|submitted by rulesforrebels to BinanceTrading [link] [comments]|
Hi AusFinance, i thought i would write on a topic i'm rather passionate about, and hopefully offer some 'food for thought' and an alternative to the standard answers of 'Super is the best environment for your money'.submitted by Savings-Flounder to AusFinance [link] [comments]
For those of you unaware, margin loans are borrowing to invest. Your shares/fund units act as security that let you borrow money to buy more shares/fund units. These are given different levels of "Loan to Value Ratio" aka LVR.
a 75% LVR means you can make up a total investment with a minimum of 25% your money, and a maximum of 75% borrowed money. So with $2,500 you'd be able to borrow up to $7,500 (Making up a total portfolio of $10,000).
Why borrow to invest?
Simply put, Margin lending amplifies your gains and your losses. I have included a table below to demonstrate what a margin loan will do to a $25,000 investment at an 8% p.a. return at different LVRs. I am using Leveraged Equities variable 4.24% interest rate on their direct investment loan as the interest cost - the product offers access to the vast majority of funds and shares that an investor needs, it's just lacking advanced features like options trading (who cares!)
Here we can see the return improve from the standard 8% all the way to 11.8% if using 50% LVR. But in my opinion, 50% LVR is too risky for many investors appetite here, even if it is my ideal point. Instead, i would direct your attention to 35% LVR.
Why 35% LVR?
a 35% LVR comes with a number of benefits to an investor doing standard VAS/VGS/VDHG style etf investing.
1-(Loan/(Lending Value + Buffer)).
So if we take a standard favourite of Ausfinance such as VAS, VDHG etc, we can see that they have a LVR of 75%. Industry standard buffer is 10%. so let's figure out a margin call on a $25,000 investment, with $14,000 borrowed funds (35% LVR):
1-($14,000/(($39,000*0.75)+($39,000*0.10))) = 58%
it would take a 58% drop in the portfolio to bring it to a margin call. This is the portfolio dropping from $39,000 to $16,470.
This requires a staggering drop before you experience a margin call, and if you are concerned reducing your LVR to only 25% will still improve your return and increase your chance of never being margin called.
You have time to add to your holdings with equity only (buying a dip + decreasing your overall LVR). the important thing is you can manage your risk and it requires truly a cataclysmic level of decline before you experience a margin call ,and at that point that may not be your biggest concern.
Why all the fuss? What's the point of risking being margin called?
It's all in that % return. in the following example i will use ASIC's compound calculator, along with the following parameters:
$25,000 initial deposit (your capital), $0 regular deposits, annual compounding, and a 30 year time horizon. The only assumption is that as the portfolio grows in capital value, the 35% LVR is maintained.
Case 1 - 0 LVR (AKA [email protected]%) - after 30 years of compounding at 8% you end up on $251,566
Case 2 - 35% LVR (AKA compounding at 10.1%) - after 30 years of compounding at 10.1% you end up on $448,291
Verdict - Case 2 ends up being $196,725 better. a 78% superior return
Every % matters so much in a long term strategy, it is truly impossible to overstate how important it is to long term outcomes.
Case Study: Super Showdown
As a final demonstration of the power of a low leverage strategy we will put two different cases head to head. Let us assume that a 30 year old intends to retire at age 65, and has the option of either having $50,000 in super, or invested at a 35% LVR.
After retirement, they will either 1. Take the money tax free in pension phase or 2. pay capital gains tax by cashing out their own 'pension' each year, with their marginal tax rate being 30% (using the currently legislated but not implemented rates). Case 2 will overstate their tax slightly, as i will not scale it, i will just hit the whole thing at 30%.
We can see that with the CGT discount, paying 15% tax is actually better than paying a 0% tax rate due to the higher return. It's an out-performance of $508,681
But okay, i hear you, CGT discount may be gotten rid of, let's recalculate it with no discount:
Even without a CGT discount (and 30% flat is more tax than you'd pay on a CGT discounted method on the highest marginal rate currently) there has been an out-performance of $306,102
What do i hope you take away from this?
Even if you decide that the risk of margin lending is too much for you, or that i'm absolutely insane to choose an outside of super strategy that relies on borrowing to invest, i hope that i have given you something to think about.
the one thing i hope everyone takes away from this just as a general point is the sheer power of small changes in your long term return %.
I really strongly believe in conservatively leveraging safe and boring investments to boost that all critical return over the long term to create outstanding long term results.
minor edit: fixed up some grammar
Disclaimer : I'm not a tax attorney or CPA, I trade from my mom's basement and my day job is handing out flyers while wearing a hotdog costume.submitted by indonesian_activist to wallstreetbets [link] [comments]
Previous Post https://www.reddit.com/wallstreetbets/comments/ia18vv/prpl_lousyand_kind_of_shady_tax_receivable/
Right since wsb like small caps now, let's take a moment to learn about public companies with Umbrella Partnership C Corporation (UP-C) IPO structure. This won't actually give you any trading edge whatsoever, but will help you to lose money more slowly or flatten the loss porn curve shall we say. PRPL went public by a reverse merger with a shell company but ended up having pretty much the same corporate structure as a typical UP-C IPO.
We will compare last week favourite meme stock PRPL with other small caps PLC that also have UP-C structure. I couldn't do it with sector peers because none of TPX, SNBR and CSPR have it.
TRA and UP-C started in early 2000s have been gaining popularity since.
Despite it's name, Tax Receivable Agreement (TRA) functions mostly as a way for pre-IPO owners to siphon cash from public companies. There are plenty of other ways for a public company to get step up basis on tax without TRA, it's just the only one that siphon cash back to the pre-IPO owners. It has always been somewhat controversial and challenged many times, several legislation was introduced but on all occasions congress chose not to pass it.
Now a UP-C IPO is when the income generating company is actually a LLC or partnership. in PRPL case this is Purple LLC. It's basically a clever way for the pre-IPO shareholders/partners to retain pass trough treatment of income and to avoid double taxation (corporate and shareholder level). Here's a small diagram of what it looks like
This UP-C structure have added inherent risk for public shareholders such as
For PRPL, Purple LLC would be the original partnership and PubCo would be Purple Innovation PLC. Also similar is the class A and Class B stocks. Class B which are retained by the original partners exchangeable to Class A stock. When they actually exchange/sell the class B stock into Class A, on a typical UP-C this will trigger a step up basis under TRA(Tax Receivable Agreement).
So when the partners of the partnership sell, they not only get the proceeds but also a amortizable tax deductions from goodwill. Example of a simplified case; if the pre-IPO value is 10$ and current stock price is 30, the basis step up would be 20$ x amount of shares sold booked as liability in the public company. Say Partner X exchange and sells 1 million of class B stock in the market, besides getting 30 MM USD, he will also get a certain percentage of the step up basis (usually 80%) or about 20 MM USD * 0.8 = 16 MM USD. This 16 MM USD is booked as TRA liability in the public company. Payable by cash to the partner when that tax benefit is realized, on the basis of with/without calculation. Some TRAs may even include the Net Operating Loss (NOLs) and other tax assets in the partnership on stock sale. A typical TRA sharing percentage is about 80% for the partner and 20% for the public company with a duration of 10-15 years. TRA is not specifically tied to stock ownership, for example in PRPL, innoHold may sell all their stake when PRPL stock reaches an all time high. Besides the sales proceeds they would then continue to receive cash for realized stock benefit from the step up for 10-15 years after they ceased to be stock holders.
Furthermore the way this is recorded in the balance sheet may use a "more likely then not" threshold so it won't actually appear until the company starts making a taxable profit. But they usually have a little note in the income tax section regarding it.
FROM PRPL 10-Q Q1 in notes on financial statements (income taxes)
Early Warning of Possible Valuation Allowance Reversal in Future PeriodsFROM PRPL 10-Q Q2 in notes on financial statements (income taxes)
For the period ended June 30, 2020, and in assessing the realizability of deferred tax assets, management determined that it is now more likely than not that its net deferred tax assets will be realized and that a full valuation allowance for its deferred tax assets is no longer appropriate. As of the period ended June 30, 2020, the Company is no longer in a three-year cumulative loss position. As a result of the removal of this negative evidence and other items of positive evidence, the Company has determined that the deferred tax assets are now more likely than not to be realized.Great now that the company have started making money, time to surprise public stock holders with instant liability.
PRPL Balance sheet Q2
Another cool feature of TRA is the Indemnification/clawback obligations.
No assurance can be given that the IRS will agree with the allocation of value among our assets or that sufficient subsequent payments under the tax receivable agreement will be available to offset prior payments for disallowed benefits. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the benefit that we actually realize in respect of the increases in tax basis resulting from our purchases or exchanges of LLC Units and certain other tax benefits related to our entering into the tax receivable agreementAnd even more wicked
Some companies pay interest on their TRA liability, even before the tax benefit is realizedTo top it off on a few TRAs spotted in the wild
Furthermore, payments under the tax receivable agreement will give rise to additional tax benefits and therefore additional payments under the tax receivable agreement itselfYep, paying the TRA will lead to another tax benefit attributed to the TRA leading to an increase in the TRA liability. It's like a perpetual motion machine.
Besides PRPL, The public markets have a history of underestimating and not fully understanding TRA impact
Let's take a look at PBF Energy TRA liability,
pre IPO it was estimated to be only about 96.8 MM USD
The drop you see in 2017 was due to the TCJA legislation enacted reducing corporate tax rate. Because of rona PBF market cap has fallen off a cliff since then, but you get the point, TRA liability increases in size along with company market cap and assets.
In order to avoid the swelling cost of TRAs,
Some companies have negotiated a cap on TRA payments. For example, when Genworth Financial (GNW) entered into a TRA with General Electric following their separation, the companies agreed on a maximum aggregate payment to GE of $640 million. As described in Genworth’s March 1, 2005 10-K filing: To put that number in context, $640 million is 35% of Genworth’s 2004 EBITDA. PRPL currently doesn't have any such cap.
For getting out of a TRA,
Clarivate Analytics(CCC) recently sought early termination / buyout of their TRA
The amount is usually NPV of potential tax benefits, which as you can imagine is very imprecise and will depend a lot on partners discretion.
Comments from Tax Professionals on TRA:
TRAs fundamentally change the nature of IPOs by transferring value from public shareholders to the pre-IPO owners. This Article shows that TRAs have rapidly risen in popularity and have very recently evolved in ways that make them universally available to any IPO. This Article analyzes the ways that TRAs transfer wealth from public companies to pre-IPO owners, presents previously overlooked economic and disclosure issues arising in these transactions, and argues that the SEC should require companies to publicly disclose these material risks.
