In this episode of The Acquirer’s Podcast Tobias chats with Bill Brewster, who runs Sullimar Capital Group. During the interview Bill provided some great business analysis into a number of companies including AB InBev, GE, Netflix, and Ubiquiti. He also discusses:
– How He Went From The Flooring Business To The Investment Business
– Why I Don’t Steer Away From Leverage
– What I Liked About Investment In AB InBev, GE, Netflix, and Ubiquiti
– Why Don’t More People Use Dollar Shave Club vs Gillette
– Business Valuation Analysis Is Not Just About Metrics – Case Study
– Phil Fisher’s Scuttlebutt Can Still Be Used To Find Great Opportunities Today
– If There’s A Wall Street Analyst Hammering A Company, Investors Really Need To Know Why, Before Taking The Other Side
– What Can Investors Learn From Buffett’s Pivot On Airlines As An Investment
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Tobias Carlisle: All right, man. You Ready?
Bill Brewster: I’m ready.
Tobias Carlisle: Let’s do it. Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today is my good friend, Bill Brewster. He’s a reformed lawyer who spent some time running a flooring franchise through the dark days of a housing bust in 2008, 2009 before someone finally gave him the intelligent investor and he became a full blown value investor card carrying member of the Berkshire cult. He runs Sullimar Capital and he writes some of the most penetrating, interesting research that I have read and it’s all based on deep research that he does. We’re going to talk to him right after this.
Speaker 3: Tobias Carlisle is th founder and principle of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcasts participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliate. For more information, visit acquirersfunds.com.
Tobias Carlisle: Hi, Bill, how you doing?
Bill Brewster: Doing well, Toby? How are you doing?
Tobias Carlisle: I’m very well. You have to explain to us how you can be running a flooring franchise through the depths of the housing bust in 2008, 2009.
Bill Brewster: That’s a fair question. I should probably explain it to myself. I was in law school, as you had mentioned. I guess a curse of being in Chicago and a benefit too I got really into options, studying, and trading, and whatnot, and learned pretty quickly about halfway through my first year that law school, and being a lawyer was not necessarily for me, right?
Bill Brewster: I finished the first, probably a year and a half and I talked to my now wife, and I was like, “I don’t know that I want to do this law thing.” And she said, “Well, you got to finish.” When I finally completed it, I passed the bar. I said, “All right. Well, now what I’ve never really wanted to be a lawyer.” I thought that a franchise system would sort of put some barriers or lend some business expertise to sort of supplement the weaknesses that I had.
Bill Brewster: In retrospect, there were some calculations that I probably could have done a lot better. Some of it was timing, some of it was me. But it was not a good marriage.
Tobias Carlisle: Well, you’re a good business analyst. I’m interested, how did you think about that opportunity as you’re going into it, and what was wrong with it?
Bill Brewster: Well, so back in the day, the company that I chose to join has successful franchises around it, right? So they built successful brands. I was looking at, boy, if I can own sort of the flooring equivalent of what they built in other home services, that’s going to be fantastic. I missed a couple really key things and that’s probably a good lesson and motivated reasoning right there. But I’m in Chicago, right? They’re telling me, “Hey, this is what we think the average marketing spend, should be and we know how to own a neighborhood and this and that.”
Bill Brewster: Well, I mean, what is a good marketing spend in Omaha is not a good marketing spend in Chicago, right? I mean, I miss it says scale I miss it says, my defined market, I tried to spend too much money on too large of a market, right? I probably should have just tried to own a block with the amount of money that I was trying to do. I tried to own neighborhoods. Long story short, I think that I learned that there is a different business that the franchisor runs than the franchisee runs, and a lot of great franchise or brands are built on the marketing dollars of franchisees. So-
Tobias Carlisle: Now that you’re a value investor now, and I always say this, but value is a very broad church. How do you characterize yourself as a value investor?
Bill Brewster: Yeah, sorry, sorry for the alarm, if you can hear that. Anyway, so I was saying to you when I transitioned out of the flooring franchise, I was fortunate enough to get a job at BMO Harris bank. In Chicago, I underwrote loans. In between that time while I was waiting to start, because they had credited analyst programs, and I had to wait to go into that. My grandma’s friend sent me three books, and two were Bogle books, and one was the Intelligent Investor. I don’t know. I think that guy has a sixth sense of humor to do that to me.
Bill Brewster: I could just be naively indexing and super happy, I guess.
Tobias Carlisle: Right.
Bill Brewster: But I just think Buffett talks about it, when you read it, it either clicks or it doesn’t, right? I’m not a hardcore like quite value guy. I see a lot of merit in that strategy. I think when you’re running a research based process, one of the things that’s tough about just doing price to book or EV to EBIT, or whatever, whatever you want is, it takes a long time to dive into an idea. Then let’s say it rewrites on you in six months. If you sell it, it’s a taxable event.
Bill Brewster: In a non taxable rapper or in something that doesn’t take as much time, I’m a full endorser of that like three quant strategies. I just don’t know that, for what I’m trying to do, it’s the best way to get where I need to go, right? I think I’ve adopted a little more monger.
Tobias Carlisle: You’re treating them like more of a … You view yourself as a business owner, you’re doing a full analysis of the business and I watch your Twitter account pretty closely, and you dive into the conference calls and all the notes as much as you possibly can. Are you looking at more leveraged companies? Is that what you feel that’s where your insight is going to be best applied?
Bill Brewster: Yeah, well, I would say I don’t steer away from leverage, which is potentially destructive habit. That said, I just think it’s important to keep leveraging context, right? One idea that I pitched last year was ABM Bev. I know why people don’t like that. If everybody liked the idea, I’d argue it’s not value, right? But I think it’s important to look at debt ladders, to look at the covenant structures. When is the debt maturing? How hard can they push the debt markets going forward?
Bill Brewster: I like to look at credit default spreads, I like to look at just sort of how the bonds are trading. I think I have a lot of respect for the credit market, and I probably need to learn a little bit more about it to be candid.
