More Than You Know: Finding financial wisdom in unconventional places [Mauboussin]
Lots of great charts looking at the macro environment [Insecurity Analysis]
The underappreciated role of luck in investing [Validea]
Investors, look up from your algorithms [Daniel Arbess]
Is there a new world debt crisis on the horizon? [World Economic Forum]
The biggest mistakes bosses make when making decisions [WSJ]
To boost the economy, let's first change how we measure it [Marketwatch]
Profile of Johnson & Johnson (JNJ) [WSJ]
How Best Buy (BBY) survived the retail apocalypse [The Week]
A look at Netflix's (NFLX) culture [WSJ]
Uber's secret restaurant empire [Bloomberg]
Why battling bugs is a booming business [Harding Loevner]
Why one of the biggest mall owners is doubling down on malls [WSJ]
Bao Fan: China's tech dealmaker [FT]
There have never been so many bonds that are almost junk [WSJ]
Why sports teams may get more valuable [WSJ]
Thursday, November 1, 2018
What We're Reading ~ 11/1/18
Wednesday, October 31, 2018
Notes From Sohn San Francisco Investment Conference 2018
The Sohn San Francisco 2018 Investment Conference recently concluded and featured hedge fund managers sharing their ideas in order to benefit the Excellence in Investing for Children's Causes Foundation and its beneficiaries, as well as The Sohn Conference Foundation and pediatric cancer research.
Notes From Sohn San Francisco Conference 2018
- Mick McGuire (Marcato Capital Management): 2 Long Ideas
- Shashin Shah (Think Investments): Long Radico Khaitan (RDCK-IN)
- Alex Gleser (TPG Public Equity Partners): Long Philips (PHG)
- Jeff Osher (No Street Capital): Short Trupanion (TRUP)
- Glen Kacher (Light Street Capital): Long Farfetch (FTCH)
- Michael McLochlin (Highland Capital Management): Long Marvell Technology (MRVL)
- Gil Simon (SoMa Equity Partners): Long New York Times (NYT)
- Kevin Oram (Praesidium Investment Management): Long Cornerstone OnDemand (CSOD)
- Jeff Shen (BlackRock): On Asian Markets
- Dan Morehead (Pantera Capital): On cryptocurrencies & blockchain
Next Wave Sohn San Francisco Notes: Emerging Managers
- Marcelo Desio (Lucha Capital Management): Long Talend (TLND)
- Vineer Bhansali (LongTail Alpha): Plays for a rising rate environment
- Daniel Kozlowski (Plaisance Capital): Long Pure Cycle (PCYO)
- Franklin Parlamis (Aequim Alternate Investments): ServiceNow (NOW) trade
For other recent investment conference coverage, be sure to also check out notes from Capitalize For Kids Toronto, as well as notes from Invest For Kids Chicago, and also a summary of Great Investors' Best Ideas Dallas.
Mick McGuire Long Corepoint Lodging & Extended Stay America: Sohn San Francisco 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Mick McGuire of Marcato Capital Management who pitched 2 longs: Corepoint Lodging (CPLG) and Extended Stay America (STAY).
