Thought Bubbles from the Deep

[galumay]

For those using DCF on FCF out there. What discount rate are you seeing implicit in levered owner's earnings in the Aust market right now? My estimate, rubbery as it is, is around 8%pa. Implies about a 5% equity risk premium on QE suppressed yields.

I am no longer sure how relevant equity risk premiums are when otherwise yields are effectively negative after inflation and tax - perhaps the risk premium lies with bonds!

My rubbery estimate is 5%, but I do apply a much lower growth projection than most so its probably swings and roundabouts as far as a deduced value range.

If you really want a heavily calculated figure for equity risk premium then Damodaran is your man.

 

[kid hustlr]

Aussie bond yields out the back really increased lately with the curve steepening sharply. Is this action world wide??

Is this Greece related (everything is ok!?!?) or a world growth theme of 'perhaps it's not THAT bad'??

Enjoying the thread DS.

 

[qldfrog]

DS,
I invite you to look at the last post of Rimtas that I found quite interesting on Re: Elliott Wave and the XAO
is stock market economic more than Elliot Wave and worth reading.
Thanks Rimtashttps://www.aussiestockforums.com/forums/showthread.php?t=15355&page=23&p=869392#post869392

 

[DeepState]

I am no longer sure how relevant equity risk premiums are when otherwise yields are effectively negative after inflation and tax - perhaps the risk premium lies with bonds!

My rubbery estimate is 5%, but I do apply a much lower growth projection than most so its probably swings and roundabouts as far as a deduced value range.

If you really want a heavily calculated figure for equity risk premium then Damodaran is your man.

1. Thanks for the guide to Damodaran.

2. ERP is just an outcome observation in my case rather than the basis for developing the discount rate for equities.

3. You are a bear amongst bears for equities as a whole!

 

[DeepState]

Need to know more about luxury clothing brands and the power of CRM via customer cards and Enterprise Resource Planning (for transport and distribution to retail businesses..ie. no manufacturing) to maintain their value. Anyone got a handle on this stuff?

 

[DeepState]

DS,
I invite you to look at the last post of Rimtas that I found quite interesting on Re: Elliott Wave and the XAO
is stock market economic more than Elliot Wave and worth reading.
Thanks Rimtashttps://www.aussiestockforums.com/forums/showthread.php?t=15355&page=23&p=869392#post869392

Thanks. However, I don't think the commentators are talking about cash in the sense that Rimtas is referring to (cash sitting in the hands of portfolio investors). It is this (cash sitting on balance sheet). This is the cash sitting on the sidelines awaiting (direct, as opposed to portfolio) investment. This is real and supports arguments of EPS growth potential beyond normal during a recovery because it can be internally financed for a while. In turn, this supports prices:

 

[DeepState]

Aussie bond yields out the back really increased lately with the curve steepening sharply. Is this action world wide??

Is this Greece related (everything is ok!?!?) or a world growth theme of 'perhaps it's not THAT bad'??

Enjoying the thread DS.

Yes, duration premia have expanded. It steps tightly with Greece and that seems one valid reason in a correlation sense. As to why Greek bond yields are coming back in, I have absolutely no idea as to the reason for that. I just observe it to be so.

It's funny that the world is focused on Greece. There is another 'Greece' in the Pacific. It's called Japan. The major difference is that Japan is not part of a currency bloc and is largely internally financed. Major difference, for sure. But not so different in terms of debt sustainability.

 

[qldfrog]

Thanks. However, I don't think the commentators are talking about cash in the sense that Rimtas is referring to (cash sitting in the hands of portfolio investors). It is this (cash sitting on balance sheet). This is the cash sitting on the sidelines awaiting (direct, as opposed to portfolio) investment. This is real and supports arguments of EPS growth potential beyond normal during a recovery because it can be internally financed for a while. In turn, this supports prices:

View attachment 62601

Seen that way it is absolutely crazy:
reaching 30% of assets of a company waiting in the bank for???
right time for acquisition,
new tool?

