Idea Incubator

DISCLAIMER: The views and information I provide are for informational purposes only; are not meant as investment advice; are subject to change without notice of any kind; do not constitute an offer of products or services with regard to any fund, investment scheme, or pooled investment; nor do they in any way, shape or form represent the views of my employer.

Please do not use anything on this site – but especially this page – as investment advice. ALL third-party information should be used within the context of your own personal investment ‘mosaic’.


Weatherford International (NYSE: WFT)

April 3, 2017

Commentary this morning from BAML on the SLB/WFT joint venture:

And Tudor Pickering believes WFT is worth a look with the Halliburton CFO Mark McCollum joining the Company.


Marathon Petroleum (NYSE: MPC)

November 28, 2016

MPC Elliot Management Letter November 2016

MPC Elliot Managment Presentation November 2016


Navistar International (NYSE: NAV)

November 17, 2016

NAV is up almost 45% since the deal-related jump in early September. Missing that move after explicitly documenting how attractive the deal was at the time is the definition of stupidity…

nav-2 nav

September 7, 2016

Navistar Deal Fuels German Rivalry (WSJ 9.7.16)

  • NA heavy-duty truck market $30 billion
  • VW China JV with Sinotruk (Hong Kong) Ltd.
  • Daimler has 40% of the US market
  • Andreas Renschler, CEO of VW’s Trucks and Buses business, was the architect of Daimler’s US strategy
    • Left Daimler in 2014 after passed over as CEO
  • Daimler Trucks CEO Wolfgang Bernhard ran VW’s ‘namesake’ car brand a decade ago
  • Both CEOs are focused on utilizing common platforms in order to generate scale economics
  • Daimler owns truck maker Freightliner and egine supplier Detroit Diesel

September 6, 2016

VW buys 17% Navistar stake; full merger is possible (Automotive News 9.6.16)

17M: Per the notes taken this morning, the above commentary is not a surprise. A full merger should take awhile, so likely plenty of time for the market to ‘forget’ about this potential deal and for some air to come out of the stock between now and merger day. Definitely something to keep on the radar…

VW to Take Navistar Stake (WSJ 9.6.16)

  • $200 million at $16 for a ‘nearly’ 17% stake
  • Emissions Gate has cost VW nearly $20 billion so far
  • Since 2010 NAV has lost roughly half of its US market share
  • VW and NAV have been in talks since early 2015
  • VW gets two BOD seats
  • Have agreed to cooperate on purchasing and developing new products
  • Carl Icahn and Mark Rachesky each control about 20% of NAV
    • 17M: Wow – did not know their stakes were that large .
  • Icahn originally bought in hoping to combine it with Oshkosh
  • Truck market
    • VW big player in Europe and Brazil under MAN and Scania brands
    • Volvo produces trucks in the US under the Mack brand
    • Daimler owns Freightliner
    • US heavy duty truck production projected to fall by 33% in 2016, from 200,000 vehicles in 2015
    • NAV has 11% of the NA HD truck market
    • Freightliner is the leader at 40%
    • Paccar makes Peterbilt and Kenworth trucks
    • US market by rank: Freightliner, Peterbilt, Kenworth, Mack and Navistar brands
  • VW created commercial vehicle holding company in 2015
    • EUR34.5 billion revenue
    • EUR1.7 billion EBIT

17M: This is huge news (obviously). A very good credit research firm has been pounding the table on NAV debt; and with VW now in the equity, this becomes an extremely interesting potential idea. Would not be surprised to see VW make a bid for the entire company sometime in the near- to medium-term; but at minimum, likely VW is a game-changer from an operational standpoint.


Liberty Media Group (NASDAQ: LMCA)

September 19, 2016

Liberty Media buys Formula One auto racing giant (Denver Business Journal 9.7.16)

  • $4.4 billion deal
  • Formula One a 21-race multinational series
  • Greg Maffei: “We see a business that’s well run and extraordinarily successful. It’s virtually unparalleled to bring as much cash to the bottom line…as Formula One does.”
  • Liberty paid $746 million to acquire an 18.7% stake in the opening stage of the deal
  • The second leg will consist of $1.1 billion cash, 138 million non-voting Liberty tracking stock valued at $2.93 billion, and $351 million of debt instruments issued by Formula One that can be exchanged for Liberty stock
  • Second leg set to close in early 2017
  • CVC Capital Partners purchased in 2006
  • Promotions, marketing and digital media distribution will all be increased under Liberty ownership

Viacom (NASDAQ: VIAB)

October 24, 2016

Two Wary Moguls Hold Key to CBS Deal (WSJ 9.30.16)

  • Moonves is not interested in fixing an array of underperforming networks
    • Possible ‘carrot’ is a voting stake in National Amusements
  • Moonves not convinced, but CBS could benefit from VIAB’s international ops and Paramount
  • Moonves believes TWX would make a better fit for CBS

September 24, 2016

Will CBS Buy Viacom? (Barron’s 9.24.16)

17M: Fantastic article outlining the current Media environment. CBS is leading the charge on the standalone streaming front in order to monetize its high quality programming, and is a template for what ValueAct is likely pushing for behind the scenes at Fox.

While on the surface – outside of National Amusement’s 80% stake – it makes little sense for CBS to attach failing VIAB channels to its portfolio…from a broader macro standpoint it makes perfect sense to bulk up the total content portfolio in preparation for a full bundle + skinny bundle + streaming world. This is, of course, precisely what John Malone has outlined now for several years, and I would not be surprised to see consolidation go a step further with the Cable Cos going after the content providers in order to create enough scale to compete against the absurdly priced streaming options out of Netflix, Hulu and Amazon.

Once the Cable Cos step up their technological game – IMO highly likely to be led by CHTR – and the cost of standalone content begins to crystallize, I firmly believe even average-income consumers will begin to appreciate the price/value proposition of the cable bundle. Simply because ESPN will be offered outside of the traditional bundle does not mean it will be cost effective. DIS would be out of their minds to not bundle ESPN with other properties; and likewise, if CBS and VIAB get together, consumers are not going to be able to pick and choose between standalone Nickelodeon and CBS…they will be bundled together, simply in a different form than the traditional bundle.

All that to say – IMO the key bridge to the ‘other side’ is cable bundle technology. This article is spot on – scrolling thru channels is quickly becoming a relic in the age of Apple TV. It has to change, and the market will force it – just a matter of when, not if.

VIAB Updated View on Valuation and Strategic Options (JPM 9.15.16)

  • Net leverage 3.5x as of F3Q16 – potential need for a dividend cut (which has obviously subsequently taken place…)
  • $1.4B of debt due in the NTM
  • JPM SOTP valuation
    • Media Networks: 6.25x EBITDA
    • Paramount: $7 billion
  • 75% of Media Networks value comes from top three brands
    • Nickelodeon 43%
    • MTV 20%
    • Spike 11%
  • CBS deal structure
    • 50/50 cash/stock at no premium
    • $500 million synergies
    • 5.1x PF net leverage

September 12, 2016

In the name of the father (Economist 8.25.16)

“According to one former Viacom executive who knows Ms Redstone well, a recombination [with CBS] is her priority.”

