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Corporate Earnings

AEC – And Then The Money Started Rolling In

(A dark lit room gives to a crescendo of light. Cain Hammond Thaler is seated in the middle of a high back chair adorned with geometric patterning. A long hookah pipe wraps around the side of the arm and the stem is curled between two long fingers of his right hand.)

Welcome my child, to the creature comforts of my 9th floor office. Sit yourself in that plush chair – may I get you a stiff scotch or gin?

(You silently move around the front of the Bergère and drop into the cavity with a soft *crinch)

I was just talking about AEC with some other visitors. Have you heard of them?

Why yes! It is true that they just bashed earnings estimates with nary an effort.

What’s that you say?

Oh, yes, quite right. They defiantly rose beyond revenues expectations also.

No?

Well, at any rate, it was quite the quarter for them. I say their management continues to prove themselves most capable stewards of my money.

And what would have happened, had I listened to the naysayers and complainers?

Hah! Yes, quite right. Good show, old sport.

(Cain lifts the stem of the hookah to his lips and draws, closing his eyelids momentarily. Somewhere in the background, the bubbling sound of rolling water is heard)

(an exhale of breath brings forth a cloud of swirling white air scented with fruit)

True, FFO did hold steady this quarter. Of course, with no acquisitions, there was no increased depreciation to apply to cash flow.

My thoughts?

Well, I believe the company was concerned with visibility of the future. They wanted to see some resolution on the state of the housing market and bond yields, among other things, before proceeding with any long term decisions.

Of course, now they’re back to buying up properties and landing deals.

Yes, I had heard of their latest seven asset, $324 million acquisition. Why, that more than makes up for the few quarters of biding their time, doesn’t it?

Just today, did you hear?

They…

..no, no, I mean to say…

…well sure, but never mind that. They just issued another $115 million in notes this quarter. Their debt is quite secure.

I would agree with that, good man.

Did you see that property occupancy remains at an astounding 95.8%!?

And they keep cutting expenses, at the same time as rates for their apartments continue to rise.

Yes, very good!

What do I think of the analysts that have harped on the company??

Why I think they’re a very dilapidated lot…not much use from their work at all, is there?

Hah! A shabby pack of uncongenial scabs!? That’s rich.

oh my, I don’t believe I can write that which you just said…

(chuckles)

(Cain sets aside the hookah pipe on a nearby table)

Now, you simply must try a sample of that de Jerez I was telling you about…

(Cain arises to barely conceal the seigneurial embroidery in the fabric of his seat. Before the image can be made out, the room darkens)

(Scene)

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The TSLA Cult Marches On

There is a reason why I put (at the time) 2-3% of my account into TSLA puts, when I wanted to bet against the stock, rather than trying to short it. Shorting a cult favorite is absolute madness. TSLA can run as high as you can imagine – give them a $30 billion market cap, with one factory sitting half empty – why the hell not?

Sure it makes no sense, but as a short seller, you will not survive the process.

Now, I am reserving the right to judge Tesla’s earnings for when they actually file. I want to look through the books, read the notes, and compare some things. But, I do have an early concern.

First, Tesla did not have surprise earnings this quarter. They lost money. What they claim is that they made money from operations (unlike the opposite last quarter where they lost money from operations but came ahead selling pollution credits). But it’s funny how sometimes little word games we play can sugar coat what amounts to pure semantics.

Tesla’s “operation profit” is based after factoring out “leasing” and other items; that’s pretty vague and since I was already concerned about Tesla’s leasing practice anyway, it doesn’t reassure me, especially at these prices for the stock.

How is leasing not a part of operations?

The second red flag here is the owners who are allegedly purchasing these vehicles.

Aditya Satghare – Lazard Capital Markets
Got it. Okay. The second question was on the U.S. Market so, could you give us a little bit more color about your buyer base here and you know what kind of potential brands do you think your customers are swapping out and who do you think you are grabbing share from?

Elon Musk – Chairman of the Board, Chief Executive Officer, Product Architect
We hit some pretty good numbers for that. It’s a really broad mix of cars. It’s not and not just a premium sedan. In fact, I think we

Deepak Ahuja – Chief Financial Officer
I believe we used off that in our last earnings call that we shared

Aditya Satghare – Lazard Capital Markets
..it’s a the capital raise

Deepak Ahuja – Chief Financial Officer
Probably that’s right.

Deepak Ahuja – Chief Financial Officer
If you go back and look at our capital raise presentation,

Elon Musk – Chairman of the Board, Chief Executive Officer, Product Architect
And we haven’t go ahead and just talk about some of the cars we are replacing. Yes. It’s a wide range of cars. It’s not like you can say or it’s been probably five or something like that or it’s quite short right now, it’s like. (Inaudible).

Deepak Ahuja – Chief Financial Officer
This is from the ALG overview taking data from that bulk and they are showing sort of its various events and hybrids, so are the big ones. But it’s interesting like we have got the largest one here is sort of in the order of 10% and 11%. A lot of people are buying our car instead of the Prius, but that’s 10%. Obviously things like the E-Class are buying our cars there is a lead which also coming from so, it’s like E-Class, Prius, lead the Highlander, BMW 5 Series, Odyssey Honda Odyssey it’s like it’s 4% in the Honda Odyssey very like Model S (Inaudible) is 4%. Volkswagen Jetta is 4%.

Aditya Satghare – Lazard Capital Markets
Interesting.

Elon Musk – Chairman of the Board, Chief Executive Officer, Product Architect
Mix of Honda Civic is 3%, so it’s really a pretty broad range just from previous segment.

