Notes From Sohn San Francisco 2016: Morfit, McGuire, Palihapitiya & More

Below are notes from the 2016 Sohn San Francisco investment conference where investment managers presented their latest ideas to benefit charities.  We also posted up notes from the Next Wave Sohn San Francisco conference as well that featured emerging managers.

Notes From Sohn San Francisco 2016 Conference


Mason Morfit, ValueAct Capital

• Idea: Long Morgan Stanley (MS)
• Try to find businesses with enduring franchise value
• 3 defined business units
• 7 defined revenue types
• Did a lot of work to understand the unit economics
• 75% of the revenue and 85% of the profit come from asset light fee based businesses (not capital intensive businesses)
• Long term trend is very positive
• MS has maintained and in some cases grown its share in wealth management and investment banking advisory 
• Risk factors: earnings decline, principal loss, liquidity/access to capital

Mick McGuire, Marcato Capital Management

• Idea: Long Buffalo Wild Wings (BWLD)
• Owns 5% of the company
• Differentiated concept focused on wings, beers, sports
• ~1,200 units with potential to grow to 1,700 units
• Long history of industry leading same store sales (SSS) growth
• Central component of investment thesis:
• Differentiated concept with long runway for growth
• SSS declines and capital allocation missteps have hurt shares
• Opportunity to create shareholder value by: transitioning to a 90%+ franchised model by 2020, improve 4 wall margins (several hundred bps opportunity), and optimize capital structure
• Multiple has compressed as traffic has slowed and costs continue to rise
• When growth slowed, BWLD acquired franchised stores for high multiples
• Average replacement cost is ~$2.3mm per unit but in 2015, spent $3.5mm per unit - overpaid; bad use of capital
• Incentives are weighted singularly towards growth, not ROI
• While unit volumes have increased significantly since IPO, ROI has decreased because the cost to build a unit has increased
• Franchised businesses command higher multiples; higher franchise mix correlated with higher multiples
• BWLD is 50/50 today but recommending that they go to 90% franchised model by refranchising units at multiple of 6.0x EBITDA
• Valuation: if they can move to a higher franchised model range of value from $218 to $311 (versus ~$141 today)

Chamath Palihapitiya, Social Capital

•  Primarily invests in fast growing private tech companies
• Multi-trillion dollar opportunity hiding in plain sight
• Retail will be a $1T business by 2025
• Every company succeeds based on three factors: build a great product with great market fit, develops adjacent products in deep verticals, invests in features to drive ARPU
• Amazon (AMZN) thesis based on AWS and outsourcing infrastructure spending and moving it to the cloud; reshaping economics by taking out costs
• Similar concept for software that will move to the cloud

• Idea: Long Workday (WDAY) 
• $100bn opportunity in 10 years; 20% IRR
• Workday is the system of record for HR and is viewed as the best in class product among CIOs
• Leading market share supporting the largest global employee bases including Samsung, McDonalds, IBM
• HCM product manages 19mm employees on behalf of its employers
• Adjacent products in deep verticals: Workday Financials - system of record to manage financials; now manages financials for global companies
• Invest in features to drive ARPU (payroll and many other features)
• Rapid pace of innovation
• Workday competes against Oracle (ORCL) and SAP (SAP)
• Lowest spend on M7A over the last 5 years
• "M&A is what you do when what you do doesn't work anymore."
• Done< $0.3bn over last 5 years, SAP and Oracle have had a lot of M&A
• Netflix ability to close the books and file with the SEC went down significantly with Workday versus Oracle
• Workday is an enterprise product company
• Best management team in software
• Fully aligned, long term oriented
• 97% customer satisfaction; very high consistent with consumer tech like Facebook, Google, Apple but this is enterprise tech
• Following the Salesforce playbook but doing it better
• $100bn company in 10 years

Carson Block, Muddy Waters Capital

• Idea: Short Tutor Perini (TPC)
• Construction company
• Nearly all analysts have the stock as a buy
• FCF is the Achilles heel - the company bleeds cash in working capital driven by growing accounts receivable
• Loan agreement has been amended 6 times in 5 years and there is a chance that banks could pull RC facility; Business has $94mm of cash on BS but 79% of cash sits in JV so it could run into a major liquidity problem
• 4 CFOs over 9 years
• Summary: business can't consistently generate cash, projected earnings growth highly questionable, lack of management credibility, and liquidity could become challenged