What those lawyers are saying is basically that TRAs are made possible by retards buying stocks and not reading the fine print.
TL;DR: When you do DD on a company it's not just about topline and gross margin, verify the corporate structure and liabilities agreements so you won't be surprised come earnings.
submitted by lurkingsince2006 to wallstreetbets [link] [comments]
tl;dr - Earnings is gonna be lit!PRPL earnings is tomorrow, 8/13, after hours. Any other date is wrong. Robinhood is wrong (why are you using Robinhood still!?!).
I'm going to take you through my earnings projections and reasoning as well the things to look for in the earnings release and the call that could make this moon even further.
I'm calling $244M Net Revenue with $39.75M in Net Income, which would be $0.75 Diluted EPS. I'll walk you through how I got here
Total Net RevenueI make the assumption that Purple is still selling every mattress it can make (since that is what they said for April and May) and that this continued into June because the website was still delayed 7-14 days across all mattresses at the end of June.
May Revenue and April DTC: The numbers in purple were provided by Purple here and here.
April Wholesale: My estimate of $2.7M for Wholesale sales in April comes from this statement from the Q1 earnings release: " While wholesale sales were down 42.7% in April year-over-year, weekly wholesale orders have started to increase on a sequential basis. " I divided Q2 2019's wholesale sales evenly between months and then went down 42.7%.
June DTC: This is my estimate based upon the fact that another Mattress Max machine went online June 1, thus increasing capacity, and the low end model was discontinued (raising revenue per unit).
June Wholesale: Joe Megibow stated at Commerce Next on 7/30 that wholesale had returned to almost flat growth. I'm going to assume he meant for the quarter, so I plugged the number here to finish out the quarter at $39.0M, just under $39.3M from a year ago.
Revenue Expectations from Analysts (via Yahoo)
My estimate of $244M comes in way over the high, let alone the consensus. PRPL has effectively already disclosed ~$145M for April/May, so these expectations are way off. I'm more right than they are.
Gross MarginsI used my estimates for Q3/Q4 2019 to guide margins in April/May as there were some one time events that occurred in Q1 depressing margins. June has higher margin because of the shift away from the low end model (which is priced substantially lower than the high end model). Higher priced models were given manufacturing priority.
Operating ExpensesMarketing and Sales
Joe mentioned in the Commerce Next video that they were able to scale sales at a constant CAC (Customer Acquisition Cost). There's three ways of interpreting this:
General and Administrative
A Purple HR rep posted on LinkedIn about hiring 330 people in the quarter. I'm going to assume that was relative to the pre-COVID furloughs, so I had June at that proportional amount to previous employees and adjusted April and May for furloughs and returns from furlough.
Research and Development
I added just a little here and straight lined it.
Other ExpensesInterest Expense
Straightlined from previous quarters, although they may have tapped ABL lines and so forth, so this could be under.
One Time and Other
Unpredictable by nature.
Warrant Liability Accrual
I'm making some assumptions here.
Earnings (EPS)I project $39.75M or $0.75 Diluted EPS (53M shares). How does this hold up to the analysts?
EPS Expectations from Analysts (via Yahoo)
EPS Expectations from Analysts (via MarketBeat)
These losers are way under. Now you know why I am so optimistic about earnings.
Keep in mind, these analysts are still giving $28-$30 price targets.
What to Watch For During Earnings (aka Reasons Why This Moons More)Analysts, Institutionals, and everyone else who uses math for investing is going to be listening for the following:
This factor is HUGE. If PRPL guides to higher margins due to better sales mix and continued DTC shift, then every analyst and investor is going to tweak their models up in a big way. Thus far, management has been relatively cautious about this fortuitous shift to DTC continuing. If web traffic is any indicator, it will, but we need management to tell us that.
Warrant Liability Accrual
I could be dead wrong on my assumptions above on this one. If it stays, there will be questions about it due to the drop in exercise price. It does impact GAAP earnings (although it shouldn't--stupid accountants).
Capacity Expansion Rate
This is a BIG one as well. As PRPL has been famously capacity constrained: their rate of manufacturing capacity expansion is their growth rate over the next year. PRPL discontinued expansion at the beginning of COVID and then re-accelerated it to a faster pace than pre-COVID by hurrying the machines in-process out to the floor. They also signed their manufacturing space deal which has nearly doubled manufacturing space a quarter early. The REAL question is when the machines will start rolling out. Previous guidance was end of the year at best. If we get anything sooner than that, we are going to ratchet up.
CACs (Customer Acquisition Costs)
Since DTC is the new game in town, we are all going to want to understand exactly where marketing expenses were this quarter and, more importantly, where management thinks they are going. The magic words to listen for are "marketing efficiencies". Those words means the stock goes up. This is the next biggest line item on the P&L besides revenue and cost of goods sold.
New Product Categories
We heard the VP of Brand from Purple give us some touchy-feely vision of where the company is headed and that mattresses was just the revenue generating base to empower this. I'm hoping we hear more about this. This is what differentiated Amazon from Barnes and Noble: Amazon's vision was more than just books. Purple sees itself as more than just mattresses. Hopefully we get some announced action behind that vision. This multiplies the stock.
Cashless Exercise of PRPLW Warrants
I doubt this will be answered, even if the question is asked. I bet they wait until the 20 out of 30 days is up and they deliver notice. We could be pleasantly surprised. If management informs us that they will opt for cashless exercise of the warrants, this is anti-dilutive to EPS. It will reduce the number of outstanding shares and automatically cause an adjustment up in the stock price (remember kids, some people use math when investing). I'm hopeful, but not expecting it. The amount of the adjustment depends on the current price of the stock. Also, I fully expect PRPL management to use their cashless exercise option at the end of the 20 out of 30 days as they are already spitting cash.
I'm not just holding, I added.
PRPLW Warrants: 391,280
PRPL Call Debit Spreads: 17.5c/25c 8/21 x90, 20c/25c 8/21 x247
Also, I bought some CSPR 7.5p 8/21 x200 for fun because I think that sucker is going to get shamed back down to $6 after a real mattress company shows what it can do.
UPDATESI've made some updates to the model, and produced two different models:
From the recent S-3 filing for the May secondary, I pulled the following:
I diluted earnings by the above share count.
Model With Warrant Liability Going to Zero
Model With Warrant Liability Going to $47M
A few people called me out on my assumption, that I also said could be wrong. My favorite callout came from u/lawschoolbluesny who started all smug and condescending, and proceeded to tell me about June 31st, from which I couldn't stop laughing. Stay in law school bud a bit longer...
One other comment he made needs an answer because WHY we are accruing MATTERS a lot!
Now that we have established that coliseum still has not exercised the options as of july 7, and that purple needs to record as a liability the fair value of the options as of june 31, we now need to determine what that fair value is. You state that since you believe that there is no logical reason that coliseum won't redeem their warrants "there is no longer a warrant liability where the company may need to repurchase warrants back." While I'm not 100% certain your logic here, I can say for certain that whether or not a person will redeem their warrants does not dictate how prpl accounts for them.
The warrant liability accrual DOES NOT exist because the warrants simply exist. The accrual exists because the warrants give the warrant holder the right to force the company to buy back the warrants for cash in the event of a fundamental transaction for Black Scholes value ($18 at the end of June--June 31st that is...). And accruals are adjusted for the probability of a particular event happening, which I STILL argue is close to zero.
A fundamental transaction did occur. The Pearce brothers sold more than 10M shares of stock which is why the exercise price dropped to zero. (Note for DS_CPA1 on Stocktwits: there is some conflicting filings as to what the exercise price can drop to. The originally filed warrant draft says that the warrant exercise price cannot drop to zero, but asubsequently filed S-3, the exercise price is noted as being able to go to zero. I'm going with the S-3.)
Now, here is where it gets fun. We know from from the Schedule 13D filed with a July 1, 2020 event date from Coliseum that Coliseum DID NOT force the company to buy back the warrants in the fundamental transaction triggered by the Pearce Brothers (although they undoubtably accepted the $0 exercise price). THIS fundamental transaction was KNOWN to PRPL at the end Q4 and Q1 as secondary filings were made the day after earnings both times. This drastically increased the probability of an event happening.
Where is the next fundamental transaction that could cause the redemption for cash? It isn't there. What does exist is a callback option if the stock trades above $24 for 20 out of 30 days, which we are already 8 out of 10 days into.
Based upon the low probability of a fundamental transaction triggering a redemption, the accrual will stay very low. Even the CFO disagrees with me and we get a full-blown accrual, I expect a full reversal of the accrual next quarter if the 20 out of 30 day call back is exercised by the company.
I still don't understand why Coliseum would not have exercised these.
Regardless, the Warrant Liability Accrual is very fake and will go away eventually.
ONE MORE THING...Seriously, stop PMing me with stupid, simple questions like "What are your thoughts on earnings?", "What are your thoughts on holding through earnings?", and "What are your thoughts on PRPL?".
It's here. Above. Read it. I'm not typing it again in PM. I've gotten no less than 30 of these. If you're too lazy to read, I'm too lazy to respond to you individually.
Hi,submitted by Dr_Sargunz to CanadianInvestor [link] [comments]
This is my first attempt at writing a DD report. I hope it makes sense.
Just a few cautionary words:
IntroductionToromont Industries Ltd. (TSE:TIH) provides specialized equipment in Canada and the United States. The Company operates two business segments: The Equipment Group and CIMCO. The Equipment Group supplies specialized mobile equipment and industrial engines for Caterpillar Inc. (NYSE:CAT). Customers for this business segment vary from infrastructure contractors, residential and commercial contractors, mining companies, forestry companies, pulp and paper producers, general contractors, utilities, municipalities, marine companies, waste handling companies, and agricultural enterprises. CIMCO offers design, engineering, fabrication, and installation of industrial and recreational refrigeration systems.
The Company was founded in 1961 and operates out of Concord, Ontario. As at December 31, 2019, Toromont employed over 6,500 people in more than 150 locations across central/eastern Canada and the upper eastern United States.
The primary objective of the Company is to build shareholder value through sustainable and profitable growth, supported by a strong financial foundation.
Description of the 2 Main Business Segments
ManagementCEO, Scott J. Medhurst has been with the company since 1988. He was appointed President of Toromont CAT in 2004 and he came into his current position as President and CEO in 2012. He is a graduate of Toromont’s Management Trainee Program.
CFO, Mike McMillan joined the executive team in March of 2020. His predecessor, Paul Jewer is retiring this year and has been working with McMillan during the transition period.
VP and COO, Michael Chuddy has been with Toromont since 1995.
