"Also appreciate your thoughtful analysis of where the company sits at the moment."
I think what is happening now is far from a terminal problem.
Rather, I think that the company has been hit by a bit of a perfect storm with the confluence of a number of cyclical factors impacting the result in the past half:
- decline in the A$
- rampant international freight rates
- related to the cause of extreme freight rates, supply disruptions causing lost sales and elevated inventory management costs
- cycling unusually high pcp (Covid-stimulus payments in calendar 2020 and 2021 and lack of international travel pulled forward demand that would otherwise have occurred in the past 6 months)
as well as some company-specific issues, namely:
- investing in a complicated ERP system at the same time as making, and integrating, several acquisitions (not insignificant execution risk here), and
- continuing to operate with duplicated fixed cost overheads in the acquired businesses.
In my experience, successful investing requires avoiding being confined to just first-order thinking (because that's basically what the overwhelming majority of investors do).
And in NTD's case, the factors listed above will occupy first-order thinking today.
On the other hand, the higher-order thinking that is required will look at those factors, and ask, "Everyone is aware of the factors driving the share price now, but how will they look in the future?" (Because having a different view to consensus of the future is what successful investing is all about, remember).
And second-order thinking would go something like this...
In relation to the cyclical factors:
- the A$ will mean-revert at some point (already stabilised since the end of the financial year);
- freight rates will normalise to levels well below where they were 6 months ago (already dropping fast);
- global supply chains will sort themselves out (already occurring in recent weeks), making inventory management easier, with non-recurrence of the lost sales volumes just experienced;
- JH2022 was cyclically weak due to demand pull-forward into 2021, but in JH2023 the company will be cycling that sluggish 6-month period.
And for the company-specific issues:
- the ERP system should hopefully be completed and be demonstrating cost-reducing efficiency (I intentionally use "hopefully" because it's a big and risky project);
- rationalisation of the duplicated overheads that came with the acquired businesses would be delivering a lowering of the cost of doing business.
So while the recency phenomenon will have the market focusing on the results being reported today, by this time next year I am sure that the company will be delivering a far cleaner result, and reporting higher levels of profitability.
Exactly how much higher, I can't say because it will depend on how fast the negative forces , that are impacting now, ease ... or even reverse to become positive earnings drivers.
But, for the reasons articulated above, I am highly confident that the FY2023 result will be a an improvement on FY2022 on (probably not the current half, because that's still going to be a bit tough going, but definitely JH2023, which I expect will look very good relative to JH2022).
Don't get me wrong; I'm no blinkered cheerleader for this kind of business model.
These sorts of distribution businesses are hard work.
As can be seen, there are many external factors outside of management's control that can whipsaw a little business like NTD and while there is a modest degree of brand loyalty when it comes to tyres, it is seldom sufficient to engender any real pricing power.
For those reasons, valuation multiples of "catch-and-pass" businesses will always be lower than broader market multiples; and because they are not businesses that can easily increase their intrinsic value over time, the best way to invest in them is invariably by arbitraging the cyclical influences.
In other words, classic "straw-hats-in-winter" investments.
And for mine, while 2021 was a nice hot summer for NTD's earnings, it feels very much like a bit of a winter of discontent is impacting NTD currently.
Maybe not a severe winter ('cos then the stock would be trading at 5x or 6x prospective P/E, instead of the 7.5x which is where I view it), but more like a mild winter.
Or perhaps late autumn.
So I feel the box marked "Share Price Bottomed?" has now been checked.
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