Tobias Carlisle: Let’s talk about ABM Bev a little bit. What was your attraction to it and why was that distinctive to what the market was saying?
Bill Brewster: Well, I wouldn’t say uninformed variant perception on management, but I do think that with management teams, stock price drives narrative a lot of the time. Back in 2015, 2016 these guys could do no wrong, they had the 3G virtuous cycle. I think they probably overpaid for SABMiller, their stock price gets hit, and now they’re morons. I just think they have admitted that they miss things, the world has changed a little bit on them, beer volumes are declining. But part of it is they are a management team swimming upstream a little bit.
Bill Brewster: Part of it, I think, is people aren’t taking a step back and just really thinking about the big picture. ABM Bev has almost doubled the gross margins of their nearest competitors. Their operating margins are salivatingly fat, and they have a distribution system that’s built out that I don’t know if it quite rivals Coke, but I can’t think of too many more envious or enviable distribution system.
Bill Brewster: Over the long term, I think that that’s a hand I want to play and I think beer is a drink that has been consumed for a long, long time. There’s premiumization trends in the US and developed worlds. In the developing markets I think it’s a scale game, right? How many minutes do you have to work to get your buzz on? If they have such a scale advantage, and they can distribute that in front of people, they’re competing with people making alcohol in the bathtub. Over the long term, I want to be that product pusher.
Tobias Carlisle: You don’t like the pruner that the toilet one?
Bill Brewster: No, no. Look, I mean, people have to do what they have to do to escape sometimes, right? But I do think that beer offers the occasion to have people do that. They’re innovating, they’ve got some brews that are not traditional brews that they can get in front of people that are cheaper and we’ll see. I mean, in five, seven years, maybe people look at me and say, “Boy, had you missed that?” I’ll say, “I don’t know, I was an idiot.” But, yeah, I’m willing to put my chips in.
Tobias Carlisle: Interesting. An interesting business, because it seems to be reasonably resistant to the economic cycle when things get bad, if anything, people drink more. And so, they seem to do quite well through those periods. But I remember coming into my screen, maybe a year or so ago, Sam Adams … and I’m just blanking a little bit on the name of the stock, but I’m pretty sure the ticket i Sam. Sam Adams also got unusually cheap, and I guess that’s all of the premium boutique beers pushing him. Was that sort of the move away from macro, as they call into micro? Was that the driver of the undervalued, do you think?
Bill Brewster: Yeah, I think that’s probably some of the overhang on a lot of these stocks. I mean … So Heineken has, I would say, a better aggregate brand portfolio, right? If you just had to bed straight brands, Budweiser I mean, you’re really long lager in the US, which is under attack. But I think what’s under appreciated is US revenues are maybe … I don’t know. I think it’s 28%. I think is the number but let’s call it 25 to 30% of revenues.I mean, it’s ultimately an emerging markets play and I think that people focus.
Bill Brewster: I can’t sit here and tell you, yeah, more assets chasing the same share of throat for lack of a better term is a good thing for the US business. But I think they’re going to manage, okay.
Tobias Carlisle: I don’t think I can drink any more micro beers. I’ve had enough of the IPAs, like the passion fruit flavored beer. I really just want … Give me the thing that tastes as close to water as you possibly can. Just give me the regular robot that’ll do me.
Bill Brewster: There you go. Well, Bud Light. It’s not even made with corn syrup, right?
Tobias Carlisle: Let’s say yeah. Let’s talk a little bit about, how do you sighs positions? Do you like to stay fully invested? Do you carry cash? How diversified do you like to be? Do you look at industry concentration and so on? When you’re constructing your portfolio considering a new position, how do you think about those things?
Bill Brewster: That’s a great question. That’s something that I’m working through every day, trying to think through that. Now, if I’m tinkering, that’s not very good, right? But I just did performance attribution for myself. It’s not audited. I’m not an RA, please don’t listen to what I’m saying here. That said, cash drag has hurt me over time. I was fortunate, I guess, or smart. I don’t know which one, but I deployed a lot of capital from November to January. A lot of it was late December and a lot of it was high Beta, if you want to take that approach to it, right?
Bill Brewster: I don’t view the world through that lens. Netflix is something that ended up in my portfolio, which is not a traditional value play. I have a little bit of concerns about the business model, but I do think I see the world through scale a lot, right? ABM Bev, I like cable companies and I do think that over time, the scale advantage on Netflix is something that I’m comfortable betting on. Okay.
Bill Brewster: Now, how much am I comfortable with that, right? ABM Bev is 10% of what I run. Netflix is three. Now, Netflix is not the reason that my performance has been good over the last couple months, because it’s only 3% I guess it went up to four and a half or whatever but at costs, I’m much more comfortable with the stability of Budweiser’s fundamental business and business model than I am Netflix at this stage and valuation. I just try to think … I mean, I don’t think anybody that’s long Netflix isn’t a little nervous when the earnings call comes out that they’re not hitting a growth pocket, because if they do, it’s going to be painful, at least from a volatility perspective.
Bill Brewster: I would be more inclined to size that position big if fundamentally I thought the story was still together and everybody bailed on it because growth. I’m fairly long charter. Also, that’s another large position for me. My view on that was they had an earning score where they had some integration issues that they had released and is on the back of a buyback at higher prices and deals that fell through and I think people sort of threw in the towel, or at least got dejected, right?
Bill Brewster: I pulled up all their old transcripts, and I was reading through and they had laid out. Like this building migration is a real risk. It’s not a small risk, it’s a risk. Here we are, fast forward two and a half, three years, and the building migration happens, the risk materializes itself, and the stock’s off huge. I think that I had lived through an integration at BMO Harris, it was miserable. I bet it’s still miserable over there. I mean, trying to get people to change software is like going to the dentist, everyone complains.
