Monday, June 19, 2017

Examining The Growth Of The Luxury Industry In Asia Through 'The Cult Of The Luxury Brand'

Radhu Chadha and Paul Husband’s book The Cult of the Luxury Brand: Inside Asia’s Love Affair With Luxury describes the rise of the luxury industry in Asia.

In the past 40 years, Asia has become the world’s largest market for personal luxury goods such as clothing and jewelry. According to Bain & Company’s Fall-Winter 2016 Luxury Goods Worldwide Market Study, Asians bought more than half of all luxury goods in 2016.

Chadha and Husband’s book examines the cultural and economic reasons for Western luxury brands’s popularity in Asia. For example, they argue that the conspicuous wearing of luxury clothing has become a way for Asians to define their position in society. This trend, they say, has been influenced by the significant social changes in Asia in the past half-century.

It is beyond the scope of this article to decide if such broad cultural analyses are correct. However, if they are, there are interesting implications for investment analysis. Chadha and Husband’s key model, based on their cultural analysis, is the “Spread of Luxury” model. According to the model, luxury good consumption in Asian nations passes through five stages based on the nations’ levels of development. If this is true, it opens up a way to project the growth of the luxury industry in Asia. (Read More)

Thursday, July 16, 2015

A Balance Sheet Quirk At Bank Of America

Back in late 2011, I read John Hempton's March 2010 post about Repo 105 like transactions at Bank of America on his blog, Bronte Capital. Hempton, an Australian hedge fund manager and one of my favorite bloggers, wrote about how you could detect evidence of the transactions--which he described as being intended to make the bank look less risky before end of quarter reporting--by comparing the bank's average assets in a quarter to its assets at the end of the quarter.

Hempton's example was from 2006, but I used the same method to look at Bank of America's 2010 and 2011 results and was surprised to discover similar results. I initially planned to write about it then, but events intervened and I didn't have the chance to do so.

Well, I've finally written about this, taking into account the additional three and three-quarters years of financial results that have passed since then. The results are a little more ambiguous than they were back in 2011, though I think they're still interesting. Anyway, they can be found in my most recent SeekingAlpha article here.

Thursday, March 26, 2015

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': The Risks Of Growth

There is a running theme in my articles about Beer Blast, Philip Van Munching’s history of the beer industry in the late 20th Century. That theme is that change is often bad for companies.

In my first article about the book, I described how companies’ introduction of new products often only damaged their brands. In my second, I showed how trying to change a beer brand’s qualities to save money or to make it more modern also damaged their brands. In both of these articles, change was bad for beer companies even when it was desired.

Growth is probably the type of change that companies desire most. Growth, after all, is what drives stock prices up. When a company is growing, it can hire new employees and promote old ones. And, of course, leading a growing company brings benefits for management. Managers, like most people, enjoy seeing their areas of responsibility expand. Such expansion comes with bigger salaries and higher status in their industries. No wonder corporate executives are always trying to grow their companies.

However, Beer Blast shows that even growth, the most desirable form of change, can be more problematic than anyone can imagine. (Read More)

Saturday, March 21, 2015

Special Dividends And A Looser Credit Agreement May Signal A Turnaround At QC Holdings

I recently wrote an article for SeekingAlpha about alternative finance company QC Holdings (QCCO). The company has seen its revenues and earnings fall significantly since 2008, which has caused its stock price to plunge nearly 80%.

That said, the company may be going through a turnaround. It has declared special dividends two quarters in a row after not being able to pay dividends for a year. This shows that management is confident in the company's future--or at least confident that they don't need to hold onto more cash to deal with future problems. The company's credit agreement, which controls the terms of its loans, has also become less restrictive. This mean that the company's bankers are less worried about its financial situation. Given than QC Holdings' management and bankers are probably the people who  understand the company's prospects best, this is a strong endorsement of the company's future.

Anyway, the article can be found here. It was chosen for SeekingAlpha's Pro program, meaning that it will only be available to non-paying members for a month, so I hope you'll check it out soon!

Monday, March 16, 2015

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': Brand Image

In my most recent article, I discussed the beer industry’s quest for new products as seen in Beer Blast, Philip Van Munching’s history of the industry in the late 20th Century. Van Munching argues that the industry’s constant introduction of new beer varieties has diluted the value of existing brands, hurting beer companies’ brand image.

