Author Topic: CWL.TO - Caldwell Partners International  (Read 2367 times)

matts

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Re: CWL.TO - Caldwell Partners International
« Reply #10 on: November 08, 2018, 05:56:35 PM »
Looks like they won't report today as the TSX indicated. Last year they reported after close Nov 9th so I'm not concerned.

 


matts

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Re: CWL.TO - Caldwell Partners International
« Reply #11 on: November 15, 2018, 07:03:24 AM »
Company reported last night. As I predicted, revenues were up around the 20% mark. Operating revenue was strong. They also raised their dividend by 12.5%. They did take a sizable charge against their US tax assets due to the Trump tax cut. Because of their weird August year-end, they did not make the adjustments at the end of Dec 2017 like everyone else. My oversight. Still, it's a one-time and non-cash charge to IFRS earnings and since there is no analyst coverage there is nothing to miss.

Still very cheap with a well-covered 6% yield
SA update submitted for publication with all the details.


matts

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Re: CWL.TO - Caldwell Partners International
« Reply #12 on: November 16, 2018, 05:40:57 AM »
My follow-up was posted on SA this morning

https://seekingalpha.com/article/4222650-caldwell-partners-follow-strong-results-predicted-plus-big-increase-dividend


Sorry to be adding to your reading stacks :)

Stock has gone from 1.40 to 1.65 since my first article just over a week ago. Still a cheap stock with a 6% yield.



writser

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Re: CWL.TO - Caldwell Partners International
« Reply #13 on: November 16, 2018, 10:12:31 AM »
Thanks for writing these articles. I'm a bit skeptical regarding the usefulness of your EV/EBITDA calculation.  Operating cash flow is mainly very high this year because of a 3.5m increase in compensation payable. If you ignore that then sure, the EV/EBITDA ratio is great but I don't think the 6m is a proxy for real earnings / cash generating power. I actually think that the income statement provides a more realistic view of the earning power of this company.  This year ~4m for an EV / EBIT of ~6. Still cheap but is this year part of a trend or just an exceptionally good year? Probably a bit of both.

This might be a bit of a pessimistic view but I'd say that with a company such as this one the 'quality of earnings' isn't great. Basically the partners make or break the company, will take the lion's share of profits and will not have a shareholder-friendly spirit. The shareholders will only get residual profits. That, combined with the cyclical nature of the business will ensure that profits will be volatile and can drop like a rock in a bad year.

On the other hand, I'm probably being too pessimistic. They've grown revenue at a nice clip the past decade while paying out a juicy dividend, have a conservative balance sheet and generated a decent ROE the past 5 years. If the growth continues you'll probably do fine (but what I'm wondering is: will you do great?). It's cheap, but I'm not sure if it is cheap enough for me. I haven't made up my mind yet.

Regarding your articles: one thing I'm missing is: what is your estimate of fair value and how did you arrive at it?
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 #14 on: November 16, 2018, 10:55:19 AM »
Thanks for writing these articles. I'm a bit skeptical regarding the usefulness of your EV/EBITDA calculation.  Operating cash flow is mainly very high this year because of a 3.5m increase in compensation payable. If you ignore that then sure, the EV/EBITDA ratio is great but I don't think the 6m is a proxy for real earnings/cash generating power. I actually think that the income statement provides a more realistic view of the earning power of this company.  This year ~4m for an EV / EBIT of ~6. Still cheap but is this year part of a trend or just an exceptionally good year? Probably a bit of both.

This might be a bit of a pessimistic view but I'd say that with a company such as this one the 'quality of earnings' isn't great. Basically the partners make or break the company, will take the lion's share of profits and will not have a shareholder-friendly spirit. The shareholders will only get residual profits. That, combined with the cyclical nature of the business will ensure that profits will be volatile and can drop like a rock in a bad year.

