Marriott International Inc (MAR) Five Year Comparison

Something that we are looking for in a business is the ability for its earnings (really, its free cash flow available for distribution) to keep up with inflation. Over the past five years, the CPI is up 23% and the PPI is up 28%. Truflation has it as 26% since January 2020, and the price of a USPS first class stamp is up 23%. So we would like to see free cash flow per share and earnings per share meet or exceed this increase.

Earnings per share for Philip Morris were $1.54 in Q2 2024 versus $1.49 five years earlier (Q2 2019), a dreadful showing. In contrast, when we looked at Lamar Advertising in February, we compared Lamar's results for the year 2023 with those of 2018 and found that their shares outstanding grew 3% in five years, revenue grew 30%, and cash from operations grew 39%. So, Lamar's cash from operations per share went from $5.70 to $7.67, an increase of 35%. That was comfortably better than inflation. We also looked at Enterprise Products Partners (and compared it to Altria), finding that the partnership's free cash flow per unit had grown substantially (by 3.3x) from 2018 to 2023.

How about Marriott International (MAR)? One of our theories is that a "royalty-like" business (with high free cash flow margins) should easily outpace inflation. Let's look at free cash flow per share for the first half of 2024 vs 2019. Note that in our FCF calculation, we subtract the stock based compensation (SBC) that is customarily added back. (Marriott's SBC is not quite 1% of revenue, compared with 3% at Apple and 9% at Facebook.)

We find that Marriott generated $4.30 of free cash flow per share (again, excluding SBC) during the first half 2024 versus $1.43 during the first half of 2019. That's a 3x increase in five years. How did it happen?

We start by decomposing the change in FCF per share into: the change in shares * the change in revenue * the change in FCF margin. The company bought back 14.4% of its shares over the past five years, which increased the FCF per share ceteris paribus by a multiple of 1.17. Then, revenue increased 20% from $10.3 billion to $12.4 billion. And then, most importantly, the free cash flow margin increased from 4.6% of revenue to 9.8% of revenue, a 2.13x increase. (You can check: 1.17 * 1.2 * 2.13 = 3x.)

So more than 2/3 of the increase in FCF per share was from increased FCF margin. We do some initial calculations and find that capex remained at about 2% of revenue and stock compensation remained at about 1% of revenue; neither of those were the cause. Nor was there a meaningful change in working capital as a percentage of revenue.

However, we do see that cash expenses as a percentage of revenue dropped from 90% to 83%. That's what drove most of the increase in FCF per share. How did it happen?

For one thing, Marriott overhead went from $451 million the first half of 2019 to $509 million the first half of 2024 (+13%) while the number of rooms increased 23% and total revenue increased 20%. So part of the story here is operating leverage and growth. Overhead per room fell from $335 for the first half of 2019 to $307 the first half of 2024 (-8%). Not many companies are able to keep their SG&A costs below inflation. And the overhead per room falling means they are realizing economies of scale as they grow.

Something else that was a significant help was that in the first half of 2019, Marriott's cost reimbursements were less than its reimbursable expenses by $340 million, while the first half of 2024, the reimbursements have been $15 million ahead of the expenses. That difference of $355 million is 2.9% of revenue, which explains a significant chunk of the difference in FCF margin. 

There was a data security incident involving unauthorized access to the Starwood reservations database. Marriott recorded $124 (net) of expenses having to do with this incident, some (but not all) of which were recorded in reimbursed expenses.

Another help was in Marriott's owned/leased (as opposed to managed and franchised/licensed) properties, where profitability improved from $137 million to $170 million even as total revenue fell. Marriott went from having 63 properties and 17,101 rooms that were owned or leased (1.3% of rooms) to owning/leasing only 50 properties with 13,110 rooms (0.8% of rooms).

We would not expect Marriott to be able to increase free cash flow margin at the same rate that it did over the past five years. But we would expect the unit count to continue to grow, and for revenue to grow faster than inflation (because of unit growth), and for free cash flow to grow faster than revenue (because of operating leverage). 

Interestingly, there has been significant multiple contraction in Marriott shares over the past five years. When FCF/share was $1.43, shares traded for $127 (44x). Now they trade for 28x the first half of 2024's free cash flow. That's a multiple contraction of 36%.

Other Earnings Notes (Q1 2024)

[Previously regarding Lamar Advertising, Intercontinental Exchange, Marriott International, Royal Gold, and Sprouts Farmers Market.]

