John Lewis' Value Investing Congress Presentation: Long ePlus & Rosetta Stone

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is John Lewis of Osmium Capital who presented 2 ideas: E-plus and Rosetta Stone (RST).


John Lewis' Value Investing Congress Presentation

Osmium: concentrated (85% top 10), $100 mm - $1 bn market cap, 2-4 year hold

In the office has Wall of Fame and Wall of Shame

The Osmium 8 of how to create value, assess the quality of the business and understand incentives/cap structure
(1) Low valuation: low to MSD OCF multiple
(2) Can it continue to produce cash flow
(3) Double barrel deployment: reinvest in the business and buy back shares to create value
(4) Porters 5 forces
(5) User experience/LT client relationships
(6) Quality attributes 10%+ pre-tax margins, decent ROIC
(7) BS strength
(8) Management ownership

One-pager case studies VITC Vitacost- sold to Kroger for 50% gain
ZIPR Zip realty sold to Realogy for 90% gain
LOV Spark Networks- on-going engagement


First Idea: ePlus (PLUS)

A long term compounder in the IT space
High margin revenues, very sticky, low valuation 40% discount to peers 
Debt has to be adjusted for non-recourse piece
Have been repurchasing shares
Diverse customer base
Will grow revenues with existing and new clients as they sign up new partners 


Second Idea: Rosetta Stone (RST)

Two activists now involved
Very seasonal, high margins
Lots of capital to reinvest
Really nice educational institution products suite
New acquisitions in EU  Stock is very cheap, one of the cheapest software stocks
Problems: no strategy to create value (sounded like too much R&D), no urgency, no segment reporting (consumer vs. education), seasonal (consumer is all Q4, education Q3)
SOTP is $20-$35 based on Osmium, CEO's own estimates and Private Equity buys in the space.
Cheap even with Consumer at zero.  

Q&A: Free apps? They made a freemium product acquisition so they are in that. Berlitz is still making good money (language instruction is not dead).


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

John Lewis' 3 Long Ideas at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is John Lewis of Osmium Partners who pitched 3 ideas: Tucows (TCX), Rosetta Stone (RST), and Intersections Inc (INTX).


John Lewis' Value Investing Congress Presentation

•    Launched 2002 in Greenbay California. Up to ~$1B market cap.
•    17.4% annualized since inception.
•    Their process 1- mid single digit of cash flow multiple, 2- well defined market segments, and 3- internal opportunities to reinvest capital in the business or capital structure.
•    Looks at the quality of the business model – porter’s five forces, define high quality businesses as businesses with long term customers, look for 10% EBIT margins and good returns on capital.
•    Don’t take balance sheet risk – no net debt businesses.
•    Invest alongside owner-operators.


•    Tucows (TCX) is the first idea – owns a variety of subscription based businesses. Think he is the small cap version of Singleton – has repurchased over HALF of the company with 7 dutch tenders. Announced a 15% share repurchase in march. Think its worth 22 versus $12.
•    First business is domain wholesale business very sticky and ting – newer business.
•    Very little following.
•    Domain business - $105MM rev, 11% EBITDA margins and 14MM domains. Three legs to the domain business – yummy names is an exceptional business. Cost basis is less than a dollar and sell them for $1500 - $1800 if they sell it.
•    Two interesting catalysts – GoDaddy was taken private at 2x sales. IPO in third quarter 3-4 sales.
•    Demand Media Spinoff is a comp – thinks it will spin for 1.5x sales.
•    Domain business worth between $10.7 - $17.
•    Ting – mobile wireless carrier. Retention rate is equal to contractual operators like Sprint ,AT&T. 
•    Believes the industry is ripe for disruption. Ting leverages Sprint’s network (MVNO).
•    Ting subscribers are up 380% YoY. Gives someone a $5 Starbucks gift card if they compare their bill to Ting.
•    Churn is 7% - ARPU is $21. $900 in lifetime revenue per customer. Generating an estimated 9x return on customer acquisition costs.
•    Think Ting is worth $10.5 using a DCF
•    Believe the business is worth $22MM per share or 75% upside.