Aditya Satghare – Lazard Capital Markets
Got it. Now that’s helpful and congratulations on the good execution this quarter.

Alright, the BMW-style high performance vehicles excluded, most of the cars being listed here are significantly cheaper than a Model S. The range of these electric/hybrids is $25,000-$40,000. So you have people trading up $30,000-$50,000.

Okay, so how many highly affluent Prius owners do you think are out there? I did a quick push and found some statistics that actually quite a few millionaires do buy cheaper cars – that sort of thrift sort of plays to having millions of dollars in the first place. So I guess if Tesla sales are being driven by millionaire Prius drivers who just desperately wanted a high performance electric vehicle, then that’s great.

But if you question the depth of the pool of Prius-driving-millionaires-wanting-to-spend-$70,000-on-an-electric-car, then you’re left wondering if Tesla doesn’t have a pricing/contract problem that’s letting people climb into one of their vehicles who should never be climbing into one.

Because at $70,000 on the low end, any pricing problem is ultimately going to be a Tesla liability.

I have no evidence of this, but it doesn’t smell right, and I’m betting there’s a problem with the way Tesla’s leases have been set up, from the get go. Those parts of the last earnings release and filing felt wrong before. And since they drove the company into a loss this quarter, they still feel wrong now.

It might not matter at all, but any lurking issues, at – now – $150 a pop could easily derail this company.

Again (I’m sure you little pricks, getting ready to spam my comment section aren’t going to take any stock in this), I don’t have a problem with Musk or the Model S. But paying this much for the shares is madness.

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Eat At Olive Garden, Or Else – New Long, DRI

For a while now, I’ve been painfully aware that my portfolio is too focused on commodity prices. I have a fat position in silver, and my two largest positions are a uranium miner and a fracking services company, respectively. While I think there’s good justification that both of those should do well in any sort of market that we might see, because of supply/demand issues and long term necessity to maintain the power grid, at some point you watch competitive coal prices disintegrate and ask “Has the world changed that much?”

Most the rest of my account is distributed to the multifamily “Death Of Home Ownership Rates” thesis, which is working splendidly and has been well documented before now.

And I have a hedge position against the euro, and generally hate everything about the EU. That position theoretically hedges the commodities, a little, but has a mind of its own most of the time.

But in between those things, there’s basically nothing. And in many respects, my strategies are open to certain…weaknesses…that can be leveraged in the wrong sort of outcome.

Watching commodity prices just crater this spring and summer, like they are today, it was clear that I needed a backup play; something that would so benefit in a deflationary vortex that it could dull the pain.

Naturally, the low margin, godless work of the restaurant industry is ripe for such a role.

I’ve spent some hours peering over numbers and feel most comfortable with Darden Restaurants (DRI). Owners of such mainstay, middle class eateries as Olive Garden, Longhorn Steakhouse, and Red Lobster, this company is big and boring, priced modestly with low expectations that, in the event of any noticeable depreciation or positive developments, it will leap over.

I added DRI today for $49.72

Consider that the stock has barely performed over the last year, but sales have grown steadily. Meanwhile cash flows have the cash balance up 16% year over year, and the company pumped over a billion dollars into acquisitions and developments in the last 9 months.

The cost for the book is a little high, but more importantly the price per earnings and sales are low. And the dividend payout stands over 4%, well supported by their high cash levels. Depreciation is very high in the restaurant business, but much of it is tied up in land and buildings, from the acquisitions, so real cash and earnings are realistically greater.

The company appears to me to be cleaning up and simplifying their operations. Financial derivatives were largely unwound over the last year.

Obviously, I am not that excited about DRI. I’m buying up a single digits margin restaurant company. I mean…come on. But, with input prices falling as fast as they are, especially gasoline and fuel, DRI should come out ahead.

31% of DRI’s sales are eaten up in the cost of food and beverage. Another 15% are absorbed in general restaurant expenses. Every 1% move lower in broad commodity prices will expand DRI’s profit margin by about half a percent. And, with gasoline costs coming down, the consumer is set to have more money to splurge on a nice evening out with the family. This will push up profit margins as less food gets thrown out.

You can see DRI’s profit margins fluctuate wildly – for example, in the February quarterly report, the margin is everywhere from as low as 4.5% to as high as 7.6%. Think about how much commodities have fallen since February, then realize that a pressure spike could (and maybe already has) jack those margins above 10%, with minimal risk.

I’ll hold DRI for a few quarters, likely, then liquidate it for whatever is left. This is a play on input costs. But long term, I hate restaurants and will burn this thing at the first sign of trouble.

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CLP Earnings Out – Looked Fine

Colonial Properties Trust announced earnings yesterday, and they were largely what I expected, particularly after seeing AEC’s numbers. The two firms emulate each other closely. CLP took a break from pursuing fast paced growth to work on cleaning up their books. They dropped debt by ~$200 million, selling off roughly equivalent properties in non-core assets.

Towards the end of this quarter, they began making purchases and pursuing their development pipeline.

And of course they arranged the merger with MAA.

The lull in multifamily performance should be coming to an end shortly. At that point, I expect great things to resume from these firms, with their depreciation-masked cash flow and record demand for their units.

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RGR Goes Blastoff!

Well it would seem I was off by selling RGR this week. Ah well, no regrets on my part. I had feared a sell the news type reaction, so I took my 40% and ran.

I’m surprised the stock is up by this much, given how far down background checks are.

What a marvelous company.

At any rate, I won’t be chasing it here. I’ve had my fun and intend to let the good people of Ruger manage it alone.

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