Today Chipotle reported 4Q 2013 results. Boy, was this an awesome quarter for a terrific company. The conference call contained some gems about Pizzeria Locale which I have also included below.
** Sales increased 20.7% to $844.1 million
** Comparable restaurant sales of 9.3%
** Net income increased 29.8% to $79.6 million
** Profit margin of 9.4% from 8.8% in 2012
** Produced operating cash flow of $140.07 million
** 2013 operating cash flow of $528.78 million from $419.96 million in 2012
** 2013 free cash flow of $328.85 million from $222.92 million in 2012
** $323.2 million in cash ($892 million when including other investments)
** No debt
** Opened 56 new restaurants in 4Q 2013
** Opened 185 new restaurants in 2013
** Total of 1,595 restaurants in operation
** Average restaurant sales of $2.17 million from $2.11 million in 4Q 2012
** Restaurant level operating margin of 25.6% from 24.6% in 4Q 2012
** 2013 EPS increased 19.7% to $10.47 from 2012
** 180–195 new restaurant openings
** Comps in low to mid single digits (excluding price increases)
Press release: http://finance.yahoo.com/news/chipotle-mexican-grill-inc-ann...
For a second I thought we were back in 2007. 20% sales growth, 30% earnings growth, and 9%+ comps? Yowza! Not what you would expect from a chain with 1,500 restaurants valued at $15.3 billion.
All I can say is that I wish more restaurants took notes from Chipotle. There are a lot of new restaurants on the market that investors like to proclaim as the next Chipotle, but the truth is that few businesses (let alone restaurants) come close to the value-oriented mission/leadership of Chipotle coupled with extraordinary and consistent financial performance. Read this for more on that thought: http://boards.fool.com/finding-the-next-chipotle-or-buffalo-...
In the conference call, Steve Ells shared some very helpful information regarding Chipotle's arrangement with Pizzeria Locale. (Note that when Ells references "Bobby and Lachlan" he is referring to Bobby Stuckey and Lachlan Mackinnon-Patterson, the founders and owners of Pizzeria Locale.) Ells said the following (emphasis added):
Under our agreement with Bobby and Lachlan, Chipotle has an equity interest in this new venture and could become the majority owner over time as the concept expands. In addition to providing capital to open additional restaurants, Pizzeria Locale can also draw on Chipotle’s resources and expertise in other areas such as real estate, finance, purchasing and marketing. Bobby and Lachlan and their team are driving this concept and are responsible for all facets of restaurant operations. Not only do Bobby and Lachlan share our vision to change food culture, they are exceptionally capable restaurateurs who can help us achieve that. The first Pizzeria Locale is opened in Denver and we are currently looking at a couple of other additional sites in Denver also.
Prior to this we did not know much regarding Chipotle's financial arrangements with Pizzeria Locale. As I suspected, Chipotle could very well become a majority owner of Pizzeria Locale once the concept proves it has some legs. This is somewhat similar to the deal Buffalo Wild Wings struck with PizzaRev in 2013. Pizzeria Locale certainly won't be a major driver of growth for Chipotle anytime soon, as Ells himself has repeatedly mentioned, but this arrangement gives Chipotle the ability to become a majority owner of Pizzeria Locale should the concept begin to see success in multiple locations.
Ells said the following about ShopHouse:
ShopHouse continues to remind me of Chipotle in its earliest days. Customers really love the food and the experience and we are eager to introduce more people to the flavors of ShopHouse. This year, we planned to open more ShopHouse restaurants in Washington DC and Los Angeles.
Later in the call, Ells went into some more specifics:
We’re expecting to open a couple of few more ShopHouse’s this year. We’re expecting to open a couple of more Pizzeria Locale this year. If I compare the rate of growth so far with both of these concepts it's faster than Chipotle started out.
I bolded that sentence because it is important for us to remember this point. It took two years for Chipotle to open its second and third locations, and the company waited six years before expanding outside of Colorado. ShopHouse is well beyond that milestone within two years, and Pizzeria Locale will probably expand to multiple locations quicker than Chipotle did when it was starting out in the 1990s.
Ells continues on Pizzeria Locale and ShopHouse:
It's not time to unleash them; it's time to grow smartly and watch them and make sure that we’re cooking delicious food and serving in a way that excites customers, and we’re doing that. We’re very happy with the results. - http://seekingalpha.com/article/1983091-chipotle-mexican-gri...
Chipotle is focusing on cultivating leadership and outstanding performance at all levels of the organization, and the same goes for Pizzeria Locale and ShopHouse. Chipotle is patiently cultivating these concepts, supporting wonderful restaurateurs, and little by little these concepts will continue to expand. Chipotle's overall mission is not tacos and burritos. This is a company focused on Food With Integrity, cultivating restaurateurs who deliver high quality food at affordable prices.
Co-CEO Monty Moran explained that Chipotle's new catering services are approaching 1% of overall sales. Nearly 500 restaurateurs lead approximately 2/3 of all Chipotle restaurants.
Ells said it is unlikely that Chipotle will open many more international locations in 2014. Steve Ells expects Chipotle to be GMO-free by the end of 2014 -- a notable milestone for a company of Chipotle's size. But, honestly, would we expect anything less?
I consider Steve Ells to be my favorite CEO, and this quarter helps demonstrate why. Chipotle is a mission-driven business empowering all of its many stakeholders.
The stock is up over 13% in after hours, and it looks like early Chipotle investors (who held on to some/all shares) may be in store for a spiffypop tomorrow.
