1st Quarter Earnings Season
A review of Portfolio Companies
EZPW
Cost Basis: $5.2
Current Price: $7
Target Price: $8.5-$9
Link to original writeup:
A little more than a year after my original writeup, my thesis seems right on point. EZPW has seen its business hit an inflection point, as inflation ramps higher and covid stimulus money expires. Underbanked consumers are returning to pawnshops to meet their everyday cash needs and PLO has now reached the same level it was at in 2019. US and Latin America pawn reported record breaking quarters in terms of PLO, revenue, and operating income. In fact, this quarter was nearly identical to one the EZPW did in the second quarter three years ago. That means EZPW could be on track to reproduce the $70M in free cash flow they did in 2019.
Most importantly, EZPW reinstated their share buyback program. $50M over three years is a little less ambitious than I wanted or the previous one. However, it marks a step in the right direction and still accounts for ~12% of the total company.
The real question is what’s next? I nailed my original thesis and now I’m up ~40% from my original purchase a year ago. Not bad, but I’m not sure how many more growth levers can be pulled to get the stock higher over the next 6-12 months. Despite the stellar earnings report, the stock is essentially flat a week after reporting. With management already guiding for a buyback, I think the only logical remaining lever would be continued PLO growth. I only see that continuing if the economy operates at full strength, albeit with a continued inflationary backdrop. Luckily, this is a macro bet I would like to take right now; I’m going to keep holding for now, especially since I don’t see a lot of downside right now.
Sprout Farmers Market:
Cost Basis: $24.5
Current Price: $24.4
Target Price: $40
Link to original writeup:
Sprout Farms certainly dropped the ball here. The high inflationary environment should have been perfect backdrop for the grocer to have solid post-Covid comps. Instead, the company grew sales by 4% and same store sales by just 1.6%. Just pitiful when you consider the 7% inflation rate. Even worse, other grocers have provided sales growth inline with inflation or even in the low double digits. Hell, even $IMKTA grew sales at 16% the last quarter. Sinclair continued to offered initiatives for driving bigger basket sizes, but they all came off very gimmicky. A good grocer doesn’t need to obsess over basket size. Grocery shopping is very habitual. The average consumer visits the same grocery stores, at the same time of the week, and know exactly what they need to get. While promotions and discounts might get to buy more of an item they were already going to purchase, its very difficult to motivate them to buy a marginal product they weren’t going to originally purchase. It’s even harder for these promotions to incentivize customers to switch to a different grocer than they normally use. Sprouts is beginning to see the difficulty of this venture. Based on this most recent quarter, Sprouts is seen as a second-tier grocer by consumers. They are cutting back spending at sprouts, while either holding constant or increasing it at other grocers. In other words, Sprout is losing market share. While the grocer market is far from a winner take all market, playing for second isn’t a winning strategy. I have severely misjudged the quality of business and assigned it to high of an exit multiple. For those reasons, I am out of the stock, despite only holding it for less than a year.
I sold out of $SFM on 5/12/2022 for $24.41. This represents a .37% loss on my original investment over eleven months. Over the same time frame, the S&P 500 fell 12%.
Vontier
Cost Basis:$31.02
Target Price: $45
Current Price: $25.08
Link to original writeup:
Vontier continued to be unremarkable. Management continues to reiterate the $300-$350M EMV heading for the next fiscal year. Given, their track record of both conservatism and consistency when it comes to giving guidance, I think its in investors best interest to believe them at this point. I really do like this management team and their capital allocation; however, the business fundamentally worries me. There is no guarantee that management’s diverters into alternative energy will be as lucrative as their existing product lines. Management plans to reduce share count by 5% by the end of the year, but even that can’t save a potentially sinking ship.
At this point, I would sell the stock, however, I have decided to hold for two reasons. First, I think most of the downside has already been priced into the stock. When management first came out with the 2023 EMV headwind last quarter, the stock plunged 20% but now has returned to its pre-announcement levels. This rebound has occurred when the broader market, especially industrials, has been absolutely slammed. Second, I don’t have any better ideas to put my (fake) money to work. Yes, this is a lame and unacceptable excuse, but I have explained the reasoning for this in a prior post. It’s a personal problem that I am actively deciding to fix and hope to avoid this problem in the future. Until then, Vontier remains in the portfolio.
Other Portfolio News:
I also sold out of our very first position, John B. Sanfilippo & Son. Much like Sprouts Farmer Market, I misjudged both the overall quality of the business and the valuation it deserved.
I sold $JBSS at $74.75 or a 5% loss when dividends are included. The S&P 500 is up 6% over the same time frame.
Our portfolio now comprises three positions: $EZPW, $VNT, and $SPWH. I hope to add two more stocks before I leave for Germany next week.