Todd Westhus's WDC Trade: Long Bank Debt/Short Bonds (Sohn New York Conference Presentation)

We're posting up notes from the Sohn New York Investment Conference.  Next up is Todd Westhus of Olympus Peak Asset Management who presented a Western Digital (WDC) trade: long bank debt / short bonds.


Todd Westhus's Sohn New York Presentation

•    Western Digital (WDC) - negative cyclical and secular headwinds. Capital structure arbitrage. Long bank debt/short bonds. 2 points downside with 50 points upside.

o    HDD is losing share over time to SSD where WDC is a smaller player. HDD is in secular decline.
o    SSD has cyclical and competitive issues. WDC is losing market share in SSD
o    SSD inventory bloated and prices falling. Cycle is early and WDC has worst balance sheet in industry
o    HDD industry revenue expecting to decrease 15% over 4 years. Melting ice cube
o    WDC SSD has been growing 2% a year while industry grew 24%.
o    WDC has an inventory issue
o    Margins going to get worse. Gross margins likely to go flat or negative in a recession
o    China will be entering SSD market and will create more supply.
o    $11 billion of debt and EBITDA can go negative in a recession from $4 billion today


Be sure to check out the rest of the Sohn New York conference presentations.

Jim Chanos' Sohn Conference Presentation: Short Hard Disk Drive Makers STX & WDC

We're posting up notes from the Ira Sohn Conference 2013 in New York.  Next up is a summary of the presentation from Jim Chanos of Kynikos Associates.  He presented "Mobile Computing Revolution: Collateral Damage in Hard Disk Drives."  He focused on hard disk drive makers Seagate Technology (STX) and Western Digital (WDC), calling them value traps.


Hard Disk Drive Decline: Short STX / WDC

Losers and winners. "Death of the PC” Units are actually just beginning to decline. Tablets increased 142% yoy in Q113. Only had one quarter of declining units so far. Hard drive decline even more slowing, began rolling over earlier than PC, but big snap back after the floods in Thailand.

Western Digital (WDC) & Seagate Technologies (STX) both look "cheap" and he says they are a value trap. 5-6x p/e, 4x EV/EBITDA. Industry consolidation has resulted in better pricing, and stronger margins.

Bulls say proliferation of user-generated data (photos, etc.) will outweigh the effects of PC unit declines.  Short Idea: WDC, STX stocks are soaring, while Dell (DELL) and Hewlett Packard (HPQ) are in decline. But pricing is up from 8% of PC BOM, to 10%.

He says cloud efficiency actually reduces Hard Disk Drive demand. STX short. Says margins will collapse from the 25-30% guidance. Says they have accounting issues, because of acquisition they put $1B in goodwill on the books, this may have goosed their profitability.

STX: Lots of insider selling of the stock. Top 4 officers have sold half their stock in the last 2 years. #3 guy quit last night abruptly. Says it's the PC business with about a year lag. End of 2013 they get hit. (For the converse argument, note he doesn't mention the huge FCF generation, and lack of significant debt).


We've recently also posted up Jim Chanos presentation on China as well as a recent interview about his longs and shorts.

Check out the rest of the hedge fund presentations from the event: notes from Ira Sohn Conference 2013.

Curtis Macnguyen's Ivory Capital Q2 Letter

Founded in 1998 by Curtis Macnguyen, Ivory Capital is a long/short equity hedge fund that focuses on value-based investments. It's worth noting that before founding Ivory, Macnguyen worked at Siegler, Colliery & Co, the same shop that Greenlight Capital founder David Einhorn previously worked for.

Ivory is based in Los Angeles and today we're covering their second quarter letter that updates their portfolio.

At quarter end, Ivory Capital's top five positions were:

1. Microsoft (MSFT) 6.5%
2. Yahoo! (YHOO) 5.1%
3. Citigroup (C) 4.0%
4. DeNA Co (TYO:2432) 2.7%
5. Advanced Micro Devices (AMD) 2.6%


Performance & Equity Exposure

Ivory finished the second quarter -2.2% and year to date for 2011 they are -1.85%. Their equity exposure is 69.5% long and 43.4% short, leaving them net long 26.1%. While they saw outperformance in their other long positions of Sprint Nextel (S) and CVS Caremark (CVS), other longs hurt them.


Position Updates: Western Digital (WDC), Seagate Technology (STX) & Hospira (HSP)

The hedge fund thinks that consolidation in the hard disk drive industry should bring solid economics and dampen the cyclical nature of the industry. They also like STX's share repurchases and dividend (4.5% yield).

The current issue of our Hedge Fund Wisdom newsletter analyzes STX as numerous other hedge funds own shares (and it also features analysis of YHOO, a controversial stock at the moment).

Ivory also fancies generic injectables and infusion pump maker Hospira (HSP) because they see it as a strategic asset with 25% market share and high barriers to entry.

Embedded below is Ivory Capital's Q2 letter to investors (email readers come to the site to view):



For more letters from hedge funds, we've posted up the following:

- Oaktree Capital: Howard Marks' latest commentary

- Corsair Capital sees increased volatility ahead

- David Einhorn & Greenlight Capital's Q2 letter

- Third Point buys MOS & SLE

- Jonathan Ruffer worried about China