3/20/2017

Driving a higher ROE with Regis (RGS)


This post's goal is uncovering companies improving productivity, profitability and capital structure.Improving these component drivers will ULTIMATELY lead to a higher ROE(a higher stock price). Warren Buffett commented the returns a company gets on equity is the key factor for a profitable investment. Simply, ROE reports how well a company is doing. My discovery process helped uncover several potentially interesting companies. For today I will focus on Regis Corp.


Regis Corp (RGS) is the beauty industry's global leader in hair salons and cosmetology education. It owns, franchises and operates beauty salons that offer haircutting, hair coloring and markets a wide selection of professional haircare products to its customer. The Company owns, franchises or holds ownership interests in nearly 9,000 worldwide locations operating under concepts such as Supercuts, SmartStyle, MasterCuts, Regis Salons, Sassoon Salon, Cost Cutters and First Choice Haircutters.
BRAND Names:


















































Above, I mentioned this post started with a search for companies improving Productivity, Profitability and Capital Structure.  Essentially, companies driving a future higher ROE before the stock price reflects improved results. (more on this below).

Why is Regis an attractive investment?
Let's start with the current historical and industry cheap valuation; EV/EBITDA= 6.03, P/S = .30 versus related industry = 1.70, P/B = 1.10 versus related industry = 9.50, 52-week stock price change = -19.02%, cash per share = 3.36,  more current valuation measures in the table underneath.
















The stock gets exciting during 02/2017 earnings call. They announced a deeper commitment to a thoughtful strategic transformation that increases their valuable successful franchise business. Sell targeted salons to franchisees and continue to close under performing salons and operate a smaller base of profitable company owned salons. Although in the early stages Huron Business Advisory is formally engaged to assist delivering and speed up the expanded franchise business model. The initial focus will be on franchising under performing company owned SmartStyle salons in Walmart.

For the recent reported quarter, royalty revenue increased 4.3% and franchisees produced 10 consecutive years of positive same-store sales increases. Management recognizes franchisees operate units more successfully based on local knowledge of their market, labor, lower corporate overhead, and employee costs.Hence, this leads to part of the rationale for the strategy shift.

Its important to recognize the much higher market valuations for a successful franchise business. The super cut brand alone is worth more than the current valuation. Super cut for years is ranked one of the best franchises by Entrepreneur magazine.

2016 Top Franchises from Entrepreneur's Franchise 500 List http://bit.ly/2npO9iz

2017 ranking dropped to 13 after top 5 rankings in prior years.




 

Technology investments are paying off as online check-ins through supercuts.com and the Supercuts app doubled in the last year. Over 2.3 million check-ins occurred in calendar 2016. Digital check-in guests show stronger repeat visit rates.  Since fiscal 2012 1,900 underperforming salons were closed. During this same time, franchise business grew by adding over 500 salons. Additionally, steps push forward to continue franchising underperforming SmartStyle locations. Another benefit besides the higher valuation for a growing stable franchise business is the increased management focus on fewer company owned profitable salons.


From the  Q2 earning call on 02/2017. "Although, we are in the early stages of our work with Huron, we're moving forward with a sense of urgency. At this point, it is not yet possible to provide further details on the pace of franchise conversions of the potential financial impact on our results. In future quarters, as our plans are solidified and we gain greater visibility, we expect to provide additional clarity as to the pace and potential impact of our franchise expansion along with enhanced disclosures on the overall profitability and performance of our franchise business."



Back to RGS investment discovery process.

Warren Buffett's vocal commitment on a company's return on its equity emphasizes its importance in making a successful long term stock investment. Return on capital succinctly captures operational performance.

Each fragment in the ROE equation has its own underlying drivers. So, specific business attributes drive ROE (profitability* productivity* capital structure). Each equation's part forms a critical link in driving a higher value. Each measure has its own detail interconnection.

For instance,  gross margins and expenses drive profitability. Asset levels, quality, and turnover drive productivity, while debt and new capital needs drive capital structure. Then, working back up the value chain intangibles such as market position, loyalty, brand strength, and supply chain strength drive margins and expenses.

ROE Components: Profit/Sales * Sales/Assets * Assets/Equity = ROE Return on Equity. Its also called the DuPont formula(analysis).
 

A: Profit/Sales =Profit Margins (PROFITABLITY)
B: Sales/Assets = Asset Turnover (PRODUCTIVITY)
C: Asset/Equity (CAPITAL STRUCTURE)
A*B*C = ROE

Profitability (Profit/Sales) financial drivers are gross margins, SGA, operating margins.
Productivity (Sales/Assets) measures asset productivity and is simply the amount of sales generated per asset dollar deployed. For example; sales/AR, sales/inventory, sales/PPE, Inventory turnover, Fixed Asset Turnover.


Below are 3 tables supporting that Regis's  is moving in the right direction to drive a higher ROE and  a future higher stock price.

Productivity:












note the improving asset turnover


Profitability:










note the improving operating margins, net margins, FCF margins, EV/EBITDA



Capital Structure:
















note the reduction in share count, debt per share, total liabilities


Catalysts:
Continuation of the aggressive share count reduction at favorable prices.

Grow the franchise business as percentage of total revenues forcing a higher market multiple.

Sale of under performing corporate owned units to existing franchisees or close.

Activist investors Daniel Beltzman of Birch Run Capital owns 10,655,170 shares or 23.02% of the shares outstanding. Beltzman forced changes, took a board seat, removed management, and pushed for Daniel Hanrahan a former executive at Royal Caribbean Cruises as CEO.



Long RGS

3/13/2017

Overlooked Industrial Conglomerate, Jason Industries

Jason Industries (JASN) is an industrial global manufacturing conglomerate.  The company operates in the following four segments; finishing, seating, acoustics and components. Year ending 12/2016 revenue was $705,519,000.