On average, leaders have 29 years of business experience and have served at Toromont for 19 years. Seeing long tenures, good stock performance, excellent business planning and execution is usually a sign of strong leadership. In addition, insiders hold more than 3% (~$175 million) of the company’s outstanding shares. Medhurst owns more than 170 thousand shares, Chuddy owns just under 100 thousand shares and the former CEO and current Independent Chairman of Board of Directors, Robert Ogilvie owns more than 2 million shares, making him the 4th largest stockholder. High insider ownership typically signals confidence in a company's prospects. Compare this to Toromont’s main Canadian competitor, Finning, where insiders own less than 0.4% ($12 million) of the company (this number varies depending on where you look, I just took the highest one I found).
Recently insiders have been selling stock (Figure 1). I cannot speak to the reasons why insiders are selling but the remaining position owned by the insider is sizable and demonstrates that the executive still has confidence in the company. Some of the reasons insiders sell are: they don't believe in the company’s future, they need money for personal use, they are rebalancing their portfolio, among others.
Figure 1: Buy and selling activity of insiders (the data is from MarketBeat, so take that for what it's worth).
On a somewhat unrelated but still related note, 50% of Toromont employees are also shareholders.
Growth StrategiesToromont has five growth strategies (expand markets, strengthen product support, broaden product offerings, invest in resources, and maintain a strong financial position). I chose to focus on the following two strategies, as they seemed most prevalent.
Growth Through AcquisitionRapid growth in this industry is generally driven through acquisitions. Toromont has gone through multiple acquisitions since the 90’s:
This acquisition allowed Toromont to make headway into the Quebec, Western Labrador, and Maritime markets, as Hewitt was the authorized Caterpillar dealer of these regions. Hewitt was also the Caterpillar lift truck dealer of Quebec and most of Ontario and the MaK marine engine dealer for Québec, the Maritimes, and the Eastern seaboard of the United States (from Maine to Virginia).
Toromont had total assets of $1.51 billion before the acquisition, the acquisition added $1.024 billion in assets, nearly doubling the balance sheet (look at Figure 2 for more details about the acquisition).
Figure 2: (all numbers are in thousands) The final allocation of the purchase price was as of Dec 31, 2018, Note 25 of 2018 Annual Report. $1.024 billion was added to the Toromont’s B/S
Large acquisitions like this one can be the downfall of a company. Here are some of the risks highlighted by management at the time of the acquisition:
The result of the acquisition and Hewitt’s integration with Toromont’s existing business produced a 39% increase in EPS in 2018 and 14% increase in 2019.
DividendToromont pays a quarterly dividend and has historically targeted a dividend rate that approximates 30 - 40% of trailing earnings from continuing operations.
In February 2020 the Board of Directors increased the quarterly dividend by 14.8% to $0.31 per share. This marked the 31st consecutive year of increasing dividends and 52nd consecutive year of making a dividend payment. The five-year dividend-growth rate is 12.09%.
Table 1: Information about the last eight dividends
Risks/Threats and MitigationDependency on Caterpillar Inc.
It goes without saying that Toromont’s future is heavily dependent on Caterpillar Inc. (NYSE:CAT). For those who don't know, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It has a market cap in excess of $68 billion. All purchases made by Toromont must be made from Caterpillar. This agreement has been standing since 1993 and can be terminated by either side with 90 days notice.
Given that the vast majority of Toromont’s inventory is Caterpillar products, Caterpillar’s brand strength and market acceptance are essential factors for Toromont’s continued success. I would say that the probability of either of these being damaged to an unrecoverable point are low, but at the beginning of this year, I would have said the probability of the world coming to a complete stop was very low too and look at what happened. Anything is possible. The reason this is a major consideration is because it's a going concern issue. Going conference is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If there was irrevocable damage to Caterpillar’s brand, Toromont is no longer a going concern, meaning the company would most likely be going bankrupt or liquidating assets. The whole Company might not go under because the CIMCO, SITECH, and AgWest business units would survive but, essentially ~80% of the business would be liquidated.
In addition to the morbid scenario I laid out above, Toromont is also dependent on Caterpillar for timely supply of equipment and parts. There is no assurance that Caterpillar will continue to supply its products in the quantities and time frames required by Toromont’s customers. So if there is supply chain shock, like the one we just saw, there is the chance that Toromont will not have access to sufficient inventory to meet demand. Which in turn would lead to the loss of revenue or even to the permanent loss of customers.
Again, both of these threats have low a probability of occurring but either could single handedly cripple Toromont’s business. As of now, Caterpillar continues to dominate a large market share (~38% as per Gurufocus) in the industry against large competitors like John Deere, CNH Industrial, Cummins, and others.
Caterpillar's stock has been on a slow decline for a couple years but that is due to reasons beyond the ones that directly concern Toromont’s day-to-day operations. I would say if you don't believe in Caterpillar’s continued market share dominance, investing in Toromont is probably not for you.
Shortage of Skilled Workers
Shortage of skilled tradesmen represents a pinch point for industry growth. Demographic trends are reducing the number of individuals entering the trades, thus making access to skilled individuals more difficult. Additionally, the company has several remote locations which makes attracting and retaining skilled individuals more difficult. The lack of such workers in Canada has caused Toromont to become more assertive and thoughtful in their recruitment efforts.
To combat this threat, Toromont has/is:
Cyclical Business Cycle
Toromont’s business is cyclical due to its customers' businesses being cyclical. This affects factors such as exchange rates, commodity/precious metal pricing, interest rates, and most importantly, inventory management. To mitigate this issue, management has put more focus on increasing revenues from product support activities as they are more profitable than the equipment supply business and less volatile.
Environmental Regulations Affecting Customers
Toromont’s customers are subject to significant and ever-increasing environmental legislation and regulation. This leads to 2 impacts:
Impact of COVID19
While the company had been declared as an essential service in all jurisdictions that it operates in, Q1 2019 results were lower as a function of COVID19 reducing activity in many sectors that Toromont services. Decline in mining and construction projects lead to a decrease in demand for Toromont products in the latter part of the quarter. Revenues were trending for 5-7% growth for the quarter before the effects of COVID19 were felt.
Management cannot provide any guidance on how to evaluate the impact of COVID19 on future financial results. They are focusing on ensuring the continued safety of employees and working with customers and the jurisdiction they operate in to evaluate appropriate activity levels on a daily/weekly basis. Lastly, management is keeping a close eye on how this crisis has led to an increase in A/R delinquencies and financial hardship for customers.
The Executive Team and the Board of Directors have taken a voluntary compensation reduction. Wage increase freezes and temporary layoffs have been implanted on a selective basis. Management believes that expanding product offerings and services, strong financial position, and disciplined operating culture positions the Company well for continued growth in the long term.
Toromont competes with a large number of international, national, regional, and local suppliers. Although price competition can be strong, there are a number of factors that have enhanced Toromont’s ability to compete:
Main Competitor in Canada: Finning International Inc.Finning International Inc. (TSE:FTT) is the world's largest Caterpillar dealer that sells, rents and provides parts and service for equipment and engines to customers across diverse industries, including mining, construction, petroleum, forestry and a wide range of power systems applications. Finning was founded in 1933 and is headquartered in Vancouver, Canada.
I am sure there are some people looking at this table and thinking Finning looks rather promising based on the metrics shown, especially in comparison to Toromont. Finning’s dividend yield, P/E, and price/book look more attractive. Their top line is 2x. Not to mention it operates worldwide and is the only distributor in the UK, while Toromont only operates in half of Canada.>! Before you go off thinking “I need to use my HELOC to buy some Finning,” as some people on this subreddit are prone to do, ask yourself: do you see any cause for concern in the metrics listed above? !<
One glaring question I have is: why is Finning trading at half of Toromont’s market cap given that it operates internationally and has twice the number of employees and revenues of Toromont?
Q1 2020 Financial Results
Figure 3: Q1 2020 Income Statement
Overall operating income, net earnings, and EPS all decreased even though Toromont saw an increase in revenue for the quarter compared to Q1 of 2019.
Assuming the world does return to “normal,” many of Toromont’s customers (especially in mining and construction) may try to catch up for lost time with increases to their operational activity, leading to an increase in Toromont’s sales for the remainder of the year. Of course this is a major assumption but it’s a possibility.
Below is a comparison of the last eight quarters. You can see the clear cyclical nature of their business.
Figure 4: Last eight quarters of earnings
Sources of LiquidityCredit
Financial AnalysisAnalysis of Debt
Historically, Toromont has had very low debt levels. The spike in late 2017 was due to the acquisition of Hewitt. Management paid off the debt aggressively in 2018. At the end of December 2019 Toromont had $650 million of debt maturing between 2025 and 2027. As a result of COVID19 the company has taken on more debt. This additional access to debt accounts of the slight uptick in historical debt in 2020 (Figure 5).
Figure 5: Toromont’s historical debt, equity, and cash
The long-term debt to capitalization ratio is a variation of the traditional debt-to-equity ratio. The long-total debt to capitalization ratio is a solvency measure that shows the proportion of debt a company uses to finance its assets, relative to the amount of equity used for the same purpose. A higher ratio means that a company is highly leveraged, which generally carries a higher risk of insolvency with it.
The debt-to-equity ratio is at 47% and debt-to-capitalization ratio is 32%, Toromont has $388 million in cash that could be used to pay down debt by nearly 50% and bring the net debt-to-equity to 23% and net debt-to-capitalization to 18%. As mentioned before, management is holding on to cash to insure sufficient liquidity during these times.
The implication of these ratios is that Toromont does not take on large amounts of debt to finance growth. Instead the Company leverages shareholders equity to drive growth.
For comparison, Finning has a debt-to-equity ratio of ~100% (it differs between WSJ, 99%, and Yahoo Finance, 101%). The nominal amount of their total debt is ~$2.2 billion, which gives them a long-term debt to capitalization ratio 62%. Finning carries $260 million in cash.
Figure 6: Toromont’s debt-to-capitalization and debt-to-equity ratios
Return on equity (also known as return on net assets) measures how effectively management is using a company’s assets to create profits.
Toromont’s return on equity is generally around 20%. Go to Figure 6 to look at the ROE for the last 4 years. In comparison, Finning has had a ROE of ~11% for the last three years, about 3% in 2016 and a negative ROE in 2015 (as per Morningstar).
Return on capital employed (ROCE) tries to find the return relative to the total capital employed in the business (both debt & equity less short-term liabilities). Toromont’s ROCE (ttm) for March 31 2020 was 22%. This means for every dollar employed in the business 22 cents were earned in EBIT (earnings before interest and tax). Finning had a ROCE of 11% as of December 2019.