17M: I did not know this until this article. That’s a game-changer from a downside protection standpoint, IMO. Need to start running some numbers on a pro forma combination…

September 4, 2016

Sell Disney, Buy Viacom and Netflix (Barron’s 8.27.16) (thoughts via Twitter)

September 3, 2016

Were VIAB not 80% owned by National Amusements and thus 100% exposed to the extraordinarily difficult operating climate for sub-scale media properties, I would not even waste my time. But the fact of the matter is National Amusements controls both CBS and VIAB, and likely has little incentive to watch either waste away before attempting some form of a restructuring – either a merger of the two entities and/or a sale of Paramount. Sharp observers will retort that VIAB continues to trade like death in the face of a rather obvious restructuring special situation set-up…thus perhaps the market has already priced in the economic effects of a restructuring. I have not even dug into the numbers yet, as I have simply been observing the situation from the sidelines; so some simple math taken from Google Finance:

  • Market Cap: $15,890 million
  • Debt: $12,365
  • EV: $28,255
  • 2015 EBITDA: $3,316

The rumor is that Chinese firm Wanda wants to buy a stake in Paramount that value the unit at $10B. If you take out $10B from VIAB’s EV, and assume $2.5B of current ‘core’ EBITDA, VIAB trades for 7.32 times EBITDA. Assuming $200 million of D&A and a 40% tax rate, NOPAT is $1,380, of which VIAB trades for 13.23 times. Seems pretty fair to me.

So for a special situation set-up to work from here, more than likely a highly accretive merger with CBS needs to occur.

But another factoid worth considering is the commentary John Malone provided on VIAB’s assets in a July 2016 interview. Yes, at least a portion of Malone’s comments are him playing public poker; but his large-scale investment in DISCK sort of corroborates his view that seemingly sub-scale media properties are currently on sale.

Viacom Board Gets Paramount Sales Options (WSJ 9.2.16)

  • Outgoing CEO Dauman delivered a board presentation detailing options for potential sale of Paramount
  • WSJ says deal now appears unlikely any time soon
  • VIAB was initially approached by more than 50 parties; but eventually whittled it down to three serious bidders
  • VIAB bylaws are in the process of being adjusted again to require that a Paramount deal receive support from 2/3 of directors and from the majority of the class A shareholders

Viacom May Tighten Reins on Paramount (WSJ 8.25.16)

  • Paramount Pictures CEO Brad Grey
  • New VIAB CEO Tom Dooley is calling on the Paramount team, led by Grey, to defend Paramount’s turnaround plan
  • Grey has run Paramount for 11 years, and is signed up thru 2020
  • Paramount tied for last place in market share among six largest studios
  • China’s Dalian Wanda Group has discussed taking a 49% stake that would value the studio at $8-$10 billion

Viacom Veteran Tries to Turn Page (WSJ 8.22.16)

  • Shari Redstone, Sumner Redstone’s daughter, is president of National Amusements Inc
  • Interim CEO Tom Dooley succeeds former CEO Philippe Dauman
  • Shari called Dooley in June to tell him she wanted him to succeed Dauman
  • Five new National Amusements-appointed directors will join VIAB’s BOD
  • Eversource Energy Chairman Thomas May will take over as VIAB’s chairman role from Dauman after September 13th
  • About Dooley, Kenneth Lerer, a venture-capital investor who has known Dooley for about 20 years and is one of the five new VIAB directors, said: “He’s a terrifically talented executive. He’ll take out any uncertainty that exists.”
  • Dooley first joined VIAB in 1980
  • Dooley and Dauman left to start a media-focused PE firm in 2000 after VIAB acquired CBS for $37 billion; they returned in 2006

ON-DECK CIRCLE

April 6, 2016

Several interesting deal-related situations currently on the menu.

  • SUNE —> TERP
  • ETE/WMB —> both sides
  • HAL —> BHI
  • PFE —> AGN
  • AGN —> VRX

TERP is very interesting, as I have noted in its own section below; the ETE/WMB situation is on-going, and I believe a dividend cut/another round of new lows are in the works; BHI is set to receive a $3.5B BUF; AGN has failed to decline materially in the face of significant HF hotel ownership; and AGN could potentially get involved with VRX in some fashion.


TerraForm Power (NASDAQ: TERP)

September 3, 2016

TERP, along with ETE (post-early February debacle), is one of the great missed opportunities of 2016 for me. It is my job as a surveyor of the global investment landscape to soak up all possible information and make an informed portfolio decision. Whether that information is from my own first-hand due diligence or talking to/observing investors closer to a situation than I could ever get does not matter – with Appaloosa involved, TERP was a no freakin brainer…and I blew it, by worrying that I did not know the company well enough myself. This ‘game’ is about operating with imperfect information; and virtually nothing I did on my own would have brought me closer to a final investment decision than simply accepting the fact that Appaloosa was involved in a massive way (not relative to their AUM, but relative to the size of TERP).

April 5, 2016

Invenergy Acquisition 12.21.15

Appaloosa 12.21.15

Appaloosa 1.1.16

Vivent Termination 3.9.16

Appaloosa 12.7.15

  • “In the first place, the Agreement was struck between an affiliated subsidiary and its controlling parent. Under well-established Delaware law, we believe the validity of this Agreement (and the conduct of the officers and directors who approved it) would be evaluated under the entire fairness doctrine, not the business judgement rule. Thus, the burden of proof as to fairness falls on the Company’s Board of Directors, who must establish that the Purchase Agreement was fair to TERP from a commercial standpoint, and that the procedures by which it was adopted were also fair.”
  • TERP originally committed to purchasing Vivint assets at $1.84 per watt from SUNE

Appaloosa 11.30.15

  • TERP’s original business purpose was: “…to act as a vehicle to hold and finance a high quality portfolio of fully-developed wind and solar power assets that were supported by long-term power purchase agreements with large, investment-grade corporate counterparties.”
  • The Vivint transaction moved TERP into the higher risk residential market

Interesting note on Appaloosa’s purchase activity. They began accumulating TERP between $12.50 and $14 in slugs of several hundred thousand shares; but when the price tanked to under $7 on 11/30, they went all-in with several million shares near the lows of the day.

April 3, 2016

Distressed debt investor Appaloosa upped its TERP stake from 9.5% to 10.88% on Friday.

This is kinda sorta setting up to be one of those ‘no brainer’ set-ups. Appaloosa has been involved since mid- to late-2015, and my guess is we see news of Baupost involvement in the not-so-distant future. These types of anecdotes help underpin the analysis of the underlying asset base. Great amounts of work lie ahead, but this is the type of set-up I like prior to diving in.

