SYTE - Enterprise Diversified

[LR1400]

I like the idea of freeing up capital and moving it toward seemingly higher value assets/companies. I am still curious as to why they chose HVAC.

 

Not a shareholder, but learning a lot and would like to follow some of this path in the future. The dilution item is still troubling even if it does erode value per share.

 

They seem Iike good people who may have taken slight advantage of shareholders for their own benefit.

[andgroup]

Right.  But here is the thing.  Steven is not just freeing up capital and moving towards higher value assets, that's one part of it to be sure. 

 

He is also adding additional capital itself into the mix, and on top of that he is locking in some tremendous brain power who now have skin in the game, and doing it at a reasonable price point which basically puts a floor under the stock, and will be used to our advantage going forward.

 

So you are either in one of two camps.

 

1.) You believe that Steven Kiel and his group are a bunch of crooks who took over a 3-4 million dollar company, put tons of time and resources into cleaning everything up and building a solid platform for future growth, and then added another 4 million, and now another 10 million in capital to this operation, just so he could figure out how to retroactively screw you out of a small slice of your original buy in at the 3-4 million dollar price level.

 

or

 

2.) You believe that Steven Kiel and his group took over a company, made substantial investments of time and resources and capital without drawing a salary and added a ton of brain power to the operational side and the capital allocation side, because he actually believes that they can do what they love to do, which is to compound money at a high rate of return for many years to come.

 

And to be honest... I remember that when I first bought into this deal, that I was worried that Steven's fund only owned 4-6% of the company, because it would be so easy for him to get frustrated, call it quits, and leave.  So the increase in his share of the company actually made me feel much safer, and showed a much higher degree of commitment to the future of this company than I had originally anticipated, and probably is one of the reasons that there has not been much volatility in the stock price.

 

So my message to Steven is that I trust your judgement, ignore the critics, and focus on what you are there to do, which is to compound money, using whatever vehicle you think gives us the best risk/reward profile.

 

Thanks,

John Woods

[LR1400]

Right.  But here is the thing.  Steven is not just freeing up capital and moving towards higher value assets, that's one part of it to be sure. 

 

He is also adding additional capital itself into the mix, and on top of that he is locking in some tremendous brain power who now have skin in the game, and doing it at a reasonable price point which basically puts a floor under the stock, and will be used to our advantage going forward.

 

So you are either in one of two camps.

 

1.) You believe that Steven Kiel and his group are a bunch of crooks who took over a 3-4 million dollar company, put tons of time and resources into cleaning everything up and building a solid platform for future growth, and then added another 4 million, and now another 10 million in capital to this operation, just so he could figure out how to retroactively screw you out of a small slice of your original buy in at the 3-4 million dollar price level.

 

or

 

2.) You believe that Steven Kiel and his group took over a company, made substantial investments of time and resources and capital without drawing a salary and added a ton of brain power to the operational side and the capital allocation side, because he actually believes that they can do what they love to do, which is to compound money at a high rate of return for many years to come.

 

And to be honest... I remember that when I first bought into this deal, that I was worried that Steven's fund only owned 4-6% of the company, because it would be so easy for him to get frustrated, call it quits, and leave.  So the increase in his share of the company actually made me feel much safer, and showed a much higher degree of commitment to the future of this company than I had originally anticipated, and probably is one of the reasons that there has not been much volatility in the stock price.

 

So my message to Steven is that I trust your judgement, ignore the critics, and focus on what you are there to do, which is to compound money, using whatever vehicle you think gives us the best risk/reward profile.

 

Thanks,

John Woods

 

He's probably a decent guy that should've handled the rights offering differently. It makes sense that you feel safer with him having more skin in the game, he also has a relatively low risk opportunity to dramatically increase his net worth. I would forego a salary for that opportunity as well.

 

I personally don't put too much weight into brain power in mature industries. Certainly poor brain power can cause problems, however, great brain power in mature industries rarely makes much difference in my experience, meaning it won't lead to out-sized returns alone.

[andgroup]

I agree with your comment that brain power in mature industries tends not to add much value.  Where I trust Steven is in this regard, that he has said that he would not commit capital unless he believed there was a chance for higher returns than he had been able to generate in the public markets.

