We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is the credit panel which consisted of Ted Goldthorpe (BC Partners) and John Zito (Apollo Global Management).
Credit Panel at Capitalize For Kids Conference: Ted Goldthorpe & John Zito
Ted - Illiquid Credit
John - Liquid Credit
• Markets less efficient than ever - main theme
• ETFs today 10% of the market
• ETFs and high yield all driven by flows
o Leads to interesting decoupling in the market`
• John: ETF Creation - buys the biggest issuer of debt, not the largest market cap. Not a function of who is the most solvent. Buy a unit of risk in the co with the most debt outstanding.
• When there are outflows, could be very violent moves
• Tesla - Disconnect between equity and debt
o Historically over 30 years - 88% correlation between Russell 2000 and HYG
o HYG unchanged last 30 days, Russell down 30%
• Credit / equity relationship completely changed
• TSLA, Carvana, Wayfair are good examples
• Softbank / VCs paying high revenue multiples for companies that are growing fast.
• Carvana 9bn mkt cap, 9x revs, $350mm of HY, looking for 6% bond yield. 9% cost when it priced.
o Shows divergence between credit and equity markets. Stock down 50% this month, bonds unchanged
• Tesla, despite good earnings, has bond at 80cent on dollar, $50bn of equity, big difference
• Liquid / illiquid risk
• Value being created by taking illiquid loans off of balance sheets, lending to PE.
• Bought unrated debt from bank to a power plant with A rated customers. Bought at 70c on dollar, got it rated, flipped for 1.2x MOIC, infinite IRR
• A loan they underwrote had 38% LTV, 13% IRR on loan, whereas equity sponsor expecting 15% IRR. Illiquid credit allows for great risk adjusted returns
• SUNE + private or public, high quality MLPs, gaming RE (vici),with long term cash flows getting underpriced in public equity markets
o Can reclassify as infra debt instead of public equity and get cost of debt couple hundred BPs lower. No one wants mark to market headache
• multiple infra vs equity buyer base looks at stuff there is a big spread between yields as infrastructure investors are thirsty for yield
• More stuff being called infra – be careful
o TXU equity held in infra funds
o GreenForLife BC Partners bought (waste management) - some LPs classify as infrastructure
o call it infrastructure = cost of capital goes down
• When is next default cycle?
o EU HY 3x higher, triple B grown crazy
o Lots of stress in hospital, mining, retail
o Default rate underestimate stress being felt by companies
• Growth in insurance cos crazy
o To make money, must get a very large Triple B portfolio optimal portfolio
o Lots of the growth in assets around there because of it
o 10-20% of triple B. —> HY during a down cycle. What does that impact HY?
• Central banks pulling out lots of liquidity in the next 18 months
o real delta into short rates globally
o EU bonds swapped into dollars is 300+bps positive spread
• ECB causing serious distortions in EU credit market
• Steinhoff
o Filed for bankruptcy
o No entities in Germany originally.
• Incorporated an entity because of IG rating
• Issued bonds in Germany
• 1.85% yield
• Much of it was placed with ECB at par
• 6 mos later at 40c on the dollar
• ECB set to be largest HY manager in EU.
o Distorted market, now exited market and lots of issues with defaults and downgrades now
• Active management will need to be really important for the next 5 years because of these risks to serious dislocations
• Could lead to massive repricing’s in the FI market
• J Crew
o Took IP away from lenders and raised money on it
o Covenants and document ignorance are killing lenders due to scummy sponsors
• All metrics on covenants worse than 2007. Investors need bonds so they just take it
• Covenants matter only at most importance time (recession), so there is a non-linear negative impact
• Last 3 biggest deals, if they want to sell assets, they can take a dividend without compensating creditors.
o Reuters - 6.5bn
o AkzoNobel - 3bn
o Envision - 2bn
• EBITDA adjustments at ATH too
o EBITDA quality getting worse
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Monday, October 29, 2018
Credit Panel: Ted Goldthorpe & John Zito at Capitalize For Kids Conference 2018
Alex Roepers Long Owens Illinois, Huntsman, G4S: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Alex Roepers of Atlantic Investment Managment who pitched three long ideas: Owens Illinois (OI), Huntsman (HUN), and G4s (GFS.L).
Alex Roepers' Capitalize For Kids Presentation: Three Long Ideas
• 3 High conviction value stocks
• Owens Illinois
o Third time pitching this
o Largest maker of glass bottles in the world
o 25% global market share
o Grown 20% despite largest segment shrinking 4% a year
o Very stable, luxury product is put in glass bottle
o Taking mega-beer capacity to craft and specialty bottles
o $400mm FCF, has $100mm annually in asbestos payments
o Pushing on major corp dev move
• Sell EU biz 8x EBITDA
• Use to cut debt in half, use rest to buyback stock
• With that, can get to $42 share price in 12-18 months
o All of the negative impact is multiple compression despite earnings power growing, lower debt, etc
o Talking to financial sponsors, Koch industries, BRK, trying to put fire under their ass
o 15 % global fund position, 25% US fund
• Huntsman
o 168% upside
o 5.4x PE, 5x EV / EBIT
o $55 target price
o Taking their most cyclical business (Venator) public, paid down debt
o Went from $23 -> $35 and has sold off
o Fears around their product
o Downstream, differentiated, not as effected by the spot price changes
o 6% organic growth in polyurethane, great biz
o Own 53% of Venator – listed spinoff
o Roadmap to $4.40 EPS by 2020
• G4S
o One of the big security contractors. For corps, embassies, airports
o 3-5 year contracts, price escalators
o Tech components, camera, software, etc which is higher margin
o 9.3x PE
o Target Price £3.9, 85% upside
o #1 or #2 player in cash delivery solutions (think Brinks truck)
o They have a contract with WMT for cash close that saves them two days from cash close at store level to delivering to bank acct at head office
• Target also starting a pilot
o Grow 360 cash biz then take it public at scale at high multiple
o High quality business
Be sure to check out the rest of the presentations from Capitalize For Kids 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.
Colin Stewart Long Information Services Corp: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Colin Stewart of JC Clark who pitched a long of Information Services Corp (ISV.TO).
Colin Stewart's Capitalize For Kids Presentation: Long Information Services Corp
• L/S in Toronto. 9.2% net for 19 years
• Attractive businesses today – as seen by the what the multiple market is paying for them
o Infrao Database / storage
o Land / Real estate
o Tech
• Recurring revs, pricing power, high margin structure, etc
• Similar characteristics, less well know
• Land registry has those characteristics
• Information Services Corporation
o Saskatchewan land and corporate registry services
• 45% upside over next 1-3 year
• Monopoly position in its core registry business
• Undervalued, underfollowed, housing worries
• Can grow + M&A opportunities
• Good biz, cheap asset, growth = asymmetric
• 7.7% FCF yield• Registry ops 54% revs
o 15 years left on MSA w/ SK governmento Monopoly on this biz. Can use and resell data later
o 0.3% of all real estate transactions in Saskatchewan
• Services 33% revs
o Distribution of public records and data
o Growing thru acquisitions
• Tech solutions 13% revs
o Bought a product they used a ton and liked
Secular trends
Under levered, cheap multiple
Core registry is infra structure like asset
High quality biz
Underfollowed
Valuation is great
Providing backend tech to Nova Scotia, wins in Arkansas and Ohio to provide their service.
