This weak economy should actually help Monro Muffler Brake – S. Meka (MNRO, KSS)

Manager: Sreeni Meka

Covestor model:  Long Term Value

According to the recent employment report, non-farm payrolls added a quarter million jobs and unemployment stayed at 9 percent, which is one and a half percent lower than peak 2008 unemployment figures. First quarter GDP edged up a little, to $15 trillion from last quarter’s $14.8 trillion.  The latest household debt service ratio (DSR), which is an estimate of the ratio of debt payments to disposable personal income, is at 11.75 from a peak of 13.95 in the third quarter 2007, and trending downwards.

As consumers are spending less disposable income on discretionary items such new automobiles, more and more consumers are driving existing cars longer. As auto companies consolidate dealerships, more consumers are turning towards smaller body shops for auto repairs. Monro Muffler Brake, Inc (NASDAQ: MNRO) is one of those auto body shop chains. Headquartered in Rochester, New York Monro has presence in 19 northeastern and midwestern states, with 783 stores.

Monro provides service on cars, vans and light trucks for brakes, mufflers and other auto maintenance like oil changes and wheel alignment services. Monro is growing its business through strategic acquisitions in contiguous states and slowly expanding from northeastern states to midwestern states.

Monro maintains gross margins of 43 percent and pretax margins at 11 percent of its revenue. Its return on equity is at 17 percent, and as of 5/1/11 it’s trading at 18 times forward PE while earnings grew 39 percent from the past year.  (Data: Yahoo Finance)

Given the growth perspective, current economic conditions, its strategic location, service differentiation and customer loyalty, I find Monro an attractive buy. I included Monro in my Covestor portfolio last month.

Kohl’s (NYSE: KSS) is another stock I recently added in to my portfolio. I added Kohl’s due to its solid balance sheet and financial background.

Kohl’s long term debt is less than its working capital. Kohl’s has more cash than its long term debt and as of 5/1/11 is trading at 1.9 times its tangible book value. Kohl’s business has been strong, and it maintains close to 40 percent gross margins and consistently returns 15 to 20 percent on its equity. Kohl’s recently initiated a dividend program and states it intends to maintain a payout ratio of more than 20 percent of its earnings.

I also noticed in Kohl’s cash flow statement that last year it spent $926 million to repurchase its stock. I think it is the great time for Kohl’s to buy its own stock,  while it is trading its well below intrinsic value.

I will discuss my other portfolio strategies and general market trends in my next letter.

Sources:

Unemployment and Houshold DSR information from the Bureau of Labor Statistics (http://www.bls.gov/)  Bureau of Economic Analysis (http://www.bea.gov/)

“Kohl’s Corporation Reports Financial Results, Initiates Dividend and Increases Share Repurchase Authorization to $3.5 Billion” Press release, 2/24/11, http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle_pf&ID=1532369&highlight=”

Kohl’s cash flow statement information from Yahoo Finance, https://finance.yahoo.com/q/cf?s=KSS+Cash+Flow&annual