Do you know if these figure are including borrowing facilities ( I could understand figures with that) or are actual positive cash fully own by corporations;
in that case it is mindblowing
I wish this was the case for our banks!!!!
Thanks for your answers

 

[DeepState]

Seen that way it is absolutely crazy:
reaching 30% of assets of a company waiting in the bank for???
right time for acquisition,
new tool?

Do you know if these figure are including borrowing facilities ( I could understand figures with that) or are actual positive cash fully own by corporations;
in that case it is mindblowing
I wish this was the case for our banks!!!!
Thanks for your answers

Pls beware: This is as a %of CURRENT assets. That figure is likely higher partly for tighter inventory control and also due to precautionary cash to reduce risk for debt rolls etc if facilities get pulled. This figure is 'cash', not facilities.

There has been good balance sheet repair since the GFC. Along with a strong interest coverage (albeit at QE rates), there is higher capacity for companies to borrow as well. Lending standards have been consistently easing from the peak of the GFC. Basically, there is a lot of balance sheet capacity to lever into GDP growth without dilution. This justifies a higher than 'usual' PE ratio.

 

[rimtas]

This is the cash sitting on the sidelines awaiting (direct, as opposed to portfolio) investment.



View attachment 62601

That is actually a nice chart (with five waves approaching a peak by the way).

The question is-if this is the cash, waiting to be invested, it's accumulation during decades probably leads to think that companies lack worthy economic investments, which is terrible situation. Also I noticed that the amount of cash in this chart rose the most during and after GFC(maybe due to margin liquidation ?) so it probably has little value in determining whether current levels can support further growth. Now it's just started to flatten out. But that's just the first look guess, I need to do more research on this.
Also, it would be good to know maybe this cash serves as a collateral for buybacks(though this sounds bizarre), as this is widespread phenomenon.
I found a Bloomberg article on this:

“Companies in the S&P500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled. Stock buybacks, which along with dividends eat up sums of money equal to almost all the S&P500 Index earnings, vaulted to a record in February, with CEO’s announcing $104,3 billion in planned repurchases. That’s the most since the Trim Tabs Investment Research began tracking the data in 1995 and almost twice the $55 billion bought a year earlier and an average of more than $5 billion in buybacks each day.
Companies that are earning a lot of money and generating cash are borrowing money at basically zero rates and buying back. From an investor standpoint, you want the highest return on your dollar, period. If the highest return comes not from growing your business but buying your shares back, that’s fine” (Bloomberg3/3).

Technically speaking, if the profits of these companies are being generated by a rising stock market, which is rising due to their own stock buying what will happen to corporate profits when the market turns down?

 

[DeepState]

That is actually a nice chart (with five waves approaching a peak by the way).

The question is-if this is the cash, waiting to be invested, it's accumulation during decades probably leads to think that companies lack worthy economic investments, which is terrible situation. Also I noticed that the amount of cash in this chart rose the most during and after GFC(maybe due to margin liquidation ?) so it probably has little value in determining whether current levels can support further growth. Now it's just started to flatten out. But that's just the first look guess, I need to do more research on this.

I look forward to the outcome of your further research. My perspective on this differs rather materially from the one(s) you are espousing.

Also, it would be good to know maybe this cash serves as a collateral for buybacks(though this sounds bizarre), as this is widespread phenomenon.

That's not how it works.

Technically speaking, if the profits of these companies are being generated by a rising stock market, which is rising due to their own stock buying what will happen to corporate profits when the market turns down?

Technically, that is not what is occurring.

 

[DeepState]

Kathmandu (KMD-AU) looks too cheap to me. Position initiated a couple of days.

Priced for perpetuity of gross margins following liquidation of overstock following the FY14 Winter season. Further, assumes that same store growth will be 1%per annum.