TERP 3Q15 Earnings Presentation

1918 MW Portfolio

  • Location
    • US: 72%
    • UK: 20%
    • Chile: 5%
    • CAD: 3%
  • Generation Type
    • Solar: 74%
    • Wind: 26%
  • Asset Age
    • <2 years: 56%
    • 2-5 years: 23%
    • >5 years: 21%
  • Remaining Contract Length
    • 0-5 years: 5%
    • 6-10 years: 11%
    • 11-15 years: 31%
    • 16-20 years: 33%
    • 20+ years: 20%

Pro Forma Portfolio

  • 9/30/15 base: 1918 MW
  • Invenergy wind: 930
    • $1.9B acquisition – $1.1B cash, $818 million project debt
    • Invenergy retains 9.9% stake in US assets
  • Vivint solar: 523
  • PF: 3371

9/30/15 Pro Forma Capital Structure

  • Liquidity: $1,454 – $796 cash, $658 revolver capacity
  • Senior Notes: $1,250 (due 2023 and 2025)
  • Permanent Project Debt: $1,305
  • 2016 Run-Rate EBITDA: $397
  • Total Net Debt: 4.43 times

Seritage Growth Properties (NYSE: SRG) 

December 16, 2015

Akin to the DISCA ‘tell’ Malone provided, Buffett buying an 8%+ stake in SRG is a massive ‘tell’ for a complex situation…

SRG 3Q15 10Q


Discovery Communications (NASDAQ: DISCK) 

December 17, 2015

Using CS’s 2016E earnings from the ‘Investor Day Recap’ below, DISC’s adj. EPS is approximately $2.10. Estimated D&A is north of $300 million, but DISC indicates that ‘maintenance capex’ is around $100 million – so by adding $300 to 2016E EBT, then subtracting $100 and taxing the adj. EBT figure at 30%, EPS is approximately $2.10. Of course, it is conservative to tax the $200 difference at the full 30%, since as long as DISC continues to grow, that tax savings will accrue to the equity.  At 17.5 times 2016E earnings, DISC is worth approximately $37. Assuming a 15 times EBITDA take-out multiple, DISC is worth over $45 per share.

The core of DISC’s attractive competitive position, as outlined by Malone in his Liberty investor day interview, is two-fold: 1) it owns virtually all of its distributed content, and 2) it distributes on a global scale. Continuing with the Malone assist down the court, this type of platform would likely be extremely attractive to a larger media company with an international presence…such as FOX.

December 16, 2015

At the Liberty investor day John Malone said his investment in Discovery is a ‘double bank shot’. He would sell CHTR in order to retain DISCA. Doesn’t get much more complicated than that.

CS Media Note 11.20.15

DISCA CS Note 11.4.15

DISCA CS Investor Day Recap 9.30.15


DowPont (NYSE: DP)

(Yet-to-be-announced name and ticker – you read it here first)

December 15, 2015

DowPont Merger Presentation 12.11.2015

DowPont Merger Transcript 12.11.2015

Highly doubt this will every morph into an idea; but you never know.

Merger Presentation Notes

  • Pro Forma Segments/Sales/Synergies
    • Ag: $19B – $1.3B
    • Material Science: $51B – $1.5B
    • Specialty Products: $13B – $.3B
  • Synergies
    • Cost: $3B
    • Growth: $1B
  • Deal Ratios
    • DD: 1.282 shares of DP
    • DOW: 1 share of DP
  • Board/Exec
    • Executive Chair: Liveris
    • CEO: Breen
    • BOD: 16 directors; 8+ 8, including Liveris and Breen and 2 co-lead independent directors
  • Targeting 2H 2016 closing
  • Global Ag Company 
    • Market
      • DP $19B
      • MON $16B
      • SYNN $14B
      • BAYN $12B
      • BAS $7B
    • Product categories: Germplasm, Traits, Insecticides, Herbicides, Fungicides, Emerging Tech
  • Material Science Company 
    • Fully integrated pure play materials company
    • Packaging, Transportation, Infrastructure
    • Leverages DOW low-cost platform
    • Low Cost Monomers
      • Ethylene and Propylene building blocks
    • 70% of revenue focused on: packaging, transportation, construction
  • Specialty Products Company 
    • Leading brands: Tyvek, Kevlar, Nomex, Tedlar
    • Segments:
      • Electronics & Communications $4B
      • Nutrition & Health $4B
      • Industrial Biosciences $1B
      • Safety & Protection $4B
  • Financials
    • Revenue: $83B
    • Operating EBITDA: $15B
    • Operating EBITDAM: 18%
    • Net Debt: $18.3B

Molson Coors Brewing Company (NYSE: TAP)

September 20, 2015

AB InBev Brews Plan For a Beer Behemoth (WSJ 9.17.15)

A Global Antitrust Grilling (WSJ 9.17.15)

Brazil Tycoons Pursue Capstone For Beer Empire (WSJ 9.17.15)

Keg Party May Get Wild If Brewers Merge (WSJ 9.17.15)

Notes

  • U.S. market share
    • ABI 45% – down from 49% in 2008
    • SAB 25% via the MillerCoors JV (not sure how though, given MC has total share of 28%…additional U.S. interests perhaps?)
  • Craft beer has doubled U.S. share since 2008 to 9%
  • SAB has 40% of the African beer market
  • Worldwide market share:
    • ABI 21%
    • SAB 10%
  • Cross ownerships
    • Altria Group 27% stake in SAB
    • SAB 58% stake in MillerCoors JV
      • TAP has right to up its stake to 50% in a change of control scenario…
      • …as well as a right of first refusal on the remaining 50%
    • SAB JV with Chian Resources Enterprise, giving it 23% of Chinese market
    • Altria an Columbia’s Santo Domingo family control more than 40% of SAB

Brazil

World Bank Data

BRL Chart

September 23, 2015

On one hand I am baffled; on the other, I am enthused to see a real-live crash situation playing out before our eyes. The BRL shows absolutely zero signs of bottoming here, trading today above 4.15 per USD. Brazil’s FOREX reserves are almost $360B versus external debt of $350B; the balance of payments has nudged up into positive territory; and the central bank has kept real rates at almost, if not the highest level in the world – I do not understand why the currency is behaving as it is. But I am starting to get excited for a crash scenario…and ABEV is my primary method of ‘playing’ said crash.

Balance of Trade

External Debt

Forex Reserves

September 15, 2015

Brazil central bank chief Alexandre Tombini stays above the fray (FT 9.12.15)

Brazil’s central bank doing a good job of keeping inflation under control in the face of a deteriorating fiscal/currency situation. Low interest rates would simply fuel the hyperinflation fire.

