Note- Originally I planned to run an on-going, cumulative type of blog in the vein of @WXYZ and @TomB16 's excellent offerings. But instead I've decided to periodically post individual “episodes”. If you'd like to check out Episode 1 (about the semiconductor industry) you can read it here. Warning- All of the information here was researched, analyzed, and written by me. And I'm an amateur with no credentials, so please don't take me too seriously. ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Episode 2 - Specialty Commerce & Online Auctions This morning I woke up and made a shopping list of a few things I needed to buy: Two large bulldozers One 1973 Fender Strat Three totaled Ford F150’s One 2’x2’ custom oil painting of my pet rabbit I didn’t feel like getting out of bed so I pulled out my laptop and bought a couple bulldozers from RBA, then I clicked over to Reverb to grab the Strat. I found a great deal on some fire-damaged trucks at IAA. The hardest part was the oil painting, because it meant I had to choose from dozens of strikingly handsome photos of my rabbit. But once I finally decided, it was easy to commission the artist on Etsy. Yeah, most of it’s a lie. But the interesting parts are true. Personally, I don’t spend enough time appreciating this bizarre and glorious world that affords wealthy people the opportunity to buy hydraulic cranes from their laptops while eating breakfast in bed. It’s similarly amazing that an average person like me can easily commission a high-quality sculpture of my rabbit for a reasonable price while drinking coffee in my pajamas. Putting the novelty aside, some of these unique companies have a valuable place in our economy. Amazon and the other juggernauts can dominate almost everything… but not everything. That’s why I’ve decided to break out the Smelloscope, because to the naked-nose, the swirling scents are pretty disorienting. I’ll be comparing these companies in two separate groups: #1 Those that sell mostly to consumers and small retail companies #2 Those that sell autos and other large machines ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- GROUP #1 Peer description: Specialty online sales and auctions for consumers and retail businesses. Peers: Ebay, Wayfair (W), Etsy, Overstock.com (OSTK), and Liquidity Services (LQDT). Fundamental Value and Management Effectiveness: Ebay has an attractive P/S, P/E, and P/FCF, compared to this group. However they are the only company that has more long term debt than current assets, they also have an unfavorable debt to equity ratio compared to peers. Ebay does have a 1.6 current ratio which is significantly better than most of the group, but nowhere near the whopping 6.0 current ratio that ETSY is sporting. I wanted to know more, so I looked into it, and apparently ETSY recently decided to take out a large long-term loan to invest in product development, marketing, potential acquisitions, and also to buy-back $100M+ worth of its shares. OSTK and LQDT both have notably strong current assets and zero long term debt. They also have notably good P/B, debt to equity, and P/S. In fact, these numbers almost seem too good to be true… Oh hey, look at that... OSTK and LQDT’s profit margins, P/E, ROE, and ROA are terrible. Hmmm. As far as the others, Ebay is leading the pack for the most recent quarter with superior profit margins, ROE, and ROA. However, they have worrisome trends in each of these categories over the last 5 years. Lots of ups and downs. For its part, ETSY has been reasonably competitive in the most recent quarter, putting up decent profit margins, ROE, and ROA. They also have very good trends in each of these categories over the last 4 years. As for company leadership, ETSY seems to have the most well regarded front man based on employee and investor ratings on Glassdoor and Owler. Ebay also has a reasonably rated CEO. It should be noted, evaluating CEOs is not my strongpoint. Insider Information: Ebay is 4.6% insider owned which is pretty impressive compared to the peer group. They do however have a very unfavorable number of shares sold compared to shares purchased over the last 12 months. ETSY and LQDT are significantly beating the peer group in terms of shares purchased vs shares sold over the last 12 months. What about the blood-thirsty doubters? OSTK and Wayfair have an alarmingly high short interest at nearly 30%. ETSY is also at a concerning 10.6%. Ebay and LQDT are at a comparatively comfortable <3%. What do other Smelloscopes detect? The pro-analysts don’t seem to like any of these companies very much. Research Team, CFRA, The Street, and Market Edge are generally all recommending holding or selling. Company News and General Thoughts: Ebay and OSTK have not fared well against Amazon. There’s a bit too much overlap between the three companies and Amazon is clearly the boss. Ebay has recently decided to sell StubHub and are apparently trying to focus more on their core business. In my opinion, if they focus more on their auctions and stop trying to directly compete with AMZN they will have a much better shot at thriving. Conversely, over the last four years ETSY has shown signs that they are not only Amazon-Resistant, they might even be Amazon-Proof. Think about it… Amazon can’t sell you custom made wedding decorations, custom-designed jewelry, or oil-painted portraits of your family. But ETSY can, and they do it well. Additionally, ETSY recently purchased Reverb, a company which specializes in sales of vintage music equipment. Another area where Amazon is not currently a strong contender. As mentioned previously ETSY also recently took out a long-term loan in order to increase their current assets. Their plan is to put the cash towards marketing, core product improvement, possible acquisitions, and share buy-back. My personal experience and subjective opinions: I’ve been using Ebay semi-regularly since 1999 and have found it to be extremely useful. One thing that annoys me though: I wish there were fewer “buy it now” listings. I go to Ebay for the auctions, if I want to buy it now I will go to Amazon or a brick and mortar. I have never used Etsy. But I have used Reverb (owned by ETSY). I also have friends who are buyers and sellers on Etsy, and they have all had positive experiences. On a personal level, I like it that there is a publicly traded company out there trying to give artists a larger place in the economy. Wayfair sort of seems like Amazon and Ebay’s annoying, hipster little-brother. From the small amount of research I’ve done, Wayfair doesn’t really have much to offer that isn’t already provided by other more