 

So he has obviously seen something in this space that has convinced him that he can achieve high returns here, or at least that he cannot find better returns elsewhere that promise safety of capital.  None of this means that he will be right, but his judgement has been very solid in the past, and I think the bar has got to be pretty high for him to believe in something enough to commit capital.  He's human, he will make mistakes from time to time.

 

But based on all the information I can gather, I just happen to hold the view that he will be right more often than he is wrong.

[Jurgis]

I should probably not post here, since I have no interest in SYTE (anymore). And I may remove this message in 10... 9...

 

In the meantime though, I don't see what's to be excited about. So a bunch of smart guys take over SYTE and the best idea they have is ... drumroll ... dilute and invest into a new hedge fund. I thought these are smart guys who are running their own hedge funds. If they wanted invest in stocks, why did they not invest in stocks directly from SYTE? If they have no good ideas where to invest money, then why do they believe that hiring another hedgie is a solution? Overall, what's the point of a structure where hedge fund invests in SYTE which in turn invests into another hedge fund that invests into some stocks? I guess it would look worse if their hedge fund would invest directly into another hedge fund - that would be admission that they don't have ideas themselves, no?

 

To make this post somewhat relevant, I've seen these gymnastics in other places that won't be named (apart from SYTE I'll criticize by category like Buffett ;)) and I haven't seen this lead to great results. IMO every layer added usually means worse results.

[andgroup]

You mean like the gymnastics that Buffett and Munger pulled by using Blue Chip Stamps to acquire See's Candy, or buy up shares in Wesco?  Or the numerous other deals they did like that?  Yeah, you're right, that didn't work out too well.

[Ballinvarosig Investors]

Finally sold out, so this will be the last comment from me unless Sitestar somehow becomes attractive again.

 

Firstly, when I bought my shares several years ago, the stock price was below the sum of the parts valuation. When the likes of Jeff Moore got involved I thought finally there were enough shareholders behind the thing that we could see full value of the company unlocked. At that point, no one suspected how bad things were at the top, let alone that management needed to be booted out. Needless to say, I was fine with this, and hoped that with shareholders running the company, they would do their best to maximise shareholder value (I assumed the company would be liquidated, or run as a going concern). At no point did I even consider what would happen next. I guess it's at this point, my thoughts diverged with those of management. Whatever you say about the investment properties, or the internet business, at least you could get a handle on the value of these things. The same cannot be said of Alluvial's hedge fund, or the HVAC value fund that Sitestar have gotten into. For me, these vehicles are too opaque, there is no transparency with them whatsoever (what exactly are we invested in here, what is the fee structure, etc.). Perhaps these are great opportunities, perhaps Steve Kiel is a great guy, we have to take their word for it. As a fiduciary, I feel I just can't take that chance. Especially when I look at what happened to SED Intl, Steak and Shake, Chanticleer, etc. I've learned having a value guy at the helm hasn't been a guarantee that delivers the best outcome for shareholders. That is why I am out.

[InelegantInvestor]

All of you who are making excuses are missing the point. Steven Kiel may be the greatest investor ever. He may be making choices that will ultimately enrich holders of Sitestar. That is irrelevant- the ends do not justify the means. He said one thing before he was in control and did the opposite when he was.  He and his handpicked Board voted themselves the right to buy a huge number of shares at below market and below intrinsic value, with no independent oversight. Others were not allowed to participate. There is a massive conflict of interest here. 

 

The posts speculating about Kiel's "insecurity" and such are laughable ex post facto justifications of actions that were clearly and undeniably unethical. People who behave unethically typically do not do so only once.

 

 

[andgroup]

I'm not missing your point, I just choose not to place as much weight on your point as you do.

 

Some people hold principled philosophies and some people hold pragmatic philosophies and some people hold a mixture.

 

Investing is a probabilistic endeavor and when I place myself in Steven's shoes I can think of many reasons that he could have made the choices he did and still felt like he wasn't being unethical at all.

