Greenhaven Road Capital 2Q18 Letter: FCAU, ETSY, TRIP, AINC, YELP

Smart Money

Fiat Chrysler

  • Fiat’s long-time CEO passed away after becoming gravely ill due to complications from a shoulder surgery
    • There is no other way to say it: he was the best. He got it
  • After the onset of his illness, Sergio was replaced by a tenured lieutenant who had run the Jeep and Ram division
  • Fiat investment will continue to appreciate with the strategy and foundation put in place by Sergio and his team
  • Chairman and his holding company, Exor, own approximately 30% of the company
  • In June, US sales were up 8% year over year, including a 1% reduction of marginally profitable fleet sales and strong increases in higher margin jeeps and trucks
  • In Europe, sales are down by 2% in terms of units, but the mix shift away from low margins Fiats and Lancias to high margin Jeeps and Alpha Romeo should be accretive
  • Company has indicated it will spin off or sell their auto parts business this year
    • Management has been stingy with information so far, but the unit is likely worth north of $4 per share
  • I believe the sale of the parts business is likely a precursor to the sale of the entire company
  • We are several years into an economic cycle and the fruits are evident in FCAU’s balance sheet and earnings power. There are synergies to be realized from combining with another manufacturer. Now is a logical exit window for Exor
  • Looking ahead just a few months, there is a likely scenario where Fiat will be sitting on $7+ of net cash from the sale of Magnetti Morelli and the ordinary cash generation of the business
  • With the current price hovering around $17, this would be a healthy business with a strengthening balance sheet selling for 2.5x growing earnings
  • A lot of destruction from trade wars is baked into the current price. If and when these fears dissipate, there appears to be significant upside in FCAU shares

ETSY

  • Decided to raise prices, increasing the per-transaction fee from 3.5% to 5%
  • It is rare for a company to introduce a near 50% price increase and still be unlikely to face a significant decline in demand
  • As this is a platform business, virtually all of the incremental revenue could drop to the bottom line
  • Management has pledged to make significant investments in marketing and product so there will not be an explosion in profitability, but we should continue to see growth in buyers, frequency of purchases, conversion rates, revenue, and ultimately profitability

TripAdvisor

  • Remains the dominant travel research company and maintains the largest installed base for travel apps
  • Company continues to make progress on their in-destination business for local tours and activities, and has been optimizing ad spending on the hotel business to improve profitability
  • It is plausible that TripAdvisor can improve their monetization rates on the $1.3+ trillion in travel spend it influences

Ashford Inc

  • Announced an innovative financing program that uses excess cash at the AINC level to help finance new hotel purchases at the Ashford Trust REIT
  • I may have underestimated Monty Bennett. When Ashford was spun out of Ashford Trust and Braemar, Monty took all of his deferred compensation in Ashford Inc stock and has since aggressively granted stock options and purchased shares in the open market – clearly wants to own AINC
  • I also knew that it was likely that AINC would buy a project management business from Monty and his father. The high margin targeted business, Remington, manages renovation projects for hotels. Shareholders will not be allowed in the vote on the transaction, which will ultimately increase the AINC share count by more than 50%
  • AINC also surprised shareholders when the company recently disclosed the intent to buy a second business, also from Monty, related to property management
  • The company should address its massive and easily fixable governance discount
  • AINC’s share price could easily double by addressing these concerns and treating shareholders fairly

YELP

  • Like TripAdvisor, consumers can make more informed decisions based on ratings and reviews from other consumers. The underlying Yelp community appears quite healthy with cumulative reviews up 22% y/y. Yelp is undergoing business model changes that have distorted recent financials
  • In late 2017, completed the sale of its money-losing but revenue-generating “Eat24” food delivery business to GrubHub
    • GrubHub paid over $250M for Eat24 and now integrates with Yelp, providing high margin transaction revenue whenever Yelp’s platform leads to an Eat24/GrubHub order
  • In this past quarter, revenue growth was only 12%, but when adjusted for the sold food business, revenue was up over 20%
  • Second change to Yelp’s business model has been underway for more than a year as the company shifts towards a more flexible contract model that allows businesses to turn on and off their ad spending as they see fit
    • Yelp’s previous twelve-month contract model was a vestige from when the primary competition was the Yellow Pages, which required a 12-month commitment from advertising customers
    • Getting a small merchant to sign a yearlong contract and commit thousands of dollars of spending is no small task, requiring an extensive sales force
    • By shifting to a more flexible model, Yelp is trading the certainty of annual contracts for lower barriers to adoption with increased trial advertising by businesses
    • As an indicator of success, advertising accounts were up 27% y/y for Q2
  • Yelp influences hundreds of billions of dollars of consumer spending but is under-monetizing their traffic
  • One promising area is their “Request a Quote” feature, which allows a consumer to request quotes from multiple vendors without leaving Yelp’s site or app. If a consumer needs to power wash a 500-square-foot deck, instead of reaching out separately to 5 contractors and describing the project 5 times, they can now write a single project description, review prospective vendors, and request a quote from up to 10 at once
  • Yelp is led by its founder who owns $100M worth of stock
  • Company trades at less than 2.5x EV/sales and is buying back stock, growing the top line at 20%, and pulling several levers to improve monetization and engagement
  • They should continue to benefit from operating leverage as revenue grows. Current balance sheet has $800M in cash, which allows the company to repurchase stock or make strategic acquisitions

Greenhaven Road Capital 2Q18 Letter, July 2018

Image Source: Yelp

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