I know I have no plans whatsoever to sell any of my remaining shares. I plan on holding Chipotle for the next ten years and beyond because, honestly, I think we're just getting started. The P/E now stands at 47. Should shares get clobbered by Mr. Market at some point, I will consider adding to my position.
David K [more]
Yesterday Polaris (PII) reported 4Q 2013 results. (Polaris makes just about any motorized vehicle except cars and trucks -- things like ATVs, motorcycles, snowmobiles, and more.) Earnings beat analyst estimates for the quarter, but apparently 4Q revenue and 2014 guidance were lower than what analysts were expecting (boo hoo). Shares were down nearly 7.5% at some points yesterday after the results were reported. I own Polaris indirectly through an account I help manage, and I think this is a business with extensive long-term potential. I might add to my position here, especially if the stock continues to fall a bit.
Year-over-year sales increased 20% in the quarter and 18% overall to $1.12 billion in 2013. Earnings increased 23% year-over-year in the quarter and 22% overall in 2013 to $381.07 million. Margins increased across the board for the quarter and year (10.1% profit margin in 2013 compared to 9.7% in 2012). Operating cash flow for the year increased to $499.15 million from $416.11 million in 2012. Hardly numbers to scoff at; I wish more quarterly "disappointments" looked like this.
My understanding is that this was the first quarter that the new Indian motorcycle models were released, which helped motorcycle sales increase 94% year-over-year in the 4Q for Polaris. I like the approach the company is taking with the iconic Indian brand by lowering prices of the new Indians to better compete with Harley Davidson:
The ambitious rollout by parent Polaris Industries, the $3.2 billion-a-year maker of snowmobiles and all-terrain vehicles, comes after a series of false starts by previous owners in the 60 years since Indian went bankrupt.
One big difference is the price: Polaris repositioned the brand to go head-to-head with Harley by cutting thousands of dollars off the sticker of each of its new models.
The new lineup includes the Indian Chief Classic, starting at $18,999; the Indian Chief Vintage, at $20,999, and the Indian Chieftan, at $22,999. Until now, Indian bikes were priced as high was $37,000 but suffered from marginal quality. They will arrive in dealerships in September. -http://www.forbes.com/sites/joannmuller/2013/08/04/indian-mo...
Polaris management is projecting 14%-18% earnings (EPS) growth in 2014, accompanied by a 11%-14% increase in sales for the year. Analysts are expecting Polaris to increase earnings at 15% annually for the next five years. We can use the Future Value valuation method to gauge where the stock might likely trade in five years based on these projections. As a recap, here is the Future Value method formula:
Current EPS * (Expected Annual EPS Growth ^ # Years) * Expected Future P/E = Estimated Future Stock Price
Using the Future Value valuation technique, here is what Polaris shares would trade at in five years if earnings expand at 15% annually for the next five years and the stock trades at a P/E of 18 in 2019 (these numbers use the company's new TTM EPS of $5.35):
5.35*(1.15^5)*18 = $193.69
An unofficial rule of thumb I have is to look for stocks that could reasonably double over the next five years. In other words, it would be great to plug in "reasonable" projections for annual earnings growth for five years (along with a reasonable future P/E multiple) and see that the stock can become a double over the next five years with that scenario. In the case above with our "reasonable" Polaris projections, the stock would return roughly 8.5% annually -- a likely market-beater over the long run.
Stocks have to return an annual average of roughly 15% to double after five years. Let's see what Polaris looks like with 18% annual earnings growth (the high end of the company's EPS growth guidance for 2014) and a P/E of 20 (Harley Davidson, Polaris' larger and slower-growing competitor, currently trades at a P/E of 20):
5.35*(1.18^5)*20 = $244.79
Now we're talking! This would result in a very close double over a five year period, and almost a guaranteed market outperform. With either of these two projections, Polaris is likely to beat the market. I am impressed by the company's management team (from what I have researched) and expect that the company's continued R&D and product innovation will lead to consistent sales and earnings growth for the foreseeable future.
Let's see what the stock would look like in five years if the company grows earnings at a mere 12% annually and trades at a P/E of 15 in five years:
5.35*(1.12^5)*15 = $141.43
In this scenario, the stock essentially treads water for five years and likely lags the market.
Currently Polaris trades at a P/E of 23.95 with a market cap of $8.87 billion. I am tempted to add at today's levels, and would jump on the opportunity to add more to my position should the stock fall below a P/E of 20 in the relatively near future. I think it is likely for the company to expand earnings at an average annual pace of 15% for the next five years, in which case the stock will very likely beat the market over that time period.
Polaris has an innovative (and expanding) product line, an experienced CEO and management team with proven innovative streaks, and solid earnings growth and overall financial strength. I'm watching closely and may add shares around current levels, but would welcome more irrational behavior from Mr. Market to drive shares down to even more attractive levels.
I encourage anyone interested in Polaris to check out the entire 4Q 2013 earnings report here (it includes a thorough recap of the various segments of the business): http://finance.yahoo.com/news/polaris-reports-record-2013-fo...
David K [more]
Let's be real: as we investors, we want to to find companies that produce returns comparable to Chipotle and Buffalo Wild Wings over the past decade. As a conscious investor, I am also eager to find more innovative leaders like Steve Ells and Monty Moran at Chipotle and Sally Smith at Buffalo Wild Wings. I find restaurants to be one of the simpler businesses to follow, and restaurants double as businesses that can easily be evaluated with the "Lynchian research method" -- direct experience of the product, word of mouth from friends, etc.