Lamar Advertising
The market capitalization of LAMR at $122 per share is $12.5 billion and the enterprise value is $16.8 billion. During the first quarter of 2024 (release), the company reported net income plus depreciation and amortization of $154 million, up 3% from $149 million a year earlier. The quarter's NI+D yield on the market capitalization annualizes to 4.9%. Revenue for the quarter was $498 million, which was up 5.7% from the prior year quarter.

Intercontinental Exchange
For the first quarter of 2024 (release), ICE earned $877 billion of adjusted free cash flow on $2.3 billion of total revenue (less transaction-based expenses) for a royalty-like 38% free cash flow margin. Revenue (less TBEs) was up 21% from the prior year and adjusted FCF was up 30%. (The diluted share count is up 2.5% y/y.) The current market capitalization of ICE is $79 billion and the enterprise value is around $100 billion, so at a 3.5% free cash flow yield on the enterprise value it is not super cheap. We like ICE's M&A goals: "deepen moats, gain intellectual property, increase customer wallet-share".

Marriott International
For the first quarter of 2024 (release), MAR earned $1.09 billion of adjusted EBITDA (less SBC) on $1.5 billion of total revenue (excluding cost reimbursements) for a royalty-like 71% margin. Revenue (excluding reimbursements) was up 5.2% from the prior year and adjusted EBITDA (less SBC) was up 2.6%. The current market capitalization of MAR is $67 billion and the enterprise value is around $80 billion. The adjusted EBITDA (less SBC) annualized yield on the enterprise value is 5.5%. The diluted share count was down 6.2% year-over-year. Despite being a $67 billion market capitalization company, Marriott spent only $109 million on capital expenditures in the first quarter. The company spent $1.1 billion on share repurchases and $151 million on dividends, for a shareholder yield of 7.7%.

Royal Gold
Reported results: Royal Gold's net income plus depreciation was $86 million for the first quarter of 2024 versus $110 million the prior year. The company spent $100 million on debt repayment and $26 million on dividends. Net liabilities are down to $55 million. The market capitalization is $8.45 million so the enterprise value is $8.5 billion. The NI+D yield on the market capitalization is 4.1% (annualized).

Sprouts Farmers Market
We wrote about Sprouts back in October 2023. At that point, the market capitalization was $4.3 billion and the enterprise value was $5.8 billion. Shares have been on a tear and the market capitalization is now $7.7 billion at $77 per share (+79% since we wrote about it.). 

The enterprise value is $7.7 billion if you ignore the non-current $1.4 billion of operating lease liability, since the landlords finance their stores and they have no net financial debt (see 10-Q). They generated $213 million of cash from operations less stock-based compensation in the first quarter, and spent $51 million on capital expenditures, for $162 million of FCF. (A 8.4% annualized yield on the EV, or 7.1% if you capitalize the store leases into EV.) They bought back $60 million of stock and built the cash balance by $110 million. (The cash build was because of restrictions on being able to buy back shares.) Share count is down 2.7% year over year. They earned $1.12 per share so P/E is 17x. Sprouts is a growth monster at a reasonable price. They opened 7 stores in Q1, bringing total to 414 in 23 states.

Earnings Notes (Q4 2023)

Freeport-McMoRan Inc. (FCX)
For Q4 2023, Freeport reported operating cash flow of $1.32 billion and capital expenditures of $1.36 billion, giving a free cash flow for the quarter of negative $42 million. Their quarterly copper production of 1.1 billion pounds was up 2% y/y, at an average realized price of $3.81 per pound. Their guidance for 2024 free cash flow is $1.2 billion (at $3.75 copper), which would be only a 2% yield on the current enterprise value of $57 billion.

FCX’s consolidated operating cash flows are estimated to approximate $5.8 billion (including $0.1 billion of working capital and other sources) for the year 2024, based on current sales volume and cost estimates, and assuming average prices of $3.75 per pound of copper, $2,000 per ounce of gold and $19.00 per pound of molybdenum. The impact of price changes on operating cash flows for the year 2024 would approximate $400 million for each $0.10 per pound change in the average price of copper, $180 million for each $100 per ounce change in the average price of gold and $120 million for each $2 per pound change in the average price of molybdenum.

Capital expenditures are expected to approximate $4.6 billion for the year 2024 (including $2.3 billion for major mining projects and $1.0 billion for the Indonesia smelter projects). Projected capital expenditures for major mining projects include $1.1 billion for planned projects primarily associated with underground mine development in the Grasberg minerals district and potential expansion projects in North America, and $1.2 billion for discretionary growth projects.