Mihir Wohra, PIMCO

• Idea #1: Rates trade - Hawkish Fed
• Market is currently underpricing the possibility of a Fed hike or that there will just be one hike
• Buy a pair: buy a put on the 1 year rate

• Idea #2: Dovish Fed - Buy REITs
• REIT prices tend to be correlated to equities over the short-term but underlying economic factors prevail over the long term
• Will do well if Fed doesn't raise rates or cuts

• Idea #3: Commodities trade: Long call options on 2018 Natural Gas - No Fed correlation
• In the midst of global price convergence that will pull US natural gas prices higher while lowering global prices; US is opening new LNG export terminals and US nat gas is the cheapest in the world so there are buyers
• Buying 2018 at a discount to 2017 is attractive given US LNG exports are only increasing over the next few years

• Idea #4: Bonus trade: sell puts / buy calls on October VIX Futures
• Volatility should rise towards long term averages if election stays close
• Volatility could rise more if Trump probability of winning increases

• Idea #5: Bonus trade: Currencies - works if Trump win probability decreases
• Mexican peso has significantly underperformed other EM and commodity currencies in 2016 due to possibility of Trump victory and tougher US policies toward Mexico

Jeff Osher, Harvest Capital Strategies

• Idea: Long Echostar (SATS)
• Global provider of satellite services, video, delivery solutions and broadband satellite technologies
• Echostar Technologies: set top box business with $1.3bn revenue; $100mm EBITDA, 7.6% EBITDA margins
• Satellite services: $445mm revenue; 84% EBITDA margins; very good business with long dated contracts
• HughesNet: $1/4bn revenue; provide consumer broadband for households that can't get wired broadband
• Duopoly: Hughes and Viasat
• Hughes has 1mm subscribers with 30% EBITDA margin
• Business is capacity constrained
• 2016 launches will drive 50% revenue growth for Hughes within 3 years.  Given higher incremental margins, EBITDA should nearly double
• Sum of the parts valuation results in target price of $71.76 (versus today at ~$44)
• Other actions could result in homerun scenarios: Echostar Technologies divestiture, Echo Mobile, Dish Mexico, Sling TV, Brazil orbital slot, Pay TV, positioning for opportunistic M&A

Joseph Lawler MD, JFL Capital Management

• Idea: Short IP Group (IPO.LSE)
• Publicly traded fund that invests in healthcare companies
• Most publicly traded investment firms trade at a discount to NAV but IPO trades at a premium
• Adverse selection process - they seem to invest in companies that other VCs have passed on
• Investments are overvalued especially investment in Oxford Nanopore.  It's a DNA sequencing company; the cost of DNA sequencing has gone down significantly and has become commoditized

Arjun Divecha, Grantham May Van Otterloo & Co

• Idea: Investing in Indian financials (non state-owned banks)
• Never think of an emerging market as a place to permanently put capital
• India from a long term point of view looks pretty good as a place to invest - well positioned for economic growth over next 5 years
• Private sector financials are taking market share away from state owned banks
• Dependency ratio looks pretty good in the future versus other countries like US, Japan, and China.  Dependency ratio = ratio of non-working to working people
• India looks good because of improving fiscal discipline, improving inflation, current account benefiting from oil windfall (big importer of oil), capacity utilization is very low
• India is massively under-urbanized
• Household debt to GDP is 9% versus US where it is ~100%
• Huge scope for increase in consumer loans
• Pitch was about investing in non state-owned banks, like publicly traded ones such as HDFC Bank, Axis Bank, IndusInd Bank and Yes Bank; State owned banks can't make loans anymore due to loan issues
• The private banks are very well run; 3-6-3 banks
• Not easy for foreign investors - must have access to local market
• HDFC Bank (HDB) and ICICI Bank (IBN) are listed on the NYSE 
• 4-5% net interest margins
• Valuations are high but earnings growth has historically justified high valuation
• HDFC trading at 4.5x price to book
• 26.7% earnings growth over 20 years
• Thesis summary: well positioned for economic growth, low penetration of financial sector, well run financials are taking market share from well run banks

Peter Palmedo, Sun Valley Gold

• Idea: Gold: data and dogma
• Discovered Summers-Barsky Gold Thesis: price of gold is driven by the real return in capital markets
• From 2002 to 2015 gold real return was 7.9% versus a blended real return of 4.5%
• China gold demand in excess of domestic supply
• Most PMs hold unsubstantiated beliefs about gold but the algorithmic, data driven models will get it
• Own gold in the simplest form
• Cheap, safe and stable; think about gold in the context of portfolio insurance and risk diversification 
• Buy gold if you think we are in a low real return world

Be sure to also check out the presentations from the Next Wave Sohn San Francisco conference as well, which featured emerging fund managers.

