What I Wish I Wrote ~ October 5, 2017

Performance of dividend payers in the S&P 500 versus non-dividend players in the S&P 500 (Dividend Growth Investor)

Is DaVita juicing its earnings through an opaque non-profit? Warren and Charlie’s Excellent Insurance Gambit (Sirf-Online)

Did Warren Buffett kill value investing? (The Irrelevant Investor)

The psychological biases that leave us unprepared for disaster (Tim Harford)

What do the best investors do that the rest don’t? (Behavioral Value Investor)

Google Travel is worth $100 Billion (Skift)

Reciprocation Bias. It can build trust and love. Or it can lead to great harm. (Farnam Street)

You are Facebook’s product (London Review of Books)

We need to stop pretending that the autonomous car is imminent. (Recode)

Should you top-off a position (aka average down) or double down? (MarketFox)

Sequoia Fund trying to repair some reputational damage from its Valeant fiasco. (The Washington Post)

And now you know why you can’t stop stuffing your face with those cheese puffs. (Now I Know)


Humira Biosimilar Threat: Who Gets the Customer First?

The concern with AbbVie’s blockbuster biologic Humira is the lost of patent exclusivity in the U.S. and Europe over the next two years.

The worry is revenue from Humira will drop off a cliff as generic drugs enter the market.

This would be a logical worry if Humira was a small molecule drug. A generic small molecule drug simply has to prove it is the same chemical formula as the branded drug. No new safety and efficacy trials needed.

Humira is a biologic, a large molecule, that is synthesized from living cells. The process to synthesize and isolate the biologic is the drug. A small change in the process can yield vastly different results.

A biosimilar is a company’s effort to reverse engineer the original process to create their own biologic. The new biologic should be similar to the original.

Because it is a new and different process, the biosimilar has to undergo safety and efficacy trials. This drives the cost up to produce the biosimilar.

Recent biosimilars are coming to market at 15-25% discounts to the original because of the extra costs. Unlike generic small molecule drugs that are 50, 60, 70% cheaper than the branded drug.

Switching Costs

Biologics have some switching costs built into them.

If you are taking a biologic and your illness is under control with little or manageable side effects would you switch to a biosimilar? Knowing that it may work less effectively or not at all? And your side effects could increase to save 15-20%?

If you’re a doctor and your patient is responding well to the branded biologic will you suggest switching to the biosimilar? Knowing that it isn’t the exact same drug and it may not treat your patient as effectively or may increase the adverse side effects?

The Real Threat

The real threat is a new patient trying the cheaper biosimilar first and responding favorably to it. Then there is no reason to switch over to the more expensive original biologic.

Who gets to acquire the customer first?

Why Amgen’s News is Good for AbbVie

This is also why the news this morning that Amgen’s Humira biosimilar will be delayed in the U.S. until 2023 is beneficial to AbbVie.

It doesn’t simply mean less competition over the next 5-6 years.

It means AbbVie gets to acquire new patients over the next 5-6 years. And these new patients are unlikely to switch when Amgen’s biosimilar launches.

The lifetime value of an AbbVie’s U.S. Humira customers just increased.

Further Reading:

AMM Dividend Letter Issue 5: Growing Wealth like Grace Groner with AbbVie (ABBV)



Snap-On Tools, A Dividend Stock to Avoid?

Snap-On Tools (NSA) is the premier toolmaker. The company pays a decent dividend and has grown its dividend.

SNA Dividend Chart

SNA Dividend data by YCharts

However, Snap-On Tools is not the most consistent dividend grower.

Snap-On experiences periods where it doesn’t raise its dividend. These periods can last several years.

SNA Dividend Chart

SNA Dividend data by YCharts

Short Snap-On Tools

J Capital Research through their Podcast discussed their short call on Snap-On and why it is a dividend stock to avoid.

I recommend listening to the whole podcast because it does a really good job of breaking down all of Snap-On’s business. I listed a few of the highlights below.

  • Excessive use of credit to make sales.
  • Expect bad debts to rise from 3% to 6% of their loan book.
  • Excessive credit use has pulled forward sales.
  • Revenues and earnings in the Tools division will decline as finance division pulls back and credit use declines.
  • Snap-On took full control of their finance division in 2011.
    • Back then finance receivables were 54% of sales.
    • Now receivables make up 86% of sales.
  • Last year’s credit growth remained at 15% but sales growth fell to 5% from the 7% rate of the last few years.