Working capital is the amount of cash and other current assets a business has available after all its current liabilities are accounted for. In the last ten years, Toromont’s working capital has fluctuated between 1.6 at its lowest (2018) to 2.8 at its highest (2016). At the end of 2019 it was at 1.8. Meaning current liabilities equate to 60% of current assets.
Interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. Toromont has an interest coverage ratio 15x (as per WSJ). Finning on the other hand is at 4x. At this point I feel like I'm just beating up on Finning.
For those of you who made it this far, I have to admit something to you. This whole post is just a facade to ask you a question that has never been asked on this subreddit before: Should I buy BPY.UN? It keeps going down and I'm worried if I buy it, it will keep going down and I'll lose money. I don't want to lose money. Although if you go through my post history, you'll see I've been looking at/buying penny stocks.
Key Performance MeasuresBelow is a chart with key financial measures for the last four years. A few things I want to highlight:
Price Chart ComparisonsI don't do technical analysis. To those who do, good luck to you because let's be real, you'll need it. This section is just to get an idea of past performance and evaluate the opportunity cost of investing in Toromont compared to a competitor or a board based index fund.
I thought it would be easier to look at pictures as opposed to reading a bunch of numbers off a table.
For the sake of not creating a picture album of screenshots, I just looked at charts for the last 5 years. If you're interested in looking at different time intervals you can do so on google finance.
These are the only two Caterpillar distributors on the TSX, making them direct comparisons. If I was looking for exposure to this industry, I would be choosing between these two companies (on the TSX anyways). There isn't really much to evaluate here. It's like they saying: “A picture is a thousand words,” or in this case, it's 128%. If you have time, go look at the graph from August 1996 to now. I can safely say it hasn't been much of a competition. Toromont has outperformed by ~2500% in stock price appreciation alone. If you're a glass half full kind of person, I guess you could look at this disparity as Finning having enormous upside. LOL
If I'm not buying individual stocks, I’m buying the S&P 500 and to a lesser extent a Nasdaq index fund. This gives me a second look at the opportunity cost of my money. The story is not as bad as the Finning comparison. If you had bought $100 dollars of Toromont stock 5 years ago, it would have turned into $207 today, whereas the same $100 dollars in VFV would have became $157.
Just a quick aside, you can see the volatility in Toromont’s stock is much higher compared to the VFV. VFV has a relatively smooth trend upwards while Toromont trends upwards in a jagged path. This is the risk of single stocks, they move up and down more erratically, leading inventors who don't have a grasp of the business or conviction in their pick to panic sell or post countless times on Reddit asking why their stocks keep going down. “I bought the stock last week and it's done 3% already, do you guys think it’s going bankrupt? I thought stonks only go up???”
The S&P/TSX Capped Industrials Index isn't my favourite comparison for Toromont because its constituents cover many industries ranging from waste management (WCN), to railways (CNCP), to Airlines (AC, lol, had to mention it. I miss the days when there were double digits posts about AC. I wonder where those people have gone, because I can tell you where AC stock has gone... absolutely nowhere). Regardless, I used TTIN because I deemed it a better comparison to Toromont than the entire TSX. The story is on par with the other two comparisons. Toromont’s out performance is significant.
I just threw this bonus chart in here because when I saw it, I was like BRUHHH (insert John Wall meme)… It's completely unsustainable but that's impressive given the vast differences between the two.
Now, of course, past performance does not dictate future results and all that good stuff, but it really gets you thinking about how the rewards disproportionately favours winners compared to the overall market. People are generally happy getting market returns (i.e. the just buy VGRO people) but being able to pick even a few winners really pays. This reminds me of the Warren Buffet quote: “diversification is protection against ignorance.” The context of the quote is that if you are able to study a few industries in great depth and acquire a wealth of knowledge, you can see returns astronomically higher than those who diversify across the board market. The problem then becomes you put yourself at risk of having all your eggs in one basket. Look at what's happening with Wirecard in Europe right now. This is why the real skill in investing is managing risk.
Analyst Price Targets and EstimatesThe prince targets set for by analysts range from $63-$81. The average price target is ~$72, with the majority of targets within the 70-$71 range. Given the current price of $65.66, there is a ~10% upside. These price targets haven't changed much due to COVID19 even though revenues and EPS forecasts have been downgraded for 2020. The consensus estimate on 2020 revenues is $3.36 billion, down from the actual revenues of $3.69 billion in 2019 and the consensus EPS for 2020 is $3.01 down from actual EPS of $3.52 for 2019 and $3.10 for 2018. The fact that revenues and EPS forecasts have been downgraded, yet price targets remain untouched, for the most part, indicates that the effects of COVID19 are expected to be short-lived.
Figure 12: Earnings and estimate ranges for Toromont. Note: EPS numbers in this graphic are diluted EPS numbers.
Assuming P/E ratio stays the same as it has been for the last 12 months (~19x) and EPS goes down to ~$3.00 (as per analyst consensus), the implied price would be $57.
Using the last 12 months of revenues, the EV-to-Revenues ratio is at 1.56x. Assuming that ratio stays the same and with revenues estimated to be ~$3.36 billion, enterprise value (EV) comes out to $5.2416 billion. Using Q1 2020 figures for shares outstanding (82.015 million), cash ($388.182 million), and debt ($745.703 million), the implied price for a share is $58.94*.
\Note: Enterprise Value is equal to market cap plus total debt minus cash.)
Dividend Discount Model
The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value.
The average dividend growth rate is 12% for the last 5 years is 12%. There is no way Toromont can increase the dividend at this pace in the long term, thus, I chose a long term dividend growth rate of 5%. This is the assumed rate in perpetuity. The required rate of return will equal WACC, 6.85% (averaged from 2019 Annual Report). The dividend over the last year is $1.16 (two payments of $0.27 in 2019 and two payments of $0.31 for 2020).
The fair value equals $65.84.
Figure 13: DDM calculation.
Closing ThoughtsThere is no doubt that Toromont trades at a large premium. The current P/E is 19x and the CAPE ratio (Shiller P/E) is 26x. The fair value of the Company as per Morningstar research is in the mid $60 range.
Based on all valuations I did and analyst price targets, I would start buying in the high $50 range or maybe the very low $60 range, but my belief in the company has to do with long term thematic trends and how the Company operates, rather than today's price. Although I have to admit, the price does look more attractive now than it did in the beginning of June when the stock hit new all time highs. It seems like the only companies hitting new all time highs these days are tech companies, so it's refreshing to find a non-tech company achieving the same feat.
Toromont is not going to double next year or the year after that. It is a relatively low margin business, with slow growth and a cyclical business cycle. I like that the Company has strong financials, low debt, and good management. They don't take shortcuts or unwarranted risk. Future growth will mostly be driven through acquisition, but management is cautious with acquisitions and don't overextend themselves. One of the biggest problems Finning has been facing for the last couple years is political and social turmoil in South American countries which is affecting their mining clients and thus affecting revenues/margins.
The Q2 earnings are reported on July 22 202. We should have a clearer picture on the prospects of the Company from management. Hopefully we have a better idea of the COVID19 situation by then too. Regardless, I think the company is in a position where its services will always be in demand so short term fluctuations are not something that shake my confidence in this pick.
Limitations and Further Areas of ResearchBy no means is this an exhaustive due diligence report. This is enough for me to feel confident in the business and its trajectory. Limitations/further areas of the research include:
>! I know I took a few shots at people in this post. It's all in good jest. If you're offended well.... maybe you should be. I don't know, you have to figure that out on your own or you could make a post on Reddit asking random people on the internet whether you should be offended or not. !<
Remember I'm not an expert, I'm just a random guy on the internet.
DisclosureI am long Toromont. This information is not financial advice. Please do your own research and/or talk to a financial advisor. All data provided is current prior to the market opening on June 29, 2020. Inconsistencies in data can be due to many reasons, the foremost being that data was spruced from multiple different websites.
As each person’s definition of what “Ethical” means differ and there is no black-and-white definition of “ethical”, it is important to understand that some trade-offs have to be made.submitted by SirBanterClaus to UKEthicalInvesting [link] [comments]
In this Ethical/SRI Criteria Series, we take a look at some of the most popular Responsible Investment (e.g. Ethical, ESG, Sustainable, Impact Investing) funds and their "Ethical" investment criteria to help you make better fund selections to align with your own values.
L&G Future World ESG Developed Index Fund
The Future World funds are for investors who want to express a conviction on environmental, social and governance (ESG) themes. The funds extend LGIM’s approach to sustainable investing across a broad array of asset classes and strategies.
Future World is a natural evolution of what Legal & General Investment Management (LGIM) has always done – it reflects its culture and is aligned with its investor clients’ values. It seeks to identify long-term themes and opportunities, while managing the risks of a changing world.
Investors are increasingly recognising that ESG factors play a crucial role in determining asset prices, and helping to identify the companies that will succeed in a rapidly changing world – the winners of the future. As a result, sustainable investing is very much here to stay.
Hence the Future World Fund range helping to bring investments that incorporate ESG principles into the mainstream. The fund range include:
The objective of the Fund is to provide a combination of growth and income by tracking the performance of the Solactive L&G Enhanced ESG Developed Index (the “Benchmark Index”).
LGIM's approach rests on three pillars: long-term thematic analysis, the integration of ESG considerations and active ownership.
It believes that well-managed companies are more likely to deliver sustainable long-term returns. Assessing companies on their management of environmental, social and governance (ESG) issues is an important element of risk management, and therefore part of investors’ fiduciary duty.
Companies are intrinsically linked to the economies and societies in which they operate. Investors are collective owners of companies and LGIM therefore believes that it has a responsibility to the market as a whole. By incorporating ESG factors into investment decisions, LGIM believes investors can gain an element of protection against future risks and the potential for better long-term financial outcomes.
Future World "Protection List" (Negative Screening)
Through the Future World fund range companies are incentivised to operate more sustainably allowing clients to go further in integrating ESG factors into their investment strategy.
Companies are incorporated into the Protection List if they fail to meet minimum standards of globally accepted business practices. Across the LGIM-designed Future World funds, securities issued by such companies will not be held or exposure to them will be significantly reduced. The Future World Protection List includes companies which meet any of the following criteria:
There are a number of international conventions and treaties that have been developed with a view to prohibiting or limiting the use and availability of these weapons. The manufacture or production of such weapons is illegal in a number of jurisdictions globally and the involvement of companies in such weapons brings reputational risk and censure.
LGIM uses data for the identification of companies involved in the manufacture or production of controversial weapons provided by a well-known and highly respected ESG data provider.