Boston Investment Conference Notes 2014: Summary of Stock Picks

Today we're posting notes from the 2014 Boston Investment Conference that recently took place.  The event features hedge fund managers pitching their latest ideas to benefit the Boston Children's Hospital. 

This event follows "Chatham House Rules" which means unfortunately that the pitches will not be linked to any particular speaker.  That said, if you look at some 13F filings, you might be able to guess who pitched what.

Speakers (In No Particular Order)

David Abrams, Abrams Capital
Will Danoff, Fidelity Investments
Jason Capello, Merchants' Gate Capital
William Duhamel, Route One Investment
James Grant, Grant's Interest Rate Observer
Jeremy Grantham, GMO
Jonathon Jacobson, Highfields Capital
Alex Klabin, Senator Investment Group
Seth Klarman, Baupost Group
Beeneet Kothari, Tekne Capital
James Litinsky, JHL Capital Group
Michael Lowenstein, Kensico Capital
Joshua Resnick, Jericho Capital
Barry Sternlicht, Starwood Capital


Notes From The Boston Investment Conference 2014

First Pitch: Brookdale Senior Living (BKD):  EV/EBITDA (2015) about 11.5.  $33-34 stock price: 6B market cap, 6B debt with 12B EV.  He likes the services businesses they are developing.  They offer a premium product.  There is limited supply and strengthening demand and demographics.  They recently purchased #2 operator and believes there are cost synergies.  They own 40% of their real estate and have option to buy more. 

They have 10% market share in their industry and are 4X bigger than #2.  The industry has years of consolidation in front of it.  Lack of current supply a result of over-building in the late 1990s and it took about 15 years to absorb this.  Supply shortage is driven by demographics.  He compared FFO multiple to multi-family housing operators: 10.6   c/w 20.2 

Their services business includes home health care, hospice care, car/transportation services and physical therapy, speech therapy and occupational therapy.  “They have a captive customer base of 100,000 high net worth individuals.”  They can institute group purchasing and get bulk discounts.  He believes their real estate is worth $27-35 share.  In a few years their operating business can produce   $750M EBITDA and 8X this gives you a stock price in the 50s.  They can potentially spin out their operating company.  He talked about a proxy statement filed in June that had some interesting information.


Second Pitch: Ctrip.com (CTRP):  Could be a double in 2-3 years.  $9B market cap.  50% market share.  15% growth.  Tourism is the new luxury in China vs. branded goods.  Online travel penetration is 17% vs. 45% in US.  Company can grow with both secular growth and increased online penetration.  C-trip is synonymous with travel in China.  Because of competition, they were spending heavily on IT, sales, engineers and to recruit more hotels.  This has affected their margins.  Compared their gross margins and (I believe) their operating margins to other companies:

PCLN  EXPE  CTRP('14)  CTRP('08)
84        78        70               73
44        25        12.5            38.2

So the company still has high gross margins and their increased spending is affecting SGA.  According to the investor, 2014 is their last big year of investment spending and the 'heavy lifting' will have been done.

CTRP has bought stakes in multiple travel related businesses that are marked at cost on their balance  sheet.  Investor values those stakes at $2B giving company an adjusted market value of $7B.  PCLN is the 800 lb. gorilla in online travel space and they are partnering with CTRP and purchased a 10% stake   They are expecting an IPO of E-HI (phonetic spelling), one of their travel related companies, in early 2015. They expect earnings to go from $2 to $4 in the next 3 years.  They value $4 at 25X (a smaller multiple than current one) plus $20/share in investment stakes representing $120/share or about double current share price.  He considers it a high growth business.  He notes that in 2009, PCLN had a $7B market cap and now-5 years later-has a $60B market cap.


