This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
In most of my posts, I research individual businesses that I (possibly) intend to invest in (at a better price point) or currently have a holding. The problem with this is that it completely misses the screening process (i.e. explaining why I might not invest in a particular business).
Over this three-part series, I am going to outline some companies I have screened out & why. These companies are Lennar (US Housebuilder), Triton (US Industrials) and Salesforce (CRM titan)
#1 LENNAR - CYCLICAL FOR WHEN MARKETS ARE WEAK
Snapshot of LEN
Lennar is a homebuilder which operates in almost all areas of the US and provides associated financial services and BTR/multifamily operations (and has a market cap of c.$35bn)
Fairly similar in size to DR Horton, both companies have their respective niches (e.g. Lennar has higher sale price and DR Horton has move-in read homes) and similar market caps
Nuances to $LEN; more suitable at the bottom of the cycle than most
Whilst I do not invest in REITs because they generally do not get mispriced as much as other businesses one exception to that rule is housebuilders. Unlike traditional REITs, the underlying land bank of a housebuilder is generally valued at cost and the operational cash flow tend to vary more than a REIT (hence higher risk but also higher payoff)
As seen in the huge growth in Zillow/Opendoor volumes, there is a shortage of housing in the US and housing prices are at an all-time high. This has three amazing benefits for a housebuilder
Bring forward greater amounts of landbank and develop it
Increased operational leverage (e.g. more sales at a higher price)
Use higher leverage to lift ROCE
My conclusion: Buying housebuilders at the bottom of a cycle can be an immensely profitable trade if they aren't overleveraged & have the cash to trade out of the cycle. $LEN fits that bill. That being said since most housebuilders must hold 3-5yrs of landbank to feed their business, $LEN is closer to 2yrs, I think the working capital cycle makes this business uninvestable for me.
#2 TRITON - GREAT BUSINESS, CURRENTLY OVEREXTENDING... BECAUSE IT HAS TO COMPETE WITH PEERS
Snapshot of TRTN
Triton engages in the acquisition, leasing, and sale of various types of intermodal containers and chassis to shipping lines and has a market cap of $4.5bn (so more of a small-cap for US)
My stats are a bit old, however, it has a fleet of 3.7m containers representing 6.2m TEUs or 7.0m cost equivalent units
When extreme price volatility is not your friend
Triton earns c.80% GM but is geared at 75%; so every minor operational gain has a material impact on Triton's ROE
To maintain stock, the business has capex of c.$800m-$1bn a year and pays out large dividends (c.$200m)
Whilst this is all well & good; the business is at a particular pinch point where it is growing aggressively buying up containers at high prices (but also hoping to re-sell them at high prices).
Great company - but I need the dust to settle on container volumes
Compared to US peers, Triton currently has a superior scale which means that their overheads are a smaller percentage of revenue (e.g. Triton's G&A is 5.5% of Revenue vs. 6% for Textainer vs. 8% for CAE)
All of this being said, it constantly needs to flatline leverage and Capex to grow its business
Justifiably they are choosing to grow capex in this current time (as set out by the options below)
My conclusion: Triton is a greatly run company, however, now more than ever it is flatlining growth otherwise Textainer, Cosco, CAE and any number of other competitors will catch it. In short, scale is the only possible "moat" it has over its competitors and with such a highly levered business I think this makes it riskier than other no moat style businesses.
#3 SALESFORCE- GREAT BUSINESS, OUTSIDE OF MY CIRCLE OF COMPETENCE
Snapshot of $CRM
You would have to live under a rock to not know of Salesforce ($CRM)... however, for completeness, it provides modern, SaaS-based CRM software to businesses.
They have many services, however, I tend to divide it into
Sales Cloud (which manages sales function)
Service Cloud (which manages multi-channel customer support), supported by solutions for marketing, commerce, analytics and data integration.
Salesforce’s products have big market share in products (e.g. Tableau, Slack etc), and importantly are compatible with each other (e.g. you stay in the Salesforce’s ecosystem)
As their pitch goes, "Using Salesforce increases productivity, lowers IT costs, increases customer satisfaction, increases marketing return on investment (ROI) and increases revenue."
Why this is a more difficult business to understand
CRM has grown organically, however, they have also grown successfully through acquisitions
Omitted from the below is their huge $27bn acquisition of Slack which was acquired a 27x FORWARD SALES
Since $CRM are the M&A experts, I won't say whether Slack was appropriate however what I will conclude is:
$CRM have grown CRM market share to 19% whilst others (e.g. Oracle/SAP) have remained at static levels
Slack could be a starter for them to move into the "collab" product space where Zoom/Box/Teams/OneDrive operate and $MSFT will make their life very difficult as it moves into the collaboration space (e.g. Teams, OneDrive etc)
On an overall revenue multiple (c.9x) this business may look ok compared to current highs, however, on an OCF (35x), CF (40x) and even P/E (128x)
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