Teranet at 10.2x EBITDA in 2008. Had 10 years remaining on their contract.
At least 45% undervalued
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Kim Shannon Long CI Financial: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Kim Shannon, co-CIO of Sionna Investment Management. She pitched CI Financial (CIX.TO), seeing 68% upside.
Kim Shannon's Capitalize For Kids Presentation: Long CI Financial
• “Disruption Trap or Contrarian Value?”
• Thinks tech disruption of a theme is too far, too fast
• Mentions the Gartner Hype cycle and thinks the expectations are too high for this company.
• Some do get disrupted, many don’t. Thinks more companies are victims than would be true. Reminds her of the wake of dot-com bubble where there were good opportunities
• Factfulness is a great book that she thinks is relevant for this situation and it goes over human errors and emotions. More negative and fearful than one needs to be.
• Lots of quotes of historical misjudgements of future trends. “You’ll never make money on the internet” Bill gates to Steve jobs in 1995. This is one of the quotes she shared on it
• Humans are clearly not great at extrapolating tech disruption
• The Stock
o Is cheap - 8.6 PE
o P / CF is 8.3x
o 37% below 52 Week high
o 48% ATH, Low financial risk - Net debt to equity is .43
o Interest coverage is 25x times
o 2.3x debt re-payability
o Solid profits and earnings, high ROIC, ROE >20%, Growing EPS will continue to grow
o Should trade at a premium multiple.
o Insiders been buying YTD, no sales. Buying accelerated. Company plans to increase share repurchases
o CI Financial
o Unlikely supporter as they used to be a big subadvisor in 2006. 90% of revenue at the time. Shows some articles about the squabble
o Amazing sales machine and cost control and great serial acquirers. Watched spectrum united deal after it closed. Took out most of its costs.
o Just bought Sentry and cut cost there too.
o Skillful, aggressive capital allocators. One of the firsts into the “income trust” game
• Why has it fallen?
o Dividend cut
• Typically shows weakness in ops
• But they chose that they’d rather buy back stock as its accretive. Don’t want to be constrained by dividend payments when they can buy back shares or make acquisitions
• This is the market taking the wrong signal from this action.
o Negative perception of fund management
• Regulatory pressure
• Fee pressure
• Redemptions
• Lower fee substitutes
• Secular vs. cyclical pressure on returns
• Over done?
• Suggests active management death debate is overblown
• Still has profit margins >30%
• Despite fee pressure of -3-4% per year
• Can balance the fee pressure with synergies from acquisitions, cost control thru tech
• Indications that alts which have not out performed S&P500 last decade may stop taking asset flows
o Maybe peaked due to capacity constraints
• Largest independent fund manager in Canada
• Believe at $19 is a contrarian value buy
• Worth $32, 68% upside
• In Jan, was as cheap as $30
• Potential takeover target - as it has significant scale in Canada and would be attractive to global player looking to make headway in the market
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Maria Jelescu Long Tellurian: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Maria Jelescu of Ardinall Investment Management who pitched long Tellurian (TELL), seeing 25% 1-year upside and 4-9x in the long-term.
Maria Jelescu's Capitalize For Kids Presentation: Long Tellurian
• TELL - LNG project. Large scale LNG development. US oversupplied. One of few pure-play LNG developers. 25% near term uplift 12 mo
• Long term, stock has 4-9x potential
• Full alignment w/ management and key stakeholders
• Reviews how what used to be a group of regional gas markets with large price discrepancies is now becoming a global market.
• Global demand is growing quite fast.
• Clean, reliable and affordable solution for energy
• Historically LNG for supermajors, Cheniere has changed that
• Founders of Cheniere are founders of TELL. They have 20 year take or pays
• LNG today: developed by Supermajor and JV partners that are buyers
• Tellurian is building an integrated model where their equity partners are their customers
• removes the 3 risk
o Gas Supply - Own 15Tcf in resource for $1bn
o Gas Transport Midstream pipeline
o Gas Liquefaction - Bechtel contract
Alignment of partners Bechtel and GE. Own pipeline, etc. Double the LNG Canada Project size. Chairman former founder of Cheniere (LNG).
Management is making “Cheniere 2.0” with a twist. Tellurian becomes the GP of the project where they get management fee ($100mm / year) + promote on 28-42% of LNG volumes. Partners commit entry price + fixed price.
Who are equity partners and who would pay the fees? Tellurian generates a ton of fees, but is the 2nd cheapest LNG project global, still gives a very high, unlevered, double digit returns as equity partners. Total, a 19% shareholder sees value. No firm partners yet, but plenty in the data-room
Management fee at 20x = equity market cap today. Get the carry for free.
Base case - low case: cash flow = market cap today. Cost reimbursements after final investment decision in 2019 - > 25% to the share price. Phase 3 = 9x in 9 years, assuming flat share count.
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Jennifer Foster Long Hasbro: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Jennifer Foster of Chilton Investment Company who pitched long Hasbro (HAS), seeing 50% upside.
Jennifer Foster's Capitalize For Kids Presentation: Long Hasbro
• Franchise business (owned IP) – 52% of sales [above average operating margins]
• Partner business (licenced IP) – 31% of sales [below average operating margins]
• Gaming business– 17% of sales [above average operating margins]
• High quality, global business, 18x forward PE, high ROIC, stable operating margins over cycleShareholder friendly with 5% shareholder yield (dividend + buyback)
• 90% of toy sales oriented to recurring events (birthdays, holidays, etc) providing stability
• Analog toys and games growth has accelerated since smartphones have been introduced
• Have been able to adapt to digital disruption by leveraging their unique IP that are currently monetized in Franchise business by selling toys. Magic the Gathering game in Open beta, have been experimenting and tweaking game for a long time. Very famous and popular analog game franchise and has significant potential to make money if the game is well designed.
• Dealing with Toys R Us overhang which should be resolved by EOY18x 7 year median earnings multiple for toys business
• 2x digital premium for gaming assets, as digital peers at 23x earnings
• $6 estimated 2020 EPS
• $120 share price, 50% upside
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Evan Hornbuckle Long Under Armour: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Evan Hornbuckle of Wellington Management who pitched a long of Under Armour (UA).
Evan Hornbuckle's Capitalize For Kids Presentation: Long Under Armour
Brand turnaround, trough sentiment, under-earning and unloved
• Many successful consumer turnarounds – LULU, Nike, Adidas, Puma
• New management not “growth at all costs” ROIC, gross margin oriented
• Extremely high short interest
• Cheap if you look forward 3 years, put normalized EBIT margin (9%) and historical earnings multiple (30x)
• UA overbuilt opex and inventory to prep for $10bn in sales, Sports Authority went bankrupt and didn’t downsize fast enough. Tried to grow into it
• Liquidating excess inventory, beating 2018 guidance. Has a large markdown reserve account ($144mm) which once released is ~2018 EBITDA.