Bill Brewster: You’ve got … One organization feels like they’re being talked to in a way, another one thinks that they know every … I mean, it’s not ideal, right? Sometimes I think, at least in that case, the financial community models out in M&A integration to go perfectly, and then life happens. Then maybe somebody who’s IRR or something gets hit, and they say, “You know what? I’m done with this.” I like to scoop into those situations.
Tobias Carlisle: But do you think because you think ultimately that is a problem that they can solve that they can get that under control? When they do, then it’s largely back to business as usual?
Bill Brewster: Yeah. Well, fundamentally, I mean, what I love about that entity, when you listen to them talk, they talk about, “How can we keep our …” If you think about … I’m just trying to think about how to explain it. If you think about a building that’s built and it’s like 55% fall, and they just want to keep hammering users into that building, right? Their ideas, we’re going to charge a cable price, that’s low enough that the competition isn’t going to be able to beat us. We’re going to maximize the amount of money per home, we pass.
Bill Brewster: I think that when you get that type of strategy, and you get the local scale benefits, you can undercut your competition once the game is sort of one. I think that where they are combined with John Malone, and that whole you can bet against them. But I’ll take the other side of that trade.
Tobias Carlisle: I mean, that was one of John Malone’s. I hate to say innovations, because it’s a reasonably obvious position now, I guess, for the benefit of hindsight. But he saw that if he could get scale, and TCI, this is a story in the outside. He saw that if you get scale and TCI, then he would have better buying power, infrastructure becomes much cheaper on a per user basis because it cost you the same to put it in the ground, however you do it.
Tobias Carlisle: Then, the more people you hammer in, the better your metrics start looking. Is that what charter is trying to do?
Bill Brewster: Yeah, I think so. I view Netflix through the same lens, right? I mean, back when you were building out cable pipes, you had free cash flow negative, financial statements, and everybody could look at that and say, “What the heck are you doing?” You get to 300 million users. On a per user basis, these content numbers that are eye popping, are going to be a lot less eye popping, and they’re also going to be really, really hard to compete with. But Netflix is rich. I mean, I don’t think anybody’s going to sit here and pitch it but true value investment, right?
Tobias Carlisle: Well, how do you feel about competition from someone like YouTube? Google’s got similar kind of distribution, but the advantage that they have is that people will upload this, this gets uploaded to YouTube for free and this will get dozens of years. Then, Joe Rogan uploads his for free and that’ll get multi millions of views, but that their content costs are nil.
Bill Brewster: Yeah, yeah. No, I know and Joe Rogan’s too went up to three hours of your day, right? That’s a fair amount of attention.
Tobias Carlisle: Right.
Bill Brewster: I personally cut Netflix, I said, “I don’t like this, I’m spending all my time searching. What am I doing?” Then it took me like a month to re subscribe. Really, what got me comfortable with how they understand their business is if you look at their … Forget about their income statement because it’s not worth looking at, look at their cash flow statements, right?
Bill Brewster: I mean, if you look at their cash content spend, and their marketing and selling spend, I just aggregate all that and say, “Okay, well, this is the cost of acquiring a customer and keeping them.” They’ve been remarkably consistent on their projected customers or projected subs.
Bill Brewster: If I saw that go way out of whack … I mean, that’s sort of my KPI, right? I feel like that’s a good indication that they’re executing on their plan, and they have the long term view, then I’d have to rethink what I’m looking at. I understand I’m sort of pitching like looking at eyeballs here. It’s not that the investment I’m trying to hang my career on, but I see a lot of merit in it. Let’s see.
Tobias Carlisle: Let’s see, eyeballstheold.com metric.
Bill Brewster: Yeah, that’s exactly what I’m a little concerned about.
Tobias Carlisle: When you put that … I mean, to be fair and I don’t mean that as a criticism, but every one of their eyeballs actually is a subscription and a fee paying subscribing customer. It’s real revenue, it should be a very good business. That’s exactly the kind of business that you want, recurring subscription revenue. They don’t have quite fixed costs, but it doesn’t cost them any more for 1,000 people to watch than it does for a million people to watch the same content run.
Bill Brewster: Yeah, you get some operating leverage out of it. I would say, the real … Sometimes I think people get carried away with subscriptions, right? The real value in subscriptions is you’re locking in your monetization. If you look back at when Adobe went subscription, or when Microsoft went subscription, their fundamental problems are people spend like 90 bucks, and then they wouldn’t buy something for three more years, right?
Bill Brewster: Well, if you can charge them 10 bucks a month and lock them in it on the three year example or …let’s call it two, you’re turning $180 or $90 into 40, right? I mean, that’s huge. I think that you can make a fair argument that media, at least the movie business, there is some volatility in ticket sales, right? But if you can collect up front your subscription, you can sort of reduce some of the, I guess, unknowns that are coming with the revenue stream. I think that there’s merit and subscriptions actually adding value in that industry.
Tobias Carlisle: I think that’s one of the most interesting insights to come out of the Dollar Shave Club, that they said, it’s crazy that Gillette charges is so much for each individual razor. We’re just going to charge you whatever it is $1 or $2 or $5 a month. But because you’re doing it on a recurring basis, and you don’t necessarily go and buy razors on a regular basis from Gillette. So you buy them when you when you think you need to and then you remember, they actually managed to get more money out of people for their spend on razors than Gillette was getting out of them, which is kind of a brilliant insight just by making it a recurring regular payment.
Bill Brewster: Yeah. I mean, if you looked at my Mac three right now, I should change the blade, right? But I’m not going to, so I should probably be on a subscription model from the business standpoint.
Tobias Carlisle: When you’re undertaking evaluation, just in general terms, what’s the process that you go through? What do you sort of … You look for a metric for each individual company or you’re doing a DCF or how do you do it?
Bill Brewster: I think about what’s out of the gate now. I just talked about Netflix, so add this one back, right? But what’s my out of the gate free cash flow yield and then I try to compare that among … I mean, I’ve sort of borrowed this from Buffett but what would I get on the tenure, right? Then, what do I think the growth path is and what do I think returns on incremental capital are? That’s sort of how I figure out, “Am I interested in this business?”