Mick McGuire's Sohn San Francisco Presentation: Two Longs
• Corepoint Lodging (CPLG) – lodging REIT spun off from La Quinta
• Spun off from La Quinta recently so a new company in equity markets
• 315 properties REIT with all La Quinta branded properties and operated by Wyndham
• Some classic dynamics of spin-off at play (Less analyst coverage, noisy financials, atypical shareholder base due to spin)
• Earnings were temporarily depressed and should increase as 1) hotels impacted by hurricanes in Texas and Florida will come back online and contribute to earnings; 2) renovations are completed
• Trading at a discount to peers at 8.3x EV/EBITDA vs median of 10.6x
• Other sources of earnings upside are increased oil and gas activity – have more exposure to oil and gas markets
• Trading at a discount based on hard asset value
• Substantial opportunity to improve hotel level profitability
• If margin improvement doesn’t happen, business likely to be sold (Taxable spin purposefully preserved ability to sell immediately)
• 55% upside based on current price, using 11x multiple and 2019 EBITDA of $232m
• Extended Stay America (STAY) – hotel owner/operator with 599 properties and 27 franchisees
• La Quinta part 2 but at the beginning of the story
• Largest single brand hotel owner and operator in North America
• Longer length of stay, less labor and higher margins versus typical lodging operator
• Company knows current structure is sub-optimal and seems motivated to do something, which could unlock value
• Highest margins relative to peers, strong cashflow profile, positive industry fundamentals, discounted valuation
• Re-franchising less profitable units
• Building new hotels with cash flow
• Last of its kind to separate its hard real estate assets from its brand company
• Capital deployment likely to drive shareholder value: stable cash flow from retained hotels, refranchising less profitable hotels, goes into: repurchasing shares, new hotels, growing franchise business which is minimal cost and high returns
• Attractive valuation: Trading at discount to peers. 8x EBITDA versus peers at an average of 10.7x
• Argues co belongs in a larger portfolio
• 134% upside to $38.12 target price based on 2022E Maintenance FCF/Share of $2.29 and 15x multiple
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Michael McLochlin Long Marvell Technology Group: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Michael McLochlin of Highland Capital Management who pitched a long of Marvell Technology Group (MRVL).
Michael McLochlin's Sohn San Francisco Presentation: Long Marvell Technology Group (MRVL)
• There’s been a selloff in the semiconductor industry due to concerns of slowing global growth
• End markets matter when it comes to semiconductor investing
• Marvell operates in strong end markets – data centers and communications infrastructure which both benefit from high growth, average margins, average competition and high secular growth
• Starboard got involved and took a large position; majority of board and senior management replaced. Since then YoY revenue went from -15.4% to up 3%, gross margin improved 800 bps
• Cavium Acquisition has improved their product offering
• Four key reasons to own: Potential upside to estimates, Strong management team, Compelling valuation (thinks stock is a double), Multiple call options
• Networking and storage are the two key end markets that Marvell plays in
• Solid State Drives (SSD) will drive the majority of growth
• Adoption of SSD growing in other areas (e.g. desktop, enterprise)
• HDD – data center growth offsets decline in client use
• Networking: Beginning of a multiyear growth phase for 5G and they have more components in 5G technology than 4G
• Margin expansion opportunity: Gross margin has gone up 800bps, going forward – more opportunity for margin expansion
• Management exceeding expectations and are strong capital allocators
• Despite best of breed margin profile, valuation trading at a significant discount to peers
• Some call options in the business like cross selling and product expansion that can drive additional upside
• Risks? Economic downturn, HDDs decline quicker than expected, Cavium underperformance, 5G spending slows down/delayed. Mitigants: secular trends in end markets, data center growth offsets, strong management, faster ramp in 5g spending
• Current price: $16.5 per share, upside to estimates = $5 per share, multiple expansion = $10 per share, giving price target of $31.5 per share.
Note that we also posted up notes on Jeff Smith's presentation (Starboard Value) on long Marvell (MRVL) at a separate conference as well.
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Shashin Shah Long Radico Khaitan: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Shashin Shah of Think Investments who pitched a long of Radico Khaitan Ltd (RDCK-IN).
Shashin Shah's Sohn San Francisco Presentation: Long Radico Khaitan
Company
• Long Radico Khaitan Ltd. (RDCK-IN), an Indian spirits company with domestic liquor brands
Thesis
• Indian consumer staples have done really well over the last 15 years; +21% IRR
• Per capita consumption of alcohol of 3L per person in India is much lower than the rest of the world and the world average of 6L per person
• Radico has a 7% market share of the Indian branded liquor market
• Really challenging to sell alcohol in India so barriers to entry favor existing players; in many states – distribution owned by the government
• Magic Moments vodka has very strong 50% market share as the #1 in Vodka in India
• Long runway for growth given vodka consumption (vs. other spirits) is underpenetrated versus other markets
• Expect margin expansion to 20% in ~2+ years versus 17.5% this year (More upside given that industry peers Diageo and Pernod have margins of ~30%)
• More recently have launched premium products that compete with products from Pernod and Diageo and have ability to drive further margin expansion
• Have decreased leverage significantly – expect to be at 0.0x by 2019
• Business is very attractively priced (Attractive valuation – 20x forward earnings, rev growth of ~20%; EBITDA growth of ~40%)
• Management owns 40% of the business and has never sold a share
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Glen Kacher Long Farfetch: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Glen Kacher of Light Street Capital who pitched a long of Farfetch (FTCH).