On the other hand, I'm probably being too pessimistic. They've grown revenue at a nice clip the past decade while paying out a juicy dividend, have a conservative balance sheet and generated a decent ROE the past 5 years. If the growth continues you'll probably do fine (but what I'm wondering is: will you do great?). It's cheap, but I'm not sure if it is cheap enough for me. I haven't made up my mind yet.

Regarding your articles: one thing I'm missing is: what is your estimate of fair value and how did you arrive at it?

Strong arguments.

You're right, OCF isn't a great metric here, but I wanted to use a standard valuation metric for the SA articles and Net Income was just too messy the last couple of years. The company's own metric, Operating Income, is much better. All share-based comp is cash based an expensed immediately so it's a very fair approximation, but you do have to adjust for taxes. LTM Op Income was 4MM so we agree that's a good starting point. Now, I think they can grow that at least 10% a year in the current environment by hiring more partners and the fees naturally increasing due to executive compensation inflation.

Quality of earnings: This is a relationship business and your assets work out the door every night, no doubt about it. They take the lion's share of the profits because they are the assets. Same with investment bankers and that was still a great business to own for a very long time. The high dividend they have committed to restricts their ability to push their own pay to an extreme. This is evidenced by fairly steady net margins over the recent period. Can the partners leave? Sure. But reading the bigger competitors calls and materials, HSII and KFY, they seem very focused on developing auxiliary services to boost growth. Only Caldwell is talking about focusing on increasing partner counts. That gives me some comfort that there won't be a "comp war" that pulls partners from Caldwell. Other than compensation packages, I don't know what would make a slew of Caldwell partner run to a competitor. The company already has the scale to provide all the support the partners need, without the big corporate culture.

That's why I think they can modestly grow partner count to grow revenues/op profits at least 10% barring a slowdown in the overall economy. They should get small margin increases with scale, but let's ignore that. I don't have a price target because I know my opinion will change based on changing dynamics and macro. I just know that 6x EV/Op income is cheap enough for me. I could make up a number and say it's worth 2.50, but if tomorrow Korn/Ferry updates guidance that's going to change. I'll hold it as long as I feel it's cheap and in the meantime collect my 6% dividend.

Oh, one more thing that popped into my head to mention as I typed this. The share-based comp is expensed quarterly dollar for dollar but their PSUs cliff vest after 3 years so there is an interesting dynamic that if the stock does fall, it will boost their earnings as the accruals are reversed. They can't sell to lock in gains like fast vesting options. A small, but nice little counterweight. Sure, it means that when the stock is up their earnings fall, but I care less about that  :P

Thanks for your feedback, much appreciated.


 


« Last Edit: November 16, 2018, 11:03:56 AM by matts »

zuokk

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Re: CWL.TO - Caldwell Partners International
« Reply #15 on: November 19, 2018, 08:54:14 AM »
Any thoughts on potential buybacks as a possibility with all that cash?


matts

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Re: CWL.TO - Caldwell Partners International
« Reply #16 on: November 20, 2018, 08:02:33 AM »
Any thoughts on potential buybacks as a possibility with all that cash?

Thanks for reading. I think buybacks are unlikely. At 30M market cap, the company is just too small to think about getting smaller. even though in the mathematical sense it might be a good capital allocation decision. They have hinted at growing partner count the next couple of years. If they hire individual partners, they will need cash to staff up, pay initial comp etc. They might also buy a smaller firm with several partners already operating. I think that is a risk to the stock, as they could easily overpay for a firm that doesn't end up performing (that's what happened in London in 2016). I would much prefer them to hire partners individually with smaller initial investments.

 

hell0dude

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Re: CWL.TO - Caldwell Partners International
« Reply #17 on: January 11, 2019, 12:16:02 PM »
Any thoughts on this stock now that it is down 14% due to slower than anticipated growth. Since economic uncertainty was quoted as the main driver, do you guys think it could be a good entry point as trade talks between US and China progresses? Majority of professional fees is generated from the US.