Fundamentally Furloughed

Thanks for all the great feedback! Glad you are enjoying the posts.

I’ll see what the news holds tomorrow and see if there are any interesting stocks or funds to chat about. I’m keeping an eye on Facebook’s earnings today, they are all ready up so I’m guessing investors are expected a drop in advertising revenue which has been offset by large growth.

Time will tell!


From Google Finance

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On the topic of Sainsburys, they had their quarterly announcement this morning.

Still slightly up but you can see the optimism ahead of the earnings before market close yesterday.

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Domino’s Pizza - DPZ (Buy)

One stock I’ve had my eye on for a while is Domino’s Pizza. The franchise has grown in popularity over the years, and after an aggressive rebranding in 2009, they have quickly become the biggest pizza chain in the world.


From Statista

Domino’s Pizza had their quarterly report already, it was last week, which gives us the perfect amount of time to let the earnings cool off and have a slice of the data ourselves.

Before we dive into the facts and figures. I found some interesting facts while doing some research into Domino’s Pizza, and there don’t fit anywhere else. Here are some interesting facts for you to munch on.

  • Domino’s stores across the globe sell an average of 3 million pizzas a day.
  • Domino’s operates 17,000 stores in more than 90 countries around the world (Q1 2020).
  • Domino’s estimates that it has more than 350,000 franchised and corporate team members worldwide .
  • More than half of Domino’s sales now come from outside the U.S. (2019 global retail sales: $14.3 billion of which, $7 domestic, $7.3 international).
  • Domino’s International has experienced 105 consecutive quarters of positive same-store sales growth (Q1 2020).
  • In the U.S., Domino’s generates more than 65% of sales via digital ordering channels.

Interesting to see their strength digitally, but also their success overseas outside their dominate home market. But let’s look at the historic share price.


From Google Finance

What should be catching your eye is that aggressive jump up in Feb. This is when they announced their fourth-quarter earnings for 2019, and beat expectations! They also increased their dividend by 20% off the back of higher profits.

How is Domino’s Pizza expanding so quickly and so successfully? The franchise approach gives them a way to expand their stores with very low upfront costs (the franchise owner pays and also has to source the location) and they take a cut of the revenue as well. How much they take is tricky to find. A lot of franchises do try and hide the figures, and often only the “book cost” percentages are known.

Let’s talk about running a Domino’s Pizza store. Firstly, if you apply to open one of their stores it is likely you will be turned down.

Over 90% of its franchise owners come from being a Domino’s team member first and that “opportunities for external candidates are very limited and are sought only when [the company does] not have an existing franchisee or new internal franchisee who can buy or build the stores in need.”
From Franchise Direct

Assuming you worked at a Domino’s and wanted to open your own, you would need roughly £200k of dough. In return, you would expect to make 8-9% of total sales as take-home profit. £90k as profit for a store owner per year for the bigger stores.

Keep in mind this includes “contributions” towards Domino’s pizza for branding and marketing. Each store is created with either a ten or five-year contract, meaning they aren’t going away anytime soon. Considering most stores will pay off the upfront costs and be paying profits to the owner within that time frame, it’s likely they will renew.

Now we can check out a snapshot of the company and see where its strengths and weakness are as an investment.


From Genuine Impact

This is a classic, high quality, high momentum stock. You have strong financials, there is a lot of a promise for the future, and even with the spike in share price, not massively overpriced compared to the market.

We’ll start with the financial aspects, the quality. The profitability of Domino’s Pizza is not as high as you’d expect. Relative to the rest of the market this isn’t a high-profit business. What is improving the quality rank then? It’s the financial strength and capital allocation. High dividend pays out and low debt makes this a very resilient company.

Speaking of debt, let’s get the figures out of the last report.

  • $200.8 million of unrestricted cash and cash equivalents;
  • $4.10 billion in total debt ; and
  • $158.6 million of available borrowings under its $200.0 million variable funding note facility, net of letters of credit issued of $41.4 million. As previously disclosed, subsequent to the first quarter, the Company borrowed $158.0 million under its variable funding note facility.

$4.1 billion of debt sounds a scary number, why are they considered a low debt company? The net income for Q1 was $121.6 million and growing. The debt isn’t being called up any time soon. It does restrict their ability to take on additional debt, but the high incoming and reliable revenue (long term contracts on each franchise) and physical assets (franchises borrowing equipment from Domino’s Pizza directly) means there are a lot of reassurances for anyone lending to Domino’s Pizza.

