Charting Banking XX: short history of the last 25 years

US Bancorp is a great bank, did a great job navigating the crisis and is a Buffett stock. I just wish it was cheaper.

This March 2007 presentation on the business of banking was first shared by Noise Free Investing and I was reminded of it while looking for some info for the Charting Banking series. Some of the interesting points are:

• Importance of fee income
• Sector consolidation after the 1987-88 crisis
• Branches are still a key asset
• Non bank competition / shadow banks share (the info I needed)
• New risks in modern banking
• Regulation as a friend and a barrier to entry (Walmart?)
• Customer loyalty and how to measure it
• Supermarket banking shortcomings

Dean Foods: this is not good

Strange things happening in the milk category,

Yes, I’ll give you what is an anecdote. But it is one of the things frankly, that I am somewhat worried about. And that is if you go back and you look at our fluid milk volumes several quarters ago, and you track them on a weekly basis, we used to see, as you would expect, was a truly stable category with complete household penetration. You used to see very flat volumes week to week, right? So very little change in average daily sales.

We’re now seeing a different pattern. And that pattern is at the beginning of the month, we’re seeing sales rise above the trend line. And by the time that you get to the end of the month, sales are down in what are meaningful percentages for a category like this, that’s flat, it has been for 30 years. So you’re seeing inter-month volume volatility, or a volume pattern emerging. And the only conclusion, I think, you can draw from that is there are people who are big consumers in this category, they’re just running out of money, starting at the end of the month.

And you’ll recall, during the month of June and in part of July, the Congress stalemated over extending unemployment benefits for a large number of people. We saw that in our business in soft volumes. So that’s really my concern about the category is that there are still a very large number of households in the U.S. who are very constrained in terms of disposable income, and they’re cutting back wherever they can. And they’re not cutting back just one category, they’re trimming around the edges everywhere. And we see soft category volumes. – CEO Gregg Engles

Conference Call 2nd Quarter 2010

This strange pattern in a basic good that only just recently started being deeply discounted by retailers to drive traffic does not speak very well of the  consumer’s economic prospects. Consumers constrained, businesses hoarding cash, banks not lending yet, government tied up … The only glimmer of hope from this conference call:

And I think as Gregg mentioned in his prepared comments, we do see, to some degree, bifurcation of our categories. Our more premium categories are growing. Our more value-oriented categories seem to be flat. And so I think, we’re going to continue to see that as we move forward. I think the recession has affected different classes of folks in different ways – COO Joseph Scalzo

No Position

Turnaround Cases: Penn Traffic ($PTFC)

Let’s make a break with the Premier Exhibitions series. While doing some well deserved procrastination, I crossed paths with Penn Traffic Co a supermarket chain filling for chapter 11 a couple of days ago.

Retail is combat sport. Having worked for a very successful and admired retailer I learned to never start a retail business and to avoid investing in one. Why not?

Another big problem with retail is the transparency of the business. Sam Walton spent thousands of hours inside his competitors’ stores. It’s virtually impossible to have any trade secrets in retailing. Your competitors can walk into your stores and, in about 15 minutes, understand your entire business-model advantage and how to replicate it. There are very few industries that are as openly transparent, and that’s problematic for the long-term investor. – Pabrai

Large retailers are constantly trying to pick the next good location while running out of space to grow, with the competition right behind them, and paranoid of the possible appearance of a new demographic trend. “Location, location, location” and “retail is detail” does not seem too much of a competitive advantage. Because of this, retail is a low margin business with little margin for error.

It is also a business that heavily depends on the trust and credit of its suppliers. Suppliers do not want to be the last one standing with distressed receivables so in difficult times retailers can suffer the equivalent of a bank run and swiftly collapse. This makes turnarounds in retail particularly difficult.

After that nice intro you might wonder what intrigues me about Penn Traffic. Actually, it is a very good case study of what you want to avoid in a turnaround investment: a marginal business in a difficult industry. But it may also be, and may is the key word, a liquidation opportunity. To get up to speed you can find a couple of good VIC reports here and here. (subscription free)

Penn Traffic is what I call an unrepentant alcoholic with their third trip into chapter 11: not an unusual record in retail. The reasons for their problems are the two Ws: Wal Mart and Wegmans, two of the strongest retailers out there. Meanwhile, Penn Traffic has to compete with a unionized work force and small stores in suburban locations (approximately 35K ft per store).

During their previous chapter 11 they sold Big Bear their crown jewel: a bad sign. Asset divestments are common in turnarounds but you want the company to sell their marginal assets not their core. If they were forced to sell their core assets, it is very probable that their marginal assets were un-sellable.

I would say that at its current stage, Penn Traffic could still be interesting as a liquidation play and as a potential case study on the margin of safety provided by real estate assets. It still owns 17 stores and 2 shopping centers whose value is not reflected in the books, with a market value probably north of $50 million.

However, we have also to take into account the long term leases. These can be undone or renegotiated in Chapter 11 but I would be much more comfortable if the company manages to sell those stores. In the case of Penn Traffic:

I have not done the heavy lifting yet. However with the leased stores shopped around, hidden assets potentially way north of $ 50 million and still reporting $15 million of book value there might be something there for a company valued at $15 million $1.5 million. Buyer beware, bankruptcy is a highly uncertain process and I am definitely no expert.

Would love to discuss this idea with readers more informed in liquidation plays.

No position