Glen Kacher's Sohn San Francisco Presentation: Long Farfetch (FTCH)
Company
• Long Farfetch (FTCH), an online personal luxury goods marketplace based in London
• Marketplace model with 1,000 total suppliers: 40% brands, 60% boutiques
Thesis
• Complex supply chains and high end brands do not translate well to Amazon’s scale and price driven business mode
• Compared Neiman Marcus's position in the 1990s as category winner to Farfetch as category winner now in the 2000s
• Also compared similarities to Zozotown in Japan, whose gross profit as a % of GMV increased over time and took EBITDA margins from 25% to 35%
• Personal luxury goods market is large and expected to be $450bn TAM by 2025
• Luxury goods are underpenetrated online versus apparel
• Farfetch runs a lot of the ecommerce websites for large luxury brands (e.g. Shopify for luxury)
• Recent margin decline driven by investment in online sizing technology
• Multiple drivers of success: Increasing TAM (3% to 10%), online penetration (9% to 15%), share of online TAM, take rate increase (from 33% to 38%), and margin expansion (from -19% to 35%)
• Attractive repeat customer spending. Initial purchase: $619 on site, in year 5 same customer spent $2,853 annually
• Believes it is a double over next few years
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Gil Simon Long New York Times: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Gil Simon of SoMa Equity Partners who pitched a long of New York Times (NYT).
Gil Simon's Sohn San Francisco Presentation: Long New York Times (NYT)
• Conventional views: news is a commodity, consumers won't pay for news, advertising only way to scale
• SoMa's view: consumers aware of 'fake news,' will pay up for trustworthy, differentiated content, most info still free but quality journalism worth paying for, direct subscription model better aligns publishers with consumers. Analogous to music industry streaming shift
• At the very early innings of the evolution of the new business
• Company with legacy, credibility and scale and has been around 170 years
• Believes internet will go from headwind to tailwind for high quality journalism
• 2011 – implemented their first paywall (with 20 stories a month for free)
• Shifting business model to creating journalism worth paying for
• Broadening content to deep research, more multimedia content (The Daily by NYT is one of the top podcasts in the country
• Very few publishers have crossed the chasm to monetizing print newspaper content – only FT, WSJ, Washington Post, and the New York Times
• Recently tighter paywall to 5 free articles per month driving conversion to paid subs
• 70%+ subs are digital subs
• 80% of print subs have a digital login
• See more revenue going towards subscription
• Opportunity for margin expansion from ~12% today to 20% by 2022
• Can’t be viewed as a legacy print media company; Underestimating future earnings leverage based on fixed costs of the newsroom
• Believes that it is a double to $40-$50 in 2 years
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Jeff Osher Short Trupanion: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Jeff Osher of No Street Capital who pitched short Trupanion (TRUP).
Jeff Osher's Sohn San Francisco Presentation: Short Trupanion (TRUP)
Company
• Short Trupanion (TRUP), a pet health insurance company
• An insurance company that is looking for a SAAS-like multiple by using software nomenclature and getting coverage by software analysts
Thesis
• Believes that TRUP is an insurance company masquerading as a subscription software business by using software nomenclature and getting coverage by software analysts
• Gross margins of 17% are nowhere near SAAS companies
• Looks more like standard insurance company with policyholders than a subscription company with subscribers. Company drivers are net premiums earned and losses incurred just like other insurance companies
• Company pays potentially illegal commissions through “rewards program” for veternarians based on referrals/sales and may be under regulatory investigation (although nothing disclosed) - Offering paid trips to vets and money to money to hospitals for policy activations = commissions
• Believe they could have an adverse selection problem as they are distributing/selling primarily through vet hospitals and healthy pets do not visit the vet hospitals
• Believes they are in an Inevitable Rate spiral which will result in a death spiral - Premiums have to be increased to offset higher claims and thus healthier pets unlikely to be signed up
• Valuation: Trades at a 9x P/B – way higher than best in class insurance peers like Progressive which trades at 3.6x P/B; Believes intrinsic value is $7.05-10.60 representing 65% to 77% downside
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Alex Gleser Long Philips: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Alex Gleser of TPG Public Equity Partners who pitched a long of Philips (PHG).