With fast-casual dining on the rise, I think we are in store for more great investment opportunities in the restaurant space over the next decade. In this article, I delve into why I consider free cash flow to be such a key metric to evaluate growing restaurant concepts. I also evaluate Noodles & Company, Chuy's, and Potbelly in more depth.
The Secret Ingredient to Find the Next Chipotle or Buffalo Wild Wings: http://www.fool.com/investing/general/2014/01/25/the-secret-...
Investors often look for the next Chipotle Mexican Grill (CMG) and Buffalo Wild Wings (BWLD) in the restaurant field, and for good reason: both stocks have returned more than 1,000% over the past 10 years, compared to a measly 60% return from the S&P 500. Noodles & Co. (NDLS), Chuy's Holdings (CHUY), and Potbelly (PBPB) have recently arrived on the scene and are being compared to Chipotle and Buffalo Wild Wings. While these restaurants have promising concepts and long-term potential, they are missing a key ingredient that has led to the phenomenal success of Chipotle and Buffalo Wild Wings.
Free cash flow
Why is free cash flow important, especially for restaurants? Free cash flow -- which is operating cash flow minus capital expenditures -- measures how much cash remains with a business after investing in property, equipment, and other items necessary for the expansion of that business.
Operating cash flow -- the cash flow produced by a business -- can either fully cover capital expenditures (expansion costs) or a business will be required to borrow money (i.e. go into debt) or issue stock (diluting shares outstanding). Put in other words: if a business has negative free cash flow, it is a signal that the business itself is not producing sufficient cash flow to finance expansion.
This is a critical point that's easy to overlook. Looking back at Buffalo Wild Wings and Chipotle Mexican Grill, we can see the importance of finding young restaurants with promising concepts that are capable of expanding without going into debt or issuing thousands of new shares of stock.
Buffalo Wild Wings went public in 2003 with a market capitalization of approximately $216 million. At that time, the company operated 245 restaurants in 29 states. In 2003, the company produced $16.07 million in operating cash flow, while capital expenditures totaled $10.74 million; this means the company's free cash flow for the year came out to $5.33 million. Buffalo Wild Wings continues to produce positive free cash flow today, and is aiming to open its 1,000th restaurant this year and open 1,700 restaurants by 2023.
Chipotle went public in 2006 with a market capitalization of roughly $1.36 billion. At that point, Chipotle operated 489 restaurants (including eight franchised locations) in 21 states. In 2006, the company produced $103.6 million in operating cash flow, with capital expenditures coming in at $97.31 million. Chipotle produced $6.20 million of free cash flow in its first year of being a public company. This cash flow production has allowed Chipotle to build up $532.17 million in cash on its balance sheet with no debt, a major financial cushion as the company continues to build upon its base of over 1,500 restaurants and fledgling ShopHouse and Pizzeria Locale concepts.
How Noodles, Chuy's, and Potbelly stack up
Noodles & Co. -- which is stacked with former executives from Chipotle -- oversees a total of 380 fast-casual restaurants (both company-owned and franchised) in 29 states and the District of Columbia. In 2012, Noodles produced $32.07 million in operating cash flow, but capital expenditures stacked up to $47.38 million -- leading to negative free cash flow of $15.31 million. In the first three-quarters of 2013, the company produced negative $7.33 million in free cash flow.
Not only that, but in its third-quarter conference call, CEO Kevin Reddy said this is not expected to change anytime soon. "We do anticipate the long-term debt we'll increase a bit over the next few quarters as our operating cash flow is modestly lower than that capital we deploy investing in the restaurants."
Yikes! Noodles is, for now, expanding beyond its means. This places significant pressure on new locations to produce positive free cash flow in order for the company to pay off a growing chunk of debt. This is a key thing to watch for with Noodles, whose management team envisions 2,500 Noodles locations in the U.S.
Chuy's -- a relatively small Tex-Mex chain with 47 restaurants in 14 states -- has a concept which is quickly growing in popularity. In 2012, the company produced $24.52 million in operating cash flow with $27.25 million in capital expenditures, making for free cash flow of negative $2.73 million. In the first three-quarters of 2013, the company's free cash flow stands at negative $2.7 million. Chuy's plans on opening 10 or 11 new restaurants in 2014, but it's unlikely for this expansion to occur without it adding more debt or issuing new shares of stock.
Potbelly operates 288 shops in 18 states and the District of Columbia, as well as 19 franchised locations both in the states and the Middle East. In 2012, Potbelly's operating cash flow nearly outgrew capital expenditures, still the company produced just under $1 million in negative free cash flow. In the first three-quarters of 2013, however, the company did produce positive $3.11 million in cash flow. Should it continue, this trend will serve Potbelly well as the company plans to open 30 new sandwich shops each year.
Foolish bottom line
We should remember that Chipotle and Buffalo Wild Wings didn't always produce positive free cash flow. But, upon entering the public stage, both companies fueled their successful national expansions through funds generated by the actual business (rather than debt or stock issuance). Put in other words: Chipotle and Buffalo Wild Wings have funded the development and opening of new locations through the cash flow generated by existing locations.
It remains to be seen whether Noodles, Chuy's, and Potbelly can sustainably grow and open new locations without being forced to go into debt or issue more shares of stock. Noodles, despite its managerial roots with Chipotle, is unlikely to be free cash flow positive in 2014. Chuy's is teetering on the edge of producing positive free cash flow, while last year's numbers seem to show Potbelly is capable of funding expansion through its operating cash flow.
Noodles, Chuy's, and Potbelly all have ambitious expansion plans. If you're looking for comparable businesses (and investment returns) to Chipotle and Buffalo Wild Wings, focus on finding a business capable of financing growth through existing cash flow production. Without this component, there's no telling whether you have actually found a restaurant gem or a concept incapable of expanding without debt and equity financing.
