April 4, 2017

Good Morning Everyone,

Usually I discuss companies that I would recommend for your portfolio, but today I want to discuss one that didn’t quite make the cut.

Savaria (TSE:SIS) provides mobility and accessibility solutions in the form of elevators, stair lifts, vehicle conversions, and others. The company is quite small, but they just acquired Shoppers Drug Mart’s automotive division, which has led to quite a bit of investor excitement. To get a better idea of what they do, check out this nice video they made:

I’ve known about this company for more than a year now, but for some reason I’ve always been skeptical of it. I know seniors are always going to be around, but I just didn’t fully understand the need for Savaria’s products. I also had doubts regarding competitive advantage and reliance on R&D to maintain it. So, I asked my mentor, and he actually owns them, but he gave some good points on why there are better solutions and better investments:

SIS is a favorite – management owning ~ 36%, growth looks good, div keeps increasing, good acquisitions and strong balance sheet. The only offset really is valuation. It is pricey, but the premium is justified.

Although little news is not a good thing, SIS like most acquirers need to be given time to execute their business plans…SIS is solid and does good things for seniors. Yes, it looks like first 9 mths of 2016 they spent $668K on R&D, which was more than 50% higher than the year before. But it is not a big amount on $88M in revenue.

There is some loyalty in the business and word of mouth is a very important factor (think seniors discussing at a coffee shop). Branding is important, and the Shoppers acquisition was important here. Reliability is also key, especially for the mobile market, because returns/problems will quickly eat up margins. Yes, the market for elevator and mobile assistance for seniors is there and is still highly fragmented.  Consolidation will help the company reduce costs and improve buying power on things like advertising/marketing.

I would not say SIS has a giant competitive advantage, other than its ability to serve customers well, but as it grows it will have a size advantage over smaller competitors. In addition, having a public listing lowers its cost of capital and helps facilitate private company takeovers.

But one just has to wonder … do seniors really want to stay at their 30 year old house by getting lifts and elevators and robotize their homes while worrying to maintain house costs, pay high taxes, snow shovelling, lawn mowing, water bills, and roll their green and brown garbage bins back and forth…notice how many senior assisted homes there are now.

Now I’m not saying that there aren’t SIS products in there, but nurses, caretakers, and as simple as wheelchairs, and shuttle buses are still the most preferred and convenient (i.e. sure the shuttle van may have SIS products but think how long it would take to lift or de-lift 30 seniors after dinner down a building stairs vs. just going down a ramp with a wheelchair).

And how often does one have to update the products? Unless the machine is so electronically software dependent and needing update constantly, would a senior even know how to use it? Not every senior can work a smartphone! Plus how much power does it take? Can they pay off this energy bill over time?

Think when was the last time you updated your stapler or hole puncher? It’s not like a senior assisted building is going to have huge OTIS elevators like in shopping malls too. So it is understandable that SIS needs to acquire further companies and to keep future contracts going.

Again, it’s the brand name as more baby boomers age and its ability to serve customers well that counts. Other than that, it is a good company quantitatively although it bit high in valuations…In our club we are planning this 2017 year to build huge positions in the holdings mentioned in this addressed e-mail of this doc. No doubt one would do better than SIS over time.

As you can see from his response, he does like the company, but also thinks there are better businesses. Savaria actually has incredibly impressive financials, but they don’t have the strongest history (have done decent since ’09, but not that great before, including cut dividends). Of course, no company starts off perfectly, but as long-term investors, we typically look for a long history of strong performance; otherwise, it should be classified as speculative. But, like my mentor said, the business isn’t exactly a necessity. In fact, most seniors probably can’t afford the systems that Savaria offers, making it recession-prone, not recession-proof, especially with no recurring revenue (ie. servicing requirements) as my mentor mentioned. This company definitely isn’t bad, and investors may do quite well, but I have more confidence in the other companies I listed last week.

Btw, the Canadian companies that my mentor is planning to “build huge positions in” include:

  • A&W Royalty Income Fund (AW.UN) – I think MTY is just so much more diverse
  • MTY Foods (MTY)
  • Pizza Pizza Royalty (PZA) – Pizza 73; not a fan
  • Cineplex (CGX)
  • CCL Industries (CCL.B)
  • Alimentation Couche-Tard (ATD.B) – Mac’s; you would do well with this one but it is a market darling and they have been acquiring at a rapid rate
  • Boyd Income Fund (BYD.UN) – car repair services; I have personally witnessed new car technology prevent car accidents and I think it’s only going to improve so not a fan, plus they have a lot of debt
  • Dollarama (DOL) – again, a market darling, and a solid business, but it’s just not a business I want to own
  • Inter-Pipeline (IPL) – I like ENF more because more diversity
  • Enbridge Income Fund (ENF)
  • Waste Connections (WCN)

Best Regards,


“We make a living by what we get.  We make a life by what we give.”

Update: So far I’ve been wrong on this one.  As I said, I think it’s well-managed, but I’m not a huge fan of the business.  That being said, I have learned a lot more since then, and I have learned that great management in a fragmented market (even a declining market like Boyd), can produce outsized returns.  It may be worth me taking another look at some point.  But right now I’m probably more focused on finding the next 10-bagger 😛 

If any of you have compelling reason for me to look at this again, please tell me!

Missed the boat again (like Zach)?

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