Manpower Group is a global staffing company. They provide recruiting services. They place a broad and diverse group of workers, from office staff to industrial workers. They also have a rights management unit, which provides consulting for workforce issues, such as advice to improve overall productivity.
This is not a “good business” with high returns on invested capital. Its earnings are driven by the cyclical nature of the global employment trends. However, Manpower has been in business for 75 years and has a strong global footprint, with a concentration in Europe. 13% of their revenue is from the United States, 13% is from Asia & the Middle East, and the remainder is from Europe. They have a particularly big focus in France, where 26% of their revenue comes from.
Manpower is in the most cyclical industry that there is: staffing. Their fortunes are dictated by the performance of demand for global employment. The company has performed well as unemployment rates fell in Europe and the United States. Employment in the European Union peaked at 11% in the middle of 2013 and is now down to 6.8%. In the United States, unemployment peaked at 10% and is now down to 4%.
The stock has been punished all year long. From its peak of $136 in January 2018, it is now down to $73.16.
In the quantitative sense, Manpower is a compelling bargain. The current P/E of 7.93 compares to Manpower’s 5-year average of 15.69 and an industry average of 24.14. Analysts don’t anticipate a significant decline in earnings. The stock currently has a forward P/E of 8.83. Additionally, the current EV/EBIT of 5.96 compares to a 5-year average of 9.27, which represents a 55% discount.
A bet on Manpower is obviously a bet on the US and Europe avoiding a recession in 2019. The economies of the United States and Europe are tied at the hip. A recession in the United States will likely coincide with a recession in Europe. There are indeed exceptions to this synergy, such as the 2011-13 period, when Europe languished while the recovery remained strong in the United States, but for the most part, they are closely correlated. Manpower’s performance is primarily dictated by the employment fortunes of these companies, as you can see in the below.
As I’ve stated elsewhere, I do not think that we will experience a recession in the upcoming year. The 2-year vs. 10-year treasury yield, along with the 3-month vs. 10-year treasury yield, has not yet inverted. Typically, after the inversion, the US has 1-2 years before the recession begins. Usually, the unemployment rate doesn’t start ticking up until immediately before the recession. This means that Manpower group is likely getting into the best part of the employment cycle at an attractive valuation.
The market is apparently concerned that Manpower’s earnings and cash flows are at a cyclical peak. I believe we are close to a cyclical peak, but I think a lousy period for Manpower is likely 2-3 years away and is not imminent. In the meantime, I think this is an attractive bargain with the wind at is back.
Manpower has a strong footprint in temporary hiring. This is a segment of Manpower’s business that will likely benefit from where I think we are in the cycle: a period when temporary workers will be in demand as firms struggle to retain employees.
Overall, I believe Manpower will benefit from where we are in the cycle in the upcoming 1-2 years. I am purchasing the stock with a margin of safety, with the stock trading significantly below its historical valuation multiples.