Bill Brewster: Then, there’s other things like my favorite investment that I did was intrepid potash. That was a price to book thing, right? It wasn’t a fundamental price to book screen, it’s a company that I had known because I banked, and they got into perceived distress, and it was distressed. But the company was trading for something stupid, like I mean, maybe $200 million EV, or maybe it might have been even 160. But they had just put $550 million capex into this company and it’s a mining company. It’s everything no one wants.
Bill Brewster: But I was digging through the credit agreements, and I realized that Farm Credit owned the needed majority of, I guess, voting rights, so they could drag along the pensions with whatever the pensions didn’t matter anymore, right? Farm Credit was formed for the purpose of helping farmers and commodity type companies get through down cycles, so I was reasonably confident that they were going to amend their side of the credit agreement. I knew the bankers that BMO. I didn’t know what they were doing, but I think highly of them, especially in the food group.
Bill Brewster: I just figured, they’re going to get this done. It took a lot longer than I thought it was. I mean, there were some times that I was pretty nervous, but that wasn’t very hard to DCF. I just knew if it re rated close the book, which it should be at least 80% of book, given the returns on capital that that business should generate, that I was going to win. Then it’s a matter of how long and do you want to pay the tax? But I was pretty comfortable with that one.
Tobias Carlisle: How long ago was that?
Bill Brewster: I think it was 2016, June of 2016ish.
Tobias Carlisle: There were a few companies globally, a few potash companies globally that were in distress about the same time. I remember there was a Canadian traded down, it was a net net. Then you got the entire potash mine, I guess it is for free. And I-
Bill Brewster: Yeah.
Tobias Carlisle: I remember seeing that written up on a few different websites. What was the driver of the … It’s fertilizer, so I guess it’s demand for agriculture that drives the demand side. Is that the case?
Bill Brewster: Yeah. Well, I mean, potash is really interesting. It was a cartel. I forget when they broke up. I want to say it was 2010 or 2011. I’m pretty sure it’s Belarus and another country but they produced all the potash or could potentially produce all the potash that’s needed, right? So because they were a cartel, it was supply restricted. I think that when you look at how long a potash mine takes to … I mean, this is a terrible business, right? But how long it takes to bring a mine online and once you’ve committed to that capital, you’re going to do it.
Bill Brewster: All these projects were undertaken at exactly the wrong time, the cartel breaks up, everybody starts losing money, you have large exit costs. It’s it’s a recipe for just irrational behavior for a really long time. I’m not going to call it bottom, but I think 2016 is a reasonably decent bed at the bottom, and it just happened given opportunity.
Tobias Carlisle: You felt that $550 million in capital spend was probably a reasonable proxy for what the whole thing was worth.
Bill Brewster: Yeah, yeah. Because they were digging out these low cost mines, right? There’s like two parts of the business. Basically, they’re geographically advantage so they can pump water into lakes, and then use the sun to just evaporate the lake and then go scrape the lake and get their potash, which is basically just like salt, right?
Bill Brewster: They had to shut down the part of their business where they were going under the ground and mining. But all the capex was basically spent to improve those lakes and then improve their processing. I felt like that those are reasonably good dollars. That’s not like you’re not buying a hole in the ground for that.
Tobias Carlisle: Because that’s the thing-
Bill Brewster: You’re buying a hole in the ground, but not quite.
Tobias Carlisle: Literally, like a hole in the ground with a layer on top. That’s the thing I always-
Bill Brewster: That’s right. That’s right.
Tobias Carlisle: That’s the thing that always makes me most nervous about the mining place as a value investor as a deep value guy. Particularly, I don’t mind looking at them. But the thing that I’m always most nervous about is at the very peak of this cycle, they’ve dropped a huge amount of money into it, then is that actually representative of what this thing is worth in the down cycle or over the full cycle. It’s hard to know. I’ve never really been able to arrive at the correct answer because the thing that we’ve been grappling with over the last 20 years is, what is China’s impact? Is China’s sort of demand artificial?
Tobias Carlisle: I’m not going to be there in the future or is this just the way that the world is like China is going to have this gigantic demand for basically the supercycle. Remember the supercycle?
Bill Brewster: Oh, I remember yeah back with the bricks. This is going to be awesome. Internet [inaudible 00:28:52].
Tobias Carlisle: Where did the supercycle go?
Bill Brewster: I don’t know. I’ll tell you what? ABM Bev is brought me down into Brazil a little bit and the bricks are not the bricks anymore. They got to come up with something. I guess we got Fang now. But those are probably a lot more sustainable than the bricks but time will tell on that statement.
Tobias Carlisle: Let’s just switch gears a little bit and talk about LaCroix and National Beverage which is one of your favorite positions.
Bill Brewster: Yeah. Well, that one I … That Ubiquity sort of rhyme. Lacroix I had a lot more personal knowledge with and both of those opportunities came up because of short reports. That was one of those opportunities where there are some corporate governance problems at LaCroix. I mean, they’re just are. It’s National Beverage Corporation. That said, they had a super clean balance sheet and even if they were paying this entity off to the side, I figured, well, the auditors can get at least audit cash flow and they can audit debt and there’s no debt.
Bill Brewster: I’m in the Midwest, I just looked around at what was going on with … I mean, they were winning all kinds of end caps at grocery stores. I thought it was just going to be like this beautiful brand that turned into Coke and I was a young Buffett. There were some other transactions that had occurred was just taken out by, I’m pretty sure, Dr. Pepper Snapple and it just made a lot of sense to me that LaCroix should be worth materially more.
Bill Brewster: Now, we’ll see how the story ends up. I was on the Twitter and Mark Otis was short. I always get nervous when code is just short. Anything that I like, I was dabbling, I exited. But I was dabbling because it’s sold off a lot. He had seen discounting and he was pressuring in a short. I was happy I was out, but it’s a good lesson on how quick the world can change on you because I thought that brand would be there forever. It still may be but this is quite a hiccup.