FCX’s financial policy is aligned with its strategic objectives of maintaining a strong balance sheet, providing cash returns to shareholders and advancing opportunities for future growth. The policy includes a base dividend and a performance-based payout framework, whereby up to 50% of available cash flows generated after planned capital spending and distributions to noncontrolling interests would be allocated to shareholder returns and the balance to debt reduction and investments in value enhancing growth projects, subject to FCX maintaining its net debt at a level not to exceed the net debt target of $3.0 billion to $4.0 billion (excluding net project debt for the Indonesia smelter projects).

They are quite leveraged to the copper price as you can see: $400 million additional operating cash flow for each ten cent increment in copper price. Yet even $4.75 copper would only give an additional $4 billion of operating cash flow which would be kind of lackluster on the $58 billion EV. They are crazy to be spending money on growth! They should demand contracts in hand for $6/lb before they spend a penny more on capex.

Barrick Gold Corp (GOLD)
For Q4 2023, Barrick reported cash from operations of $1 billion and capital expenditures of $861 million, giving a free cash flow for the quarter of only $136 million on an enterprise value of $25 billion. Gold production was up 1% y/y in Q4. Their cash cost was $982 per oz and their "all-in sustaining cost" was $1,364/oz. 

Like other commodity producers and miners, they are plowing it into capex: They produced 4.05 million ounces of gold in 2023, down from 4.1 million in 2022 and closer to 5 million in 2020. Cash cost has risen from $700/oz in 2020 to $960/oz last year. Operating cash flow for 2020-2023 (four years) totaled $17 billion but they spent $11 billion on capex. So only $6 billion of cumulative free cash flow ($1.5 billion per year) and production is in decline!

Remember that to recover an ounce of gold they have to process 28 tons of ore, and for every ton of ore, they have to also move 6 tons of waste.

Comstock Resources Inc (CRK)
Comstock produces almost 100% natural gas and sells it for the pittance of $2.50/mcf. They reported negative free cash flow for Q4 and FY 2023 yet they grew production 6% y/y. Although they may get some religion about lighting cash on fire now that natural gas is even lower:

"In response to weak natural gas prices, Comstock plans to suspend its quarterly dividend until natural gas prices improve. In addition, the Company plans to reduce the number of operating drilling rigs it is running from seven to five. Two of the five drilling rigs will continue to be deployed in the Company's Western Haynesville play. As a result, Comstock plans to spend approximately $750 million to $850 million in 2024 on its development and exploration projects to drill 46 (35.9 net) operated horizontal wells and to turn 44 (38.2 net) operated wells to sales in 2024. Comstock expects to spend $125 million to $150 million on its Western Haynesville midstream system, which will be funded by its midstream partnership."

Comstock has $3.4 billion of net liabilities and a $2 billion market cap. It is conceivable that the equity here goes to zero.

PrairieSky Royalty Ltd. (PREKF)
PSK reported revenue for 2023 of $380 million, generated $283 million of funds from operations (74% margin). They spend 13% of revenue on income tax, 9% on G&A expense, 3.4% on finance expense (interest), and about 1% each on production taxes and on exploration and evaluation. The $283 million of funds from operations is a 7% shareholder yield on the $4 billion market capitalization. (Based on Q4 would be an 8% yield.)

Horizon Kinetics wrote about PSK in the annual letter for their Inflation Beneficiaries (INFL) ETF:

"With today’s temporarily depressed energy prices, PrairieSky should be able to generate C$1.50 in FFO/share, which equates to a 7.5% yield. This could be viewed as a “base case” minimum return—assuming no improvement in energy prices, production volumes, or Canadian price differentials. Assuming modest improvement here, namely with pricing and volumes, it is reasonable to expect more than C$2.00/share of FFO, or a 10% yield. If prices rebound more fully, and volume grows even moderately, FFO could exceed C$2.50 share, nearly a 12% yield."

One big hope for PSK would be more export of natural gas from Canada. Their share of natural gas production for the quarter was 5.4 million Mcf of gas which was sold for only $2.19 per Mcf.

Intercontinental Exchange Inc. (ICE)
For the full-year 2023, ICE earned $3.05 billion of free cash flow on $8 billion of total revenue (less transaction-based expenses) for a royalty-like 38% free cash flow margin. The current market capitalization is $78 billion the enterprise value is around $100 billion, so at a 3% free cash flow yield, it is not cheap. Something else to note was FCF was flat from 2022 to 2023. Their M&A goals: "deepen moats, gain intellectual property, increase customer wallet-share".

