Some things it is helpful to know about Emeco:
“A large part of our sustaining capex is the replacement of machines at the end of their useful life. We can therefore naturally contract certain asset classes within our fleet where we see lower demand for them over the medium term and use the cash to retire debt. I refer to this as “right sizing” the balance sheet to the earnings of the business through the cycle.”
And a long presentation by the CEO here.
Disclosure: I am long Emeco
One thing that makes me a bit uneasy about Emeco is its very high 'growth capex' when its fleet utilisation is at 52%. Imo they would be better off paying down their debt.
That is unless this growth capex is necessary to maintain profits at their current level, which if so that isn't really growth capex at all.
You can see that annual fleet utilisation bobs up and down but has not dipped below 72%. There are some individual months when utilization has gone down into the 50s and 60s but that's been due to reassignment of equipment from one contract to another. Management does a pretty good job of breaking out detailed KPIs on a quarterly basis.
Also, they are paid according to ROIC and share price, so don't be surprised if low utilization translates into a shrinking fleet and if a low share price triggers buybacks. They bought a feww million shares last calendar year at prices between $0.43 and $0.72.
Thanks for the question and keep 'em coming if you have any more.
Hi Red, always interested in reading your thoughts...ReplyDelete
Although, I think sometimes you need to step away from the financials and think about competitive dynamics a bit more. For EHL - it is hard to see utilisation EVER getting back up to historical levels unless commodity prices go through the roof again or something really unexpected happens. For me its in liquidation mode, no point to even consider growth capex. Its a bit similar to your Hawaiian Air thesis which also looks great on paper, but misses the most significant glaring risk - the entrance of Larry Ellison buying the other inter-island carrier to compete with HA due to his $300m Lanai purchase.
This is really the worst type of competitor to go up against, someone with literally unlimited funds (ok not unlimited... but literally billions to play with). And he also has got the long-term ex-CEO of Hawaiian airlines on board. How can you be confident that in an commoditized industry like airlines, there is not going to be irrationality.
Thanks for this, JT.Delete
The Emeco thesis is not quite as glib as implied by my presentation of it. The point of isolating growth capex is principally to isolate its cash flows as it shrinks, not to engage in some naive extrapolation of future growth. I'm mostly interested in "either way" investments and I think this is one of them. I'll follow up in detail.
HA is more interesting (and you're not alone in doubting my sanity on this one): its interisland segment earned 9c a mile in pretax profit in the midst of likely the most "predatory" fare war seen in the US, even though it had half the market, half the gates, etc that it does now.
9c in'06-'07 is 7c at today's fuel prices. At 7c for interisland, HA earns (interisland = 50, International = 120, North America =-100) = 70 in systemwide EBIT today. It will earn 95 next year and so forth.
Is Larry irrational enough to burn cash as an alternative to simply buying HA? Could be, but, imo, one can be a chav without being foolish.
I should say, though, that HA is the only member of my portfolio that I enjoy. And that's almost always a sign that there's some downside risk present.
Thanks for the comment