• Another $80mm in gross cost savings announced, unclear if it will be used to reinvest in business
Base case – 3 year outlook
• Sales – 8% CAGR [assumes modest global share gains in the category]EBIT Margin 9% [ 6-7 year average] 30x Multiple [ very rarely traded below this multiple before the recent blow up]
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Zach George Long Marriott Vacations: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Zach George of FrontFour Capital who pitched a long of Marriott Vacations Worldwide (VAC).
Zach George's Capitalize For Kids Presentation: Long Marriott Vacations
• Largest global Upper-upscale and luxury branded vacation ownership company, premier resort, club and exchange program operator
• 100% upside from current levels
• VAC closed the transformational of ILG
o Pushed by FrontFour
o Serious synergies being discount
• VAC’s performance has been terrible this year, driven by
o Concerns that consumer spending has peaked
o Quarate retail selling its large stake in VAC
o Management focused on integration
o Yet to report its first Clean Quarter post deal close
o $1bn+ in FCF in 2 years on 6bn EV
• Reviews the timeshare biz model
o Claims points model has fixed previous issues with timeshares
o Better amenties versus standard hotels
• High quality customers, $130k+ HHI, High home ownership rate, high FICOs, mostly married
• Deal closed Sept 1
• CEO bought shares with his own money
• $75mm in targeted annual cost savings in 2 years
• Some rev synergies
• $1.60 / share annual dividend
• Recurring revs, low capex
o 60% is recurring, fee based streams
o Synergies are ~10% of 2019 EBITDA
• CEO thinks cost synergies will “pale” in comparison to revenue synergies
• Thinks $195 in 2020. 15x 2020 Earnings
• VAC ROIC and FCF conversion > market averages
• Large, impressive brand portfolio
• Deal is leader in branded vacation ownership
• Established an industry duopoly
• Why does this exist?
o Concerns timeshare biz has peaked
o Initial synergy guidance below expectations
• Wanted $100mm in cost synergies + rev synergies guidance
o Investors have had to digest significant timeshare equity supply
o Wyndham WW $5bn spinoff
o Hilton Grand Vacations HNA has sold $1bn block
o Qurate retail block sale
o Niche space has lot to do
o Management being conservative on guidance until deal closed
• 2020 -> $13/share FCF
• Some sell side models haven’t been updated for the deal closing
• Thinks 15x PE multiple on 2020 pro forma eps = $195
• Cheapest among its peers on FCF Yield
• Risk
o Regulatory risks as regulated on state level
o Substitutes like Airbnb
o Cancellation of HOA management contracts
• Unlikely to be cancelled due to the number of votes needed
o slowdown in credit securitization market
• Slows ability to churn inventory
o insufficient timeshare inventory
• $6.5bn of VOI sales inventory
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Ryan Marr Long Chorus Aviation: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Ryan Marr of Waypoint Investment Partners who pitched a long of Chorus Aviation (TSX:CHR).
Ryan Marr's Capitalize For Kids Presentation: Long Chorus Aviation
Segments
• Charter (Air Canada Jazz) - 40% of sales
• Maintenance - 5% of sales
• Regional leasing - 55% of sales
• $234mm FCF
• 7% Dividend yield
• Charter biz
o Predictable charter biz, no earnings vol to AC, till 2025
• Leasing biz
o ROE is at average of peers
• Trades at a discount to both of their peer groups
• Discount due to Air Canada relationship risk
• Company’s statements understate leasing biz profitable
• Air Canada
o People think it will get “Aimia’d” by Air Canada
o Jazz and Aimia spun out in 2006 From Air Canada
o Had contracts in place above market fees to maximize value from IPO to Air Canada
o 2015 - Amend and Extend agreement
• Reductions in markups + more capex
• Less than $20mm reduction due to leasing provision where Q400 is leased to AC and its earnings making up the difference
o Jazz existing separate from Air Canada is beneficial to Air Canada for cost management purposes.
o Jazz is 45% of AC’s flights, 25% of all passengers
o Strong market position due to this benefit for labour, and few regional competitors having any overlapping routes
• Lease portfolio
o Poor disclosure for the lease portfolio
o LDD ROE
o Why in the regional leasing?
• Desire for diversification
• Leasing Experience with AC
• Leases Q400s AC
• 3rd party opportunities & Capital support
• $200mm investment from Fairfax (TSX:FFH) to support leasing
o Attractive and established marketing
o Regional leasing market has little leasing
o Competitive advantage in aircraft leasing
• Leasing in general
o Tax benefits
o Capital benefits
o Regional 20% leased vs 40% leased more generally
o Was due to government support to regional carriers which are no longer here
o Chorus already 3rd largest regional lease provider
• Thinks they can take share
• Many PE backed w/ lim. Life funds, will be sellers of their biz over time
o Their competitive advantage is due to being an operator of aircraft
• $10 target, 45% upside, 7% dividend to wait
o Equity growth from capital reinvestment
o Contract flying biz over 7 years generates entire market cap in cash
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Mark McKenna Long Cigna: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Mark McKenna of BlackRock who pitched a long of Cigna (CI).
Mark McKenna's Capitalize For Kids Presentation: Long Cigna
• It is a vertical merger
o Vertical integration. Reduce costs, increased access, integrate an experience, intensify experience
o Transformative experience
o Old media telco -> phone, PC, TV, Content all different and silo’do Current media telco -> content, TV, phone, network, PC, content, all completely integrated, leading to a superior experience
• Early days in healthcare transformation that should follow media’s lead
o Liquid, large cap, 40-80% upside in NTM
o Healthcare today: Everything is disparate. Doctor, pharmacy, MRI, Hospital, etc all silo’d
o Healthcare going forward: all integrated and information shared etc
• Cigna, Express Scripts deal. Additive thru integration
• Cigna - health Network
o Dentist, Doctor, Hospital, MRI - Medical Expertise
o Cigna doesn’t take risk, but for a self-insuring company, they manage the rest of the networks, management, etc
• Express Scripts - PBM network
o Formulary
o Pharmacy
• No communications between the two for 30-60 days
• Integrates experience
o Expansive data set
o Fully aligned incentives (Shouldn’t be writing more scripts)
o Increased patient touchpoints and deeper health interventions
o Total cost of care reduction and better patient outcomes
• Value creative for Cigna shareholders
o Cigna EPS 2021 from $18 —> $2.50 post deal
o Mostly cost synergies, but $2 / share of revenue synergies, which is a conservative estimate
o Thinks its very likely these are realized
• Carl Icahn hates it
o Price
o Regulatory risk
o Competitive disruption
o Post-Anthem margins and customer retentions
o Value destructive
• BlackRock lead a behind the scenes campaign between shareholders and ISS
o BR got the deal thru
• 30-40% recovery even if doesn’t happen, from recovery of share price + 15% share repurchase
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Andrew Iu Long Hostelworld: Capitalize For Kids Conference 2018
We're posting up notes from Capitalize For Kids 2018 investment conference. Next up is emerging manager Andrew Iu of Burgundy Asset Management who pitched a long of Hostelword (HSW.L).
