Sold off $BDL Flanigan’s Enterprises 

I erroneously set a market order rather than limit. Going into 2017, I want to run a much more concentrated portfolio, but I want a bit more liquidity as well. I still think Flanigan’s Enterprises is a great company, but I want this focused on a smaller number of securities -although I will likely take a small portfolio position if the opportunity to purchase the stock at my original purchase price presents itself. The portfolio is now 50.8% cash. I’m hoping to run a fully invested portfolio in 2017.

BDL Flanigan’s Enterprises – Hurricane Matthew

I just trimmed my position in BDL from 10% to 3%. With Hurricane Matthew approaching, I don’t I want to be too exposed to the company. Back in Q2 as you guys probably recall, the Fort McMurray Fire in Canada sent Gamehost down 20% in just a few days because they had a Casino in the area. I watched Gamehost drop 20% at 12% of my portfolio and the ghosts of the McMurray fire still haunt me. This time, BDL has restaurants in parts of the Palm Beach area and parts of Palm Beach is being evacuated. Evacuation mandates could change for better or worse depending on the direction of Matthew. All of BDL’s restaurants are concentrated within the Miami and Palm Beach area although it’s important to note that Miami is not being evacuated at this time. I still like the stock, but I’d rather buy this lower in the future if I can than sit through uneconomic sellers in a potential drawdown. The more illiquid a stock, the more difficult it is to sell, and it only takes one large seller to move it. This post becomes relevant if the rest of Palm Beach and Miami are evacuated.

Flanigan’s Enterprises ($BDL) Earnings Update

Flanigan’s Enterprises reported earnings last month. Few things to note:

  • Sales rose 6.4%
  • Net Income rose 35.63%
  • Comps for the segments are as follows:
    • Restaurant Food Sales – Corporate Owned: +5.6%, Partnership +4.82%
    • Restaurant Bar sales: Company owned, +8.67%, Partnership, +7.65%.
    • Package Store sales: +6.96%
  • Operating costs increased 4.91% from $22.85m to $23.2m.

What’s most interesting about this report is that the company raised prices to offset the rising food costs. I was expecting comps on these costs to lap in October (that’s when the company fixes its food costs for the fiscal year with its suppliers), but the company raised prices to offset this.

The company trades at 13x today while posting mid single digit comps; the restaurant sector is flat to negative. The sector trades at a P/E >20 while the company trades at a minimum 35% discount to that conservatively assuming zero growth for $BDL. Earnings are also guaranteed to be higher over the long run as a result of the favorable partnership structure. I have placed a limit order to purchase more shares – I am looking to buy more hopefully below ($24.1) where I trimmed it last month. If this executes, $BDL will go from 8% back to about 11% of the portfolio.

Update

I was so tired I crashed after work, I should have the Avnet post up tonight. Also sold off a portion of $BDL, the portfolio has 18% equity in the stock. PFIN reports tomorrow and not today. I’ve sold my position, and the portfolio now holds 49℅ cash.

So for a two-week recap – Sold SODI, PFIN, PFHO – Bought AVT, small Canadian Company.

Long: AVT, BDL, MNDO, GH, small Canadian company.

I’ll update the homepage this weekend.

Added some $BDL and $MNDO

I added some BDL and some more MNDO. They now, combined, makeup about 21% of the portfolio with an even split. Also increased the Trip Advisor short by 50% that one is now 1.7% of the portfolio. I regret not adding the Jan 2018 LULU puts. LULU reports in June, so hopefully we see a rally before it.

Game host is down today because they announced a dividend cut. This should have been glaringly obvious, but investors still reacted negatively. I placed a limit order for $9.40, but it didn’t execute. Pier 1 Import along with everything in retail (LULU included) has been hammered today because of Macy’s earnings. Updated position weightings are now updated as of yesterday on the homepage. The portfolio is currently 45% cash.

Forgot to Mention

I sold the rest of my CBK position at around $2.60 about two weeks ago. And One risk for Flanagan’s Enterprises is that management expects higher seafood prices and since demand is elastic in this case, they can’t pass on the cost to the customers – this means lower future margins. I believe that risk is priced in at these levels when you take growth, the P/E, and also the excess equity of the land and buildings I mentioned earlier into account. I’m not a fan of investing in ‘growth’ stocks. Growth is usually a secondary reason for me and never the theme of a thesis. If it exists, that’s great, but I won’t buy something simply because it is growing. At a P/E of 10-11, the market is assuming it’s going to stay flat if seafood prices do not rise as fast as management expects, we could see some margin upside.

Update

Hi Guys,

I’ve been a bit sick and also really busy lately, so I haven’t posted anything in about 3 weeks. So I want to update, there will be no ‘Official’ May Performance Report, but I’ll summarize the updates on each position on here as of today’s date (5/5/2016) – Happy Cinco De Mayo btw – Regular monthly performance reports will commence in June. The portfolio rose 0.49% vs 0.39% for the S&P 500. The portfolio is still about 50% invested, it’s difficult to find bargains in this market – most of the ‘cheap’ cyclical stocks are stuffed with overvalued inventories that still need to be written down, so I don’t want to buy something just because it looks cheap. I’ll update for the other indexes later on the homepage, but I believe it underperformed all other indexes except the S&P.

Flanagan Enterprises (BDL)

I want to start with BDL since I purchased this stock mid last month but didn’t have time to post about it. This is going to be a very brief summary of what I would have written. I purchased this at $21.2, the stock trades at about $18/sh so i’m about 15% underwater now.

In a nutshell, the company owns and operates restaurants and liquor stores in the Florida area. The company still generates mid to high single digit comparable store sale numbers and is growing at 10% and yet it trades at about 11x earnings.

