SGRP - SPAR Group

[Palantir]

A brief writeup for those interested in microcaps.

 

Investment Thesis:

Spar Group (SGRP) is a small, fast growing company in a very fragmented market with strong tailwinds that should propel future growth. It is trading at a projected EV/EBITDA of 6.65 and a trailing FCF yield of 9%, which should expand substantially in the future.

 

Business:

SGRP is in the merchandising industry, this is where firms staff stores for product promotions, sales, and advertising. Historically, stores' internal personnel have handled these functions, however, they are trying to outsource this to a third party provider, which points to increasing business for SPAR. The other major tailwind is international expansion - many of SPAR's clients are trying to expand abroad, and SPAR can and is leveraging that relationship with them to be their merchandiser in foreign markets as well. Their foreign strategy is to take controlling (51%) stakes in a foreign subsidiary, while partnering with a local player who owns the rest of the stake, giving both sides a vested interest in its success.

 

Spar has a few competitive advantages:

 

1) Has relationships with major companies, and if their client is large, profitable and successfully growing, there is little reason to switch merchandisers.

2) Has a global footprint - due to their partial subsidiary strategy, the company has a presence in multiple countries, largest of which are Japan, China, India, Mexico, and Turkey, which is a major asset to their clients in expanding abroad as they can stay with the same vendor.

3) Has a mobile-based software platform which allows them to communicate with workers, monitor product levels in stores, and rapidly execute their programs resulting in faster execution for clients. This software can also be easily translated into foreign languages with relative ease. This is a very key competitive advantage for the firm.

 

Opportunity:

This firm is likely undervalued because it is small, obscure, in a low-profile industry and doesn't particularly stand out on many screens.

 

Valuation:

 

The International segment is faster at growing the top line.

 

Revenue              2012              2011              2010              2009                2008    YoY Growth

United States  43,096.00      37,809.00      36,564.00      26,427.00      30,803.00      8.8%

International    59,670.00      35,715.00      26,590.00      31,122.00      38,808.00      11.4%

 

However, the domestic business is also more profitable.

 

Operating Profit        2012            2011              2010            2009            2008        YoY Growth

United States        3,299.00        2,774.00        3,043.00        888.00        879.00              39.2%

International            708.00          111.00        -212.00        -566.00        591.00                4.6%

 

I estimate EBITDA by allocating D&A by the amount of long lived assets disclosed on their 10K.

 

Long Lived Assets      2012            2011              2010            2009            2008       

United States            3,145.00      2,169.00        2,231.00      4,001.00      4,070.00

International            2,129.00        1,385.00          657.00          278.00          337.00

                                5,274.00        3,554.00        2,888.00        4,279.00      4,407.00

 

D&A is estimated by allocating by percentage of total Long Lived Assets.

 

D&A                            2012            2011              2010            2009            2008

United States            695.91          652.41            786.41      1,010.77        867.20

International            471.09          416.59            231.59            70.23          71.80

 

 

EBITDA                        2012            2011              2010            2009            2008      YoY Growth

United States          3,994.91      3,426.41        3,829.41      1,898.77      1,746.20        23.0%

International            1,179.09        527.59            19.59        -495.77          662.80          15.5%

Total                        5,174.00        3,954.00      3,849.00      1,403.00      2,409.00       

 

Over the past five years, the international division has grown slower, but the firm has started ramping up their international acquisition since 2009, so we can reasonably expect them to grow internationally even faster. Given that this is a multi-billion dollar industry, and this is a tiny firm, I think it is reasonable to expect high growth rates to continue. I predict a more conservative domestic growth rate of 9% for the US division and 15% Internationally, to get the below projections.