Andrew Iu's Capitalize For Kids Presentation: Long Hostelworld
Hostelworld – Cheap, microcap online travel agency (OTA)
Defensible market – EXPE tried to grow their hostel business and failed
Opportunity to grow commission rates in line with Booking
Incremental contribution margin for Hostel operators 70%+, so they can take the rate increaseApp is successful driving engagement, which is reducing dependence on Google, increasing their EBITDA margin over time
9x FCF
Cheap because:
Worries around economic growth (despite being hostels being the lowest cost means of travel)
Revenue slowing and EBITDA falling [this is due to new cancellation policy impacting revenue recognition (but not cash flow), making income statement ugly]
Significant redemptions from their largest shareholder Woodford, leading to price pressure
20% IRR without multiple expansion, coming from dividend yield, take rate expansion, revenue growth, and share gains
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Brad Dunkley Long Premium Brands: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Brad Dunkley of Waratah Advisors who pitched a long of Premium Brands Holdings (PBH.TO).
Brad Dunkley's Capitalize For Kids Presentation: Long Premium Brands
• Largest holding - secular holding
• Specialty meat biz
• $3bn sales, $3bn market cap
• Meat is the fashion business
o “On Trend” products keyo Local Authentic brands with a story
o All natural
o Ethically raised
o Low card, high protein
o Paying for quality is in
• Premium outperforming mass in beer industry
• Craft beer volumes crushing it, taking share
• Not dissimilar
• Muskoka Brewery - small, but 200 across the country all taking share from Labatt
• Labatt would buy them, but lose their soul when they become big co. Share gaining would stop
• Hemplers —> Oscar Meyer is similar analogy. Hemplers only in Pacific North West
• Hard to compete with the local, and story behind the co
• First biz in PBH is speciality foods 80% of EBITDA, 20% is food distribution
• Hemplers is 1 of 40 brands owned by PBH
o Only buys a biz where the manager wants to stay
o Focused on high regional market share, not high national market share
o #1 in Canada in beef jerky + pepperoni stickso #2 in jerky in US with Oberto acquisition
o Taking expertise from other businesses and advising acquired businesses. Sharing best practices. Taking certain products from one brand and bringing them to another in another region
o Most SBUX breakfast sandwiches made by PBH
• Food Service business
o premium and customized cuts of meat and seafood
o High-end restaurants, local butcher shops
o Focused on “centre of plate” Fish, Steak, Seafood
o Supply The Keg with steaks across Canada
• $1bn revenues acquired of LTM period
• Oberto branded meat stick launch throughout the US
• Continued QSR / Food service contract wins in sandwich biz
o QSRs, Convenience stores, retail
o Helps QSR customers save on labour and spoilage
o High ROII biz
• Foodservice expansion into central / eastern Canadao Opening 1H 2019. New factory
• Create value thru accretive, low-risk M&A
o Acquirer of choice, customized transactions - lower multiples paid
o No integration of assets, target management stays on
o Higher manager retention - 48 mentioned since 2005, only 2 left
o kind of like BRK
o Great reputation as acquirer of choice
o 3rd, 4th gen business where families are more emotionally attached to business.
• Product innovation
• Geographic expansion
• Input sourcing and informational advantages
• High ROI greenfield projects, driving 4-6% annual organic growth volume
• Pays 9-10x EBITDA on recent deals
• EPS CAGR since 2011 26.4%
• Stock is 17.5% CAGR since 2001, including the most recent drawdown of 23%
• CEO, CFO haven’t sold shares, continually buying and adding
o Thinks they are underpaid. No options issued.
• Down 23% from April ATHs. Why?
o Missed earnings 4 q’s in a row due to labour costs, factory opening late
o General sell-off of Canadian consumer stocks
o Company had perfect timing on equity issuance in April
• $150mm equity issuance at $117.35
• $172.5m coverts
• Tightly held, Turtle creek, Pender west
• Biggest Equity raise ever at ATH
• People who finally excited to get in (big bank funds) have blown out, and convert arb funds
o 11.7x NTM EBITDA. Cheaper than Saputo and growing faster than Saputo
• Recent precedents Big meat cos buying at 14x, 12x currently for PBH
o No value attributed to company platform
o Now? Trough sentiment
o Defensive in macro
• No price target
o Buy and forget about it
o 13-15% annual compounder for foreseeable future
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Friday, October 26, 2018
Invest For Kids Chicago Conference Notes 2018: Griffin, Zell & More
The Invest For Kids Chicago 2018 conference recently took place. It featured investment managers sharing their latest ideas to benefit underprivileged children in the Chicago area. Here's notes/summary of the event:
Notes From Invest For Kids Chicago 2018
Ken Griffin (Citadel Investment Group): Took down risk in August. Hasn't felt comfortable with lots of risk in about a decade. Says there's lots to worry about and October has obviously thus far been volatile, but this is where portfolio managers can shine. Sees lots of opportunity for Citadel in commodities. Says to hire great people then delegate.
Sam Zell (Equity Group Investments): Macro commentary, lots of uncertainty about next month's elections. Long cash, maybe gold? He thought we were in the 8th inning a few years ago, elections have since taken us into extra innings.
Christopher James (Partner Fund Management): Long Intuit (INTU). Known for its TurboTax and QuickBooks products, proprietary datasets are where the real value is. Big Data + Workfroce 2.0. New "One Intuit" ecosystem driving value as well. People trust the company, are opting into data sharing. INTU has underappreciated upside and is partnering well with a range of other fintech companies.
Mark Lampert (BVF Partners): Long Idorsia (IDIA-CH), spin-off from Actelion done in conjunction with Actelion's sale to Johnson & Johnson. Founders/owners of co are exemplary scientists and business operators. Invested $525 million into Idorsia, more open market purchases recently. Insider purchases stand out as among biggest in industry. Thesis is to co-invest with the Clozels, the founders.
Vivian Lau (One Tusk Investment Partners): Long Bombardier. Prior management made a ton of mistakes. Co has a strong backlog and good long-term demand.
Daniel O'Keefe (Artisan Partners): Long Dentsply (XRAY). Depressed earnings/multiple. Co is growing, has good margins and ROIC. Says dental spending is seeing secular, long-term growth. 180 million Americans are missing at least one tooth. XRAY historically trades low-to-mid 20's P/E but has recently been mid-to-low teens. They overpaid for Sirona, failed merger integration, and have had 4 CEO's in 3 years. Thinks margins should revert, sees FY19 op margin at 17-21%, EPS at $2.30 to $2.80, stock worth $41-71, currently trades $35.