 

The volume on that stock averages what 50,000 shares per day at .06 cents per share that is 3,000 dollars per day?  Could he have raised the money he needed (3-4 million) to do these next deals by dumping those shares on the open market?  Or would that have collapsed the stock price due to a lack of demand for the shares?  Would that be fair to current shareholders or to the people in his fund? 

 

So he placed the shares in bulk with lockup provisions. He raised needed capital without crashing the stock price and boxed out the former CEO.  Acquired more capital to do even larger deals. Probably gave other larger investors confidence to invest even more capital because he is firmly in control now.

 

If you are going to be waiting around to find anyone on this planet who has zero perceptions against them of being unethical before you invest. You might want to upgrade the size of your mattress.

 

I personally do not believe that it follows, that just because us smaller shareholders got clipped a bit while he was trying to locate the right structure that this automatically means Steven Kiel is unethical or dishonest.

 

If you want to make the private placement your own grandstanding issue that's fine. Sell. I could be wrong, but I do not agree with you.

[frugalchief]

I like the idea of freeing up capital and moving it toward seemingly higher value assets/companies. I am still curious as to why they chose HVAC.

 

Not a shareholder, but learning a lot and would like to follow some of this path in the future. The dilution item is still troubling even if it does erode value per share.

 

They seem Iike good people who may have taken slight advantage of shareholders for their own benefit.

 

I'm not a shareholder...actually just came across the company yesterday (forgot where), then found this thread.  I have interest in Sitestar b/c my background follows a lot of their progression....started in real estate investing, brokerage, and property management, then became CFO at a 'mom & pop' HVAC business.  HVAC is a great industry to get into, IMO.  If they are doing it right and not overpaying, it could compound for them greatly.

[LR1400]

I like the idea of freeing up capital and moving it toward seemingly higher value assets/companies. I am still curious as to why they chose HVAC.

 

Not a shareholder, but learning a lot and would like to follow some of this path in the future. The dilution item is still troubling even if it does erode value per share.

 

They seem Iike good people who may have taken slight advantage of shareholders for their own benefit.

 

I'm not a shareholder...actually just came across the company yesterday (forgot where), then found this thread.  I have interest in Sitestar b/c my background follows a lot of their progression....started in real estate investing, brokerage, and property management, then became CFO at a 'mom & pop' HVAC business.  HVAC is a great industry to get into, IMO.  If they are doing it right and not overpaying, it could compound for them greatly.

 

What kind of returns and margins do you see in the HVAC sector?

 

What size total revenue numbers are these companies typically?

[frugalchief]

I believe your pre-tax earnings should be 15%-25% of revenue.  We are small, 7.5 employees, will do about $2mm in revenues this year.  Did $1.25mm last year.  We are 3.5 years young, and previous capital allocation was awful, resulting in 0% return, even negative.  (There was no 'business' focus on the business, so things will change)

 

Most companies I'd guess are doing revenue of $500,000 - $5,000,000.  This industry is a majority of mom & pop companies...lots of single operators, and single operators + helpers...not ran like a business, just provides an income/lifestyle.  Companies with a few technicians (2-5) - probably average $1mm - $5mm.  I believe there are few companies (in the area I live - South Texas) that dominate and probably do $10-25mm, with the largest company maybe doing $50mm.  This is purely a guess, but I see a trend....a mature operation should produce $1mm per technician (It's about what we are doing in our operation).

 

One thing the biggest players do is add plumbing and electrical services into their HVAC business.  It's a great play - you become THE company to take care of issues in your neighbors homes.  Something that'd be nice for Sitestar to maybe think about to create more value for those customers.

 

It's a seasonal business.  Summers are tough work, but we can shoot the lights out.  About this time of year it gets tough.  Our worst month (January 2016) was 15% of our best month (July 2016) (**should note, January 16 was an anomaly...I really doubt we'll see that again...our winter months are usually 40-50% of our summer months).  I'd imagine the HVAC business they are building in AZ will follow similar trends.