 

Projected EBITDA   2013             2014               2015             2016         2017       YoY Growth

United States       $4,354.45         $4,746.35   $5,173.52    $5,639.14        $6,146.66           9%

International       $1,355.96  $1,559.35   $1,793.25 $2,062.24 $2,371.58         15%

Total                       $5,710.41         $6,305.70   $6,966.77 $7,701.38 $8,518.24

 

 

The firm’s EV is materially the same as it’s market cap of 38M, which gives us a projected EV/EBITDA ratio of 6.65, or the inverse, which is an expected EBITDA return of 15%, and this is conservatively estimated, if the firm accelerates its international growth rate, which is expected, then this should exceed this rate of return. Given the modest multiple and the high rates of growth combined with a sustainable and proven business model, I believe this firm is very undervalued.

[LC]

Nice write up :)

 

Who are their competitors? Are their any large players in this industry that could scoop SPAR up?

 

Can you go into more detail about the business? Who does SPAR need to make connections with? Is it the box stores themselves (the targets, walmarts, safeways, whole foods, mom & pop supermarkets, etc.), or the distributors, or the manufacturers (unilever, P&G, etc.)?

 

I think the business is a good one. It certainly has advantages over using traditional in-store employees. Is SPAR the best in the industry, or will they get squashed by an in-house team @ Unilever or Walmart?

[watsa_is_a_randian_hero]

The story sounds good.  Also like large insider ownership.

 

That said, the long-term results aren't as attractive.  2.5% CAGR in revenue since 2000; 11% CAGR in TBV since 2000.  Appears that earnings have been volatile over the period as well, with a couple large loss years.

 

thoughts?

[Palantir]

Nice write up :)

 

Who are their competitors? Are their any large players in this industry that could scoop SPAR up?

 

Thanks.

 

My current understanding is that their competitors are basically a large number of small firms and that the industry is very fragmented. So I don't believe there is one major competitor per se. My understanding is that this is an industry that is expected to consolidate in the future in large part because clients would prefer not to deal with multiple third party merchandisers instead of one reliable and proven firm.

 

Can you go into more detail about the business? Who does SPAR need to make connections with? Is it the box stores themselves (the targets, walmarts, safeways, whole foods, mom & pop supermarkets, etc.), or the distributors, or the manufacturers (unilever, P&G, etc.)?

 

Based on their 10K, they are involved in dealings with all three classes of clients. They do not name their clients in their filings, but I believe it is all of those you mentioned.

 

I think the business is a good one. It certainly has advantages over using traditional in-store employees. Is SPAR the best in the industry, or will they get squashed by an in-house team @ Unilever or Walmart?

 

I unfortunately can't determine the relative standing of SPAR compared to its competitors, but as you noted, there is a significant advantage vs in-store employees, and I think that same dynamic works for them when it comes to competing against in-house teams at Walmart.

 

[Palantir]

That said, the long-term results aren't as attractive.  2.5% CAGR in revenue since 2000; 11% CAGR in TBV since 2000.  Appears that earnings have been volatile over the period as well, with a couple large loss years.

 

thoughts?

 

I would prefer to focus on the performance 08 onwards. I didn't go into the history of the firm in my writeup, so it is an oversight on my part, but the firm had a management change in 08, where Gary Raymond replaced the founder of the firm who became Chairman. Since then Raymond has been in charge of the strategy where they paused acquisitions for a while to wait for the business to strengthen and then ramped up again. As a result, I think their near term and future growth rate should be much higher than historical.

[lemsinge]

I wanted to see if anyone has been following this stock in the last few years?

 

Gross margins have declined every year for as far as I go back (~30% down to ~20%), causing EBIT & EBITDA to be essentially unchanged, despite the 1.5x revenue increase since 2013. Only in 2019, did we finally see a strong performance, with slightly lowered SG&A expenses at the same level of gross margin and higher revenue, resulting in $12mm in EBITDA (Capex is effectively zero) vs. an EV of $30mm.

 

The business definitely is going to see significant headwinds from Covid-19, and it is tough to see what the future holds without any information (aside from an educated guess) about who their largest clients are. Yet, the level of cheapness + its asset-light balance sheet attracts me.