Companies that are involved in the manufacture or production of cluster munitions, antipersonnel landmines, and biological and chemical weapons will be incorporated into the Future World Protection List. Companies incorporated into the list are involved in the core weapons system or components or services of the core weapons system considered to be tailor-made and essential for the lethal use of the weapon. Additionally, if companies are involved in the production, maintenance/service, sale/trade or research and development in relation to the core weapons system, they will also be incorporated into the list.
LGIM uses data for the identification of companies in breach of the principles provided by a well-known and highly respected ESG data provider.
Companies that are in breach of at least one of the UNGC principles for a continuous period of three years (36 months) or more will be considered to be persistent violators of the UNGC principles and incorporated into the list.
LGIM uses data for the identification of pure play coal companies provided by a well-known and highly respected ESG data provider.
Companies which derive a significant proportion of their revenues from the mining of bituminous or lignite coal, development of mining sites for bituminous or lignite coal, or the processing of bituminous or lignite coal are considered to be pure coal companies and will be incorporated into the Future World Protection List.
LGIM ESG Scoring (28 metrics) & Tilted indices
LGIM uses a proprietary ESG scoring methodology based on 28 metrics to score and monitor companies, across Environmental, Social and Governance factors, plus an extra Transparency factor - see below. It uses these scores to design ESG-aware tilted indices which invest more in those companies with higher scores and less in those which score lower, while retaining the investment profile of a mainstream index. The ESG Score is aligned to LGIM's engagement and voting activities.
28 Key Metrics used to calculate ESG Score
1. Carbon emissions intensity
LGIM considers the carbon dioxide emissions that a company produces directly (‘Scope 1’) or is indirectly responsible for through its purchased energy (‘Scope 2’). The sum of these emissions is divided by the companies’ revenue. This provides a measure of the carbon emissions intensity of a company’s activities, adjusted by company size and applicable across different sectors. Data on indirect emissions from companies’ supply chain and use of sold products (‘Scope 3’) is not used.
Companies whose carbon emissions intensity is less than the global median will receive a higher score, whereas companies with more carbon-intensive activities will receive a lower score. Carbon emissions data is provided by Trucost.
2. Carbon reserve intensity
Carbon reserves are reserves of fossil fuels (oil, coal and gas). Companies owning such reserves present investors with two long-term risks. First, if all known fossil fuel reserves were burnt, the associated carbon emissions would lead to a dramatic rise in global temperatures and extreme weather events. This would cause unprecedented disruption for companies’ operations and supply chains, in addition to the significant human costs from forced migration, water stress and pressures on global food supply. The second risk, which is partly a reaction to the first, is that the value of fossil fuel assets may significantly reduce, due to the ongoing energy transition accelerated by policy and technological trends.
Companies with very large fossil fuel reserves or with very carbon-intensive reserves (e.g. coal, tar sands) are more at risk from this change.
This metric looks at the embedded carbon in the fossil fuel reserves owned by a company, divided by a company’s market capitalisation, to adjust for company size. This represents a carbon reserves intensity score for a company. Carbon reserves data is provided by Trucost.
3. Green revenues
The transition to a low-carbon economy presents investment opportunities. New technologies are already leading to new revenue streams in sectors from agriculture to infrastructure and energy, with further innovation anticipated as the world develops alternatives to our current approach to energy and natural resources.
Companies who derive revenues from low-carbon services and technologies are assigned a green revenue score, in proportion to the percentage of company revenue derived from ‘green’ activities. This is applied as a positive uplift to the companies’ score.
Companies that may have a lower score due to their exposure to carbon emissions are rewarded if they have revenue exposures to green sources. This is intended to encourage companies to drive innovation and provide solutions to the energy transition.
LGIM follows its data provider’s classification of green revenue streams, but exclude carbon trading, gas- and nuclear-related activities.
Currently, many companies’ disclosures are not sufficiently granular enough to identify green revenue streams. LGIM encourages companies to improve disclosures in this area.
Green revenues data is provided by HSBC.
Themes: Social Diversity and Human Capital
Social Diversity: LGIM believes that companies that are representative of their employees and society, which bring together a diversity of views, backgrounds, values and perspectives, have a better track record of innovation, decision-making and culture.
Having diverse companies also has macroeconomic benefits, as all talent within an economy is effectively utilised.
Gender has been chosen as a proxy for social diversity within a company. Data on gender is globally reported, provides an easily measured way to review total workforce and management levels, and can also serve as an indicator for a company’s overall approach, as companies with strong approaches to gender diversity are also likely to have a commitment to other types of diversity.
LGIM recognises that some companies and sectors face challenges in attracting a diverse group of employees. Therefore, by looking at diversity across the different levels within a company, we seek to capture the development of a pipeline of talent. The social diversity theme tracks four indicators, looking at the percentage of:
4. Women on the board
5. Women at executive level
6. Women in management
7. Women in workforce
Across all four indicators, LGIM considers 30% gender diversity as a minimum standard, with companies below this threshold receiving negative scores. LGIM believes this represents a turning point within organisations, creating a critical mass that can influence change and impact the culture and practices of companies.
Having diversity across the workforce is important for the culture of the organisation and an indicator of the future talent pipeline for management. However, LGIM ESG scores that in most sectors and regions, gender representation is higher in the general workforce than it is at more senior levels.
Social diversity data is provided by Refinitiv.
Human Capital - Policy & Incidents: People are the most important assets for any company. Attracting and retaining the best talent, motivating them to be innovative, efficient and committed to the goal of the company is key for future success. A number of indicators can allow investors to get a sense of how companies manage the risks and opportunities associated with their workforce. LGIM has chosen to use the strength of companies’ social policies, checked against social incident rates, as proxies for how companies value, respect and support their employees and workforce, and how they promote a healthy and engaging work culture.
LGIM utilises four human capital indicators to capture whether companies have sufficient policies in place with regards to below. Across each policy category, companies who are deemed to have no formal policies in place receive a negative score. Companies with a formal policy in place receive a neutral score. Finally, companies with adequate to strong policies receive positive scores.
8. Bribery and corruption policy
Occurrences of bribery and corruption can indicate issues related to culture and employees; LGIM looks for reassurance that companies are managing these risks by implementing appropriate policies.
9. Freedom of association policy
The ability of employees to freely form and join unions is a key component of a healthy work culture.
10. Discrimination policy
Attracting and supporting a diverse and inclusive workplace is critical to creating a working culture with diversity of thought to support decision-making. A strong policy against discrimination is a key element to achieving this objective.
11. Supply chain policy
The strength of the supply chain is critical for most companies and it is a crucial component of applying consistent social standards across the businesses globally. LGIM expects companies to have strong policies for their supplier relationships.
LGIM also incorporate incidents into this theme, as a high level of material incidents may indicate that current policies are either of poor quality or insufficiently enforced. As such, it considers:
12. Employee incidents
13. Business ethics incidents
14. Supply chain incidents
A penalty is applied to companies’ Human Capital policy score depending on the severity of the incident.
All human capital indicators are provided by Sustainalytics.
Themes: Investor rights, board composition and audit quality
Board composition - The board of directors is the primary structure setting corporate strategy and direction, overseeing management’s performance and approving the use of investor capital. Having the right composition at the top of a company is an essential element of its success. Maintaining strong corporate governance through a high quality and independent board dilutes the risk of power being concentrated in one or a few people in an organisation and ensures there are appropriate levels of accountability.
This theme is composed of data on three indicators:
15. Independence of the chair
The chair leads the board, setting agendas for the discussion and ensuring the board has the right people and the right information required to make the best decisions and hold management accountable. As set out in our global voting policy, LGIM therefore expect the chair to be independent upon appointment and throughout their tenure. LGIM assesses whether the chair is currently an executive or has been a former executive of the company. A high score is attributed to an independent chair.
16. Independent directors on the board
An independent board is critical in overseeing the management and capital of a company. LGIM acknowledges that the structure of boards varies between companies and countries. As set out in LGIM's global voting policy, it believes that having a minimum of at least 30% independent directors is an essential safeguard for minority shareholders. Companies that fall below this threshold are penalised, whilst companies with a majority of independent directors are rewarded with top scores.
17. Board tenure
Regular refreshment of the board contributes to a continued independent board with the relevant skillsets. Regular refreshment can also assist in questioning established best practices and avoid ‘group think’. However, LGIM equally recognises the value of retaining corporate knowledge within a board, therefore do not wish to see too frequent change. LGIM's methodology reflects its global voting policy in that a lower score is attributed to boards with very high or very low board tenure.
Audit oversight - Having accurate and reliable financial information is the bedrock of investment decision-making and effective corporate governance.
Investors expect companies to demonstrate and explain the established processes and procedures to ensure the independence and robustness of the internal and external audit functions, and the level of oversight from the board.
18. Audit committee expertise
The audit committee plays a vital role in safeguarding investors’ interests. LGIM expects all companies to have at least three independent members on the audit committee, including a “financial expert” as defined by the US Securities and Exchange Commission’s rules following the Sarbanes-Oxley Act. Companies who fail to meet this minimum standard are penalised.
19. Non-audit fees paid to auditors
The extent to which auditors conduct non-audit work (i.e. consulting, IT support, etc.) for an audit client is an important proxy for independence.
Auditors should not audit their own work, and the higher margins available on the non-audit work may affect their willingness to negatively mark the accounts. LGIM does not expect excessive non-audit work to be conducted by the company’s external auditors, as this will bring into question the independence of their judgment. In line with LGIM's global voting policy, the scoring methodology penalises companies when non-audit fees exceed 50% of the companies’ audit-related fees.
20. Audit opinion of the accounts
An auditor’s opinion provides a view into the extent to which a company’s financial statements represent a "true and fair" view of a company's financial performance and position. From a score perspective, LGIM only assumes that a company is compliant when the opinion is “unqualified” (i.e. a company’s financial statements are fairly and appropriately presented, without any exceptions, and in compliance with accounting standards). All other auditor opinions result in a negative score.
Investor rights - The ability of shareholders to vote is an important mechanism in the public equity markets, to demonstrate dissent and align the interests of the company and management to that of the owners. In contrast, a diminished ability to hold corporates to account weakens fundamental checks and balances.
Investor rights are therefore assessed based on two data points:
21. Free float
The greater the number of shares held by disbursed shareholders (free float), the greater the opportunities for shareholders to use their voice for influence and impact. LGIM encourages companies to have a free-float of at least 50%.
22. Equal voting rights
LGIM subscribes to the principle of ‘one share, one vote’, as control of a company should be proportional to the risk being borne by investors. LGIM believes this is both a fundamental right of shareholders and an essential feature of good corporate governance. Without it, investors lack the ability to influence the companies they own and have a say in how their capital is being used.
