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Due Diligence: Toromont Industries Ltd. - Building Together For An Exciting Future

Due Diligence: Toromont Industries Ltd. - Building Together For An Exciting Future
Hi,
This is my first attempt at writing a DD report. I hope it makes sense.
Just a few cautionary words:
  • Grammar (and English in general) is not a skill of mine. There will be a few parts that you might have to decipher, good luck.
  • I tried not to provide too much commentary and stick to the facts. I know you are spending your valuable time reading this and you probably don't want to listen to some random guy on the internet pontificate.
  • For those of you who are easily offended/triggered, can't take a joke, or sarcasm isn't your taste, DO NOT click the spoilers.
Lastly, the following is just my findings, by no means is it a representation of all the information out there. It is just the baseline for me to have confidence in becoming an owner of the Company. Do your own due diligence or talk to a financial advisor to find what is best for you and your financial situation.
Happy reading!

Highlights

  • Over the last 5 years the stock price has more than doubled.
  • Toromont dominates market share over everything east of Manitoba in Canada.
  • Customer base is heavily diversified, giving the Company many opportunities to expand into multiple industries.
  • Dividend has increased for 31 consecutive years. It has been paid for 52 consecutive years
  • The management team is extremely knowledgeable and have a good track record

Introduction

Toromont Industries Ltd. (TSE:TIH) provides specialized equipment in Canada and the United States. The Company operates two business segments: The Equipment Group and CIMCO. The Equipment Group supplies specialized mobile equipment and industrial engines for Caterpillar Inc. (NYSE:CAT). Customers for this business segment vary from infrastructure contractors, residential and commercial contractors, mining companies, forestry companies, pulp and paper producers, general contractors, utilities, municipalities, marine companies, waste handling companies, and agricultural enterprises. CIMCO offers design, engineering, fabrication, and installation of industrial and recreational refrigeration systems.
The Company was founded in 1961 and operates out of Concord, Ontario. As at December 31, 2019, Toromont employed over 6,500 people in more than 150 locations across central/eastern Canada and the upper eastern United States.
The primary objective of the Company is to build shareholder value through sustainable and profitable growth, supported by a strong financial foundation.

Description of the 2 Main Business Segments

  1. The Equipment Group includes the following 6 business units:
  • Toromont CAT: one of the world’s largest Caterpillar dealerships which supplies, rents, and provides product support services for specialized mobile equipment and industrial engines
  • Battlefield Equipment Rentals: supplies and rents specialized mobile equipment as well as specialty supplies and tools.
  • Toromont Material Handling: supplies, rents, and provides product support services for material handling lift trucks
  • AgWest: an agricultural equipment and solutions dealer representing AGCO, CLAAS and other manufacturers’ products
  • SITECH: provides Trimble Inc (NASDAQ:TRMB technology products and services. Trimble is a SaaS company that provides positioning, modeling, connectivity, and data analytics software which enable customers to improve productivity, quality, safety, and sustainability. Target industries: land survey, construction, agriculture, transportation, telecommunications, asset tracking, mapping, railways, utilities, mobile resource management, and government.)
  • Toromont Energy: supplies, constructs, and operates high efficiency power plants up to 50 MW, using Caterpillar's leading power generation technologies. Toromont Energy operates plants that supply energy to hospitals, district energy systems, and industrial processes.
  • Performance in this segment mainly depends on the activity in several industries: road building and other infrastructure-related activities, mining, residential and commercial construction, power generation, aggregates, waste management, steel, forestry, and agriculture.
  • Revenues are driven by the sale, rental, and servicing of mobile equipment for Caterpillar and other manufacturers to the industries listed above.
  • In addition, Toromont is the MaK engine dealer for the Eastern seaboard of the United States, from Maine to Virginia.
  • MaK engine is a marine diesel engine manufactured by Caterpillar
  1. CIMCO is a market leader in the design, engineering, fabrication, installation and after-sale support of refrigeration systems
  • Performance in this segment is dependent on the activity in several industries: beverage and food processing, cold storage, food distribution, mining, and recreational ice rinks.
  • CIMCO has manufacturing facilities in Canada and the United States and sells its solutions globally.
  • CIMCO services the ice rinks of 23 out of 31 NHL teams. So if you are watching a game and the ice is shitty, you know who to blame… the Ice Girls, obviously.
  • For those of you who live in the GTA and have skated on The Barbara Ann Scott Ice Trail at College Park, the trail was created using CIMCO proprietary CO2 refrigeration technology.

Management

CEO, Scott J. Medhurst has been with the company since 1988. He was appointed President of Toromont CAT in 2004 and he came into his current position as President and CEO in 2012. He is a graduate of Toromont’s Management Trainee Program.
CFO, Mike McMillan joined the executive team in March of 2020. His predecessor, Paul Jewer is retiring this year and has been working with McMillan during the transition period.
VP and COO, Michael Chuddy has been with Toromont since 1995.
On average, leaders have 29 years of business experience and have served at Toromont for 19 years. Seeing long tenures, good stock performance, excellent business planning and execution is usually a sign of strong leadership. In addition, insiders hold more than 3% (~$175 million) of the company’s outstanding shares. Medhurst owns more than 170 thousand shares, Chuddy owns just under 100 thousand shares and the former CEO and current Independent Chairman of Board of Directors, Robert Ogilvie owns more than 2 million shares, making him the 4th largest stockholder. High insider ownership typically signals confidence in a company's prospects. Compare this to Toromont’s main Canadian competitor, Finning, where insiders own less than 0.4% ($12 million) of the company (this number varies depending on where you look, I just took the highest one I found).
Recently insiders have been selling stock (Figure 1). I cannot speak to the reasons why insiders are selling but the remaining position owned by the insider is sizable and demonstrates that the executive still has confidence in the company. Some of the reasons insiders sell are: they don't believe in the company’s future, they need money for personal use, they are rebalancing their portfolio, among others.
Figure 1: Buy and selling activity of insiders (the data is from MarketBeat, so take that for what it's worth).
On a somewhat unrelated but still related note, 50% of Toromont employees are also shareholders.

Growth Strategies

Toromont has five growth strategies (expand markets, strengthen product support, broaden product offerings, invest in resources, and maintain a strong financial position). I chose to focus on the following two strategies, as they seemed most prevalent.
  1. Expand Markets
  • Toromont serves a wide variety of end markets: mining, road building, power generation, infrastructure, agriculture, and refrigeration. This allows for many opportunities for growth while staying true to their core competency. Further expansion into new markets doesn't require Toromont to build a whole new business model or learn the intricacies of the new industry because their products stays the same. Thus, the main concern is the application/selection of the products for the customer.
  • Expansion is generally incremental. Each business unit focuses on market share growth and when the right opportunity presents itself, geographic expansion is archived through acquisitions.
  1. Strengthening Product Support
  • In an industry where price competition is high, product support activities represent opportunities to develop closer relationships with customers and differentiate Toromont’s product and service offering from competitors. After-market support is an integral part of the customer's decision-making process when purchasing equipment.
  • Product support revenues are more consistent and profitable.

Growth Through Acquisition

Rapid growth in this industry is generally driven through acquisitions. Toromont has gone through multiple acquisitions since the 90’s:
  • Acquisition of the Battlefield Equipment Rentals in 1996
    • Toromont grew Battlefield from one location to 82 locations
  • Acquisition of two privately held agricultural dealerships in Manitoba to form AgWest Equipment Ltd
  • Acquisition of Hewitt Group of companies in Q3 2017 for a total consideration of $1.0177 billion
    • $917.7 million cash ($750 million of which was finances through unsecured debt) plus the issuance of 2.25 million Toromont shares (equating to $100 million based on the 10 day average share price)
Acquisition of Hewitt Group of companies
This acquisition allowed Toromont to make headway into the Quebec, Western Labrador, and Maritime markets, as Hewitt was the authorized Caterpillar dealer of these regions. Hewitt was also the Caterpillar lift truck dealer of Quebec and most of Ontario and the MaK marine engine dealer for Québec, the Maritimes, and the Eastern seaboard of the United States (from Maine to Virginia).
Toromont had total assets of $1.51 billion before the acquisition, the acquisition added $1.024 billion in assets, nearly doubling the balance sheet (look at Figure 2 for more details about the acquisition).
Figure 2: (all numbers are in thousands) The final allocation of the purchase price was as of Dec 31, 2018, Note 25 of 2018 Annual Report. $1.024 billion was added to the Toromont’s B/S
Large acquisitions like this one can be the downfall of a company. Here are some of the risks highlighted by management at the time of the acquisition:
  • Potential for liabilities assumed in the acquisition to exceed our estimates or for material undiscovered liabilities in the Hewitt Business
  • Changes in consumer and business confidence as a result of the change in ownership
  • Potential for third parties to terminate or alter their agreements or relationships with Toromont as a result of the acquisition
  • Whether the operations, systems, management, and cultures of Hewitt and Toromont can be integrated in an efficient and effective manner
In 2018, the Company started and successfully completed the integration of the Maritime dealerships acquired through Hewitt under Toromont’s decentralized branch model (bottom up approach). Under a decentralized model, regional leadership make business decisions based on local conditions, rather than taking top down mandates. A bottom up approach is an advantage in businesses like Toromont where the customer mix can vary vastly from region to region. It allows for decision-making that is better aligned with customemarket needs and more attuned to the key performance indicators used to manage the business. In 2019, the integration of the decentralized branch model was implemented in Quebec after its success in Atlantic Canada in 2018. Successful integration of Hewitt into the Toromont family shows the depth of industry and business knowledge possessed by the management team. Being able to maintain inherited customer relationships and ensure low turnover is no easy feat. Many companies have completely botched these kinds of acquisitions. One that comes to mind is Sobeys (the second largest food retailer in Canada) acquiring Safeway for $5.8 billion. Three years later, they wrote off $2.9 billion as a loss because they did not anticipate the differences in consumer habits in Western Canada vs Eastern Canada, among other oversights.
The result of the acquisition and Hewitt’s integration with Toromont’s existing business produced a 39% increase in EPS in 2018 and 14% increase in 2019.

Dividend

Toromont pays a quarterly dividend and has historically targeted a dividend rate that approximates 30 - 40% of trailing earnings from continuing operations.
In February 2020 the Board of Directors increased the quarterly dividend by 14.8% to $0.31 per share. This marked the 31st consecutive year of increasing dividends and 52nd consecutive year of making a dividend payment. The five-year dividend-growth rate is 12.09%.
Table 1: Information about the last eight dividends

Risks/Threats and Mitigation

Dependency on Caterpillar Inc.
It goes without saying that Toromont’s future is heavily dependent on Caterpillar Inc. (NYSE:CAT). For those who don't know, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It has a market cap in excess of $68 billion. All purchases made by Toromont must be made from Caterpillar. This agreement has been standing since 1993 and can be terminated by either side with 90 days notice.
Given that the vast majority of Toromont’s inventory is Caterpillar products, Caterpillar’s brand strength and market acceptance are essential factors for Toromont’s continued success. I would say that the probability of either of these being damaged to an unrecoverable point are low, but at the beginning of this year, I would have said the probability of the world coming to a complete stop was very low too and look at what happened. Anything is possible. The reason this is a major consideration is because it's a going concern issue. Going conference is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If there was irrevocable damage to Caterpillar’s brand, Toromont is no longer a going concern, meaning the company would most likely be going bankrupt or liquidating assets. The whole Company might not go under because the CIMCO, SITECH, and AgWest business units would survive but, essentially ~80% of the business would be liquidated.
In addition to the morbid scenario I laid out above, Toromont is also dependent on Caterpillar for timely supply of equipment and parts. There is no assurance that Caterpillar will continue to supply its products in the quantities and time frames required by Toromont’s customers. So if there is supply chain shock, like the one we just saw, there is the chance that Toromont will not have access to sufficient inventory to meet demand. Which in turn would lead to the loss of revenue or even to the permanent loss of customers.
Again, both of these threats have low a probability of occurring but either could single handedly cripple Toromont’s business. As of now, Caterpillar continues to dominate a large market share (~38% as per Gurufocus) in the industry against large competitors like John Deere, CNH Industrial, Cummins, and others.
Caterpillar's stock has been on a slow decline for a couple years but that is due to reasons beyond the ones that directly concern Toromont’s day-to-day operations. I would say if you don't believe in Caterpillar’s continued market share dominance, investing in Toromont is probably not for you.
Shortage of Skilled Workers
Shortage of skilled tradesmen represents a pinch point for industry growth. Demographic trends are reducing the number of individuals entering the trades, thus making access to skilled individuals more difficult. Additionally, the company has several remote locations which makes attracting and retaining skilled individuals more difficult. The lack of such workers in Canada has caused Toromont to become more assertive and thoughtful in their recruitment efforts.
To combat this threat, Toromont has/is:
  • Recruited 303 technicians to achieve growth targets
  • Created 208 student apprenticeship programs
  • Working with 19 vocational institutions in Toronto to teach about best practices and introduce the Company as a future employer to students
As a result of these initiatives and others, Toromont saw their workforce grow by ~8% 2019. Growing the workforce is one of the primary building blocks for future growth.
Cyclical Business Cycle
Toromont’s business is cyclical due to its customers' businesses being cyclical. This affects factors such as exchange rates, commodity/precious metal pricing, interest rates, and most importantly, inventory management. To mitigate this issue, management has put more focus on increasing revenues from product support activities as they are more profitable than the equipment supply business and less volatile.
Environmental Regulations Affecting Customers
Toromont’s customers are subject to significant and ever-increasing environmental legislation and regulation. This leads to 2 impacts:
  1. Technical difficulty in meeting environmental requirements in product design -> increased costs
  2. Reduction in business activity of Toromont’s customers in environmentally sensitive areas -> reduced revenues
Threats such as these come with a business of this type. As an investor in Toromont, you can't do much to mitigate these kinds of threats because it's out of your hands. Oil and gas, mining, forestry, and infrastructure projects are major drivers of the Canadian economy, so I think there will always be opportunity for Toromont to make money, regardless of government action.
Impact of COVID19
While the company had been declared as an essential service in all jurisdictions that it operates in, Q1 2019 results were lower as a function of COVID19 reducing activity in many sectors that Toromont services. Decline in mining and construction projects lead to a decrease in demand for Toromont products in the latter part of the quarter. Revenues were trending for 5-7% growth for the quarter before the effects of COVID19 were felt.
Management cannot provide any guidance on how to evaluate the impact of COVID19 on future financial results. They are focusing on ensuring the continued safety of employees and working with customers and the jurisdiction they operate in to evaluate appropriate activity levels on a daily/weekly basis. Lastly, management is keeping a close eye on how this crisis has led to an increase in A/R delinquencies and financial hardship for customers.
The Executive Team and the Board of Directors have taken a voluntary compensation reduction. Wage increase freezes and temporary layoffs have been implanted on a selective basis. Management believes that expanding product offerings and services, strong financial position, and disciplined operating culture positions the Company well for continued growth in the long term.
Competition
Toromont competes with a large number of international, national, regional, and local suppliers. Although price competition can be strong, there are a number of factors that have enhanced Toromont’s ability to compete:
  • Range and quality of products and services
  • Ability to meet sophisticated customer requirements
  • Distribution capabilities including number and proximity of locations
  • Financing through CAT Finance
  • E-commerce solutions
  • Reputation
  • Financial health

Main Competitor in Canada: Finning International Inc.

