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Mallinckrodt: FCF-Rich Business with Attractive Risk-Reward

January 12, 2019 in Audio, Best Ideas 2019, Equities, Health Care, Ideas, North America, Small Cap

A.J. Noronha of Desai Capital Management presented his in-depth investment thesis on Mallinckrodt (US: MNK) at Best Ideas 2019.

Thesis summary:

Mallinckrodt meets the key criteria A.J. looks for in an investment: (i) significant discount to intrinsic value; (ii) strong margins, which demonstrate operational excellence; (iii) strong cash flow and a low price to cash flow multiple; and (iv) a significant price discount to book value. Risks include revenue concentration, pricing pressure, and political or legal pressure.

A.J. considers the overall risk-reward tradeoff as attractive at recent prices. The stock recently traded at ~$19 per share, roughly half of the 52-week high of ~$37 per share.

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About the instructor:

A.J. Noronha, CFA has over eight years of investment management experience, and has worked closely with Mr. Desai since Desai Capital Management’s inception with all aspects of the fund, with his primary responsibilities being equity research, due diligence, and developing investment theses for DCM’s portfolio. He has been ranked as highly as #1 (Value), #6 (Long), and #9 (both Overall and North America) in SumZero’s independent analyst rankings, and his independent research on Dow Chemical was selected as one of their top ideas of 2015.. He served as an instructor for MOI Global’s Best Ideas 2018 and Wide Moat Summit 2018, and was an invited participant (non finalist) in the 2017-2018 Sohn Conference Foundation Idea Contest and 2017 SumZero/Van Biema Value Partners Idea Challenge. Prior to DCM, Mr. Noronha gained investment experience working for a mid-market PE/VC fund, and also co-founded and served in a C-level role for a biomedical engineering startup. He earned a degree in Finance, magna cum laude, from the University of Notre Dame, where he was selected to be a member of the prestigious Applied Investment Management honors finance course where students manage a portion of the University endowment under the guidance of the Chief Investment Officer, and also holds a JD with Dean’s List honors & a concentration in business enterprise (selected coursework taken through the Kellogg School of Management) from Northwestern University. He is a proud CFA Charterholder, is an active Candidate Member of the CFA Society of Chicago & serves on its Professional Development Advisory Group Board, and is a member of Irish Entrepreneurs & Harvard Alumni Entrepreneurs.

Paratek Pharma Convert: Well-Covered by Asset Value, with Upside

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Equities, Fixed income, Health Care, Ideas, Micro Cap, North America, Transcripts

Saurabh Sud of T. Rowe Price presented his in-depth investment thesis on the convertible debt of Paratek Pharmaceuticals (US: PRTK) at Best Ideas 2019.

Thesis summary:

Paratek Pharmaceuticals (convertible debt and equity) is a misunderstood biopharma company focused on the development and commercialization of antibiotics. Paratek’s lead product candidate, omadacycline, is a novel tetracycline-derived, broad-spectrum antibiotic that received FDA approval in October 2018, for both oral tablet and intravenous formulations for use against ABSSSI (acute skin and skin structure infection) and CABP (community-acquired bacterial pneumonia).

Capital has been receding from the antibiotic sector for years, and we are at a point where resistance is moving faster than our ability to provide new antibiotics.

Paratek’s debt is likely covered 3-4x based on its asset valuation. The convertible debt recently yielded 10.7% (PRTK 4.75% 2024s), offering an asymmetric payoff as the company embarks on its commercialization journey.

With the product approval risk behind us, the market underestimates a credible management’s incentives and potential asset conversion events that mitigate downside for the convertible debt. In an upside scenario, the stock also is likely worth 2-4x but we will need the earning power of a profitable operation to confirm the potential asset valuation via good capital allocation during the commercialization phase.

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Saurabh Sud is a senior portfolio manager in the Fixed Income division of T. Rowe Price, with specific expertise in credit markets. Previously, Saurabh spent about six years with PIMCO, including as senior vice president of portfolio management. He holds a B.Tech in electrical engineering from Indian Institute of Technology in Delhi and an MBA in finance from Columbia Business School.

Cummins: Diesel Engine Maker with Shareholder-Friendly Management

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Equities, Ideas, Large Cap, North America, Transportation

Christopher Bloomstran of Semper Augustus Investments Group presented his in-depth investment thesis on Cummins (US: CMI) at Best Ideas 2019.

Thesis summary:

Cummins provides diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions and electric power generation systems. Cummins sells to OEMs, distributors, and other customers. The network of ~500 wholly-owned and independent distributor locations spans across 7,500 dealer locations in 190+ countries.

