Author Topic: CWL.TO - Caldwell Partners International  (Read 1214 times)

matts

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CWL.TO - Caldwell Partners International
« on: November 06, 2018, 09:29:40 AM »
Hi All,

I just posted a thesis on this company on SA. Would appreciate any feedback.

https://seekingalpha.com/article/4218710-caldwell-partners-underfollowed-5_7-percent-dividend-payer-short-term-catalyst


Thanks



flesh

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Re: CWL.TO - Caldwell Partners International
« Reply #1 on: November 06, 2018, 09:54:36 AM »
Nicely done. I'll look into it over time, don't have the bandwidth to get it in before earnings. Good luck.

matts

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Re: CWL.TO - Caldwell Partners International
« Reply #2 on: November 07, 2018, 11:11:09 AM »
Thanks Flesh. Not easy to digest a new idea and make a decision with only a couple of days before earnings. The editorial process at SA took 2 days longer than i anticipated, probably because it was my first submission.

writser

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Re: CWL.TO - Caldwell Partners International
« Reply #3 on: November 07, 2018, 11:27:18 AM »
fwiw it was also written up on a blog a while ago (maybe it's yours): https://pettycash.blog/2018/08/03/caldwell-partners-tse-cwl/ . Will put your article on the to-read stack :P .
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

matts

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Re: CWL.TO - Caldwell Partners International
« Reply #4 on: November 08, 2018, 06:23:48 AM »
fwiw it was also written up on a blog a while ago (maybe it's yours): https://pettycash.blog/2018/08/03/caldwell-partners-tse-cwl/ . Will put your article on the to-read stack :P .

I was not aware of the blog post. I'll check it out. Thanks!

Schwab711

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Re: CWL.TO - Caldwell Partners International
« Reply #5 on: November 08, 2018, 07:37:18 AM »
Nice summary writeup matts.

Do you know why does the opportunity exist? On a quick review, it looks like they increased business in Europe in FY2016 and lost quite a bit of money. It looks like they always take some losses in Europe to help broaden their search horizon but 2016 was a particularly bad year. They seem to have pulled back from expanding in to Europe, which helped the stock. Is this roughly what happened? Do you know of any other background on the company?

It looks like they are roughly 50% undervalued with low risk. It's an interesting idea and I like the business.

matts

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Re: CWL.TO - Caldwell Partners International
« Reply #6 on: November 08, 2018, 07:51:54 AM »
Nice summary writeup matts.

Do you know why does the opportunity exist? On a quick review, it looks like they increased business in Europe in FY2016 and lost quite a bit of money. It looks like they always take some losses in Europe to help broaden their search horizon but 2016 was a particularly bad year. They seem to have pulled back from expanding in to Europe, which helped the stock. Is this roughly what happened? Do you know of any other background on the company?

It looks like they are roughly 50% undervalued with low risk. It's an interesting idea and I like the business.

Thank you for your feedback.

Yes, you have the story right. They stumbled in Europe, but as you point out, it's a great business model. It's capital light, so they can easily expand or contract in any given region by hiring/firing search partners. The losses are there, but at least it's quick and clean without assets and capital being trapped.

I believe the biggest reason the opportunity exists is liquidity. It's terrible on the OTC and just adequate for a small investor on the TSX. Market cap is 30 million whereas direct competitors are 700MM and 3 billion.

Finally, I think the whole sector is cheap because it is cyclical and we are late into a very long cycle. Slow down in the economy does mean a slowdown in business. No doubt about that. I believe I have enough experience to spot a significant downturn in order to go out with a loss from the peak, but with good returns overall.

« Last Edit: November 08, 2018, 08:00:59 AM by matts »

matts

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Re: CWL.TO - Caldwell Partners International
« Reply #7 on: November 08, 2018, 07:57:21 AM »
Oh, I should also point out that under the founder, Mr. Caldwell, the company was never a very good capital allocator and he paid himself a ton. To the point that there was a shareholder revolt and activism in 2009.

So ya, those with long memories are turned off by the historical track record.

He has now left and has no role other than a 10% stake. I'm sure he's just happy to live off the dividends.

Schwab711

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Re: CWL.TO - Caldwell Partners International
« Reply #8 on: November 08, 2018, 08:22:10 AM »
That would make sense that CWL was especially punished in 2016 because major US brokers started to shut down grey market trading around that time. It certainly became harder to access a market in their stock right as they are printing bad numbers. Who knows, but that at least partially addresses the problem of why is the opportunity available.

The comments on Mr. Caldwell helps explain the past. In a lot of ways, this reminds me of PACI. There was a long history of sideways to down price movement, but under the hood there was substantial corporate governance improvement (single class of stock) and aligning of incentives (like the private placement to key employees). All of the changes in aggregate eventually made a minority investment attractive for PACI and it looks to be the case here.

You don't seem to mind the size of competition gap, which I agree with. I think this is one type of business where only modest scale is necessary to succeed. From there, it should be relationships. They seem to be able to expand those relationships so they must provide a decent service. It's not the greatest business ever and capital-lite comes with earnings volatility. Good managers should be able to use that to their advantage to try to expand and leave when it doesn't work. I think the financials show that's how they've treated Europe. I like the financial history in that sense.

I agree on the cyclicality. I think something like 6x EBITDA, with the assumption that some day CWL can distribute most of the excess cash to today's investor. Is anything near today's EBITDA the cycle average? That's a big question. I think we are more than compensated for the risk that it's not.

Maybe 100% upside is too aggressive (from a multiple expansion perspective) and 50%-67% upside is more realistic. That has a very good shot of happening with further earnings stabilization or growth. Either way, that still gets us to 15%-18% returns, assuming excess cash is distributed (or the market at least credits them for the cash during the holding period). That's all before considering anything above minimal growth, which also seems possible. There's definitely a holding period requirement since we are relying on multiple expansion. I'm not sure what a deeper dive will show, but 15% expected returns, with a right-tail skew, feels roughly right.
« Last Edit: November 08, 2018, 08:23:44 AM by Schwab711 »

matts

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Re: CWL.TO - Caldwell Partners International
« Reply #9 on: November 08, 2018, 08:32:50 AM »
Great points.

I agree on the scale. You need a bit of it to have a brand, but after that, it's all about the relationship between partners and clients. That leads to a risk of your partners being poached. Works both ways however. From reading all their communications, their pitch to partners is that it's a smaller company, only a couple partners in each market, more dynamic than the big guys etc. So far, they have been able to add partners if you account for the Europe retreat.

One little tidbit I did not include in the article: Caldwell actually announces major search successes on their LinkedIn page

https://www.linkedin.com/company/the-caldwell-partners/

It's not enough to build a model or anything, but the number of announcements has definitely ticked up in recent months. I was able to tally them up monthly going back 12 months. Before that Linkedin just dates the post as "1 year ago" and it gets messy.