Is Kogan Worth Buying Even if Founders Are Selling?

A few weeks ago I was standing at a tram stop when the woman next to me caught my attention.

She seemed frustrated and confused. On her phone was the share price of Kogan.com Ltd [ASX:KGN]. My immediate guess was she either bought the stock or was thinking about buying.

After looking puzzled, she made a phone call.

Yeah, I saw it…well, did they announce anything?

As I made my way onto the tram I decided to have a look myself. The stock dropped more than 12% within the day.

With a little detective work I found rumours of Kogan founders, Ruslan Kogan and David Shafer trying to sell large chucks of their holdings.

Kogan denied such rumours. But just eight days later, shareholders found out the truth.

$42 million for personal finances

The best kind of business is one that any idiot can run. Take REA Group Ltd [ASX:REA] or SEEK Ltd [ASX:SEK] for example.

Both of these businesses are amazing. They don’t cost much to run. They spit out tons of cash. And they’ve both got an extremely strong self-sustaining network down here in Australia.

I’m not taking a jab at management in either business. But their decisions aren’t the secret sauce for their success. Doing most of the heavily lifting is the economics of their business.

The problem is that these businesses are few and far between, especially one you can buy for a reasonable price.

The next best thing is to find a business with average economics and a great management team. Management might own a large interest in the business. They could even be the founders.

With management that think like shareholders, even an average business can yield high returns thanks to savvy capital allocators.

Yet when those managers start selling large chucks of stock, it’s time to hoist the red flag. And this is exactly what Kogan did on Wednesday.

 

 

According to the company, Ruslan and David received an offer for 6 million shares. And the pair ‘reluctantly accepted’.

Here’s what The Sydney Morning Herald (SMH) wrote on the Wednesday:

Online retailer Kogan.com’s founders have “reluctantly” sold $42 million worth of company shares a week after an attempt to sell an even bigger parcel sent the stock tanking.

Yes that’s right. Days before Kogan founders tried to offload shares at a discounted price, the Australian Financial Review wrote.

The SMH continues:

Kogan.com’s shares have been on a roller-coaster, jumping to $9.80 early last week – before the attempted sell-off came to light – after it revealed it would start selling whitegoods and built-in kitchen appliances.

Even with the past week’s declines the stock is up considerably from a year ago, when it traded at $1.60.

The buyer or buyers of the 6 million shares remain a mystery for now. The parcel will constitute a significant holding if it is single owner, which must be disclosed to the ASX within two days.

The transaction is Mr Kogan’s fourth major sell-down in the past year. He controlled 36 per cent of the company’s stock at its last disclosure while Mr Shafer held 14 per cent.

Both founders said they ‘remain fully committed to the business’. The reason they gave for selling boiled down to personal financial reasons.

While I’m not familiar with each situation, why would two men need $42 million in a rush?

Even if they did need a few million, why not just borrow and use their shareholdings as collateral. If they expect the share price will continue to climb, why not hold on?

Worth the hype?

Kogan is a great company.

Their mission is to make technology (and now a whole lot more products) affordable to Aussies. They’re a bit like Amazon.com, Inc. [NASDAQ:AMZN] in that sense.

They’re trying to be the place Aussies shop online because of the deals and range on offer.

To achieve that goal, Kogan has to keep margins extremely low. The company’s operating margin was 2.2% and their profit margin was 1.3%.

Sounds terrible, doesn’t it?

But these low margins are driving (hopefully) Kogan’s sales. If online shoppers associate Kogan with a wide range of great affordable products, they’re more likely to buy their laptop, headphones or TV on their site.

Right now it’s all about scale for the tiny ecommerce group.

Some investors have already made great returns on Kogan. In fact, one of my Wealth Eruption subscribers told me he made more than 100% on the stock within months.

But will shareholders see similar returns in the months ahead?

Maybe not. It would be silly to try and predict month to month returns. But for Kogan to grow another 100%, 200% or 300%, the company has to seriously ramp up sales.

From 2014 to 2017, Kogan grew sales annually by an average of 19.4%. They’ve also beaten 2017 expectations by 20%.

In the first half of 2018, Kogan generated almost as much in sales as they did for the whole of 2017.

But for another share price double in the near future, you’d have to expect sales to continue growing by at least at 30–40%. Otherwise the stock’s triple digit earnings multiple will start looking too high.

30–40% sales growth is possible, but is it probable? Maybe that was in the back of Ruslan and David’s minds when they decided to sell out for a cool $42 million.

 

Your friend,

Harje Ronngard, Editor, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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