Daniel Miller's Pitch on Bon-Ton Stores & Rowan: Value Investing Congress Las Vegas ~ market folly

Tuesday, April 8, 2014

Daniel Miller's Pitch on Bon-Ton Stores & Rowan: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Daniel Miller of Gabelli's Focus Five Fund.  His presentation entitled "Investing in Conviction" pitched Bon-Ton Stores (BONT) and Rowan (RDC).

Daniel Miller's Value Investing Congress Presentation

•    Concentrated high conviction approach – owns 25 – 35 of the firms best ideas, with the ability to invest 50% of assets in the top 5 positions, however there is a 15% industry cap.
•    Private equity approach attempt to purchase the business at a 30% - 50% belpw PMV. Question to ask, would we want to own this business and could we generate a 25% IRR if they consummated a LBO?
•    Question to ask, why would you want to buy your 60th best idea?
•    Two ideas: both have transitions in regards to mgmt. teams and are niche operators in an environment with larger players. Both have the potential to rapidly grow FCF over the next quarters.

•    Bon-Ton Stores (BONT) is the first idea. $1.1MM EV/ $225MM market cap. Half of the debt is tied to mortgages, and the remainder from a 06 acquisition – primarily low cost.
•    270 locations – primarily in the mid-west. Operates in primarily small and mid-cap communities. •    Hired a new CEO two years ago – has done a good job restructuring and transforming the business. 
•    Currently trades for 5.0x FY2015E EBITDA of $200MM. Think its private market value is 6.5x EBITDA or $23 per share, roughly a double.
•    Why is it cheap? Poor weather as some stores were impacted for 10 – 20 days, and large shareholders like Fidelity sold some shares.
•    CEO does not want to commute from NYC to Milwaukee anymore, will be leaving next year. CFO is talented however.

•    Rowan (RDC) is the next pitch $4B market cap, $5.1B EV.
•    Is an operator of a young fleet of specialized jackups.
•    Went through a recent transformation.
•    Generates strong cash flow, believes they will generate $4 in earnings by FY15, and $5 or greater in FY16.
•    Why is it cheap? Trades against larger peers with older fleets like Noble, Seadrill, Ensco, etc. – whom which the sell-side is bearish.
•    Should generate ~$1.2B in EBITDA by FY15, apply a 6x multiple and the stock price is implied a $43.5 or 30% upside with no heavy lifting required. Also recently started a dividend.

Be sure to check out the rest of the Value Investing Congress presentations.

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