Alex Gleser's Sohn San Francisco Presentation: Long Philips (PHG)
• Portfolio has transformed dramatically with spin off of lower margin lighting business and sale of TV/electronics businesses (Went from a diversified conglomerate to a healthcare and personal care company but market still not viewing the company with the right lens)
• Attractive secular growth ( End markets growth at 7%, have #1 or #2 share in their major categories)
• Significant margin improvement opportunity (Diagnostic imaging is primarily where their margins lag and ability to increase their margin here; See 600 bps of margin improvement potential across the segments of the company; Management contemplating 100bps/year of expansion from 2017-2020)
• Management has delivered hitting organic growth targets of 4-6% and 100 bps margin expansion over the last year
• Attractive valuation: Trading at 9.2x EV/EBITDA - lower than peers
• Some optionality in other part of the business
• Strong balance sheet provides a nice margin of safety
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Kevin Oram Long Cornerstone OnDemand: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Kevin Oram of Praesidium Investment Management who pitched a long of Cornerstone OnDemand (CSOD).
Kevin Oram's Sohn San Francisco Presentation: Cornerstone OnDemand (CSOD)
• Leading vendor of talent management software
• Operational changes as a result of private equity involvement ($300 million from Silver Lake in 11/17) at Cornerstone will lead to a meaningful inflection in cash flow growth while also positioning the company for a potential sale to a strategic acquirer
• Leading position in the talent management space
• Cornerstone has salesforce efficiency levels well below industry peers, almost 50% lower
• Constructive engagement with management to drive changes in composition of board and management
• 95% renewal rates, should generate strong recurring revenue and cashflow; more than 3,300 customers with 37 million users
• Positioned to be acquired by a strategic but have not been acquired yet because strategics don’t want to do the work to transform the business
• $90/share potential value versus ~$48 share price today
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Jeff Shen on Asian Markets: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Jeff Shen of BlackRock who talked about the Asian market.
Jeff Shen's Sohn San Francisco Presentation: Asian Market
Co-CIO, Systematic Active Equity at BlackRock. Talked about China capital markets more generally. China is second largest equity market in the world (after US). It is very liquid but a lot more retail investors versus more developed equity markets. ~85% of trading volume comes from retail investors.
China equity markets are opening up to a broader investor base given MSCI decision to include Chinese companies.
Uses machine learning and big data to generate conclusions about the Asian market. Big data + big market = big alpha.
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Dan Morehead on Cryptocurrency & Blockchain: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Dan Morehead of Pantera Capital who talked about cryptocurrency and blockchain.
Dan Morehead's Sohn San Francisco Presentation: Cryptocurrency & Blockchain
Bullish on crypto-currencies and blockchain technology. Believes that blockchain is going to do to finance what VOIP did to telephone monopolies. It’s not only about blockchain and payments but decentralized applications will disrupt many different industries.
Discussed newer stable coins, which are low volatility cryptocurrencies (pegged to USD or similar) that are important for the use of applications requiring consistent and stable value exchange.
Recommends buying a basket of currencies – some will be losers and some will be winners- but asymmetric upside will help the winners outperform the losers.
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Marcelo Desio Long Talend: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Marcelo Desio of Lucha Capital Management who pitched a long of Talend (TLND).