Risk to Dividend Growth Investors

Snap-On Tools’ dividend is not at risk.

The risk to a dividend growth investor is Snap-On Tools going through another long period without raising its dividend as it works through its bad loans.


Money. Pizza. Respect: Roughly Valuing Papa John’s (PZZA)

First, you get the money. Then you get the Pizza. Then you get respect.

To steal borrow a line from the joke stealer borrower The Fat Jew.

For John Schnatter it’s: First you make the pizza, then you get the money, and then you get the respect of running a $2.6 billion pizza company.

John Schnatter
(Papa) John Schnatter being carried respectfully

I like the pizza delivery business. It’s a simple product and process that everyone enjoys. And it dominates the home delivery market, for now.

Very little capital and space are needed to open a new store. Returns on invested capital are typically higher for pizza delivery stores than other restaurants

PZZA Return on Invested Capital (Annual) Chart

PZZA Return on Invested Capital (Annual) data by YCharts

And Papa John’s (PZZA) is returning excess capital back to shareholders through share buybacks, initiating a dividend, and increasing their dividend.

PZZA Dividend Chart

PZZA Dividend data by YCharts

But I’m not the only one who likes Papa John’s Pizza.

Papa John’s stock price has increased 169% over the last 5 years.

PZZA Chart

PZZA data by YCharts

A compound annual growth rate of 21.96%.

What price would I have to pay today to get another 20% annual returns over the next 5 years?

Why 20%?

Why not?

Let’s aim for above-average returns.

Also, I’m human and I need a margin for error. Hopefully, my error is paying a little too much. Instead of a 20% per year returns I still end up earning a return greater than 10% per year. The 20% provides a cushion if I misvalue the company.

Rough Valuation

This is just a rough estimate. An exercise to see how attractive Papa John’s stock is at today’s prices and/or what potential price makes the stock attractive.

Papa John’s generated $1.714 billion in revenues last fiscal year and EBITDA of $207.19 million. An EBITDA margin of 12.08%.

At the end of 2016, Papa John’s had 5,097 stores (owned and franchised) globally. That’s $40,649 EBITDA per store.

Papa John’s expects to add 1,571 more stores to its global footprint, both owned and franchised. Mostly franchised and in international markets.

6,668 stores in 5 years.

Let’s expect the average EBITDA and EBITDA margin per store to remain the same.

6,668 stores x $40,649 EBITDA/Store = $271.05 million EBITDA .

Using a EV/EBITDA multiple of 12 = $3.252 billion enterprise value. Papa John’s currently trades at a 14x EV/EBITDA multiple. Papa John’s 5-year average is 14 and its 10-year average is 10.

Papa John’s announced a new share repurchase plan and financing plans that will push leverage to 3-4x EBITDA within the next 12-18 months. Using the lesser 3x EBITDA, this will push Papa John’s debt up to $621 million. And I’ll assume no more debt is added over the next 5 years.

$3.252 billion enterprise value – $621 debt = $2.631 billion market cap.

Assuming Papa John’s continues reducing share count by 1.9 million per year. This leaves 27 million shares outstanding in 5 years. A reduction of 9.5 million shares. This is higher than the 7 million shares that could be purchased at today’s prices under the new $500 million share repurchase program.

In five years, assuming all targets are met, profitability and leverage remain the same, and with a favorable EV/EBITDA multiple, Papa John’s could fetch a share price of $97.

Buying Papa John’s today at $71 per share potentially produces 6.44% per year not counting its dividend.

It is a positive return but not an above average return.

Attractive Prices

But based on this rough valuation and a desire for 20% returns, Papa John’s is very attractive around $40 and below.

If we’re willing to accept less returns, like 15%, than Papa John’s looks attractive around$50.

Again, this is just a back of the napkin estimate. It is prone to error, both undervaluing or overvaluing.

South Sea Bubble & Initial Coin Offerings Similarities

The craze surrounding cryptocurrencies and initial coin offerings is an echo of the South Sea Bubble that hit England in the early 1700s.