September 13, 2015

With the BRL’s failure to fall to new lows on the S&P DG last week, it appears a significant amount of negative economic data is priced into the currency at this point. But lots of work needs to be done here, as after Brazil’s last bust in the early 1980’s it took more than a decade to stabilize the currency. Below are some notes from a recent WSJ article on Brazil’s economic plight written up on the Scratch Notes page yesterday…

Brazil’s Big Bet On China Turns Sour (WSJ 8.28.15)

  • Stock market down 22% YOY; BRL down 33%
  • 2Q GDP growth projected to be -1.7%
  • Inflation approaching double digits; UER and interest rates rising
  • “Brazil is in danger of losing its investment-grade rating, to judge by the views of credit-rating firms, potentially sparking a disorderly currency decline.”
    • 17M Note: This past week S&P downgraded Brazil to ‘junk’ status, yet the BRL failed to decline to new lows (off the top of my head; if it did, it was minimal). Potential high probability that lots of poor economic news is already baked into the currency here…
  • Brazilians exiting the country for Florida, NY, etc.
  • Exports: iron ore, soybeans, beef, oil
    • China trade: $2B in 2000; $83B in 2013
    • China is largest trading partner
  • Investors poured more than $1T per annum into EM countries
  • “Brazilian Miracle” from 1966-1973 followed by hyperinflation and debt crises in the 1980’s
    • In the 80’s Brazil stabilized its currency via spending cuts and taming inflation
  • China demand for iron ore lifted prices from $19 in 2000 to $126 in 2011; on the back of which Vale launched a $16B expansion of its main iron ore complex
  • President Dilma Rousseff’s approval rating is 8%
  • $371B of CB reserves available to ‘cushion’ the slump
  • Exports to China down 19% in the first seven months of 2015

Mondelez International (NASDAQ: MDLZ) 

August 10, 2015

In the CNBC interview detailing BRK’s PCP purchase, Buffett noted that KHC will not be making any large CPG acquisitions in the next couple of years, effectively ruling out a near- to medium-term MDLZ purchase. Given that I am currently on the sidelines, this is more than fine with me. I would like to see some air come out of the stock so that I could consider establishing a position. MDLZ has a fantastic opportunity to boost margins on a standalone basis; while activist involvement – Pershing and Trian – merely represent some downside protection via the potential push for a sale in the event margin expansion does not materialize.

August 7, 2015 

Ackman Bets on Mondelez Going on Sale (NYT Deal Book 8.7.15)

Big Changes in Food Industry Turn Activists Upside Down (WSJ 8.7.15)

August 6, 2015 

Activist Ackman Takes $5.5 Billion Stake in Snacks Giant Mondelez (WSJ 8.6.15)

As I have lamented several times on Twitter in recent months, my biggest YTD regret was not buying MDLZ in the mid-$30’s in the wake of the Kraft-Heinz deal. The KHC deal reset industry margin expectations, and MDLZ has SIGNIFICANT room to improve. Further, as I noted in late March, it would make economic sense for the new Kraft Heinz entity to acquire MDLZ in order to not only reset the cost base but to bring forward the expiration of the international licensing agreements that currently prohibit Kraft Heinz from distributing Kraft products overseas.

Pershing Square’s involvement now confirms this thinking; but unfortunately it appears the the investment opportunity is gone. However, given the higher probability of an operational reset, and/or a sale of the Company, I will take another look at MDLZ in detail.


Suzuki Motor Company (TYO: 7269)

August 1, 2015

Third Point 2Q15 Letter

In one of Loeb’s better letters of late, he outlines a compelling investment case for Suzuki Motor Company. It is a classic Loeb event-driven investment structure with multiple potential catalysts, an inefficient balance sheet, hidden assets and a strong underlying long-term operational outlook:

Catalysts. ~5-year VW litigation overhang (entry & upside catalyst); VW’s 20% ownership stake stake (entry); potential buyback of the 20% stake (upside); potential Suzuki acquisition by VW

Net Cash. Due to the VW litigation overhang, Suzuki has maintained a net cash position of ~$5B

Hidden Assets. Loeb lists the following key assets of Suzuki:

  • 56% stake in Maruti Suzuki, which is listed in India and has a ~$20B market cap
  • 5.5% royalty stream on all Maruti sales – a ~$500MM growing dividend
  • 100%-owned Gujarat plant – 1MM annual vehicle production, and future emerging markets export hub
  • Japanese auto biz with ~$500MM of EBIT
  • Cyclically depressed ASEAN biz
  • European biz
  • $5B net cash
  • $2.75B equity stakes in VW and other auto manufacturers

LT Outlook. The Indian auto market is a tremendous LT growth opportunity with less than 2% of the population owning passenger cars. With ~45% market share, Maruti is in fantastic position to capitalize on this long-term outlook.


Alibaba (BABA) 

September 13, 2015

China Economic Data Sanity Check

China GDP Data

China Consumer Spending

In 2014 Chinese consumer spending was approximately $4 trillion according to Trading Economics, or ~$2,928 per capita (versus the $2,260 cited in the article). At $1,214 times 367MM users, BABA’s GMV is approximately $446B. Assuming 80% market share, the Chinese online shopping market is approximately $557B. So, the Chinese online shopping market is approximately 14% of 2014 consumer spending.

The article cites U.S. online spending of approximately $963 per capita per annum, which works out to an online shopping market of $307B. This represents ~2.5% of 2014 consumer spending.

The article is wrong to imply that over half of consumer spending goes toward online spending; but it is odd that the Chinese online shopping market is so much higher than the U.S. as a % of total consumer spending.

Barron’s Article Review

Time for a review of the Barron’s article, which may spill over into a full post on the situation as the article is quickly turning into a ‘battleground’.

Notes:

