Adam Crocker's Value Investing Congress Presentation: Groupe FNAC and Molina Healthcare ~ market folly

Wednesday, September 10, 2014

Adam Crocker's Value Investing Congress Presentation: Groupe FNAC and Molina Healthcare

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is Adam Crocker of Metropolitan Capital Advisors who presented long Groupe FNAC and Molina Healthcare.

Adam Crocker's Value Investing Congress Presentation

Long: Groupe FNAC (FNAC.PA)  

• “It’s the Best Buy and Barnes and Noble of France, Spain and Portugal... what's not to love??”
• Retailer of books and electronics with stores in France, Iberian Peninsula, Brazil, other Europe. Spun out of Kering Group in 2013 with an underappreciated ticketing asset similar to Ticketmaster
• Retailer is an ok business facing challenges but incorrectly priced as if disaster were right around the   corner
• Strong and growing net cash balance provides downside protection
• Trading at under 6x EV/EBIT, but the retail business trades at more like 1.0-1.5x EBIT if you back out   value of cash and ticketing
• Thinks opportunity exists because people put in the “too hard” pile (recent spinoff, €550 market   cap, contrarian, challenging, and uncomfortable)
• Metropolitan asks themselves: Would anyone care if this business no longer existed? Their research  suggests yes, customers and suppliers would care

• Retail business:
o Leading brand in its markets, particularly France. #1 retailer of books, music, videos,   computers, photography products
o 56% of revenues were from FNAC loyalty members (similar to Amazon prime)
o 3rd most visited website after amazon and Cdiscount  
o Brick and mortar stores are actually well maintained, rare for this kind of secular decliner
o Similar to BKS, management is transitioning from books / DVDs to mobile phones, toys, and stationery.  These new products were over 10% of revenue in most recent quarter and grew 17% from Q1 to Q2 2014
o Cost rationalization by reducing headcount, rent negotiations, and consolidating back office.  Have eliminated 10% of SG&A since 2011

• Ticket company:
o 50% market share in a market characterized by high network economies of scale. Comps are CTS (Germany), Ticketmaster (US) and these companies tend to trade at high EBIT multiples.  Metropolitan thinks this business is worth 15xEBIT
o Assuming 15x EBIT at FNAC implies 225mm euro ticketing value
o Ticketing is a good business because of a low cost/benefit ratio for event promoters, secular tailwind for more live performances, and IT infrastructure is more complex than many assume (especially for larger venues)
 o Also have a retail network that gives them advantages vs competitors by driving retail traffic and cross-selling opportunities
o Positive catalysts: improved product cycle (i.e. Apple iPhone 6) or any macro improvement 

• Valuation: 
o Assuming €225mm ticket value, €250mm cash, €25mm Brazil asset gets to €500mm. Entire company trades at €550 market cap, so retail is implied €50mm value
o Retail did €50mm operating profit in 2013
o Best Buy has similar problems, trades at 8x EBIT. This would imply a €54 price target
o Major disconnect vs. peers BBY, BKS, DRTY, DXNS. These trade at an average 5.5x EBITDA while FNAC is 2.9x
o Management plan is to stabilize revenue, gross margins, and reduce inventories 3% annually to achieve 3% EBIT margins in the long term.  They have achieved the first 3 goals and are working on the 4th now.  If they achieve 3% EBIT margins, could get to €79/share (+126%)

Long: Molina Healthcare (MOH)

• Complex industry but simple story. Medicaid and Medicare have unsustainable cost trends related   to the Affordable Care Act and Molina offers a solution, particularly for those who fall under both   Medicare and Medicaid (referred to as “dual eligible care”). These “duals” are the most expensive group of beneficiaries and the government is extremely interested in seeing its programs succeed

• Medicaid trends:
o Medicaid is #1 line item in most states' P&L 
o Medicaid projected to grow 8% long term due to ACA. Managed care is taking a bigger piece of this because they have demonstrated an ability to drive equal or better outcomes at lower cost than the government-run alternative
o What is Medicaid managed care? Insurers manage health benefit of low income patients on behalf of state payors in exchange for per member per month (PMPM) fee.  Save the system money by standard blocking and tackling (incentives for healthy pregnancies, encouraging the use of primary care physicians, the use of generic drugs)
o 75% of Medicaid members in managed care, but most expensive patients are typically fee- for service. This is the opportunity for Molina
o “Actuarial soundness” concept - by law, rates must be adequate relative to Molina's risk

• Question is when, not if, Molina earns a reasonable profit on new membership, particularly for  the “dual eligibles”. Unless you think the government is already maximizing efficiency of those under dual  eligible care, there should be opportunity for Molina

• Why the opportunity? Perceived risks - difficult to predict short term cost trends, political risk /   government seen as unreliable customer, dual population never managed before, costs uncertain

• Big uncertainty is “What will the cost be of managing dual eligible members?” Molina hasn't   discussed their expectations but comps have

• Management thinks they can double revenue from FY13 to FY15 from $6.6bn to $12.5bn

• Sees takeout option for a commercial insurer (when Wellpoint bought Amerigroup, the merger   proxy discussed opportunities for insurers to serve dual eligible beneficiaries)

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

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