Companies are tested against three criteria:
In addition to the traditional E, S and G metrics, LGIM also assesses companies on their overall transparency. Without access to comprehensive corporate data, investors are unable to properly assess material risks and opportunities related to their investments.
23. ESG reporting standard
Analysing the company's overall reporting on ESG matters and the extent to which it conforms to international standards as well as best practices.
24. Verification of ESG reporting standards
Assessing whether the company’s sustainability report has been externally verified according to a report assurance standard.
25. Carbon Disclosure Project (CDP) disclosure
Responding to relevant CDP questionnaires is an established best practice in carbon emissions reporting
26. Tax disclosure
Assessing whether the company reports taxes paid in each country of operation. The best score requires full country-by-country reporting, a moderate score is given for when some but not all taxes are disclosed, whilst a low score indicates that tax disclosure is happening in only a few or none of the countries of operation.
27. Director disclosure
Assessing the level of disclosure regarding board directors, including directors’ biographies. This information is critical for investors in order to assess the skillsets and relevant experience of director nominees and the overall quality of the board of directors.
28. Remuneration disclosure
Disclosure of executive pay policy and practices is critical to allow proper analysis of the alignment between pay and performance and to ensure that the quantum of pay is both reasonable and within market standards.
Score calculation - Each of the 28 data points are assessed and scored, creating a sub-score at the theme level.
Individual themes are then aggregated to form the environmental, social, governance and transparency scores.
Companies’ final ESG scores are presented between 0 and 100. A high-scoring company will have met most of our criteria for best practice; a company scoring 0 has not met any of LGIM's minimum expectations and represents a very significant concern.
Scores are updated twice a year in March and September.
LGIM's Global ESG Scores of companies - March 2020 can be found here
LGIM's objective is to effect positive change in the companies and assets in which it invests, and for society as a whole. In 2019, LGIM focused on:
Future World Funds: Climate Impact Pledge
As one of the largest asset managers in Europe, LGIM seeks to use its scale to ensure companies are playing their part to accelerate the transition to a low-carbon economy. The investment risks surrounding climate change have become so urgent that, for the first time, LGIM is going beyond solely engaging with companies in order to hold them to account on the issue.
In December 2015, 195 governments agreed in Paris to limit the increase in the average global temperature to well below 2°C above pre-industrial levels. The Climate Impact Pledge represents LGIM's commitment to address climate change by engaging directly with the largest companies in the world, which are crucial to meeting the 2°C Paris target. The companies will be assessed rigorously for the robustness of their strategies, governance and transparency.
Companies that fail to meet its minimum standards (ESG Scoring) will be removed from, or not invested in, our range of Future World funds, subject to the disinvestment process. In all other funds where LGIM cannot divest, it will vote against reappointing the chair of their board of directors, to ensure LGIM are using one voice across all of our holdings.
The companies covered by the pledge include market leaders in sectors ranging from resource mining to finance. LGIM's assessment takes into account whether they have a corporate statement that formally recognises the impact of climate change; whether they are fully transparent on their carbon contribution; how climate considerations are embedded within the corporate strategy; and whether the board composition is diverse and robust enough to drive innovation and change. LGIM will rank companies based on these criteria, and engage directly with them to improve their rankings. LGIM will also make public the names of some of the best and worst performers, alongside examples of best practices that LGIM would like to see adopted more widely.
Disinvestment Process - If companies fail to meet these criteria, and if after a period of engagement, the company has not addressed the areas of concern, LGIM will either not invest or exclude the company from active Future World funds ("Protection List"), and reduce or divest the company from Future World index funds.
In the Future World index funds, LGIM will make sure the impact of divestment is no more than the tracking error disclosed in the fund’s prospectus. That could mean it will have to retain some investment in companies that do not meet its criteria in order to avoid tracking error. LGIM believes this combined approach of ranking, publicising, voting and divestment can send a powerful message to all companies that their investors are serious about tackling climate change.
Summary: LGIM's proprietary ESG Scoring using 28 key metrics of Global Companies is very impressive to see - it ensures that this is done in-house and not reliant on third-parties, hence it is more transparent and can be amended to match evolving views. I've taken the opportunity to use these ESG Scores and match them up with the L&G Future World ESG Developed Index fund's top 10 holdings below.
In addition, the width and depth of the metrics encompasses many important factors, and the fund would effectively penalise those firms with low ESG scores by tilting exposure to those with higher ESG scores. Though there's a lot of detail, I'm surprised that what's missing is the weightings between the environmental, social, governance and transparency factors (i.e. is each factor weighted equally or is E more important than say T?).
In addition to this, there is a Negative Screening overlay ("Protection List") and Active Voting/Engagement to compliment the process. For a low-cost passive/index tracking fund, this is all very good to see (and quite rare as most simply have a negative screen) and would certainly please those cost-conscious responsible investors.
Having said that, the fund size is still relatively small and the fund lacks a long track record - though this may not be a big concern for an index tracking fund.
Fund Size: £126.8m as at 31/05/2020
Number of Holdings: 1292
OCF: 0.25% as at 30/09/2019
Target benchmark: Solactive L&G Enhanced ESG Developed Index
Top 10 Holdings & LGIM ESG Scores
This is actually my first DD I've ever posted so fuck you and forgive me if this doesn't work out for you.I've been looking at $PSTG for a while now and if my buying power didn't get so fucked from my decision to buy 8/7 UBER puts, I would have been already all over this play.submitted by OnYourSide to wallstreetbets [link] [comments]
What had got me looking into Pure Storage was an unusual options activity alert. I've looked into this company before but didn't entirely understand what they do. Now after looking at them again, I'm still not exactly sure wtf they do....BUT I've gotten a better clue. Basically what I got from my research is that these guys fuck with "all-FLASH data storage solutions (enabling cloud solutions and other low-latency applications where tape/disk storage does not meet the needs)."......and ultimately what this all means to me is that these are the motherfuckers making those stupid fast laser money printers with the rocket ships attached. And that's something I'm interested in.
Now, here is the DailyDick you all degenerates have all been fiending for:
Fundamentally: PureStorage remains one of the few hardware companies in tech that is consistently growing double motherfucking digits, yet remains constantly cucked and neglected by investors (trading at 1.9x EV/Sales).
The 36 Months beta value for PSTG stock is at 1.62. 74% Buy Rating on RH. PSTG has a short float of 7.28% and public float of 243.36M with average trading volume of 3.16M shares. This was trading at around $18 on Wednesday 8/5 when I started writing this and as of right now, it's about $17.33 💸
The company has a market capitalization of ~$4.6 billion. In the last quarter, PSTG reported a ballin'-ass profit of $256.82 million. Pure Storage also saw revenues increase to $367.12 million. IMO, they should rename themselves PURE PROFIT. As of 04-2020, they got the cash monies flowing at $11.32 million . The company’s EBITDA came in at -$62.81 million which compares very fucking well among its dinosaur ass peers like HPE, Dell, IBM and NetApp. Pure Storage keeps taking market share from them old farts while growing the chad-like revenue #s of 33% in F2019, 21% in F2020, and 12% in F1Q21.
Chart of their financial growth since IPO in 2015:
At the end of last quarter, Pure Storage had cash, cash equivalents and marketable securities of $1.274B, compared with $1.299B as of Feb 2, 2020. The total Debt to Equity ratio for PSTG is recording at 0.64 and as of 8/6, Long term Debt to Equity ratio is at 0.64.Earning highlights from last quarter:
What are Pure Storage's other revenue drivers? Well these motherfuckers also have the products to address the growth of Cloud storage as well as the products to drive the growth of on-prem storage. For on-prem data center, Pure sells Flash Array to address block storage workloads (for databases and other mission-critical workloads) and FlashBlade for unstructured or file data workloads. On-prem storage revenue is mainly driven by legacy storage array replacement cycle.
So far, it seems like Pure Storage's obviously passionate and smart as fuck CEO has been spot on with his prediction of the flash storage sector's direction. Also seems like he's not camera shy either. Pure Storage's "Pure-as-a-Service and Cloud Block Store" unified subscription offerings is fo sho gaining momentum it. This shit is catching on with enterprises, both big and small. COVID-19 increased the acceleration of our digital transformation and the subsequent shift to the cloud. This increased demand in data-centers is going to drastically help Pure Storage's future top and bottom line. To top it off, NAND prices are recovering! (inferred from MU earnings). I expect Pure Storage to get some relief on the pricing front because of this which obviously in turn should improve revenues.
PSTG's numbers look pretty good to me so far but are they a good company overall? Even when scalping and trading, I don't like to fuck with overall shitty companies so I always check for basic things like customer satisfaction, analyst ratings/targets, broad-view industry trends, and hedge fund positioning.. that sort of thing.Pure Storage stands out in all of these fields for me.
Customers like Dominos Pizza and many others all seem to be happy AF with no issues. I can hardly even find a negative review online. Their products seems to be universally applauded. Gartner and other third party independent analysts also consider Pure Storage's product line-up some of the best in the industry.
The industry average for this sector is a piss poor 65.Pure Storage has a 2020 Net Promoter Score of 86
Enterprises are upgrading their existing storage infrastructure with newer and more modern data arrays, based on NAND flash. They do this because they're forced to keep up with the increasing speed of business inter-connectivity. This shit is the 5g revolution sort to speak of the corporate business world. Storage demands and needs aren't changing because of the pandemic and isn't changing in the future. The newer storage arrays are smaller, consume less power, are less noisy and do not generate excess heat in the data center and hence do not need to be cooled like the fat fucks at IBM need to be. Flash storage arrays in general are cheaper to operate and are extremely fast, speeding up applications. Pure Storage by all accounts makes the best storage arrays in the industry and continues to grow faster than the old school storage vendors like bitchass NetApp, Dell, HPE and IBM.
Pure Storage’s market share was 12.7% in C1Q20 and was up from 10.1% in the prior year - LIKE A PROPER HIGH GROWTH COMPANY.HPE, NetApp and IBM, like the losers they are, lost market share.According to blocksandfiles.com, AFA vendor market share sizes and shifts are paraphrased below:
Hedge Funds are on this like flies on shit.
Alliancebernstein L.P. grew its position in Pure Storage by 0.5% in the 4th quarter. Alliancebernstein L.P. now owns 104,390 shares of the technology company’s stock worth $1,786,000 after purchasing an additional 560 shares during the last quarter.
