The Casey Report E.B. Tucker
How to profit from collapse Everyone knows what s already happened Few people can figure out what happens next Think about incentives What will people do next? These people will be customers somewhere
% of population owning residence Housing Bust - Landlords Win 70.0 69.0 68.0 67.0 66.0 65.0 64.0 63.0 62.0 61.0 60.0 59.0 U.S. Home Ownership Rate Easy credit meant everyone was a qualified buyer... 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Federal Reserve Bank of St. Louis "Alarge group of people that should not have purchased homes will become renters and stay renters for a decade"
Nobody Wanted Rental Property
It s Lonely At The Bottom April 2008 Mortgaged for $170,100 April 2009 Lis Pendens Filed October 2009 Judgement granted $181,880.63 January 2010 Courthouse auction $28,000 February 2010 E.B. buys for $33,000 October 2015 Total rent received $75,329.78
What s Happening Today? What will happen next? What will people want when that happens? Can we buy what they ll want tomorrow at a discount today?
It s dangerous to be right when the government is wrong Voltaire
My Trip To The St. Louis Fed
These Guys Are Dangerous
Dangerous Propaganda
Fed Market Distortions
Millions of vehicles Auto Sales Highest Ever 20 18 16 14 12 10 8 6 4 2 0 U.S. Light Vehicle Sales Number of newly registered vehicles 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: U.S. Department of Commerce & Bloomberg U.S. auto sales are higher than the peak of last decade's credit bonanza...
Meanwhile Median Annual Income 2011 $USD Median Annual Income 2011 Dollars 58,000 57,000 56,000 55,000 54,000 53,000 52,000 51,000 U.S. Personal Income The average car buyer makes less money than he did last decade... 50,000 Source: Bloomberg
Pay Later.Or Never U.S. Auto Loans Outstanding 1.1 $USD Trillions 0.9 0.7 Total value of loans Outstanding now over $1,000,000,000,000 0.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg / Federal Reserve
What We Know Fed created distortions in the auto finance market 0% car loans for 84 months Few American cars last 84 months Auto sales at record high while income down Look for more confirmation that this trend is ending
Steel Market As An Indication Steel Applications by Market Estimated Shipments 2013 Automotive Steel 26% Construction Automotive Machinery & Equipment Energy Container Appliabces National Defense Other Source: American Iron and Steel Institute
Plenty of Unused Capacity 100 U.S. Steel Production Capacity 90 % of Capacity Used 80 70 60 50 40 30 Steel production capacity is extremely slack... It s the sign of a weak market 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg / American Iron and Steel Institute
Steel Production Down
What We Know Auto sales at all-time high Credit to blame 0% interest for 7 years can t get much easier The Fed borrowed tomorrow s auto production Auto sales likely already turned down Average car/suv uses 1/1.5 ton of steel Steel market incredibly weak People will now drive cars longer they ll be harder to buy They ll have to fix the car they can t afford to trade
The Parts Market OEM Parts AutoZone / O Reilly Pick It Yourself
Retail Auto Parts $ Per Share 300 250 200 150 100 O'Reilly Automotive Inc (ORLY) Parts retailer with 4,465 locations SalesGrowth -10% Op Margin -18% Debt/EBITDA - 0.9x ORLY US OReilly Automotive Inc 50 0 2011 2012 2013 2014 2015 Source: Bloomberg
Retail Auto Parts $ Per Share 800 700 600 500 400 300 200 AutoZone Inc (AZO) Parts retailer with 5,069 locations Sales Growth - 7.5% Op Margin -19% Debt/EBITDA - 2.1x AZO US AutoZone Inc 100 2011 2012 2013 2014 2015 Source: Bloomberg
Pick It Yourself $ Per Share 40 35 30 25 20 15 10 LKQ Corp (LKQ) 347 North American salvage yards Sales Growth -18% Op Margin -10% Debt/EBITDA - 2.1x LKQ US LKQ Corp LKQ stock ran with retail auto parts stores until 2014... 5 2011 2012 2013 2014 2015 Source: Bloomberg
Strong Dollar = Weak Steel Market Dollar Index Value 155 150 145 140 135 130 125 Trade Weighted U.S. Dollar Index Dollar vs less circulated currencies U.S. Dollar shot higher just about the time LKQ disconnected from parts retailers (ORLY) & (AZO) Trade Weighted U.S. Dollar Index: China, Mexico, Taiwan, Israel, Korea, Singapore, Hong Kong, Venezuela, Argentina etc.. 120 2011 2012 2013 2014 2015 Source: Federal Reserve Bank of St. Louis
How It Works The Scrap Business Buy wrecked cars at auction or from owners Inventory parts Sales counter in front office fills orders slowly stripping the car Ideally 100% return on car purchase in 180 days Sell metal car body as steel scrap Actual Scrap Yard Clearwater, FL
The Most Fragmented Business I ve Ever Seen Engine Blocks Sold For Chinese Re-Building Even This Car Turned a Profit
LKQ Held Back By Steel 2011 H1 scrap metal 16% of total sales 2015 H1 scrap metal 7% of total sales Strong Dollar is bad for steel and LKQ Change in dollar trend will benefit LKQ Slowing new car sales will benefit LKQ parts business
LKQ History The scrap/parts business is incredibly fragmented LKQ formed in 1998 by entrepreneur scrap yard owners in Florida, Michigan, Ohio & Wisconsin Made 200 acquisitions of small local scrap yards Domestic growth is almost zero now LKQ is a typical big company and a far cry from it s entrepreneurial roots It s LKQ vs a thousand local operators The stock will perform in line with changing macroeconomic factors
Let s Buy LKQ in 1998 2014 Small group of yard owners gets together realizes LKQ has no challenger Group agrees to combine businesses and build a giant Group agrees to May 2015 IPO Group takes shares in exchange for contributing business to combined entity May 2015 IPO at $8 per share Stock market has absolutely no clue how FENX works
Confusion = Opportunity 12 11 10 Fenix Parts Inc (FENX) Newly combined group of formerly independant operators Fenix Parts Inc $ Per Share 9 8 7 6 5 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Source: Bloomberg
Fenix Parts Inc. Shares outstanding 20 million Company will use stock, cash & debt to make accretive acquisitions August 2015 bought Bayville, NJ yard October 2015 bought Forest City, NC yard October 2015 bought Tri-City Greensboro, NC yard Company can continue to buy yards adjusting purchase price for financing conditions Will eventually grow into LKQ s only viable competition