Marcelo Desio's Sohn San Francisco Presentation: Long Talend (TLND)
Company
• Pitched long Talend (TLND) which helps companies integrate and manage data from disparate sources and across a wide variety of environment
• Leading platform that is in the perfect spot to help companies manage data explosion
Thesis
• Believes that data explosion becoming a major problem for companies as historical on-premise solutions for data management no longer workable
• Strong secular trends showing increase in data creation (10 fold rise in data by 2025), 3x growth rate of data experts by 2020, $205Bn spend in public cloud in 2020
• Large addressable market = $23Bn
• Gross Margins: 79-82% long term target
• Operating Margins: 20-22% target
• Strong recurring revenue, over 2000 customers
• Disruptive pricing model by charging on a user basis versus legacy models of charging by data volume
• New enterprise GTM model leveraging free products and trials, 3M downloads, 500k+ online community and outbound marketing = qualified leads
• High quality board and management
• Price target = $105, 70% upside from current price of $58 (Based on 6.5x EV/revenue on CY21 revenue estimate)
• Takeout acquisition candidate at a much higher potential multiple based on comps
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Daniel Kozlowski Long Pure Cycle: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Daniel Kozlowski of Plaisance Capital who pitched a long of Pure Cycle (PCYO).
Daniel Kozlowski's 's Sohn San Francisco Presentation: Long Pure Cycle (PCYO)
Company
• Pitched long Pure Cycle (PCYO), which is an asset-rich, vertically integrated, emerging water utility located in the Denver, CO metro area
• 3 components of the business: 25k acre feet of water, 930 acre zoned master plan community and also selling water for hydraulic fracking and oil and gas royalties
Thesis
• Believes that there is tremendous underlying value in the company’s three businesses/assets that is not recognized by the market given that the company is underfollowed and underappreciated (and not represented in ETFs)
• Value of 25k-acre feet of water = ~$1.6Bn+ based on water connection fees and service fees
• Residential land value = ~$420mm+. Net cash of $20m
• Water for oil and gas fracking = free call option; currently selling water for $100k-200k per well
• Market Cap = $219M versus a total un-discounted value of $2.0Bn+
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Franklin Parlamis on ServiceNow: Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Franklin Parlamis of Aequim Alternate Investments who pitched a ServiceNow (NOW) trade.
Franklin Parlamis's Sohn San Francisco Presentation: ServiceNow (NOW)
Presentation called “Volatility Exposure without the burn”. Talked about ServiceNow (NOW) long converts and short stock as a way to play the volatility trade. Focused on in-the-money converts versus in-the-money LEAPs. Said it's cheap because big funds are selling to small arbs.
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Vineer Bhansali's Presentation at Sohn San Francisco Conference 2018
We're posting up notes from the Sohn San Francisco 2018 investment conference. Next up is Vineer Bhansali of LongTail Alpha who gave a presentation on investment ideas in a rising rate environment.
Vineer Bhansali's Sohn San Francisco Presentation
Economic risk globally begins rising, political/geo-political risk
continues to increase. Earnings and momentum strong but being adjusted
lower. Correlations across strategies at all time highs.
Talked about ideas to invest in a rising interest rate and yield environment. Winners in a steepening yield curve environment include banks and financials, small caps with low financial leverage, quality, Two year Treasuries. Generally likes to be long volatility, especially in interest rates.
Losers in a steepening yield curve environment include bond proxies, tech, anyone with excessive financial leverage, low quality and any long duration asset.
Be sure to check out the rest of the Sohn San Francisco 2018 presentations.
Monday, October 29, 2018
Notes From Capitalize For Kids Investment Conference 2018
The 2018 Capitalize For Kids investment conference recently took place and featured top investment managers sharing their latest investment ideas to benefit childrens' mental health. To date, they've raised over $5 million for their beneficiaries. Click each link below to go to that speaker's presentation.
