market folly

Today we're posting notes from the 2014 Boston Investment Conference that recently took place.  The event features hedge fund managers pitching their latest ideas to benefit the Boston Children's Hospital. 

This event follows "Chatham House Rules" which means unfortunately that the pitches will not be linked to any particular speaker.  That said, if you look at some 13F filings, you might be able to guess who pitched what.

Speakers (In No Particular Order)

David Abrams, Abrams Capital
Will Danoff, Fidelity Investments
Jason Capello, Merchants' Gate Capital
William Duhamel, Route One Investment
James Grant, Grant's Interest Rate Observer
Jeremy Grantham, GMO
Jonathon Jacobson, Highfields Capital
Alex Klabin, Senator Investment Group
Seth Klarman, Baupost Group
Beeneet Kothari, Tekne Capital
James Litinsky, JHL Capital Group
Michael Lowenstein, Kensico Capital
Joshua Resnick, Jericho Capital
Barry Sternlicht, Starwood Capital


Notes From The Boston Investment Conference 2014

First Pitch: Brookdale Senior Living (BKD):  EV/EBITDA (2015) about 11.5.  $33-34 stock price: 6B market cap, 6B debt with 12B EV.  He likes the services businesses they are developing.  They offer a premium product.  There is limited supply and strengthening demand and demographics.  They recently purchased #2 operator and believes there are cost synergies.  They own 40% of their real estate and have option to buy more. 

They have 10% market share in their industry and are 4X bigger than #2.  The industry has years of consolidation in front of it.  Lack of current supply a result of over-building in the late 1990s and it took about 15 years to absorb this.  Supply shortage is driven by demographics.  He compared FFO multiple to multi-family housing operators: 10.6   c/w 20.2 

Their services business includes home health care, hospice care, car/transportation services and physical therapy, speech therapy and occupational therapy.  “They have a captive customer base of 100,000 high net worth individuals.”  They can institute group purchasing and get bulk discounts.  He believes their real estate is worth $27-35 share.  In a few years their operating business can produce   $750M EBITDA and 8X this gives you a stock price in the 50s.  They can potentially spin out their operating company.  He talked about a proxy statement filed in June that had some interesting information.


Second Pitch: Ctrip.com (CTRP):  Could be a double in 2-3 years.  $9B market cap.  50% market share.  15% growth.  Tourism is the new luxury in China vs. branded goods.  Online travel penetration is 17% vs. 45% in US.  Company can grow with both secular growth and increased online penetration.  C-trip is synonymous with travel in China.  Because of competition, they were spending heavily on IT, sales, engineers and to recruit more hotels.  This has affected their margins.  Compared their gross margins and (I believe) their operating margins to other companies:

PCLN  EXPE  CTRP('14)  CTRP('08)
84        78        70               73
44        25        12.5            38.2

So the company still has high gross margins and their increased spending is affecting SGA.  According to the investor, 2014 is their last big year of investment spending and the 'heavy lifting' will have been done.

CTRP has bought stakes in multiple travel related businesses that are marked at cost on their balance  sheet.  Investor values those stakes at $2B giving company an adjusted market value of $7B.  PCLN is the 800 lb. gorilla in online travel space and they are partnering with CTRP and purchased a 10% stake   They are expecting an IPO of E-HI (phonetic spelling), one of their travel related companies, in early 2015. They expect earnings to go from $2 to $4 in the next 3 years.  They value $4 at 25X (a smaller multiple than current one) plus $20/share in investment stakes representing $120/share or about double current share price.  He considers it a high growth business.  He notes that in 2009, PCLN had a $7B market cap and now-5 years later-has a $60B market cap.


Third Pitch: Western Union (WU):  They will earn about $1.50 this year and since they have some excess depreciation FCF will be higher.  Next year will be better.  Have about a 3% yield.  They had problems in the past by pricing their product too high.  They took a price cut.  But this mess creates the current opportunity.  A similar thing happened to MO many years ago.  They cut prices which freaked out the market but did well from there.  Talked about a competitor XOOM but they have a narrow market.  Thinks WU can use technology to their advantage.  Their expenses are high because of compliance costs but he feels this can ultimately deepen their competitive moat.  Their volumes are growing and so should their earnings. 