Tobias Carlisle: I like it as a category because I think everybody recognizes that the obesity epidemic for one of a better word is probably tied closely to how much sugary water everybody’s drinking. These things offer an alternative that has some flavor. I’ve seen it described. It’s like watching the … When you flick between channels and you see the snow on the screen, whatever that’s called. Or it’s like somebody else drinking soda in the room beside you. That’s the taste of it. It doesn’t taste good. But I don’t mind it. Actually, I enjoyed it. I drink some of it and it tastes all right. Maybe it’s a little bit too … There’s too many bubbles in it something like that. The next one that comes along is going to be low fizz.
Bill Brewster: Well, out there they say that they like Topo Chico and that’s more effervescent than LaCroix. I don’t know, we’ll see. We’ll see.
Tobias Carlisle: If you go through Texas and other areas like that Topo Chico is everywhere.
Bill Brewster: Oh, it’s huge. It’s huge. Just my buddy’s out there and he was from Texas. He was like, “I don’t know, man. Topo Chico’s taken off.|” I said, “Well, I don’t know, I don’t know.”
Tobias Carlisle: I hate to use this name in vain. But Chris Cole, he visited me when I was in Playa Vista. This is in California. He saw the big boxes of Topo Chico and he bought some because he couldn’t … I don’t know if there’s some sort of supplies you out there. But he’s like you can’t get them this cheap. He put a polythene.
Bill Brewster: Just going to wholesale it. One of the fun things about investing is in the scuttlebutt that I was doing, I have a friend that used to be in marketing. He was telling me that LaCroix would hire the firm to do their advertising, right? They knew that they didn’t have the skill to compete against Coke in TV. We said, “All right, what are we going to do?” They came up with that pop party can?
Bill Brewster: I guess, rumor has it that they hated the can but it tasted really well. They were smart enough to say, “You know what? If it tastes well, let’s see how it goes.” Their game was, “We’re going to win on premise conversion?” Right? When you walk by this box, it’s going to pop up out of the aisle, and somebody is going to grab it. The thing that I like about that and a lot of people complain that their Opex was too low relative to sales and what Coke is.
Bill Brewster: But if you have just those colors on the box, convey a brand image to you and it’s organic. When you roll out a new flavor, you just flip the colors. If coke wants to release a lime, sugary drink, like take out a rebranded Sprite. I mean, there’s a ton of money that goes into that. Now, arguably it’s more durable. I mean, we’ll see. But I like the packaging. That was a not insignificant part of my thesis combined with Instagram was like everything and there’s a bunch of social signaling like drinking LaCroix, so I’m cool. I mean, it was like the perfect storm to blow up.
Tobias Carlisle: I can never get used to the pronunciation because there’s a British TV show that they showed in Australia when I was a kid called Absolutely Fabulous. There’s a fashion brand, I think called Liqua and somebody on the show mispronounced that as LaCroix and then corrected. Oh, it’s Liqua sweetie. Then that was sampled by like EDM, electronic dance music group and so the whole song was just it’s Liqua sweetie. I can’t call it LaCroix, but I guess I’m doing it.
Tobias Carlisle: Let’s talk about ubiquity. What’s the story there and how did you find it? How did you value it? How do you think-
Bill Brewster: Well, that was one that my buddy had told me about it. He’s out in Silicon Valley, he used to be with the NSA. He’s pretty plugged into that whole, I guess, community of coders and whatnot. He was like, “Look, man, I’m just telling you that every single small business out here uses ubiquity.” I was like, “Well, why why does Cisco not just kill him?” He thinks, or thought at the time that it was a fundamental organizational principle that Cisco is more enterprise driven. Ubiquity strategy is to get product out cheap, right?
Bill Brewster: Robert Pera is the founder. He’s an old Apple guy and he left. His whole strategy was like, “Rely on the internet and rely on distributors.” I said, “I don’t you know if I believe this.” A short report comes out, I’m reading the short report, and I start looking around my house and I realized that my wireless network runs on ubiquity. I had paid somebody to come set it up. I have all these wireless access points, and I just started calling people. I started with the sales guy. I was like, “I gave you a fair amount of money. Now, you’re going to give me some intel right?”
Bill Brewster: Then I just kept asking people for leads. I probably talked to, I’d say, six to eight people. I mean, probably six, if I’m really thinking about like real conversations. But I just asked him, I’d say, “Why are you guys selling this product?” Right? Almost invariably, what came back is, “It’s stable, and it’s cheap and our customers like it. We make money and we don’t feel like we’re overcharging.” I said, “Okay, well, why not Cisco?”
Bill Brewster: They were at that point, still installing some of the more expensive equipment was Cisco equipment. They’ve since transitioned. But it just got me really interested that the story was, “We’re not marketing, we’re B, to B, to C.” Every one of the people that I talked to, like the story checked out. Then, when I looked at that, I mean, there was a short overhang on the stock, and I just didn’t really buy that. He gave an investor day. People hated it. I loved it. I mean, sometimes people want to have like an abnormal result in a normal package.
Bill Brewster: I think when you’re looking at a lot of these entrepreneurs, like if they’re socially awkward or something, I mean, they’re not normal, right? I mean, this guy has created a multi billion dollar company, like he’s not going to be like you or me, probably.
Tobias Carlisle: I’m pretty socially awkward, Bill.
Bill Brewster: Yeah, well, you might be the next billionaire. I hope you are, Toby. People would tell me that I’m socially awkward too and here I said so. Well, I should but I digress. Anyway-
Tobias Carlisle: If we’re talking … Well, let’s talk about socially awkward. Big Larry Holdings, you went to the-
Bill Brewster: Oh, gosh. That’s quite the transition right there.