Long-standing customers include primary heavy and medium-duty truck manufacturers, including PACCAR, Daimler Trucks North America, Navistar International, Volvo, and Fiat Chrysler. The stock closed 2018 at $133 per share, down nearly one-third from the all-time high reached in early 2018. The business will have produced $23+ billion in revenue and earned $2+ billion in profit in the year just ended. Led by a shareholder-focused and long-tenured management team, returns on equity and capital are 20+%.

The stock discounts the inevitable economic cycle as well as concerns about electrified power as a disruptor to diesel engine technology. At 9.6x current-year expected earnings, the investment case rests on both risks being overstated and over-discounted.

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About the instructor:

Christopher P. Bloomstran, CFA , is the President and Chief Investment Officer of Semper Augustus Investments Group LLC. Chris has more than 25 years of investment experience with a value-driven approach to fundamental equity and industry research. At Semper Augustus, Chris directs all aspects of the firm’s research and portfolio management effort. Prior to forming Semper Augustus in 1998 – in the midst of the stock market and technology bubble – Chris was a Vice President and Portfolio Manager at UMB Investment Advisors. While at UMB Investment Advisors, Chris managed the Trust Investment offices in St. Louis and Denver. Among his investment duties at the firm, he managed the Scout Balanced Fund from the fund’s inception in 1995 until 1998, when he left to start Semper Augustus. Chris received his Bachelor of Science in Business Administration with an emphasis in Finance from the University of Colorado at Boulder, where he also played football. He earned his Chartered Financial Analyst (CFA) designation in 1994. Chris is a member of the CFA Society of St. Louis and of the CFA Institute. He has served on the Board of Directors of the CFA Society of St. Louis since 2002, where he was elected to sequential terms as Vice President from 2005 to 2006, President from 2006 to 2007 and Immediate Past President from 2007 to 2009. Chris has judged the Global Finals and the Americas Finals several times for CFA Institute’s University Global Investment Challenge. Chris served for a number of years as a member of the Bretton Woods Committee in Washington DC, an institution championing and raising awareness of the International Monetary Fund, the World Bank and the World Trade Organization. He has also served on various not-for profit boards in St. Louis. His resides in St. Louis with his wife and two children.

Goldman Sachs: Leading Securities Firm Slightly Below Tangible Book

January 12, 2019 in Audio, Best Ideas 2019, Equities, Financials, Ideas, Large Cap, North America

Christian Olesen of Olesen Capital Management presented his in-depth investment thesis on Goldman Sachs (US: GS) at Best Ideas 2019.

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About the instructor:

Christian Olesen is the investment manager of the Olesen Value Fund. Previously, Christian worked in a dual role of Analyst and Trader for Xaraf Management, a group within Paloma Partners that focuses on a variety of equity and credit strategies. Before that, Christian was Senior Associate in the research department of DebtTraders Group, a New York-based broker-dealer specializing in distressed and high yield bonds, and Senior Financial Analyst in the corporate finance advisory services group of Stern Stewart & Co., a New York-based financial advisory firm best known for its proprietary EVA? (Economic Value Added) concept. Christian holds a B.S. in Economics, with concentrations in Finance and Accounting, from The Wharton School, University of Pennsylvania. He also holds the CFA (Chartered Financial Analyst) designation.

NRC: Recently Public Environmental Services Firm at Discount

January 12, 2019 in Audio, Best Ideas 2019, Equities, Ideas, North America, Small Cap

Eric Gomberg of Dane Capital Management presented his in-depth investment thesis on NRC Group (NYSE: NRCG) at Best Ideas 2019.

Thesis summary:

NRC Group is a recently public environmental services company that trades at a substantial multiple discount to peers despite a superior growth outlook (20%+ EBITDA growth) over the next several years (at least through 2020). NRC is largely unknown due to becoming public via SPAC, but Eric believes strong fundamentals will quickly drive investor awareness.  The business has high barriers to entry, a diverse customer base of over 5,000 customers, and exceptional recurring revenue characteristics for non-discretionary spend, making the business largely anti-recessionary and defensive.

The company has three business units, a standby services segment for potential oil spills or other potential accidents, with 99% annual customer retention and incremental margins in excess of 75%, an environmental services unit, with over 3000 customers, for low cost (sub $10,000), non-discretionary remediation activities, and waste disposal, with EBITDA margins of ~50%. Post 2019, in which cap-ex will be elevated to complete three new landfills (which will have payback periods of 4-5 quarters), cap-ex will be 3-4%, resulting in tremendous free cash flow (2020 should exceed $60mn versus a sub-$300mn market cap).