South Sea Bubble

The South Sea Bubble wasn’t just a bubble related to trade involving the South Seas, the waters off South America. It was also a joint stock bubble

The South Sea Company was a joint stock offering to fix the finances of England. Ultimately, it was a scheme. No trade would reasonably take place but the company’s stock kept rising on promotion and the hope of investors.

The joint stock of the South Sea Company rose so much and captivated the attention of so many, that “enterprising” individuals looked to raise money by launching their own stock offerings.

It was an unregulated market and all manner of initial stock offerings were being floated.

  • For the improvement of London and Westminster.
  • For settling the island of Blanco and Sal Tartagus.
  • For the importation of Flanders Lace.
  • For purchasing land to build on.
  • For trading in hair.
  • For breeding horses.
  • For a perpetual motion machine.

And much more. Some plausible and others absurd.

But no person was more “enterprising” in their stock offering than the following man. From Charles McKay’s classic Extraordinary Popular Delusions and the Madness of Crowds

But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one, started by an unknown adventurer, entitled “company for carrying on an undertaking of great advantage, but nobody to know what it is.”

Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.

The demand or joint stock offerings grew so large that people threw caution to the side. They did not want to miss out on the next big winning joint stock offering and they would pay almost any price.

Cryptocurrencies & ICOs

Fast forward to today and the buzz around Cryptocurrencies.

The two leading names are Bitcoin and Ethereum. Both cryptocurrencies have seen their trading values skyrocket within the past year. And the rise has attracted a lot of individuals looking to invest in the next great thing.

It has also attracted “enterprising” people looking to raise capital through an initial coin offering (ICO).

An ICO typically involves selling a new digital currency at a discount — or a “token” — as part of a way for a company to raise money. If that cryptocurrency succeeds and appreciates in value — often based on speculation, just as stocks do in the public market — the investor has made a profit.

Unlike in the stock market, though, the token does “not confer any ownership rights in the tech company, or entitle the owner to any sort of cash flows like dividends,” explained Arthur Hayes of BitMEX, one bitcoin exchange.

An initial coin offering is unregulated means to bypass the traditional way of raising capital for a new venture.

Afraid of missing out on the next big thing, people are willing to hand their money over no matter how thin the premise.


Dentacoin is the first Blockchain concept designed for the Global Dental Industry. The Dentacoin ERC20 token is configured to be used globally by all individuals.

Dentacoin aims at improving dental care worldwide and making it affordable through utilizing the Blockchain advantages. We believe that empowering patients to become an active part in the industry development process is the key to shaping the future of dental care.


The coin issuer is asking for $100 million to make coupons for marketing services with its parent company, Gravity4.

Stox Tokens

Stox.com needs $30 million for what are essentially casino chips to use in a prediction market


Hubii seeks $50 million so writers, musicians, and filmmakers can cut out Netflix, Spotify, and YouTube and somehow still get paid.

Paragon Coin

Paragon requires $100 million for a farm-to-pipe cannabis supply-chain tracking and payments system.

And many others. Some more absurd than others.

How Does It End

The South Sea Bubble ended when the English government enacted laws to stop the excessive offerings.

The unregulated markets became regulated.

Most likely the same thing will happen to cryptocurrencies and ICOs.

When the cryptocurrency markets and the “me too” initial coin offerings become too big to ignore, governments will look to regulate them.

China already banned cryptocurrency exchanges.

ICOs are essentially unlicensed security offerings. The SEC and U.S. regulators don’t like that.

When the bubble bursts I don’t think the fist movers and the established players like Bitcoin and Ethereum will go away. Blockchain technology should find its way into everyday life.

Will all these “me too” offerings continue to exist after the bubble bursts?


Avoid the FOMO

Instagram Ad to day trade bitcoin.

If the fear of missing out on the cryptocurrency craze strikes you and you’re bombarded with all sorts of “get rich quick” cryptocurrency schemes remember this.

If you think you want to invest in an ICO remember you’re giving your money to a stranger on the internet who might be using a fake name, who probably isn’t building what they say they will, whom you can’t sue for fraud and is probably stealing your money to buy a Porsche.