tag:blogger.com,1999:blog-4631423976894080706.post2514152588746608923..comments2023-10-17T06:55:06.255-04:00Comments on the red corner: Emeco's Downsidered.http://www.blogger.com/profile/04089263693762295793noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-4631423976894080706.post-21528753891947089162013-11-19T18:48:02.313-05:002013-11-19T18:48:02.313-05:00And also,
1) You may be interested in comparing E...And also, <br />1) You may be interested in comparing Emeco with Seven Group's WesTrac segment. WesTrac is the Cat dealer in Australia and Seven group is quite well followed.<br /><br />2) Emeco's inventory is not so esoteric that one can't look up what comparables to its individual pieces are selling for in used equipment markets the world over. I haven't noticed any softening yet though, of course, it could happen in the future.red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-15834353237253866952013-11-19T18:26:54.947-05:002013-11-19T18:26:54.947-05:00Since I've held it it's ranged between $0....Since I've held it it's ranged between $0.16 and $0.34 so yes, if you can get comfortable with the sensitivities there's some room to benefit from the volatility.red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-86017267314063558452013-11-19T18:16:02.673-05:002013-11-19T18:16:02.673-05:00Thx for your reply. I'm a bit worried that use...Thx for your reply. I'm a bit worried that used equipment prices might fall further, reducing potential proceeds from disposals. Using a sensitivity table, as you mentioned, might be the right approach.<br /><br /><br />The stock is likely to remain very volatile until operations stabilize or markets get comfortable with the deleveraging of the balance sheet.Kiskoskyhttps://www.blogger.com/profile/15302340819028303086noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-11301000399542113662013-11-18T19:03:08.271-05:002013-11-18T19:03:08.271-05:00In any case, probably worth breaking out a spreads...In any case, probably worth breaking out a spreadsheet and calculating at what combination of disposals and discounts to carrying value the covenants get breached. red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-12496275750396075532013-11-18T18:54:12.847-05:002013-11-18T18:54:12.847-05:00Hi.
I was having a discussion about that today, a...Hi.<br /><br />I was having a discussion about that today, as it happens.<br /><br />So,<br /><br />Emeco's at 377 in net debt now and, on the assumption that EBITDA comes in at 90, net debt needs to get below 315. <br /><br />EBITDA of 90 implies utilization rates in the 45% range, so half the fleet, with a book value of ~$380 million, is idle in that scenario. <br /><br />If they sell 1/3 of the idle machines at 3/4 the carrying value, they generate $95 million. Plus there is OCF of ~$20 million coming in ever quarter, even at the low end. (Working capital release is not likely to be terribly significant, in my view.)<br /><br />red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-32183668722964469922013-11-18T18:29:06.913-05:002013-11-18T18:29:06.913-05:00Hi Red. I compared the latest announcement from Em...Hi Red. I compared the latest announcement from Emeco with your downside case. Expected FY 2014 EBITDA is A$90-105m vs. A$215m in your downside case. They still expect to generate FCF and pay down debt, but even the revised 3.5x leverage covenant could be tough to comply with (current net debt is A$377m).<br />What's your take?Kiskoskyhttps://www.blogger.com/profile/15302340819028303086noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-20771841704943553882013-09-18T11:12:46.638-04:002013-09-18T11:12:46.638-04:00There's an investment lesson in that comment. ...There's an investment lesson in that comment. Thanks.<br /><br />red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-15628920718347259582013-09-18T10:57:53.968-04:002013-09-18T10:57:53.968-04:00'13 EBITDA $188m and they spend $178m on capex...'13 EBITDA $188m and they spend $178m on capex.<br />I wonder how they justify 'growth' capex when revenue was down 22%. hilarious.luckyscumnoreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-15568895408021472262013-07-17T18:16:15.100-04:002013-07-17T18:16:15.100-04:00Hi Michael,
On his specific point:
1) I'd r...Hi Michael,<br /><br />On his specific point: <br /><br />1) I'd rather be long Emeco than short (or long) Caterpillar. Caterpillar has large fixed costs and Emeco doesn't. Caterpillar is exposed to mine development capex; Emeco not so much. Caterpillar has to spend cash on maintenance capex through the cycle; Emeco has only to stop buying equipment. Those differences are what makes Emeco an attractive proposition. <br /><br />2) A useful exercise for anyone considering a position in Emeco is to calculate Emeco's % exposure to Chinese construction and map out what happens to Emeco's cash flows, earnings and balance sheet if Chinese construction expenditure experiences a crash. <br /><br />3) The lazy (and imprecise) way to assess what happens is the following: He implies that global mining will return to 2006/7 levels. Emeco earned AUD $59m in 2006. Halve that, just for fun, and make it $25m. Add the cashflow from disposals, subtract the debt, and that's your downside equity value.<br /><br /><br />red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-39631463991179100842013-07-17T16:13:22.433-04:002013-07-17T16:13:22.433-04:00Hey red,
What's your take on Chanos's poi...Hey red,<br /><br />What's your take on Chanos's point: <br />http://www.buysidemetrics.com/?p=11072<br />http://video.cnbc.com/gallery/?video=3000182758<br /><br />Kind regards,<br /><br />MichaelAnonymoushttps://www.blogger.com/profile/10995766376449894702noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-49197146124513435952013-07-07T16:29:20.059-04:002013-07-07T16:29:20.059-04:00That’s a very good outline. Thanks, and I hope tha...That’s a very good outline. Thanks, and I hope that people happen upon it so that they can put it to use someday.<br /><br />I think maybe that if we create a 2x2 with equipment/end-user characteristics on the x (ASP, credit risk, regulation, customer size), and lease v buy characteristics on the y (maintenance needs, service needs, residual value risk, balance sheet flexibility etc), a comprehensible pattern will emerge. <br /><br />So, for example, restaurant equipment is a credit risk story and profitability is going to be determined by how well one manages that. Like Silver Chef, for example. http://quinzedix.blogspot.com/2012/09/silver-chef-equipment-leasing.html<br /><br />It helps a great deal if each customer is operating on a knife edge while the customer’s industry as a whole is quite stable. Like individual restaurants or airlines where individual businesses go in and out of business but are simply replaced by other restaurants and airlines with the very same equipment needs. <br /><br />Ryder, otoh, seems to recognize that it’s a beneficiary of regulation and service complexity http://online.barrons.com/article/SB50001424053111904757804578036773617133936.html<br /><br />The danger for leasecos is when there's a certain concentration in equipment brand/type, extensive/regular maintenance requirements, and high/invariable residual value. E.g. maintenance is maybe ~50% of the value in the photocopier value chain (10% for the equipment, 40% for the consumables) so, when combined with concentration in brands, there’s a real temptation for OEMs to get in the game. <br /><br />Railcars – I imagine that it’s high ASP + high maintenance margin + high margins on daily & hourly rates + especially the local nature of the fixed cost base that limits direct competition from other lessors (or OEMs) with railyards in other places.<br />red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-20828812733781127072013-07-05T11:26:28.756-04:002013-07-05T11:26:28.756-04:00I'll share some more of my notes on various se...I'll share some more of my notes on various segments. It's interesting -- there are few "hard-and-fast" rules. More questions than answers, but some interesting things to ponder. I think the biggest key insight for me is in regard to the ASP of the equipment... Bigger ASP = better RoE for leasing company. Then again, note that it doesn't hold true for all segments -- see the slot machine leasing company. Perhaps it is the regulatory nature of certain categories... Hmmm. I may be on to something now...<br /><br />- Railcars (Buffett loved GATX for the 20% ROE it generated... What is it about leasing railcars that is so special?)<br /><br />- Airplanes (strong incentive for airlines to take good care of the equipment for both customer care reasons and regulatory reasons... i.e. regulators won't let you fly if the equipment isn't kept up, and you go BK if you cant fly)<br /><br />- Trucks (Ryder -- why did this company do so well?)