•    Rosetta Stone (RST) is the next idea. 
•    Tremendous amount of progress.
•    Perception that they have lost market share – spends $200MM a year in R&D and control distribution – invested $1B in building the brand
•    Perception: Dying CD Business – CD business is in decline – worth only $4 per share.
•    Low margin business perception – maintenance R&D is $10MM, growth RD is ~$30MM.
•    Thinks Adobe is a similar story – from shrink wrapped product business to subscription, LT relationship SaaS business.
•    Hidden asset: Global E&E business – a lot of growth. 100% subscription as a service business with 80% renewals and high margins. Peers trade 4-6x sales, and a lot of M&A. 3x sales for the E&E business – 100% upside. M&A comps around 3x sales.
•    Key part of the business is distribution.
•    Acquired a freemium business – RST bought it below the price it cost to set up at customers at .50 cents – with cross sales already materializing. 
•    Purchased Lexia Learning, Tell Me More and Vivity Labs at attractive multiples.
•    Value CD business at half of sales 
•    SOTP of $28 


•    Next idea is Intersections Inc.  (INTX)
•    Thrown off lots of FCF – bought back shares – a cannibal.
•    Management and board own half of the Company.
•    14% dividend yield
•    BofA is 50% of the total business or $266MM in sales.
•    BofA component priced at 1x cash flow or run-off or $2.5. Shorts think the BofA is the entire business – false. Broke out identity guard- better offering than LifeLock and its compliant/ethical versus LifeLock.
•    Customer acquisition costs  - pay back period is 6 months. $42MM run-rate. Osmium believes it should be worth 15x EBITDA given its high margin profile this would be $6.5 per share. This is  reasonable given zero customer concentration, mid-teen EBITDA marginsand double digit growth (20%+).
•    Pet monitoring device Voyce – complete optionality. 
•    Put in the Oscar “Swag” Bag – a large range of outcomes.
•    $11MM in invested capital.
•    Management has been accurate in forecasting.
•    Followed this Company for six years – in 08 the worst year they were only off by 1% in regards to their forecast.
•    SOTP - $12 per share or a double.

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

What We're Reading ~ Analytical Links 6/26/13

10 risks we face right now [TheStreet]

On the Sharpe ratio [Research Puzzle]

Value badly lagging glamour: value premium is now a discount [Greenbackd]

Taking a deeper look at Rosetta Stone (RST) [Investing 501]

On the Fed and interest rates [Aswath Damodaran]

Interview with Liberty Media's (LMCA) John Malone [Denver Business Journal]

If cable is dying, why is it still making so much money? [TheAtlantic]

Nook sales tumble 34%, Barnes & Noble rethinks strategy [CNN Money]

Owens Illinois (OI): Glass bottles lend pop to soda makers [WSJ]

Barron's midyear 2013 roundtable [Barrons]

Why boring stocks beat exciting ones [WSJ]

On the IRS' study of REITs [FT]

Government Accountability Office says airline merger reduces competition (duh) [NYTimes]

On art as an investment [NPR]

Inside story of fraud at Ranbaxy, Indian drug company [Fortune]

Notes From 2013 Value Investing Congress Las Vegas: Day 1

Here's some brief notes from the 2013 Value Investing Congress taking place in Las Vegas.  This event has somewhat of a new format with a lot more speakers presenting rapid fire ideas.  As such, we'll highlight the takeaways from each pitch below from day 1.  Check back tomorrow as we'll have notes from day 2 as well.

*** 50% discount to next VIC: Also, there's currently a 50% off sale for the New York Value Investing Congress in September. This is the biggest discount to the event you'll see and the sale ends tonight!  Sign up here with discount code N13MF


Steven Romick, FPA Funds: Occidental Petroleum (OXY) & Oracle (ORCL)

Romick likes to focus on contrarian names that investors have seemingly forgotten about.  He mentioned old large cap tech names such as Oracle (ORCL), Microsoft (MSFT), and Cisco Systems (CSCO).  He likes ORCL because they offer a unique product and have recurring revenue streams.  His other idea was Occidental Petroleum (OXY), an oil producer that isn't really focused and can make a lot of adjustments to create value now that the chairman is gone.  Romick says OXY is a sum of the parts play.


Phil Goldstein, Bulldog Investors: Imperial Holdings (IFT)

The company was raided by the FBI and lawsuits post-raid and Bulldog started buying around $1.60.  They went activist and got seats on the board and he thinks there's value to be unlocked there.


John Hempton, Bronte Capital: Transglobe Energy (TGA)

He mentioned he's short an astonishing 120 companies.  His specialty is frauds and he looks for fake cash and fake assets (receivables, goodwill, etc).  He spoke negatively about Transglobe Energy, pointing out they don't collect on oil they've sold until 7 months later.  He's also skeptical since the company shows no inventory and he has other balance sheet questions.  Additionally, he flagged Jos A. Bank (JOSB) due to potential inventory issues and PureCircle (PURE.LN) for balance sheet issues.