Potential Catalysts/Investment Rationale :



Strong Insider activity, see details below.

Mispriced undervalued stock with a negative -54% 52 week stock price performance. Management is forecasting 64M to 67M adjusted EBITDA or around EV/EBITDA ~ 6 for fiscal year 2017.

Value based institutional shareholders with ownership at significantly higher prices.

Management projected fiscal year 2017 cost cutting with improving operational efficiency offering multiple levers to improve future results. A positive USA manufacturing regulatory environment could provide future benefits.

Proven and extremely talented management and board with turn around success and material skin in the game. 

A unique moat created by a collection of dominant companies in diversified business segments (Seating, Acoustic, Finishing, and Components) serving multiple sectors with repeat long term customers.

 

Insider Activity Details:
CEO(Kobylinski Brian)purchased 30,000 shares on 03/2017 and Interim CEO J Quinn added 100,700 shares on 09/2016 to his existing 19.20% ownership. These two recent purchases in combination totaled 130,700 shares for $261,119 at an average price of $1.99. In addition, 10% Owner(Wynnefield Partners Small Cap Value)purchased 1,026,334 shares for $2,540,913 at an average price of $2.45 per share during 2016.See table below
  



























 Board member and former Interim CEO Jeffry N. Quinn owns 4,382,809 shares, 19.20% shares outstanding per the 4/13/16 proxy. Quinn is Founder,Chairman and CEO of The Quinn Group and Quinpario Partners. Additionally, Quinn was named interim CEO of Jason on 11/9/15 and continues to serve as chairman of the board. Before Jason Industries,Jeffry Quinn was the former CEO of Solutia a global specialty chemicals and performance materials company. He led Solutia through Chapter 11 reorganization. Then after 8 years transformed this bankrupt small local player into a global leading specialty company. Solutia was sold in 2012 to Eastman Chemical Company (NYSE: EMN) for $4.8 billion.

 After the sale of Solutia, Quinn founded Quinpario Partners a privately owned investment and operating firm. Quinpario Partners formed Quinpario Acquisition Corp that completed its first business combination in 2014 when it acquired Jason Industries. Jason directors and executive officers as a group own 23.10% of Jason. Note again, that on the insider table above Quinn(interim CEO) purchased an additional 100,700 shares on 09/2016. 



Current Valuation per Yahoo


































Risk is the large debt and potential negative economic trends.

Long: JASN

3/09/2017

Stable Profitable 100 Year Old Business Crystal Rock (CRVP)

with near zero Institutional ownership.

Crystal Rock (CRVP) founded in 1914 is a home and office distributor for water, coffee, beverage products and office supplies. They bottle and distribute natural spring water under the Vermont Pure® brand, Crystal Rock® label and their own Cool Beans® coffee. Most sales derived from route distribution throughout the Northeast United States.



Customer value is created with their unique services and products. Premium Crystal Rock is ultra pure water produced with reverse osmosis and added minerals.  Crystal Rock Spring Water branded Vermont Pure comes from three different springs in the South Western part of Vermont. Filtered only for sediment, the spring water is highly regulated. Another Crystal Rock brand is Cool Beans Coffee roasted in Hartford, CT. Furthermore, CRVP services their beverage equipment and offers over 40,000 office product items including paper, breakroom, janitorial, technology, furniture, custom print services, signs and stamps.











































The largest and most profitable revenue product is water sales.
Below is a table comparing 2015 to 2016 revenue by product line.  





















Commentary: Water sales volume increased.The warm 2016 summer likely a contributing reason for the volume increase.


The decrease in coffee sales was lower volume due to commoditization pricing by competitors and availability in grocery/box stores. Cool Beans® made up 19% of the category in 2016 compared to 15% in 2015. Lastly, management believes a large part of the decline is due to their website software changes. Customers found it difficult to use. The website changes negatively affected other line items, Office Products.



Current Valuation:








 Insider trading for 2012 to 2017























Discounted cash flow using a modest projected FCF is greater than current price.

Additionally, management is moving the right levers for a higher intrinsic valuation. By improving the productivity, profitability and capital structure it will lead to a higher intrinsic value.

Strategic formula/Dupont Formula/ROE = Profitability x Productivity x Capital Structure


As shown below PROFITABLITY (improving gross margins, FCF margins, reducing expenses).
Productivity is driven by improving asset turnovers such as DSO, cash conversion,inventory turns.


Debt, and shares outstanding drive the capital structure improvements. These 3 areas of improvement (Profitability x Productivity x Capital Structure) will lead to a higher stock price.


Financial line items below from 2011 to the most recent reported highlights improving valuations with decline in enterprise value. 
 
 






































  








Long CRVP

3/06/2017

Nano Caps Trading Below Intrinsic Value




The 3 nano cap ideas below share multiple improving value attributes. Specifically, these attributes trade at historical value discounts compared to 2013 to 2015 for...GROSS MARGIN %, SHARES OUTSTANDING, TOTAL/NON CURRENT LIABILITIES, DEBT PER SHARE, FCF MARGINS, EV/EBITDA, EV/REVENUE. 

In addition, the 3 stocks (CRVP, TRT, EEI) reported positive insider buying.















Crystal Rock Holdings (CRVP) produces, markets and distributes bottled water under Crystal Rock and Vermont Pure brands. In addition, distributes coffee under the Cool Beans brand.














 
















 







Long CRVP


Trio-Tech International  (TRT) provides semiconductor testing and burn-in services. It also designs, develops, manufactures and markets equipment / systems used in manufacturing/testing semiconductor devices and electronic components. 
















































Ecology and Environment (EEI) is an environmental consulting company. It offers professional services to industries in the energy, natural resource management, hazardous material services and health sciences.