John W. Rogers Jr. (Ariel Investments): Long Stericycle (SRCL), long Madison Square Garden (MSG), MSG Networks (MSGN). People will probably still want to watch live sports, they own very valuable sports rights in a world class city.
Vivien Azer (Cowen & Co): Long Canopy Growth (CGC/Weed). Says it's a once-in-a-career disruption and only a matter of time. Consumer packaged goods companies are getting into the sector. Target price: C$82.00, 30x sales in three years.
Jeremy Schiffman (Palestra Capital): Long Airbus. In the good part of the cycle, about to get even better. Higher margins to follow: op margins going to mid-teens in next three years. Worth 180 Euros per share in three years. Stock buyback is possible next year. 40,000 new aircraft deliveries worldwide in the next decade. FCF heading from under 3bn Euros to 8bn Euros. Short U.S. Trucking: (Wener, Knight-Swift, Heartland): good part of cycle right now but about to get a lot worse. 60 PMI likely to mean-revert to 50 or lower; if 40, short makes a lot of money.
Philip C. Ordway (Anabatic Investment Partners): Long Alaska Airlines (ALK). Advantages from cost structure, customer loyalty, and markets/routes. Attractive margins and returns on capital. Current valuation = very low expectations. Secret sauce is Alaska's credit cards: loyalty program generated ~$1 billion of CFFO in '17. Operating margins ~40-50% with zero capital required, membership growing 10-12% per year. Bank of America pays Alaska every month based on members' credit card usage. Co's integration of Virgin America almost complete, sees FCF >$2 bn in next 3 years. ALK 10% FCF yield, 9x P/E.
Constance Freedman (Moderne Ventures): Long Fujifilm. Venture capitalist looking to invest in old industries undergoing technological transformation. 3d printing, augmented reality, digital transactions are technologies applicable to many markets. Document solutions, healthcare, imagine segments all use disruptive technologies. Undervalued today relative to peers. Revenue and profit growth from healthcare and imaging. Sees 15x E 2018 EPS, 6% ROE
For more recent investment conference coverage, head to our summary of the Great Investors Best Ideas (GIBI) Dallas Conference.
Thursday, October 25, 2018
Sohn London Investment Conference 2018: Only a Month Away
The 7th annual Sohn London Investment Conference is only a month away. It will feature Europe's leading hedge fund managers sharing their latest investment ideas to benefit the Sohn Conference Foundation for the treatment and cure of paediatric cancer. If you're in the UK or Europe, this is always a great event to attend.
To learn more about the event and to register, head to: www.sohnconference.org/london
Sohn London 2018 Speakers List
Adrian Croxson, OZ Management
Per Lekander, Lansdowne Partners
Andrew Dickson, Albert Bridge Capital
Maxime Franzetti, Mubadala Capital
Bernie Ahkong, UBS O'Connor
Andy Brough, Schroder Investment Management
Dureka Carrasquillo, Canada Pension Plan Investment Board
Benoît Colas, PrimeStone Capital
Rachel Reutter, J O Hambro Capital Management
Vikram Kumar, Kuvari Partners
Luke Newman, Janus Henderson Global Investors
Professor Richard J. Gilbertson, Li Ka Shing Professor of Oncology, University of Cambridge
Conference Details
When: 29th November 2018
Where: London Marriott Hotel, Grosvenor Square, London W1K6JP, United Kingdom
Schedule: 11:30 Registration and lunch buffet, 12:30 Speakers, 13:45 Break and further refreshments, 14:30 Speakers and Idea Contest, 15:45 Break, 16:30 Speakers, 17:30 Networking drinks
This year also includes the inaugural Sohn Women's Brunch, which will bring together a number of the most senior women in finance.
You can register for the conference by clicking here.
Pershing Square Starts Hilton Stake Again
Bill Ackman's investment firm Pershing Square Capital Management today revealed that they've started a new position in Hilton (HLT). Pershing now owns a 3.7% stake, or around 10.9 million HLT shares.
This isn't the first time Pershing has owned HLT shares in recent memory. They sold their previous stake in Q2 of 2017 after the company split itself up into a real estate company, an asset light management company, and a timeshare business.
This time around, they've bought HLT, which is just the asset light hotel management business. This year, HLT shares have dropped from a high of $87.62 to a low of $63.76 before slightly rebounding to current levels of around $67.
For more on this fund, we've also highlighted their Pershing Square's new position in Starbucks (SBUX) and thesis presentation.
Summary of Great Investors' Best Ideas Conference (GIBI) Dallas 2018
The 2018 Great Investors' Best Ideas (GIBI) Dallas Conference recently concluded with proceeds benefiting The Michael J. Fox Foundation for Parkinson's Research and the Vickery Meadow Youth Development Foundation. Here's a brief summary of the event:
Great Investors Best Ideas Dallas Conference 2018
Lee Ainslie (Maverick Capital) talked with Lee Hobson (Highside Capital) about quantitative investing and utilizing its features to replicate various typical fundamental processes: screening companies, position sizing, data sets. Maverick has been focused on the intersection of man and machine, instead of simply one versus the other. Didn't pitch any individual names. Maverick has launched four quant funds over the past few years that have higher turnover, in addition to their fundamental hedge fund.
Jim Grant (Grant's Interest Rate Observer): Likes municipal
closed end fund BlackRock Investment Quality Municipal Trust (BKN), says trading at 13% discount. Also recommended
shorting Matthews International (MATW) due to aggressive accounting, as
well as fighting secular trends like the shift to cremation.
Ray Nixon Jr (Barrow, Hanley, Mewhinney & Strauss): Pitched General Electric (GE), sees valuation around $12 on a sum of the parts basis. Obviously there's been a lot of volatility in this name.
Lisa Hess (SkyTop Capital): Bullish on the electric vehicle shift. Pitched Sherritt International debt: 7.875% 2025, as well as Aumann in Germany, a copper coil play. Also mentioned that Tesla (TSLA) is a religion, not a stock.
Michael Price (MFP Investors): Bullish on AT&T (T) as well as Intel (INTC).
Marc Cohodes (Former Managing Director of Copper River Management): Negative on MiMedx Group (MDXG). Also mentioned Intec Pharma (NTEC) as a long.
Richard Mashaal (Senvest Management): Paramount Resources (Canadian E&P), sees a double or triple in next 1-1.5 years. Cited increased production and hidden assets as reasons for bullishness, also thinks multiple could re-rate.
Ken Hersh (George W. Bush Presidential Center): e-Sports is a
huge business in early innings. Sees 280 million fans going to 550
million in next 4-5 years. Plays on the trend include Amazon (AMZN) due
to their ownership of streaming platform Twitch, game maker Activision
Blizzard (ATVI), and graphics card maker nVidia (NVDA).
Roger Staubach (Former Executive Chairman JLL Americas): "Adversity reveals genius and prosperity conceals it."
Stay tuned in the next few weeks as we'll be covering a ton of investment conferences.