Peabody Energy Corp (BTU)
The market capitalization of Peabody is now $3.35 billion versus $3.3 billion when we wrote about them last quarter. (It was $4 billion when we wrote about them in August 2022.) Total liabilities less current assets are now $335 million, so we would put the enterprise value at $3.7 billion now. For the fourth quarter of 2023, Peabody's adjusted EBITDA was $345 million, up from $270 million in the third quarter. Adjusted EBITDA for the full year 2023 was $1.4 billion which is about equal to the Q4 annualized figure. That puts the EV/EBITDA at 2.7x. Operating cash flow for the quarter was $282 million and $1,036 million for the year. Capital expenditures were $158 million for the quarter and $348 million for the year. So the free cash flow yield on enterprise value is 13% based on the most recent quarter or 19% for the full year.

Thoughts from Coal Trader: "If executed successfully, the Centurion and Shoal Creek organic investments should deliver extremely high IRR's and return significant free cash flow to Peabody in the coming years. Peabody’s team also found a way to further enhance the Centurion investment by acquiring the adjacent Wards Well deposit. These investments will pivot the company more towards the met market where the long term fundamentals are far more favorable compared to thermal. The long term prospects of the company have significantly improved with Centurion being the flagship of their portfolio in the years ahead. The average realizations of the met segment will improve significantly with the addition of Shoal Creek and eventually Centurion. This is probably something that will be overlooked by many analysts, but I believe the 'relativities' in the metallurgical coal market are something the sector if going to have to contend with for far longer than most believe. That is to say, the price spreads between high-quality coking coals relative to lower-quality coking coals may be here to stay..."

Seems cheap and everything, but would rather own coal royalties at current valuations.

Natural Resource Partners, L.P. (NRP)
No year-end results yet, but NRP put out an 8-K in January about a warrant settlement:

On January 29, 2024 (the "exercise date"), holders of Natural Resource Partners L.P.'s (the "Partnership's") warrants to purchase common units ("warrants") exercised 462,165 warrants with a strike price of $34.00. On January 31, 2024, the Partnership settled the warrants on a net basis with $10 million in cash and 198,767 common units. The 15-day VWAP ending on the business day prior to the exercise date was $97.62. Of the originally issued 4.0 million warrants, 1.08 million warrants with an exercise price of $34.00 remain outstanding.

As of the September 30, 2023 quarterly results, NRP had 2,190,000 warrants outstanding. An October purchase (8-K) brought them down to 1.54 million warrants. We had been wondering what they did with their Q4 cash - we won't know for sure for another few weeks until they report earnings, although they did aggressively tackle the warrants. Wonder if they were redeeming the preferred (12% liability) during the fourth quarter?

Exxon Mobil Corp (XOM)
XOM reported cash from operations of $13.7 billion and free cash flow of $8 billion (58% of CFO) for the fourth quarter of 2023. The market capitalization is $400 billion and the enterprise value is $420 billion so the free cash flow yield is 7.6% at current oil (and LNG) price. For the full year of 2023, shareholder distributions were $32.4 billion ($14.9 billion of dividends, and $17.4 billion of share repurchases) which is a 8% shareholder yield.

Imperial Oil Ltd (IMO)
We mentioned IMO last week. Production in the fourth quarter was up 8.5% versus the prior year, while capex for the quarter was down 34% versus the prior year. (See results. Full year capex was down 2% from 2022.) Free cash flow for the quarter was $667 million, which is about an 8.6% yield on the enterprise value. Imperial is a share cannibal. During 2023, they shrank the share count by 8.3%. 

Enbridge Inc (ENB)
Enbridge shares have been really weak, under-performing Enterprise Products, for example. (Also compare with EPD, NTG, and FEI over the past three years.) It's a $70 billion market capitalization company yielding 7.9% (dividend) which is quite high compared to what it has yielded historically. And it is a C-corp so you don't even get the annoying Schedule K-1 that you do from other midstream companies. From the Q4 call:

2023 showcased the predictability of our business amid continued geopolitical instability, persistent inflation and rising interest rates. This is as a result of the 98% of Enbridge's earnings being generated from either cost of service or take-or-pay contract assets. Our debt portfolio is less than 10% exposed to floating rate volatility. Our customer base is over 95% investment grade, and 80% of our EBITDA is earned from assets with protection against inflation. We are rated BBB+ by all rating agencies and remain committed to our long-held leverage target of 4.5x to 5x.