After doing this research, I am inclined to explore Potbelly (without developing a pot belly...) in more depth. Any quickly-expanding restaurant that can produce positive free cash flow is especially worth following. I'll be watching all three companies closely going forward.
Thanks for reading!
David K [more]
I was recently asked if I had done any research into BJ's Restaurants (BJRI), an $825 million business with 146 casual dining restaurants. Starting some initial research into BJRI, there are a few things about BJRI that stick out to me:
-- Consistent sales growth: Sales have increased annually from $426.71 million in 2009 to $760.16 million over the past four quarters. This is good, but unfortunately it is one of the few bright spots that I see with the company from a financial perspective.
-- Earnings are struggling, especially recently. I'm not sure what's causing this, but earnings decreased 46% year-over-year in the most recent quarter. Higher expenses appear to be straining margins quite a bit, although the last quarter is the only one where something like this seemed to happen.
-- $30.45 million in cash with no debt. But:
-- The cash position has decreased from $53.19 million in 2010, because:
-- The company has produced negative free cash flow since 2010. Each quarter/year BJRI's gap between capital expenditures and operating cash flow is increasing. In other words, CapEx is increasing at a greater rate than operating cash flow. This is draining the company's cash position, and the company's free cash flow production is still heading in the wrong direction (further in the red) after two fiscal years.
My guess is that BJRI accelerated expansion in 2010, leading to higher capital expenditures. For now, the company's cash position will cushion the company's negative free cash flow. However, that cash will burn up pretty quickly if current trends continue within the company. It looks like BJRI brought on a new CEO in 2013, Gregory Trojan, so it will be interesting to see if the financial situation improves this year.
BJRI was in a good cash flow position until, for whatever reason, 2010. The growing negative free cash flow -- and simultaneous disintegration of the company's cash -- is a big red flag at this point. BJRI's current restaurants are not producing enough to finance capital expenditures; hopefully this is something the new CEO and this management team are focused on tackling in 2014. [more]
I've seen mixed reactions to the concept of Conscious Capitalism, both in Fooldom and elsewhere. The most common reaction tends to be disagreement with usage of the word "conscious." "Why, Bernie Madoff was a 'conscious' capitalist when he screwed people out of their retirements!" On a level I can see where this disagreement comes about. I'm more interested in the concept itself, however, rather than getting into arguments about semantics.
Whether you call it conscious capitalism, conscientious capitalism, socially responsible business -- people get the general idea of what is implied and being discussed. For better or worse, John Mackey's Conscious Capitalism terminology has stuck with the mainstream and managed -- for the better, I believe -- to attract numerous leaders in the business community who seek to approach business in a new light. In my mind, conscious capitalist businesses are those who broaden their definition of success beyond financial gain, instead including employees, community members, customers, shareholders, and other stakeholders in the mission, practices, and purpose of the company.
With that said, just about every business will have a broad vision or mission statement that encompasses many of the ideals of conscious capitalism. Coca Cola isn't just selling you drinks infused with loads of corn syrup, they are selling you happiness (of course!). Even Arch Coal -- a company that literally blows apart mountains in the Appalachian region -- lists "environmental stewardship" as a core value.
I bring this up because just about every business will claim some measure of social responsibility. To do otherwise is a publicity death sentence. For investors who want to become stakeholders in businesses who share optimistic ideals and practices, simply finding companies that list warm and fuzzy values doesn't make the cut anymore.
I see this as a challenge of the conscious investor -- investors who are determined to build a portfolio of businesses guided by passionate individuals focused on achieving long-term success for all stakeholders. These are businesses whose leaders are intent on improving the world through the tools of entrepreneurship, and offer more than the occasional lip service to their mission/vision statement. This means finding innovative leaders willing to admit they are wrong on occasion (e.g. Netflix's Reed Hastings with the Qwikster debacle), leaders who seek to empower all stakeholders, and leaders focused on long-term results rather than beefing up short-term results at the expense of long-term performance or company values. Finding people and businesses like this is, at least in my experience, easier said than done. It is, however, very much consistent with the Foolish method of investing.
I am trying to improve my practice as a conscious investor. I try to ask myself this simple question before clicking "Buy" on an investment: "Is this company's leader someone I would want to work with?" In other words: do I really want to become a co-owner in this business? This can be a challenging (and even frustrating) question to answer honestly. However, I believe it is a question every long-term investor -- every conscious investor -- should ask with each of their current and prospective investments.
Another helpful practice is to see how employees rate their respective workplaces on Glassdoor (a website where employees can anonymously rate wherever they work, in addition to rating the company's CEO). I recently realized the importance of giving a company's Glassdoor ratings a quick run-through before making an investment. After buying shares of a company that I saw as a promising long-term investment, I decided to check its Glassdoor ratings. To my disappointment, employees gave the company pretty dreary ratings. 2.8 out of 5 stars. 23% of employees approved of the CEO. And this is for a company that has listed happy employees as one of its core principles for over 50 years. There is a major difference between listing core principles and actually manifesting those principles in a recognizable way.
Today, there are few excuses for investors to not invest consciously. We are becoming a stakeholder every time we invest in a business. With tools like Glassdoor, Twitter, online customer and investor relations, the veil between a company’s talk and walk -- perception vs. actuality -- is as thin as it has ever been for publicly traded businesses.