Finning International Inc. (TSE:FTT) is the world's largest Caterpillar dealer that sells, rents and provides parts and service for equipment and engines to customers across diverse industries, including mining, construction, petroleum, forestry and a wide range of power systems applications. Finning was founded in 1933 and is headquartered in Vancouver, Canada.

Toromont Industries Ltd Finning International Inc.
Market Cap $5.84B $3.02B
Price $65.66 $18.49
Dividend Yield 1.87% 4.36%
Number of Employees >6,500 >13,000
Revenues (ttm) $3.69B $7.57B
Trailing P/E Ratio 19x 11x
Price/Book 3.71x 1.35x
Profit Margin 7.71% 3.54%
Places of Operations Manitoba, Ontario, Québec, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland & Labrador, most of Nunavut, and the Northeastern United States British Columbia, Yukon, Alberta, Saskatchewan, the Northwest Territories, a portion of Nunavut, UK, Ireland, Argentina, Bolivia, and Chile
Table 2: A quick comparison between Toromont and Finning.
I am sure there are some people looking at this table and thinking Finning looks rather promising based on the metrics shown, especially in comparison to Toromont. Finning’s dividend yield, P/E, and price/book look more attractive. Their top line is 2x. Not to mention it operates worldwide and is the only distributor in the UK, while Toromont only operates in half of Canada.>! Before you go off thinking “I need to use my HELOC to buy some Finning,” as some people on this subreddit are prone to do, ask yourself: do you see any cause for concern in the metrics listed above? !<
One glaring question I have is: why is Finning trading at half of Toromont’s market cap given that it operates internationally and has twice the number of employees and revenues of Toromont?

Q1 2020 Financial Results


Figure 3: Q1 2020 Income Statement
Overall operating income, net earnings, and EPS all decreased even though Toromont saw an increase in revenue for the quarter compared to Q1 of 2019.
  • All of these decreases were contributed to COVID19, as the pandemic lead to increases in costs
Historically, Q1 has always been Toromont’s weakest quarter. Q1 accounts for ~20% of yearly earnings and is consistently the least profitable quarter. Toromont’s profit margin generally ranges from 5%-9% progressively increasing into the later half of the year. This is good news for investors with the thesis that the economy will return to "somewhat normal" in the latter half of this year. The majority of the earnings for 2020 are still on the table for Toromont to earn. If current conditions persist, or there is a second wave and lockdown later in the year, we will most likely see a regression in Toromont’s growth to last year’s levels or even lower.
Assuming the world does return to “normal,” many of Toromont’s customers (especially in mining and construction) may try to catch up for lost time with increases to their operational activity, leading to an increase in Toromont’s sales for the remainder of the year. Of course this is a major assumption but it’s a possibility.
Below is a comparison of the last eight quarters. You can see the clear cyclical nature of their business.
Figure 4: Last eight quarters of earnings

Sources of Liquidity

Credit
  • Toromont has access to a $500 million revolving credit facility, maturing in October 2022
  • On April 17 2020 they secured an additional $250 million as a one year syndicate facility
Cash Position
  • Cash increased by 22.6 million for the quarter
  • Cash from operations increased 13% Q1 2020 compared to Q1 2019
  • The company also drew $100 million from their revolving credit facility
  • $4 million dollars of stocks were repurchased during Q1 2020
Given their access to $750.0 million dollars of credit and cash on hand equaling $388.2 million, the Company should have sufficient liquidity to operate if COVID19 and its aftermath persist for an extended period of time.

Financial Analysis

Analysis of Debt
Historically, Toromont has had very low debt levels. The spike in late 2017 was due to the acquisition of Hewitt. Management paid off the debt aggressively in 2018. At the end of December 2019 Toromont had $650 million of debt maturing between 2025 and 2027. As a result of COVID19 the company has taken on more debt. This additional access to debt accounts of the slight uptick in historical debt in 2020 (Figure 5).
Figure 5: Toromont’s historical debt, equity, and cash
The long-term debt to capitalization ratio is a variation of the traditional debt-to-equity ratio. The long-total debt to capitalization ratio is a solvency measure that shows the proportion of debt a company uses to finance its assets, relative to the amount of equity used for the same purpose. A higher ratio means that a company is highly leveraged, which generally carries a higher risk of insolvency with it.
The debt-to-equity ratio is at 47% and debt-to-capitalization ratio is 32%, Toromont has $388 million in cash that could be used to pay down debt by nearly 50% and bring the net debt-to-equity to 23% and net debt-to-capitalization to 18%. As mentioned before, management is holding on to cash to insure sufficient liquidity during these times.
The implication of these ratios is that Toromont does not take on large amounts of debt to finance growth. Instead the Company leverages shareholders equity to drive growth.
For comparison, Finning has a debt-to-equity ratio of ~100% (it differs between WSJ, 99%, and Yahoo Finance, 101%). The nominal amount of their total debt is ~$2.2 billion, which gives them a long-term debt to capitalization ratio 62%. Finning carries $260 million in cash.
Figure 6: Toromont’s debt-to-capitalization and debt-to-equity ratios
Profitability Ratios
Return on equity (also known as return on net assets) measures how effectively management is using a company’s assets to create profits.
Toromont’s return on equity is generally around 20%. Go to Figure 6 to look at the ROE for the last 4 years. In comparison, Finning has had a ROE of ~11% for the last three years, about 3% in 2016 and a negative ROE in 2015 (as per Morningstar).
Return on capital employed (ROCE) tries to find the return relative to the total capital employed in the business (both debt & equity less short-term liabilities). Toromont’s ROCE (ttm) for March 31 2020 was 22%. This means for every dollar employed in the business 22 cents were earned in EBIT (earnings before interest and tax). Finning had a ROCE of 11% as of December 2019.
Liquidity Ratios
Working capital is the amount of cash and other current assets a business has available after all its current liabilities are accounted for. In the last ten years, Toromont’s working capital has fluctuated between 1.6 at its lowest (2018) to 2.8 at its highest (2016). At the end of 2019 it was at 1.8. Meaning current liabilities equate to 60% of current assets.
Interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. Toromont has an interest coverage ratio 15x (as per WSJ). Finning on the other hand is at 4x. At this point I feel like I'm just beating up on Finning.
For those of you who made it this far, I have to admit something to you. This whole post is just a facade to ask you a question that has never been asked on this subreddit before: Should I buy BPY.UN? It keeps going down and I'm worried if I buy it, it will keep going down and I'll lose money. I don't want to lose money. Although if you go through my post history, you'll see I've been looking at/buying penny stocks.

Key Performance Measures

Below is a chart with key financial measures for the last four years. A few things I want to highlight:
  • Toromont had large capital expenditure last year (most of it went to increasing inventory) so they have the choice to keep capital expenditure down this year and preserve cash
  • From the start of 2018 (aka end of 2017) to the end of 2018 Toromont stock was down about 3% while the TSX Composite was down more 12% and S&P was down 7%. This stock has a history of out performance not only on the upside but also on the downside. I'll go into a bit more detail in the next section.
Figure 7: Summary of key financial measure for the last four years

Price Chart Comparisons

I don't do technical analysis. To those who do, good luck to you because let's be real, you'll need it. This section is just to get an idea of past performance and evaluate the opportunity cost of investing in Toromont compared to a competitor or a board based index fund.
I thought it would be easier to look at pictures as opposed to reading a bunch of numbers off a table.
For the sake of not creating a picture album of screenshots, I just looked at charts for the last 5 years. If you're interested in looking at different time intervals you can do so on google finance.

  1. Toromont Industries Ltd v. Finning International Inc.
Figure 8: Five year price chart of TIH v. FTT
These are the only two Caterpillar distributors on the TSX, making them direct comparisons. If I was looking for exposure to this industry, I would be choosing between these two companies (on the TSX anyways). There isn't really much to evaluate here. It's like they saying: “A picture is a thousand words,” or in this case, it's 128%. If you have time, go look at the graph from August 1996 to now. I can safely say it hasn't been much of a competition. Toromont has outperformed by ~2500% in stock price appreciation alone. If you're a glass half full kind of person, I guess you could look at this disparity as Finning having enormous upside. LOL

  1. Toromont Industries Ltd v. S&P 500 Index
Figure 9: Five year price chart of TIH v. VFV
If I'm not buying individual stocks, I’m buying the S&P 500 and to a lesser extent a Nasdaq index fund. This gives me a second look at the opportunity cost of my money. The story is not as bad as the Finning comparison. If you had bought $100 dollars of Toromont stock 5 years ago, it would have turned into $207 today, whereas the same $100 dollars in VFV would have became $157.
Just a quick aside, you can see the volatility in Toromont’s stock is much higher compared to the VFV. VFV has a relatively smooth trend upwards while Toromont trends upwards in a jagged path. This is the risk of single stocks, they move up and down more erratically, leading inventors who don't have a grasp of the business or conviction in their pick to panic sell or post countless times on Reddit asking why their stocks keep going down. “I bought the stock last week and it's done 3% already, do you guys think it’s going bankrupt? I thought stonks only go up???”

  1. Toromont Industries Ltd v. S&P/TSX Capped Industrials Index
Figure 10: Five year price chart of TIH v. ^TTIN
The S&P/TSX Capped Industrials Index isn't my favourite comparison for Toromont because its constituents cover many industries ranging from waste management (WCN), to railways (CNCP), to Airlines (AC, lol, had to mention it. I miss the days when there were double digits posts about AC. I wonder where those people have gone, because I can tell you where AC stock has gone... absolutely nowhere). Regardless, I used TTIN because I deemed it a better comparison to Toromont than the entire TSX. The story is on par with the other two comparisons. Toromont’s out performance is significant.
I just threw this bonus chart in here because when I saw it, I was like BRUHHH (insert John Wall meme)… It's completely unsustainable but that's impressive given the vast differences between the two.
  1. Toromont Industries Ltd v. NASDAQ-100
Figure 11: Five year price chart of TIH v. ZQQ
Now, of course, past performance does not dictate future results and all that good stuff, but it really gets you thinking about how the rewards disproportionately favours winners compared to the overall market. People are generally happy getting market returns (i.e. the just buy VGRO people) but being able to pick even a few winners really pays. This reminds me of the Warren Buffet quote: “diversification is protection against ignorance.” The context of the quote is that if you are able to study a few industries in great depth and acquire a wealth of knowledge, you can see returns astronomically higher than those who diversify across the board market. The problem then becomes you put yourself at risk of having all your eggs in one basket. Look at what's happening with Wirecard in Europe right now. This is why the real skill in investing is managing risk.

Analyst Price Targets and Estimates

The prince targets set for by analysts range from $63-$81. The average price target is ~$72, with the majority of targets within the 70-$71 range. Given the current price of $65.66, there is a ~10% upside. These price targets haven't changed much due to COVID19 even though revenues and EPS forecasts have been downgraded for 2020. The consensus estimate on 2020 revenues is $3.36 billion, down from the actual revenues of $3.69 billion in 2019 and the consensus EPS for 2020 is $3.01 down from actual EPS of $3.52 for 2019 and $3.10 for 2018. The fact that revenues and EPS forecasts have been downgraded, yet price targets remain untouched, for the most part, indicates that the effects of COVID19 are expected to be short-lived.
Figure 12: Earnings and estimate ranges for Toromont. Note: EPS numbers in this graphic are diluted EPS numbers.

Valuation

Multiples
Assuming P/E ratio stays the same as it has been for the last 12 months (~19x) and EPS goes down to ~$3.00 (as per analyst consensus), the implied price would be $57.
Using the last 12 months of revenues, the EV-to-Revenues ratio is at 1.56x. Assuming that ratio stays the same and with revenues estimated to be ~$3.36 billion, enterprise value (EV) comes out to $5.2416 billion. Using Q1 2020 figures for shares outstanding (82.015 million), cash ($388.182 million), and debt ($745.703 million), the implied price for a share is $58.94*.
\Note: Enterprise Value is equal to market cap plus total debt minus cash.)
Dividend Discount Model
The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value.
The average dividend growth rate is 12% for the last 5 years is 12%. There is no way Toromont can increase the dividend at this pace in the long term, thus, I chose a long term dividend growth rate of 5%. This is the assumed rate in perpetuity. The required rate of return will equal WACC, 6.85% (averaged from 2019 Annual Report). The dividend over the last year is $1.16 (two payments of $0.27 in 2019 and two payments of $0.31 for 2020).
The fair value equals $65.84.
Figure 13: DDM calculation.