Third Pitch: Western Union (WU):  They will earn about $1.50 this year and since they have some excess depreciation FCF will be higher.  Next year will be better.  Have about a 3% yield.  They had problems in the past by pricing their product too high.  They took a price cut.  But this mess creates the current opportunity.  A similar thing happened to MO many years ago.  They cut prices which freaked out the market but did well from there.  Talked about a competitor XOOM but they have a narrow market.  Thinks WU can use technology to their advantage.  Their expenses are high because of compliance costs but he feels this can ultimately deepen their competitive moat.  Their volumes are growing and so should their earnings. 


Fourth Pitch: Sberbank.  This is a Russian bank.  Investing is simple but not easy.  They have NIM of over 5%.  They compare favorably to WFC on most metrics.  He says they have terrific management.  They have a 4.1% yield (but it may be cancelled).  They have over 100 million accounts.  Competitors are Alpha Bank and Bank of St. Petersburg.  He thinks situation with Russia should straighten out next year.  The sanctions will be under vote to be renewed on 7/31/15.  He feels there is no point for them to make concessions well before this.  “Everyone is a value investor until prices get really cheap.”  They have an unfair funding advantage.  They have 46% deposit share.  They don’t have to take high risk to get high returns (like Geico).  They can pick and choose among customers.  There is risk from falling oil and from the ruble.


Fifth Pitch: Cogent (CCOI):  It has a $2B EV and is involved with Internet connectivity.  It has corporate customers ($700/month) and net-centric content providers like Netflix (NFLX).  They have a high quality network.  Apparently $14B of invested capital with the lowest cost network.  20-25% demand growth.  The industry is consolidating with higher pricing and profitability and more efficient cap-ex.  Should be strong revenue growth with capex going down. 

Talked about net neutrality debate.  ISPs are backing away from pay prioritization since alternative is regulation from FCC.  In worst case, sees Cogent losing 4% of revenues.  Mentioned “take or pay agreements”.  He thinks that pay prioritization will likely be banned.  He sees company returning about $2.70 in capital: ½ in dividends and ½ in buybacks (total 8.1%).  He thinks the stock can trade into the low $60s (currently $34 ~ not sure when or what assumptions he has made). 


Sixth Pitch: Ophthotech (OPHT):  A speculative biotech play.  Drug in pipeline is Fovista.  I believe it is a platelet development growth factor inhibitor used in conjuction with anti-VEGF (vascular endothelial  growth factor) drug to treat wet AMD, which is some type of macular degeneration. 

Says leading cause of blindness in 55 and older population in US and EU.  Has market cap of $1.5B and EV of $1B (about $500M cash)  Has another drug called Zimura, which is in phase 2.  Cheap because no near term catalyst.  Feels probability of approval is mispriced.  Novartis made a deal with company for their ex-USA licensing rights with possible $1B milestone   payments.  He feels this has de-risked the investment.  A launch could occur 2017-2019.


Seventh Pitch: China Mobile (CHL): Largest mobile company and has over 800 million subscribers.  Trades at 4.3x 2015 EBITDA and 3.4% dividend yield.  75% owned by China; 25% publicly traded.  Has $73b in cash.

Has the world's leading 4G network.  They previously had TD-SCDMA network that was disappointing.  Now 4G with global standard TD-LTE.  China Mobile has one year head start over competitors China Telecom and China Unicom.  He expects data usage to "explode" and expects capex to decline materially.  National Tower Co is a separate company that may be spun out that will be very valuable. 

He expects ARPU, 4G and data revenues to ramp up making up for compression in voice and SMS.  Margins should improve.


Eighth Pitch: HDFC Bank (HDB):  This is a bank in India and he likes the country overall.  Thinks it is a high quality bank at 16x earnings and notes that Modi is pro-business.


Winning Student Presentation: Short Diamond Resorts (DRII).  (Very short presentation and did not catch gist of the thesis)
 

This concludes notes from the 2014 Boston Investment Conference.  If you missed it, we've also posted notes from the following recent hedge fund conferences:

- Invest For Kids Chicago Notes: Ackman, Robbins, Zell & more

- Sohn San Francisco Notes: Ubben, Billick, McGuire & more

- Capitalize For Kids Sohn Canada Notes: Ainslie, Dinan, Robbins

- Summary of Stock Picks From Robin Hood Investors' Conference

- Great Investors' Best Ideas Dallas Notes: Einhorn, Perry, Ackman & more

- InvestPitch 2014: Stock Picks From Emerging Hedge Fund Managers