  • 45 of 52 analysts rate it a BUY; 5 neutral; 2 SELL
  • Average PT: $95.50
  • BABA trades for 25X consensus estimates for the NTM; author believes should trade closer to EBAY’s 15X
    • 17M: This is bunk, as EBAY has far slower projected growth. A more valid point would be to eliminate the egregious stock comp add-back in BABA’s earnings estimates and perhaps put a 20X to 30X multiple on that
  • Compares BABA to its predecessor Alibaba.com, which IPO’ed at HK$13.50, went up to HK$40 before declining to HK$10 and ultimately being taken private for HK$13.50
  • Final IPO lock-up expires later this month, with 1.6B of 2.5B total shares become available for sale
    • BABA ‘assures’ shareholders that the owners of the 1.45B have pledged not to sell
    • $4B repo planned to counter any selling pressure
  • JD.com eating into Taobao and Tmall market share
  • Non-retail businesses losing money – Youku Tudou (YOKU), a YouTube-like video site lost ~$140MM last year, and the movie-production arm is also in the red
  • LTM GMV as of June was $409B, and has compounded at 55% for the last three years, with BABA’s revenue tracking closely at 56% per annum
  • User figures don’t add up:
    • BABA claims 367MM users…about the same as one government agency’s estimate of China’s entire online shopping population
    • BABA claims the average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites
    • 98MM users in June 2011, growing 39.1% p.a. thru June 2015
      • A biannual national survey conducted by the Chinese Internet Network Information Center, an official agency, shows that China’s online shopper population has a CAGR of 23.5% p.a., rising from 173MM in June 2011 to 361MM this past December
    • Average annual spend per user averaged $1,215 for the past 7 quarters
      • U.S. online shoppers average $963
      • U.S. per capita GDP ~7.5 times China
      • China per capita total average annual spend (online + physical) is ~$2,260
        • According to the author, it is odd that the average Chinese citizen would spend more than half of his/her annual spend online, when the bulk of consumer spending on food, beverages, housing, transportation, home health products and restaurant dining does not occur online
  • Corporate governance:
    • Jack Ma and Simon Xie own the underlying businesses, and by legal agreement cash flow and profits are transferred to the holding company
      • This structure is designed to get around the Chinese prohibition against foreigners owning ‘sensitive’ industries such as the internet
    • Jack Ma failed to abide by the legal contract cited above in 2011 when he unilaterally transferred ownership of Alipay to a separate partnership controlled by him, which eliminated BABA’s right to Alipay’s earnings
      • According to Ma, the reason for the move was that a change in licensing requirements by Chinese banking regulations required nonbank payment processors to be domestically owned…
      • Which is odd given that Alipay was domestically owned both before and after the transfer
      • BABA is now entitled to 37.5% of Ant Financial Services – which owns Alipay – profits & value; and Ma has said he will reduce his ownership in Ant by giving shares to employees of Ant and BABA
    • April 2014 related part transaction
      • Deal for a 20% interest in the Internet streaming company Wasu Media Holding (000156.China)
      • BABA financed the purchase of hte shares by a third party, Simon Xie, a limited partner, by giving him a $1B loan
      • A year later the $1B loan was assumed by an unnamed Chinese bank, but…
      • BABA provided Xie a $300MM loan to cover the interest payments; and had to deposit $1.1B as collateral for the loan…so BABA is on the hook for $1.4B
        • 17M: This is shady, but tough to know what backs this collateral pledge…if Xie fails to repay the loan, does BABA have the right to Xie’s ownership in Wasu? What is that potentially worth? Just playing devil’s advocate…it stinks for sure

September 12, 2015

Alibaba: Why It Could Fall 50% Further (Barron’s 9.12.15)

Ugly, ugly, ugly. Horrendous governance issues; reporting integrity; Chinese economic slowdown…

It will be interesting to see how much momentum the short thesis gains with the broader public. Some incredibly smart investors flagged this as a slam dunk short back in December 2014, so the short thesis may already be played out. Glad I have avoided thus far (and got out of YHOO in the high $30’s/low $40’s…), but really want to dig in here to come up with a rock solid opinion, long or short.

July 29, 2015 

Down more than 30% from its post-IPO high, BABA is potentially set up as a compelling long-term investment here. Morningstar has a fair value over $90, and my original valuation work got me to materially above $100. There are big concerns around accounting and governance, which I hope to explore in detail in the near future. The valuation issue most often cited (in my experience) is the judicious use of ‘non-cash’ stock compensation and the fact that the Company adds it back to earnings in order to derive ‘adjusted’ earnings. Awhile back my initial pass at the stock comp issue found that a significant amount of equity awards vested as a result of the IPO, and likely it was/is inappropriate to extrapolate that level of stock comp as a form of opex. I need to do more work. Regarding governance, I personally believe BABA is a large enough global player, with significant enough shareholders (i.e. SoftBank), that Jack Ma has enormous incentive to not screw over common stock holders. Again, I need to do more work here…


Union Pacific (UNP) 

July 29, 2015

Down more than 20% from its 52-week high alongside a broad downdraft in transports – and due to extremely weak coal carloads – UNP is selling for approximately 85% of Morningstar’s fair value estimate. (I only use Morningstar as short-hand, as I have not looked very deeply at UNP myself.) With an attractive long-term financial outlook – cost advantage vis-a-vis trucking; pricing power; declining Operating Ratio – and a business most similar to Berkshire’s coveted Burlington Northern, the recent downdraft in UNP shares could be reasonable entry point into a long-term ‘compounder’.


Canadian Pacific (CP) 

July 29, 2015

One of my greatest errors of omission the last several years is not investing in the Pershing Square-catalyzed turnaround at CP. Just a boneheaded, egotistical decision to not invest because I did not want to ‘follow’ a larger investor. The set-up was so obvious I could vomit. It was not a matter of ‘following’, but rather SIMPLY acknowledging that Pershing Square was the catalyst. I have learned my lesson, as evidenced by my investment in ZTS. Rant over…

CP is down over 25% from its 52-week high for reasons similar to UNP; however, CP also had a recent BOD dispute, and Hunter Harrison is sick. CP’s operational turnaround continues, and they have aggressive guidance in place thru 2017 (or 2018) I believe. I am looking forward to digging in…


Mylan (MYL) 

August 7, 2015

Mylan’s Perrigo Backup Plan

  • MYL raised guidance, but conservatively excluded any contribution from the upcoming Copaxone generic
  • On the call CEO Heather Bresch said: “We like Perrigo, but we don’t have to have Perrigo.”
    • I like this comment a lot, as I believe it confirms my belief that MYL will not dilute intrinsic business value by overpaying for PRGO

July 29, 2015

Dealpolitik: Did Mylan Stockholders Know Enough When They Approved Its Inversion?

Decent article on the corporate governance deficiencies at MYL – unfortunately it is AFTER the fact, thus not helpful at this point in time.

While unfortunate for those betting exclusively on a take-out, I do not believe the governance concerns here are backed up by the historical operating record. MYL has done a fantastic job growing per share intrinsic value; and I believe the chairman laid out a case for NOT combining with TEVA that is highly cogent with the context of the historical operating record. My strong inclination is that this deal break is a compelling long-term buying opportunity…

May 7, 2015

MYL 1Q15 Earnings Presentation

After reading thru MYL’s 1Q15 earnings presentation, and some more pondering, my initial investment thesis is as follows:

  1. One a standalone basis – excluding any future biz development activity – MYL is wroth 15 times 2015E EPS of $4.13, or $62
  2. MYL has a strong track record of accretive biz development activity, as evidenced by its 5-year (2009-2014) EPS CAGR of 21% per annum versus top-line GR of 9% per annum…
  3. …Assuming a modest level of biz development (relative to recent history), MYL is worth $76 —> assuming 12% EPS growth from 2015-2021, and a 15X terminal PE
  4. The proposed PRGO acquisition woudl bump MYL up to a 17.5X multiple company due to a pro forma 50% OTC/specialty earnings stream —> MYL is worth $89 in a PRGO scenario, assuming 12% EPS CAGR from 2015-2021 and a 17.5X terminal PE
  5. TEVA is desperate to mitigate Copaxone risk —> I believe this is the ultimate end game for MYL, and likely gets taken out for at least $100, as HFMLarryBird has posited…

May 4, 2015 

Investment Thoughts. Value Line had the following to say about MYL in its April 2015 write-up:

“MYL has an interesting future. The generic drug industry is fragmented and due for greater consolidation. About 45% of the market is dominated by six companies: TEVA, ACT, MYL, HSP, IPXL and PRGO. MYL could be acquired, or continue to do the acquiring. It will probably move further into the specialty and complex generic drug arena, where margins are higher. It also has a very good chance of acquiring the rights to manufacture a generic version of blockbuster asthma drug Advair. This would be a huge coup for MYL. Lastly, implementation of the Affordable Care Act, and an increase in healthcare spending over the next few years, should benefit the Company.”