Closing Thoughts

There is no doubt that Toromont trades at a large premium. The current P/E is 19x and the CAPE ratio (Shiller P/E) is 26x. The fair value of the Company as per Morningstar research is in the mid $60 range.
Based on all valuations I did and analyst price targets, I would start buying in the high $50 range or maybe the very low $60 range, but my belief in the company has to do with long term thematic trends and how the Company operates, rather than today's price. Although I have to admit, the price does look more attractive now than it did in the beginning of June when the stock hit new all time highs. It seems like the only companies hitting new all time highs these days are tech companies, so it's refreshing to find a non-tech company achieving the same feat.
Toromont is not going to double next year or the year after that. It is a relatively low margin business, with slow growth and a cyclical business cycle. I like that the Company has strong financials, low debt, and good management. They don't take shortcuts or unwarranted risk. Future growth will mostly be driven through acquisition, but management is cautious with acquisitions and don't overextend themselves. One of the biggest problems Finning has been facing for the last couple years is political and social turmoil in South American countries which is affecting their mining clients and thus affecting revenues/margins.
The Q2 earnings are reported on July 22 202. We should have a clearer picture on the prospects of the Company from management. Hopefully we have a better idea of the COVID19 situation by then too. Regardless, I think the company is in a position where its services will always be in demand so short term fluctuations are not something that shake my confidence in this pick.

Limitations and Further Areas of Research

By no means is this an exhaustive due diligence report. This is enough for me to feel confident in the business and its trajectory. Limitations/further areas of the research include:
  • Looking into the growth of each sector Toromont services and extrapolating that growth to calculate Toromont’s future growth opportunity.
    • As per IBIS Research the heavy equipment rental market in Canada is ~$8.3 billion. It grew 1.1% yearly for the last 5 years.
    • The US market is estimated to be $47 billion, with an average growth of 2% for the last 5 years
      • Sorry but I couldn't get my hands on future projections as each report is $750
  • More research into competitors
    • I chose to include Finning only for simplicity’s sake. But there are many other competitors like:
      • United Rentals (NYSE:URI) provides similar services to Toromont/Finning in 49 U.S. states, 10 Canadian provinces, Puerto Rico and four European countries. The only thing being they aren't distributors for Caterpillar.
      • Rocky Mountain Dealerships Inc (TSE:RME) sells, leases, and provides product and warranty support for agriculture and industrial equipment in Western Canada
      • Holt Cat, N C Machinery, Ziegler CAT (none of these companies are publicly traded)
  • Further analysis can be done on the B/S and accounting treatments.
  • The effects of automation in the industry
    • Distributors in the US have started working with industrial automation companies to provide autonomous construction equipment on rent to contractors
      • Sunstate Equipment Co.'s partnership with Built Robotics
  • I was not able to do a discounted cash flow, which would be critical to finding the intrinsic value for Toromont and having true confidence in the company and its trajectory.
  • Further analysis of CIMCO and prospects of future growth
    • Based of the financials, CIMCO seemed like a small part of the business, which is why I mainly focused on the Caterpillar dealership side
These are not all the limitations or areas of further research, they are just the glaring one that came to mind.
>! I know I took a few shots at people in this post. It's all in good jest. If you're offended well.... maybe you should be. I don't know, you have to figure that out on your own or you could make a post on Reddit asking random people on the internet whether you should be offended or not. !<
Remember I'm not an expert, I'm just a random guy on the internet.

Disclosure

I am long Toromont. This information is not financial advice. Please do your own research and/or talk to a financial advisor. All data provided is current prior to the market opening on June 29, 2020. Inconsistencies in data can be due to many reasons, the foremost being that data was spruced from multiple different websites.
submitted by Dr_Sargunz to CanadianInvestor [link] [comments]

How Margin Loans Work - a Primer

Occasionally people ask how these loans work. With that in mind: from the Canadian prairie on a beautiful day in July, to you:

First, if you're from the U.S.: I'm doing this from a Canadian perspective which means I'm ignoring the Regulation T, special memorandum account, overnight maintenance requirement, and initial margin, because all of those are concepts that have no equivalent or application in Canada. But the basics are the same. You can ignore all of those concepts because they have no bearing on how margin actually works. Those concepts are simply restrictions in how you can use margin and as a practical matter they're not onorous restrictions.

I'm also ignoring U.S. risk-based "portfolio margin" because that's a specialized, alternative margin system some brokers offer in the U.S., that we don't have in Canada. We have traditional, rules-based margin that hasn't changed in Canada in 100+ years.

Note: If you are a Canadian resident buying U.S. stock in Canada you still fall under the Canadian rules for margin.

Margin in Canada hasn't really changed since the 1900's, except you have to put up at least 30% nowadays instead of 10% as it was back before the crash of 1929. Basically that's the only thing that's changed.

In Canada you can borrow up to 70% of a position at once for most stocks. This means that if you want to buy $10,000 worth of RBC or Apple, you only have to put up $3,000 and your broker lends you the rest.

Margin was first developed in the Netherlands which basically invented the modern financial system we have today in the West, back in the 1600s. The Dutch East India corporation (ticker VOC) was at one point 20% of the world's total commerce. That would be like a company in 2020 grossing about 16 trillion US a year. By comparison Apple brings in about one half of one percent of that. The Amsterdam stock market developed just to trade VOC and other shares and related securities.

Seein the success of their Continental rivals, the British copied the Dutch and for a long time, until after the Battle of Waterloo, the western world had two rival financial capitals, London, and Amsterdam. For various historical reasons, Amsterdam got pushed out of the picture and for about 100 years the City of London (which is what the financial district in London is called) was the financial capital of the west. They of course now share that crown with New York City.

But it's really the Dutch who started it all, around the time of Vermeer.

***

The concept is that the bank (or broker) will lend against some of your stock, but not all of it. They want a "haircut." The haircut is the amount they won't lend against. In Canada the haircut is usually 30% but can be 50% and there are some stocks the banks won't lend against at all, like most of the stuff on the TSX-V or on the U.S. pink sheets. Every bank is different, so BMO InvestorLine might want 50% on one company and Interactive Brokers Canada might want 30% or vice versa for another. But most things are 30%, some are 50% and some are 100% (meaning no loan).

The maximum available leverage is 1/haircut.

If the haircut is 30% as is typical in Canada, the bank will let you buy up to 1/0.3 = 3 1/3 as much as your cash, meaning, you can borrow up to 2 1/3 dollars for every dollar you put up. That's the limit. But:

So say you have $3,000 and you want to buy on margin. As the bank haircut (margin rate) is 30%, you can buy $3,000/0.3 = $10,000 worth of stock. Obviously you then have a loan of $7,000.

You now have $10,000 worth of stock, but remember, the bank won't let you borrow against 30%*$10,000 = $3,000. So your collateral is only $7,000. So you now have a $7,000 loan collateralized by $7,000 worth of stock.

In the above example, you put up 30% margin, the same as the haircut.

It's easy to see that if your total position slides so much as a dollar, you will have less collateral than $7,000 and therefore get what's called a "margin call" where they will tell you that you have to put up more money in a few hours or sell stock (which automatically pays down the loan to the extent of the sale) so that you have enough collateral to cover your loan, otherwise they will automatically sell a stock of their choosing at an amount of their choosing.

They are also allowed to sell whichever stock they choose automatically without calling you first, in the event of a margin call. That is explicitly set out in your margin agreement.

There have been at least two challenges to that in the Ontario courts in the last 20 years or so, where the former client argued that the bank sold their shares out without first advising them, or, in one of the court cases, after promising to hold off so that the client could put up money, and then reneging on that and selling the client's stock anyway.

The court in both cases sided with the bank. The margin is for real, not negotiable, it is there to protect the bank and the other client's capital, and the words "the bank can sell at any time and without prior notice" mean what they say they mean. If you get sold out at a loss, don't expect the courts to give you redress.

So obviously you need some "buffer" because of volatility, but how much do you borrow?

Now you have to understand some more math.

target margin = 1-(1-x)*(1-haircut)
x is the price drawdown
target margin is how much margin you have to put up.

Say Apple is marginable at 30% (the haircut) by your bank. You decide you want to borrow on margin. But you decide, "I will allow Apple to slide 40% from what I buy it at before I get a margin call." So how much margin should you put up?

target margin = 1-(1-0.4)*(1-0.3) = 1-0.6*0.7 = 1-0.42 = 0.58.

So you have to put up 58% margin.

That means if you have $3,000 to invest, you would buy $3,000/0.58 = $5,172 worth of Apple. If Apple is trading at $350 that means it can slide to $210 before you get a margin call. At which point you will have lost 0.4/0.58 = 68.9% of your money. (Remember, leverage is simply 1/margin.)

You can convince yourself by working through it as a check.

In the example, as you had $3,000 and you margined that at 58%, you bought $3,000/0.58 = $,5172 worth of stock. Obviously your equity at the time of purchase was be $3,000 because you owned $5,172 worth of stock and owed the bank $2,172. Because of the haircut, 0.3*$5,172 = $1,551 could not be used as collateral.

Then the stock slid 40%, from $350 to $210, so your total stock position was then (1-0.4)*$5,172 = $3,103. Of course, you still owed the bank $2,172. But remember, not all of the $3,103 was available be used as collateral, only 70% (meaning, 1-haircut) of that.

So at $210 your collateral was (1-0.3)*$3,103 = $2,172, exactly the same as the loan amount. $210 was, therefore, the lowest price at which you still have sufficient collateral. Anything less and you would have received a margin call or the bank would simply have automatically sold stock, depending on how they saw the risk.

Key takeaway here is that the haircut is 30%, meaning that 30% of your stock cannot be used as collateral, which mathematically also means that your account equity/total amount of stock = (total amount of stock-loan)/(total amount of stock) has to stay at or above 30%. You're putting up 58%, meaning you're borrowing 1/0.58 - 1 = 72 cents from the bank for every dollar of your own money that you put up.

The formula above is simply a rearrangement using basic algebra, of the basic margin equation which is:

price at margin call = initial price of stock*(1-target margin)/(1-haircut)


Whatever you do, make sure you are maxing out your TFSA or possibly RRSP or possibly both before you use margin, or only contribute a small amount of capital to a margin account and make sure your TFSA or RRSP is your main stock investment vehicle. Do not put up your TFSA as collateral on a margin account. You could end up getting a margin call, then the broker transfers the TFSA over to the margin account, but then the stock market slides again and now your TFSA is wiped out along with your margin account. Questrade offers this and I think it's an absolutely terrible idea. Frankly I think the CRA should disallow it. Notice how none of the banks offer this.

Also have a plan for a margin call. You will get a margin call at some point. One good plan is simply to sell enough stock to pay off the margin loan and then re-enter margin when conditions warrant. It makes absolutely no sense to have cash lying around to meet a margin call. Why not just invest the cash and not use margin. The old adage is, "Never meet a margin call" and I think that's good advice. If the bank gives you to choice of either putting in more money in or selling, then sell.

To me there are only 3 reasons you would use a margin account:


To me the following are bad reasons to trade on margin:


Margined investing = active investing = checking your positions at least daily and following a trading plan.

Finally, the average investor working with average capital should always, always, make the TFSA their #1 priority. The TFSA is truly a gem. When I was in my 20's back in the 90's, the only tax shelters for the average Canadian were the sale of their primary residence and the RRSP, the latter which is a deferral and a deduction but not an outright break the way the TFSA is.

The TFSA offers leverage effectively equal to the capital gains inclusion rate * your average taxation rate, and yet without a margin call and at zero percent and it doesn't even magnify your losses. No margin account can match that.

Some investors don't believe in margin at all. Like Warren Buffett, who said in a 2018 CNBC interview, "It's crazy to borrow against securities." (Note he said borrowing against stocks, not borrowing to buy stocks.) But he is right in saying that the bad thing about margin is that it gives you limited additional potential upside but at the cost of great potential downside.

Understand the risks. Read your margin agreement. Consider even meeting with a securities lawyer who can explain the agreement to you.

Consider this statement from an article posted on a popular stock investing website (Fair dealing exception), posted March 15th, 2020:

" https://www.fool.com/investing/2020/03/15/5-ugly-lessons-from-a-nasty-margin-call.aspx

From its close on Feb. 19 to its close on March 12, the S&P 500 fell more than 26%, a huge decline in less than a month. Like many investors who had been using options in a margin account, I faced a margin call during that precipitous decline and was forced to liquidate positions to satisfy that call.
Note that despite facing that margin call, I never actually borrowed money from my broker. I just had margin available and usable from a purchasing power perspective in the event some of my options got exercised against me. It didn't matter to my broker, though, who only saw the margin math, rather than the cash and investment-grade bonds that were also in that account and hadn't seen their values evaporate.
Unfortunately, my experience during that margin call revealed some very ugly realities about how Wall Street really works, particularly when it comes to retail investors. "

He goes on set out "lessons learned." None of those lessons learned is "read your margin agreement before you trade." So he didn't really learn his lesson.

Anyway, it's up to each person to do what is right for them, bearing in mind the risks. But know the risks. Trading with margin doesn't mean you'll be wiped out, but if you trade anything you need to know what you're doing and that is even more important if you've agreed to borrow money.

The post here was to explain how to do the calculations for this popular and important financial tool as there is a lot of misinformation out there on the subject, make some suggestions on how you can use it as a part of your overall portfolio, and give my opinions on how one might do that.

Whichever road or roads you take, good investing.

