Tag Archives: alternative

Restaurant Investing: What Early Investors Should Look For In An IPO Opportunity

Summary What are the telltale signs that a company’s stock is worth its post-IPO price? Do investors need to look beyond mere hype to make such a crucial decision as putting their money into a business? What are the metrics that an investor needs to closely review before making that investment decision? Photo Courtesy: Value in Wall Street Investing in a company that’s going to IPO is a difficult decision to make. With all the hype surrounding restaurant IPOs these past five years, the abundance of “noise” made by early investors and even the companies themselves drowns out the “right noises” that should be heard by anyone interested in getting in. Introduction The first point to remember is that it is never too late to invest in a stock as long as the company has a solid foundation of financial and operational management. In that respect, the CEO and CFO are the most important people to get to know because they carry the bulk of the responsibility for managing operations and finances. The second point – a deeper one – is how they’ve been performing in the years preceding the IPO. Very often, investors will merely look at the current revenues or average sales volume or unit growth published in the IPO prospectus, read a few articles from expert financial analysts and then jump headlong into the investment. More often than not – and this is because the vast majority of investors can’t actually get in at the IPO price – they are forced to buy at prices much higher than the actual performance of the company warrants. To help investors make better decisions, we’ve studied one of the best performing companies of this decade and showcased their metrics to elucidate what we mean when we say that management and margins should be the factors driving investor sentiment – and not the “campaigning” surrounding an initial public offering. Background For the purpose of this showcase, we’ll be looking at Chipotle (NYSE: CMG ), which is one of the top performers in the fast casual segment. In an earlier article, we discussed how this burrito maker crushed 3 prevalent myths about restaurant investing. In this article, we’ll see something entirely different: what were those early signs that told us that this was going to be a good company to invest in? The end objective here is to allow investors a deeper and broader insight into the decision-making process that should necessarily precede an IPO investment. With close to 1,800 restaurants efficiently serving burritos and other Mexican fare since the 90s, CMG is a fast casual restaurant that boasts one of the highest AUVs in the segment – $2.47 million over the last full fiscal (2014). Consider that its AUV growth for the three years preceding the IPO stood at above 6%, and you’ll know that comp sales growth contributed to a large part of that – growing an average of 16% in the three years before going public – as did aggressive but well-planned unit growth, which saw units go from 229 at the beginning of 2003 to 481 at the end of 2005 – a growth of 210%. When all these factors work together, they produce a solid foundation on which to base an investment decision. Of course, not all companies can boast stellar numbers before their IPO year, but the fact remains that these indications must necessarily be there in part. Anything less would likely miss the whole point of investing – to acquire, hold on to and benefit from a share of a consistently profitable public company. Analysis If you had delved into Chipotle’s margins reports for the five years preceding the IPO, this is what you would have seen: Strong cost control action on several fronts like occupancy, labor, food and pre-opening costs. An operating cost that went from 118% of revenue to 95% of revenue in 5 years. A net income percentage that grew from -18% to over 6% during that time. Five Years Pre-IPO Fiscal year 2005 2004 2003 2002 2001 Total revenue 100.00% 100.00% 100.00% 100.00% 100.00% Food, beverage and packaging costs 32.23% 32.75% 33.25% 33.07% 34.37% Labor costs 28.47% 29.63% 29.80% 32.50% 34.99% Occupancy costs 7.59% 7.69% 8.10% 9.15% 8.92% Other operating costs 13.22% 13.65% 13.80% 14.56% 16.38% General and administrative expenses 8.28% 9.53% 10.84% 12.61% 15.72% Depreciation and amortization 4.46% 4.63% 4.78% 5.50% 6.63% Pre-opening costs 0.31% 0.47% 0.52% 0.50% 1.71% Loss on disposal of assets 0.50% 0.36% 1.43% 0.73% 0.06% Total costs and expenses 95.06% 98.70% 102.51% 108.62% 118.79% Income (loss) from operations 4.94% 1.30% -2.51% -8.62% -18.79% Income (loss) before income taxes 4.82% 1.30% -2.44% -8.45% -18.24% Net income (loss) 6.01% 1.30% -2.44% -8.45% -18.24% If that data weren’t sufficient, you could have taken a look at its comparable store sales and average unit volumes, which were equally impressive: 6% growth in average unit volume for the three years preceding the IPO. 16% comp sales growth average for the period. Fiscal Year 2005 2004 2003 Average Restaurant Sales $1,440 $1,361 $1,274 Comparable Store Sales 10.20% 13.30% 24.40% If you still weren’t convinced, you could have looked into how fast it was growing its stores: A jump of 270% in the number of stores – all company-owned – between the beginning of 2001 and the end of 2005. Fiscal Year 2005 2004 2003 2002 2001 Units 481 401 298 229 177 Conclusion From what you would have seen of its Margins, Comp Sales, AUVs and Unit Growth in the 3-5 year period before it went IPO, you would have realized that this is a company with strong management and bright prospects for the future. So what about companies that are going IPO now or in the near future? Well, take a look at their metrics – just like we did for Chipotle for the years leading up to the IPO. Do they show strong or improving margins? Or both? Are they steadily growing their stores while keeping their pre-opening costs, occupancy and other current liabilities in check? Is their AUV improving or at least holding while they add more units? Are they going overboard on G&A using unit growth as the reason? Are their prime costs (food and labor) within reasonable bounds for the segment? These are questions that every investor in an IPO must necessarily ask. While this is no guarantee that a company that shows these positive indicators will make you money in the future, it gives you as educated a perspective to make your decision from as possible. Over the next week, we’ll be covering several recently-gone IPOs in the restaurant industry to try and arrive at some common denominators that underline strong performance and stability in a company. If you enjoyed this article, we’d be pleased as punch if you would do us the honor of reviewing our extensive coverage of major and minor players in the restaurant industry, and commenting candidly on what you think about them. Click here to see all other articles in our profile page. Some of the companies where investors were affected by “IPO-itis”: Potbelly (NASDAQ: PBPB ) PBPB data by YCharts Wingstop (NASDAQ: WING ) WING data by YCharts The Habit Restaurants (NASDAQ: HABT ) HABT data by YCharts El Pollo Loco (NASDAQ: LOCO ) LOCO data by YCharts Bojangles’ (NASDAQ: BOJA ) BOJA data by YCharts