Of course, simply practicing business from a conscious capitalist perspective doesn’t mean a company is destined to become a market-beating investment. Some conscious capitalist companies, such as Jamba Juice, have been laggard investments over the long run thus far. A company cannot sustainably expand its concept, or improve its capacity to serve various stakeholders, unless financial growth follows suit. Part of the challenge for conscious investors is to find businesses where the three key factors -- people, planet, and profit -- are aligned in a mutually beneficial manner.
Many long-term investors are already conscious investors. I see conscious investing as the intense focus on becoming co-owners with innovative leaders manifesting visionary ideas into reality. This entails thinking more deeply about where we are investing our limited funds, who we are joining as co-owners, as well as the vision of the business in which we are becoming a stakeholder. Conscious investing is essentially synonymous with Foolish investing, utilizing various tools (such as Glassdoor and social media) to better understand who we are investing in.
These are just some musings for now. I consider myself a conscious investor, constantly trying to improve both my analysis and, of course, selection of the few companies in which I actually invest my money. Vision, culture, methods -- these are all important ingredients for a long-term investment success story. Here’s to finding the businesses that are improving the world and empowering their stakeholders along the way.
David K [more]
I like a lot of what I see with Universal Display (OLED):
-- The company is a leading innovator in the field of organic light emitting diodes (OLED). In plain English, Universal Display develops and licenses "thin, lightweight and power-efficient solid-state devices that emit light." In even plainer English: the company develops the technology for flat panel displays on products such as smartphones and TVs.
-- With over 3000 final and pending patents, the company has a strong innovative edge in this field, most noticeably through its licensing deals with Samsung and LG. Universal Display is another classic example of an "enabling technology" business -- similar to InvenSense and Ambarella -- enabling businesses like Samsung and LG to continue to expand and improve their electronic product offerings.
-- The company's sales have expanded 793% since 2009 to $125.29 million. In the most recent quarter, revenue expanded 162.50% year-over-year. Universal Display's earnings have increased annually from -$20.51 million in 2009 to $21.55 million over the past four quarters. The profit margin is steadily increasing each year as well, most recently clocking in at a healthy 17.2%.
-- The company is now free cash flow positive. Operating cash flow production has annually increased over the past several years, coming in at $33.15 million over the past four quarters. In the first three quarters of 2013 the company produced $22.58 million in cash flow, outdoing the $17.75 million produced in the entirety of 2012.
-- $248.28 million in cash; no debt. That's the type of balance sheet I like to see.
-- Experienced, innovative, and involved management. According to Yahoo! Finance, insiders own 45% of all shares outstanding. CEO Steven Abramson, who has been with the company since 1996, owns the second largest number of shares (386,785) of all insiders; Ambramson was also awarded the Ernst & Young Entrepreneur Of The Year in 2013. Founder Sherwin Seligsohn remains on board as Chairman. CFO Sidney Rosenblatt has been with the company since 1995 and owns 267,574 shares. Chief Technological Officer Julia Brown joined the company in 1998 and owns 225,684 shares.
This is an experienced management team with a high level of insider ownership, and a proven knack for leading an innovative business that is now seeing incredible financial growth.
-- This is a $1.5 billion company trading at a P/E of 71. Considering: 1) the company's position as an innovative leader in OLED technology, 2) an experienced and involved management team, and 3) superb financial growth and cash flow production, I think the P/E of 71 is justified and will come down over time through continued earnings growth.
-- A cherry on top could be the announcement of the Apple iWatch, which will likely utilize LG technology (and, therefore, Universal Display's OLED technology). It is also rumored that Universal Display's technology will be utilized in Google Glass. I would not base an investment solely or largely on a hypothetical scenario, but it is likely Universal Display will continue to have a growing presence in the ever-bustling field of technology. Regardless of what company produces the next hot device -- whether it is Apple, Google, or someone else -- there is a good chance Universal Display's technology will be involved and the company will benefit.
All in all, I am glad to have found Universal Display. This company has a lot of pluses that I anticipate will lead to market-beating returns over the long run. [more]
It might be a bad sign for my social life that I get excited when I find a boring business. Nonetheless, I came across Multi-Color (LABL) today, and boy is this one a zinger. This $590 million company literally prints labels. Since 1916. Over the past two years the company engaged in a string of acquisitions, further expanding Multi-Color's labeling presence into Scotland, Switzerland, Mexico, the U.K., and other countries.
The company's markets include labeling solutions for products in home and personal care, wine and spirit, food and beverage, and other specialty consumer products in the U.S., Canada, Asia, Europe, and a host of other countries as I mentioned above. The company's operations encompass pressure sensitive labels, in-mold labels, and glue-applied labels. Multi-Color produces labels for Coca Cola Brazil and other major brands around the world. My research into the company is just beginning, but this gives you a basic idea of the company's operations and clients in a global context.
Insiders own 24% of all shares outstanding. CEO Nigel Vinecombe -- who has been with the company since 2008 -- is the largest insider shareholder, owning 3.7% of the company.
In the most recent quarter, sales only expanded 4% year-over-year. TTM revenue stands at $668.41 million. However, earnings expanded 30.5% year-over-year; TTM net income is $31.32 million. Between fiscal 2009 and fiscal 2012 Multi-Color expanded revenue 238%. Cash flow production has more than doubled over that period to $77.53 million over the past four quarters.
The balance sheet is rough -- $21.28 million in cash with a hefty chunk of $394.38 million in debt. Still, the company's growth has been pretty impressive up to this point. Free cash flow has been consistently positive over the past few years, so I don't have many doubts about the company's ability to manage its load of debt.