For more details on the TFSA and its contribution rules, see https://www.reddit.com/CanadianInvestocomments/hcy9r9/how_the_tfsa_works/


submitted by KhingoBhingo to CanadianInvestor [link] [comments]

A Closer Look at Powell's Books and Emily Powell's Letter

Full disclosure: I'm nobody. I am not an important person, I claim expertise in nothing, and my sole motivation for writing all this crap that few people will actually read is a simple desire to express myself. I have never worked at Powell's or personally known anyone who does. I have never joined a union, I have never owned a business. The number of years I've lived here makes my imaginary-but-real "PDX creds level" something other than "tourist," but certainly not "native." Demographic traits like gender, race, and social class shouldn't be factors in determining the value of any idea, and I make no apologies for that belief. While I'm considered well-educated by most standards, my background is not oriented to business or economics. Consequently, my knowledge of these matters is basic (maybe even juvenile) and spotty. If I have overlooked or misunderstood something, I'd appreciate a clarification or correction.
Emily Powell's letter and the public reaction to it has rubbed me the wrong way, and I haven't been able to shake off the feeling.
In particular, I'm troubled by this excerpt, explaining the rationale for mass lay-offs:
We are simply not that kind of business – we run on duct tape and twine on a daily basis, every day trading funds from one pocket to patch the hole in another. We have worked hard over the years to pay the best possible wages, health care and benefits, to make contributions to our community, to support other non-profits. Unfortunately, none of those choices leave extra money on hand when the doors close. And when the doors close, every possible cost must stop as well.
Taken at face value, this is easy to agree with. "I am a small business owner," some say. "I get it. I would hate to have to make that decision." Others are nostalgic and worried about what this means for the future, especially for the Burnside location. This threat to another facet of Portland's cultural identity comes not long after the food trucks were displaced.
Poor Emily, Poor Powell's, Poor Portland.
This is a reasonable response.
On the other hand of the spectrum, people are furious that, in the midst of a health crisis, hundreds of Portlanders have found themselves unemployed and with the timer on their health benefits ticking down to zero. This, too, is an understandable response.
And though it was addressed to the employees, it can be argued that the letter was truly a PR move crafted to elicit the former reaction and get ahead of the latter. Some might call that cynical, and some might call it obvious. Whatever it is, I couldn't let it go and I had to drill down into that paragraph.

"...we run on duct tape and twine..."

Powell's Books is a private, family-run company. We can't go picking through their spreadsheets, but there's ample evidence their annual revenues are somewhere in the tens of millions. There's no way to meaningfully estimate their operating costs, but we can assume their margins are thin. That said, how does a company run well for fifty years and not accumulate a cash reserve and significant body of investments? How does a company not do so before, or concurrently with, expanding to new locations?
Cash flow was presumably healthier in the early days, and that would handily account for any stores with pre-Internet grand openings. Even in a rough marketplace, the idea that they're squeaking by without a nickle left over at the end of the month is curious.
If Powell's cash flow is so poor that the company "runs on duct tape," what sense does it make to react to the advent of tablets and dwindling book sales by shuffling physical locations when big chains like Borders and B&N were downsizing? Why, in late 2006 when Amazon was already a powerhouse and quickly picking up steam, did Powell's relocate one of their retail stores instead of observing that the market was disrupted and they would have to adapt? It's not 20/20 hindsight or an isolated incident, either. They made similar brick-and-mortar moves in 2010 and in 2016.
If we accept that Powell's margins have been razor-thin since these decisions were made, then it must be that these operations were carried out with leverage. What have they accomplished by doubling down on the satellite shops, besides damaging their brand as a quirky, independent book store?

"...to pay the best possible wages, health care and benefits..."

There's no two ways about it. This is straight bullshit.
How many mom and pop stores have driven their "family" to unionize?
Powell's labor relations are not merely an embarrassing footnote in the company's history. The current CEO has continued the legacy of involuntarily layoffs and other assorted big box retailer behavior. Despite the letter describing them as "colleagues who feel like family," there is only evidence that Powell's considers staff as expendable as any other commodity. Recent events are merely an extreme instance of what they've been doing quite comfortably since the '80s.

"...to make contributions to our community, to support other non-profits..."

I don't know Emily Powell. At all.
I don't just mean privately. I'd never heard of her until I'd read a news article containing her letter, and the few hours I've spent researching the company has not yielded a cohesive public persona.
A piece from her alma mater tells cutesy stories about when she was a little girl helping out in the store and describes her as looking more like a co-ed on her way to class than a CEO. Oh, but Belle's not just a bookish little thing that's nice to look at. She's smart enough to keep the modest family business running just the way it always has been.
But sometimes her bio projects the image of an accomplished entrepreneur and community pillar whose legendary and iconic business thrives because of her vigorous online presense despite ruthless competition. When she's not drinking the blood of her enemies, she's chairing various non-profit initiatives and spends her weekends admiring her impressive real estate portfolio.
Well, which is it? Small business owner just scraping by like everyone else with a little of the ol' "bless this mess" attitude? Or business ninja who does battle with superior forces and is merely biding time until Amazon reveals its fatal flaw?
This isn't as simple as taking off some paint-covered overalls and undoing a ponytail before slipping into a cocktail dress and some Jimmy Choos. One can be Jesus on the cross wailing in the wind about having been forsaken, or one can be post-cross Jesus with the wrathfulness and the vengeance and the blood rain and the hey, hey, hey, it hurts! But not back and forth at will, and certainly not both at the same time.
Ironically, when it came time to address a substantial change in the way Oregon corporations are taxed, the "mogul" Emily Powell was nowhere to be found.
A nonpartisan review of Measure 97 opined that it was not drafted very well and could potentially cost working-class Oregonians more than intended. Of course, most of that burden would be the result of the natural corporate reflex of distributing the pain over the masses rather than eat a relatively small loss. It's the rational choice for an entity whose reason to exist is profit. Yet the Toys-R-Us kid in all of us is incapable of retaining that essential truth and wants to believe corporations have a conscience and a soul. How can McDonald's be so bad? Ronald seems so nice.
So, "folksy and relatable" Emily Powell appealed to that kid. It doesn't matter if you shopped at Powell's once on a family road trip, or if you grew up here and the City of Books was one of your haunts, or even if you've never been and you're sick and tired of watching behemoths devour local businesses. In any case, you can't help but be touched when the owner of Powell's says their quirky li'l speciality store might become a thing of the past. The litany of reasons she had for being opposed to it included valid concerns like the wording of how the proceeds would be spent, but her priority was the effect it would have on the little people just trying to make a buck with their small businesses, implicitly including herself. It must have been hard to maintain that "aw, shucks, we're just a local business" image when the only other family-named store fighting a "big business" tax proposal in Oregon was Walmart.
In an interview, Emily Powell justified her opposition thusly:
"We’re relatively low above the $25 million mark. If you’re over 25 you are all the same."
The language of the Legislative Revenue Office's official report on Measure 97 is surprisingly clear, and its description doesn't use quite the same palette as Powell's (emphasis is mine):
Measure 97 retains the current minimum tax structure for S-Corporations, partnerships and C-Corporations with sales less than $25 million. For C-Corporations with sales greater than $25 million, a new tax rate of 2.5% is imposed on sales above the $25 million threshold. For example, a C-Corporation with Oregon sales of $50 million would pay a corporate minimum tax of $30,001 for the first $25 million in sales (the current tax) plus 2.5% on the second $25 million ($625,000) for a total minimum tax of $655,001.
There are only two obvious explanations for this discrepancy: (1) a book store owner with an Ivy League MBA skimmed a corporate tax proposal before a media interview (2) the answer was a deliberate attempt to misinform voters
Keep in mind the report was released several months before the interview. Compare the highlighted amount that a company "relatively low above the $25 million mark" would have to pay annually against what Powell claims immediately before that (emphasis mine):
We’re challenged every year already to figure out how we’re going to be viable for the next year, and this is about a fifty times increase on our current tax bill.
Using the mistaken (revenue * 0.025) formula, the tax bill becomes $1.5M when gross revenue is at least $60 million. Therefore, if we accept that she simply misunderstood how the new rate would work, we are then left to gauge whether she was as sloppy with a calculator as she was with reading a document of critical importance, or if she deliberately undersold Powell's revenue by more than a factor of two.
Meanwhile, Michael Powell personally contributed a $25,000 cash donation to the campaign opposing Measure 97 despite having no active role in the company. There's little use in speculating why he made the donation in the first place and why he chose such an awkward amount. It may have been a symbolic gesture, seeing as it was positively dwarved by contributions from Target, Costco, Kroger, et al. (i.e. massive corporations who stood to shoulder nearly 80% of the burden, as designed). Either way, donating a five-figure sum to a campaign of any kind is not the act of a man who is worried sleepless about money as Belle-Emily characterized her father. The optimistic view is that the Powells are genuinely driven by the desire to provide value to the community through the book store and do not trust the government to use the extra funds to improve public early childhood and kindergarten through grade 12 education, health care, and senior services as intended.
Other than a 2006-2007 offer to donate 10 books to school-age children for every cash donation made by customers, search results for charitable contributions and community involvement made by the Powell's Books entity are slim pickings. Emily and her husband have evidently made a variety of personal contributions to various charities. Emily is listed as a director of what is sometimes called the "Powell Foundation Inc." but is properly identified as the "G R Powell Foundation" (EIN: 930986542). In 2017, it claimed capital gains from divesting some shares, which is a literal answer to my rhetorical question about the likelihood Powell's Books has something in its threadbare, patched pockets besides operating income. It would make no sense for the non-profit Powell Foundation to have a portfolio while the for-profit Powell's Books is on a hand-to-mouth basis.
It's not possible to get a full and accurate picture of their contributions. The point is, no one can verify whether Emily Powell is financially and personally committed to values she publicly espouses. Does she give so much back to the community that she could conscionably undermine an influx of tax dollars projected to be in the hundreds of millions?

"...when the doors close, every possible cost must stop as well..."

That seems universally true for virtually every brick-and-mortar business. It's a funny thing to hear from a Powell, at least about the City of Books, because the "gotta pay the rent" excuse doesn't work so well when you own the goddamn building.
This revelation makes all the missteps involving buildings owned by other companies exponentially more confusing. Powell's pissed away untold millions following an obviously dying paradigm and unironically fancies itself "innovative." They could have consolidated their position by judiciously closing some of the satellites (or just leaving them damn well alone) and making expansions more in accord with the changing times, like refining their web presense.
Powell's got their start online before Amazon, a fact by which they are apparently not embarrassed. Their current tech looks like an actual small business owner tapped his CS undergrad grandson to make it. Before all this research (especially before knowing they've had a website since 1995), I chastised myself for being excessively critical of their in-store inventory database and its website, but it seems I'm not alone.

"... I can only hope we might find a way to come back together on the other side of these terrible times..."

None of my arguments or observations are meant to suggest that Powell was readily capable of keeping her staff paid and covered, nor do I believe she was in any way obligated to find a way to make that happen. Conversely, it's not Portland's responsibility to serve as stewards of the Powell's dynasty.
Should the unthinkable happen and the stores remain shuttered after the pandemic has passed, we need not shed any tears for poor Emily. The little bit of publicly available financial information is plenty. To put it mildly, the Powell family isn't doing too badly. You will not spot any of them buying generic breakfast cereal at Albertson's. All signs point to Emily struggling to keep her bookstores open not because she needs to, and not for the sake of those who work under her, but just because.
The only remaining conceivable reason to support Powell's is its status as a Portland fixture. (Interestingly enough, the Powell's franchise didn't even start in Oregon. The first bookstore was a location in Chicago.) Powell's wants you to show support by treating them like Amazon, except the website isn't as well-developed, prices are significantly higher, and shipping is slower. Under no other circumstances does this sound like an attractive offer, but you're expected to read that letter and conclude that any small business owner would arrive at the same dismal state if they had all of Powell's advantages, not the least of which is freedom of concern for rent at their flagship location. They squandered the only asset distinguishing them from competitors when they kicked nearly every member of their "family" to the curb. Have fun trying to resolve the paradox of Powell's letting everyone go to stay afloat because they want to continue caring about job creation for the little people.
It's not my place to tell anyone what to value. If you don't care about any of the above, and you simply want Powell's to exist for whatever reason, that's your business and your money.
If the intent behind giving up some of your cash is supporting local small businesses, I can only hope you find yourself carefully evaluating what that really means and why it's important.
submitted by maivres_non to Portland [link] [comments]