I didn’t have much to add on the value but then I did some extra digging. Price to income and cash flow Domino’s Pizza are considered overpriced and expensive.

However, if you look at the price to book ratio for the current financial year and previous two, Domino’s Pizza has almost the cheapest valuation out there, #72 out of 5,500 stocks. This is only one metric, by and large, this is an expensive stock to pick up.

As we shift our focus to the momentum, I wanted to highlight the future share price versus future growth estimates. The expected returns analyses the expected share price increase looking ahead 12 months. The expected growth is looking at revenue and EPS growth. A high dividend will drag on the share price but the future growth of the company looks very promising.

The momentum is high, with a lot of analysts flagging this investment as a buy. They have extremely strong future revenue and earnings growth, which is fueling the high confidence.

So what could possibly be the downside?

As of April 21, 2020, nearly all of the Company’s U.S. stores remain open, with dining rooms closed and stores deploying contactless delivery and carryout solutions. Based on information reported to the Company by its master franchisees, the Company estimates that as of April 21, 2020, there are approximately 1,750 international stores that are temporarily closed.

Company Withdraws Two- to Three-Year Outlook
Due to the current uncertainty surrounding the global economy and the Company’s business operations considering COVID-19, the Company is withdrawing its two-to three-year outlook for global retail sales growth, U.S. same store sales growth, international same store sales growth and global net unit growth.

They are throwing up the stop signs and preparing to underperform as the pandemic carries on. This seems a sensible move given the future is hard to predict and plan for right now.

This level headed approach has only added to the confidence in management to delivery.

A strong brand and franchise setup, good cash flow to keep them safe, high future growth prospects, a growing dividend, and damn tasty pizza. What isn’t to love?

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I love your posts, thanks for the contribution.

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Glad you like them!

It gives me something to do with my time and counts as “training”. :roll_eyes:

If there is anything you want me to write about in particular let me know!

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Just ordered a Dominos for the first time in years :pizza: :plate_with_cutlery: Great post :slight_smile:

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Absolutely love your analysis on these companies, keep up the good work (I mean training)

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Great posts, really insightful :ok_hand:t5:

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Really useful analysis @jcksmith850

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Thanks for all the great feedback everyone :tada:

I’m glad you enjoy the pieces. I’m having a think what to write about today and answering any questions. Hopefully my analysis gets better with time, I’m learning a lot as I go.

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Could you do one on Shell? Interested to hear everyone’s perspective following the dividend cut

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Royal Dutch Shell - RDSB (Hold)

I’ve been looking at the feedback on my pieces and there are some improvements I can make. Hopefully, it makes these write-ups more useful for everyone!

As requested by @SpyrosL , my views on Royal Dutch Shell. Shell has been an investment stable for countless years, in fact, it is still the biggest contributor to the FTSE 100 index.

First thing I want to cover off is RDSA versus RDSB. You’ll see that Shell is not the biggest single ticker in the FTSE 100, but it shows up twice.


From LSE Market Capitalisation

I am focusing on RDSB for a reason, firstly this is the “British” side of the business meaning it follows UK tax laws. This is important as it means you won’t get any of your dividend withheld. RDSB pays in British Pounds, controls 43% of Shell, has voting rights, but during bankruptcy, you do not have access to assets until everyone else has taken what they need.

RDSA, on the other hand, is based in the Netherlands and pay dividends in Euros, however, Dutch laws mean 15-25% of the dividends are withheld for tax reasons. This share class controls 57% of the company but it comes with no voting rights. In the event of bankruptcy, you get immediate access to assets.

share class comparison

No matter which class you pick, the payout is the same when it comes to dividends. I’ve seen a few places use the share class interchangeably, so make sure you pick the one which is right for you.

What Does Shell Do?


From Royal Dutch Shell Investor Portal

Before we dive in, Shell is an extremely big company. It’s worth taking a step back to first understand what we are even talking about. What does Shell even do?

To help keep us focus Shell offers a nice way to group the business into four segments.


From Royal Dutch Shell Investor Portal

Integrated Gas includes producing, marketing, trading LNG and GTL products. This also includes and manages its New Energies portfolio. This is anything related to being more carbon neutral. We will be touching on this business line a lot.