Currently the stock trades at a P/E of 19. Only three analysts follow the stock, and they expect Multi-Color to expand earnings at 13.5% annually for the next five years. To me this looks like a conservative estimate considering the company grew earnings 19% annually over the past five years.
Multi-Color has no major competition that I know of, but I will need to research the company quite a bit more before I consider investing any of my own money. The company was too boringly appealing for me to pass up. I'll keep Multi-Color on my watchlist -- at this point a CAPS pick is probably as far as I'd go until I learn more about the company.
Multi-Color's high level of insider ownership, expanding global presence with a niche (and important) product, and steady growth make it a business worth watching. The fact that the company is flying below the market's radar doesn't hurt either.
Next time you're looking to spice up your social life, start by researching a labeling business.
David K [more]
Annie's (BNNY) is a company that I recently stumbled upon. Annie's produces quality food products using organic ingredients -- products such as mac & cheese, crackers and other snacks, and recently frozen food such as pizza. Annie's may be known by some from its rabbit mascot, Bernie, the "Rabbit of Approval." I have Celiac Disease (gluten intolerance) and grew up in a vegetarian household, so I've been eating Annie's products for as long as I can remember. (The company was founded in 1989.)
I wrote an article about Annie's that will hopefully be published on Fool.com this week, but I wanted to post a few rough notes here. Currently Annie's sells its products in roughly 15,000 stores across the U.S. I see Annie's as an up-and-comer competitor/comrade to Hain Celestial and WhiteWave Foods -- two comparatively larger businesses in the space of organic foods.
Over the past several years Annie's has seen sales grow approximately 15% annually, with earnings expanding around 17.5% per year. Annie's has already produced $12.72 million in operating cash flow in the first two quarters of fiscal 2014, compared to $8.72 million in fiscal 2013. A lot of things are clicking for Annie's financially.
Analysts currently expect Annie's to grow earnings at 25% annually over the next five years. Those are pretty ambitious numbers, but I think Annie's will be able to grow earnings between 20%-25% over the next several years. This makes the stock's current P/E of 54 look somewhat acceptable, although it is a good amount higher than the P/E ratios of Hain and WhiteWave (which currently trade between P/Es of 35-40) -- who have also grown earnings over 20% annually over the past four years (Hain's earnings have expanded 40%+ annually since 2009).
Although Hain and WhiteWave have managed to expand earnings at a faster pace than Annie's over the past several years, today's price point might not actually be too bad for Annie's. The stock's performance is primarily hinged on future performance, as should be expected for a $700 million company in the quickly expanding field of organic food.
I also admire the management team at Annie's; they could be put next to the definition of conscious capitalism. CEO John Foraker says: "We were founded as a company that wanted to show that you could be socially responsible and environmentally sustainable and build a great business at the same time." Foraker actually mentions John Mackey's Conscious Capitalism as one of his favorite books.
My article will delve into the company's background a bit more. I am happily invested in Hain Celestial, which is actually the fastest growing business (also with the lowest P/E) among WhiteWave and Annie's. However, Annie's is another values-driven business with a loyal following and a growing product portfolio -- and the company's solid financial results reflect Annie's ever-expanding presence in the organic food market. Annie's is backed by an experienced and innovative management team, and as such it is hard for me to look at the company and see anything but a likely long-term winning investment.
I will continue to research Annie's, and hope others following or interested in the business chime in here. The company's prospects are bright, but the price tag does give me pause for now. This might change as I continue to research the business. I am watching closely and would jump at the opportunity to become a shareholder at a lower price. [more]
Stamps.com (STMP) is a company I came across after looking at the Forbes' "20 Non-Tech Stars Of The 2013 Best Small Companies List." Stamps is a leading provider of internet-based postage solutions, with over 450,000 monthly subscribers. Stamps allows customers, small businesses, and other enterprises to purchase postage through an online or software interface. Subscribers of Stamps -- who can simply print stamps from their home or office -- tend to pay up to 80% less on postage costs than through standard avenues.
Stamps has a market cap of $618 million, and only three analysts follow the company. The company's financials immediately caught my eye, especially considering the stock is trading at a P/E of 18. Earnings are currently growing at 25% year-over-year, coming in at $34.58 million total over the past four quarters. Revenue has been growing at roughly 7.5% and is expected to increase closer to 9%-10% in the upcoming quarter and 2014. Stamps has an impressive profit margin of 27.55%; a number which is steadily increasing (the profit margin was over 28% in the most recent quarter). The company also raised its 2013 earnings guidance by 12% after reporting 3Q 2013 results.
Cash flow growth is equally impressive. In the three quarters so far reported in 2013, the company produced $33.2 million in operating cash flow -- already surpassing the $27.29 million produced by the business in 2012. Over the past year, the company's cash position has nearly doubled to $73.54 million -- with no debt whatsoever. Stamps seems to be a quickly growing cash machine.
The company has an interesting management team. Most of the executives (including CEO Kenneth McBride) of Stamps have been with the company since 1999 (the company began operating in the mid-1990's). Even more interesting is the fact that all of the company's executives are 45 years old or younger. In other words, Stamps's executive leadership has been with the company since they were 25-30 years old, working their way up the ranks of the business. Insiders own 14% of all shares outstanding.
The few analysts following the business expect Stamps to expand earnings at a pace of 20% annually over the next five years (over the past five years earnings expanded 37.2% annually). I like a lot of what I see with Stamps: a young and experienced management team, an innovative product with a substantial customer base, and what appears to be rock solid financials (earnings and margins growth, cash flow production, and a stellar balance sheet).