MYL Valuation Overview

Crudely, I estimate MYL is worth $61 on a standalone basis, utilizing “Street” estimates (according to Factset), a 15X terminal PE and a 75% annual payout ratio. MYL is highly unlikely to remain in its current configuration for the next six years, so this FV more or less moot. Perhaps it is a reasonable “downside” scenario.

Utilizing the acquisition multiples cited in MYL’s letter to TEVA, MYL is worth between $107 and $136. MYL’s valuation demand that discussions cannot proceed unless the initial offer is “well in excess of $100” appears excessive, per the MYL-cited acquisition multiples; as such, perhaps a final offer will land somewhere between $107 and $136, with initial offers between $90 and $100.

Again crudely, utilizing Deutsche Bank’s initial crack at a Pro Forma MYL/PRGO EPS, I estimate MYL is worth $84 if the terminal PE is bumped up to 17.5X.

Triangulating the situation – with Paulson & Co. in the stock; an extremely friendly M&A environment; a generic space looking to consolidate; and TEVA still waiting in the wings – MYL appears to have a favorable risk/reward profile in the mid-$70’s. But…

HFMLarryBird has outlined the situation extensively in recent weeks, and believes you potentially get an entry catalyst via a significant bid hike for PRGO, perhaps down to the mid-$60’s.

I am in no rush; I will continue to monitor.

MYL/TEVA Correspondence. On April 27, MYL rejected TEVA’s overtures with a harsh rejection letter. I only recently began to follow the MYL situation, and from what I gather from reading other event-driven investors’ commentary, MYL has poor corporate governance, and a weak CEO at the helm. I highlight those negatives because if I were to have read the MYL letter in a vacuum, I would have said it was quite good. To highlight my “vacuum” analysis, in my opinion the MYL Chairman presents a strong case against a tie-up with TEVA on the following grounds: it lacks industrial logic (too much operational overlap negates the organic growth profile that makes MYL an attractive asset), the valuation is far too low (TEVA’s proposal values MYL at 16.6X LTM EBITDA, versus comp take-outs of between 20X and 25X), and TEVA public tactics (making a an acquisition proposal public without first discussing the offer behind closed doors) indicate its historically poor culture remains in place, contrary to TEVA’s claims.

Outline of the letter:

  • Key players: MYL Chairman Robert Coury; TEVA CEO Erez Vigodman
  • Coury and Erez met Friday April 24 to discuss Erez letter to MYL dated April 21. Discussed the following troubles TEVA has experience over the last several years:
    • 1st generic Copaxone approval
    • Persistent turnover and turmoil among TEVA leaders/BOD and strategic confusion
    • Underperformance v. comps
    • Increasing need to find new sources of growth
    • ***Erez claims TEVA is different now***
  • “Change” is not evident by the way TEVA approached MYL – made bid public without discussing with MYL first
  • MYL unanimously rejected TEVA’s indication of interest
  • Minimum criteria for interest in MYL (by any party, not just TEVA):
    1. Valuation 
      • Higher valuations have been placed on lesser quality companies in comp space than TEVA has indicated
      • Will not entertain unless well in excess of $100
      • Best-in-class take-outs 20X; with Indian component 25X; TEVA at 16.6X
    2. Acquisition Currency 
      • Three core areas of consideration for a transaction: geographic reach, portfolio diversification and capability expansion
      • Re TEVA:
        • Geographic positions between MYL and TEVA the same; combining would add complexity beyond short-term synergistic benefits
        • Thousands of overlapping products
        • Synergistic benefits don’t outweigh long-term growth erosion
        • Terrible cultural fit
    3. Regulatory Risk 
      • MYL would need “hell or high water” guarantee that an acquirer would do whatever it takes to pass regulatory hurdles – no exceptions

TEVA responded to MYL on April 29 with the following:

“Your letter paints a fundamentally distorted picture of Teva and ignores its rich heritage, unique culture, industry-leading achievements and contributions that have benefited patients and healthcare systems worldwide, while for years creating substantial long-term value for our stockholders.

“My focus has been and will remain on Teva’s deep commitment to consummating a transaction as soon as possible. To that end, we stand ready to engage with Mylan’s Board of Directors in a constructive manner while continuing to pursue antitrust approvals and building upon the very positive interactions with Mylan and Teva stockholders to date.

“Moreover, we note your willingness to cede substantial ownership of Mylan’s equity to Perrigo stockholders at a substantial discount to our premium offer, let alone to your stated minimum price for engaging with us. Your increased offer for Perrigo today takes away even more economic value from your stockholders in attempting to pursue a transaction that is already challenged, financially and otherwise.

“The characterizations of the antitrust issues in your letter considerably overstate the regulatory hurdles for a combination of Teva and Mylan, both in terms of scope and timing. As noted, Teva fully expects that the regulatory reviews of a Mylan acquisition can be completed in 2015. Further, Teva is confident it can meet the very same seven-month timing window Mylan laid out for its Perrigo offer.

“I fully agree with you that it would have been preferable to have engaged in a private discussion to explore this transaction. However, you left us no choice but to make our proposal public after you publicly rejected a potential offer before it had even been made. It is hard to reconcile that preemptive rejection, your announcement of a firm offer for Perrigo before your Board of Directors even responded to the Teva proposal and the tone of your letter to me with the proper exercise of fiduciary responsibilities under any legal or business framework.”


Precision Cast Parts (PCP) 

April 16, 2015

PCP Quick DCF April 2015

Description. Precision Castparts Corp. manufactures metal components and products. It provides investment castings, forgings, fasteners and fastener systems for critical aerospace and industrial gas turbine applications. The company operates through three reportable segments: Investment Cast Products, Forged Products and Airframe Products. The Investment Cast Products segment manufactures investment castings for aircraft engines, industrial gas turbine engines, airframes, medical prostheses, armament, unmanned aerial vehicles and other industrial applications. The Forged Products segment manufactures forged components from sophisticated titanium and nickel-based alloys principally for the aerospace and power markets, and manufactures metal alloys used to produce forged components for aerospace and non-aerospace markets which include products for oil and gas, chemical processing, and pollution control applications. The Airframe Products segment produces highly engineered fasteners, fastener systems, aero structures, and precision components for critical applications in the aerospace, automotive and industrial machinery markets. The company was founded on April 1, 1953 and is headquartered in Portland, OR. (Source: Factset)

Segments. Forged Products (44% of Revenue), Airframe Products (30%) and Investment Cast Products (26%). (Source: Factset)

BOD. 8-director BOD with CEO as Chair. 5 of 8 directors are “retired” from their respective industries – appears excessive. Directors are up for annual election.

