Speedwell Research's News Update and Weekly Recap
Confidence Trade-off, APi Global Parallels to Constellation Software, The Founder's Surplus, Horizontal vs Vertical Inventory, RH Update
Welcome to Speedwell Research’s Newsletter. We write about business and investing. Our paid research product can be found at SpeedwellResearch.com. You can learn more about us here.
This is a weekly recap, where we summarize recent content you may have missed.
Table of Contents:
Speedwell Releases & Upcoming
Spotlight
Coverage Updates
Sharing Links
1. Speedwell Releases & Upcoming.
Research.
This week, we released our 4Q24 business update on RH.
This is a key time for RH as their business isn’t just undergoing a lot of transformation, but they are facing potentially extreme supply chain pressure from tariffs.
The Synopsis Podcast.
This week, we released a dialogue mailbag episode answering your questions! We also discuss RH, API Global, Constellation Software, NVR, Dream Finders Homes, Axon, Copart, and Drew’s recent interview with Compounding Quality.
Upcoming.
Podcast
We have a Dialogue business update podcast on RH and we also want to do a special second one on explaining the potential impacts of tariff’s in the economy.
Research
Our next research report will be on AppFolio! This is a vertical market software company that caters to real estate property owners.
Coverage
There are no conferences or earnings for our companies next week.
Become a Speedwell Member today to get access to all of our research updates and our in-depth research reports!
2. Spotlight.
Below are select quotes from our various writings and podcast.
Viral Tweet: RH CEO Live Reacting to Stock Down -25%
Dialogue: Mailbag: Macro Matters?, Comparing Roll-Ups, Making Decisions, When Buy the Second Best?
Confidence Trade-off: “There’s just so many different kind of ways you can look at this [macro] which is why at Speedwell we tend to not because you are basically trading off things that you can know with a lot of confidence which is you know the business having a product that creates value that consumers love, for something that’s very hard to have any confidence in, which is, what are tariffs going to be? What are interest rates going to be? And how is that going to impact the economy?”
APG Parallels to CSU: “They also have a little bit of a Constellation Software like apsect to them [APG] where if you’re selling your business and you care about the home it actually ends up in, you’re not going to want to sell it to someone in PE who is going to not care about who’s running it, who’s going to fire people, who’s going to also trade owners five years from now.”
Differences Between NVR & DFH: “One of the bigger differences between NVR and DFH is NVR is more vertically integrated… whereas DFH is very spread out been a lot more acqusitive, very open to acquiring a new market and kind of letting an independent leader just that market as their own and really just try to build as many homes as possible and sell them.”
Competitive Advantages Shine in Down Markets: “So as long as you don’t actually have an issue selling what you’re building, then competitive advantages don’t actually matter as much… but then when the economy contracted, demand softened, and then all of a sudden you saw much more importance in the kind of competitive advantages that one business had versus the othther. And all of that kind of becomes much more of a stark comparison.”
Go for Quality: “You usually want to go with a quality company just because we tend to underestimate the extent to which a bad company tends to surprise to the downside, and a good company tends to surprise to the upside.”
Circle of Competence: “I don’t think the circle of competence has actually anything to do with your understanding of the business per say. I think it has to do with the kind of confidence you could have in the assumptions you need to name as an investor in order to get an adequate return.”
The Importance of Culture: “It’s one of those things that is incredibly important and incredibly hard to actually know… That’s not something that really shows up in the earnings transcripts so it tends to show up in the value it creates, but it is downstream.”
The Founder Surplus: “Once a founder leaves, you’re kind of relying a little bit on the historical surplus that has been built up.”
RH 4Q24 Business Update
Exciting Times: “I’m in my car and Jack [CFO] told me what’s happened [about the tariffs], and I just started laughing. I thought, okay, this is when we thrive. We’re at our best in times like this. And so it’s exciting times, yes you still have to compete. The playing field is the playing field… So I’m not too worried about any of that. I’m more excited to get off this phone and get to work. It’s exciting times.” - CEO, Gary Friedman on the 4Q Call
Risk Factors: “We see three main risk factors: 1) depressed business activity driven by soft existing home sales, 2) illiquidity risks given their debt maturity in 2028, and 3) tariffs increasing costs and potentially precipitating a global economic slowdown and thus exacerbating the potential for a liquidity issue.”
Consumer Preference: “As a seller of nonessential, infrequently purchased, large ticket discretionary items, they are very susceptible to consumers differing purchases. In addition to the adverse economic impact the tariffs could cause, it could also foment weakness in the stock market, which can further dampen consumer confidence and thus their appetite for furniture.”
Under Pressure: “I mean, you figure out how to be more efficient, you figure out how to work better. As humans— I’d like to say humans without deadlines are useless, right? We’re no good without deadlines. We’re not good without pressure.” - CEO, Gary Friedman on the 4Q Call
Horizontal Inventory vs Vertical Inventory: “Horizontal inventory is the breadth of inventory a retailer carries, whereas vertical is amount of stock of a given item. New collections essentially mean that the amount of horizontal inventory grows, but not vertical. This is an important distinction to make because analyst will often look at building inventory as a sign of pending sales slowdown. But that would only be pertinent if it was vertical inventory, which is not the case with their recent inventory build. As they rationalize their inventory, they will unlock more working capital that can help pay down debt.”
Read the RH 4Q24 Business Update here
3. Coverage Updates.
RH
RH reported 4Q24 Earnings on Tuesday, and the stock dropped -40%.
4Q net revenues were +10% y/y.
Total 2024 annual revenues came in at $3.2bn or +5% y/y.
Operating income was $70mn with operating margins at 8.7%.
Management has guided for 10-13% revenue growth in 2025.
Plans to open 7 Design Galleries, 2 Outdoor Galleries, and 2 “New Concept Galleries” this year.
Read the full RH 4Q24 business update here
After earnings, RH released a press release announcing new guidance
Guiding FCF to $250-350mn now.
Disclosed demand QTD is +17% y/y.
They clarified that this metric is essentially the gross order value before returns.
Noted negotiations are in progress on eliminating the Vietnam Tariff. For context, Vietnam is their largest supplier.
4. Sharing Links.
Check out Speedwell Research’s Drew Cohen’s YouTube Channel. It is focused on general investing and business content. Videos are released twice weekly. Feel free to drop questions you want answered on any video!
The Individual Investor’s Advantage
“As an individual investor, you do not have to explain your decisions to anyone and that is such a big advantage.”
Beginner’s Guid to Picking Stocks
From picking what stock to look at to rudimentary analysis, we cover it all.
Other Links.
A Letter a Day: Shelby Bonnie on Why Passion Trumps Payment (link)
Michael Mauboussin on How Dispersion Creates Opportunities (link)
Leandro (Best Anchor Stocks): Unpacking the Drivers of Value Creation (link)
Mohnish Pabrai: When Mr. Market Gets Depressed, Back Up the Truck (link)
Howard Marks: The Winds of Change (link)
A Letter a Day: Conversation between Todd Combs, Michael Mauboussin, and Tan Santos (link)
And a special thank you to Matthew Harbaugh for helping put this weekly recap together!
The Synopsis Podcast.
Follow our Podcast below. We have four episode formats: “company” episodes that breakdown in-depth each business we write a report on, “dialogue” episodes that cover various business and investing topics, “article” episodes where we read our weekly memos, and “interviews”.
Speedwell Research Reports.
Become a Speedwell Research Member to receive all of our in-depth research reports, shorter exploratory reports, updates, and Members Plus also receive Excels.
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Thanks for the updates. Your content and its quality are off the charts currently!