Deutsche Bank - On the Brink of Insolvency

Deutsche Bank - On the Brink of Insolvency
On this week's edition of DDDD (Data-Driven DD; yes this is what I'm going to be calling this), we'll be looking at Deutsche Bank. Once one of the largest banks in the world, it's now a shell of its former self after the 2008 financial crisis.
Disclaimer - This is not financial advice, and a lot of the content below is my personal opinion. In fact, the numbers, facts, or explanations presented below could be wrong and be made up. Don't buy random options because some person on the internet says so; look at what happened to all the SPY 220p 4/17 bag holders. Do your own research and come to your own conclusions on what you should do with your own money, and how levered you want to be based on your personal risk tolerance.
A Brief History of Deutsche Bank (and Deutschland)
Let’s first start with some background around Deutsche Bank, because it has some very interesting history behind it. In particular, it’s somehow taken part in causing some of the worst crises and scandals in world and economic history ever since its founding in 1870. Here’s a brief timeline:
  • Founded in Berlin in 1870 with the original mission to facilitate trade between Germany and foreign nations
  • Rapidly expanded overseas in the late 1800s, opening branches in London, Shanghai, and South America
  • Financed the Holocaust in the 1930s, including the construction of the Auschwitz concentration camp and the Gestapo
  • Broken up to 10 smaller banks after Germany’s defeat in WWII by the Allies, but those banks later merged back together less than 10 years later
  • Acquired a bunch of overseas banks, including banks in the UK and the US, during the 80s and 90s, growing to become one of the largest money management firms in the world
  • Drove the market for CDOs in 2007 and even created CDOs consisting of their bad subprime mortgages, somehow got an A-level rating on them from the rating agencies, and aggressively marketed the CDOs to investors while knowing that their CDOs were shit. Their head of CDO trading, Greg Lippmann, knew about this and told everyone that CDOs were effectively a Ponzi scheme, even shorting CDOs himself through Credit Default Swaps. He then went around to different funds in Wall Street and told them that CDOs were going to collapse and sold them Credit Default Swaps as a way to short the CDO market, creating synthetic CDOs, the asset on the other side of that trade, with them to sell to other investors. This entire scheme was the inspiration for The Big Short, in case you didn’t realize this by now.
  • Also the bank that finances businesses of the current President, which might be worth considering for political motives / implications if something bad happens to Deutsche Bank
  • Today, they focus on Corporate Banking, Investment Banking, Private Banking, and Asset Management
Let’s see how $DB’s performance has been the past few years
$DB, 2002-2020, Monthly
Yikes, it went from an all time high of $140 in 2007 to $6 today in 2020. In terms of their market cap, it went from $70B from its 2007 peak to $13B today. So, what happened? Let’s look at their 2019 SEC annual filing.
10-K Deep Dive
Income Statement (omitted boring parts)
Revenue € 22.4B (Net Interest = 13.7B, Credit Losses = -723M, Commission & Feed = 9.5B)
Expenses € 25.1B (mostly Compensation and G&A)
Net income after taxes €-5.3B (includes 2.6B of losses from taxes)
From their interest income, 19% comes from Corporate Banking, 39% from Investment Banking, 30% from Private Banking, and the rest comes from some other various operations.
So in a good year, in a period of “high” interest rates in the US (at least relative to the past decade), Deutsche Bank is still somehow losing billions. In fact, it states that their slight 4% YoY increase in net revenue income was driven by the fact that the US had a more favorable interest rate environment during that year, and their reduction of deposits in Germany, where they were experiencing negative interest rates.
German Interbank Rates
Negative interest rates mean that banks need to pay the central bank to safely store their reserves with them, making it really hard to make a profit for banks. Luckily they had the relatively high interest rates of the US to make up for it in 2019. With interest rates cut to 0% again, this will be a very different story for 2020, and they’ll likely see even larger losses for this year.
Balance Sheet (omitted boring parts)
Assets € 1.3T
Cash & Central Bank Deposits € 147B
Financial Assets € 531B (Trading Assets - €110B, Derivatives with a positive value - € 333B)
Loans € 430B
Liabilities € 1.2T
Deposits € 572B
Financial Liabilities € 404B (Trading Liabilities - € 37B, Derivatives with a negative value - € 317B)
Long Term Debt € 136B
Equity € 62B
So there’s a few very interesting things here. First, is the fact that their book value is €62B, or $67B USD, giving them a leverage of 26, which is way higher than literally every bank in the United States.
Top 100 US banks, sorted by leverage
What does a bank leverage ratio mean? It’s a quick way to see how well capitalized a bank is, and its ability to withstand negative shocks to its balance sheets without becoming insolvent. It’s harder to think of a more severe shock to the economic systems and people’s ability to pay back loans than a complete worldwide lockdown.
Another thing fishy with their book value is that their market cap is sitting at 13B USD. Even in January, before the stock market crashed it was sitting at 17B USD. That’s a big red flag, because theoretically if Deutsche Bank’s assets were all liquidated today, investors should theoretically be left with €62B, or $38 per share, which is way higher than the stock’s current $6 share price. This should especially be easy because the vast majority of their balance sheet consists of liquid assets or assets that should be easy to liquidate… or are they?
Derivatives
Let’s take a closer look at their derivatives. In their annual statement, they mentioned that they were trying to discontinue their derivatives business, which already helped cause one banking crisis a decade ago. They restructured and put all their “bad” capital, like their derivatives, in its own entity, called the “Capital Release Unit”, with the goal of liquidating these assets to release capital and de-leverage themselves. In 2019, their Capital Release Unit lost a total of €3.9B and held the €333B of derivatives. It also looks like they’re doing a bad job of releasing this specific class of capital, because their derivative assets and liabilities actually increased since 2018. That’s because a lot of these derivatives are not traded in exchanges, but instead over-the-counter with parties that have an ISDA agreement. As anyone who’s watched The Big Short can tell you (so literally everyone else on this subreddit), these OTC derivatives tend to be illiquid and difficult to value due to lack of price discovery.
This is why Deutsche Bank’s book value is more than their market cap, even before COVID-19. There’s doubt as to what some of the OTC derivatives are actually worth. They have a book value of €62B with derivatives supposedly valued at €333B, meaning if the actual net value of these derivatives are 19% or more lower than what they say they are, they become insolvent. This is the bank equivalent of buying SPY puts on margin in Robinhood (yes I know you can’t do that), but not knowing how much your puts are worth until you try selling. If you were like most of wallstreetbets you probably bought SPY puts when SPY was at 220. You know if you tried to sell your puts you might find out that they’re now worth a lot less than you originally bought them for (in the case of OTC derivatives, they can actually have a negative value!), realizing your portfolio value (equity) is below zero and you get a margin call (insolvent). In fact, they’ve allegedly done something similar in 2008 by failing to recognize losses related to the explosion of super senior tranches of CDOs, which may have led to joining Lehman Brothers in the bank graveyard if they did.
Let’s take a closer look at these derivatives, specifically the ones that mature in 2020.
Derivatives maturing in 2020 by nominal value
Type Bilateral Central Counterparty Exchange Traded
Interest €2.5T €8.7T €4T
Currency €4.3T €95B €17B
Equity €98B 0 €184B
Credit €39B €63B 0
Commodity €2.7B 0 €31.9B
First a few things to clarify. Bilateral Clearing is an agreement between some party with an ISDA agreement with the bank, where the bank acts as the counterparty to the derivative being sold. Central Counterparty Clearing is when an institution facilitates an OTC derivative transaction by ensuring both sides of the transaction are financially sound enough and have enough collateral to not default on the derivative, and if any party defaults on the derivative, the central counterparty is now financially responsible for their side of the trade. This was put into place after 2008 when the risk of counterparties like AIG defaulting on credit default swaps became a huge systematic problem.
Also, a nominal value is different from a derivative’s actual price. For example, if you bought a SPY 4/20 220p, the nominal value of your derivative is $22000 (100 shares * $220 per share) but the actual value of your put is $0.
We know that since Dec 2019
  • Interest rates got cut all around the world
  • Currencies exchange rates have dramatically changed since December with oil-exporting countries. For example USD / CAD went from $1.30 to $1.42 during this time period
  • Equity values exploded, even with the bull run we’re currently in
  • A lot of BBB-rated companies got downgraded, and we might see defaults come in, even with the Fed buying bonds
  • Oil is fucked
These recent events will probably change the valuation of these derivatives by a lot, some of which are going to be realized on their balance sheets immediately (eg. exchange traded derivatives) because their valuations can easily be calculated. The key here is that the net losses needs to be below €62B or they become insolvent.
Now, we’re in the age of too-big-to-fail businesses and the US government and Fed bailing out everyone, which is a real risk of taking a short position against $DB, especially considering how connected they are with other US financial institutions by acting as the counterparty or the central counterparty clearing house to many derivatives that they hold. If Deutsche Bank goes under, a lot of other financial institutions are going to have problems. The problem with Deutsche Bank is that it is not a US company and can’t be hence bailed out by the US government. In fact, they weren’t eligible for TARP, the last government-funded bank bailout back in 2008, which is partially why they’ve been a financial mess ever since.
Their Q1 earnings call is on April 29, so we’ll find out how much trouble they are then.
TLDR; DB 5p 10/16
submitted by ASoftEngStudent to wallstreetbets [link] [comments]

Assessing Costco intrinsic value


https://preview.redd.it/rq3f7d5jx7v41.png?width=624&format=png&auto=webp&s=6a5a089910b8d51723bccd6c73aeb8eccd675373
1. Business Tenets
1.1 Is the business simple and understandable?
Costco operates a relatively simple and understandable business. Revenues are derived from sales of commodity items and membership fees. 97% of revenues are derived from net and sales and 3% from membership fees, both metrics have increased slightly since 2017.
Operations are worldwide (12 countries as 2019), but 67% of the 782 warehouses are located in the US and Canada. Expenses are derived from merchandise cost and SGA mostly, 87% and 3% of total revenues respectively.
Net cash flows from operating activities increased by 10% from 2018 to 2019.
In terms of labour relations, Costco stands as a desirable employer. On top of offering health and retirement benefits above competitors, Costco’s employees perceive on average above minimum wage. Costco is involved in several litigations regarding the treatment of seasonal employees and unfair compensation, these litigations should not affect future performance.
Price flexibility is minimal, pricing and product offering are the main factors to succeed in the industry. Costco achieves price differentiation through discounts on big purchases and running tight inbound logistics. Costco would have to absorb the reduction in prices internally instead of passing the burden to members, in case of aggressive competition.
Capital allocation has remained stable for the past two years, despite the increase in net sales (18.3%). ROE decreased from 0.25 to 0.24 in 2017-2019, and ROA increased from 0.07 to 0.08 in the same period. Dividends decreased considerably from $8.90 to $2.44 in 2017-2019 or 74.6%, this should work as a catalyst for the stock to appreciate as resources are used to buyback stocks instead.
1.2 Does the business have a consistent operating history?
Yes, the company has been doing the same business for the past 43 years. The model delivers value to members. Renewal rates are in the high 80s in the US. The average annual sales per location are growing at 9% annually. The business model is shifting insofar as the company is deriving 4% of total sales from its online platform. In 2017, the average annual sales growth per location was only 4%. By 2019, the figure grew to 9%, way above the goal of 5% stated in the growth strategy. The reason for this growth is the expansion of operations outside of the US and Canada regions. Does the fact that the company is shifting resources to its online offering and locations overseas changes the underlying nature of the business? Considering that the original wholesale discount model delivers value, I see these changes as necessary adaptations to a new environment instead of deep changes in the underlying nature of the business.
1.3 Does the business have favourable long-term prospects?
Costco should last for the next 25 years regardless of future recessions, and/or inflations/devaluation of the American dollar. The services and products of the company are: 1- desired, the majority of its offering is acyclical and members have to replenish them constantly. 2- has no close substitute, most of the offering is available at other retailers; however, Costco’s prices, private label brands and special offerings are unique and offer value to members. 3- is not regulated, there are no constraints in terms of prices besides the competition. Overall, the former factors, plus the large network of warehouses, distribution centers and food processing plants create a moat around Costco.
2. Management Tenets
2.1 Is management rational?
Despite its maturity, Costco allocates 12% of net sales into the construction and development of new warehouses. 25 new warehouses were opened and net sales increased by 8% in 2019. The stock repurchase program was retired. Additionally, 1.09 and 1.76 million shares were repurchased at an average of $225.16 and $183.13 during 2019 and 2018 respectively. In April 2019, a new repurchase program in the amount of 4 million was authorized. Cash dividends per common share declined by 73% from 2017 to 2019. Overall, management is allocating earnings into the construction of new warehouses and the repurchase of shares instead of paying cash dividends.
2.2. Is management candid with shareholders?
Yes, it is. Annual reports do a solid job of detailing each of the risks that the company faces. Management informs shareholders about risks related to foreign currency, gasoline price fluctuations, exposure to the China-US trade war, regulations on wages and healthcare, cannibalization of sales from new locations, etc. Moreover, a 5% growth in sales annually is clearly defined as the benchmark to measure performance.
2.3 Does management resist the institutional imperative?
Yes. Costco has avoided the minimization of its employees’ salaries and benefits despite the industry trend of reducing costs through minimum wages. Moreover, Costco grew organically instead of M&A during the last bull market.
3. Financial Tenets
3.1 Focus on return on equity, not earnings per share
Return on equity has improved exponentially from 12.5% in 2011 to 26.10% as of 2019, as it is expected to continue increasing as Costco expands operations internationally.
*The company does not present marketable securities in the financials.
Overall, management has been successful at generating returns given the capital employed.
3.2 Calculate “Owner Earnings” to get a true reflection of the value
Owner earnings = Net income + depreciation and amortization + depletion – capital expenditures + additional working capital
Owner earnings in 2019 = 3659 + 1492 - 2865 = 2,286
Owner earnings in 2016 = 2679 + 1370 - 2502 = 1,547
Owner earnings are increasing substantially as economies of scale increase the profitability of each location.
3.3 Look for companies with high-profit margins
SGE as a % of sales has remained stable at 10% despite the constant addition of new locations.
Operating profit margin 2019 = 2.45
Operating profit margin 2017 = 2.12
Operating margins are high for the industry, and they are increasing as operations expand.
3.4 For every dollar retained, make sure the company has created at least one dollar of market value
Retained earnings accounted for $10258 in 2019, which is an increment of $2372 from the $7887 of 2018.
At the same time, the market value of the company increased from $217 per share (438,437) at the end of 2017 to $296 per share (438,775) at the end of 2019.
Thus, market value increased from $95,140,800 to $129,877,400 or roughly $34,737 million which is considerably higher than the increment in retained earnings.
Market Tenets
4.1 What is the value of the business?
Using this publication as a guide
https://medium.com/popularengineering/how-to-calculate-the-intrinsic-value-of-stocks-like-warren-buffett-f9b97e3738ba
I ended up with the following numbers: 3% expected growth of earnings per share,10% discount rate, DCF 23.95$ per share, terminal value 99.17$ per share. This leaves me with an intrinsic value of $123.12 per share for Costco which is less than half of the current market price of the stock ($310).
4.2 Can the business be purchased at a significant discount to its value?
No, Costco is currently trading at $310 per share or 35 PER which is substantially overvalued according to the analysis.
Disclaimer: I do not own Costco stock. This was a learning exercise only. This is my first valuation and I would like to know what I could do better next time. Please let me know if you have any constructive criticism to offer, especially regarding my intrinsic value. Does estimating an intrinsic value of $123 per share makes sense? I feel like I probably messed something up along the way.
Also, I used “The Warren Buffett Way” as a guideline for the analysis.
Thanks in advance for the input.
submitted by 3012hs to SecurityAnalysis [link] [comments]

