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Tuesday, March 28, 2023 3:13:31 PM
As we all know, the value of any company is supposed to be the present value of all cash returnable to shareholders in the future. Some here and on the other board intimate or outrightly state that value can be determined by driving while looking in the rear view mirror; that is to say, that past results are the primary indicator of value.
IMHO, where a company has sufficient size, momentum and history, past results can be a very important indicator of future potential. For example, if you look at the biggest six Canadian banks, they've been doubling their dividends on average about every 10 years for the past two decades. Combine that with payout ratios of generally just less than 50% and a somewhat oligopolistic position, and that gives you a pretty good idea of what to expect in the future. Another example might be Canadian Tire (CTC.A), which has doubled its dividend on average about every 5 years over the last decade and a half, with a more modest payout ratio. And yet another example might be goeasy (GSY), whose dividend is over 10x what it was a decade ago, with a slightly lower payout ratio than Canadian Tire. Of course, there's lots more data available but, with the types of companies I've mentioned, you can learn a great deal - and project a great deal - by looking at some key historical information.
Having said that, you must always look to the future, even with those companies. For example, what effect will the transition to electric vehicles have on Canadian Tire over the long term. Some might think the effect will be minor, but that's the sort of thing that's worth considering.
Now, on to the small companies. Even for them, historical information is not unimportant. You might be able to garner insights into revenue growth, margins, expense control, receivables, cash needs, etc. That much is obvious, but these companies don't have enough history of operating at scale to be able to use historical information by itself to estimate future cash flow. Of greater importance is how quickly they might reach scale, what size that scale might be and what the financials might look like when they get there. Everyone gets to judge that for themselves, but to use historical data alone to value small companies or to compare them with large ones is IMHO not thinking clearly.
For Reliq, as we know, revenue - as constrained as it has been - is still growing strongly. Some would suggest that's all the company will get because that's all they've done historically. Guess again. Gross margin has increased from 4% in 2019, to 15% in 2020, to 59% in 2021, to 62% now. Some would tell you that the company's gross margin has topped out. I don't think so. Expenses have been well controlled. Pretty hard to be negative about that. Profitability is close. The company has showed intelligence in fundraising. There've been issues around adherence and collections. Some will say that the company will never work those issues out. Time will tell on that front, but IMHO this is all part of working out the kinks, and past information on that front tells you very little about what will happen in the future.
Until we can see some data showing progress toward resolution of the issues, there should be and probably will be a material credibility discount applied to the company's valuation. As pointed out by an astute poster over on ceo.ca, that big 16 March 2023 announcement (as well as a lots of other ones) are being "banked" by investors pending adherence and collections progress. That's a whole lot of pent up value that will hopefully get released in the near term. None of that is available by driving while looking in the rear view mirror.
My point isn't to suggest that the company is a wonderful risk free investment. My point is to suggest that people who tell you to judge small companies primarily through the lens of historical information aren't really giving you good advice.
Post credit to Invester22 on Stockhouse. Well said and worth sharing. $RQHTF
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