Tobias Carlisle: You’re not quite, you’re not … I know some people who are in the cold. We both know somebody in the cold.
Bill Brewster: Although some of the shorts might say they’re the same person. Yeah, we do know somebody that’s in that call. Look, I think that Sardar appears to me to be the type of guy that if it’s working out, you can look past and when it’s not, he’s a crook in people’s minds. I talked to Shane Parrish there and then subsequently at Berkshire. Shane, had that thing called perfectly. I guess in 2010, he saw some stuff that he didn’t like and he wrote a letter and got out.
Bill Brewster: But I hope I’m not talking out of school, Shane. But he’s an interesting … I mean, it is absolutely true that there’s a guy that stands up and asked a question and says, “I’ve been with you for six years, I believe. Everybody told me not to believe. I’m starting not to believe what should I do?” Sardar just picks up a peanut, puts it in his mouth and looks at him. He’s like, “You got to answer that question for yourself.”
Bill Brewster: Okay, man. This guy is underwater after six years of believing in you. I mean, there’s no sympathy in that guy. He doesn’t care. I don’t like the entity because I don’t like what’s going on at Steak ‘n Shake, and I don’t like the debt that they have.
Tobias Carlisle: What about the … For me, I followed Sardar when he was little on fund before I moved to the States. It’s at least 2009, 2008. I’ve kind of been following him to the extent that I could. He was written up in sort of some Texas, local newspapers. This is pre Steak ‘n Shake. I thought this guy’s a very clever investor and he’s an activist, so I’m sort of interested in what he’s doing. I followed him all the way up to when you got control at Steak ‘n Shake. Then a few things, tweet me selling your signature and branding it under your own name. That’s odd behavior. If you’re a celebrity, capital allocator, maybe Buffett could get away with that. Buffett never do it, but maybe-
Bill Brewster: Maybe they would never do it. That’s the thing, right?
Tobias Carlisle: Maybe he could get away. If he endorses something, probably people are going to go and buy it because he’s endorsed it. But if you’re an unknown, that’s a really unusual move and it needs to be kind of justified in some way. Then the related party transactions and that insane compensation scheme. From my perspective, it makes it uninvestable because you don’t know even if he does very well, how much of that falls through to you as a shareholder, not enough. There’s somebody crimping the hose on the way through, there’s a hole in the hose.
Bill Brewster: That’s exactly how I think about it, too. Then on top of all that, and I might not have this right, but I think I do. If you’re a shareholder there, your real interest is in the Lion Fun one and the Lion Fund two. The Lion Fund one might on those Cracker Barrel shares, but it’s not. I mean, look, I guess when you’re dealing with a controlled company, you don’t have that much say anyway. But if that Lion Fund one has a 12-year or a 10-year lockup with two year options, or whatever it has. I mean, I don’t know what the terms are. But you’re even further removed from the assets that you think you like and he’s charging. I don’t know if it’s 0620 or 0625.
Bill Brewster: I mean, I don’t know how much upside to Steak ‘n Shake, and Western Sizzlin’ and Run-Off, and Maxim magazine, and Cracker Barrel have. I hope people in the entity do well, but it’s not something that interests me.
Tobias Carlisle: When you moved into it though, I thought this is potentially Steak ‘n Shake potentially. I can see Shake Shack is huge, right? That’s become an extremely popular place for its great branding, easy to get into lots of stuff to like about Shake Shack. Maybe not the price, but I like everything else. But Steak ‘n Shake, I can see if you’re a clever operator, maybe you can get control of that and turn that into a Shake Shack.
Tobias Carlisle: After something that’s just been forgotten about for a very long time turns around starts doing very well. I mean, there’s a potentially huge upside and something like that. But that’s not the way it’s turned. For me, that’s enough.
Bill Brewster: Well, I mean, that’s the value dream, right? You find an asset that’s been forgotten about by the market and the narrative switches and it rewrites and then if you can get earnings growth on it, I mean, that’s how you get 100 bagger. I don’t think this is going to be that. I mean, one of their biggest problems, in my opinion, is Steak ‘n Shake is just … I mean, their financial results are terrible right now and they’re going to need to change all that. They think they’re going to do it by franchising, but the unit economics on the restaurants aren’t working as it is. So, how are you going to sell the franchise to somebody?
Bill Brewster: By the way, you got to roll debt in 18 months. I mean, I’d been at banks, and I would not think that the bankers are having a fun conversation right now. But-
Tobias Carlisle: That’s it. There is a price that I do think it’s starting to get sort of optically cheap, and there is a price that I could buy it, but probably not where it is, would have to be just like stupid cheap, I’d probably buy some.
Bill Brewster: Well, here’s the only problem with that and this is where I go back if it was in like an ETF or some tax advantage rapper. Let’s say you buy it, how long is it going to take to rebate and then you got to pay tax? I don’t know. That one’s tough for me.
Tobias Carlisle: Well, let’s change gears again. I don’t mean to beat you up about this one, but we did discuss it in real time. So, GE, walk us through.
Bill Brewster: No, no. Don’t do it. No, no. Look, I think GE, when I looked at it, maybe with rose colored glasses, well definitely, I just see their aviation business, their health care business, what their power business could have been. I think that that’s a really good lesson for me to remember where … I read grants all the time, right? I should have called grants and been like, “Why does Jim hate this entity for 20 years?” Right?
Bill Brewster: Then, I mean, there’s a certain amount of hubris that goes into taking any active stock position, but I probably should have listened to a lot of smart people that were smarter than me. I joke with my buddy who writes under the science of hitting investing. He and I talk a lot. I’m like, “The next time I ever open up a 10K that reads like, GEs, I’m just throwing it away. I’m done.” I still think on an asset value basis, it’s probably cheap. But-
Tobias Carlisle: It’s just got an ocean of debt, isn’t? The debt is the thing that scares me.
Bill Brewster: Yeah, well, it should there. [crosstalk 00:44:58]. It’s got no cash flow, so that’s a bad combo.