Half of the EBITDA is from their liquids pipelines. They've got the Mainline pipeline from the western Canada oil sands and then the Line 5 that takes it to eastern Canada refiners. The Flanagan South and Seaway can also take that Mainline oil from Canada down to Gulf Coast refiners. ("We transport about 30% of the crude oil produced in North America. We transport about 65% of U.S.-bound Canadian exports.")

A quarter of their EBITDA is gas transmission. They carry from western Canada to export, also to eastern U.S. Connects PA gas to eastern U.S. as well as Gulf Coast. ("Enbridge moves about 20% of the natural gas consumed in the United States. We are the largest natural gas supplier to New England, the Southeast and virtually all of Florida. Our transmission network is also webbed throughout the Gulf Coast. We are also one of the largest offshore natural gas transporters in the Gulf of Mexico.") They are working on LNG export from western Canada, called the Woodfibre LNG project.

Other quarter is gas distribution (utility). ("Enbridge’s gas utility business, Enbridge Gas Inc., becomes the largest by volume in North America—with about 7,000 employees delivering 9.3 billion cubic feet of natural gas per day (Bcf/d) to about 7 million customers.")

Allison Transmission Holdings Inc (ALSN)
We keep noticing ALSN on the daily all-time highs list. Per their website, Allison is the world’s largest manufacturer of fully automatic transmissions and hybrid propulsion systems for commercial-duty vehicles. 

On fourth quarter sales of $775 million, they did $170 million of net income and $186 million of adjusted free cash flow (24% free cash flow margin). On full year sales of $3 billion, they did $659 million of adjusted free cash flow (22% FCF margin). Revenue for the year was up 10% for 2022 and adjusted free cash flow was up 37%. They repurchasing $260 million of shares during 2023 (6 percent of outstanding). The market capitalization is $6.25 billion and the enterprise value is $8 billion, so the FCF yield is 8%.

Penske Automotive Group, Inc. (PAG)
Highlight from fourth quarter results:

For the three months ended December 31, 2023, total new and used units delivered increased 8% to nearly 117,400, and total retail automotive revenue increased 5% to $6.2 billion. Same-store new and used units delivered increased 9% to nearly 116,700, and same-store revenue increased 4%, including a 7% increase in service and parts revenue. Total retail automotive gross profit decreased 1% to $1.0 billion, including a 1% decrease on a same-store basis. Same-store service and parts gross profit increased 7%.

Revenue for the fourth quarter was $7.3 billion, gross profit was $1.2 billion, EBITDA was $357 million, and capital expenditures were $103 million. The current market capitalization is $10 billion. Net income was $190 million for the quarter and $1 billion for the full year.

AutoNation Inc (AN)
Highlight from fourth quarter results:

New Vehicle Gross Profit - Decreased $102 million reflecting gross profit per vehicle retailed of $3,653, compared to $5,633 a year ago, partially offset by an 8% increase in unit sales. Used Vehicle Gross Profit - Decreased $27 million reflecting gross profit per vehicle retailed of $1,455, compared to $1,847 a year ago and a 4% decrease in unit sales. After-Sales Gross Profit - $540 million, an increase of $61 million or 13% from a year ago.

Revenue for the fourth quarter was $6.8 billion, gross profit was $1.2 billion, and net income was $216 million. During the quarter, AutoNation repurchased 1.15 million shares of common stock (3% of shares outstanding at start of quarter) for an aggregate purchase price of $151 million. The current market capitalization is $6 billion. Net income was $1 billion for the full year.

Enterprise Products Partners LP (EPD)
Highlights from fourth quarter results:

Enterprise reported net income attributable to common unitholders of $5.5 billion, or $2.52 per common unit on a fully diluted basis, for 2023 compared to $5.5 billion, or $2.50 per common unit on a fully diluted basis, for 2022. Operational DCF was $7.5 billion for 2023 compared to $7.6 billion for 2022. DCF provided 1.7 times coverage of the distributions declared with respect to 2023. Enterprise retained $3.2 billion of DCF in 2023 to reinvest in the partnership, repurchase partnership common units, and reduce debt. Distributions declared with regard to 2023 increased 5.3 percent compared to those declared for 2022 and marked Enterprise’s 25^th consecutive year of distribution growth.