Notable Ownership. Berkshire has had a position since early 2013, establishing it in the low-$200’s. In late 2014/early 2015 BRK added to the position in the low $200’s again. Of course, this is not Buffett buying – it is a ~$700MM position; but given PCP’s medium-sized market cap of less than $40B, strong operational history (industry-leading margins, tax-efficient return profile, minimal dilution) and low debt/EBITDA (1.31X at CYE14), a full take-out by BRK would not surprise.

Valuation. Stealing from Morningstar’s latest DCF model, PCP trades for ~16X 2015 (FYE March) EPS, and ~15X 2016 EPS. MS projects top-line growth of approximately 6% thru 2019, with 2019 Revenue at $12.7B; whereas the “Street” projects Revenue of $11.6B in 2019.

Likely, Revenue growth will fall somewhere between Morningstar and the “Street”, with upside potential from acquisitions, which neither MS or the “Street” appear to be baking into estimates. But, with numbers trending in the wrong direction as a result of O&G exposure, and the stock trading at a reasonably full multiple considering the direction of the numbers, downside potential remains, in my opinion. Though depending on time horizon, it may be a reasonable dollar-cost-average type of situation.

If PCP traded down to 12.5X 2016E EPS of $13.76, or to ~$172, I would become more interested. However, PCP is a high quality company with strong management, and time-permitting it would be worth further due diligence in order to unpack PCP’s end markets over the next 5 to 7 years, acquisition potential, governance and any potential events.


Microsoft (MSFT)

January 9, 2015

Some quick scratch notes on a couple of “Street” reports and MR 10Q

  • ~$5 of Net Cash 
    • (Gross Cash – Unearned Revenue) x (1-15% TR) = Tax-Adjusted Cash
    • Tax-Adjusted Cash – Total Debt = Net Cash
  • FY16 Adj. EPS ~$3.45
    • D&C and Commercial segment SOTP
    • OPEX assigned by % of COGS for each segment
    • 50% of R&D assumed ‘growth’
    • 30% tax rate
    • Consolidated FV PE ~17 times
    • All-In FV ~$64
    • POPS ~84% of EPS, or $2.89 – 6.2% yield at recent $47

Think a pretty healthy dose of skepticism from the investment community remains after years of Ballmer capital destruction-led stock price under-performance. It does not take much capital discipline to transform the valuation of this truly cash cow. Clearly challenges remain due to PC pressures, but MSFT is an Enterprise beast that has the economies of scale to adapt. With activists on the board, I believe that over time MSFT will be valued like the true franchise it is. Growing 6% to 8% per annum while paying out/accumulating over 80% of annual earnings is the definition of a franchise. Ultimately, I believe a 17 multiple will prove conservative – a 20 PE is quite defensible, IMO. 20 times $3.45 plus $5 in cash is a $74 FV today. But sticking with the conservative 17 PE, at a recent $47 MSFT is trading for ~73% of FV. More to come here…


MARB Basket

October 17, 2014

Some serious air has come out of the MARB (stealing Bloomberg’s Merger Arbitrage function symbol) universe, specifically the cable/telco deals. While there are rumblings about regulatory delays, my guess is the spread widening has more to do with the risk-off nature of recent market activity. As I’m writing, spreads have come back in with the market up strong today; but as of last night, the TWC/CMCSA, DTV/T and SWY deals according to the Bloomberg MARB screen had the following adjusted annualized spreads:

  • TWC: 8.94% assuming 9 months to close
  • DTV: 9.58% assuming 9 months to close
  • SWY: 8.40% assuming 12 months to CVR realization

For the TWC and DTV deals, the annualized spreads assume the stock portion is hedged out at current levels – i.e. $49.59 for CMCSA and $33.64 for T. My guess is that spreads will come in at some point, presenting the opportunity to hedge out the stock portion at higher levels. If CMCSA was hedged at $55, the annualized return would rise to 25.3%; if T was hedged at $35, the annualized return would rise to 13.81%.

Were I more long-term bearish on the general market, I would put on this relatively market-neutral MARB basket trade. While perhaps incorrect in my thinking, I am currently quite bullish on the general market over the medium term (1 to 2 years), and thus am finding other more attractive General and Event opportunities. Were the economy, credit and equity markets weakening in unison, I would very likely allocate a significant portion of capital to this basket.

MARB Analysis 10.16.14


Danone SA (DANOY)

September 25, 2014

DANOY came onto my radar in late July when the WSJ reported that it was undergoing a strategic review of its operations in an effort to improve growth. With a market cap less than $50 billion and nutrition assets in hot demand, I thought DANOY would make an interesting takeout candidate for a large consumer products company such as Nestle, which outbid DANOY for Pfizer’s nutritional business in late 2012. But at over $15 per ADS, DANOY was trading at almost 20 times earnings with a low-margin dairy business attached to it, so I set an alert price for the February 2014 52-week low of $13.23. With DANOY trading around $13.20 at present, I did some preliminary valuation work to see if the idea is worth pursuing…

The DANOY financials are relatively messy, with many acquisitions, sales and minority interest transactions, as well as significant currency volatility due to emerging markets exposure (specifically Turkey and Russia). 1H14 results were significantly impacted by milk inflation and emerging markets currency volatility, so my preliminary work focuses largely on 2013 results. My guess is that milk inflation will subside, and with management focused on boosting margins, non-Nutrition margins will return to 2013 levels or higher (i.e. 2012 Fresh Dairy EBITM was 12% versus 10% in 2013); and with strong underlying growth (2% SSS versus reported of -5% in 1H14), 2013 financial results likely represent a reasonable base case financial picture.

DANOY has four segments: Fresh Dairy Products, Waters, Early Life Nutrition and Medical Nutrition. For valuation purposes, I break the Company down into NutritionCo and CashCo.

  • NutritionCo
    • 2013 Sales: EUR 5,606
    • FV Sales Multiple: 4.95 times (sales multiple Nestle purchased PFE’s nutrition business for)
    • Net Debt: 1,474 (based on share of consolidated sales)
    • USD FVPS: $9.79 (using a $1.20 exchange rate)
  • CashCo
    • 2013 Sales: 15,693
    • EBIT: 1,728
    • Int. X: 198
    • Net Income: 994 (35% tax rate)
    • FV PE: 17.5X (very generous, but giving benefit of the doubt for margin improvement)
    • FVPS: $6.49 ($1.20 exchange rate)
  • Put Liability
    • EUR 3.1 billion minority interest put liability
    • $1.16 per share

Total FVPS is then $15.12 per share. At a recent $13.20 PPS, the P/FV is 87%. Considering the operational volatility and generous multiples I am assigning both segments, a 13% discount to FV is far too small. Perhaps a large investor could push for a break-up here, but with NutritionCo already at comp margins, and my acquisition-level FV multiple, I don’t see much upside to my FV estimate.