I'll probably rate Stamps an "outperform" on CAPS this week, and will continue to research the company as time allows. So far, this looks like a quality small-cap business trading at a very reasonable P/E of 18 -- a hidden gem if I've ever seen one. My research has only scratched the surface, but so far this strikes me as a great business with extensive potential trading at a reasonable (and potentially cheap) valuation.
David K [more]
If anything, by partnering with Pizzeria Locale, Chipotle is conceding the fast-casual pizza space. Since Chipotle will not be getting in itself, it would rather assist a kindred restaurant company's success. If you're hoping for a boost to Chipotle's bottom line, don't expect it to come from pizza anytime soon. - http://www.fool.com/investing/general/2014/01/04/the-chipotle-of-pizza-could-be-anybody-except-chip.aspx
I think this is a shortsighted viewpoint. In all likelihood (in my opinion), Chipotle will buy out or further formalize its relationship with Pizzeria Locale. Chipotle's patience in working with Pizzeria Locale is, from my perspective, a good thing. Pizzeria Locale only has one location open, and it will not hurt Chipotle to further its stake once the Pizzeria Locale concept has developed a bit more.
Keep in mind that it has been Chipotle's style to focus less on rapid short-term expansion and more on developing and measurably expanding a proven concept. This isn't to say that the franchising/quick expansion approach is bad, but it simply isn't how Chipotle has operated.
Given the fact that Ells is good friends with Stuckey and Patterson (Pizzeria Locale's co-owners), I expect this relationship to be further formalized going forward. Plus, we simply don't know what the extent of the relationship is between Chipotle and Pizzeria Locale because the details were not disclosed. We do know that the two restaurants have been working together for 18 months prior to December, with the first PL opening in May 2013. I don't think this relationship should be overlooked as some sort of cop-out from Chipotle.
Steve Ells has said that Pizzeria Locale and ShopHouse will not be significant drivers of growth (i.e. add to the bottom line) anytime soon. Same goes for international expansion. I actually prefer this, because it shows Ells is focused on developing the concepts before entering into rapid expansion (which could certainly be done given Chipotle's hefty pile of cash). I prefer slower and principled expansion over rapid expansion of unproven concepts.
As I mentioned in my article, ShopHouse and Pizzeria Locale are expanding faster than Chipotle did in the 1990s. While it may seem "slow" today, it is important to keep in mind that Chipotle did not become a national sensation overnight, nor did the company expand beyond its means. I expect ShopHouse and Pizzeria Locale to be bigger components of Chipotle 10+ years down the road, but for now it is a little soon for people to get impatient with the company's careful development and expansion of the new concepts.
It is a fun category to follow, and success will not necessarily be limited to Chipotle. Sally Smith and the crew over at Buffalo Wild Wings are a sharp bunch, and will likely do well with PizzaRev. I wouldn't be surprised to see B-Dubs do a full buy-out of PizzaRev at some point in the next few years.
For now, I would say it is much too early to judge who will be the "Chipotle of pizza." I wouldn't have expected anything else from how Chipotle is working with Pizzeria Locale, and imagine we will learn more about the nature of relationship in 2014.
David K [more]
Today I opened a position in Tesla Motors (TSLA).
I know, I know, Pencils is a hypocrite judging from this article: www.fool.com/investing/general/2014/01/03/why-im-not-investi...
However, the latest preliminary guidance from the company -- despite driving the stock price up over 15% this week -- has given me confidence in the company's ability to meet (and exceed) its lofty expectations. This week Tesla announced it is expecting to exceed sales guidance by 20% in the 4Q 2013:
Tesla (NASDAQ: TSLA) sales in the fourth quarter of 2013 were the highest in company history by a significant margin. With almost 6,900 vehicles sold and delivered, Tesla exceeded prior guidance by approximately 20%. - http://ir.teslamotors.com/releasedetail.cfm?ReleaseID=819303...
In other words, without any funds going toward marketing, the cars are quickly selling at rates beyond Tesla's initial projections. More importantly, Tesla has been able to expand its production capacity and begin to meet this increased demand. In addition, Tesla's supercharger network is quickly expanding, making the roll-out of electric cars all the more feasible as Tesla vehicles continue to gain popularity.
In my article from earlier this month, I overlooked the release of Tesla's Model X this year. The Model X is a blend of an SUV and minivan, with deliveries beginning in 2014 and carrying over into 2015 (http://www.teslamotors.com/modelx). The Model X will be priced under $100,000, perhaps slightly above the $70,000 price tag of the Model S.
Now, the big kahuna: the Model E. Any Tesla investor knows (or should know) that the stock is especially hinged upon terrific execution of producing, rolling out, and profitably selling the Model E. The Model E -- Tesla's mass-market vehicle which will sell for $35,000 and up -- will mark an incredible innovation in the automotive industry, making electric cars affordable and even preferable for many people compared to other vehicles (electric or otherwise) on the market.
In a recent interview this week on CNBC, Elon Musk mentioned that one of the primary challenges for the Model E is mass-producing batteries that can be used in the vehicle. Tesla is currently forming partnerships with a variety of businesses to build a "Giga factory" to produce batteries, which Musk anticipates to be the largest battery factory in the world by far. In the CNBC interview, Musk says they plan on identifying the factory's location within the month:http://video.cnbc.com/gallery/?video=3000235888
With all this said, the stock is still pricey which places a great deal of pressure on the company to execute near-flawlessly in the coming years for the stock to be a market-beating investment. However, Musk and company have proven their projections to be accurate (or, if anything, an undershot) as well as their ability to boost Tesla's innovation and production levels over time.