SPHD: A Monthly Dividend ETF With A 3.5% Yield That Is Growing Stronger

Summary SPHD offers an excellent dividend yield of 3.5% with monthly payments. The ETF has a moderate expense ratio. The sector allocations look great and the volatility over the last few years has been lower than the domestic equity market. The PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a very solid ETF. Investors may quibble on whether the allocations are perfectly or merely good, but there is far more to like than to hold against the fund. As you’ll see in the article, I find the sector allocation to be a bigger selling point than the individual holdings. Expenses The expense ratio is a .30%. This is fairly mediocre for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 3.50%. For the investor that wants a very strong dividend yield to support them in retirement, this should certainly qualify. Investors can create a stronger yield by selecting individual companies, but they are creating a high yield portfolio that is exposed to substantial risk of dividend cuts when they allocate aggressively to companies that are yielding materially higher than this portfolio. There are two other things to like about the dividend here. One is that the dividend is paid out on a monthly basis which many investors appreciate because it is easier for them to plan around. The other is that the 3.5% dividend yield is based on trailing dividends rather than forward dividends and the dividends have been moving slightly higher over the last year. The dividend went from around 9 and a half cents per month to over 10 cents per month. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with medium weights is one area where I tend to feel conflicted. Investors won’t see the Verizon in the chart, but I rarely find ETFs that only hold one. When I checked the rest of the holdings I found Verizon was represented with 2.22% of the portfolio. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Since the allocations are less than 5% of the portfolio combined, I think the representation here is pretty reasonable. I also see Realty Income Corp (NYSE: O ) as an easy choice for investors looking for solid growth in income. The triple net lease REIT has an excellent history of raising dividends. They pay their dividends monthly and have raised the dividend 81 times already. They have done an incredible job of executing their investment strategy and it is simpler than it seems. The REIT enters into net lease operations where the tenant is paying most of the operating costs. Realty Income Corporation is acting as an alternative format of financing for their tenant. Their strategy is so successful that they have been acquiring over a billion dollars in real estate each of the last few years. They already acquired almost a billion dollars in real estate in 2015. Sectors Heavy allocation to utilities makes sense for an equity fund seeking lower total volatility levels. The utility companies have a tendency to be partially correlated to equity and partially correlated to bonds which creates a method for a pure equity ETF to reduce volatility by incorporating some exposure that is very similar to bonds. For investors with a diversified portfolio, that means this fund may not get as large of a benefit from being combined with treasuries and other long duration bonds as a total market portfolio would get. Regardless, with investors needing stronger yields in retirement and often going light on bonds in favor of equity, this would be a more rational allocation model than simply going with full market exposure. The allocation to financials provides the shareholders with exposure to REITs that would fall with utilities when rates go up, but it also gives them access to banks that would benefit from higher rates paid on excess reserves. The combination works fairly well to create a portfolio with lower volatility. The heavy allocations to consumer staples also makes sense in that context since consumer staples tend to be a solid sector for taking smaller losses during a recession. I was a little curious about their decision to put 10% into industrials, but when I looked at the individual holdings for the sector it made sense. While General Electric (NYSE: GE ) is seeing their share prices just getting back to where they before the crash, their still offer a sold 3% yield. Volatility Measured since October 2012, this fund has demonstrated annualized volatility of 10.9% compared to 12.6% for the S&P 500. The beta on the fund has been a mere .75. While the fund has not kept up with the S&P 500, it is a very attractive allocation strategy with the market at fairly high valuation levels. For the investor that would like to reduce their risk and is willing to accept a lower long term projected return, this fund fits the bill. If market prices had fallen by 40%, I would try to look at more aggressive allocations. When prices still seem high, I prefer using defensive allocations and this fund offers a great deal of them. Conclusion All around this looks like a solid fund. The only thing I can find not to be excited about is the expense ratio. Even there, the ratio isn’t terrible. It is simply higher than what I am used to paying as I favor the Vanguard and Schwab ETFs. If this fund got larger and dropped the expense ratio, it would be absolutely excellent. I think that might be a viable option for the fund’s sponsor as well since the strong yield and monthly payment with a low expense ratio would create enough demand to warrant significantly more shares of this ETF being created.