The market is pricing a perpetuation of circumstances that I find hard to argue should be embedded as central case. These include:
+ Currency effects (AUD weakened for NZD reporting);
+ Overstock and liquidation of Winter 2014 season;
+ Weak consumer sentiment and sales in Dec;
+ Installation of enterprise software, new head offices etc..
+ Expense rates in line with budget, but higher proportionality on H1 realised sales (which is exaggerated because the seasonal element of sales is heavily weighted to H2).

This type of thing has happened before in 2012 and represented a fabulous entry point as the market over-extrapolated a weak period that sounds like a strong echo of what is happening here.

Pricing lower end of management guidance for gross margin, 2.5% same store sales growth (at the lowest bound of five year history), tapering to zero and the company dying without recovery in 40yrs, $20m+ capex for the next two years, 30 more stores in the next 2.5yrs and flat thereafter, brand build for UK in perpetuity without any benefit, higher baseline expense for IT to support stronger Enterprise Systems in perpetuity... the stock has a good baseline valuation support already. When you move these things to more central case figures, it is definitively cheap. If the on-line strategy, UK/Europe hit inflections, this stock will multi-bag. I have no interest in using these as rationale required to make the case and make no allowance at all. I assume they will keep spending on it, but not get much out of it.

The street hates it. A buy signal for me in this situation. Major downgrades arrived after the H1 FY15 for not much other than the usual management underplay of market conditions etc, with downshift in gross margin due to weaker currency (not bad when you consider how much the AUD has fallen) and price pressure (as if that was somehow a revelation for the first time).

I initially looked at this as a candidate to short the heck out of. Instead, the stock looks oversold to a reasonably strong extent. In no financial distress.

Big Risks: New CEO is an idiot. Investment in ERP fails to provide better stock control and data-mining benefit arising from Summit Membership data. Rental expense erodes margins due to strategy of moving to high street locations as part of brand positioning. Sales fail to revert despite consumer sentiment reverting to square at some stage after Budget, RBA cut and eventual rebalancing of the economy. Tastes change towards lower end gear despite increasing household wealth, or away from adventure stuff. Failure to differentiate, brand erosion/confusion etc.

The market is already pricing a moderately busted franchise in zombie mode. Seems a little extreme. It wasn't so long ago that this stock was pricing in things like the take-over the fashion world. That seemed a little extreme too. I think Mr Market has been skipping a few tablets.

Position initiated with more in the tank should further weakness develop from the winter season.

 

[skc]

Big Risks: New CEO is an idiot. Investment in ERP fails to provide better stock control and data-mining benefit arising from Summit Membership data. Rental expense erodes margins due to strategy of moving to high street locations as part of brand positioning. Sales fail to revert despite consumer sentiment reverting to square at some stage after Budget, RBA cut and eventual rebalancing of the economy. Tastes change towards lower end gear despite increasing household wealth, or away from adventure stuff. Failure to differentiate, brand erosion/confusion etc.

The market is already pricing a moderately busted franchise in zombie mode. Seems a little extreme. It wasn't so long ago that this stock was pricing in things like the take-over the fashion world. That seemed a little extreme too. I think Mr Market has been skipping a few tablets.

Position initiated with more in the tank should further weakness develop from the winter season.

Interesting. FWIW I also think KMD has the making of a busted franchise. There'd be ebb and flow but the tide is going one direction. For a long time, stuff from Kathmandu were pretty cool but also mighty expensive. Now, they are pretty ugly and still mighty expensive.

The first page of the "men's shirt" on their website tells the story imo. A short sleeve shirt with conservative design has a regular price of $120, Summit Club price of $71.99, and a clearance price of $30. On that page, there were 53 products, and 26 of them were on clearance price levels. Who in their right mind will buy essentially the same shirt at full price... which is 4x the clearance price? May be the odd man going through middle age crisis and have to go on a a big adventure tomorrow can't wait for the clearance. Was that Craft whom I saw in a KMD shop the other day? ... but that market size isn't that big.