How to Determine Enterprise Value & Common Pit-falls to Avoid

Following up on this post where I wrote about the importance of balance sheet analysis and indebtedness in valuation, and how seemingly good companies can be value traps. Today I am writing about the other (and more important) side of the equation: the P&L and Enterprise Value and common pit-falls to avoid.
Following this post I am thinking about writing up a valuation case for one of the FAANGMs or popular TSX listed company given run-up in the market. If you have any companies which you would like me to take a crack at, please let me know in the comments.
As a refresher, in the last post, we grounded analysis in the following valuation formula. I've modified the EV calculation slightly - more on this later.
Equity Value1 = (Enterprise value)2 - (Net indebtedness)3; where:
  1. Equity value is the implied value to equity owners, or 'market capitalization' of a stock
  2. Enterprise value = (Un-levered Earnings metric) x (implied multiple) or DCF
  3. Net indebtedness = (debt and debt-like items) - (cash)
One thing I glossed over is how do you determine the enterprise value. What earnings metric should you use or what implied multiple is appropriate. And how is it that different methods can come up with wildly different valuation of a company?
To address this, let's talk a bit about the two most common valuation methods you might use to determine Enterprise Value or Equity Value, common pit-falls, and why you might use one over another.
Standard valuation methods:
  1. Discounted cash-flow: This is the most commonly cited method to use and most popular with institutional and analytical investors, although possibly the most prone to error. The DCF takes the sum of the expected future cash-flows of a company, on an un-levered basis (excluding interest expense), and discounts them to today's present value. The theory is simple: cash today is worth more than cash in the future. In fact, in theory the value of any company should only be based on a discounted cash-flow, yet it is often avoided or incorrectly implemented, because:
    1. It is extremely hard for individual investors to accurately estimate the future cash-flows of most companies. Investors often don't have enough information to predict future events, new entrants, technology changes, supply shocks, or unknown events. There is also psychological factors at play such as recency bias, the halo effect, and confirmation bias that often result in poor assumptions. And the sheer number of assumptions required to predict cash-flow (such as revenue growth, product mix, pricing, margins, capex requirements, working capital) make this incredibly difficult to predict
    2. Discount rates require a lot of judgment and are constantly changing. The discount rate both provides for the time-value of money and the risk of the future cash-flows. The time value of money is constantly changing with yield curve and interest rate expectations (now at an all-time low!). And the risk of future cash-flow may change based on performance of the business, capital structure (how much debt it has taken on), and outside factors which are outside of an investors control.
    3. Terminal growth rates / exit multiples have a large amount of room for error. A DCF goes on into perpetuity. To account for this, most folks use the Gordon Growth Model or Exit Multiples to address the value of the 'terminal year'. However, as discussed below, it is inherently very hard to predict the long-term expected growth or the appropriate earnings multiple of a company at the present, let alone in the future.
  2. Comparable company analysis: This is the method most popular with casual retail investors given aforementioned risks of DCFs and due to the fact that it is much less time consuming. Comps (for short) take pre-determined earnings metrics and compare them to other comparable companies to determine relative valuation. In theory, this is a very efficient analysis but there are significant pitfalls and considerations before partaking in this analysis:
    1. What earnings metric is appropriate to value the stock? There are so many to choose from: P/E; EV / EBITDA; Revenue are most common, but many folks also use EBIT; Free CashFlow ("FCF"); (EBITDA - Capex); etc.
      1. First, consider the industry. What are analysts using to value the stock? There is typically a reason they may consult one metric in their comps analysis. Look up some credible analyst reports (BMO, CIBC and the banks come to mind). If you are valuing real estate, it may be Funds From Operations ("FFO"). If you are looking at early-stage SaaS company, it may be Annual Recurring Revenue ("ARR").
      2. Second, consider the stage of the company: Is it mature and generating cash, or is it early-stage and not profitable yet? The more mature the company, the more it is necessary to move "down the P&L" to more mature metrics.
      3. Finally, consider if you will use an unlevered or levered metric. A levered metric includes interest costs in the earnings denominator; an unlevered does not. If using an unlevered metric, you are calculating Enterprise Value; if using a levered metric you are calculating Equity Value. Using an unlevered metric (e.g. Revenue, EBITDA, EBIT, FCF) allows you to compare companies regardless of capital structure, which is both more comparable and helpful if you are valuing potential acquisition targets; however, levered metrics may be helpful if the capital structure is never expected change (i.e. very large REITS, utilities)
    2. What multiple is appropriate to use? Again many factors here but this would mainly depend on the expected growth, future profitability expectations, and comparable companies
      1. Expected future growth: Growth is the single most important driver of implied multiples. Although cash-flow today is worth more, if a companies cash-flow shrinks, it will be worth much less in the future. Conversely, if it grows, it will be worth much more. Growth is inherently hard to predict, but broadly speaking can be estimated by analyzing a companies historical growth, value drivers, and creating reasonable expectations for the future. Retail value investors often over-look the importance of growth, but it has been extensively written about by key value investors; namely Ben Graham. In the Intelligent Investor, Graham writes about his rule of thumb, that the value of a stock ("V" in terms of P/E should equal = (8.5 + 2 x the long-term growth rate. Thus, a stock expected to grow at 5% per year should be worth 18.5 x P/E and a stock growing at 10% per year should be worth 28.5 x earnings. Graham was using his formula to describe value investments and this should not be applied loosely to high-growth companies or on its own, but this clearly demonstrates the materiality that he believed growth had on value.)
      2. Future profit expectations: When i look at growth, I am typically looking at revenue growth as this is the least prone to financial engineering and shows the fundamental growth of company products and services. So i like to also consider the potential future profitability on its own - that is how profitable will the company grow to be. There are several ways to review this, but I like to ground future expectations on historical trends and future expectations. Is it a 'high growth' business that can scale to grow profitability, or is it cyclical and driven by other factors (such as commodity prices). This is particularly helpful when looking at revenue multiples for early stage companies which are not yet profitable, or turn-around operations.
      3. Industry comps: While growth and risk are typically very hard to predict or model, comps provide a good check on these assumptions. The trick is finding comps, as using incorrect comps can provide a much different value. In fact, choosing incorrect comps can lead to materially incorrect valuations. It is best to look at companies with similar products and services mix, in the same industry, same maturity cycle, and growing at the same rate where possible.
OK, so the above was information overload. What the heck are investors supposed to do??
I cannot give investment advice, but I would say my analysis depends heavily on how much time I am willing to invest into one stock at the expenses of monitoring other stocks in my portfolio.
Disclaimer: I am not a licensed professional and this is not investment advice. Invest at your own risk
submitted by javalikecoffee to CanadianInvestor [link] [comments]

My Thoughts on MMI - Detailed Analysis

Summary
Metro Mining Limited (MMI) is an exploration and mining company. The Company is engaged in exploration of coal and bauxite. The Company is focused on the Bauxite Hills Project, which is located approximately 95 Kilometers north of Weipa on Western Cape York, where the Company controls approximately 1,300 square kilometers of exploration tenements. It also has approximately 4.5 billion tone thermal coal resource in Queensland's Surat Basin. The Company is also engaged in projects, including Columboola Project and Bundi Project. The Company's Mahar San project is located in the Sagaing region of northern Myanmar, approximately 220 kilometers northwest of Mandalay. The project consists of over four concessions, including approximately three small mining concessions for copper of 16 to 20 hectares, and copper exploration concessions covering approximately 7.5 square kilometers. Currently, all coal tenements for MMI are not in use due to the depressed market.
Current Output
The company is currently producing 3.4 Mt of Bauxite which is shipped to current base of Chinese clients where China is currently consumes 50% of world bauxite supply. The current FY2020 will see revenue generation of $218M and a bottom line of $12M.
Future GROWTH
MMI has plans to expand to 4Mt by end 2020 and 6Mt by 2021 and they currently look on track to do this. The design and build of their floating terminal was completed in late 2019 and this ensures they have the transport capacity to meet their 6Mt goal as well as offering major freight savings which accounts for 50% of bauxite costs. With their expansion to 6Mt, revenue should increase from$194M in 2019 to $218M in 2020 and to $313M and $321M in 2021 and 2022 respectively. This will result in a bottom line revenue from $7M (2019) to $12M (2020) to $39M (2021) and $42M (2022). As MMI scales its production, cost reductions in mining and economies of scale should occur which will positively impact the bottom line, despite production staying subdued at 6Mt for the foreseeable future.
Bauxite Market
Bauxite is a naturally occurring material which is predominantly used as a feedstock for the manufacture of alumina, which in turn is predominantly used to produce aluminium. It takes around 5t of bauxite to produce 2t of alumina to produce 1t of aluminium.
MMI produces high quality Bauxite with very low levels of reactive silica (thanks to Australian geography) making production cost substantial lower. China consumes 50% of the Bauxite market and all MMI clientele are Chinese firms. Chinese Bauxite Production is expected to increase slightly as well as domestic supply decreasing substantial as the country exhausts its current resources.
Regarding Bauxite price it follows the CBIX index and Shaw & Partners put it simply "In our view, the bauxite price is likely to trade within the recent range of US$45/t to US$55/t whilst Guinean production is supplying the marginal tonne into the Chinese market. There may be an opportunity for the price to escalate beyond 2023 as Chinese demand continues to grow, but in our view, bauxite is not a scarce commodity and any surge in price is likely to be short lived as supply responds. "
Chinese Bauxite Consumption
Competition and competitive outlook
While MMI and any Australian miners produce some of the highest quality Bauxite in the world. Guinea has risen as a major bauxite producer to become the biggest ion the world over the last five years. This is largely due to Chinese investment which is in return for capital for infrastructure they receive bauxite concessions. This is the major industry disruptions and represents the biggest hurdle for MMI as Chinese demand for imported bauxite is expected to continue to grow, but supply growth from Guinea is likely to meet this demand until at least 2022/23.
Core drivers & catalysts
Key risks
Financial Health
As of March 2020, the company is in a fairly healthy situation. Cash on hand is $11.7M (including other receivables). While there is Health Trend is fairly stable their bankruptcy score is on the cautious side due to their $35M in debt which is used for expansion to 6Mt. MMI also have $7.1M in restricted cash comprising of financial assurance bonds and other security deposits
Health Trend and Bankruptcy Risk
Valuation
The table below shows P&L of MMI from 2017 - 2025 financial year, where anything after 2020 is predicted. MMI currently has 1.38B shares on issue. 2020 derived EPS = $0.01
MMI Profit & Loss
Using a DCF to value the company, an intrinsic value of $0.94 where growth was calculated as 125% annual from NPAT of $12M (2020) - $42M (2022) and a 5% terminal growth rate as per the profit and loss thereafter.
Discounted Cash Flow Intrinsic Value
The company currently trades @ $0.10 which has been substantially depressed due to initial investment in expansions and production increases as well as COVID-19 impacts. But the company is positioned for exceptional growth as its huge investment period is well behind it.
submitted by chase_hendrix to ausstocks [link] [comments]

REMINDER--SUPPLY & DEMAND DO NOT EXIST--Marshall, Walras, Friedman, Hayek GTFO (I.e. a primer on economic critique. Here is a summary of lots of esoteric & pedantic economics developments in the last 100 years spread across OP & Comments)