The acquisition of BG accelerated our growth strategy by a decade, and helped make our Integrated Gas business a cash engine.

Upstream explores for and extracts crude oil, natural gas, and natural gas liquids. It also markets and transports oil and gas, and operates the infrastructure necessary to deliver them to market. Think deep-sea drilling, and shale.

Downstream looks at different oil products and chemicals activities. This line also trades and refines crude oil. Think gasoline, diesel, heating oil, aviation fuel, marine fuel, biofuel, lubricants, bitumen, and sulphur. You also have petrochemicals for industrial use.

Lastly, we have corporate activities. This is non-operating activities supporting Shell. Think treasury organisation, self-insurance, and central functions. If you ever break down each of the business line be aware of this little fact.

All finance income and expense as well as related taxes are included in the Corporate segment earnings, rather than in the earnings of the business segments.

Product Diversification

A $10 drop in the price of oil is a $6 million hit to their cash flow. Shell has a lot of risks related to the price of oil, and they have liabilities equal to their assets.


From Royal Dutch Shell Investor Portal

This means borrowing could be tougher for Shell, normally a cash flow rich company can brush this to the side. However, Shell’s expenditure is extremely high and they are not a very profitable company.


From Royal Dutch Shell Investor Portal

This could potentially increase the speed at which Shell moves to alternatives and renewable energy.

The risk being they have just taken an all-mighty hit to their revenue. While cutting the dividend and slowing any buybacks will reduce their outgoings it’s now going to be a significantly tougher squeeze for them.

The big issue in the world of oil right now (aside from Trump now threatening the Middle East to cut production of oil,) is the storage. We have an estimated 160 million barrels of crude oil at sea, with consumption cut and few companies accepting delivery this is an issue for anyone who is currently producing more oil or gas.

Compound this with the fact the 2019 results saw a 17.82% dip in revenue generated, an 82.75% dip in net income, and a 1.15% decrease in net profit margin, Shell was not in a strong position to have the pandemic hit them.

Dividend Cut For The First Time Since WW2

Let’s talk about the dividend cut and the controversial share buybacks of previous years.

Our cash flow from operating activities was strong compared with our industry peers, at $42.2 billion. We distributed more than $25 billion to shareholders: $15.2 billion in dividends , and $10.2 billion in share buybacks .
From Royal Dutch Shell Investor 2019 Highlights

This represents a 66% decrease in the dividend payout. However, this is absolutely a necessity for Shell right now.

Looking at the Shell financials, it’s clear why the dividends had to be cut by a third. If a $10 drop in the price of oil costs Shell $6 million in revenue, and we have lost roughly $40 since the start of the year ($66 to $25 now) then we are looking at a $24 million hit. This is not even taking into account the general reduction in the demand for their other products as well.

Overall, the energy sector is forecasted by GlobalData to face downward earnings revisions of 208% in 2020

Cutting the dividend by two thirds and stopping share buybacks will go a long way to cutting their expenditure. Given over 50% of their cash flow in 2019 was “reinvested” into keeping shareholders sweet.

What will this mean for the future of Shell’s share price without Shell bumping up the price?


From Google Finance

The share buyback program started in 2018 and they still have $10 billion left to buyback as per the original plan. This is very unlikely to carry on in the current climate, but this reduction in future share price “bumps” has hurt investor confidence.

We also have the Q1 2020 results to look over. It makes for some very sombre reading.

While cash flow has increased by 72% compared to last year, the earnings have dropped by 46%. Understandability they are now having to hoard cash and enter crisis mode.

What Is The Summary?


From Genuine Impact

A company with low profitability, a large number of liabilities and debt on their books which they are trying to use their cash flow to fight back against, a cheap investment compared to their cash flow as it’s highly distressed right now, and even at this price a weak outlook.

Looking To The Future


From Shell Energy Transition Report

The big take away here is the dominance of solar and wind, and the explosion of energy consumption in Asia in 2070.


From Shell Energy Transition Report

It’s disappointing to see Shell’s approach to being carbon neutral is counteracting their output and finding new ways to reduce their carbon consumption, rather than a focus on shifting their portfolio to renewables.

I was hoping to see more expansion with their wind farms and alternative renewable energy sources, however, Shell seems to be focusing on moving up the value chain and selling energy directly. For example their recharge stations in the UK. Currently, these are powered by wind farms but there have been mentions of using their own natural gas extracts, which they aim to get carbon neutral to avoid any bad stigma.