Historical margin is historical. Their pricing strategy is all over the shop, and they don't deserve much of a premium. May be it's fixable... but it doesn't seem likely if the bold part above is true.

 

[DeepState]

Interesting. FWIW I also think KMD has the making of a busted franchise. There'd be ebb and flow but the tide is going one direction. For a long time, stuff from Kathmandu were pretty cool but also mighty expensive. Now, they are pretty ugly and still mighty expensive.

The first page of the "men's shirt" on their website tells the story imo. A short sleeve shirt with conservative design has a regular price of $120, Summit Club price of $71.99, and a clearance price of $30. On that page, there were 53 products, and 26 of them were on clearance price levels. Who in their right mind will buy essentially the same shirt at full price... which is 4x the clearance price? May be the odd man going through middle age crisis and have to go on a a big adventure tomorrow can't wait for the clearance. Was that Craft whom I saw in a KMD shop the other day? ... but that market size isn't that big.

Historical margin is historical. Their pricing strategy is all over the shop, and they don't deserve much of a premium. May be it's fixable... but it doesn't seem likely if the bold part above is true.

Excellent observations as usual.

They have flagged that their pricing strategy is causing sub-optimal buying behaviour. The clearance behaviour leads customers to adapt. I figure that awareness is a good start and better inventory control will assist. If your inventory is better controlled to demand, you don't have as much need for clearances. A lot of this issue stems from: design choices that have missed the mark recently, poor inventory control, and pricing issues causing sub-optimal buying behaviour. All of these are readily acknowledged. This has also occurred through the company's history. They ran out of stock once not so long after listing.

Personally, I have no expectation that gross margins will be at historical levels. I am assuming they will be 'well below' these figures. Even Oroton, Nike, Tiffany etc. did not show such margin contraction over the cycle which is being priced into Kathmandu. What is priced are margins that came about due to a fairly material overstock of inventory leading into Winter of last year that was liquidated in the subsequent period, causing pull forward of demand etc... You could see the inventory overhang in the accounts. It was large. Yet same store sales growth in FY14 was 4.2% (vs 5.6% pcp on constant currency basis). It's not a sudden stop in demand. It's oversupply from poor inventory control. Then, to add insult to injury, Dec trading was weak. You can see it in other dept store retailers as well. Dec was a bad period but you need to assume that it will stay bad...it's already not.

My issue is with the extrapolations of these developments, not that they did not occur or have some lasting elements to them. I do not assume that things will go back to what they were in the good old days. Quite a bit worse, but not as bad as the Winter 2014 and Dec 2014 trading period suggests if simply extrapolated.

Virtually no-one pays full price. That is a small fraction of revenue and not a driver. You'd have to be too lazy/rich to fill in a Summit Card membership. This pricing idea is to push customers into giving away their purchasing data. That is the focus, not selling at the nominal full price. How much value there is in that remains to be seen. However, it has been a major push for many years and such data is seen to be valued from the days when frequent flyers were launched (and before that). This strategy has been in place for many years now. They have spent a stack of money on this recently, all I am saying the value of that is will produce same store growth close to the bottom end of five year experience (FY2010, which was cycling post-stimulus comps) with gross margins about 2/3rds towards the recent period from historical levels when the AUD was stronger and consumer confidence was not notably to the weak side. Add to that a heck of a lot more on capex than has been the case proportionally (think of a perpetual brand refresh program in motion), and you still end up with a "Clearance" valuation. There is no premium in here. Premium is what was in place in 2013/14...I could not get those figures if I tried. What we are seeing priced now is the stock equivalent of secular stagnation. I am seeing lowflation with materially poorer productivity of capital than history.

There is no argument from me that they are not likely to trade as well as had been the case historically. It doesn't need that. My argument is that the market is extrapolating issues that would require a continuation of what look to be transient issues into the future. I think that is an over-reaction, probablistically (I regard is as something like -1 std devn. It is probably cheap). This stock has demonstrated that pricing over-reactions have occurred in both directions and there is a reasonably close equivalent in 2012.