One thing I'm always concerned about is if people give the economics view point too much credit. To this end, I am going to give a quick little primer on some of the more esoteric, but important, debates in economics and why they matter to us.
What I want to point out is that the state/market, equity/efficiency, command/exchange, rational/irrational, theory of choice/theory of causes, 'in theory'/'in practice', supply/demand, politics/economics distinctions do not actually hold.
But, MOST IMPORTANTLY, SUPPLY AND DEMAND DO NOT EXIST!
I am going to start with classical economics, go to some outside critiques and finally in the last section, take on neo-classical. I have a reason for doing it this way.
BIG NOTE: I am going to continue this in COMMENTS, THIS IS NOT THE COMPLETE CRITIQUE
Preliminary observations on the two foundational bases of Supply & Demand:
Classical Theories
For various related reasons, the old school Labor Theories of Value (whether Smith, Ricardo or Marx's) do not hold in practice, nor do the classical theories of the center of gravitation, Malthusian theory of population or the Tendency of the Profit rate to fall. What the old school theories do have an advantage on is a focus on production over exchange, reproduction over statics, scale & scope over constant returns, distribution over efficiency, the role of rents & land, the role of politics & so on. Thus, although commodities cannot be reduced to their time-dated basis in labor, nor will market prices converge to natural prices via some classical center of gravity, not will long run population & rents eat up marginal profits, the Classical Theories are better, in many ways, than modern ones.
http://gretl.ecn.wfu.edu/~cottrell/ope/archive/0709/att-0111/01-GravMec_pdf_.pdf
http://www.ssoar.info/ssoabitstream/handle/document/29053/ssoar-jebo-2009-2-sinha_et_al-sraffas_system.pdf?sequence=1
http://ricardo.ecn.wfu.edu/~cottrell/ecn265/Principles.pdf
That said, I am not here to argue and will clarify anything I post, as this is very esoteric stuff, but I will not argue with either hardcore neoliberal types NOR with extremely online defenders of the Labor Theory (because after all, I think two key insights of it are correct).
There are several reasons for this. Smith's theory of value was as follows: every commodities 'natural price' is the natural price of the Wages + Profits + Rents which went into it i.e. Commodities Z = W + X + Y and W = P + Q, X = R + S, Y = T + U, so then Z = P + Q + R + S...etc. However, at no point will they reduce to zero, where will always be a commodity residue--which is to say nothing of his Diamond Water Paradox. Ricardo saw it all as a Cost of Production, based in the value of labor--however, a problem emerged: when he figured it this way, the size of output became dependent on its distribution. Marx's innovation was to see it as a series of reproducing matrices of production, with labor as the long term valuation metric.
The problem is that, for this to be true, labor's proportion in production has to be proportional to its output of production--i.e. the organic composition must be labor proportional--which Marx, himself, acknowledged it wasn't (and furthermore, he saw competition of capital between as what equilibrated them!). Furthermore, labor's output, due to scale & scope & other such things, often depended on the whole of other production--the rate of exploitation could not be determined ahead of time. Another issue was that Marx, himself, also acknowledged that rents (intensive + extensive + absolute) could play a role in the long run determination of value not just price. Later, Morishima showed that the Tendency of the Profit Rate to fall is false because the installation of labor-reducing, capital-using technology will always leave wages/profits as high as or higher than they were IF they do not involve an endogenous change in social structure or power. Thus if the new capital increases owner control it may reduce output and thus profits, but otherwise it will not.
http://scholarworks.umass.edu/econ_workingpape63/
https://zcomm.org/wp-content/uploads/zbooks/htdocs/books/2/2.htm
https://www.pdx.edu/econ/sites/www.pdx.edu.econ/files/PSUSvM.11182016_Hahnel_Nov18_2016.pdf
Furthermore, Marx's law only worked in the static case anyway, excluding if there was innovation, learning by doing, human capital accumulation, static returns to scale, scope & specialization, the creation of new markets (either through products or imperialism), all of which prevent a TPRF.
Monopoly, rising rents, rising worker OR employer power, state control, externalities & diseconomies of scale CAN lead to falls in profit rates, but only one at a time. I.E. unless these constantly or proportionally rose, they'd lower the profit rate once, and then adjustments would simply happen within that margin. Also, if capital is not mobile due to entry & exist costs or monetary issues, then the competition of capital which would lower its rate doesn't exist.
Thus, even in the static case, scale, scope, competition, monopoly, rents, money & so on need to be accounted for. Thus the profit rate conditionally falls (equalizes) in the static case, but will not fall in the dynamic one, absent perfectly countervailing social changes.
Marx's distinction of labor power from labor, of the importance of reproduction & of the importance of distribution must all be kept & acknowledged.
Finally, quickly on Malthus & the Commons. For Malthus, effectual demand determines current output, and in the long run, it is demographics which equilibrate. As wages rise, so does childbirth. Eventually, he argues, because population grows geometrically & food algebraically, the former will outstrip the latter. In the meantime, infant mortality, sanitation & life expectancy will adjust these to output.
The problems are this:
  1. This is only true where all land is already used up such that marginal rents are pushing against profits & wages--spare land, as long as it is not to costly to access, will prevent this process
  2. Population doesn't grow geometrically. Development & birth rates display an inverted-U shape. The fewer children who died, the longer people live, the more literate people (especially women) are, the more open the access to contraception, sex education & abortion, the higher people's incomes, the stricter the restrictions on entry & exit to the labor market & the strictness of social, moral, cultural & religious frameworks all reduce rates of childbirth.
  3. Food doesn't grow algebraically--even before industrialization, there were varying rates of scale. Food production displays constant returns to scale in the long run, but will display increasing returns to scale, statically, due to industry, unit costs, transportation, storage, variation & complementarities & in the long run due to innovation, learning by doing, training, investment, crop breeding & so on.
  4. Furthermore, industry leads to rising agricultural output because the least efficient agricultural workers go to industry, thus leaving the most efficient agriculture & the most efficient industry & these two become a virtuous cycle.
Thus, where there is available land, static & dynamic returns to scale in industry and/or agriculture, static/dynamic food production, non-geometric population growth, endogenous social change, Malthus does not apply.
Finally, the commons does not deteriorate simply from use.
First of all, there are several kinds of commons goods. The social & intellectual commons, by definition does not deteriorate.
Second, where there are network effects, due to productive consumption, like in social capital, grids, social networking & so on, use increases productivity.
Third, though, where the good is fixed, either in use, or, worse, deteriorates, it's collapse depends on the following:
  1. Throughput, the rate of resource intensity, has to stay static, grow slower or fall relative to productivity growth. If throughput efficiency stays at or rises above productivity growth, then resource use will remain fine.
  2. Using a resource doesn't entail complementarities which reduce harm--so, for example, some crop rotations prevent each others deleterious effects--this is related to (1), but on a static scale
  3. There must be static or rising returns to exploitation (if there is satiation in consumption or a glutted market, people won't take more!) of the resource.
  4. (a). People must be fully informed of the limits or sufficiently asymmetrically informed to know to exploit it. Where information is poor, such that people don't realize the advantage gained from exploitation, they will not do so. (b). The same goes for rationality, boundedness & foresight. In other words, if people are fully informed, totally uninformed, or asymmetrically, but sufficiently informed and/or totally rationally, totally irrationally or asymmetrically but sufficiently rational, then, yes, it can occur. BUT if people are not fully informed or uninformed, rational or irrational & are otherwise equal in info & capabilities, it will not occur.
  5. Similarly, people must be intrinsically selfish & rational. They must have a single set of rational preferences--they cannot switch between kin/political/powemoney logics, cannot have preferences or preferences etc. As soon as the latter emerge, countervailing processes may emerge. That said, the tragedy can still occur under alternate preference regimes, but rationality is a necessary condition of it necessarily happening (lol)
  6. Institutional, coercive/cooperative, communal processes cannot exist to prevent it. If people have moral mechanisms, common habits, political institutions, property, coercion/cooperation, it can be prevented. This is often the argument for privatization, but, for privatization to prevent resource depletion would require (a). that the costs of deterioration are born fully by the owner, that (b). they have sufficient information to prevent it, that (c). the availability of throughput reduction investment exists, (d). (optional) they feel some social obligation or are regulated & (e). that, even without that, the price of finite resources rises proportional to total stock, multiplied by the interest rate (the Hotelling rule)--in other words, the shorter term people think, the more costly resources must be, given the total stock, in order to prevent their exhaustion--the optimal price for declining resources balances total stock & total time preferences.
In empirical fact, common resources existed without depletion or private property for thousands of years. In fact, they still do. It was only after enclosure, colonialism, slavery, mass capitalism recently, and in state predation classically, that the tragedy of the commons began.
http://evonomics.com/tragedy-of-the-commons-elinor-ostrom/
https://www.aeaweb.org/conference/2016/retrieve.php?pdfid=295
https://www.boeckler.de/pdf/v_2013_07_31_mccombie.pdf
https://libcom.org/files/Caliban%20and%20the%20Witch.pdf
https://www.newscientist.com/article/mg23631462-700-the-real-roots-of-early-city-states-may-rip-up-the-textbooks/
Demand
Theories of value, like Menger, Bohm-Bawerk, Jevons & others who see value as totally determined by demand & preferences have quite a
bit of explaining to do. See, all of the empirical evidence in psychology & neuroscience points to the fact that humans have multiple methods of evaluation, desire & so on, none of which are reducible to one another, but, in many ways, this is irrelevant. Why? Because we already know that value is a social thing, rule following is public & legibility, standardization, value systems & so on are socially instituted. We all know we decided between various kinds of values all the time--monetary, kinship, political, moral--and so on. In fact, pricing in one type of value system (to abuse a metaphor) can be costly in terms of another. It is morally costly, for example, to price organs.
http://www.annualreviews.org/doi/pdf/10.1146/annurev.soc.012809.102629
http://rady.ucsd.edu/faculty/directory/gneezy/pub/docs/fine.pdf
http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2481&context=law_and_economics
https://www8.gsb.columbia.edu/rtfiles/management/healy_kieran.pdf
But, worse than this, people display indifference constantly, and, not only that, but display preferences which are not well-ordered, not transitive, shift constantly. AND, humans also display endogenous preferences, tutored preferences, dual-preference structures, meta-preferences & so on. We're subject to changes in our preferences due to socialization, advertisement, speculation & the like. We also have preferences over entire social systems and over processes & methods--means & ends are not separable. We work for its own sake. We don't want to be members of clubs which will accept us.
Preferences over preferences, over systems, over processes, over means, over social groups, over aggregate outcomes & preferences with multiple origins, social effects, inconsistent valuations & costly switches, & preference structures which are non transitive, not well ordered, not complete & display indifference cannot form a theory of value. Full Stop.
https://zcomm.org/wp-content/uploads/zbooks/htdocs/books/4/4.htm
http://dlc.dlib.indiana.edu/dlc/bitstream/handle/10535/3264/Elster.pdf
http://home.sandiego.edu/~babegendeElster.pdf
http://econfaculty.gmu.edu/bcaplan/whyaust.htm
https://www.gmu.edu/centers/publicchoice/faculty%20pages/Tylerationality.pdf
Goodbye Invisible Hand! Goodbye Supply Creating Demand! (Say's Law)
The worst idea, implicitly held, by Smith, Ricardo, Mill, Malthus, Marx, Menger, Jevons, Bohm-Bawerk & their ilk was the invisible hand. Similarly bad is Say's Laws--that supply creates demand (which Malthus & Marx denied).
First, any invisible hand requires an invisible foot--coercive mechanisms which address those who refuse to accept the logic of the invisible hand & discipline people into doing so. The Foucauldian critique of neoliberalism & disciplinarity, as embodied in figures from Beccara to Becker, is well trodden, as is Harcourt's critique of the state as the backstop of the market through mass-incarceration.
It is trivial to prove that, at least in our formulation, markets & private property need the state.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.837.9863&rep=rep1&type=pdf
http://inctpped.ie.ufrj.bspiderweb/pdf_4/Great_Transformation.pdf
Some try to argue that law & property can exist without the state
https://fee.org/articles/the-enterprise-of-law-justice-without-the-state/
https://www.jstor.org/stable/4166243?seq=1#page_scan_tab_contents
https://www.youtube.com/watch?v=_R5UZQtczdI
http://www.daviddfriedman.com/The_Machinery_of_Freedom_.pdf
Based in trust, trade & reputation, but, as far as I can tell, what they end up describing is the state itself, by a new name--but, even aside from that, there are very strong reasons to suspect this is BS:
https://www.mutualist.org/sitebuildercontent/sitebuilderfiles/otkc11.pdf
https://c4ss.org/wp-content/uploads/2009/10/MPE.pdf
The invisible foot, therefore, shows that the state is needed for private property, exchange & disciplining people into rationality, for many reasons, both formal (need for rules, common legibility, money, contract etc.), substantive (need for enforcement, discipline, market making, common knowledge, information, transaction costs, enclosure, colonialism, slavery) & socio-cultural (creating rational, statistical, calculating, market-based beings).
That said, however, there are far more serious reasons to doubt both Invisible Hand & Say's Law.
The Invisible Hand has two parts: 1. that the pursuit of selfish motives will, statically, lead to optimal social allocation of present resources & 2. that the pursuit of profit thereof, will lead to optimal dynamic investment over time.
Externalities violate the first law. Anytime something has a cost or benefit born by someone other than it's produceconsumeexchanger, it is an externality.
Public & common goods, being varying degrees of excludable & rival (most basic goods are most), are subject to the commons laws I mention above, as well as the issue that, due to free-riders, over-exploitation, incentive incompatibility & so on.
Therefore, public goods will be either under-provided or provided for with taxation embodying deadweight loss.
https://zcomm.org/wp-content/uploads/zbooks/htdocs/books/polpar.htm
https://thenextsystem.org/sites/default/files/2017-08/NewSystems_RobinHahnel.pdf
https://zcomm.org/wp-content/uploads/zbooks/htdocs/books/3/3.htm
Public bads, however, will be over-provided, or, in other words, will occur such that people are always subject to them.
There are static & dynamic public goods and bads: Static public good is security, static public bad is pollution. Dynamic public good is innovation. Dynamic public bad is loss of skills due to labor market exit.
Static public bads/goods can be in theory fixed with Pigouvian taxes on the bads and subsidies to the goods, but this is only the case if the static/dynamic are consistent, if enforcement/monitoring etc are cheap, if information is available, if the government is good enough at it, if cooperation/assent is strong enough, if the public good/bad is definable (or if there's enough resources to fund the public good).
The other solution is Coase's theorem which says that with fully specified property rights, cheap finite contracting & defined/small number of partners, the market will optimize utility on externalities. While this ignores the moral costs (which need to be decided via the property rights), within any such framework it will theoretically lead to efficient allocation.
The only problems are:
  1. If information is sufficiently incomplete, asymmetric, or fundamentally uncertain it will undercut it
  2. If Transaction, bargaining, menu, contracting costs are too high either in monetary or temporal terms, both absolutely (efficiency) or relative to one of the parties (equity)
  3. If the goods & bads are undefinable or too diffuse, they will be impossible to monitor--similarly if it's costly to enforce or research the costs & contracts it will fail
  4. If there are too many parties to the goods, the bargaining costs sky rocket
  5. If bargaining is sufficiently non-finite or constantly re-negotiable over the long run, it will fail (after all, there are multiple overlapping generations, who care about their kids & the future, and states/corporations which persist after them)
  6. If it is not incentive compatible--so if information & control fall on the same lines or if it incentives lying about impact or cost--it will fail
  7. If there are reputation, discovery, revelation, commitment or trust costs (or moral ones), this can make it indeterminate.