Notes From Capitalize For Kids Conference 2018
- Bob Prince (Bridgewater Associates): Outlook and investment strategy
- Ed Garden (Trian Fund Management): Long PPG Industries
- Jeff Ubben (ValueAct Capital): Long Hawaiian Electric (HE)
- Jeff Smith (Starboard Value): Long Marvell Technology Group (MRVL)
- Ulrike Hoffmann-Burchardi (Tudor Investment Corp): Long MongoDB (MDB)
- Alex Roepers (Atlantic Investment Management): 3 Long Ideas
- Francis Cueto (Asturias Capital): Short Belden
- Brad Dunkley (Waratah Advisors): Long Premium Brands
- Jennifer Foster (Chilton Investment): Long Hasbro (HAS)
- Zachary George (FrontFour Capital): Long Marriott Vacations (VAC)
- Evan Hornbuckle (Wellington Management): Long Under Armour (UA)
- Maria Jelescu (Ardinall Investment Management): Long Tellurian
- Ryan Marr (Waypoint Investment Partners): Long Chorus Aviation
- Mark McKenna (BlackRock): Long Cigna (CI)
- Kim Shannon (Sionna Investment Managers): Long CI Financial
- Colin Stewart (JC Clark): Long Information Services Corp
- Andrew Iu (Burgundy Asset Management): Long Hostelworld
- Ted Goldthorpe (BC Partners) & John Zito (Apollo Global Management): Credit Panel
For more recent investment conference coverage, be sure to also check out notes from Invest For Kids Chicago, as well as a summary of Great Investors' Best Ideas Dallas.
Bob Prince's Presentation: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Bob Prince, co-CIO of Bridgewater Associates.
Bob Prince's Capitalize For Kids Presentation
• Presentation title - “Outlook and Investment Strategy”
• Look back over the past decade and present - distill to cash flows and discount rates = prices and returns
• Beneath that is money and credit flows, which determine discount rates
• These are below the surface primitives that drive the headlines
• 10 years ago high risk premiums, today low risk premiums. These have driven returns
• Transitioned from long period of monetary easing to tightened
• Flow of global money and credit is gradually rolling over
• The pace of monetary tightening is moderate, mostly driven by the Fed via roll down and short rate, with impacts on USD
• While unusual for this stage of the cycle, the global financial system is not over leveraged and is supporting growth. Typically expansion financed by leverage, but this expansion financed by money, not credit, as consumers have de-levered, banks financed by core deposits, banks are lending. Capital Markets seeing low credit spreads, no credit sell off despite stock market pullback. Money pull back, but economic growth is still booming, pushing up cash flows. Strong year on earnings still. When does monetary tightening impact credit, then we have impact on economy and earnings.
• First stage of correction / recession is just a monetary pullback, but if credit and risk premiums are affected —> earnings and economic impact which leads to a recession
• China policy is now of comparable importance as the US and Europe. As China’s labour gets more expensive, we see outsourcing of labour to adjacent countries, which is becoming an independent Asian economic bloc. China + Asian 8 country bloc roughly has a GDP of Europe or USA.
• Expected returns of assets are low and the next downturn present unique risks
• Pullback of liquidity is listing the yields of all assets,
• First time since 90’s we have seen real monetary tightening
• A chart with asset returns at different stages of the cycle
o Late cycle, monetary tightening, shows everything suffers except commodities
o Early and Mid cycle, traditional assets perform well.
• Thinks we are approaching the later end of the cycle where inflation accelerates and commodities will benefit
• Unique Risks in the next downturn
o Central banks ability to reverse the downturn is more limited - need 500bps rate cut to turnaround, QE mostly spent
o Political divisions will impact effective policy action
o Deflation with interest rates near zero can trigger a self reinforcing rise in real interest rates and rising risk premiums
o Lots of obligations out there to be kept - pensions obligations, etc
• Look east
• Asia bloc taking share of global output very quickly. Increasingly independent of the issues of the west, driven by Chinese policy, which leads to independence from west. So adds portfolio diverification due to independence of economic returns. 1 year growth of GDP > Mexico GDP, 5 year > Japan, 10 year > Europe
• Balance a strategic mix, go to the beach, earn the risk premium, and diversify asset classes and macro exposures. Balance the risk allocation to growth and inflation, so when economy goes up or down, inflation goes up or down, still earn risk premium
• 50-60 long bonds, 20 equities, 10 energy equities, 10 gold equities. 7% a year since 2000, 10% since 1970. Diversify, balance exposure to growth and inflation. Not exposed to sustained inflationary or economic situation if you listen to that.
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Jeff Ubben Long Hawaiian Electric: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Jeff Ubben of ValueAct Capital who pitched a long of Hawaiian Electric (HE).
