Nehal Chopra Long Actavis & Charter Communications: Invest For Kids Chicago ~ market folly

Friday, November 7, 2014

Nehal Chopra Long Actavis & Charter Communications: Invest For Kids Chicago

We're posting up notes from Invest For Kids Chicago 2014.  Next up is Nehal Chopra of Tiger Ratan Capital.  She pitched two ideas: Actavis (ACT) and Charter Communications (CHTR).

Nehal Chopra's Invest For Kids Chicago Presentation

•    Started in FY09. Worked at Balyasny beforehand. Was seeded by Julian Robertson/Tiger.
•    Best ideas follow similar pattern: great management teams, high quality businesses. The power of compounding. Secret sauce is operational improvement and capital deployment.

Idea: Actavis (ACT)

•    Owned Forest Labs beforehand.
•    Brent Saunders joined from Forest Labs. Previous CEO of Bausch and Lomb. Brent Saunders turned it around and sold it.
•    At Forest over six months Brent executed a cost cutting program ($500MM), accretive transactions and then sold it for a 25% premium to Actavis. Made 100% return for shareholders. Now runs Actavis.
•    Rolled all of his stock ($100MM) into Actavis.
•    Chairman of Actavis (former CEO) not a slouch as well. 7.3x return.
•    Actavis is a diversified pharma company. Scale of large pharma with cost culture of a generics co. No looming patent cliff.
•    New breed of specialty pharma. Strong platform and distribution. Strong balance sheet strength and FCF generation. Benefits from a low tax rate.
•    Thesis is simple – strongly positioned across all markets which should drive substantial revenue growth. Cost cutting opportunities and debt to EBITDA at 3.5x allows for optionality. Lots of opportunities to deploy FCF into M&A and buybacks.
•    Everytime they buy a product, can drop it into the sales force bag, leads to higher margins.
•    $20+ earnings in FY16/FY17. Number could be closer to 22 to 23. 15x multiple leads to $350 plus target.
•    Actavis rumored to be in the running for Allergan or sold to Pfizer.

Idea: Charter Communications (CHTR)

•    Owned by Paul Allen, balance sheet/ op issues declared bankruptcy. Emerged in 09. Tom Rutledge joined as CEO. Excellent operator.
•    What is Charter today? Two man band, Operator: Tom Rutledge and savvy deal making of John Malone.
•    Malone owns 25.5% through Liberty Media (Liberty Broadband).
•    Rutledge has led CHTR to increase rev per customer, digital penetration, Video ARPU and Products per User. Poured lots of cash into maintenance capex to upgrade/fix network which wasn’t maintained in bankruptcy.
•    April entered into a series of transactions with Comcast. Bought former TWC assets including 1.5MM subs for $7.7B, swapping 1.7MM subs with Comcast, and will also managed Greatland (33% stake) with 2.5MM subs. Receives a mgmt fee for Greatland.
•    Charter is going from 4MM subs to 8MM subs. Many which were undermanaged, allowing Tom Rutledge to manage.
•    Bull case is operational improvements, cash flow generation and capital deployment (buyback/M&A). Levered equity returns and favorable tax position.
•    EBITDA going from $3.5MM in EBITDFA/ $8 - $9MM in FCF and 4.4x net debt, to $5.5B in EBITDA, $18 - $22 in FCF per share, net debt at 4.5x and trades at an implied 7x FCF.
•    Risks are leverage, Google fiber, timing uncertain.

Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

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