A Sunny Outlook for the Nation’s Landscaper

Posted 20 Aug 2018 07:13 PM Edited 20 Aug 2018 07:14 PM

BrightView had barely been public for a month when it delivered its first earnings report in early August. The debut quarter didn't go well for the country's only publicly traded landscaping specialist, partly because the East Coast of the U.S. had been hit with its largest April snowstorm in decades.

It was bad timing for a company that counts on the spring planting season to jumpstart a busy summer. Most companies are happy to blame weather for lower sales, but BrightView Holdings (ticker: BV) never talked about the storms, only referring to the pruning of unprofitable accounts. Chalk it up to a rookie mistake.

Investors were left to speculate why the newly public company wasn't growing as fast as expected. Shares fell 10% on the earnings report. At a recent $17, they trade 22% below their June initial public offering price.

Last week, CEO Andrew Masterman said that the early April storms cost the company some $5 million in sales, enough to put a dent in growth. The snow removal business wasn't enough to make up the difference.

BrightView's outlook is now far sunnier than its stock price suggests. With a market value of $1.7 billion, BrightView is simultaneously a giant and a nobody in the $62 billion U.S. commercial landscaping and snow-removal market. Its 2.7% market share leaves the vast majority of the market untouched, but with $2.2 billion in annual revenue it's more than 10 times larger than its biggest competitor. According to IBISWorld, there are over 500,000 landscaping providers in the U.S., most of them sole proprietors.

Plymouth Landing, Penn.'based BrightView has carved out a profitable commercial niche. The company's client roster includes Four Seasons and Ritz-Carlton properties, MIT and Duke universities, Exxon Mobil (XOM) and Alphabet (GOOGL) headquarters, Major League Baseball and National Football League stadiums, Disneyland, and even the National Mall in Washington, D.C. Maintenance services made up 74% of revenues last fiscal year. The rest came from designing and installing landscapes and other outdoor projects. Analysts expect total sales to grow close to 4% annually through 2020.

RBC Capital Markets analyst Deane Dray says BrightView's mowing, gardening, mulching, tree care, and snow removal are non-discretionary services for corporate clients. Grass grows just as fast in a recession as it does in an expansion. 'Nothing speaks more loudly of economic distress than if you've got shoddy landscaping,' says Dray, who has a $26 price target on the stock.

BrightView grew out of a 2014 merger between the U.S.'s top two private landscapers, a deal orchestrated by private equity firm KKR (KKR) which remains a majority shareholder. MSD Partners, Michael Dell's family office, owns an additional 13%.

BrightView says its scale helps the company attract and retain experienced employees. 'A gardener has the same access to health care and 401(k)s that I have,' says Masterman, who joined BrightView as CEO in 2016, after serving as an executive at Berkshire Hathaway-owned (BRK.A) Precision Castparts.

BrightView also centralized back-office functions that a local landscaper would be stuck with, including legal, billing, and accounting; the company purchases materials and machinery at discounts, directly from suppliers. BrightView's operating margins tend to be three to five points higher than competitors, Masterman says.

A Sunny Outlook for the Nation?s Landscaper
The profit edge means BrightView can squeeze synergies out of its acquisitions; the company has made eight deals since the start of 2017 for a total of $161 million.

Macquarie analyst Hamzah Mazari estimates there are another $2 billion worth of tuck-in acquisitions that BrightView could make, to effectively double its size. He has a price target of $25 on BrightView shares, which assumes a $7 benefit from future acquisitions.

For the fiscal year ending in September, analysts expects BrightView to earn $18 million on $2.36 billion in sales. Net income is expected to jump to $70 million in 2019. The private equity history has left BrightView with $1.6 billion in debt, but the company is now using its free cash flow to pay down the borrowings while still investing in growth.

The stock trades for nine times earnings before interest, taxes, depreciation, and amortization estimates for the next 12 months, a 31% discount to commercial service peers. BrightView should eventually close the gap, meaning greener pastures ahead.


Why U.S. Stocks Rule the World

Posted 20 Aug 2018 06:56 PM Edited 20 Aug 2018 06:57 PM

One of my favorite examples of onomatopoeia is 'splat,' which I learned about as an avid adolescent fan of Mad Magazine. (Didn't everyone read it as a 12-year-old') What was particularly fun was how Mad illustrated the word as a large and colorful word balloon, sometimes dominating the entire page: 'Splat!' That made it visceral.

Years later, I'm reminded of splat! by the plunging performance of virtual currencies this year. Since the end of 2017, the cryptocurrency market is down nearly 70%, according to Fundstrat. Bitcoin, in particular, has slid to $6,463, two-thirdsbelow its high of $18,675, reached in mid-December.(For more on blockchain and virtual currencies, see this week's cover story.)

At some $200 billion in total assets, the virtual-currency market remains a flattened fly'there's that splat! again'in a world where, depending on how you define it, there are hundreds of trillions of dollars in assets.

If this sounds like a victory lap on skepticism voiced here in December, it's not'well, maybe a little. Back then, I noted that Bitcoin was a bubble waiting to pop. It did. But don't call me a 'nocoiner.' According to the Urban Dictionary, a nocoiner is a person 'who has no Bitcoin. They are people (usually socialists, lawyers, or economists) who missed their opportunity to buy Bitcoin at a low price because they thought it was a scam and are now bitter at having missed out. The nocoiner takes out his or her bitterness on Bitcoin holders by constantly claiming that Bitcoin will crash.'

While it's true I don't own any virtual currency, there's no animus here. At a minimum, such assets might turn out to be a check on excessive government taxation. Someday. That would be a good thing, but it's far from a sure thing. I'm pretty certain that George Washington would approve. For most investors, cryptocurrencies remain a speculative asset, and worthy, for now, of only a tiny portion of a portfolio'small enough that you won't notice if it goes much lower.