The company partners up with other investors on the restaurants and the way the partnerships work is that the company pays the investors with the cash flows and collects no management fees beyond the money required for regular operations. Once the investors receive their invested money back in full, then the cash flow each restaurant generates is split in half between the company and the investors. So, the company is basically guaranteed to increase the bottom-line in the future. This won’t happen quickly, but if you were to model this out, the company should at least trade somewhere around 15-20x earnings. So I believe there’s at least 50% upside from these prices. S&P’s P/E ratio is about 24x, so the current P/E is less than 1/2 of S&P’s.

While the company carries about $10 million in debt, it also owns about $20 million of land and property in florida, so there is sufficient equity to conservatively eliminate the debt from any valuation calculations.

Please note that BDI and BDL are different. BDI is Black Diamond Group Ltd, BDL is Flanagan’s Enterprises.

Other Positions

Before doing this, I want to send my thoughts and prayers to the people of Fort McMurray. As some of you may have heard by now, there is a massive wildfire in the Canadian city of Fort McMurray. The city has been evacuated – though no casualties have been reported, people have lost their homes and belongings.

Canadian Trail

(Longs)

The Canadian stocks have basically offset each other over the past few days. Gamehost down 17% because of the Fort McMurray fire (more below) and Black Diamond up 28% today because it has excess capacity for temporary housing in the Oil Sands around that area.

Gamehost Inc.

Gamehost was my largest position just a few days ago. One of Gamehost’s Casinos – Boomtown Casino –  is located in the city of Fort McMurray. With the wildfire causing a complete evacuation of the city, the effect on earnings becomes obvious. Less activity at the Casino – if it even survives -and thus, less earnings for gamehost. I called the company two days ago to get more information before posting about this, but they were swamped with thousands of investors attempting to ask the same question I was – Is the building insured?

Per the company’s filing on Sedar yesterday:

The Company’s Boomtown Casino in Fort McMurray, Alberta is fully insured including property and business interruption coverage. All Gamehost properties and operations are fully insured by a leading multinational property and casualty insurance company. Management has initiated an insurance claim in anticipation of losses at our Boomtown Casino and is currently in discussions with the insurer regarding due process.

I had a 37% equity in the position wiped down to about 16%. I’m going to add more when I trim Black Diamond. I want this position and Black Diamond Group (See Below) to make up 25% of the portfolio. Any more positions on Canadian stocks will be hedged with futures or put options shorting the CAD to reduce currency exposure.

Black Diamond Group Ltd

BDI reported earnings yesterday and shot up 28% today – I don’t believe it was because investors liked the earnings, but because of the fire in Fort McMurray since BDI provides temporary housing. Total equity in this position is +19% and it’s now my largest position after the Gamehost decline.

The company reported:

  • 47% q/q decline in revenues and Q1 EPS of -0.06.
  • Total debt q/q down 20%

As I mentioned in the original thesis, the dividend was cut down to pay down debt and the company will still be cashflow positive even though earnings will turn negative. So that’s precisely what we’re seeing. While the company reported a loss of $2.4 million, it actually took in about $10 million of cash for the quarter. This is because of the discrepancy between the CapEx and Depreciation I mentioned in the original thesis.

The company has historically sold its used fleet for above book prices, but since the industry is depressed. Assuming a conservative 20% haircut on book value, the company will still trade below the new book value – this means we’re basically getting the company for free! The positive FCF and debt repayment should continue while we wait for the industry to recover.

The fire in Fort McMurray is providing support to the price, so as of 5/5, it makes up about 13% of my portfolio after the +28%. Once the stock surpasses book value, I’ll trim it down to 10% of the portfolio.

United States’ Trail

Pacific Health Care Organization

No new news on PFHO, but it has been fairly volatile. The illiquid nature of the stock leads to large swings in price. I’d buy more, but the bid/ask spread irks me. Price target remains the same at about $14/sh

Pier 1 Imports

Pier reported earnings and guided to higher margins as I anticipated in the original post. One mistake I made however, was ignoring the competitors. Piers inventories were so far in line that I thought their competitors would be irrelevant, but they are not. Virtually every cyclical company is stuffed with overvalued inventories that will have to be sold off. The company did guide to higher margins and is first in line for the industry recovery, so I’m holding on for now.

Trip Advisor (Short)

Reported earnings earlier this week. Revenues declined but investors are still not paying attention to the more important declining metrics – Trip’s Revenue per hotel shopper and Expedia’s Revenue per hotel night.

The company has investors convinced that their ‘successful expansion’ in China will fuel growth will 2017 while 2016 ‘will remain muted’. The same China where iPhone sales just fell (-25%) off a cliff?  They have been deceived into pricing a company with declining revenues at 45x earnings. The company will have to fight an uphill battle with growth since the price of the service is in a deflationary spiral.

CarMax (Short)

CarMax’s inventories remain elevated. One mistake I made on this one was buying short-term (1 year, January 2017) puts. I regret that and will get rid of all 2017 put options on the portfolio next time we have another volatility stint.

Recovery rates y/y fell from 54.2% to 51.2%. Inventories fell relative to sales, which is actually good. Past due accounts and LTV ratio trickled up a bit. The U.S. economy continues to slow and I believe we will likely see easy credit slow, which is bad for CarMax.

LuluLemon (Short)

Lulu reports earnings later this month. I’m going to address the company after that happens. I’m still yet to add my January 18′ put, but if the stock sees $65 again, I’ll add January 18′ put options.

Mind CTI Ltd

Reported earnings this week as well. Revenues fell 19%. This was expected. As I mentioned, the company’s sales has historically risen over the long-term but have wildly fluctuated, which is why it trades at 5x its Enterprise Value. Its 10% yearly dividend is basically a unicorn in today’s market.