Schwab and Carrefour
Today we are seeing a nice sell off in Schwab. It is down fifteen percent over the past five days because of a quarterly report. This is one of my favorite times to purchase a great company at an attractive valuation. I really like the idea of Schwab getting into lending. They have a competitive advantage in the Financial Advisor space, and being able to offer quality lending to that platform should be accretive to shareholders.
Other thoughts from yesterdays conference call:
They are very focused on customer satisfaction
They are focused on growth. Has good historical growth
Very focused on operational excellence/efficiency
They have high return on equity
Has a competitive advantage
Big believers in investing in technology and innovation
Risks: Blockchain Technology. Keep an eye out for ways a new technology can undermine Schwab’s competitive advantage.
Here are the historical NFCF numbers:
18.5b 2023
1b 2022
1.2 2021
6.3 2020
8.6 2019
35.6b total nfcf. 7.12 five year average
11.9b 2018
-1.2b 2017
3.3b 2016
1 2015
1.9 2014
16.9b total. 3.38 five year average 5.25 ten year average
1.4 2013
1.1 2012
2.3 2011
-1 2010
1.3 2009
5.1 b total. 1b five year average 3.84 fifteen year average
I like to look at the five year averages with this company. It will smooth out the cash flow inconsistency. Management has a good track record of growth.
Even if the five year average NFCF doesn’t grow, we are still buying this company at an attractive valuation. 17x the current five year average NFCF seems attractive in this interest rate environment. Seems like decent value, considering the quality of the company.
Carrefour:
My friend introduced me to Carrefour last year. I usually don’t take recommendations but this had some good attributes. And the stock is down 19% in the last year. They are very focused on the customer and operations. Very data focused. Care about environment and community and employees. Largest food retailer in France, with 1,500 quality own-brand products. They are innovative. Trying to develop new products and tech. Looking for bolt on acquisition. Has competitive advantage in Brazil, France, and Spain. Management made an intelligent move by exiting markets without a competitive edge. Very focused on increasing Net Promoter Score. Large land owner in Brazil with 21 billion m² in its landbank.
Some of the negatives are:
Very low return on assets. Had negative net free cash flow two years out of the last 12 years. Franchise model might not work. Brazil is a higher risk country than investing in Europe or America.
Valuation:
Net Free Cash Flow (NFCF) five year average = $1,346M
NFCF Ten year average = $893M
NFCF Twelve year average = $1,000M
$10.9B Market Capitalization.
.19c dividend paid annually. But very large ADR holding fees for American investors. So after fees only an 13.3c dividend. Current stock price is $3.15. So a 4.1% dividend after fees. And management mentioned they are committed to growing this.
Has a decent valuation when considering the historical cashflows. 7.5x the five year average.
Conclusion:
This investment doesn’t check all the boxes but has enough qualities and a margin of safety. The margin of safety would be bigger if they didn’t not own assets in Brazil. But we still feel the rewards out weight the risk. We could also see a boost to earnings if commodity prices stay high.
