Monday, December 03, 2007

Selling The Brick

The Brick has always been a relatively small holding in my portfolio because I could not get over two main concerns. One was my inability to find any real competitive advantages. Brick had several competitors which were also publicly traded companies. All of them were earning extraordinary returns on investment, yet this was the retail business and I could not see anything to stop them from eventually cannibalizing each other's business.

My second concern was that a credit crisis would have a very large impact on its business. A very large proportion of Brick's sales are made on credit with relatively easy terms. If credit were to tighten, sales would probably be hit hard. This would really hurt the business because of their warranty business. Essentially, Brick's warranty business generates large amounts of cash flow for the company because premiums are paid upfront but claims aren't made until much later. That is great; but the company has chosen to treat this as basically free cash flow and they have paid this money out in their dividends. This process is fine as long as warranty sales are stable or growing, but if they were to decline the process would reverse and the company's free cash flow would be less than its earnings. And if overall sales decline, it is very likely that warranty sales will as well.

Today, the possibility of a credit crisis appears to be much more certain. And I have still to discover any competitive advantages. As such, it appears logical to exit this position now.

The results of the Brick investment depend on your perspective. Over the 8 month holding period and counting dividends, it made 3% in Canadian dollar terms. In US dollar terms however, it made 19.7% (conservatively using a .86 exchange rate for all the dividends). As a US investor, I would prefer to look at the latter, but I think it is only fair to include both. Either way, at only 4% of my portfolio, the position was destined to be fairly inconsequential. It served as a placeholder instead of cash in my portfolio, and in that respect it was successful.


Anonymous said...

Hi Nick, I think you make a good decision. So far there is no credit crisis in Canada, and no housing downturn at all. There were few excesses. On the credit side, Rentcash operates in the Brick and will likely buffer a downturn for a while.

However, right now the Brick is operating at the top of the economic cycle. From my perspective, there is nowhere to go in the medium term but down. Aside from the obvious competitors in Leons, and the PQ company, there is also Sears Canada which maintains a strong presence, the Bay, and thousands of independents. People are also getting real peeved about quality issues from the Brick and Leons, in particular, and once you get a bad reputation in that business you are finished. To give you an idea I wont shop at Leons ever again.

Al (uccmal)

Anonymous said...

Research is key in doing any investing, in saying that the latest news with Rentcash is that it actually spun off the rent to own(Insta-rent Inc.) to shareholders in Rentcash Inc.(The Cash Store Financial Inc.) So the shareholders who have a great deal of knowledge in the rent to own are running Insta-rent. At the end of the day I think you need to again research your investment opportunities and make the connection. The founder of Rentcash was founder of Rentown which is now called Easyhome...Rentown and Budget Rental Centres were competitors and then Rent a Center came in and bought Budget Rental Centres.