Fourth Pitch: Sberbank.  This is a Russian bank.  Investing is simple but not easy.  They have NIM of over 5%.  They compare favorably to WFC on most metrics.  He says they have terrific management.  They have a 4.1% yield (but it may be cancelled).  They have over 100 million accounts.  Competitors are Alpha Bank and Bank of St. Petersburg.  He thinks situation with Russia should straighten out next year.  The sanctions will be under vote to be renewed on 7/31/15.  He feels there is no point for them to make concessions well before this.  “Everyone is a value investor until prices get really cheap.”  They have an unfair funding advantage.  They have 46% deposit share.  They don’t have to take high risk to get high returns (like Geico).  They can pick and choose among customers.  There is risk from falling oil and from the ruble.


Fifth Pitch: Cogent (CCOI):  It has a $2B EV and is involved with Internet connectivity.  It has corporate customers ($700/month) and net-centric content providers like Netflix (NFLX).  They have a high quality network.  Apparently $14B of invested capital with the lowest cost network.  20-25% demand growth.  The industry is consolidating with higher pricing and profitability and more efficient cap-ex.  Should be strong revenue growth with capex going down. 

Talked about net neutrality debate.  ISPs are backing away from pay prioritization since alternative is regulation from FCC.  In worst case, sees Cogent losing 4% of revenues.  Mentioned “take or pay agreements”.  He thinks that pay prioritization will likely be banned.  He sees company returning about $2.70 in capital: ½ in dividends and ½ in buybacks (total 8.1%).  He thinks the stock can trade into the low $60s (currently $34 ~ not sure when or what assumptions he has made). 


Sixth Pitch: Ophthotech (OPHT):  A speculative biotech play.  Drug in pipeline is Fovista.  I believe it is a platelet development growth factor inhibitor used in conjuction with anti-VEGF (vascular endothelial  growth factor) drug to treat wet AMD, which is some type of macular degeneration. 

Says leading cause of blindness in 55 and older population in US and EU.  Has market cap of $1.5B and EV of $1B (about $500M cash)  Has another drug called Zimura, which is in phase 2.  Cheap because no near term catalyst.  Feels probability of approval is mispriced.  Novartis made a deal with company for their ex-USA licensing rights with possible $1B milestone   payments.  He feels this has de-risked the investment.  A launch could occur 2017-2019.


Seventh Pitch: China Mobile (CHL): Largest mobile company and has over 800 million subscribers.  Trades at 4.3x 2015 EBITDA and 3.4% dividend yield.  75% owned by China; 25% publicly traded.  Has $73b in cash.

Has the world's leading 4G network.  They previously had TD-SCDMA network that was disappointing.  Now 4G with global standard TD-LTE.  China Mobile has one year head start over competitors China Telecom and China Unicom.  He expects data usage to "explode" and expects capex to decline materially.  National Tower Co is a separate company that may be spun out that will be very valuable. 

He expects ARPU, 4G and data revenues to ramp up making up for compression in voice and SMS.  Margins should improve.


Eighth Pitch: HDFC Bank (HDB):  This is a bank in India and he likes the country overall.  Thinks it is a high quality bank at 16x earnings and notes that Modi is pro-business.


Winning Student Presentation: Short Diamond Resorts (DRII).  (Very short presentation and did not catch gist of the thesis)
 

This concludes notes from the 2014 Boston Investment Conference.  If you missed it, we've also posted notes from the following recent hedge fund conferences:

- Invest For Kids Chicago Notes: Ackman, Robbins, Zell & more

- Sohn San Francisco Notes: Ubben, Billick, McGuire & more

- Capitalize For Kids Sohn Canada Notes: Ainslie, Dinan, Robbins

- Summary of Stock Picks From Robin Hood Investors' Conference

- Great Investors' Best Ideas Dallas Notes: Einhorn, Perry, Ackman & more

- InvestPitch 2014: Stock Picks From Emerging Hedge Fund Managers