However, Beer Blast does not only discuss brand image in the context of new products. Van Munching was the advertising director at Van Munching & Co., the former US importer of Heineken (HEINY) (HINKF). As a result, his book goes into great detail about the image strategies of several major American beer brands, offering insights about both their successes and failures.

Though Van Munching’s book was written in 1997, I feel such insights remain valuable for investors. For example, Beer Blast shows that beer companies are similar to luxury goods companies. Customers often use the brand of beer they drink to define their self image and the image they project to others. In this, they treat beer the way they treat luxury goods such as fashion items, which are similarly used to craft one’s personal image.

This may seem obvious, but...(Read More)

Wednesday, February 18, 2015

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': The Quest For New Products

BeerBlast: The Inside Story Of The Brewing Industry’s Bizarre Battles For YourMoney is a history of the beer industry in the late twentieth century. Philip van Munching, the book’s author, was once the advertising director at his family’s company, the former US importer of Heineken (HEINY) (HINKF). Though the book was written almost two decades ago, I feel it still offers valuable insights, both for those interested in investing in the alcohol industry, as well as for investors in general. 

In my opinion, the most important lesson of Beer Blast is how dramatic the beer industry’s history has been. Alcohol companies have been portrayed as safe, “defensive” investments. The common wisdom is that they do well in any environment because demand for their products is persistent. That may be true, but Van Munching’s account demonstrates how even such defensive companies can be surprisingly chaotic. Defensive companies are often driven to innovate, change, and try to grow as much as their more volatile peers.

Beer Blast shows one example of this tendency by depicting the beer industry’s quest for new, disruptive products. When I read the book, I felt this pressure to innovate was stronger than I had expected of a “defensive” industry selling a product with an ancient history like beer. The book also shows how Anheuser-Busch (BUD), the leader in the US beer industry, has used its market position to be successful in this quest for product innovation. (Read More)

Saturday, January 3, 2015

Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Part 5 - Final Thoughts

In my article series about Broke,USA, journalist Gary Rivlin’s book on the alternative finance industry, I have written about the competitive advantages of an industry that lends money to those with few alternatives. However, I have also written about the risks of investing in such an industry, such as regulation, corporate misbehavior, and competition.

In doing so, some themes have come up again and again. Such themes have been, in my mind, valuable not only for alternative finance investors, but also for investors in general. They include the importance of pricing power and the threat of competition. They also include the strength of the pawnbroking model as well as the value of analyzing a company through its relationships with its lenders.

That said, one area of the alternative finance business which I have not discussed but which Rivlin goes into in much detail is the subprime mortgage business. I have intentionally not discussed that business, since much has already been written about it and its effects on the global economy in the past few years. That said, Rivlin’s book does have some interesting insights on subprime mortgage lending and how it relates to the broader alternative finance business, insights which I feel are useful for investors. (Read More)

Monday, December 15, 2014

Recent News From World Acceptance Corporation Indicates Worrying Operating Trends At The Company

In my most recent article, I discussed how installment lender World Acceptance Corporation’s (WRLD) current situation offers an opportunity to investors. In March 2014, the Consumer Financial Protection Bureau, or CFPB, sent the company a Civil Investigative Demand, or CID, asking about its lending practices. This caused the company’s shares to fall nearly 30% in the course of a few days.

Since then, the company’s share price has been roughly flat. As I put it in my last article, it is in a sort of “limbo”—too high if the company’s business model is illegal, as short sellers argue, but too low if the company is fundamentally sound. In the short run, this situation will only be decided when the CFPB releases the results of its investigation.

In the long run, however, if the CFPB does not shut down the company, World Acceptance Corporation’s share value will be governed by its operating results. Those operating results have shown some worrying trends over the past several quarters. (Read More)

Friday, December 12, 2014

Uncertainty About World Acceptance Corporation's Future Offers An Opportunity To Investors

In my most recent article, I described how installment lender World Acceptance Corporation illustrates the risks and rewards of investing in the alternative finance industry. On the one hand, the company embodies many of the industry’s best traits, such as rapid growth, high returns on investment, and pricing power. On the other hand, the company’s main business line of installment lending has come under increasing competition. Moreover, it has been accused of building its entire business upon the misbehavior of improper lending.