VEA: Who Doesn’t Like Developed Markets With Low Expense Ratios?

Summary This fund serves a viable core holding for the international portion of an equity portfolio. Investors can customize their position by adding other small allocations. Investors need to remember the importance of international diversification even as domestic equity as thoroughly outperformed during the latest bull market. The ETF has an very reasonable expense ratio. The Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) is a great ETF for getting exposure across the world. I love covering Vanguard ETFs because the low expense ratios and reasonable allocations regularly give me reason to be excited about an ETF being designed to benefit the investors. This is no exception, the ETF sports an expense ratio of.09%. Vanguard regularly sets the bar for creating low fee investment vehicles for investors to gain solid diversification with low costs. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: These sector allocations are fairly common for large international equity ETFs with a fairly passive management style and low expense ratio. In my coverage of international ETFs, I regularly see most of these companies in the top 10. If you wonder what that means for investing, it means the funds with lower expense ratios have a very material advantage. It’s hard enough to beat a lower fee fund when the sector allocations are similar, when the underlying companies are the same it becomes an absurd task. That makes the .09% expense ratio a pretty big winner for VEA. Sectors (click to enlarge) The sector allocations here are pretty similar to the benchmark and pretty similar to peers. Since the top companies are fairly similar across major international ETFs, it shouldn’t be a huge surprise that the sector weights will also be fairly similar. In a domestic fund I would consider this to be a fairly aggressive allocation. When it comes to international equity, this reflects what is available in the market. I would love to see international investing shift to include more of the defensive sectors to reduce the volatility that can plague international investments, but for now the best strategy available to shareholders is to simply utilize international investing as a way to gain further diversification for an intelligently designed domestic portfolio. Attempting to use VEA as the entire portfolio would expose investors to a substantial amount of diversifiable risk. However, using the fund within the context of a portfolio allows it to enhance diversification and create a lower level of total risk rather than a higher level. Region Japan and the United Kingdom both got huge weightings here. If there is one critique for this otherwise stellar ETF it would be that the exposure might be weighted to create a slightly lower allocation towards individual countries. I’ve got nothing against investing in Japan or in the United Kingdom, but I would like to see heavier weights for the lower countries on the list. If investors want to create the optimal international allocations, I think VEA is a perfectly reasonable place to start. I would want to add some customized exposure to the emerging markets and possibly enhance the weight of countries that are a smaller portion of the fund. I’ve been a bear on China for quite a while, but many of my bearish assumptions have been priced into the Chinese equities now so I wouldn’t be too opposed to having a small allocation there. I’d love to add some exposure to Latin America as well. Russia is another market that is still excluded from the developed markets ETF. I would want to give the emerging markets positions a much lower weighting than the developed markets position, but I wouldn’t mind a small position in those markets. Conclusion I see plenty to like in this Vanguard fund and very little to dislike. For my personal tastes, I would want to add a little bit of emerging market exposure, but a huge developed market ETF with a low expense ratio gives investors a way to grab their main international exposure so that other positions can be customized to fit in any other small allocations the investor would like. Think of this fund as an option for the core of the international piece of the portfolio. For some investors this will be enough by itself, for others it will make sense to compliment it with a few other holdings.