I thought I would start a new “series” of posts to regularly check in with my portfolio of active investments: sort of a “post-mortem,” without the mortem (hopefully, I will discuss some successes as well). Coty recently announced that it is selling a large chunk of the business that it acquired from P&G, and Apple just hit an all time high, so I thought it was a good time to publish an update on these two.
Coty
First, let’s talk about Coty. Earlier this week, reports emerged that Coty has decided to try and sell its professional division. This FT story does a good job of outlining the reports (and floats a ballpark price of $8-9 billion, probably obtained from Coty or UBS, who is handling the transaction).
I have written about Coty several times before. As previously discussed, I basically determined to exit after Bart Becht left, based on the reporting of why he left and my original thesis. If you didn’t read the prior posts, Coty made a large acquisition of (much of) the P&G beauty business and there have been some issues with integration (and deterioration in some of the brands, chiefly the “mass consumer” segment). About 20% of revenues are attributable to the professional division, which basically sells to nail and hair salons (Wella hair products and OPI nail polish, for example). This business has been pretty solid since the acquisition. The “luxury” segment which is mostly fragrance but also some has some brands and licenses for color cosmetics, such as gucci lipstick and tiffany stuff has also been ok.
I don’t like the stated reason for the sale. Basically, to de-lever. I probably have a negative bias going into this since I’ve been sort of puzzled/annoyed with their decision to convert a portion of the dividend to scrip/stock issuance/DILUTION.
It doesn’t make much sense to me to continue paying a cash dividend while simultaneously issuing stock, diluting your shareholders. I have been ruminating on that for a while. The reason for the move was to save cash and de-lever so the rational move seems to be to cut the cash dividend. My confusion is now compounded by selling purportedly solid assets (and incurring big transaction fees for your “advisors”) simply to de-lever (as opposed to at least throwing out some weak “strategic” rationale). So you are issuing stock and selling assets you just bought to reduce leverage…while….paying….a….dividend?
I suppose it is hard to come out with a strong strategic rationale to sell the business when you only owned it long enough to share a cup of coffee and you just spent a ton of money and time acquiring and “integrating it.” Especially, if you are supposedly more rational than the usual retail shareholder base/salespeople manager team.
In addition, this morning I went through the proxy statement. Reducing leverage is one of the metrics used to determine management compensation. The formula seems to back out extraordinary transactions but I’m not 100% sure how they will define that. I also noticed they clawed back some compensation from the fired CEO and CFO.
They decided, however, to go ahead and issue some brand new “off-cycle” options for the division heads. Isn’t that nice? The stock tanks on your watch and your options are buried? No worries! Let’s reprice those for you. We wouldn’t want to lose you since you are soooo talented. Not a fan of that.
I remember Buffett and Munger (and others) railing against these sorts of compensation practices in the past. I remember for sure they talked about it back when there was a big “debate” about whether option/stock compensation should be expensed or whether everyone should just go ahead and continue issuing FASB-blessed, basically fraudulent financials.
So at this point, I think I have a good idea who I’m dealing with and we need to just part ways. Maybe if I get a 50% EL multiple (I am more motivated than the USB banker/management, apparently) I will be out.
Apple and The GOAT
Apple hit a new all time closing high this week. I’ve written about Apple a few times before. On March 5, 2018, I kind of did the whole deal and dug into how Buffett was overweight and active mutual funds as a group were underweight and decided that Buffett seems like a good investor and will likely do well in life….
No, seriously I thought it looked like a good bet. Since that date, Apple is up 54% versus 23% for the S&P 500 (price only…I did the TR but the draft didn’t save and I am lazy).
So my omission is that I bought…..ZERO shares (in fairness, I do have a fair amount of exposure through index funds). Hopefully, dear reader, you loaded up after reading my highly lucid and persuasive post. If you did, congrats (and I am accepting donations/expressions of interest for my newsletter)!
Lesson? I felt pretty strongly about the call, but I didn’t buy it, just because I didn’t have any cash. I’m pretty sure it has trounced most of my holdings since my post. We should probably have just weighed our least favorite holding against the Apple rather than thinking about lack of cash.
To lean against activity is probably a good general rule, because it seems humans tend to just try harder and do more things, which can mess with your mind AND your money. I still like Apple just fine, but probably wouldn’t buy it here. I probably wouldn’t sell it either (and pay taxes and fees).
So, that’s it. Hopefully, we’ve got a couple of lessons we can look back on in the future. At the very least I can re-read my rage about COTY management when I’m coming up with reasons to hold on or if I’m getting interested in a crappy BDC with a fat yield where they keep issuing stock.
I’ve got a couple of new stocks I am currently kicking the tires on. I will probably post about one of those soon. Thanks for reading!