Francis Cueto Short Belden: Capitalize For Kids Conference 2018 ~ market folly

Monday, October 29, 2018

Francis Cueto Short Belden: Capitalize For Kids Conference 2018

We're posting up notes from the Capitalize For Kids 2018 investment conference.  Next up is Francis Cueto of Asturios Capital who pitched short Belden (BDC), seeing 40-50% downside.

Francis Cueto's Capitalize For Kids Presentation: Short Belden

Secular Decliner

•    What is it?
o    Hard to tell, reporting on segments changed 3 times last 3 years. Trying to hide core of biz. Change revenue segments
•    Asturios has their own revenue segment mix that they have estimated. 62% of revenue in Copper Cabling and Connectors. These are the guys who make the “cords” in cord cutting.
•    Copper competitive mix vs. fibre, 5G / Wi-Fi, awful, on other side of all trends
•    ATT CEO on Apr-17 - 5G quote on replacing copper connectivity
•    CEO VZ Dec-17 - Copper cos will see a secular decline, just can’t deliver the functionality
•    CFO Commscope Aug-17 - Copper side of market is a non-growth biz
•    Cost of copper vs fibre - Fibre costs down 19% over 15 years - Copper cost has 114% over that time period.

Deceptive Accounting

•    “Adjusted” NI vs FCF – serious discrepancies
•    FCF down significantly, but adjusted NI curiously stable.
•    Working capital and restructuring killing the FCF
•    Rising inventory days and DSO. Inventory on shelves and financing sales
•    Big jump in 1 time restructuring costs
•    Snell Acquisition - Q1 2018 acquisition in the UK. No press release.
o    Only mention buried on the 82nd of 10-K. Helped them beat the quarter.
o    Who is Snell? Shrinking revs
o    Down from 105mm -> 80mm over last 5 years. No 2017 revs. They guide it up to $115mm of revenue post acquisition in 2018.

Bad Balance Sheet

•    Drives suboptimal strategic behaviour - underinvestment
•    Constrains shareholder friend corporate action - transformative M&A / buybacks
•    Amplifies impact of downward revisions
•    2.7x net leverage (Management’s definition) to EBITDA
•    3.8x Net leverage w/ preferred convertible (management)
•    4.5x net leverage w/ preferred ex restructuring
•    5.8x net leverage w/ preferred ex restructuring and NWC
•    If not worth more than 6x EBITDA, equity worthless

Target price is $34, 46% below current trading levels.

Be sure to check out the rest of the presentations from Capitalize For Kids 2018. 

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