Legal & General Group Plc grew its position in Pure Storage by 0.3% in the 1st quarter. Legal & General Group Plc now owns 258,791 shares of the technology company’s stock worth $3,213,000 after purchasing an additional 753 shares during the last quarter.
Sunbelt Securities Inc. acquired a new stake in Pure Storage in the 4th quarter worth $4,106,000.
CENTRAL TRUST Co grew its position in Pure Storage by 79.8% in the 2nd quarter. CENTRAL TRUST Co now owns 3,226 shares of the technology company’s stock worth $56,000 after purchasing an additional 1,432 shares during the last quarter.
Northwestern Mutual Wealth Management Co. grew its position in Pure Storage by 203.0% in the 1st quarter. Northwestern Mutual Wealth Management Co. now owns 2,312 shares of the technology company’s stock worth $28,000 after purchasing an additional 1,549 shares during the last quarter.
Also, everybody's favorite wall street TSLA bull, Cathie Wood has been busy steadily purchasing big lots of PSTG for her ARK ETF funds for a while now...Even going as far as selling TSLA in order to re-balance!
Hedge funds and other institutional investors own 78.93% of the company’s stock and it seems like more are piling in every day.
Tons of active options, too -Pretty good volume lately with the spreads looking decent.
Over 5,000 September $20 Calls added just on 8/3 alone 🤔
Order flow helps my thesis here, showing a recent influx of big dick money moving into PSTG.
Google Search Trends showing uptick in interest: SPY420 baby
Robinhood Trends showing the YOLO is trending up
Increased job postings on LinkedIn all across the globe, further supporting the idea that Pure Cloud Adoption is looking strong.
Technically: This broke out through down-trend line a couple of days ago and as of right now looks to be pretty oversold. Looks like its found support at the 50 DMA and zooming out , the chart just looks like to me that it's coiling up for a big breakout.
These fucking shorts are going to get squeezed out hard. Potential short squeeze coming?
**So what's the play?**I'd like to see RSI break out of the downtrend and the divergence between price & momentum ends at some point. If/when RSI breaks out, I want to play this thing aggressively with bullish call calendar spreads....THAT IS IF I HAD SOME FUCKING BUYING POWER (FUCK YOU UBER)....Soooo really what I'll be doing is asking my wife's boyfriend sometime this weekend for a loan. That way on Monday I can buy some $PSTG 9/18 $17.5 & $20 calls at open and YOLO my saddness away for a week.God forbid, I might even buy of those things called "shares" I heard about from /investing if at all possible because in all honesty, I really do feel like this is a good company to hold in a long term growth portfolio.Pure Storage is NOT looking like your average KODK prostitute to flip or scalp and actually more like someone you'd bring home to your dads.
EARNING DATE: 8/25
Pure Storage has a history of beating estimates and rocketing up. Over the last 20 quarters, the company beat revenue 17 quarters by an average of $4.9 million or about 3%. Out of the three times that the company missed on revenues, once was due to supply fuck-ups at one of its distributors and the other two times were due to Average Selling Prices declining faster than the company forecasted. Higher-than-expected ASP declines (due to NAND oversupply) is one of the risks of the storage business...but then again NAND prices look to be recovering now if MU's earning isn't fucking with us and telling us fibs. Big money is forecasting revenue to be around $396 million, essentially flat year-over-year, and EPS of a disrespectful ass penny....Fuck that conservative ass guidance! I think PSTG is going to blow that shit out the water. This chart shows Pure Storage’s past performance and we all know for sure that past performance = future results.....right?
My Prediction: After ER8/25, Pure Storage will hit new 52 week highs.$20.50 - $23.50 is my guess. Bold prediction, $27.50+ by the EOY and $50 by December 2021.
tldr: PSTG 9/18 $17.5 & $20 calls
edit: for those that bought into this, I'm in this with you!
Let's pray for a rebound next week. also, Fuck Cisco!
For a long time now, I have been playing almost exclusively martial characters, very rarely if ever playing full spellcaster classes. Some people would say that this is boring, that I should expand my horizons, do other things, but part of the reason I play so many martials is that the ultimate warrior is my ideal power fantasy. I don't care for the wizard who can bend space and time or the druid who can turn themselves into a dragon or the cleric who has learned to become the very avatar of their god on this mortal plane. These things do not interest me, they are not the representation of the kind of character I would want to become at the height of their power in a fantasy setting. No, my power fantasy is the man who can take on the world through martial prowess alone. To be a character who has become so skilled with his blade, so mighty with the wielding of weapons, that he is considered an army unto himself. A terror that carves its way through the battlefield, bolstering the morale of his allies and crushing the enemies that stand before him with unstoppable force.Please be civil in the comments and follow the rules.
But, therein lies the problem. This is not possible for martial characters in Dungeons and Dragons 5th edition.
Now, let's back up a bit and get some context first. Please bear with me, this is probably going to be a long post.
A conversation that I regularly participate in the comments of this subreddit one where I feel martial characters are underpowered in comparison to spellcasting classes. Many would disagree by saying something along the lines of this:
"Spellcasters are versatile with low hit points while martial characters are tanky with good single target damage. That's the trade off."
The idea is that it is fair that a wizard can cast Fireball to hit multiple targets at once because eventually the Fighter can learn to make 4 attacks in one turn and use all of them to absolutely wail on one guy. AoE damage vs. Single Target damage. And for a while, I agreed with this notion. It's only recently that I've come to realize that even if this is true, it's still unfair.
There are situations that can represent a challenge without access to magic that simultaneously can be handwaved with magic. Stealth can be trivialized through Pass Without a Trace or higher level castings of Invisibility. Uncross-able divides can be crossed with Dimension Door or Arcane Gate or even just a simple Misty Step. A person can be convinced to do something with a casting of Suggestion or forced to do something with Dominate Person. These are the things that magic is capable of accomplishing. And this capacity to be useful in a myriad of circumstances is one of the great draws of being able to cast magic.
However, it's considered to be a fair trade that martial characters are not good/completely incapable of accomplishing such things simply because they are good at being able to hit things. Not even things, but a singular thing. Single target damage. Only Fighters get more than two attacks per Action, so getting mobbed by a large number of enemies at once is very bad for any martial character that is not a Fighter, and only marginally less bad if you are a Fighter. The problem of course is simply that they aren't capable of hitting them all at once. The martial's current role in a party is that they are supposed to be the ones who deal a large amount of damage to the boss enemy on their turn. The Barbarian uses their Reckless attack to roll 4d20 and try to get a Brutal Critical on the Demogorgon, the Fighter uses their Action Surge to try and hit the Adult Red Dragon 8 times, the Paladin uses all of their highest level spell slots to Divine Smite Acererak for 7d8 Radiant Damage. Lots of damage, but only on the single enemy. I find this to be unfair as a trade off for two primary reasons:
It feels bad to be only good at fighting single enemies. All of these martial examples are not likely to be good at skill checks. Good at what they're good at, sure, but most characters will only end up with between 4 and 6 proficiencies unless they're a Rogue or take the Skilled Feat. And in all of these cases, the optimal stat distribution causes them to not be naturally good at other things as well. Barbarians are very multi-ability-dependent, needing high Strength and Constitution but then also needing Dexterity to bump up their AC, each being prioritized in that order. That means the other three mental stats will become worse. Fighters also tend to prioritize Strength and Constitution (if you're playing the classic archetype) and most Paladins do the same with Charisma being a tertiary stat since it is their spellcasting. So with all of them prioritizing Strength and Constitution, there is only a single skill (Athletics) between those two abilities. Even if you play a Dexterity Fighter, you're only getting good at 3 skills. As opposed to a Wizard or a Druid or a Cleric who put their points into their main stat and become decent at 5 skills as a result. Whether martial or spellcaster, all of these classes get 2 proficiencies to start. But by nature spellcasters will be skilled at more things than the martials will be because their main stats are better for more things. So it feels like being a martial makes you only good at fighting single enemies while spellcasters get to be good at fighting multiple enemies, getting over impassable obstacles, and many different kinds of skill checks. Which brings me to my second reason.
Spellcasters are actually just as good or better at single target damage than martial characters. The average damage for a failed save on Meteor Swarm is about 50% more than the average damage for 8 successful hits with a greatsword as a Fighter using Action Surge.
Meteor Swarm: 20d6(rolls of 3)+20d6(rolls of 4) = 140
8 Greatsword Attacks with 20 Strength: 16d6(rolls of 3 and 4) + 40 = 96
"But that's a 9th level spell vs Action Surge. Of course the 9th level spell is more powerful."
Let's compare instead a mid level Wizard vs a mid level Barbarian using the Comprehensive Damage Per Round Calculator.
Wizard lvl 12
First round animate object as a 6th lvl spell vs. ac 17
- dmg output 48.3
Second and third round animate object + 2 castings of Cone of Cold
- dmg output 78.3*2
Total damage for a lvl 12 wizard in 3 rounds: 204.9
Barbarian lvl 12
Human barbarian, 20 str, PaM, GWM, a +1 glaive vs. ac 17
+5 to hit (10-5 from GWM)
First round bonus action rage and 2 reckless attacks
- dmg output 36.3
Second and third round
glaive attack and bonus action attack with the end.
- dmg output 52.1*2
Total damage for a lvl 12 barbarian in 3 rounds: 140.5
As you can see, the Wizard handily outstrips the Barbarian. And we even gave the Barbarian a magic item and feats that time. Spellcasting classes are capable of outputting just as much or more single target damage as a martial class. The argument that is often made after this is that a martial class can continue to output this throughout the course of a day whereas a spellcaster has to use many resources that they can only get back later, but I contest this by saying most people don't have that many encounters per day and that while a martial can sustain this damage over the course of several rounds, most encounters will not last long that long anyways. All the enemies will be dead before a martial can stack up enough hits to match what the spellcaster has already done. Even if we do assume multiple rests and encounters over a day, the Wizard can use Arcane Recovery to get back the 6th level spell slot they just used. So they're still probably just fine for the next encounter.
So for those two reasons, I present the case that martials truly are left in the dust by spellcasters in almost every regard. That's the context for this. But this isn't just me crying because I'm a power gamer who wants to be OP. More than just the mathematics of it, I feel that there is a power fantasy is left almost entirely unfulfilled for martial characters.
What is it that makes warrior characters in movies and stories stand out, look cool, and feel powerful?
