Stronger and cheaper than what, I hear you ask? Well, Marston's (LON:MARS) were the second company I properly analysed - though I never did a writeup on them - and Philip O'Sullivan jogged my memory recently by suggesting I take another look at them. Firing back up my spreadsheets (which are, unsurprisingly, far neater than they are nowadays!) I saw only positive comparisons; they've been dragged down by the general market fall, over 10% since my first look, and they managed to meet the market expectations I had my doubts about in the first place. As you see from the graph and table, then, metrics look good. 2009 was a significant (but understandable) dip, apart from which they've earned good profits. The 5 year average sits at £58.5m, or a 5YP/E of under 10.
Those of us in Britain will probably know what Marston's do, but their business is split into three divisions - Inns and Taverns, Pubs, and Beer. The distinction between the first two is the managed vs. tenanted debate - Inns and Taverns are managed by Marston's themselves, whereas the Pubs division comprises those leased out. The pie chart below shows the split between these divisions. On gut feeling I quite like the business model as it is, as they proudly declare, vertically integrated. It benefits from its scale and expertise, and enjoys strong margins because of it.
A cursory glance at the chart and the gap between operating profit and net profit points to the obvious downside of the business, though - large interest payments implying a big debt burden. That's exactly the case, but I've become somewhat accustomed to it with my soiree into retail - after all, riddle me this: is there really such a fundamental difference between a retail company with long-term lease commitments (no property on balance sheet, no debt on balance sheet) or Marston's, who own their property and finance it with long-term loans (property on balance sheet, debt on balance sheet)? Both companies have similar cash outflows; rent or interest. Both companies, essentially, have absorbed the risk of being beholden to someone else - for that's exactly what onerous long-term commitments do; transfer cash flow risk to the leasee. From a debt and cashflow position, then, they look almost identical. The only difference as far as I see is who takes risks on…
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