Why A Hold?

While the sell-side analysts see this as a cheap buy, and “too big to fail” I find them to be too optimistic and leaning on the future buybacks making a return.


From Market Beat

With a target price of 1,922.14p this is accounting for the dividend drag being reduced, and a spike in activity and sales once the lockdown ends. I have a more pessimistic outlook and don’t believe the pandemic will ease up as quickly as planned.

Also, the assumption that Shell will make faster strides into their alternative businesses, I feel other companies will also take the same action. Meaning the demand for their most popular revenue-generating products will dip faster than expected.

I agree with the lowest estimates of 1,500p per share. While the cost-saving measures and the end of lockdown will help the share price recover, this isn’t a long term investment for me. The slow pace of innovation, the fact they buy competitors with their war chest rather than attempting or experimenting with serious R&D stinks of a stagnant beast which is simply following market trends in a low-risk manner.

If I was holding onto Royal Dutch Shell, I would be planning my exit and moving my dividends into more exciting growth companies. I’d rather invest in an acquisition target of Shell than the beast itself.

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Enjoying the write ups, also be interested to hear your thoughts on Activision Blizzard :grin:

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I’m a fan of ATVI, so that would be an exciting one to write about.

Something for me to think about over the weekend, while I’m queuing up for the shops!

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Nice mate, thanks for this!

Feel a bit stuck with Shell atm as it is 10% of my portfolio…

At current share price I am sitting at about 20% loss and a dividend yield of about 4.3%

Even at these levels the dividend is somewhat attractive - have been debating whether to dollar cost average my position down or to stop any further investment.

May main issue at the moment is that most high income stocks have pressed pause on their dividends so I don’t think I have very attractive alternatives.

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@jcksmith850 really enjoying these write ups! Thank you for taking your time to make them

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Thanks @jcksmith850 I’d be interested in imperial brands. With the decline of cigarettes, their normal bread and butter, as far as I’m aware, and they still have a huge following, namely due to dividends? But is it viable to continue those with current circumstances and the effects on the lungs. I believe they have been diversifying into e cigs, and nictine products as well?

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+1 for imperial brands. As a smoker myself I always question whether to try to recoup some loses from my bad habit by holding imperial brands

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Activision Blizzard - ATVI (Buy)

Activision Blizzard is one of my favourite investments (and @userfy_123’s by the sound of it!) It’s a high growth, strong quality company, with growing reoccurring revenue, that appeals to a range of demographics. It’s a growing sector, and few companies are better positioned to take advantage of this.

Tomorrow, Tuesday 5th May, they will be announcing their first-quarter results. It would be easier to do some analysis after the quarterly results, but I have a strong long term view on ATVI.


From Google Finance

What Is Their Business?

ATVI describe themselves as a leading standalone interactive entertainment company. Who delight hundreds of millions of monthly active users around the world through franchises including Activision’s Call of Duty®, Spyro™, and Crash™, Blizzard Entertainment’s World of Warcraft®, Overwatch®, Hearthstone®, Diablo®, StarCraft®, and Heroes of the Storm®, and King’s Candy Crush™, Bubble Witch™, and Farm Heroes™. As someone who has played Call of Duty and Diablo, delight isn’t the word that comes to mind. Enough about my terrible gaming ability and onto why this is an exciting company.

The important piece to know here is, ATVI is four companies in one. You have the game publisher and developer Activision started in 1979, but these days best known for publishing Call of Duty (they don’t develop the game, it rotates between a few development studios.) There is the giant which is known as Blizzard Entertainment set up in 1991, who is best known for smash hits such as World of Warcraft, Starcraft, Overwatch, and Diablo. Then, we have King which was created in 2003, who rode the casual gaming wave (and continue to) with their never-ending, money-sucking, app Candy Crush. Finally, have Major League Gaming originally founded in 2002, which focuses on competitive gaming, MLG is the go-to location to watch top tier esports champions battle it out for cash prizes (to date they have paid out over $9.5m in cash prizes.)


From ATVI Q4 Powerpoint

Publishing games, where you bankroll development but in return, you get paid first, have a lot of control (if you want), control the distribution and sale price and control the IP. Additionally, for in-store microtransactions and additional services, you get even more revenue post-launch.