Third Point's Campbells Video: Empty the Can
As we've detailed previously, Dan Loeb's hedge fund firm Third Point is long Campbells (CPB) and has an activist position as they seek to replace the entire board. We've posted their presentation on Campbells before.
Now, Third Point has released a short 4-minute video regarding their campaign and the problems at Campbells and they continue to use the hashtag: #RefreshTheRecipe.
Embedded below is Third Point's video: "Empty the Can"
Wednesday, October 24, 2018
What We're Reading ~ 10/24/18
Big Mistakes: The Best Investors and Their Worst Investments [Michael Batnick]
Fortune's Future 50 list: companies with best prospects for long-term growth [Fortune]
On shallow risk versus deep risk [A Wealth of Common Sense]
On Netflix's pricing power [Intrinsic Investing]
The quality of quantity at Netflix [FT Alphaville]
The economic cycle that just won't end [Morningstar]
Profile of businessman Tilman Fertitta [SBNation]
Louis Vuitton, Chanel most valuable brands but Gucci is gaining [Business of Fashion]
Amazon sets sights on the $88 billion online ad market [NYTimes]
How car ownership is changing rapidly in India [Economic Times]
Where to invest when US equities are overvalued [Mutual Fund Observer]
Viking Global Starts Position in Berry Global Group
Per a 13G filed with the SEC, Andreas Halvorsen's hedge fund firm Viking Global now owns 5.5% of Berry Global Group (BERY) with over 7.19 million shares.
This is a newly disclosed position for the firm as they did not own any shares as of the end of the second quarter.
The filing was made due to portfolio activity on October 12th. Berry Global was previously known as Berry Plastics.
Per Yahoo Finance, Berry Global "manufactures and distributes engineered materials, nonwoven specialty materials, and consumer packaging products. The company operates through three segments: Engineered Materials; Health, Hygiene & Specialties; and Consumer Packaging. It offers engineered materials, including stretch and shrink films, and converter films; trash-can liners and food bags; cloth and foil, splicing and laminating, flame-retardant, vinyl-coated and carton sealing, electrical, double-faced cloth, masking, mounting, OEM, and medical and specialty tapes; and food and consumer films, retail bags, and polyvinyl chloride films. The company also provides components for baby diapers and other absorbent hygiene products, feminine hygiene products, medical garment materials, substrates for dryer sheets, household cleaning wipes, filters, protective house wraps, and specialty agriculture and industrial products; components for adult incontinence, surgical drapes, face masks, corrosion protection, cable wrap, geosynthetics, and specialty filtration products; and a range of products for baby care, infection prevention, and food and household packaging. In addition, it offers containers; foodservice products, such as thermoformed polypropylene and injection-molded plastic drink cups and lids; closures and over caps comprising continuous-thread and child-resistant closures, as well as aerosol over caps; bottle and prescription containers; and extruded and laminate tubes"
Tiger Global Buys More Apollo Global Management Shares
Chase Coleman's hedge fund firm Tiger Global has filed a Form 4 with the SEC regarding its position in Apollo Global Management (APO). Per the filing, Tiger was out buying shares on October 22nd and 23rd.
In total, Tiger bought 815,000 shares at weighted average purchase prices of $29.57, $28.421, and $29.365. After these purchases, they now own over 35.23 million APO shares.
For more on this hedge fund, we recently highlighted other Tiger Global portfolio activity here.
Bruce Berkowitz Reduces Sears Position
Bruce Berkowitz's Fairholme Capital has filed a 13G with the SEC regarding its position in Sears Holdings (SHLD). Per the filing, Fairholme now owns 4.2% of the company with over 4.57 million shares.
This is a sizable decrease from the previous 17.42 million shares Fairholme reported owning at the end of the second quarter. The most recent filing was due to portfolio activity on October 15th.
Sears recently filed for bankruptcy and Berkowitz has ridden this investment all the way down, making it one of his biggest mistakes.
Monday, October 22, 2018
Graham & Doddsville Fall 2018 Issue: Tweedy Browne, Greenhaven Road & More
Columbia Business School has just released the Fall 2018 issue of its Graham & Doddsville newsletter. In it, they interview members of Tweedy, Browne Company such as Roger De Bree, Andrew Ewert, Frank Hawrylak, Jay Hill, Amelia Koh, Tom Shrager, John Spears, and Bob Wyckoff. They also interview Scott Miller of Greenhaven Road Capital.
Additionally, the issue also includes student investment pitches such as long JD.com (JD) and long Qorvo (QRVO)
Tweedy Browne Buys Baidu, Sina, AutoZone
Tweedy recently bought some Chinese equities: search engine giant Baidu (BIDU) and Sina (SINA), which owns Weibo, a popular social media business. They like the profitable advertising business models but have smaller position sizes due to various risks.
Domestically, Tweedy also purchased shares of AutoZone (AZO): "If you lookover the previous 11-yearperiod, its intrinsic value grew by 16% per annum, with a significant percentage of that growth driven by share buybacks. The historical record also revealed a stable and defensive business. Same store sales at AutoZone have grown in 19 out of the last 20 years, including in 2008 and 2009.AutoZone has also historically produced high returns, with a 14% ROA (return on assets) and a roughly 30% lease adjusted ROIC (return on invested capital)."
Greenhaven Road Long Etsy, Fiat, Yelp
Greenhaven Road's founder talks about his positions in Etsy, (ETSY), Fiat Chrysler (FCAU) and Yelp (YELP).
On Fiat, he notes: "Fiat Chrysler is reducing the low margin fleet business by getting out of sedans and focusing on SUVs, aligning themselves with customer preferences and higher margins.They are also going to either spin off or sell their parts division. If you backout the parts business, you're getting the core business for less than 3x earnings excluding net industrial cash and the parts business. That’s an attractive multiple for a growing earnings stream and a business that should remain profitable even if US new car sales decline by 30%."
Graham & Doddsville New Fall 2018 Issue
Embedded below is the new issue:
You can download a pdf copy here.
Friday, October 19, 2018
Hedge Fund Links ~ 10/19/18
Taking investment teams from good to great [CFA Institute]
Profile of Cliff Asness [Bloomberg]
Summary of Sohn Tel Aviv conference [Reuters]
Ray Dalio on the most important habits to build [LinkedIn]
Eddie Lampert was a wizard, now he's coming to terms with failure [NYTimes]
Profile of Joel Greenblatt [Barrons]
Hedge fund bets on beaten up New York Taxi medallions [WSJ]
Hedge fund stars crying uncle gives industry hope [Bloomberg]
Tips for aspiring portfolio managers [CFA Institute]
Hedge funds: Your fees are Bull%$&* [Institutional Investor]
Ray Dalio's Principles for Navigating Big Debt Crises: Free PDF
Bridgewater Associates founder Ray Dalio has recently released a free PDF entitled Principles for Navigating Big Debt Crises. Dalio has written this for the 10-year anniversary of the financial crisis.