<br /><br />- Casino slots (PDS Gaming -- this is a great niche! Regulated industry w/ tough competitive entry because a leasing company needs to get gambling license in every single state, growing volume demand, disparate Indian gaming customer base, strong incentives for casinos to lease due to high upfront capital costs for slot machine purchases, easy transferability of equipment if leasee doesn't pay, healthy customers)<br /><br />- Land-Based Storage Containers a/k/a "Mobile Mini" (scale allowed them to buy ocean shipping containers more cheaply than competition; even though it's a pure commodity industry, their "name brand" and distribution allowed them to get a lot better marketing than small mom-and-pops; cost $4k per container including fix-up and shipment, could borrow 80-90% LTV, and received rental income of ~$1k of rental income per year! Containers only depreciated ~2% per year, so very low maintenance costs too; it's all about keeping utilization >75% to be able to pay for box refurbishing and interest expense)<br /><br />- Restaurant leasing is a TERRIBLE market because your customers (small restaurants) are constantly going out-of-business<br /><br />- Photocopier leasing also turned out to be TERRIBLE but for a different reason -- the OEMs began to compete with the leasing companies like IKONTboneSamhttps://www.blogger.com/profile/07365046731660230233noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-51776067689780050652013-07-03T14:00:03.911-04:002013-07-03T14:00:03.911-04:00Excellent comment. I hope to write a post on how e...Excellent comment. I hope to write a post on how equipment leasing companies turn a profit & fend off competition but the second para of your reply sums it up perfectly.<br /><br />I don't know that one can do well (long-term, above average ROIC) in the leasing business without offering necessary support services. Specialized support services --> reputation ---> stickiness ---> reputation --> virtuous cicle. In that light, since office furniture requires no meaningful support, I can understand how it may not make for a good business. red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-4254255650551771662013-07-02T21:23:57.823-04:002013-07-02T21:23:57.823-04:00That's an interesting observation.
I was nood...That's an interesting observation.<br /><br />I was noodling on this in my head for a while after marveling at some outstanding VIC ideas for equipment rental companies posted in the early part of the last decade. An aircraft leasing company, in particular.<br /><br />Some combination of marketing specialization with customers due to heightened brand awareness, increasing purchasing power over OEMs due to scale, "financialization" of purchasing behavior (your "off-B/S leases" comment phrased slightly differently), growth of LCC's, increasing affluence in Asia driving consumer demand for air travel which in turn stimulated government & private airline investment, and the raw unit economics whereby few upstart airlines are able to afford several dozen $50m aircraft purchases at one time. As Munger would say, this was the kind of lollapalooza we're looking for.<br /><br />Interestingly, you can also take away some interesting lessons from the poor Wesco acquisition of CORT in 2000. Some of it is 20-20 hindsight, but you can glean some important learnings about the discretionary nature of office furniture and the "temporality" (for lack of a better word) of most white-collar services enterprises through a full business cycle.<br /><br />Anyway, both are really good case studies of Michael Porter's eponymous forces.TboneSamhttps://www.blogger.com/profile/07365046731660230233noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-17113671964189345222013-07-02T18:23:32.260-04:002013-07-02T18:23:32.260-04:00Thnaks, Sam, I think waiting for a possible fire-a...Thnaks, Sam, I think waiting for a possible fire-and-brimstone moment is the smartest thing of all. I've sized my own position as, if not a toehold exactly, then a foothold. <br /><br />I suppose equipment rental companies were best placed to benefit from the two big business trends of that time (1) the dis-integration of the value chain as their customers tried to focus on core competencies and whatnot, and the (2) the off-balance sheet nature of lease liabilities.<br /><br />red.https://www.blogger.com/profile/04089263693762295793noreply@blogger.comtag:blogger.com,1999:blog-4631423976894080706.post-26884240881528620682013-07-02T18:03:39.723-04:002013-07-02T18:03:39.723-04:00Well-written as usual Red. I like to wait for the ...Well-written as usual Red. I like to wait for the fire-and-brimstone stage in commodity-linked sectors (the valuation of even great companies tend to be disappointedly brought down equally alongside the chaff during a stampeding herd), but this is on my tracking list now.<br /><br />By the way, I'm consistently amazed by the wealth creation track-records of equipment rental companies globally over the last 20-30 years. It's uncanny.TboneSamhttps://www.blogger.com/profile/07365046731660230233noreply@blogger.com