Put in other words: I think it is more likely than not that the Model E will be released in 2017 and shake up the industry as expected. In the meantime, Tesla is boosting production of the Model S (expecting to deliver at least 40,000 vehicles in 2014), Model X production begins this year, and the company is taking steps to mass-produce batteries needed for the Model E's eventual production and release (with the trial versions coming out in 2015).
Elon Musk is a brilliant scientist and quality entrepreneur. As I've said before, someone like Musk will come with a high price tag, whether it is with Tesla or SolarCity. In Tesla's case, while the stock will undoubtedly be volatile going forward, I would not be surprised to see the company grow into a $60 billion+ valuation over the next five years as the Model E is released and Tesla's overall production capabilities expand. In terms of present-day numbers, the stock looks pricey with a market cap of $20 billion, but the company has continued to set and meet (or exceed) ambitious innovation and production targets.
I realize my timing might strike people as silly, but I am actually glad to have waited until the preliminary guidance numbers were released earlier this week. Those numbers proved to me that Tesla is expanding its production capacity, selling Model S cars like crazy (despite a $70,000+ price tag), and is gearing up for a bigger year in 2014 and beyond. Imagine what this will look like in three years with a $35,000 Tesla car. And remember all of this is happening without a dime going toward marketing.
Should the stock get hammered, I will likely add to this initial position. For now, however, the long-term likelihood of success (and market-beating returns) simply outweighs the reasons to continue to sit on the sidelines and wait for certain metrics to line up. To sum it up: I am comfortable opening a position at today's levels, and would gladly take the chance to add to this position if the stock gets clobbered by the market at some point(s). I recognize that the stock is selling at a premium, but Tesla's performance has continually reiterated why the stock should be selling at a premium.
I'll be sure to follow Tesla here going forward. Now that I actually opened a position, expect the stock to get clobbered 20%+ within a week. :)
David K [more]
I have been hearing a lot about Chuy's (CHUY) lately from my friends at college. Rave reviews across the board.
From my basic research, Chuy's is a Tex-Mex chain -- making authentic Tex-Mex dishes from scratch -- with 47 restaurants (all company-owned) in operation in 14 states. The company was founded in 1982, so expanding via new restaurants has been a relatively recent development for the company. The company opened two new restaurants in the 3Q 2013, and estimates opening nine restaurants in 2013. Management is targeting 20% unit expansion annually in the next several years.
I like a lot of what I see with Chuy's. Sales have annually increased over 25% over the past four years, with earnings expanding nearly 20% annually over the same period. Recent quarterly results show the company is basically crushing it so far as year-over-year sales/earnings growth is concerned. The balance sheet is pretty healthy with $3.22 million in cash and $4 million in debt.
The company's operating cash flow has increased over 35% annually over the past several years, which is quite impressive. However, the business is still producing negative free cash flow despite this growth in operating cash flow. This is the main concern I see comparing Chuy's to the next Chipotle -- or even as a Chipotle-esque investment -- in its early history as a public company Chipotle generated sufficient cash flow to finance expansion without going into debt.
This isn't to say that Chuy's can't produce positive free cash flow down the road, but with a P/E of 65 the company has a lot riding on its future operations. Chipotle traded at similar valuation levels, but the business itself was capable of financing rapid expansion.
The company's comparable restaurant sales -- estimated to be 2.2% in 2013 -- also lag Chipotle's comps performance. This essentially means that, like Noodles & Company, sales in new restaurants will have to drive most of the company's growth. Again, not necessarily a bad thing, but this puts even more pressure on the successful expansion of new locations.
All in all, I like a lot of what I see with Chuy's. Many of the company's executives have been with Chuy's since 2009 or longer. The company is growing at impressive rates, although they are still dependent on debt/stock financing to finance expansion at the moment.
Until the company produces positive free cash flow I would be reluctant to start a position at the stock's current P/E of 65, but if the shares get hit I would seriously consider opening a position. This is similar reasoning as with Noodles & Company -- a great concept, experienced management, fast growth, but unable to fully fuel expansion through the business. Positive free cash flow is an indicator, in my mind, of whether a business is growing sustainably. Chuy's is almost there, but not quite yet.
This looks like a great restaurant story with considerable potential, particularly if operating cash flow begins to fully fuel the company's expansion. If word-of-mouth is any indicator -- and I think it is -- Chuy's is a popular concept that should be able to expand beyond its current 14 states of operation. I know my friends, and many students at my college, love Chuy's.
Just a few thoughts for now; Chuy's is on my watchlist and is a business I wouldn't mind investing in at some point down the road. For now, with its premium valuation, I need to learn more about the company and/or wait until the company's operating cash flow outweighs capital expenditures. Small restaurants like this are fun to watch, and I look forward to following Chuy's here.
David K [more]
Today I pulled the trigger and added InvenSense (INVN) to my portfolio. InvenSense designs motion tracking systems that are used in "smartphones, tablets, gaming consoles, and smart TVs." This includes Android devices, the Wii gaming console, and others. In other words, the ability for your smartphone to automatically adjust between vertical and horizontal mode based on your movements isn't magic: there is a good chance it is enabled through InvenSense's MotionTracking technology. [more]
An interesting question recently came up on Pencils Palace, my discussion board on The Motley Fool, regarding when it is appropriate to sell a stock. This particular user owned a stock that had increased over 500%, leading this one stock to make up 30% of his portfolio. While there are a variety opinions on when (if at all) to sell a portion of a winning investment, my perspective on this issue has evolved based on personal experience. [more]