Some Brief Updates

Nothing has been posted on this blog for a while. While I have found quite a few interesting stock ideas, I have yet had the time to write something about them. Other than the usual excuses (increased school workload, and taking an interest in other things), I have just been thinking hard (daydreaming) about a few business issues/concepts that I believe have very important implications on investing. I’ve recently started writing up on a pretty big article and hopefully will have it posted this weekend.

This post will simply be an update of a few of the stocks we have written up on this blog so far:

Automodular (TSX: AM)

The thesis on this micro-cap sub-liquidation idea has largely been realized by now. I think in my initial post I came up with a liquidation value somewhere around $2.60. The stock currently trades at $2.40, after paying out $0.28 in dividends, for a nice 80% return in 9 months. I still hold a modest amount of the stock mostly because I am still paying nothing for the optionality attached ($25 million lawsuit against GM, and new business development). Automodular’s management has also proven themselves to be disciplined and shareholder friendly, announcing a share repurchase program that would shrink share count by 10% (maximum allowable amount in Canada). How the rest of the story will play out is largely dependent upon the two free options, while the risk that management may waste the cash on an acquisition has also been dramatically reduced following the appointment of a value-oriented activist investor onto the company’s board.

UNTD (NASDAQ: UNTD, FTD)

UNTD completed the spin-off of FTD in November. In my initial piece I guessed that UNTD (the “bad” stub) would get sold off while FTD (the “good” spin) might get an initial boost following the transaction, and I was wrong on both counts. Good thing value investors don’t bet on market calls!

As it turns out, UNTD debuted at $13 and rose to $18. Adjusted for the 7-for-1 reverse split, UNTD basically peaked at $2.60 in pre-spin price vs. $1.50 in my base case valuation so I sold the stock as fast as I could. It has come down quite a bit since then but it’s not my problem any more. FTD on the other hand is basically flat since the spin and I think it remains undervalued. The company trades for a market cap of $590 million, or slightly more than 10 x my estimate of FTD’s 2014 free cash flow. I think FTD is a good quality business that deserves a multiple of 15 x, so I’m holding on to my stock for now.

Barron’s recently wrote an article on FTD (http://online.barrons.com/article/SB50001424053111904148504579404841603689628.html?mod=googlenews_barrons) and shared a similar analysis by Appleseed Fund (if I ever have to start a business I’m stealing that name). You can go to the link and check it out. FTD is reporting its Q4 numbers this Wednesday and management will give an initial update on how it plans to allocate capital. My opinion is that they need to buy back their stock as aggressively as they can. FTD is also quite underlevered and can borrow money quite comfortably to shrink its equity. We will see on Wednesday if that’s going to be the case.

I should also mention that I think the spin-off was structured quite poorly. FTD as an independent entity should be appealing to many private equity firms. However, in the event of a leveraged buyout within two years of the spin transaction, FTD the spinco would lose its tax-free status and subject shareholders to capital gains taxes. In my opinion management should have spun off UNTD instead and kept FTD as the stub.

DirecTV (NASDAQ: DTV)

My buddy was the one who wrote the article on DirecTV but I know a few things about the company so here’s your update. He wrote up the stock at $58 and today it’s $78 so it has done well in the last few months.

DTV guided $8 in earnings and free cash flow a share by 2016 in their Investor Day presentation. Operationally I think the goal is quite obtainable but a large part of that target is dependent upon future share repurchases. Now that the stock has risen substantially it is unlikely they will be able to buy back shares at the same price as they assumed a few months ago so let’s just call it $7.50 a share in 2016 free cash flow.

Slap a 15 x on $7.50 the stock will be worth $112.5 by 2016. That’s an annualized return of 20% from today. Not bad at all.

DTV’s case is quite instructive in highlighting the power of share buybacks. DTV started buying back its stock in 2005, when it traded for over 15 x earnings and was still in high growth mode, and has since bought back over 60% of its shares outstanding. The stock has been a 5- bagger. My very limited pattern recognition ability tells me that Malone is trying to pull it off again at Sirius XM (or Liberty Media C class, pending shareholder approval).

Liberty Interactive (NASDAQ: LINTA, LINTB)

LINTA has risen a bit over 20% since it was written up half a year ago. The company’s market cap, however, has not gone up a lot due to the substantial buybacks that took place.

LINTA’s Q4 results were in-line with what people could reasonably expect. The core QVC US business continues to perform well, while QVC Japan and Germany have been under a little pressure. The smaller e-commerce segment has disappointed in terms of margins, largely due to increasing competitive pressure and one-time restructuring-related expenses. It’s a very small business relative to QVC, however, so I’m not that concerned. I think the value of QVC easily exceeds LINTA’s entire market cap so however the e-commerce segment turns out is free optionality.

Management also mentioned that the (tracker) spin-off they announced last fall may be extended to Q3 2014. I don’t see any reason Malone would not want to do this deal so again, not concerned. In other news, management announced another $1 billion share buyback program for 2014.

AIG Warrants (AIG-WT)

Bob, time to raise that dividend above the $0.675 threshold already!

Other Potentially Interesting Stocks 

Not sure when I will have time (reads: when I won’t have excuses) to write about all of these so I’m just going to put down my little watch list here. If you find any of these interesting send me a comment maybe you can teach me about some of them.

Ocwen Financial (NYSE: OCN) – This one is related to the article I’m writing. I love the chairman and the business. The stock has also conveniently dropped 40% in the last few months.

Altisource Portfolio Solutions (NASDAQ: ASPS) – ASPS is basically a royalty on Ocwen’s future growth. The stock trades at less than 10 x 2014 consensus earnings and I think it deserves much more than that.

TGS-NOPEC (ADR: TGSGY) – TGS is also related to the theme of the upcoming article. A write-up will be delivered at some point in the foreseeable future.

Sky Perfect (Tokyo: 9412) – Sky Perfect is Japan’s DirecTV. The stock trades for 8 times last year’s free cash flow and management recently bought back 9% of the shares outstanding.

Verisign (NASDAQ: VRSN) – Verisign is a regulated monopoly that owns the .com and .net web domain registries. In short it’s a royalty on the growth of the Internet. The company is pursuing a similar capital return strategy as DirecTV.

Fimalac (Paris: FIM) – a holding company that owns 50% of Fitch Ratings, 40% of the biggest casino chain in France and Switzerland, and €260 million of real estate assets, but trades for a market cap less than €1.4 billion.

One thought on “Some Brief Updates

  1. Nice update. I’m not sure if I would slap a 15x multiple on DTV’s 2016 expected cash flow as a base case but I’m still comfortable holding the position. Looking back, I wish I didn’t trim so much when it was in the low 60’s but at least I put it back mostly into LINTA. The US business is outperforming my and the market’s expectations and I think that’s why we’re seeing a re-rating to a higher multiple. A majority of the DTV’s intrinsic value still accrues to the US business so any sign of positive net subscriber growth is a big plus. Also I think the ~8% YoY rise in programming costs per sub as been well priced in by the market for a while now, leaving more room for upside if the recent large affiliate fee hikes subside…

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