Jeff Ubben's Capitalize For Kids Presentation: Long Hawaiian Electric
• “The Utility of the Future”
• Talking about the ValueAct Spring Fund
• Stakeholder capitalism will be the de jeur over the next 20 years
• Thus the spring fund, making companies more sustainable - invest more, go faster, be a leader, solve the problem (climate change, education, etc.)
• Hawaiian Electric - Biggest and newest investment in the spring fund
• “The resilient and growing platform that enables clean energy production and electrification of transportation to decarbonize Hawaii faster”
• Hawaii is largely an oil burner for electricity generation. 50% of US’s oil burned for power in HE. Particularly since they have tons of renewable areas
• Renewables are much more expensive since their diesel is particularly expensive
• Intermittency is the issue
• Batteries are so good that you will never need a gas peaking plant again
• Can generate 6.5bn in savings throughout the whole state which can be passed to ratepayers, state and shareholders
o Study has aggressive assumptions w.r.t rooftop solar
o Also requires a smart grid.
o Legislature and governor are buying and they are pushing them
o PUC is decoupling earnings from electron generation
• Kauai buying renewable, 70% renewables by 2019
• Off fossil fuel
• Better and less volatile rates
• Public health benefits
• Climate change mitigation
• Lower Cost of ownership for EVs
• Grid resilience
• Reduced habitat conflict and land required
• You can give lifetime free day transportation to prevent grid overloading
• 7% -> 9-10%, bank will fund rooftop solar and charging stations in MFH housing
• Terrible efficiency ratio
• This creates value for all players
• Multi-constituent environment
• Moving Hawaii into leader status
• Financial status - levers for traditional return
• Can become a growth vehicle vs dividend clipper as it has more avenues for growth
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Ed Garden Long PPG Industries: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Ed Garden of Trian Fund Management who pitched a long of PPG Industries (PPG).
Ed Garden's Capitalize For Kids Presentation: Long PPG Industries
PPG Industries
• Paints and coatings business
• Great business, 40% upside on SOTP
• No tech disruption risk, AMZN risk, private label risk. Strong moat
• We are facing an inflationary time, great time to buy as they pass on inflation, increasing gross margin
• Terrible management, lost key customer (Lowe’s), Materially underperforming peers, market on all metrics, Profit warnings, shrinking earnings while peers are growing earnings
• Accounting issues, May 2018 – says 10-K can’t be relied upon due to expense accrual issues
• Did a stupid Hostile acquisition, massively flawed strategy
Trian's Solution
• Bring back legendary CEO Chuck Bunch
• Best CEO in coatings, never sold his stock, wants to return
• Had 40 year career at PPG. Large growth in North American Architectural. Needs Capital and Attention
• Wants it to be spun off
• Add leverage to business
• Improve Governance
• Chuck had outperformed peers by 4,700bps over tenure
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Jeff Smith Long Marvell Technology Group: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Jeff Smith of Starboard Value who pitched a long of Marvell Technology Group (MRVL). They added to the position recently and filed.
Jeff Smith's Capitalize For Kids Presentation: Long Marvell Technology Group
• Semi co. Acquired Cavium in July 2018
• Half their biz in storage, half in networking
• Both are growing, both are well positioned
• #1, or #2 in almost every key market
• What SB has done with Marvell
• 114% underperformance vs peers over 5 years pre-SB
• Options backdating, 8 CFOs 8 years. Accounting investigation, auditor resignation
• Loved the business was great, Marvell’s customers wanted them to succeed
• Entire board and management changed since 2016. Just a settlement, not a proxy. More than half the board replaced via settlement, rest turned over after
• New management and CFO
• Revenue shrunk, now its growing
• Gross margins shrunk, now record highs
• Op margins shrunk dramatically, now op margins at record highs
• Stock has 2x’d since first 13D filing
• Only partially closed underinvestment gap, still below index returns, gap is widening in underperformance
• Why now? The acquisition positions it well for 5G and internet megatrend.