It's got quite the endorsement from former Federal Reserve Chairman Ben Bernanke himself, who said: "Ray Dalio's excellent study provides an innovative way of thinking about debt crises and the policy response."
You can download the free .pdf here.
And if you haven't already, be sure to also check out Dalio's first book, Principles which is quite the tome of knowledge on his ways of thinking and approaching things.
Wednesday, October 17, 2018
Value Invest New York Conference: Exclusive Discount
The conference speaker line-up includes Joel Greenblatt, Howard Marks, Matthew McLennan and many others - see the full speaker line-up and presentation titles below.
As a partner offer, the organizers have offered MarketFolly readers a $200 discount on a ticket to attend if booked before October 31, plus also a free eBook from Harriman House worth $20 (no conference ticket purchase required).
Take advantage of the exclusive discount before it expires in 2 weeks! To save, click here to register and use discount code: Marketfolly-VINY18
Click here to see the full speaker line-up
- Howard Marks - Oaktree Capital: "Mastering the Market Cycle": Fireside Chat and Audience Q&A Hosted by Scott Wapner of CNBC
- Joel Greenblatt - Gotham Asset Management: Presentation title TBC
- Álvaro Guzmán de Lázaro & Fernando Bernad - azValor: "Buying Deeply Undervalued Real Assets"
- David Iben - Kopernik Global Investors: "The Value of Being Approximately Right In a Market that Appears to be Increasingly Precisely Wrong"
- Ben Preston - Orbis Investments: "Vale: Blue Sky Mine"
- Matthew McLennan - First Eagle Investment Management: "The Value of Scarcity and Resilience"
- Richard Chilton - Chilton Investment Company: "A Private Equity Approach to Investing in High-Quality Stocks"
- Bernard Horn - Polaris Capital: "A Global Snapshot of Value Opportunities"
- Andrew Wellington - Lyrical Asset Management: "Value Hidden in Plain Sight"
- Ronald Chan - Chartwell Capital: "The Value Handover"
- Nigel Waller & Andrew Goodwin - Oldfield Partners: "Value Investing in an Age of Disruption"
- Rajiv Jain - GQG Partners: Title TBC
- Jonathan Boyar - Boyar Value Group: Title TBC
- Robert Hagstrom - EquityCompass Strategies: Title TBC
- David Shapiro - Willis Towers Watson (Moderator)
If you have any questions about Value Invest New York please direct them to the organizers at newyork@valueinvest.com
Tuesday, October 16, 2018
What We're Reading ~ 10/16/18
Why family businesses outperform [Credit Suisse]
Exclusive interview with Amazon founder Jeff Bezos [Forbes]
Op-ed from AQR's Cliff Asness: Buyback derangement syndrome [WSJ]
The untold story of Stripe, the secretive $20 billion payments startup [Wired]
Profile of the owner of the In-N-Out burger chain [Forbes]
Bob Iger's bets are paying off big time for Disney [TIME]
Pitch on Henry Schein (HSCI) [Spruce Point Management]
A pitch on Tempur Sealy [Barrons]
A capacity to suffer and setting the right expectations [Scuttlebutt Investor]
Can Larry Culp fix General Electric? [WSJ]
LendingTree is the secret success story of FinTech [TechCrunch]
Why facts don't change our minds [James Clear]
Atomic Habits: An easy and proven way to build good habits [James Clear]
A day in the life of a Waymo self-driving taxi [The Verge]
The gambler who cracked the horse-racing code [Bloomberg]
Monday, October 15, 2018
Carl Icahn Buys Dell Technologies Tracking Stock, Opposes Merger, Sends Letter
Activist investor Carl Icahn today unveiled a new 8.3% ownership stake in Dell Technologies tracking stock (DVMT) with over 16.5 million shares. He opposes the DVMT merger and released a very detailed lettering outlining his thesis and thoughts (all emphasis his):
Icahn's Letter to DVMT Shareholders
"Fellow DVMT Stockholders:
Over the decades I’ve spent much of my time searching for undervalued companies. We are very proud of our record. In fact, an investment in Icahn Enterprises depositary units made at the beginning of 2000 (when Icahn Enterprises began to fully embrace the activist strategy) has increased by approximately 1,514%, or an annualized return of 16%, through October 11, 2018 (assuming reinvestment of dividends). We have also made hundreds of billions of dollars for stockholders in companies in which we have been activist investors. However, we freely admit that many of the companies we have invested in were identified to us by stockholders who sought our assistance against mediocre management who were attempting to profit at stockholder expense. As you know, even the worst management and boards in this country are extremely difficult to dislodge.
A few months ago, several large holders of Dell Technologies Inc.’s tracking stock (“DVMT” or the “Tracker”) contacted me to express their concerns regarding, and their opposition to, Michael Dell’s and Silver Lake’s machinations and activities related to the Tracker, as well as stressing that the Tracker was, and is, deeply undervalued. (Five years ago, I vehemently fought Michael Dell who many stockholders believed was severely underpaying for the company in a going-private transaction). After researching the current situation, I quickly realized that while we have unearthed many undervalued opportunities in the past, very few companies compare to the current opportunity and the massive undervaluation of DVMT — which exists in plain sight for all to see.
The Dell Tracker currently sells for approximately $92 per share but is worth on a pure mathematical basis approximately $144 per share[1]. In my opinion, this massive distortion exists because (i) as a result of the 2013 going-private transaction, we believe the market does not trust Michael Dell or Silver Lake; (ii) the Tracker has basically zero governance rights and is trapped within a capital structure that has some of the worst corporate governance in America (at Dell, the Certificate of Incorporation even requires that the CEO has to agree to replace the CEO!), however, investor fear of this poor governance is overdone and we believe strong activism combined with litigation, if necessary, can mitigate the governance risks; and (iii) for the better part of the past year, Dell and Silver Lake worked to destroy the value of the Tracker by (1) raising the possibility of a Dell IPO, (2) floating the idea of a merger with VMware and (3) threatening a forced conversion of the Tracker into Dell common stock, among other tactics. These scare tactics are reminiscent of the tactics Machiavelli advised the Borgia rulers to use centuries ago.
Several years ago, I believe Dell and Silver Lake realized that Dell Technologies was simply a highly-leveraged hardware company facing great secular challenges and would never enjoy the growth and success of Apple and Microsoft. Therefore, they levered up dramatically to purchase EMC Corporation (“EMC”), a better positioned hybrid hardware and software company, whose crown jewel was its 82% ownership interest in VMware, Inc. (“VMware” or “VMW”). But, to purchase EMC, Dell needed $10 billion more than its bankers could possibly arrange, and they also needed to convince EMC stockholders that Dell’s offer was worth accepting. They accomplished this by engineering the DVMT Tracker that they said would allow EMC stockholders to continue to participate in VMware’s upside.