Developing games, where you have creative control, end-user engagement, can follow trends or even create new ones, and potentially create new IP if you have the distribution channels (which they do.)

Mobile gaming, with both King and Activision pushing more and more into the casual gaming experience, this gives them access to very desirable demographic, own income, spare time, actively seeing a short attention span ease to pickup distraction.

eSports hosting and team creation, where they rent venues to launch massive sponsorship backend events to see the best players around the world compete.

Own digital gaming distribution channel, with Battle.net they control even more of the user experience, pay less out to 3rd parties as they have their channel, and give them more control over their in-app purchases and digital sales.

Movies, physical merchandise, and other licence maximising activities through their studio arm. While this has been a bit quiet this could be a big step into more forms of media e.g. the Warcraft Movie.


From ATVI Q4 Financial Model

That graph is measured in millions. $5.4~ billion in bookings last four quarters, 409 million monthly active users over the final quarter. Let’s just say they are big.

What About Competitors?

I wanted to add in some comparisons to other companies to give you a feel for where they sit, these screenshots are from Genuine Impact.

Activision Blizzard

Take-Two

Electronic Arts

Ubisoft

Tencent owns a lot of developers and publishers as well (not just in China but globally), but they are a bit trickier to invest in. If you have access to the Polish exchange you might be interested in CD Projekt as well.

Financial Growth

Let’s stay focused on ATVI and it’s last earnings report. It’s worth noting that ATVI hasn’t announced any guidance changes since Q4. This likely means we are expecting positive results tomorrow. We have already seen a lot of digital and gaming related firms getting a strong boost in user numbers and spending due to national lockdowns. This will likely boost the revenue and engagement figures for ATVI too.

The expectation for Q4 was a dip in revenue, $1.6m compared to $1.8m a year ago but with microtransactions to increase. With no major new release, this would have been a fair expectation.

Expect there has been a major release. Call of Duty: Warzone, is their new free-to-play battle royale which launched in March. This has been downloaded over 50 million times already. If you haven’t heard of the free-to-play strategy before it’s a popular approach which has seen a resurgence with “battle royale” game modes.

I expect this will cause ATVI to beat expectations for this quarter and even post a very positive outlook. I would say the cloud we potentially will see is a slow down for future projects due to the lockdown, and while COVID-19 is providing a boost now, we don’t know how long that uptick will last.


From ATVI Q4 Report

While we are seeing the lockdown ease across the globe, it’s worth knowing where ATVI is making its money, it still has a strong American base followed by the European nations. While most of their services look to maximise reoccurring revenues, I am expecting to see a drop off when it comes to monthly active users. Across all their business lines people have free time right now, with summer starting and no new games lined up for the next quarter I expect the next three months will be unpredictable and largely driven by when lockdown ends. I expect a dip in activity immediately following the lockdown ending or easing.


From Genuine Impact

What we do have is a very positive and strong outlook from the sell-side analysts. There is a very strong buy consensus. The target prices are roughly where we are right now until the quarterly earnings come out. I wouldn’t be surprised to see another 5-7% increase in target price for the next quarter, even with a large number of pandemic unknowns.

Summary

We aren’t at all-time highs but I expect this year we can hit them. With some punchy future games lined up over the next two/three years, we can expect some massive payoffs. With strong profitability through their own digital distribution channel, extremely loyal customer base, and excellent capital allocation this is a very strong quality play.

However, this isn’t a cheap stock to buy right now. There is a lot of expectation built into the price. Right now we are already at the target price for the quarter, which doesn’t leave a lot of room for any negative news whatsoever. Making it very likely even a great result won’t be good enough and we will see a price correction following the announcement.

If you take an annual view, this is a very strong momentum buy. Right now one of my favourites. Excellent forecasted revenue growth, a CEO who is closely aligned to the EPS increasing, and extremely strong future sentiment. It has room to grow both in terms of revenue and in terms of price per share.

Let me know what you think of this analysis, I’ve changed the style a little to see if it’s more informative. We’ll see what the stock looks like on Wednesday after earnings and some trading activity!

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I need to do some more reading on Imperial Brand. I’ll see if I can write something today @Jonny and @Pdw.

I was thinking about doing some extra education to help round out my analysis. I’m trying to balance giving a nice overview of what it is and the pros/cons, versus a deep drive into the market trends and those risks.

If nothing else this is keeping me entertained!

Thanks everyone for your support so far!

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