This franchise could break. I just don't think it is in that position as a central case as it is evident what occurred to produce those results which are now embedded are more likely somewhat transient than entirely permanent.

I guess we'll see if the CEO is an idiot. I have no insight on that. If he is, he'll have me as company.

 

[skc]

This franchise could break. I just don't think it is in that position as a central case as it is evident what occurred to produce those results which are now embedded are more likely somewhat transient than entirely permanent.

Depends on your time horizon I suppose. I have the stock chart on close watch and am willing to take a trade if it goes above $1.40 with some conviction. But it'd be just a trade.

 

[Miner]

Sometimes look could be deceptive.
With this caveat I am presenting my visits to Kathmandu shop.
Customer service appalling . Hardly you see a sales person available or seen. The shop looks deserted. Stock of goods is pathetic. Price is so high that even after regular discounting the price is too high. This observation I am making from CBD Kathmandu shop in Perth.
I have stopped going to Kathmandu shop and preferred to go competitors.
So if this scene is not repeated in other Cities great. If this is the same story in other City stores then KMD is in a doom state as far as I am concerned. I will put my money elsewhere.
Probably the name Kathmandu is cursed .
Do not hold KMD.

 

[The Falcon]

Appreciate the analysis on KMD DV and SKC. A value play based on downside mispricing and mean reversion. I will have a bit of a dig around on this one

 

[tech/a]

Sometimes look could be deceptive.
With this caveat I am presenting my visits to Kathmandu shop.
Customer service appalling . Hardly you see a sales person available or seen. The shop looks deserted. Stock of goods is pathetic. Price is so high that even after regular discounting the price is too high. This observation I am making from CBD Kathmandu shop in Perth.
I have stopped going to Kathmandu shop and preferred to go competitors.
So if this scene is not repeated in other Cities great. If this is the same story in other City stores then KMD is in a doom state as far as I am concerned. I will put my money elsewhere.
Probably the name Kathmandu is cursed .
Do not hold KMD.

I agree.
Way way over priced.
Look a customer---just ignore them.

There is way better.
I reckon its priced exactly where it deserves to be.

 

[DeepState]

I reckon its priced exactly where it deserves to be.

Is there anything tangible you can offer about how you came to this conclusion?

 

[McLovin]

Interesting. FWIW I also think KMD has the making of a busted franchise. There'd be ebb and flow but the tide is going one direction. For a long time, stuff from Kathmandu were pretty cool but also mighty expensive. Now, they are pretty ugly and still mighty expensive.

The first page of the "men's shirt" on their website tells the story imo. A short sleeve shirt with conservative design has a regular price of $120, Summit Club price of $71.99, and a clearance price of $30. On that page, there were 53 products, and 26 of them were on clearance price levels. Who in their right mind will buy essentially the same shirt at full price... which is 4x the clearance price? May be the odd man going through middle age crisis and have to go on a a big adventure tomorrow can't wait for the clearance. Was that Craft whom I saw in a KMD shop the other day? ... but that market size isn't that big.

Historical margin is historical. Their pricing strategy is all over the shop, and they don't deserve much of a premium. May be it's fixable... but it doesn't seem likely if the bold part above is true.

I agree with you. KMD used to sell expensive, well made outdoor clothing and equipment. Now they sell less well made clothing at ridiculously high everyday prices but with constant sales in the order of 50%-60% off. You're a real idiot if you pay full price at KMD because there's always a sale just around the corner. I have a KMD jacket, I remember when I bought it it was "reduced" from $499 to $199. They've tried to imitate the North Face by moving away from their core outdoors demographic. It hasn't worked, imo, because it was never really a brand that got people excited, and as you observe the products are fairly basic/boring; some of those shirts look like they're straight outta Don Burke's backyard. The product pricing structure probably confuses customers to the point that they don't know if they're getting value for money. The mild winters in Australia probably don't help.