Pig-in-a-Poke or Piggyback Plant? Colu lumbia bia Univ niversit ity Securit itie ies Analy alysis is John M. Zolidis March 5, 2020
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Presenter Bio – John Zolidis ➢ Founded Quo Vadis Capital, an equity research consultancy and Registered Investment Advisor (RIA) in 2017 ➢ Analyst following U.S. consumer sector since 1999 ➢ Named to Wall Street Journal’s Best on the Street list in 2005 ➢ Frequently cited in the financial media ➢ Education at Kenyon College & Oxford of University (Mansfield College) ➢ Former PhD candidate in Philosophy ➢ Presented at value investment conferences in Vail, Klosters and Cyprus ➢ Based mostly in Paris, France 2
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com About the Quo Vadis Capital, Inc. ➢ Registered Investment Adviser (RIA) formed in 2017 ➢ Outsourced analyst model providing research on the restaurant and retail sectors to institutional investors ➢ Also provide consulting and advisory to companies ➢ Manager of separate investment accounts for individuals ➢ Produced out of New York and Paris, France ➢ More information at quovadiscapital.com 3
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com What is a Pig-in-a-Poke? 4
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com What is a Piggyback Plant? 5
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com What is the Central Problem of Ethics? 6
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com You Still Have to Make Decisions 7
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com What is the Most Difficult Problem in Investing? 8
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com There is no one right way to analyze companies, construct a portfolio, or adjudicate between investment alternatives You have to find what works for you and then stick with it 9
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Our Premise: Changes in expectations for future earnings or cash flows are the most reliable predictor for stock price performance My suggestion: Investors should focus on identifying when embedded expectations in an equity could be wrong 10
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Two Part Process: Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow Part 2) Valuation Review to Attempt to Determine What’s Priced In 11
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com How do we determine When Future Expectations for Earnings or Cash Flow are Wrong? 12
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com It frequently comes down to doing work that others can’t or won’t 13
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Unit Level Economic Analysis This process was developed for retail and restaurants, but the idea is applicable for any company or business that can be divided into component parts 14
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Unit Level Economic Analysis Further, the task is to take the company’s component parts and run a fundamental analysis at the unit level Among the fundamental we care about most is evaluating unit level ROIC 15
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Simplistic Retail Business Model: 16
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Simplistic Retail Business Model: 17
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Simplistic Restaurant Business Model: MARKETING RESTAURANT CUSTOMERS CORP. HQ & BRANDING COST CENTER THE STORE IS THE ECONOMIC ENGINE FOR A RESTAURANT Produces the “R” in ROIC 18
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Simplistic Restaurant Business Model: CUSTOMERS RESTO MARKETING CORP. HQ & CUSTOMERS BRANDING RESTO RESTO CUSTOMERS ADDING MORE LOCATIONS CREATES OPPORTUNITY TO LEVERAGE CORP. HQ & MARKETING SPEND RESTO CUSTOMERS 19
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Simplistic Restaurant Business Model: RESTO CUSTOMERS RESTO MARKETING CORP. HQ & RESTO CUSTOMERS BRANDING RESTO RESTAURANT OPERATORS CAN RESTO CUSTOMERS ALSO ENTER INTO FRANCHISE ARRANGEMENTS TO GROW VIA RESTO OTHER’S CAPITAL RESTO CUSTOMERS 20
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Unit Level Economic Analysis The restaurant and retail business models have in common a centralized cost structure and many locations which can be evaluated independently First step is to ask whether the “box” is any good 21
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Two Part Process: Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC Part 2) Valuation Review to Attempt to Determine What’s Priced In 22
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Comparison of 15 Resto Company Unit Level ROIC Estimated Average Restaurant-Level Lease-adj. ROIC TTM Ending With 3Q19 32.0% 30.5% 29.2% 29.0% 26.3% 27.0% 24.7% 23.7% 23.0% 22.2% 22.1% 22.0% 20.6% 19.1% 18.4% 17.7% 16.3% 16.2% 15.8% 17.0% 12.0% Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE 23
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Two Part Process: Part 1) Fundamental Analysis to Determine Our Own Forecasts for Earnings and Cash Flow a) Solve for Unit-Level ROIC b) Evaluate composition of ROIC Part 2) Valuation Review to Attempt to Determine What’s Priced In 24
Pig-in-a-Poke or Piggyback Plant John Zolidis john.zolidis@quovadiscapital.com Comparison of 15 Resto Company Unit Level ROIC ESTIMATED SALES PER AVERAGE SQUARE FOOT RESTAURANT LEVEL MARGINS $1,600 30% 28% $1,359 $1,400 28% 25% $1,200 26% 24% 24% $1,000 $913 $833 $800 $780 $738 $701 $653 $651 21% 22% $800 19% 19% 19% 18% 18% 17% 17% 17% 17% 20% $535 $515 $487 $435 $431 $600 18% $400 $308 $266 15% 15% 16% $200 13% 14% $- 12% ESTIMATED AVERAGE UNIT LEASE-ADJUSTED PRE-TAX ROIC ESTIMATED AVERAGE UNIT CASH-ON-CASH PRE-TAX RETURN 32% 57% 30% 30% 60% 52% 28% 49% 48% 50% 27% 26% 25% 40% 24% 23% 23% 22% 35% 33% 33% 31% 30% 30% 22% 30% 21% 24% 23% 23% 20% 18% 18% 19% 18% 16% 20% 17% 16% 16% 17% 10% 12% 0% Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE; Period Presented is TTM Ended with 2Q19 25
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