• Now has complete solution in enterprise Cloud data centre and service provider. Now Marvell can compete with Broadcom, who was the only complete solution. Customers want them to compete and be strong against Broadcom
• Trades below unaffected deal price
• What’s changed?
o Concerns around Cavium’s growth trajectory and inventory destocking
o Fear related to Marvell’s end markets
o Macro concerns, tariffs etc
o 10%+ FCF yield
• Inventory sell down and 4G lag before 5G buildup has temporarily impacted growth rate
• Cavium taking share in these end markets
• Went from consumer products biz, now infrastructure end markets (data centres, etc)
• Storage concern - Hard disk drives secular declines.
o Great profitable biz in slow declineo Hard drive for notebooks only 7% of Marvell’s revs
o Storage biz as a whole now focused more datacentres and Edge / Other internet
o Desktop / notebook is only 20% today
o Data centre still a share gainer
• Networking biz - all are share gainers in high growth markets
o Wi-fi
o ARM
o EDGE
o Ethernet
o Data centre
o 5G
• Not included in LT Financial Model
o Not included 5G, Revenue synergies on deal, or ARM server processors. So not accounting for the revenue growth for the above
o However, they are accounting for all the costs
• Thinks management is credible, killed their guidance. Implying that they sandbag guidance very hard.
• Goes through earnings guidance and earnings and were all big beats
• R&D is higher than their peers. Still thinks it is a solid investment in product that will payoff
• Put managers in place, thinks they are making very responsible investments, that should allow them to continue to beat earnings
• Either get that revenue, or those R&D costs will come out.
o —> earnings $2+/shr. 8x earnings today
o Trades dramatically below their peers on most metrics.
• Company in the market buying stock, $1b+ buyback program
• Still excited about this idea
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Ulrike Hoffmann-Burchardi Long MongoDB: Capitalize For Kids Conference 2018
We're posting up notes from the Capitalize For Kids 2018 investment conference. Next up is Ulrike Hoffmann-Burchardi of Tudor Investment Corp who pitched a long of MongoDB (MDB).
Ulrike Hoffmann-Burchardi's Capitalize For Kids Presentation: Long MongoDB
MongoDB
o Yottabytes
• Digitization is the megatrend —> conversion of information into data
• Identified drivers
o Devices
o # of sensors / devices
o Connections between sensors and Devices
• She has a chart of # of yottabytes generated annually
o Conservative estimate of their estimate - 2028 1 yottabyte a year in data
o Mostly unstructured data
• Have to be able to derive insights from the data
• Businesses are truly aware of the opportunity
o And counted the number of times data and ML/AI are mentioned
o Data being mentioned frequently and growingo AI less frequently, but growing fast too
o Google mentions AI/ML 50% more than the #2. On average every 6 minutes
• 2 types of biz (using a Gold Rush analogy)
o Data science enhances core biz
The Miners: GOOGL, AMZN, TWTR
o Core biz data analysis tool –
The Merchants (selling pickaxes): NVDA, IBM, AMD
• What is a better bet? Miners or merchants. Merchants outperform everyone else 225% vs 103% miners
• Which companies help derive insights from data?
• Stack
o Storage
o Extraction
o Data warehouse
o Analytics
• MongoDB hits the full stack
• Contrasts relational to MongoDB
o Relational 1979 - rows and columns. Structured data, and on premise
o MongoDB 2009 - All data, Petabytes scaling easy, in the cloud
• 3 Criteriao Market
• $68bn by 2025 - $28bn is unstructured data
o Leadership
• MongoDB is the leader in non-relational DB, with 40% share, and not tied to a given vendor
• Star ratings on Github repos, and Mongo DBs are killing it. Much more than any other solution out thereo Execution
• CEO and CTO are studs
• CEO - Dev Ittycheria - Entrepreneur BladeLogic, BMC, and then invested at Greylock
• He made a big bet on the cloud that paid off
• Professionalized the GTM and has done very well
• CTO Brain of MongoDB
• Brings them to feature parity with relational DBs + their benefits on top
• $8bn+ revenue annually in 2025 at 20% op margins then. Still 10xer over that period.
• $120 NTM price target, 40% growing over the NTM
Be sure to check out the rest of the presentations from Capitalize For Kids 2018.
Credit Panel: Ted Goldthorpe & John Zito at Capitalize For Kids Conference 2018
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.
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.