Most seriously, World Acceptance Corporation is currently under investigation by the Consumer Financial Protection Bureau, or CFPB. The company received a Civil Investigative Demand, or CID, from the CFPB in March 2014 asking for information about the company’s business practices. Some short sellers believe this investigation will lead to severe penalties, or even bankruptcy. On the other hand, it is possible that regulators will only give the company a slap on the wrist, such as a small fine, or let the company off altogether.

I believe the large distance between these two possibilities offers an opportunity for investors. (Read More

Thursday, December 11, 2014

World Acceptance Corporation Illustrates The Risks And Rewards Of Investing In The Alternative Finance Industry

In my article series about Broke, USA, journalist Gary Rivlin’s book on the alternative finance industry, I have described how Rivlin illustrates both the risks and rewards of investing in the industry.

On the one hand, businesses such as payday lenders, pawn shops, and rent-to-own companies have strong growth opportunities, high returns on capital, and pricing power. On the other hand, such companies are affected by government regulation that threatens to curtail their returns or even shut down their businesses. This regulation is, of course, in part because the alternative finance industry has a reputation for corporate misbehavior, such as lending practices that encourage borrowers to enter a debt spiral. Finally, the many strengths of the industry have also drawn many competitors, who threaten to erode the industry’s once high shareholder returns.

Few companies illustrate these risks and rewards like World Acceptance Corporation (WRLD), an alternative finance lender that makes installment loans, generally to those with poor credit. (Read More

Tuesday, December 2, 2014

Understanding The Alternative Finance Sector Through Gary Rivlin's 'Broke, USA': Part 4 - Competition And The Price Of Gold

In my two most recent articles reviewing Broke,USA, Gary Rivlin’s book on the alternative finance industry, I have written about what are probably the best known threats to the industry: regulation and corporate misbehavior. I believe that many of those who refuse to invest in the alternative finance industry refuse because of those risks. They fear that government regulation, such as interest rate caps, will end the industry’s high returns. They are unnerved by the industry’s risk of misbehavior. Such misbehavior includes not only obviously illegal activities, such as fraud and illegal collections practices, but also questionable if legal activities, such as lending in ways that encourage borrowers to enter a debt spiral.

However, I believe that it is often not the obvious risks that are the most important to an investor’s returns, but rather the ones that people are unaware of. As I wrote in my article about regulation, alternative finance companies have consistently found ways to work around regulation. Even persistent accusations of misbehavior have not kept companies in the industry from outperforming the overall stock market year after year.

Rather, I believe it is the risk of competition, one that I feel many investors have failed to consider, which may be the most dangerous to the alternative finance industry’s returns. (Read More)

Tuesday, November 25, 2014

The Reason For The DFC Global Buyout, Or Why You Should Read Corporate Filings Carefully

In June 2014, US alternative finance company DFC Global (DLLR) agreed to be bought out by private equity firm Lone Star Funds for 1.3 billion dollars. The company made 280 million dollars in EBITDA, or earnings before interest, taxes, depreciation, and amortization, in 2012, and at least 200 million dollars in EBITDA in each of the three years before the transaction. Thus, the deal was done at a price of somewhere between 4.6 and 6.5 times EBITDA. In an environment where companies generally trade at double digit multiples of EBITDA, this deal was unquestionably a bargain for Lone Star.

The purchase of DFC Global was a particular bargain because the company was not a declining enterprise that might deserve such a cheap multiple. In the company’s last investor presentation before the buyout, management trumpeted annualized revenue growth over the past nine years of over 15%, and annualized adjusted EBITDA growth of over 11%. It is noteworthy that such growth came despite a major slump in the company’s operations in 2013. That slump was caused by regulatory difficulties for the alternative finance industry in the United Kingdom, where DFC Global is the country’s largest pawnbroker. In its presentation, management argued persuasively that these difficulties were only temporary and that the company had significant long term growth prospects in the UK and the rest of Europe.

Thus, why did the same management allow the company to be bought out on the cheap mere weeks later, depriving shareholders of those growth opportunities? (Read More

Tuesday, November 4, 2014

Analysis Of An Alternative Finance Bankruptcy - Why Did Albemarle & Bond Go Under?

While doing research for my next article about Broke, USA, Gary Rivlin’s book on the alternative finance industry, I found an answer to a question that has always bothered me: Why did Albemarle & Bond (ABMLF), the British pawnbroker that was 30% owned by American alternative finance company EZCorp (EZPW), go bankrupt earlier this year?

The Consensus View

At first, it seems absurd to still be asking this question. (Read More)