[LR1400]

I believe your pre-tax earnings should be 15%-25% of revenue.  We are small, 7.5 employees, will do about $2mm in revenues this year.  Did $1.25mm last year.  We are 3.5 years young, and previous capital allocation was awful, resulting in 0% return, even negative.  (There was no 'business' focus on the business, so things will change)

 

Most companies I'd guess are doing revenue of $500,000 - $5,000,000.  This industry is a majority of mom & pop companies...lots of single operators, and single operators + helpers...not ran like a business, just provides an income/lifestyle.  Companies with a few technicians (2-5) - probably average $1mm - $5mm.  I believe there are few companies (in the area I live - South Texas) that dominate and probably do $10-25mm, with the largest company maybe doing $50mm.  This is purely a guess, but I see a trend....a mature operation should produce $1mm per technician (It's about what we are doing in our operation).

 

One thing the biggest players do is add plumbing and electrical services into their HVAC business.  It's a great play - you become THE company to take care of issues in your neighbors homes.  Something that'd be nice for Sitestar to maybe think about to create more value for those customers.

 

It's a seasonal business.  Summers are tough work, but we can shoot the lights out.  About this time of year it gets tough.  Our worst month (January 2016) was 15% of our best month (July 2016) (**should note, January 16 was an anomaly...I really doubt we'll see that again...our winter months are usually 40-50% of our summer months).  I'd imagine the HVAC business they are building in AZ will follow similar trends.

 

Great info! Thanks!

 

May go after something similar further east.

 

What are you specifically doing with regard to capital allocation that others a were lot, if you dorm mind me asking?

[frugalchief]

Right now, the best return I can make on our money is by cutting fixed and variable costs that aren't warranted to returning more value to the company.  That's already quite a bit of savings.  Now we are focusing on building our brand more. Then we will do those add-ons I mentioned.  In our market, the best use of capital is to continue to grab market share.  While results may not be immediate, the potential return is extremely attractive.

[jawn619]

Finally sold out, so this will be the last comment from me unless Sitestar somehow becomes attractive again.

 

Firstly, when I bought my shares several years ago, the stock price was below the sum of the parts valuation. When the likes of Jeff Moore got involved I thought finally there were enough shareholders behind the thing that we could see full value of the company unlocked. At that point, no one suspected how bad things were at the top, let alone that management needed to be booted out. Needless to say, I was fine with this, and hoped that with shareholders running the company, they would do their best to maximise shareholder value (I assumed the company would be liquidated, or run as a going concern). At no point did I even consider what would happen next. I guess it's at this point, my thoughts diverged with those of management. Whatever you say about the investment properties, or the internet business, at least you could get a handle on the value of these things. The same cannot be said of Alluvial's hedge fund, or the HVAC value fund that Sitestar have gotten into. For me, these vehicles are too opaque, there is no transparency with them whatsoever (what exactly are we invested in here, what is the fee structure, etc.). Perhaps these are great opportunities, perhaps Steve Kiel is a great guy, we have to take their word for it. As a fiduciary, I feel I just can't take that chance. Especially when I look at what happened to SED Intl, Steak and Shake, Chanticleer, etc. I've learned having a value guy at the helm hasn't been a guarantee that delivers the best outcome for shareholders. That is why I am out.

 

+1

[gfp]

https://www.sec.gov/Archives/edgar/data/1096934/000072174816001689/site1005168k.htm

[dwy000]

Roll ups of HVAC have been tried a number of times and nobody has cracked the code.  The problem is that they are largely mom and pops who's success is tied to an owner/manager who lives the business.  The customer relationships and employee loyalties are tied largely to that owner.  Once they sell out and move on, those relationships slowly dissipate and die - especially when employees are now reporting to an Area Manager and have to focus on budgeting and targets and other "corporate" metrics.  There are very few synergies with the exception of some systems and purchasing but those tend to take more effort to integrate than they achieve in savings.

 

Historically the play has been to buy the mom-and-pops at 3x EBITDA with a parent that trades at 5x EBITDA and get the value pop there.  But over time that EBITDA shrinks instead of growing and the whole thing dies slowly.

[LowIQinvestor]

Sitestar Completes a Private Placement of Common Stock

http://www.otcmarkets.com/stock/SYTE/news/Sitestar-Completes-a-Private-Placement-of-Common-Stock?id=144308&b=y

 

 

[writser]

Respect: this is the perfect day to file that you issue stock way below market prices.

[Sunrider]

The people participating won't be able to transfer the shares (or sell them easily) for quite a long time.