Tobias Carlisle: The problem for GE probably started somewhere during Jack Welch’s tenure that they could hit those quarterly earnings numbers to the penny should have been concerning. That’s probably where it started and way, way, way too much debt in there, even off 90%. If you include the debt in the price you’re paying in the EV, it was still bananas expensive, but that’s the boss of the value guy. How did you see it when it was down?
Bill Brewster: No, I think you’re totally right. I figure with the certainty of the cash flows of the aviation business, and where that was growing to, I mean, I think you can make credible argument that that alone is worth 80 to $100 billion. The healthcare business, I thought was worth roughly 40 to 50 billion. They sold that unit to Danaher for, I don’t know what was it, 24, 28 billion. I mean, even their healthcare business is not impaired by that.
Bill Brewster: You’re getting power and G casts and BHGE for close to free, which is the worst way to frame something, right? I mean, it’s free for a reason. What I also didn’t appreciate was how good of the work that Stephen Tusa has done on that name. I think that it’s easy. I think going forward, if there’s a Wall Street analyst that’s really hammering a company, I need to know, probably twice what they’re saying against it, to take the other side.
Bill Brewster: I mean, he’s just been so right and he’s done the job the right way. This ever gets back to him. Good work. That’s [inaudible 00:46:53] if you need me to tell him.
Tobias Carlisle: Let’s talk about some of the areas that you’re hunting now. Financials, what do you like in there and why do you like them?
Bill Brewster: Well, I think I like the big money center banks. I think from what I read, th community banks and the big ones are probably the winners. The ones in the middle, probably aren’t. I’m not a financial specialist, so do your research elsewhere. But I think that a lot of people are fighting the last war there. Look, wells, it sucks to have these headlines come out over, and over, and over again. The other side is look at how they’re performing and how long have these headlines gone on. I mean, that bank is a pretty clean bank, relatively speaking.
Bill Brewster: When we used to compete against them, they used to come in with massive holes sizes. If you’re putting together, call it a $50 million facility, we would have a limit that we’d be comfortable at and it would usually require three banks to come into the facility. Wells, it just come take down the whole thing. Then they say, “All right. Well, with this $50 million commitment, we’re going to own all your cash management, we’re going to do all your credit cards, we’re getting all the ancillaries.” That’s a really, really tough business to displace over time. That’s one that I like.
Tobias Carlisle: They’re very sticky. Everybody’s relationship with the bank is incredibly sticky, because it’s just such a pain to move all of your payments up. You’ve received your salary, and then you move on with your permits. It’s a nightmare to do. Even with those bad headlines, it doesn’t really mean much I don’t think to the ultimate consumer of those products. Maybe there are some people who are so offended by that they moved their accounts away. But I think that there are a lot more people who sit there offended and plan on moving their accounts away than people who actually did that. Where are you going to move them to? It’s not everybody’s in basically the same boat.
Bill Brewster: That’s right. I think, the Facebook narrative last year can teach you a similar lesson. What people say and what they do are different.
Tobias Carlisle: Facebook’s an interesting one, though. I certainly use it very, very rarely. I wonder if the engagement is done a little bit. I don’t know anything about it.
Bill Brewster: To the extent that they report, everything is all cylinders are firing. They don’t report hourly and stuff like that, right? But as far as the user numbers, it’s looking pretty strong, so we’ll see.
Tobias Carlisle: What’s the metric of the daily average user?
Bill Brewster: Yeah, dal and bow, right? But it’s like anything and I’m sure it’s some sort of burrito principle like the 80, 20 rule. I mean, if you looked at some of our Twitter usage, some of us are much more valuable to Twitter than others.
Tobias Carlisle: Well, I have a full blown Twitter addiction. So-
Bill Brewster: Yeah. I do too, I do too.
Tobias Carlisle: That’s where I spend my time. Let’s talk about airlines a little bit, because you follow Berkshire very closely. You’re following the foray into airlines, but you got an interesting view on what ultimately happens there?
Bill Brewster: Yeah, well, I think and I have to credit Phil Ordway for the original idea. He sort of said to me, “If you’re interested, there’s a book called Glory Lost,” and found that the guy I think, Seth Kaplan, is his name. the guy’s an airline weekly road. That is just a phenomenal summary. It’s not an easy read, but it’s a phenomenal summary of what happened over the last decade, well, 2000 to 2012.
Bill Brewster: Look, I think, bottom line is, it’s easy to look at it as a consolidation play. It’s a lot of different factors, but the healthier industry has either resulted or other factors have resulted in them capturing a lot of unit economics of the credit cards. They’re basically credit card companies with wings. As long as they don’t get too stupid and ruin what they have, I think that their future is a lot brighter than their past.
Bill Brewster: I think it’s very funny that everybody talks about them as the consolidation problem in America. I mean, their returns on assets are nothing to gawk at. On top of that, if you want to see what happens when they’re not consolidated, get the taxpayer bailout ready because the … I mean, I don’t know what it was, but 2000 to 2012 or ’14, or whenever that last merger happened, it’s atrocious what that industry does to assets.
Bill Brewster: Today, in Europe, I mean, it’s just bankruptcy after bankruptcy. The thing I love about it is I try especially being a Twitter user as I am. I try to make sure that I don’t get addicted to the things that I’m hammering into my head. To watch Buffett pivot on that, it’s such inspiring for lack of a better term. I don’t want to be a fanboy, but his ability to flip his mind and say, “You what? I don’t care how many times I stood up.” I said, “This is the worst industry ever.” Or, that I said, I have an 800 number that I dial whenever I want to buy one and he goes out and buys all of them.
Bill Brewster: The other thing that I think is sort of interesting is people have said to me, “Well, it doesn’t take a genius to bet on everything in the industry. You could just own an ETF or whatever.” Actually, historically had no aversion to making industry bets back when Clinton Care was being debated.