At a current 6.2x 2019 EV/EBITDA, shares trade at over a four-EBITDA turns discount to comps (over 10x), which Eric believes is unsustainably low. Eric note significant insider ownership (JF Lehman, the “seller” still owns 65% of the company), and think it’s worth mentioning that the SPAC sponsor’s first transaction (BLBD) is up 90% since completion. Eric believes shares of NRCG have the potential to double over the next 6-12 months.

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About the instructor:

Eric Gomberg founded Dane Capital Management in 2014. The firm is a private investment company that focuses on value and special situations investments. Dane has a runs a long-biased, long-term oriented, concentrated portfolio. The firm seeks to identify substantial mis-pricings with an asymmetric risk/reward profile. Dane has identified SPACs as a segment of particular interest, frequently prone to mispricings, and will be discussing one today.

Appian: Well-Positioned Platform for Building Enterprise Software

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Equities, Ideas, Information Technology, North America, Small Cap

Amil Bera of Advaya Investment Management presented his in-depth investment thesis on Appian Corporation (US: APPN) at Best Ideas 2019.

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About the instructor:

Amil A. Bera is the Founder and Chief Investment Officer of Advaya. Amil’s prior experience includes several investment roles for High Net Worth clients. He served as Vice President and Senior Investment Research Analyst for Wells Fargo Wealth Management in San Francisco. Prior to that, he served as Relative Value Strategies Analyst for SAIL Advisors, a Hong Kong-based Fund of Hedge Funds. Previously in New York, he served as the sole Investment Analyst for a large Family Office with capital allocations to private equity, venture capital, hedge funds, real estate, and opportunistic investments. Amil also worked as a Management Associate for the New York-based Equities Trading business of Banc of America Securities. Before graduate school, he was an Analyst at Cornerstone Research in New York, an economics and financial consulting firm where he focused on securities litigation cases. Amil has also worked in Mauritius as a Consultant for the International Monetary Fund and in New Delhi, India as an Economics Intern for the United States Department of State. Amil holds a Masters in Public Policy from Harvard University’s Kennedy School of Government. He is a Phi Beta Kappa graduate of the University of California at Berkeley, where he attained a Bachelor of Arts in Political Economies of Industrial Societies with High Honors and a Departmental Citation. In his free time, Amil enjoys travel, yoga, volleyball, performing arts, dance, and good food.

Murphy USA: Promising New Initiative Not Reflected in Valuation

January 12, 2019 in Audio, Best Ideas 2019, Energy, Equities, Ideas, Mid Cap, North America

Jeff Sutton of ValueTree Investments presented his in-depth investment thesis on Murphy USA (US: MUSA) at Best Ideas 2019.

Thesis summary:

Murphy USA operates 1,461 gas stations and convenience stores, primarily across the Southeastern and Midwestern U.S. The company has historically partnered with Walmart for 1,160 locations, which are often located in Walmart parking lots. In recent years, Murphy has diversified operations away from its dependence on Walmart by opening 301 standalone convenience stores. These standalone stores offer higher profit margins due to retail merchandise sales, as opposed to earning a small margin almost entirely from gasoline sales at other locations.

The company’s newest initiative (announced in early 2016) to “raze and rebuild” many of its existing Walmart locations offers upside potential. Murphy recently traded at $74 per share, a trailing P/E of ~15x, EV/EBITDA of ~8x, and price to cash flow of ~7x. Valuing the company at peer multiples of ~20x earnings, ~10x EBITDA, and ~10x cash flow suggests that Murphy could be worth $105 per share. According to Jeff’s analysis, applying the potential results of the “raze and rebuild” program to recent valuation multiples suggests a value of $107 per share. Combining the potential impact of the initiative with higher peer multiples would imply a stock price of $148 per share.

Murphy owns the majority of its real estate locations. Analyzing the possibility of a sale-leaseback transaction suggests the company could be worth $135 per share. Jeff estimates that the company generates $268 million in normalized maintenance FCF. Applying a 7% FCF yield indicates that Murphy may have intrinsic value of $119 per share, or as high as $159 per share if the “raze and rebuild” program is successfully implemented company-wide.