Steady as she goes. The real question will be, do the growth investments pay off? If so, earnings will rise and capex will go down, resulting in a lot more cash for distributions. (As we pointed out in October, the free cash flow per unit of Enterprise has grown substantially (3.3x) over the past five years.)

Altria, Inc (MO)
Highlight from fourth quarter results:

Smokeable products segment reported domestic cigarette shipment volume decreased 7.6%, primarily driven by the industry’s decline rate (impacted by macroeconomic pressures on ATC disposable income and the growth of illicit e-vapor products) and retail share losses, partially offset by trade inventory movements. When adjusted for trade inventory movements, smokeable products segment domestic cigarette shipment volume decreased by an estimated 9%.

Cigarettes volumes down 9%. Cigarette revenues down 2.4% y/y net of excise tax. They are not able to raise price of pack enough to maintain flat revenue. Operating income from cigarettes down 1.3% y/y.

Chipotle (CMG)
Highlights from fourth quarter results:

Total revenue increased 15.4% to $2.5 billion. Comparable restaurant sales increased 8.4%. Operating margin was 14.4%, an increase from 13.6%. Restaurant level operating margin was 25.4%, an increase of 140 basis points.

Market capitalization is $70 billion, they earned $282 million in Q4 on sales of $2.5 billion. Sixty times earnings is steep! Net income for fourth quarter was up 11% year-over-year.

Marathon Petroleum (MPC)
This Marathon is the refiner, not the E&P company (MRO). They refine almost 3 million barrels per day, which is the most in the U.S., followed by Valero (VLO) and ExxonMobil, each with about 2 million barrels per day. Highlight from fourth quarter results:

“In 2023, the business generated $14.1 billion of net cash from operations, driven by strong operational performance and commercial execution,” said Chief Executive Officer Michael J. Hennigan. “This enabled the return of $12.8 billion of capital to shareholders. We believe MPC is positioned to generate strong through-cycle cash flow with the ability to deliver superior returns to our shareholders.”

That's on a market capitalization of $63 billion. 

Marriott International, Inc. (MAR)
We wrote about Marriott in November as a royalty-like business. Highlights from Q4 results:

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) totaled $1,197 million in the 2023 fourth quarter, a 10 percent increase compared to fourth quarter 2022 adjusted EBITDA of $1,090 million. The company repurchased 4.7 million shares of common stock in the 2023 fourth quarter for $965 million. For full year 2023, Marriott repurchased 21.5 million shares for $3.9 billion. 

In 2024, we expect another year of solid growth and significant shareholder returns. With normalizing RevPAR growth around the world, we anticipate a worldwide full year RevPAR increase of 3 to 5 percent and net rooms growth of 5.5 to 6 percent. We expect this should yield adjusted EBITDA of approximately $4.9 billion to $5.0 billion for the year and enable us to return $4.1 billion to $4.3 billion to shareholders after factoring in $500 million to purchase the Sheraton Grand Chicago.

That would be quite a nice shareholder return on the current market capitalization of $69 billion.

Warrior Met Coal Inc. (HCC)
The market capitalization of Warrior is now $3.2 billion. Their current assets net of all liabilities (ignoring deferred income taxes) are $660 million, so the enterprise value is $2.5 billion. For the fourth quarter of 2023 (release), Warrior's adjusted EBITDA was $164 million, up from $148 million the prior year. For the full year (2023), adjusted EBITDA was $700 million, down from $1 billion in 2022. That puts the EV/EBITDA at 3.8x using the fourth quarter (annualized) or 3.6x using the entire year.

They sold 1.53 million tons versus 1.45 million the prior year. The average price was $234/t and the average cash cost was $121/t. Cash from operations was $245 million for the quarter and they spent $182 million on capital expenditures. 

For the full year 2023, $700 million of cash from operations, but they spent $525 million on capex. No share repurchases, even though the stock was trading for 1.2x EBITDA earlier last year.

The price per ton of met coal averaged $219 in 2023 vs $304 in 2022. It seems insane to invest so much (~$1 billion for the new Blue Creek mine) in producing more of a commodity that does not have a firm price. There are some good pictures of it in the new investor presentation though.

Coal Trader tweeted: "It seems like they’re really struggling to move this coal. Maybe the transition to more HVA is hurting more than I figured, or maybe the spreads in the Atlantic basin are making it more difficult than I assumed. Prices in Q4 were terrible, and inventories increased A LOT."

That's so brutal. There really shouldn't be any question of being able to move the product if you are expanding production.

