market folly

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.