Dirty Docs Done Good | The continued cheapness of the boozy four...
Doc Martens (finally) comes through (sort of)
Doc Martens — Lately I’ve felt like my investing style might as well be called dirty deeds done dirt cheap, because Doc Martens is nobody’s idea of a great company, but it’s obviously worth more than 58p or so, which is where it’s been trading.
I’ve written before about why Docs traded so low. Too much inventory, a sloppy approach to rolling out product (direct to consumer? B2B? Maybe all?!), and poor build quality in some of the product. Also their CEO, Kenny Wilson, probably wasn’t a great fit though it’s worth remembering Docs is one of those classic PE-spin out situations, where private equity took it for a spin around the block and then dumped it on the market (My Food Bag, I’m looking at you).
Their results weren’t great, but they were better than what the market expected. And that’s enough for a re-rate, ladies and gentlemen — stock is up +21% on five days and +13.00% overnight.
What now? There’s a new CEO — let’s see how he goes. The bigger question IMO is how the company controls its stock dissemination — frankly, retail isn’t going to be ordering as much while they’re trying to shift old stock, so DTC is probably a better bet. The big paradox, I guess, is that while every cool alt girl wears Docs (is saying alt cool anymore? Help), they’re not out buying Docs regularly enough. In other words, Docs management has some thinking to do — if they sell, say, about 850mn quid of boots a year (they do about this), and the frequency of their consumer isn’t picking up, then the solution is probably to produce less and sell it through less channels —no point rapidly producing if the pace of consumption is going to be roughly the same.
When you buy something so wildly cheap, then all you need to do is sit tight and wait for a re-rate. If mgmt can execute then I wouldn’t be surprised to see it as a stock worth about a quid or so (napkin math, I don’t do DCFs1!!!!)
More wildly cheap things
Remy, Pernod, Diageo, Brown-Forman (aka the boozy four)
“Invest at the point of maximum pessimism”
Sir John Templeton
Look, you could throw a knife at almost any listed booze company now and you’d find value. Remy trades around ~18x earnings, Diageo at 17x, Brown-Forman at 20x and Pernod at 18x. Not that long ago you couldn’t buy Brown-Forman for less then +30x earnings. I’ve banged on my drum a lot about this, so I won’t tell you it again — there’s a reason there companies are trading so down and dirty — many suffer from the delusion that it’s still the so-called golden age of their industry — think parties at Soul with Sally Ridge, Eric Watson still in NZ, etc. Sit back, relax, the booze is flowing.
There’s nothing wrong with it not being the “glory days” of booze2 . That doesn’t mean people aren’t drinking anymore. Far from it. I think what I mean is that the method of deployment isn’t as effective anymore — celebrity endorsements don’t resonate (P Diddy Cognac anyone…? 🤮), while a lot of marketing campaigns seem unclear on who their audience is. Celebrity endorsements worked when there was a distance between the celebrity and the audience. Now there’s no distance. Celebrities are just like us, and they’ve no glamour to sell.
Humans have drunk alcohol for a long time, and each century sees its repeat of cyclical pattern — spirits, beer, wine, cocktails. There is nothing original under the sun. That’s why I say “glory days” with scare marks, because it feels a little erroneous and what I’m really saying is the “mad men”-ification of booze doesn’t really work anymore. It hasn’t for a long time.
I will digress to another sin: cigarettes. Do you know what the best stock of the 20th century is? Philip Morris, baby (now Altria).
If you’d invested in 1925 (almost a century ago), your return would be a remarkable 16.5% or so. That trounces the records of many great investors and many stocks, especially after such a long time — $1.00 invested in 1925, compounded annually at 16.5% would be worth ~$3.65mn or so.
The reason I talk about another sin stock is because, in spite of the downright unpopular reputation of cigarettes as a stock, they still produce plenty of cash flow for relatively little investment. Altria produces a free cash flow of about ~$9bn and you buy that FCF at 9x earnings or so. Year to year, a company like Diageo will produce in excess of $2bn free cash flow. You are “buying” that free cash flow at a substantial discount to the normal premium the company trades at (albeit, not as cheaply as Altria!). So while the stock remains depressed, your company is sitting there collecting free cash flow on the back of its trading activities. It’s not like the company is sitting there twiddling their thumbs! Guinness, etc, is still going to sell.
Eventually the valuation disconnect will revert, because markets in the long run are fairly good weighing machines. All you need to be certain of is that your booze companies will continue to sell said booze.
Have you ever seen an accurate DCF? Neither
I’m allergic to any kind of “good old days” — to borrow from Karl L (RIP) —'There is nothing worse than bringing up the 'good old days.' To me, that's the ultimate acknowledgment of failure.'