November 28, 2017
The Merrell Brothers investment management team recommends international investors acquire the shares of Ashtead Group, a global equipment rental company at current levels. Ashtead Group’s shares are significantly undervalued and the company offers long-term stock appreciation. We believe Ashtead Group is currently worth $137.00 (OTC: ASHTY) per share. Offering a 32.5% premium based on a 24 P/E (TTY) multiple and EPS of £4.26 (1£=$1.34, $5.708 EPS) and a $103.41 ADR (11/28/2017). Trading on the London Stock Exchange, Ashtead Group earned 107.8 per share (GBX, TTY) and currently trades at 1,949.00 (GBX) or 18.08 times Price to Earnings. We value the company at a 24 multiple, meaning Ashtead Group has an estimated valuation of 2,587.2 (GBX) or a 32.75% premium to the current level.
Ashtead Group deserves a spot in your portfolio because of its strong brand recognition, potential market share growth, strong balance sheet, young rental fleet, and solid margins. The company operates in the United Kingdom, Canada, and the United States under two business lines, Sunbelt Rentals and A-Plant. Sunbelt Rentals is Ashtead’s North America brand and represents 87% of their revenues while Ashtead Group’s A-Plant operates exclusively in the United Kingdom. Ashtead Group is currently the second largest rental company in the United States with 7% market share and the leading rental company in the United Kingdom with 7% market share. Their goal is to attain a market share of 15% in the United States with a long-term goal of 20%. During the past year, Sunbelt increased revenues by 2/3 in Canada. Their long-term Canada goal is to generate 10% to 15% North American revenue from Canada and attain over 5% market share. Since 2010, Sunbelt has doubled their North American market share. Their goal is to expand their North American store footprint by nearly 40% within four years. Presumably, Ashtead Group will benefit from the forecasted continuation of the robust construction market in North America and the United Kingdom. Their significant market share and national scale provides them with lower cost of capital, superior buying power, technology advantage, and the ability to make accretive bolt on acquisitions. The Merrell Brothers rate Ashtead Group a strong buy at the current market price.
April 7, 2015
The Merrell Brothers investment management team believes Warren E. Buffett should consider adding toy maker Mattel, Inc. into the fold of Berkshire Hathaway Inc. We believe Mattel makes an excellent acquisition target for Berkshire Hathaway because of Mattel’s iconic, decades old, wide moat brands, deep discounted price from peak earnings (FY 2013), worldwide distribution platform, strong market share in the toy market, and high economic margins. The Merrell Brothers believes the underlying value of Mattel is worth at least $36 dollars a share. We generated an estimated price per share by taking a 14 multiple times Mattel’s peak FY 2013 earnings of $2.58. Earnings during FY 2014 have been slashed to $1.45 due to a 7.1% decrease in revenue and gross margins, compressed operating margins, inventory issues, acquisition integration costs, and a senior management shakeup. The Merrell Brothers team believes Mattel will be able to reverse the one year speed bump and start growing its earnings during the near future. While children today have become more engaged with electronic devices, we believe the Mattel’s iconic brands still resonate with kids today and in the future. During the past year, Mattel generated impressive revenues of $6.023 billion. Mattel’s competitors Hasbro and Lego are firing on all cylinders even with the threat of electronic devices and we believe Mattel can join the success of its competitors.
The newly appointed permanent CEO, Christopher Sinclair, is familiar with Mattel as he has been board member since 1996 and served as interim CEO from January of 2015. During the past, Sinclair has successfully turned around a handful of companies and lead PepsiCo’s international division to significant growth. We believe the new management team can make the entire company more efficient by cutting costs, creating new products, and growing its brands. We believe all of Mattel’s brands can be refreshed and reinvigorated back into growth mode with Mr. Sinclair at the helm. At current price levels, the Merrell Brothers believe Mattel could fit within the Berkshire Hathaway Inc family. As avid Berkshire Hathaway shareholders, we would enjoy seeing it added to the Buffett portfolio.
It is estimated that Mattel controls approximately 17% of domestic and 14% of the international toy market. Mattel generates 46% of revenues outside of the United States and Canada. Mattel’s core portfolio brands include Barbie, Fisher Price, American Girl, Monster High, Hot Wheels, Thomas & Friends, and MEGA BLOKS. During FY 2014, Mattel earned gross margins of 49.8% and operating margins of 10.9%. However, these impressive margins have taken a breather from the prior year. During FY 2013, Mattel earned gross margins of 53.6% and operating margins of 18.0%. We believe Mattel’s refreshed leadership team can significantly improve their margins. Some of the margin compression was the result of the integration of the MEGA Brands acquisition for $460 million during 2014. Mattel generates significant free cash flow (FCF) of $1.84 per share during FY 2014. Shares are currently trading at 13.0 times their FY 2014 FCF. During the past ten years, Mattel has generated aggregate FCF of $15.31 a share ($5.54 billion) and paid $9.38 in dividends per share. The Merrell Brothers believes that Mattel is significantly undervalued and shares could be acquired at the current levels of $24.00 per share. We believe Mattel meets most of Buffett’s key investing requirements and the current valuation represents a long term buy.
We believe Chicago Bridge & Iron Company, N.V. (CB&I) (NYSE:CBI) is an attractive buyout target and could be acquired within the next 12 months, possibly from Berkshire Hathaway (NYSE:BRK/A). Chicago Bridge & Iron is trading at a trailing twelve month price to earnings (P/E) multiple of 7.63 and the company has a market capitalization of $4.47 billion. CB&I is trading at a 66.8% discount to its peer group. Shares are currently trading at a three and a half year low because of the weak oil market and the 2013 acquisition of the Shaw Group. However, we believe CB&I will prevail because of their global footprint, high barriers to entry, robust backlog of projects, engineering and manufacturing scale, capable management team, deep list of customers, joint ventures, and strong margins. CB&I is a complete global energy infrastructure focused company that provides conceptual design, engineering, procurement, fabrication, modularization, maintenance, program management, technology, and environmental solutions. CB&I can design, engineer, fabricate, and construct anything from oil refiners, Liquefied Natural Gas (LNG) plants, nuclear power plants, fossil fuel power plants, renewable energy, pipelines, to oil platforms. The Merrell Brothers Investment Management team believes investors buying shares today will be rewarded in the future. Even if an acquisition of CB&I does not materialize in the near term, we still believe the shares are significantly undervalued and we advise that you acquire this discounted business. We rate CB&I as a buy for the long term investor and shares should be acquired near the closing price $41.31 (12/19/2014).
Coach is a global lifestyle brand that markets and designs handbags, leather products, wearables, footwear, sunglasses, jewelry, watches, wallets, belts, and perfumes to women and men. Coach offers an incredible value, near 4% dividend, strong global presence, and shares could be picked up at current price of $34.60. The Merrell Brothers Investment Management Team has a strong buy rating on the stock. The team has purchased shares for all of our clients and the Merrell Brothers Investment Management team personally owns shares in Coach. The stock has lost 42% of its value from its year high and is 55.5% off its all time high of $77.84. We believe owners will be rewarded in one to four years with exceptional returns. The wait for the growth transformation is tolerable because shareholders should collect a big near 4% dividend each year. We believe Coach has several catalysts going forward, those include: the fact that Coach recently hired a talented creative director, refreshing stores during the next two to three years, closing underperforming stores, an attractive 4% dividend, strong international growth, clean balance sheet, soon to be completed newly centralized NY corporate headquarters, attractive margins, and a cheap valuation.