My new alert price for DANOY is $10, which is approximately 66% of my FV estimate.

DANOY Scratch Spreadsheet September 2014


Qualcomm (QCOM)

September 5, 2014

  • Potentially interesting around $70 per share
  • Current Assets + LT Securities – Total Liabilities = $16.33 per share as of most recent quarter
  • Fully-taxed 2014 EPS $3.10 using Morningstar-estimated EBIT of $8 billion and a 35% tax rate
  • 7% top-line growth, 100% payout ratio, 25X terminal PE
  • 5-Year IRR 18% from $75 per share

Armstrong World Industries (AWI)

August 29, 2014

Not entirely sure how I feel about this idea. Need to let it marinate for awhile. Virtually the entire thesis relies upon management’s definition of “mid-cycle”. 2013 EBITDA was $370 million, and mgmt believes mid-cycle EBITDA is approximately $750 million. At $750 million, with $130 D&A, and $131 interest expense via 7% pre-tax rate on debt of 2.5 times EBITDA, “mid-cycle” EPS is $5.02 at a 40% tax rate. At 15 times earnings, AWI operations are worth $75.30 per share. New debt issuance over and above current ND of $900 million would be $16.70 per share, for a total equity fair value of $92 per share.

If we assume management is overly optimistic, and mid-cycle EBITDA is between the $750 mgmt figure and 2013 EBITDA of $370, or $560 million, then mid-cycle EPS is $3.41 and excess capital is $8.56. Total equity FVPS would be $59.72 in this scenario, just above the current quote of $57.

As tempting as the $92 estimate is to believe, especially given large shareholder involvement, the current $57 price does not provide enough of a MOS against management’s mid-cycle estimate failing to materialize. While I am of the belief that the US business cycle is younger than it appears due to prolonged deleveraging, which gives credence to mgmt’s mid-cycle goals, I would feel safer buying below 70% of the middle of my fair value range (between $60 and $92).

All that to say, however, something tells me I am making a mistake by not acting on the stock now…ValueAct very well could push for a break-up and/or recap of some sort, and with the huge market share position of the Ceilings segment (h/t marketfolly), it would likely trade at a big multiple post spin. But I will sit on the sidelines for now…

AWI Scratch Notes 8.29.14


Hologic (HOLX)

August 28, 2014


Safeway (SWY)

– buyout consists of $32 in cash and an estimated $3.65 in asset sale proceeds
– at $34.81, stub trades for 77% of fair value
– 30% annualized return if takes 1 year (gross is 30%)
– unfortunately takes a lot of capital to get to a 10% net position – 80% gross position at current price, 40% for a 5% position…


Ophthalmology Basket

Regeneron (REGN)
– 20% owned by Sanofi, likely take out by them
– 93% of MS FV

Akorn (AKRX)
– generics manufacturer
– great target for VRX at $3.4B cap
– selling at MS FV

Cooper (COO)
– tremendous margin expansion potential via daily disposables
– trading at 20x but with double digit earnings growth
– $7B cap makes for great take out by other three lens makers
– 83% of MS FV


Ambev SA (ABEV)

July 12, 2014

– Have yet to go through the 20-F and transcripts, but some Street notes indicate volume opportunities in the off-premise “value” segment via returnable 300ml bottles, which will bring Ambev in line with local value market. Right now, at a 20% premium.
– Also, opportunity in the higher margin premium segment, albeit via volume cannibalization

– Over next 10 years, 7% growth of 3% vol and 4% pricing seems reasonable. Some Street reports are over 8%.

– I’d say an exit GR of 5%, 2% vol and 3% pricing, is a decent target
– 10% cost of equity, 2% pricing power, and a 40% ROE leads to a terminal PE of ~20X.
– 2014 adj eps ~$.31
– Terminal value is $13, for a price IRR of 6.2% pa
– Average dividend at an 80% payout ratio is 5.2%
– Total IRR ~11.4% over ten years

– On a standalone basis it appears pretty close to fair value at current levels, but setting aside the oddity of why ABI hasn’t just taken the remainder over before now…
– BEAM was taken over well over 30x earnings. Given its already huge stake in the Company, ABI could easily afford to pay over 30x and still have its ACB well below take out levels.

– 30x $.31 is $9.3, roughly 30% higher than current levels, while 40x is over 70% higher from here

– my guess is that I’m low-balling the medium term growth rate and terminal PE.
– A 35x near term take out PE is likely a reasonable 3 year target
– 7% 4 year growth and a 35x take out multiple is a three year target of $14. And you get better than a 4% yield while you wait.
– worst case scenario ABEV is worth slightly more than the current price

July 9, 2014

– normalized tax rate ~20%
– effective tax rate artificially boosting FCF, likely
– DB models 100% FCF payout
– 2014 normal EPS ~$.31 – assumes no investment income and 20% TR
– cash per share ~$.31
– pricing power appears gigantic – no way distribution network could be replicated for even 40 times earnings
– 20X terminal PE too low???

July 7, 2014

At the end of a recent report analyzing a potential ABI/SAB merger, MS discusses the potential for ABI to take-out the minority position in Ambev. I know virtually nothing about this situation – i.e. something as basic as the minority % in Ambev – but a first pass at Ambev’s financials in the back of MS’s report shows interesting potential (Estimates are MS’s. Data in BRL):

  • 5-year growth rates: 7.5% revenue, 7.5% ebitda, 15.7% net income
  • Yields at 15.96: 2.4% dividend, 5.2% FCF
  • Debt/EBITDA: .2X
  • Adj. 2014 PE: 21.1X
  • At a 7.5% growth rate, 2014 EPS $.34, terminal PE of 20X, payout of 100% (headline EPS appears lower than adj. EPS) and 10% discount rate…
  • ADR FVPS is $8.09
  • Current $7.16 PPS ~89% of FV
  • Given the adj. earnings discrepancy, perhaps terminal PE should be 22X…
  • FVPS rises to $8.74, and P/FV drops to ~82%

Interesting exposure to Brazil, selling below FV with take-out potential likely keeping floor under price. Interesting.


PetSmart (PETM)

July 3, 2014

http://www.bidnessetc.com/22408-petsmart-moves-higher-as-jana-partners-discloses-stake/

Have never looked at PETM. First glance, not entirely sure what is so interesting. Some quick valuation work:

  • 2014E EPS: $4.33
  • NWC: $624MM
  • TD: $551MM
  • LTM EBITDA: $932MM
  • If target leverage is 2X EBITDA, then debt capacity is $1.94B, or $18.57 per share
  • Incremental interest expense is ~$54MM after 35% tax rate
  • Pro forma EPS $3.81 after recap
  • If FV PE is 15X, then operating bus is $57.18
  • Add in excess capital of $18.57, total FVPS is ~$76

Will keep an eye on for any major sell-off, but would have to go quite a bit lower to get interesting, especially if the business is weak as the above article suggests.

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