What does Captain America do? https://youtu.be/oRwFd1G6_U4?t=42
What does The Punisher do? https://youtu.be/01SYT5MPsHw?t=28
What does The Bride in Kill Bill do? https://youtu.be/a3aFv8IQb4s?t=319
Neo and Trinity do? https://youtu.be/NgAmX8GRwDw?t=57
Aragorn? (the most classic of all fantasy warrior archetypes) https://youtu.be/wSgeEH-Zwbk?t=3
Thor? (yes, even though he uses magic I still argue he's a martial character because of the way that he primarily engages in physical combat) https://youtu.be/-mHaq88BAV4?t=131
Ip Man? https://youtu.be/Kv9ygN2B8WU?t=97
John Wick? https://youtu.be/SamAItb8L58?t=86
Or John Wick? https://youtu.be/0L9SzBANF0w?t=264
Or what about John Wick? https://youtu.be/ElZ9y6l9KhI
A common theme with all of these characters is that they can fight many opponents at once and still win. Whether outnumbered by a handful or outnumbered by a hundred, they make a real contest out of something that would and should make instant losers out of anybody else. When they do it by themselves, they're badass. When they do it in the middle of a battlefield, their martial prowess inspires the common soldiers around them. This is all part of the fantasy of being a powerful non-magic fighting character. I put in John Wick three times because the whole draw of his character is that he's so hyper-competent at killing that he can take down entire organizations of enemies by himself. Even in a world of assassins and professional killers, they consider him their Boogeyman. And this character was so popular it spawned a franchise that thusfar has made more than $500 million dollars at the box office. But the part where he has a 1v1 with the bad guy is not what makes us like him. It's arguably the most underwhelming part of the first John Wick movie. Being able to fight many enemies is often cooler than fighting a single skilled enemy.
Take this clip from the movie Hero as a prime example that shows both ends of the spectrum. In the first half of the scene, two people are fighting their way through a literal army on their own and winning. In the second half of the scene, there is a duel between two swordmasters. And while the duel exhibits great skill, it is not the more impressive half of the scene. To put it another way, the thing that makes you think Broken Sword is skilled is not that he duels the Emperor. Rather, it's the other way around. You believe that the Emperor is skilled because he is capable of fighting Broken Sword, a man who just cut his way through an entire army with the help of only one other person.
The pinnacle of a martial character's "cool factor" is not the ability to be able to participate in skilled single combat against someone of equal skill, but to be outnumbered so dramatically that there should be no chance of winning, and yet they can and do anyways. The odds and logic of the situation tell you that it is impossible. But they accomplish the impossible with nothing but the swiftness of their sword.
Now, don't get me wrong, one on one fights definitely are cool. But what can take an entire scene to establish that competence can be established in seconds using a battle in which the hero is heavily outnumbered. They are cool in different ways, one being naturally more drawn out than the other, but it's important to have both. If you're only limited to one or the other but not both, that kind of sucks.
Back to D&D, it is not possible to be this kind of character as a martial. Firstly, due to the mathematics and action economy of the system, it is always more efficient to put all of your damage onto a single target because it's hard to spread out. Secondly because you are limited in the number of attacks you can make, that puts a hard limit on the number of enemies you can kill per turn. 20th level Fighter with 4 attacks? Barring specific subclass abilities or feats, it's literally impossible to exceed killing that number of enemies. Even with feats, you only max out at 5 attacks (using the bonus action attack from Great Weapon Master) on your turn without using Action Surge. If you are outnumbered 100 to 1, how long do you think a 20th level martial character could last? Say you're a 20th level Fighter against 100 Goblins, no Great Weapon Master feat. Assuming you hit with 100% accuracy and kill every one of them in one shot and use both of your Action Surges, it will take you 23 turns to kill them all. And for each one of your turns, they can also make their turn, surrounding you on all sides and attacking you 8 times a turn in response. For ease of calculation, if you had 18 AC wearing non-magical plate armor, Mob Combat rules (found on DMG page 250) assume you are statistically likely to take 12 damage per turn. 252 damage (using average damage) over 21 turns of keeping you surrounded. If you have enemies that aren't CR 1/4 against a 20th level character, say 100 CR 1/2 Thugs, they could make two attacks each, that turns into 16 times per turn and that turns into 30 damage per turn. 630 damage over 21 turns. If the Fighter had 20 Constitution and maximum health rolls (10 on a d10) at every level, they would have 300 hit points. They would barely survive against the goblins. They would not survive against the thugs. That's not even including the possibility of being attacked from range with shortbows and crossbows and such. Eventually, you will lose. And it won't even really be close.
We think these characters should be capable of surviving situations like these, after all at 20th level any Fighter should be a legendary character based on their prowess and skill. But the way the game works, they just aren't capable of surviving.
What is the power fantasy of a spellcaster? To be so powerful that they can bend reality to their will? To cast magics that affect the very fabric of existence? Could a 20th level spellcaster survive a 1 v 100? Quite handily I think actually. How about a 1 v 1000? Well, given that Meteor Swarm allows you to make explosions of 40d6 damage in a 40 foot radius in 4 different locations, you could actually hit 900 creatures at once if they were all bunched up enough (each meteor can hit 225 creatures at peak efficiency). Turn that down to a 1 v 100 real quick. Mathematically, it's entirely possible simply because they can deal enough damage at a fast enough rate combined with the myriad of spells they can use for damage mitigation (Shield, Blade Ward, Blink, Stoneskin, Mirror Image, Blur, etc.)
Many might argue that this is fair, as it is unrealistic for a single person to be able to fight 100 people at once without magic and win. That could never happen in real life. But then I would counter with this:
Aren't we playing Dungeons and Dragons?
Is it realistic for someone to be able to pull meteors out of orbit with their mind? Or open up gates to other dimensions because they figured out how to tear holes in reality? Or to have discovered a word that is so powerful, so forbidden, that simply speaking it can cause another person to drop dead on the spot? Or to raise an undead army of skeletons? Why does realism become the limit for a Fighter when the Wizard's entire existence is predicated on breaking the rules of our reality?
Almost any spellcaster's power fantasy can come true. If you want to be someone who causes explosions on the battlefield, you can do that. If you want to be someone who turns illusions into reality, you can do that. If you want to be a seer who prophesies the future, you can do that. If you want to take over the world with thousands of full powered spellcasting clones of yourself, you can even do that. You are more limited by your own imagination and creativity than the actual rules of the game. But the simple fantasy of "I want to be able to fight a bunch of guys at once" is out of reach of the martial character, despite the fact that it's supposed to be the primary thing they're good at.
To summarize and conclude, I am of the opinion that the most common image of a skilled fantasy warrior is exemplified in their ability to fight a large number of enemies at once or in quick succession, not their ability to handily defeat a single opponent. The biggest design flaw and biggest disappointment for martial characters is their inability to fulfill this fantasy. Their single target damage is mechanically what they are known for, but I think what martial players like me really want more than anything is to be able to fight many enemies at once. I believe one of the ultimate power fantasies for a martial character is to be able to fearlessly charge forward into any number of enemies with full confidence of victory until a suitable challenger approaches. If Dungeons and Dragons is a game of wish fulfillment, the wishes of martial players like me cannot be fulfilled as it is currently designed.
I've been looking at old playtest packets for 5th edition and I found out some interesting things. The 11th level Hunter Ranger feature, Multiattack used to be something that any martial character had a choice to take at some point. Whirlwind Attack was available to be learned by Fighters and Monks, and Volley was on the list of Fighter maneuvers that could be learned. It seems to me that the reason that martial characters are so subpar in comparison now is that they were watered down across the board, mechanics that used to be able to be used by many are currently sequestered into individual subclasses.
Now, to be clear, I'm not really looking for a "solution" to this problem. At least not as far as 5th edition is concerned. The issues are too fundamental, too rooted in the core of the system to solve without an egregious amount of homebrewing. But I did want to put this out there as a topic of discussion to see if others in the community find validity in my idea. Is the problem of "linear fighters vs quadratic wizards" just an issue of efficiency, versatility, and mathematics? Or is the true problem that martial characters lack the ability to fulfill what is probably one of the core wishes of people who want to be warriors in fantasy settings?
edits: many typos I spotted after the fact -_-
There's a lot of common responses I keep seeing pop up here that I want to address here in the main post.
"This is a game of resource management, you should just have more encounters per day to balance it out!"
First of all, this isn't something that a player can do themselves. This is entirely dependent on a DM and it's much more work for them to do so and be accommodating. They have to balance every encounter. It isn't as simple as just "having more encounters." Someone has to do that work.
Second of all, I mentioned this, but at a certain point it just becomes a slog when you're being constantly worn down every day just to give enough time for turtle martials to catch up to rabbit spellcasters. I don't know about you, but even as a martial, I wouldn't have fun doing this all the time.
Third of all, it completely ignores the point of my post. I don't care about being able to mathematically catch up to the wizard over the course of a day, I want to feel badass in my own right and I want to be able to do it whenever I want. It doesn't matter that a Wizard can cast Meteor Swarm once per day and I can use Action Surge once/twice per short rest. The point is that I use it and I'm done. And until I get that next short rest, I'm just as weak as a Wizard. Fighters can "recover" more quickly than spellcasters, but in the actual encounter? In the actual fight? They have less resources that they can burn through more quickly than spellcasters. This is the crux of the problem here. Without rests, there is nothing that makes a Fighter better than a Wizard. Anything I can do, he can do better, 🎶 he can do anything better than me. 🎶
It's basically the same thing as saying a Wizard can finish a marathon with their spells but then they'll be really tired when they're done. You can finish the marathon too if you take a few hour long rests along the way. Why can't I just finish the marathon with my own strength? Am I at least faster at sprinting the hundred meter dash? No, the Wizard is faster at that too, but you'll be able to do another hundred meter dash in an hour or so. He still can too, he'll just be marginally slower than you.
Do you see the problem with this argument yet?
"Martial characters should be getting magic items to make them better and then they'll be as good as spellcasters."
But spellcasters don't need magic items. This only supports the argument that martial classes are handicapped in comparison to spellcasters. It's essentially saying that spellcasters can stand on their own but martial classes need a magic item wheelchair to be able to keep up. Do you see the problem here?
Why is it too much to ask that martial classes can stand at the same level as spellcasters through just their own class features?
"Cleave is a really good tool."
And I agree. But last time I asked my DM, he said no. Maybe I'll get to ask him again, but I respect his rulings because he's my friend and I respect him.
"It sounds like the 5th edition system is not for you. You should try something else, like Pathfinder 2e!"
I would if I could but my group seems happy playing 5th edition. As much as this post is a huge complaint rant, not everything is about me. And I won't DM a Pathfinder game because frankly, I'm not good at DMing. I think other people have less fun when I'm behind the screen and I think I have less fun when I'm behind the screen. I wish it weren't the case, but it seems to be the one I'm stuck with. I just don't have a mind made for DMing.
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