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CZZ capilano honey limited

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Ann: Half Year Report to Shareholders, page-110

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MarsC

4,364 Posts.

477

09/02/17

12:23

Post #: 22484351
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Originally posted by madamswer ↑

@Fire Bull, @Cain Treanor

Thanks for your thoughts; they are very instructive for me, and I'm sure others benefit from your insights as well.

As you know, GP Margins is my focus, because it is such an important driver of financial performance, and because a great deal of empirical evidence points to a strong correlation between GP Margin and long-term profit growth (and hence, increasing intrinsic value).
(Any CEO will tell you that it is far easier to manage Cost of Doing Business than it is to manage Cost of Sales, the latter being influenced far more by extraneous factors which outside the control of company managers)

I remain a bit confused what is happening in the supply chain of this industry, insofar as it has caused the compression in CZZ's GP Margins.

The most striking thing to me is something you (and Cain, I think) said a few posts ago, namely that the cost of raw honey feedstock has doubled (although the period over which this occurred, was not specified).

To the extent that CZZ has not been able to pass this higher input cost onto its customers might go a long way to explaining the GP Margin decline over time. And - importantly - to the extent that honey feedstock prices have peaked, it might mean that the GP Margin could stabilise from here, and could even improve.

In my investing experience, I have found that with each investment situation there are just one or two critical things about a company one needs to understand well - where the market is not - in order to make money from investing in such a company.

And the more I study CZZ, the more convinced I am that it is what is driving the GP Margin.

Which is why your snippet of information about the 100% hike in the raw materials (which would represent a good 70% or 80% of Cost of Goods, I expect, so its a big deal) is potentially such a crucial piece of the jigsaw puzzle.

Because if there is any "normalisation" of the price paid to suppliers of raw honey, then this will present a meaningful earnings tailwind for CZZ in coming years; and this is something I am not sure the market fully understands or appreciates.

So, to this end, there are one or two questions that I have (and whose answers I suspect will be of benefit most followers of CZZ):

1. Over what period did raw honey prices go from your quoted figured of $3 to $6?

2. What is the "average" raw honey price over time (that is, if there is enough of an arms-length history between apiary operators and CZZ for the notion of "average" to even exist)?

3. One thing that I can't reconcile is the consensus view that the industry is well-supplied with honey (and even oversupplied), yet the guys who actually produce the stuff are enjoying prices today that are double what they were at some point in the past. Can anyone explain this inconsistency?

Thanks for your tutorship.
Madamswer

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@madamswer, @Fire Bull, @Cain Treanor, @vic_wattle

Hi all. Interesting discussion going on here. I don't know too much about honey (it's that gooey, sweet stuff that comes from bees, right?).

I don't know how much of a scale advantage Capilano has on its competitors, or whether or not it is the lowest cost producer. If it is the lowest cost producer, don't you think (this is especially directed at you @madamswer) don't you think a reducing GM makes sense if it co-exits with increasing market share? That is, if you really are the lowest cost producer, then gaining market share by lowering prices, rather than being a race to the bottom, can actually be a sensible way to get to the top.

Now I have no clue if that is part of what's going on here, and @madamswer's last comments about growing input costs do loom rather large in my mind (and is the inverse of a recent series of discussions I was having with respect to Farm Pride (FRM), where my sense was that recent reductions in one of the key inputs was expanding the GM, which I feared would be a temporary phenomenon).

Last edited by MarsC: 09/02/17

CZZ Price at posting: $15.30 Sentiment: None Disclosure: Not Held
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