Mick McGuire on Cincinnati Bell, Corrections Corp & NCR Corp

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Mick McGuire of Marcato Capital Management.  He focuses on companies with market caps between $1-5 billion and employs activism where needed.  He previously worked for Bill Ackman's Pershing Square.  He pitched 3 ideas:


Long Cincinnati Bell (CBB)

Trading around an EV of 3.8bn, McGuire highlights that Cincinnati Bell is actually two companies in one: a legacy telecom company that generates cashflow but is declining and a data center/colocation business that is seeing 20% growth year over year.

Currently, CBB uses free cash flow to fund the data center growth.  The stock is disliked by both growth and yield investors so the solution is to split the businesses.

The company will be spinning off its data center business as a REIT.  Then the telco business can de-lever, pay a dividend and repurchase shares.  McGuire is looking for a December or Q1 initial public offering (IPO).  His sum of the parts yields a target price of $8.30.

We just posted yesterday how Marcato Capital Management filed a 13G on CBB and are now one of the largest owners.


Corrections Corp of America (CXW)

This is an oldie but goodie as McGuire's previous employer, Pershing Square, had also owned Corrections Corp in the past.  Marcato Capital Management says this is a name with a hard catalyst in the form of a REIT conversion.

McGuire has been working with Corvex Management on this one (Keith Meister's activist firm) and CXW is waiting on approval.

The fundamental thesis on this name is that there's an "acute overcrowding problem in public prisons."  McGuire argues that private prisons like CXW are a better option and there's significant barriers to entry here.  The average cost per bed is 80k+ for government versus 55-65k for private.  He also points to incremental margins being high.

Given the theme of REIT conversions this year in the markets, McGuire highlighted why it's beneficial to be a REIT: free cashflow by tax savings, superior credit rating, and cap rates.  He says CXW trading at 15x AFFO would be worth $50/share.


NCR Corp (NCR)

McGuire's last idea is National Cash Register (NCR).  They supply ATM's and point of sale (POS) devices.  They have an incumbent position in the market and ATM's are their primary focus.  He likes that they have high barriers to entry due to the frequent servicing requirements of ATMs (Diebold is their main US competitor).

He pointed out that emerging markets are driving growth and that there are often regional duopolies in the segment.  In North America, we're in the midst of a big upgrade cycle for money center banks but it's just begun for smaller banks.  The thought here is that banks pay up for advanced ATMs to reduce in-branch spending.

McGuire also points out that NCR is #2 in self-checkout point of sale, behind IBM.  This has been a big trend popping up around the country.

He points out that the growth is obscured by the company's underfunded pension.  The company issued $600mm in debt at 5% to help fund it.  Marcato Capital Management originally built their position in the spring.  He likes the 11% free cash flow yield and sees 35% upside.  He sees $3.80 in EPS in 2015.

For more from this hedgie, we've previously posted McGuire's 3 ideas from the Value Investing Congress.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

David Einhorn & Greenlight Capital: Long Apple, Ensco, NCR (Q2 Letter)

Dealbreaker posted up hedge fund Greenlight Capital's second quarter 2010 letter and we wanted to highlight the latest portfolio moves from David Einhorn's camp. Year to date for 2010, Greenlight's funds are up 1.6%, 2.2% and 0.8% respectively. Some of their portfolio gains as of late can be attributed to their long position in physical gold as well as their short of Moody's (MCO). It sounds as though Greenlight will maintain this short position as well, writing "we believe that an eventual, but likely, legal loss will have a significant impact on MCO shares."

While David Einhorn will be presenting investment ideas in October at the upcoming Value Investing Congress (special discount here), we still get an intermediate update on his current portfolio. The main talking point in the hedge fund's letter is their revelation of various new positions. Firstly, they revealed they are long Apple (AAPL) at an average purchase price of $248.09 per share. Greenlight highlights the company's more than $40 per share in cash and thinks that while growth in the next few years will be slower than recent times, the company still has not fully penetrated its various markets. We've highlighted numerous times how AAPL is one of the most popular hedge fund holdings.

Secondly, Greenlight took a new position in African Barrick Gold (LON: ABG). They like that it trades "at less than 6x 2010 EBITDA, a 10% free cash flow yield and $200 per ounce of reserves." Einhorn previously talked about this new stake in his Ira Sohn Investment Conference presentation.

Thirdly, Einhorn touches on their new stake in Ensco plc (ESV). While we revealed Greenlight's ESV stake last week, we now get some color on their thesis. They point out the company's $7 per share in net cash and tangible book value of $37.50. They feel shares of ESV were unjustly sold off as it was not involved in the oil spill and the drilling moratorium should not affect the company's long-term potential. Greenlight's average purchase price of Ensco was $39.41.

Lastly, Greenlight Capital purchased a stake in NCR (NCR) in the second quarter as the stock sold off due to accounting losses on pension obligations, among other reasons. Einhorn points to NCR's strong cash flow generating business and strong net cash balance sheet position. Greenlight purchased NCR at $13.58 per share and MarketFolly actually revealed this stake back in May when Greenlight acquired it.

In terms of positions the hedge fund sold completely out of, we see that they have finally exited their short of Allied Capital (AFC). Their commentary next to this position jokingly says, "So much to say we could write a book about it." If you're unfamiliar, David Einhorn did write a book on this very short-selling battle entitled, Fooling Some of the People All of the Time.

Embedded below is the entire second quarter letter from hedge fund Greenlight Capital:



You can download a .pdf copy here.

Greenlight's top five largest disclosed long positions are: CIT Group (CIT), Ensco (ESV), gold, Pfizer (PFE), and Vodafone Group (VOD). While shares of Pfizer (PFE) continue to trade lower and lower, Greenlight still owns their stake as they feel the company deserves to be trading at a higher earnings multiple than current levels. Remember that you can hear David Einhorn's newest investment ideas at the upcoming Value Investing Congress (special discount here) where he and other top hedge fund managers will be presenting in October.

David Einhorn Discloses New NCR Position

Due to activity on May 14th, 2010, David Einhorn's hedge fund Greenlight Capital has disclosed a 5.1% ownership stake in NCR (NCR) with 8,234,065 shares. Einhorn's firm filed a form 13G with the SEC after market close today and this marks a brand new position for them as they did not own a stake when we looked at Greenlight's portfolio. This means that they've assembled this position over the past two and a half months.

Greenlight has returned an impressive 22% annualized since inception and that should provide you plenty of reason to track them. In terms of other recent portfolio activity, we also posted up two of Greenlight's position changes. To learn more about Einhorn's investment process, we highly recommend reading his book: Fooling Some of the People All of the Time.

Taken from Google Finance, NCR is "provides technology and services that help businesses connect, interact and transact with their customers. Through its presence at customer interaction points, such as automated teller machines (ATMs), retail point-of-sale (POS) workstations, self-service kiosks, self-check-in/out systems and DVD kiosks, the Company’s solutions enable companies to address consumer demand."

For the latest portfolio movements from prominent investment managers, make sure to check in our hedge fund portfolio tracking series.