It's no surprise that Wall Street is pitching vehicles for investors to part with their cash for virtual currencies. Nevertheless, the Securities and Exchange Commission recently delayed until Sept. 30 a decision on a proposed Bitcoin exchange-traded fund. If the SEC blesses this, look for virtual currencies to rally with verve. That will be followed by virtual-currency ETFs of every flavor and esoteric name. If the SEC demurs, Bitcoin, Ethereum, Ripple, and others will probably slide some more.

Unfortunately, an essential proof of virtual currencies' potential might come only with the next bear market or recession. No one wants a trial by fire, but if the money chases Bitcoin during severe financial stress, virtual currencies will have arrived as a store of value. For now, they're not much of a medium of exchange or a unit of accounting. Indeed, cryptocurrencies still don't fulfill the traditional three characteristics of a currency. And to paraphrase Warren Buffett, if Bitcoin isn't a currency, then what is it'

Why U.S. Stocks Rule the World

A nocoiner might even argue that virtual currencies have failed a mini stress test. Granted, the global turbulence caused by a collapsing Turkish lira seems minor. Yet it's telling that virtual currencies continue to drop and haven't attracted money seeking a haven. Admittedly, gold also has continued to soften on world markets, but the yellow metal did rise in Turkey. The greenback also probably attracted some risk-off money. Bitcoin' Not so much.

Perhaps cryptocurrencies will be less speculative when you can buy an issue of Mad with them. But which cryptocurrency will it be' Good luck with that.

American Exceptionalism

Stock markets outside the U.S. haven't exactly gone splat! this year, but they've trailed American equities, in some cases by large margins. Apart from Mexico and Norway, the U.S. is the only sizable market lit up in green on quote terminals. Globally, prices are down, a sea of red lights.

To date, the MSCI USA Index is up 6%, while the MSCI World ex-USA Index is down nearly 5% (both in dollar terms). The strong greenback is partly responsible for that differential, but hardly all of it. In local currencies, other major indexes in Japan, China, and Germany have all underperformed the U.S. Germany, for example, is off 5% in euros, versus 10% in dollars.

Don't take this as rah-rah triumphalism. It would be great if all markets rose. Spread the wealth. Lift standards of living.

Despite the spectacular rise of the Chinese economy and the heft of the European Union, there are good reasons for U.S. outperformance. Global investors recognize that economic and corporate earnings growth are much more robust here than in the rest of the world. But that's nothing new.

What market wisdom also recognizes, but individual investors might not, is that this showing also reflects the trading muscle the U.S. maintains over the rest of the world. Many folks probably don't know how powerful this advantage is, but as tariff and trade tensions rise, the market knows.

'The world still largely beats to the U.S.'s tune,' says Joseph Quinlan, head of market strategy at U.S. Trust. He surveyed 18 major indexes around the globe (representing about 60% of the world's market capitalization) and ranked each country's revenue exposure to the U.S. in terms of total revenue generation for companies listed in the indexes. The U.S. is among the top three in each country index'a powerful testament to U.S. leverage.

In the Eurostoxx and German indexes, the U.S. is No. 1, representing 19% and 22% of revenue, respectively. You might think that buying into the DAX gives exposure to the land of Goethe, but you're buying more global than domestic exposure.

In comparison, the U.S. is an island unto itself, with 62% of the S&P 500's revenue derived domestically, 5.5% from China, and no more than 3% from any other country. Bluntly put, in order to grow at a faster clip, the world needs the American economy more than the U.S. needs the world.

China also largely depends on itself. Some 92% of revenue for companies in the China MSCI originates domestically. The U.S. generates just 2.2% of China's revenue, but that's still good for second place. Everyone else pales in comparison.

Quinlan points out that China's linkage to the U.S. comes via trade and the need for intermediate parts and components for final assembly. This reliance, he adds, and China's position as the primary U.S. target in a trade war, have contributed to the weak performance of Chinese equities this year.

It's thought that President Donald Trump's stentorian stance on tariffs is part of a larger get-tough strategy aimed simply at extracting concessions. Maybe. Yet the risk is that antitrade pressures keep rising and the tit-for-tat nature of tariffs spins out of control.

Don't get complacent.

For the long-term investor, diversification is a key to good returns. Quinlan says global growth in the second half should be 'decent, but weaker than the first.'We probably have reached a peak in synchronized global expansion.'

It's true that Wall Street's performance since 2007 and the financial crisis has left other major markets in the dust, in dollar terms. 'You can't assume the past is prologue, however,' warns Nicholas Colas, co-founder of DataTrek Research.

Over the past 20 years, U.S. stocks have returned, on average, 7% annually, he says, versus about 10% longer term. That has pushed money out of stocks and into private-equity and venture-capital funds, Colas adds. Moreover, since 1999, emerging markets have risen 255% in dollar terms, double the U.S.'s return over the same period.

Short term, there could be a reversal. A report from Bespoke Investment Group says that since 1984, whenever the ratio of the MSCI USA Index to the MSCI World ex-USA Index hits a new high'as is the case now'the U.S. has underperformed three months later. A year later, however, U.S. primacy resumes. Another potential negative: U.S. stocks are a crowded bull trade. Global fund managers are running the biggest overweight in them since January 2015, according to a Bank of America Merrill Lynch survey.

Capital goes to the places that treat it best. Strong and deep as U.S. equities markets are, they're not made of Teflon. If protectionism gets out of hand, everyone loses. Says Quinlan: 'They can go too far.'