Because a tracking stock is unusual and rarely included as merger consideration, Dell and its bankers had to convince EMC stockholders that the Tracker would efficiently “track” the economic value of VMware shares. To that end, one of Dell’s bankers at the time delivered a fairness opinion that assumed the Tracker would trade at a range of +/- 5% to VMware shares; while another banker assumed the Tracker would not trade at more than a 0-10% discount to VMware shares.[2] Dell sold EMC stockholders the Tracker assuming, at most, no more than a 10% discount, yet today, Dell and some of those same bankers are now soliciting your vote to agree to exchange your DVMT shares at a 36% discount![3]
It seems clear that Dell has long-planned to repurchase the Tracker at bargain basement prices. For two years, Dell management have publicly boasted about Dell’s “…opportunistic opportunities in the market to take advantage of the discount between the two securities”[4] and have repurchased over 23 million DVMT shares at substantial discounts. This plan significantly benefits Michael Dell and Silver Lake, but at a huge cost to the DVMT stockholders. Why hasn’t the Dell Board been exercising its fiduciary duties owed to the DVMT stockholders, as opposed to just the controlling stockholders? Make no mistake, if the current “opportunistic” deal succeeds, 100% of the discount, approximately $11 billion, will be an economic windfall mostly attributable to Michael Dell and his Silver Lake partners. It is clear to me that Dell and Silver Lake have followed Machiavelli’s advice to the letter: It is better to be respected than loved, but better still to be feared than respected.
In January 2018, Dell commenced its fear campaign by telling stockholders that Dell was evaluating potential business combinations between Dell and VMware, Inc. DVMT stockholders and the market generally feared that this meant a possible reverse-merger with VMware which would result in a significant multiple contraction for the combined companies which would mean a much lower combined company stock price for the former VMware stockholders. This obviously would also result in a lower value for the DVMT stock. For good reason, these disclosures sowed fear and uncertainty that resulted in a precipitous fall in price for both VMW shares and DVMT shares. In a two-week period both stocks dropped over 25%. It is very hard to believe that Michael Dell and Silver Lake did not fully anticipate this drop and we believe this was a carefully calculated (and successful) attempt to frighten VMW and DVMT stockholders. It appears to us that VMW management and the VMW independent board members wanted no part of a merger with Dell. Instead, they agreed to dividend $9 billion to Dell to obtain some relief from, and at least postpone, a merger with Dell. Once the threat of a merger was effectively off the table, VMW and DVMT shares recovered a good part of their lost value and the discount narrowed modestly, but it continues to persist.
But, Michael Dell’s and Silver Lake’s ultimate objective was, and still is, to purchase the Tracker at a large discount and they would not be deterred. They therefore successfully struck a deal with Dell’s independent directors to exchange DVMT shares for cash and Dell stock, at a ridiculously low valuation. Instead of paying the mathematical value of $144 per share for the Tracker, they are currently offering to pay what we estimate is only $94 per share.[5] Although I know and respect one of the Dell independent directors, by agreeing to this deal, I can only conclude the independent directors must have been misinformed by advisors working for Dell and Silver Lake or by Michael Dell and Silver Lake themselves. Otherwise, it is unquestionable, in my opinion, that the independent directors breached their fiduciary duties to the DVMT stockholders. How else can one explain an agreement that so obviously transfers $11 billion in value to the controlling stockholders at the expense of the minority stockholders? The one thing these independent directors did get right, however, was to condition the deal on DVMT stockholder approval. I believe the Dell independent directors must take their fiduciary duties to the DVMT stockholders seriously. Any future transactions proposed by the controlling stockholders must always be assumed to be at the expense of the DVMT stockholders and the independent directors must always demand robust protections for the DVMT stockholders. The Board’s fiduciary duty to all stockholders demands nothing less, especially after this fiasco!
Dell now appears to be realizing that DVMT stockholders are uniformly and stubbornly against the proposed DVMT merger and is now moving into the next phase of its fear-mongering campaign. By using the scare tactic of disclosing that they have met with investment bankers to explore a potential IPO of Dell’s Class C common stock, Dell is effectively telling its public stockholders that if we, the DVMT stockholders, do not approve their proposed DVMT merger, they will invoke a draconian provision in their Charter and force us to convert our DVMT shares into Dell stock following a Dell IPO. Fortunately, in my opinion, their threat to “cram down” a forced IPO conversion is another empty one, if we stand together.
[1] Based on DVMT share price of $91.74 and VMware stock price of $141.49, as of October 11, 2018. Assumes Class V Common Stock interest in 61.1% of the 331 million VMW shares attributable to the Class V Group, per Dell Technologies Inc.’s Form S-4/A, filed with the Securities and Exchange Commission, on October 4, 2018.
[2] As disclosed in the EMC Definitive Proxy Statement, dated June 6, 2016.
[3] Based on the value of 199 million outstanding DVMT shares, at $91.74 per share, compared to the value of 61.1% of Class V Group’s interest in 331 million VMware shares, at $141.29 per share.
[4] Dell Chief Financial Officer comments made during Dell’s earnings call on March 30, 2017.
[5] Based on a 5.0x multiple of FY2019E “Core Dell” EBITDA of $7 billion and market prices as of October 11, 2018 for VMware, Pivotal and SecureWorks. Assumes DVMT shares exchanged for $9 billion of cash and 1.3665 subject to proration.
[6] Cash flow projections based on Bank of America Merrill Lynch report, dated July 16, 2018. FCF valuation multiple based on comparable company analysis, including MSFT, RHT and CTXS.
Cat Rock Capital Increases SharpSpring Position
Alexander Captain's hedge fund firm Cat Rock Capital has filed an amended 13G with the SEC regarding its stake in SharpSpring (SHSP). Per the filing, Cat Rock now owns 15.01% of the company with over 1.22 million shares.
This is up from the 936,935 shares they reported as of July 16th in their previous 13G filing. The newly amended 13G was made due to activity on September 24th. Prior to founding Cat Rock, Captain worked at Tiger Global.
Per Yahoo Finance, SharpSpring is "operates as a cloud-based marketing technology company worldwide. The company offers SharpSpring, a marketing automation solution for small and mid-size businesses. It markets and sells its products and services through sales teams and third party resellers. The company was formerly known as SMTP, Inc. and changed its name to SharpSpring, Inc. in December 2015. SharpSpring, Inc. was incorporated in 1998 and is headquartered in Gainesville, Florida."
Tiger Global Buys More Sunrun
Chase Coleman's hedge fund firm Tiger Global has filed a Form 4 with the SEC regarding its position in Sunrun (RUN). Per the filing, Tiger Global now owns over 15.23 million shares.
They purchased RUN shares on October 9th, 10th, and 11th at weighted average prices of $11.1267, $11.9614, and $11.9757. In total, they bought 231,357 shares.
As we've detailed previously, Tiger Global has increased its stake over the course of the year.
Per Yahoo Finance, Sunrun "engages in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. It also sells solar leads. The company markets and sells its products through direct channels, partner channels, mass media, digital media, canvassing, referral, retail, and field marketing. Sunrun Inc. was founded in 2007 and is headquartered in San Francisco, California."