David Nierenberg, D3 Funds: Rosetta Stone (RST)

His firm runs a concentrated portfolio of microcap stocks (typically busted growth names).  His pitch was on Rosetta Stone (RST), the popular language learning software company.  Nierenberg notes RST's solid brand in a fragmented industry.  He highlighted that the company has $7 per share in cash and no debt and has been cutting costs by closing some of their mall kiosks. He sees upside of 75% but notes that competition in the space could intensify and free offerings could emerge.


Tim Eriksen, Eriksen Capital Management: First Internet Bancorp (INBK)

He focuses on the section of the market where many companies are ignored (companies with market caps below $100 million) and he also runs a concentrated portfolio.  His pick was First Internet Bancorp (INBK):  $45m market cap, trading below TBV, with a potential catalyst of rising interest rates (loan growth).  Eriksen argued it's cheap because no one really knows about it, investors are still somewhat hesitant about financials and it's slightly illiquid.


Marcelo Lima, Heller House Capital: Hargreaves Services PLC (HSP.LN)

Lima pitched the out of favor coal industry via a UK play: Hargreaves Services PLC (HSP.LN), noting that the UK gets around 40% of its electricity from coal power.  He likes the acquisitions they've made at less than 7x earnings and highlights the benefits of their long-term contracts not being vulnerable to the ebbs and flows of commodity prices.  In the past, fraud at a Belgian subsidiary and issues at a mine weighed on shares but those problems are now gone.


Geoffrey Batt, Euphrates Advisors: Baghdad Soft Drinks (IBSD.IQ)

Batt runs the Euphrates Baghdad Fund and compared Iraq to Germany after World War II, South Korea in the 1960's and Russia in the 1990's. He sees countries that have undergone chaos as opportunities ripe for investing and Iraq fits the bill this time around.  But obviously, he points out, you still need to see stabilization in the economy and if things gradually become less worse, then equities there can head higher.  He says that the country has begun a private credit cycle and notes their oil production potential is huge.  However, he didn't pitch anything oil related.  Instead, he said he likes soda via Baghdad Soft Drinks, a Pepsi bottler.


Zack Buckley, Buckley Capital Partners: Bluecora (BCOR)

His expertise is technology stocks and he pitched Bluecora (BCOR), formerly Infospace.  He likes that they bought TaxACT and highlights Bluecora's $700 million in net operating losses (NOLs).  He said they'll probably look to do acquisitions within a year or so.


Isaac Schwartz, Robotti & Co: Halyk Bank of Kazakhstan (LON:HSBK)

He pitched Halyk National Savings Bank of Kazakhstan (Borat, anyone?) as he likes to play "ugly ducklings."  Schwartz notes the company trades around TBV and is the largest bank in the country (even though its market share is only around 20%) with the dividend now back at 4%.


Amitabh Singhi, Surefin Investments: Greenply (MTLM.IN)

He specializes in India and mentioned that Indians are fixated by gold.  Sighi likes the underappreciated, unfollowed small cap sector in India.  He's looking long-term and thinks agriculture could be a big winner.  Singhi notes that land prices have accelerated higher and while there's around 400 million acres of ag-land in the country, farms are usually only around 5 acres each.  His pick was Greenply (MTLM.IN), an Indian plywood maker.


Chan Lee & Albert Yong, Petra Capital: Sebang, Sebang Global Battery

These two harped on how South Korean equities are very cheap compared to other equity markets (they're based there).  In particular, they're focused on small & mid caps and note how these plays give you access to emerging markets exposure.  They like Sebang the holding company and subsidiary Sebang Global Battery.  They also mentioned Daechang Forging.


Jeff Pintar, Pintar Investment Company: Residential Real Estate

Pintar owns a ton of residential properties, over 2000 as the real estate bubble created immense opportunities.  He pointed out that demand for new homes is rising and supply can't keep up so more homes need to be built.  As to where the biggest demand will be in the future, he singled out Texas, Florida, California and the Carolina regions.  He thinks values can head as high as 50% in select areas.


Chris Mayer, Capital & Crisis Newsletter: First Citizens Bank (FCNCA), Atlas Financial (AFH)

He manages a newsletter with 28,000 subscribers and talked about the positives of investing in owner-operators and likes management to have skin in the game.  Mayer pitched First Citizens Bank as it's 33% family owned and also lauded Atlas Financial (AFH), Howard Hughes (HHC) and Covanta (CVA).


Be sure to check back tomorrow for notes from day 2 of the Value Investing Congress 2013 in Las Vegas.


*** Special discount for Market Folly readers:  The New York Value Investing Congress will take place in September and you can currently get a 50% discount to the event with code: N13MF.  This discount expires tonight (Tuesday) so take advantage while it lasts.  This is the biggest discount you will see for the VIC. ***