Bill Brewster: I mean, he said one of his biggest mistakes was not buying a basket of Pharma companies. I think the basket approach is something that I’ve learned a little bit from studying that move of his.
Tobias Carlisle: Before he invested in airlines, they all became incredibly cheap, though. My screen was full of them for a period, and I was at the New York Society of Security Analysts giving a presentation that when somebody asked about that, and I think six or seven out of 30 positions in my large cap screen were airlines at the time. They said, “Would you do it given that you know the buffet is so anti?” And I said, “Well, I have to because-”
Bill Brewster: That’s who I am.
Tobias Carlisle: They’re all cheap. It always does make me nervous because when I fly, I can see every single plane is absolutely packed to the gillS. There’s not a seat open on the planet flight pretty regularly. I fly to different parts of the country, so I’m seeing. I think it’s a reasonably representative sampling of what’s going on. That does make me nervous because it means it’s peak yield for the seats, maybe oil is cheap and so this is as good as it’s ever going to get.
Tobias Carlisle: But then I guess the other argument is, well, there’s a finite number of slots for these planes to land in. It’s not like it’s going to be very hard for any kind of upstart to come in and compete.
Bill Brewster: Yeah, yeah. I think that’s largely true and they can make the planes a little bit bigger. I don’t know how much more they can densify them. I mean, I think they’re pretty much at their maximum density. Something that makes me a little nervous is Delta is adding more premium seats that feels relate cycle to me. They don’t think it is but that’s TBD. I think, going forward, it might be satisfactory.
Tobias Carlisle: Well, the sit density that’s interesting, but one of the things that I have noticed, sometimes I’ll fly in one direction to where I’m going and it will be that the configuration where there’s three seats on each side and four seats in the middle, so it’s a very big plane. Then on the way back, it’ll be that middle of row is just not there and it’s like the six seats across. I think that they’re definitely getting the plane run for th-
Bill Brewster: Oh, yeah.
Tobias Carlisle: … for the flight. Both of them are packed, so they’ve nailed it.
Bill Brewster: Yeah, well, I mean, the 737 and the 8320, I mean, those are awesome machines, I think to the extent that they continue to standardize their fleets. They are not going to capture any of the economics of that, right? I mean, in my view, it all gets competed away, but it benefits consumers in that it can reduce the cost of flying. As Buffett likes to say, “So and then what?”
Bill Brewster: Well, they’re probably going to expand too much if oil is low, but if it’s high, they’ll probably pull back on capacity expansion. They’ve been able to manage through it, I mean. I think the overhang currently that exists on the stocks are everybody wants to see what happens in a recession.
Tobias Carlisle: Right.
Bill Brewster: My biggest fear with Delta is that it’s going to sell off and my main man, Warren is going to come over the top of me with a cash offer and lock in my loss. I’m going to be like, “Oh-
Tobias Carlisle: The taekwondo.
Bill Brewster: … yeah. I was right and I lost look at me.” But it’ll be interesting to watch it. Four of them control 80% of the seats will see how rational they can be.
Tobias Carlisle: It’s funny if one of them … I don’t think one of them goes to … I don’t think there’s a zero in there. I don’t think it’s a donut, but I heard there’s a great how I built this with Herb Kelleher, which is one of the … And they brought it out again recently, when he passed away. Herb Kelleher, who was the CEO, sort of founder, creator of Southwest. He said that the biggest problem in this industry is when one of those companies fails, it’s very easy for one of the other businesses to just go and pick up that plane. Now, the acid flat onto a route like a day later, it’s back in service.
Bill Brewster: Yeah. Well, there’s a reasonable argument to be made that that’s why maybe the leasing is a better place to play here, right? Because with the advent of the ultra low cost carrier model, there’s probably going to be somewhere to move that plane and who really cares? I mean, as long as your credit risk isn’t terrible, you’re probably going to keep generating some least revenue. I understand the merit in that.
Tobias Carlisle: Bill, we’re coming up on time. Just before we go, you’re a father three boys and-
Bill Brewster: Yes.
Tobias Carlisle: … homage to the great, man. What’s your most recent-
Bill Brewster: The third is Warren Graham. So-
Tobias Carlisle: That’s fantastic.
Bill Brewster: Yeah, if anyone’s tired of the Buffett Talk, I’m sure there’s a nice eye role there. I did it. My wife gets embarrassed about it. I love those guys so much because they’re free thinkers. I mean, what I know who they are, if they weren’t so rich, no, I would not, right? But I understand why people knock Buffett. I know that they see some stuff that he does is inconsistent, or he gets these sweetheart deals. That dude earned all the sweetheart deals he has, and he’s not going to sit here and tell you everything he’s thinking. He’s not going to … I mean, life is inherently inconsistent in some ways.
Bill Brewster: I just really respect everything that they’ve given me, and I hope my third kid has the chutzpah to do it his own way, and I hope he’s successful. That’s why he got the name. Plus, Warren G is a great rapper.
Tobias Carlisle: I love that quote, a foolish consistency is the hobgoblin of a small mind. I think that’s Thomas Jefferson, but I might be wrong about that. If-
Bill Brewster: Yeah. That is a good one.
Tobias Carlisle: If folks are interested in following you on Twitter, what’s your Twitter handle?
Bill Brewster: @BillBrewsterSCG and I write @sullimarcaptal.group. You can always email me through that.
Tobias Carlisle: We’ll put the links to that in the show notes. It’s always going to be on the YouTube show notes. That’s the easiest one to find, but you’ll find them on … I always publish them and push them out through anchor. I don’t know if they necessarily appear on every website. But if you need them, you can always come to acquirersmultiple.com/podcast and all of that. All that content will be there.
Tobias Carlisle: It’s been really fun chatting to you, Bill. Thanks so much for spending the time.
Bill Brewster: Yeah, man. Thanks for having me. Good seeing you again.
Tobias Carlisle: Pleasure.
Bill Brewster: All right. Take care.
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