Mason Hawkins Long Level 3 Communications: Invest For Kids Chicago ~ market folly

Friday, November 7, 2014

Mason Hawkins Long Level 3 Communications: Invest For Kids Chicago

We're posting up notes from Invest For Kids Chicago 2014.  Next up is Mason Hawkins of Southeastern Asset Management who pitched long Level 3 Communications (LVLT).

Mason Hawkins' Invest For Kids Chicago Presentation

•    Founded 1975, 40 years ago. $35 billion AUM
•    Run the Longleaf Partner Funds with a long term value orientation.
•    Purchase companies at deep discounts to intrinsic value, under three appraisal methodologies (NAV, FCF, private market comps). Generally engaged with the investees and boards in order to build IV per share. They are not passive investors.
•    “Business, People, Price” is their operating method.

Idea: Level 3 Communications (LVLT) 

•    Global telecom company which provides infrastructure to connect consumers and businesses onto the internet.
•    One of the largest fiber networks with a reproduction value in excess of $45B.
•    Rapidly growing FCF per share with modest additional capex as demand for broadband triples over next five years.
•    118K intercity route miles, 60K metro route miles in 170 major metro markets, 33K sub-seas miles. 38K buildings on market. 400K enterprise businesses within 500 ft of fiber network.
•    Large salesforce and 10 billion in NOLs which should shield pre-tax profits.
•    Street is overlooking the NOLs and extra assets overlooking after-tax FCF.
•    Have a low single digit market share but offer the most comprehensive portfolio of secure, managed network based enterprise solutions should allow for faster growth than the competition.
•    Most compelling investment due to the critical nature of their service offerings, and the fact that large customers in growing industries rely on the company. It’s the backbone.
•    CEO focused on building intrinsic value. Transformed from long-haul into an enterprise solutions company.
•    Since Jeff Storey took over as CEO, gross margins, EBITDA, FCF and other metrics have increased. Making attractive acquisitions such as Tw Telecom.
•    Share price increased 116% vs S&P at 31%.
•    Two long-term shareholders: Southeastern (17%) and Temasek (17%).
•    Significant enterprise revenue growth in conjunction with operating/financial leverage will lead to dramatic FCF growth.
•    Mid to single rev growth will lead to 60% EBITDA contribution margins.
•    Maintenance CapEx is ~12% of revenues. NOLs offset cash taxes until 2021.
•    FCF should triple from $2 per share to $6 over the next 5 years.
•    DCF leads to a $61 per share value or $21.5B of value. Excludes the value of non-earning assets such as dark fiber and 10 empty conduits. These are extremely valuable as well. Dark fiber worth “billions”.
•    Historical Gross PP&E w/ Tw Telecom worth over $45B.
•    Timing? Now as they think growing shortage of broadband capacity and upside from non-earning assets should lead to FCF growth.
•    Benefit from shift to cloud.
•    Routes the most valuable commodity: information.

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

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