 

Respect: this is the perfect day to file that you issue stock way below market prices.

[writser]

I know. They probably didn't plan it this way :) .

[rkbabang]

A new 5+% owner.

 

Sitestar Corp: Eriksen Capital Management Llc Opened Big New Position

 

 

[Foreign Tuffett]

Roll ups of HVAC have been tried a number of times and nobody has cracked the code.  The problem is that they are largely mom and pops who's success is tied to an owner/manager who lives the business.  The customer relationships and employee loyalties are tied largely to that owner.  Once they sell out and move on, those relationships slowly dissipate and die - especially when employees are now reporting to an Area Manager and have to focus on budgeting and targets and other "corporate" metrics.  There are very few synergies with the exception of some systems and purchasing but those tend to take more effort to integrate than they achieve in savings.

 

Historically the play has been to buy the mom-and-pops at 3x EBITDA with a parent that trades at 5x EBITDA and get the value pop there.  But over time that EBITDA shrinks instead of growing and the whole thing dies slowly.

 

Based on my (fairly limited) experience dealing with commercial HVAC companies, I agree with this 100%. The best managed companies are run by owner-operators who have worked in the business for decades and have long term customers built on personal relationships and customer trust in the owner's personal expertise and operational skill. The moat is the owner and without him/her the business would likely wither and die. Although I could very well be wrong, I see a rollup here as an uphill battle.

 

 

 

 

 

[wachtwoord]

Roll ups of HVAC have been tried a number of times and nobody has cracked the code.  The problem is that they are largely mom and pops who's success is tied to an owner/manager who lives the business.  The customer relationships and employee loyalties are tied largely to that owner.  Once they sell out and move on, those relationships slowly dissipate and die - especially when employees are now reporting to an Area Manager and have to focus on budgeting and targets and other "corporate" metrics.  There are very few synergies with the exception of some systems and purchasing but those tend to take more effort to integrate than they achieve in savings.

 

Historically the play has been to buy the mom-and-pops at 3x EBITDA with a parent that trades at 5x EBITDA and get the value pop there.  But over time that EBITDA shrinks instead of growing and the whole thing dies slowly.

 

Based on my (fairly limited) experience dealing with commercial HVAC companies, I agree with this 100%. The best managed companies are run by owner-operators who have worked in the business for decades and have long term customers built on personal relationships and customer trust in the owner's personal expertise and operational skill. The moat is the owner and without him/her the business would likely wither and die. Although I could very well be wrong, I see a rollup here as an uphill battle.

 

So theoretically organizing it as BRK is organized stands a chance of succeeding (set of wholly owned businesses, with their original owner operators in-place, with mandate and with equity in the holding company). Excluding insurance of course.

[Spekulatius]

Roll ups of HVAC have been tried a number of times and nobody has cracked the code.  The problem is that they are largely mom and pops who's success is tied to an owner/manager who lives the business.  The customer relationships and employee loyalties are tied largely to that owner.  Once they sell out and move on, those relationships slowly dissipate and die - especially when employees are now reporting to an Area Manager and have to focus on budgeting and targets and other "corporate" metrics.  There are very few synergies with the exception of some systems and purchasing but those tend to take more effort to integrate than they achieve in savings.

 

Historically the play has been to buy the mom-and-pops at 3x EBITDA with a parent that trades at 5x EBITDA and get the value pop there.  But over time that EBITDA shrinks instead of growing and the whole thing dies slowly.

 

Based on my (fairly limited) experience dealing with commercial HVAC companies, I agree with this 100%. The best managed companies are run by owner-operators who have worked in the business for decades and have long term customers built on personal relationships and customer trust in the owner's personal expertise and operational skill. The moat is the owner and without him/her the business would likely wither and die. Although I could very well be wrong, I see a rollup here as an uphill battle.

 

So theoretically organizing it as BRK is organized stands a chance of succeeding (set of wholly owned businesses, with their original owner operators in-place, with mandate and with equity in the holding company). Excluding insurance of course.

 

Why would an owner work for somebody else after they sell out? I imagine they would no sell in the first place, unless there is an issue with the business or a special personal situation.