Suffice it to say, the existence of publicly known enforceable contracts implies public goods, and, not only that, one's which apply diffusely to everyone in society, with infinite generations & info/control shared lines. THUS, the very existence of enforceable Coasean contracts implies at least one externality which will fail under Coase's theorem.
http://press.uchicago.edu/ucp/books/book/chicago/I/bo8281624.html
https://global.oup.com/academic/product/the-impact-of-incomplete-contracts-on-economics-9780199826223?cc=us&lang=en&
Similarly, No-Trade theorem states that if information is perfect, everything exogenous & known in advance, then there are no gains to trade, autarky & central planning are just as efficient. But, if information is totally imperfect etc., it's simply too costly to trade. Thus, the existence of gains to trade & trading imply some amount of information/exogeneity between 0 & 100.
THUS, the existence of tradeable rights & commodities implies by its very existence that the Coasean conditions of contractual convergence will not be in practice in the presence of common goods/bads.
Also, empirically, issues like pollution are very diffuse, dynamic, commonly affecting, incentive incompatible & so on.
https://web.stanford.edu/~milgrom/publishedarticles/Information%20Trade%20and%20Common%20Knowledge.pdf
https://www.ssc.wisc.edu/~dquint/econ698/lecture%204.pdf
We've good reasons to believe social costs of production & such are very widespread. Indeed, paradoxically, both maintaining & reducing production produce them!
http://assets.cambridge.org/97805218/10142/sample/9780521810142ws.pdf
http://www.kwilliam-kapp.de/documents/SCOPE.pdf
Thus, the very conditions of Smith's First Law contradict themselves in practice!
The second law, the dynamic issue, is also violated, for several reasons.
Empirically:
  1. Where info is asymmetric/incomplete/uncertain, then investors can simply make poor decisions
  2. Where entry/exist, scrap/sunk costs are high, then investment will be immobile, or worse, if wrong, costly to undo
  3. Where there are dynamic externalities, then there will be undeover provision of socially beneficial/harmful investments
  4. Where conflict/control over workers is a commodity or there are ways to extract rents, via marketing/fraud etc, then in investors will invest in guard labor, control & marketing stuff, which reduces output (but increases profit share).
Theoretically:
  1. Where the profit rate is sufficiently high, then investors may invest in capital-reducing/labor-using technologies, which actually reduce net output & then, therefore, undercut positive effects of investment. This is a feature of reswitching/reverse capital deepening. Thus where Morishima's law shows that all capital-using investment increases output, nonetheless, investors may reduce output by investing in capital-reducing!
  2. Similarly, where land & money are options as investments, investors will substitute them for labor & capital at the margins (due to tax policy, liquidity premiums, land speculation, rent/use rights, cheap credit & whole other things), thus reducing net output.
https://www.researchgate.net/publication/306003064_A_Tale_of_Three_Theorems
https://www.researchgate.net/publication/46509834_Misinterpreting_the_Coase_Theorem
https://dlc.dlib.indiana.edu/dlc/bitstream/handle/10535/10024/614-4990-2-PB.pdf?sequence=1&isAllowed=y
http://www.masongaffney.org/publications/I6A-1996_Taxes_Capital_and_Jobs_1978_revised.pdf
http://delong.typepad.com/kalecki43.pdf
This means that the Invisible Hand's first law--of static allocation--is true in theory, but, by its very nature, implies necessary empirical features which undercut, making it a pragmatically self-contradictory law. Add to this any number of contingent, but highly common empirical facts, and it's basically done.
This means that the second law fails for many of the same (both necessary & contingent) empirical reasons as the first law BUT also fails in theory for two other reasons: 1. The existence of re-switching/reverse capital deepening with a high enough profit rate and 2. the substitution of land & money for capital/labor for any number of reasons!
Say's law collapses for many similar reasons. Say's law basically says that supply creates its own demand. Produce and price will fall to equilibrate quantity & demand.
The issue is that, yes, supply = demand in national income calculations, but it does not do so ex ante AND post hoc, only the latter.
In a barter economy, supply must equal demand, people say. Now, in some sense, this is trivially true, but where there are heterogeneous capital AND consumer goods and no way to convert one readily into the other (without labor), and where consumecapital goods are costly to store, measure, transport etc. or are highly perishable, then there will be time issues of exchange playing into the necessary transfer between these. Thus, in a sense, all saving will equal investment in a Barter Economy, but the heterogeneity of capital goods, and their use in production & consumption, means that such saving & investment bears no relation to what we consider those things to be today, and that the empirical properties of storage/perishability & discount rates means that this doesn't assure optimization either. Thus, even in the Barter context, Say's law is doubtful.
That said, as an empirical fact, money/credit economies precede Barter ones. Credit is as old as civilization, with options & so on as early as the Mesopotamians.
All observed examples of barter take place in the social context of policy and confinement (and even these used a central state function to mint money!). https://www.unc.edu/~salemi/Econ006/Radford.pdf
Otherwise credit is key. Credit precedes coin & currency in time, but they are all money.
Credit/money will exist wherever:
  1. There is an external method to certify trust--especially if, said method, is (a). standardized, (b). dischargeable/exchangeable, (c). store-able, but this sort of jumps the gun
  2. There is a need for tax tokenization (a). to induce labor and/or (b). to avoid issues of perishability of in-kind goods and/or (c). avoid issues of measuring, transporting, storing & protecting of in-kind and/or (d). to assert symbolic/ornamental/sacred state/religious power
  3. The double coincidence of wants in exchange are such that it's simply too costly, due to information, complexity, agents, diversity, heterogeneous preferences, time, space, standardization, enforcement, measurement, speculation etc. to exchange without money
  4. Production takes place in time, such that one must leverage future risk against the present by assuring a constant flow of goods in the present to account for future production
  5. Accounting, for whatever reason, taxation, trade, production, contracts, religion, or for kicks/the hoot of it, is costly & needs to be standardized, legible, known & common
Credit & money will, therefore, always serve as a medium of exchange, a unit of account, a store of value, a symbolic/ornamental/social substance, often pursued for its own sake & a tax base.
The existence of gains from trade, remember, implies that there be sufficient space for it to occur, which almost ensures there will be necessary money. The enforceability of contract implies public goods & common institutions, itself implying a state-like organization, which requires money. The existence of production implies sufficient separation of present & future. IN OTHER WORDS: the very existence of sufficiently complex trade, necessary common enforceable contract & necessary long term production implies the existence of credit & money--though currency/coin is a different issue.
In such an economy, investment & savings decisions are made by separate people. THUS, savings & investment can only be equalized post-hoc, rather than ex ante (if sufficient coordination & information existed to coordinate ahead of time, trade would be superfluous remember!)
http://www.ipe-berlin.org/fileadmin/downloads/working_papeipe_working_paper_60.pdf
http://www.anwarshaikhecon.org/sortable/images/docs/publications/macroeconomic_theory/1989/2-Shaikh_Marx%20Keynes%20Kalecki%20on%20Effective%20Demand_86%20Semmler_Final.pdf
http://www.paecon.net/PAEReview/issue70/Tapia70.pdf
https://moslereconomics.com/wp-content/uploads/2007/12/Money-and-MMT.pdf
http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf
http://pubman.mpdl.mpg.de/pubman/item/escidoc:2071276:3/component/escidoc:2071274/AJS_111_2006_Beckert.pdf
A Quick Aside on Land
Land is excluded from modern economics, largely, it is argued, as a strategem against the classicals.
http://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf
But land, broadly conceived, are all fixed/non-reproducible resources, constituted by use in time. Thus it includes all soil, space, water, air etc.
Land's value depends on its intensive margin (the efficiency of capital/labor), its extensive margin (the disparity between most & least efficient) & absolute margin (its monopoly status).
Once this broader understand is achieved, one realizes that declining resources like oil or carbon sinks, that time serious like traffic congestion, that artificially scarce resources like IP or state grant resources like limited liability, are all a part of the broader conceived 'rent' of the economy. In other words, all rents are either land or commodities MADE land-like, through government force, locational monopoly & so on.
Land's value will equal the value of public goods--when added to the rest of these, it will also equal the value of social costs on common resources & the monopoly premiums of any individual commodity.
Land is interesting because it introduces high fixed costs to production & consumption, cannot be assumed away in labocapital functions, introduces locational/spatial/social monopoly, sequence issues, transaction costs, externalities & more. It cannot be assumed away & it introduces issues of public goods, monopoly, location & rents into the vary basis of micro economics.
http://www.mcleveland.org/publications/Cleveland_Time-Traveling.pdf
http://www.labourland.org/downloads/james_robertson_review_new_model.pdf
http://www.nber.org/papers/r0102
http://www.masongaffney.org/publications/G1Adequacy_of_land.CV.pdf
http://www.masongaffney.org/publications/G2009-Hidden_Taxable_Capacity_of_Land_2009.pdf
http://www.masongaffney.org/publications/K2008_Keeping_Land_in_Capital_Theory.pdf
Thus, I have briefly dealt with classical & Austrian views, because these preceded and lead into the Marshallian, Walrasian & other conceptions.
The elements I have discussed above will play into my later critiques!
Dealing with Some Preliminary Critiques of Neo-Classical Economics
The reason I did it this way was to build to the main critique of the Marshallian tradition. In a second comment post I will discuss responses to the Marshallian tradition.
Marshall & the early pioneers like Bates Clark used the above to make their arguments. But to recap:
Less fundamentally:
  1. There is no necessary static TPRF and no dynamic one whatsoever
  2. The Classical Center of gravitation does not exist
  3. Malthusian population/demographics/commons problem doesn't apply
  4. Land is central to economics & cannot be assumed away
More fundamentally:
  1. Commodity/labor theories of value are problematic
  2. The utility/demand theory of value is BS
  3. There is, necessarily & empirically no static invisible hand, and necessarily theoretically & empirically no dynamic invisible hand
  4. There is no Say's Law
  5. Money, trade, credit, institutions, public goods, production etc. imply each other
Thus I will get to the firm, scale, monetary, capital & indeterminancy critiques of Marshallian economics. I will get to Walrasian & Neo-Walrasian economics & their issues. I will get to game theoretical conceptions. And I will address critiques of economics from sociology, anthropology, philosophy & psychology.
The Marshallian system says that, where there are competitive firms, with defined conditions of production, then 'the scissors of supply and demand' will force the equilibrium of quantity & price. Eventually, price will converge to the long run cost of production, while fluctuations or changes demand will be accommodated by price. Thus, price & quantity adjust between these two bounds. Notably, however, is the fact that partial equilibrium of a single firm/commodity/industry is different than general--general equilibrium posits a meta-stable determinate solution to all the partial equilibriums.
The failures of the Marshallian tradition come down to this:
First, It would seem that anything but constant returns to scale, in the long run, implies a contradiction. The converse of this is the presence non-constant returns to scale means that either (a). the system is not in equilibrium or (b). it is not competitive
Sraffa was the first to show this. Why? Because firm level returns to scale implies it would take over its industry. Industry level ones means at a certain point, economies would be infinite. The only coherent ones are returns to scale exogenous to a firm but inside an industry, like in software.
Furthermore, increasing/decreasing returns come from different sources--one is found in production, the other found in distribution, making them homologous fails extraordinarily.
https://edisciplinas.usp.bpluginfile.php/832648/mod_resource/content/3/The%20laws%20of%20returns%20under%20competitive%20conditions_Sraffa_1926.pdf
http://www.ier.hit-u.ac.jp/~nisizawa/annalisa%20rosselli.pdf
Second, The interdependence of inputs & outputs means that leaping from partial to general equilibrium is impossible.
This is the famous Leontief model. In this model, due to interdependence, there is always a range of values & prices capital & consumer goods can take, given that they play into each other. Equilibrium may force a model to this range, but within that range itself, other factors like markup will play a role!
http://www.nber.org/chapters/c2866.pdf
https://www.jstor.org/stable/2223643?seq=1#page_scan_tab_contents
https://www.usna.edu/Users/math/meh/leon.pdf
  1. There is no scissors of supply & demand--(a). because long term labor cost is incoherent, (b). long term demand is incoherent, (c). quantity, quality, price & non-economic aspects of trade/production always exist, (d). leaping from tokens of exchange to types of laws is problematic
I've already addressed these (that was the point). Long term labor cost doesn't have a determinate meaning with interdependence, dynamic/static returns to scale, endogeneity, non-competitive capital, rents & so on. Demand is not a unitary, well-behaved function.
Furthermore, the Austrian solution to see supply & demand as the sum total of individual exchange tokens doesn't work. Either those exchanges are already a bargaining game, bounded by institutional rules, in which they are set locally, OR they represent a long term, menu-based price/quantity adjustment, which is subject to the above critiques. No general theory of tokenized exchange to supply & demand can be generated without the intercession of institutions, bargaining games, price administration, quantity adjustment & macro forces!
AND, consider labor as a function of disutility fails. There's intrinsic desire to labor. There are S-shaped and backward bending labor curves due to fixed costs of time, satiation, bureaucracy, family or constancy. Labor hours are always social--one plays at a range of productive employment, and intensity/effort are endogenous. Labor's desirability depends on the total quantity of production & consumption, as well as its social organization. Not all labor can be commodified. Thus the disutility theory fails on its face.
Fourth, Supply & Demand are not independent of each other, due to general equilibrium, scale/scope issues
IF, for example, there are gains from specialization, gains from organization, fixed costs of production (and therefore declining per unit), complementarities in production, inter-functional inputs & outputs, or public goods & externalities in STATIC econ, OR, if there is learning by doing, training, innovation, tutoring, human capital accumulation & capital breaking in DYNAMICALLY, then supply & demand cannot be considered independently. Total supply will depend on the size of demand & total demand will be determined by available supply.
http://www.palgrave.com/us/book/9780312177201
http://onlinelibrary.wiley.com/doi/10.1111/1467-9396.00216/abstract
Fifth, AND MOST IMPORTANT, Supply & Demand are not independent of each other due to heterogeneous preferences
THIS IS THE FAMOUS SONNENSCHEIN MANTEL DEBREU THEOREM. It shows that where there are heterogeneous preferences, one cannot aggregate demand, or rather than aggregate demand can take any path whatsoever--it is not determinate or stable unless forced to be from the outside. This happens with trivially small numbers of agents & preferences and means AGGREGATE DEMAND DOES NOT EXIST EVEN UNDER OPTIMAL CONDITIONS. FULL STOP.
This is because income & substitution effects can do whatever in whatever way. Jevon's Paradox, Giffen Good, Veblen Goods, Labor Saving Productivity are all versions of this, but it is a general theory. It always holds with sufficient agents & preferences.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.910.9988&rep=rep1&type=pdf
Sixth, Independent Supply curves do not exist in a finite setting
https://divulgacionmarxista.files.wordpress.com/2016/05/debunking-economics-steve-keen.pdf
Seventh, There are prevalent externalities, transaction, search & information costs, as well as non-ergodicities
Eighth, AND SECOND MOST IMPORTANT, Capital cannot be aggregated independently of distribution
THIS IS THE CAMBRIDGE CAPITAL CRITIQUE
http://piketty.pse.ens.ffiles/CohenHarcourt03.pdf
https://www.business.unsw.edu.au/research-site/societyofheterodoxeconomists-site/Documents/Michel-Stephane%20Dupertuis%20and%20A.%20Sinha%20-%20Existence%20of%20the%20Standard%20System%20in%20the%20Multiple%20Production%20Case.pdf
http://eprints.gla.ac.uk/4505/1/4505.pdf
http://www.cairn.info/revue-cahiers-d-economie-politique-2009-1-page-91.htm
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.1000.6819&rep=rep1&type=pdf
http://www.nuevatribuna.es/media/nuevatribuna/files/2013/04/15/production_of_commodities_by_means_of_commodities.pdf
https://edisciplinas.usp.bpluginfile.php/832648/mod_resource/content/3/The%20laws%20of%20returns%20under%20competitive%20conditions_Sraffa_1926.pdf
http://bnarchives.yorku.ca/259/2/20090522_nb_casp_full_indexed.pdf
In my criticism of Marshall, I will also be implicitly touching on the first Walrasian formulation as well as Hayek's Austrian formulation.
I WILL BE CONTINUING MY CRITIQUES IN COMMENTS BELOW, PLEASE DO NOT YELL AT ME, THIS IS GOING MUCH LONGER THAN I THOUGHT IN MY QUEST TO BE THOROUGH, SO I WILL FILL OUT THE ABOVE ISSUES BELOW.
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