Occidental Petroleum Corporation (OXY)
From Q4 results, Occidental's oil volume (total U.S.) was down 2.2% in the fourth quarter (year/year). Their total U.S. production in BOEs though was up 1.3%. In the Permian specifically, oil was flat and natural gas was up 14%. The wells are getting gassier!

Total oil and gas capex in the second half of the year was up 4.5% versus the second half of 2022, but in the Permian was actually down 20%. (They really slashed Permian capex in Q4... in Q3 it was up 8% y/y so maybe we'll see volumes fall off more in Q1 2024.)

Their operating cash flow in Q4 was $2.5 billion with capex of $1.4 billion, giving free cash flow of only $1.1 billion. Market cap is $50 billion and the enterprise value is $80 billion. So EV/FCF is only 5.5%.

Truly no idea what Buffett sees here. 

 

Royal Gold Inc. (RGLD)
Reported results: cash from operations was $101 million for Q4 2023 and $416 million for the full year 2023, virtually the same as Q4 2022 and the FY 2022. There were no capital expenditures in Q4 and only $2.7 million for the full year. They spent $325 million on debt repayment and $100 million on dividends. So the shareholder yield is 5.8% on the $7 billion market capitalization. (Net debt is down to $151 million.)

Kraft Heinz Company (KHC)
Noticing from Q4 results that Kraft's North American volumes were down 5.5% despite 2.5% price increase, resulting in fourth quarter sales down 3%. (They're calling this "headwinds that were driven by ongoing consumer pressure".)

 

The market capitalization is $42 billion and the enterprise value $63 billion. Cash from operations for the full year was $4 billion; surprisingly they actually have $1 billion of capital expenditures, so free cash flow is only $3 billion. They spent $191 million on debt repayment, $2 billion on dividends, and $455 million on share repurchases.

Free Cash Flow Conversion & Marriott International Inc (MAR)

As part of our search for "royalty-like" businesses that are good at converting revenue to free cash flow that can be distributed to shareholders (like Lamar Advertising), we recently did a screen of the companies in the S&P 500 index.

Now while our royalty partnerships and trusts convert 90-100% of revenue to free cash flow, we are interested in finding other businesses that are royalty-like (accepting lower margins than true royalties) for two reasons. First, to diversify away from commodity price exposure and volatility. (Nobody said it is easy being an oil man.) Second, because mineral properties are depleting while some types of royalty-like or "tollboth" businesses can exist almost in perpetuity. As long as there is human activity and commerce, there is the possibility that Visa will be getting a cut of it, whether the energy for it is coming from fossil fuels or from the sun.

Speaking of Visa, in doing this screen we excluded the financials sector, so it does not include Visa (V), even though that company's cash from operations of $21 billion over the past twelve months (ending Sept 2023) was an astounding 64% of its total revenue of $33 billion. Visa has a market cap of $500 billion and returned $18 billion of capital to investors over the past twelve months (mostly via share repurchases). But if we could live off of a 3.6% shareholder yield, we wouldn't need this blog.

Which S&P 500 companies have royalty-like businesses at more attractive valuations? Historically, big tobacco companies were the epitome of this: very high gross margin businesses employing not much capital. Altria's free cash flow is north of 40% of its revenue. Unfortunately, they are being crushed by serious competition for the first time in a century and investors are only beginning to wake up.

Another example of high gross margins and low capital expenditures is the pharmaceutical industry. The Abbott Labs spinoff AbbVie (ABBV) has the third highest free cash flow margin (43%) in the S&P 500, and a healthy 9% free cash flow yield on the enterprise value to boot. But their primary product is Humira (adalimumab) injections (comprising almost 40% of their total business) which are approved to treat autoimmune diseases such as rheumatoid arthritis, Crohn's disease, plaque psoriasis, and ulcerative colitis. The patent on Humira expired in 2016 and now (finally) at least eight biosimilar drugs are going to hit the market. Some think that other AbbVie products will be able to compensate, but for us it goes in the "too hard" pile.

A "tech" company is at the very top of the entire S&P 500 index: Verisign (VRSN). It bought Network Solutions in 2000 and it operates two of the 13 global internet root servers and provides authoritative resolution for the .com and .net top-level domains. This is Verisign's primary business, and there were 174 million of those registrations at the end of 2022, which was a 5% increase over the prior year. Verisign has an agreement with the Internet Corporation for Assigned Names and Numbers (“ICANN”) that allows them to raise their wholesale price of .com domain name registrations by 7% per annum. The gross margin on this business is 86%.