dominant companies. I have never personally used the service so my opinion isn’t worth much. Similarly, I have not used LQDT so i don’t have any personal insight into that company. Official Funkometer Readings: W = 16 OSTK = 16 LQDT = 30 EBAY = 42 ETSY = 44 Conclusions: None of these companies have mind blowing scores, but I believe EBAY and ETSY both have potential for value and growth. Particularly ETSY which has been showing respectable, consistent growth since its IPO in 2015. ETSY is also facing less pressure and competition from the industry. Because of everything stated above, and because of my own personal goals and biases I have decided to purchase a small amount of ETSY. I do not plan to purchase any of the other stocks in this group. GROUP #2 Peer description: Auctions and online sales of autos and large machines Peers: Insurance Auto Auctions (IAA), Copart (CPRT), and Ritchie Bros (RBA) Fundamental Value and Management Effectiveness: RBA has an attractive P/B, P/S, P/FCF, and P/E compared to this group. But they do have notably inconsistent and lower ROE, ROA, and profit margins compared with IAA and CPRT. CPRT is the winner as far as ROE, ROA, and profit margins. They have a solid showing in each category with steady or increasing 5 year trends. They also have the strongest current ratio at 2.55. It has been a bit difficult to assess the fundamental value of IAA since their IPO was very recent and there isn’t much history. They do however seem to have a concerning amount of long-term debt compared to current assets, and most of their value ratios are wacky. They are showing pretty decent ROE, ROA, and profit margins compared to the industry, but like I said, they haven’t had time to build up a track record. As for company leadership, IAA seems to have the edge here with significantly better CEO ratings on Glassdoor and Owler compared to CPRT and RBA. It should be noted, evaluating CEOs is not my strongpoint. Notes on Insiders: RBA and CPRT both have more than 10% insider ownership which is impressive. They also both have more purchases than sales over the last 12 months. My sources don’t have any data available yet for recent IAA purchases and sales. What about the blood-thirsty doubters? Overall there don’t seem to be many people willing to bet against these companies. Of the three, CPRT has the highest short interest at 2.15%. What do other Smelloscopes detect? The pro-analysts seem optimistic about this group. Research Team, CFRA, The Street, and Market Edge are generally recommending holding or buying. Company News and General Thoughts: These three companies are fighting for dominance in pretty stable niche industry. Consider this- When a car is deemed “totaled” by an insurance company, what do you think happens to it? Does the insurance company simply throw the car in the garbage and take the loss? Nope. They sell that totaled car to either CPRT or IAA, and then those companies auction the cars off to buyers across the world. In fact, there is apparently a HUGE demand for totaled cars. Who’da thunk? RBA’s situation is slightly different. For one thing they are based in Canada. The other big difference is that they are more focused on heavy machinery as opposed to autos. Also they primarily deal with used equipment as opposed to “totaled” equipment. IAA has recently gone through some major transitions. They were very recently a part of KAR, but the parent company spun them off this past summer. Before IAA’s IPO, Geico had been primarily selling to KAR, but after the spin-off Geico decided to diversify and start selling more cars to CPRT. Bad news for IAA, good news for CPRT. IAA has also been recently adjusting their core business model. They would like to put more of their resources into online auctions and less of their resources into brick-and-mortar auctions. If this shift goes well it could significantly increase profit margins as brick-and-mortar auctions are MUCH more expensive to operate. My personal experience and subjective opinions: My best friend is a high-level project manager at IAA. So I’ve got an informant on the inside! It’s been neat to watch his progress as the company tries to transition from brick-and-mortar auctions to online auctions. Other than that, I do not have any personal experience with any of these companies. Official Funkometer Readings: IAA = 26 CPRT = 43 RBA = 48 Conclusions: I find this odd little industry to be pretty interesting. CPRT and IAA are in the midst of a war, fighting for attention from Geico, All State, and other large car insurance companies. My guess is that either CPRT or IAA will start to dominate the other within the next 3 years, but I’m not sure which company has a better shot at it currently. Another thing to consider, although IAA and CPRT have stable, built-in business in the current economy, I worry that 10-20 years from now their core business models could be severely impacted by the increased use of self-driving cars. If us humans aren’t out there driving around and crashing into things, there likely won’t be much for IAA and CPRT to buy and sell. They will need to find a way to adjust and stay relevant. Ritchie Bros doesn’t have to worry about this quite as much. Someday there will probably be self-driving, self-operating bulldozers… but we’re not nearly there yet. For this reason, I believe RBA would be a safer 30 year investment compared with IAA and CPRT. I don’t currently own shares of any of these companies and don’t plan to buy any in the near future. However, if I receive favorable inside information from my friend who works at IAA, I may consider purchasing some shares in the future. ------------------------------------------------ ------------------------------------------------ What do you think about these two groups and the industry as a whole?
Update: Morgan Stanley disagrees with me about ETSY, and had this to say on December 5th: “The headwinds we previously laid out in our bear case scenario now appear more likely to be the base case.” Specifically, the article mentions headwinds caused by sales taxes. Another challenge is that Etsy has recently introduced free shipping, which adds complications to their bottom line. I agree with this assessment and I think the next year is likely to be challenging for Etsy. But that's ok with me, because unless something catastrophic happens I'm planning to hold for at least 5-30 years. And over that period of time I still believe the company is likely to grow and become dominant. Disclaimer-
If you find yourself at odds with Morgan Stanley's published analysis, there is a good chance you are on the right path.