Verisign's total revenue of $1.4 billion in 2022 translated to $831 million of cash from operations in 2022 (10-K). There was only $27 million of capital expenditure for the entire year, so the company bought back $1 billion of its own shares. There is no technology in this "tech business" - certainly nothing compared to deep sea oil exploration. Verisign has a cozy monopoly running a simple database. Their free cash flow for the year was $804 million, which was 57% of revenue. A great business, but the enterprise value of $21 billion means the free cash flow yield is only a 3.8% yield since everyone knows it's a great business.

We see two birds of a feather near the top of the screen: Hilton Worldwide Holdings (HLT) and Marriott International (MAR). That might be puzzling. How can the labor intensive hotel business be as high margin as charging people $10 to add their domain name and IP address to a database? The answer is that these companies pivoted their businesses. The hotel properties are owned by third parties such as hotel REITs. See how Marriott describes its business:

Terms of our management agreements vary, but we earn a management fee that is typically composed of a base management fee, which is a percentage of the revenues of the hotel, and an incentive management fee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs of operations (both direct and indirect). Such agreements are generally for initial periods of 20 to 30 years, with options for us to renew for up to 10 or more additional years.

This is an "asset-light" business model:

Marriott led the way in 1993 by spinning off its real estate into an investment trust (Host Marriott). Not only did this free Marriott from the burden of debt during the industry downturn of the late 1980s, but it spurred the company’s aggressive growth into the largest lodging business in the world, from 500 properties to around 7,000.

Other hotel groups followed, notably IHG, whose sale of the landmark InterContinental Hong Kong in 2015 completed the disposal of its major owned assets and thus the release of almost $8bn in gross proceeds from around 200 hotels since 2003 and the return of over $10bn to shareholders.

More recently, in early 2017 Hilton focused its model on its capital-efficient fee business by completing spin-offs of a portfolio of hotels and its timeshare business into two independent, publicly traded companies: Park Hotels & Resorts and Hilton Grand Vacations.

If you don't need a lot of capital to run a business, or if you do (hotels) but you get other people to make the capital investments yet still benefit from them, you can have very high free cash flow conversion.

In 2022, Marriott had $5.6 billion of net revenue (excluding $15 billion of cost reimbursement), earned $2.4 billion of net income, and generated about $2 billion of cash from operations net of stock-based compensation. So that's 36% conversion of net revenue to operating cash flow. Almost as high as selling cigarettes. Marriott had only $330 million of capital expenditures, so they paid $321 million of dividends and bought back $2.6 billion of stock. That gives a shareholder yield of 5.1% based on 2022 shareholder returns and the current market capitalization of $57 billion. 

Looking at this quarter's results:

• With the operating leverage inherent in our business, adjusted EBITDA rose 16% to $1.14 billion. After another quarter of meaningful share buybacks, diluted adjusted EPS grew 25% year-over-year to $2.11.
• Our powerful asset-light business model continues to generate a large amount of cash. And our capital allocation philosophy has not changed. We're committed to our investment-grade rating, investing in growth that is accretive to shareholder value, while returning excess capital to shareholders through a combination of a modest cash dividend and share repurchases. In the first nine months of this year, we returned $3.4 billion to shareholders. Over the last seven years, which included two years of no share repurchases as a result of COVID, we have reduced our outstanding share count by 23%.
• Over the next few years, our net rooms growth is anticipated to be squarely in the mid-single digit range. During the quarter our pipeline reached a new record high of nearly 557,000 rooms, a record even excluding the MGM rooms. Strong interest in conversions continues, including multi-unit opportunities.

For Q3 2023, Marriott's net fee revenues were $1.17 billion, up 13% year-over-year. Cash from operations was $881 million and free cash flow was $757 million (65% of revenue). During the quarter they repurchased $942 million of stock and paid $154 million in dividends.

Something to emphasize about the model: the number of rooms in the Marriott system keeps growing without Marriott shareholders needing to pay for them. In the third quarter, their room count was up 5% year-over-year. Their ecosystem has 1.5 million rooms (around a quarter of the worldwide total), but since third parties own and pay for 99% of them, cash is available for distribution to shareholders.

The business is royalty-like, because other investors are building the hotels and Marriott is getting percentages of revenue (and profits) to manage them. That is what allows Marriott to be in the top 2% of free cash flow margin in the S&P 500.