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About the instructor:

Jeff Sutton has over 18 years of investment experience, and has been a Chartered Financial Analyst (CFA) charterholder for over 14 years. Prior to founding ValueTree, he worked as an equity analyst for a long-short hedge fund, as a project manager at a $1 billion family office, and as an associate at a Southeastern private equity firm. Academically, Mr. Sutton graduated summa cum laude and Phi Beta Kappa from Rhodes College with two B.A. degrees, with majors in International Business and French. He has served as a member of the Rhodes College Alumni Executive Board. He has also earned a Master of Business Administration (MBA) degree from the Darden Graduate School of Business Administration at the University of Virginia, where he was the Senior Portfolio Manager of the Darden Fund.

Tech Data: Key Link in Technology Distribution Ecosystem

January 12, 2019 in Audio, Best Ideas 2019, Equities, Ideas, Information Technology, Mid Cap, North America

Rick Fujimoto of Silverado Investment Partners presented his in-depth investment thesis on Tech Data Corporation (US: TECD) at Best Ideas 2019.

Thesis summary:

Tech Data Corporation is one of the world’s largest wholesale distributors of technology products. It distributes PC systems, mobile phones, printers, consumer electronics, data storage, networking, servers, and more. TECD connects 1,000+ hardware and software vendors like Apple, Cisco, HP, and Microsoft to 125,000+ value-added resellers that serve end users.

Tech Data serves as a key link in the technology ecosystem because it allows resellers (IT companies serving small businesses) fast and efficient access to any technology product without having to maintain or negotiate pricing for their inventory. With revenue of $38 billion and customers in 100+ countries, Tech Data has built a strong and geographically diverse network.

While the company appointed a new CEO in 2018, Richard Hume was promoted from within. The company has a good capital allocation record, with large buybacks and accretive acquisitions. Net income for the year ended January 31, 2019 should approach $315 million, but Rick estimates the company actually earns more, making it attractive at the recent market price.

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About the instructor:

Rick Fujimoto is managing partner of Silverado Investment Partners LP, a value-based investment partnership started in 2009 in Irvine, CA. Silverado was founded on the value investing principles made famous by Warren Buffett. Its objective is to produce market-beating returns by investing in undervalued companies. Through its 10-year existence, Silverado has returned more than 12% per year to investors after all fees and expenses. Rick holds a Bachelor of Science Degree in Business Administration from Pepperdine University and an MBA from Azusa Pacific University. He lives in La Verne, CA with his wife and two children.

EZCorp: Second-Largest Publicly Traded Pawn Store Chain at Discount

January 12, 2019 in Audio, Best Ideas 2019, Consumer Discretionary, Equities, Ideas, North America, Small Cap

Matthew Sweeney of Laughing Water Capital presented his in-depth investment thesis on EZCorp (US: EZPW) at Best Ideas 2019.

Thesis summary:

EZCorp (US: EZPW) is the second-largest publicly traded pawn store chain. At a time of macro uncertainty and rising recession fears, pawn is arguably one of the best businesses to consider due to its defensive nature. For example, EZPW grew same store pawn service charges +17%, +9%, +16% from 2008-2010.

Additionally, even absent a weakening economy, organic growth in 2019 is essentially guaranteed through the rolling off of one time items, as well as operational improvements and full year impact of acquisitions made in 2018.

Further upside exists in the form of continued acquisitions: at a recent investor day, management indicated they expect to grow Latin American store count by 22-44% over the next nine months.

Given a recession-proof business with significant growth on tap, one might expect a premium multiple, yet we estimate that on an absolute basis EZPW trades below NAV and at multiples not seen since the 2009 crisis. On a relative basis, EZPW trades at a more than 50% discount to a public peer. To be fair, the company deserves a discount due to a controlling shareholder and the risk of potential dilution through convertible bonds, but recent improvements to corporate governance are promising, and the convertible bonds are well out of the money at recent prices, which justify significant upside for EZPW. Importantly, this upside should grow if the economy weakens.

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About the instructor:

Matthew Sweeney is the Founder and Managing Partner of Laughing Water Capital. The firm employs a concentrated equity strategy while focusing on companies that are dealing with some sort of structural or operational difficulty that is judged to be easily solved by an incentivized management team if given enough time. Matt began his career at Cantor Fitzgerald where he focused on equity idea generation for institutional clients. He received a Bachelor of Arts degree in History from the College of the Holy Cross, and a Masters degree in International Relations focused on the Middle East and Terrorism from Seton Hall University. Matt is a Chartered Financial Analyst (CFA), and former Vice Chair of the New York Society of Security Analysts (NYSSA) Value Investing Committee.

Aptiv: Leading Auto Supplier in Electrification and Autonomous Tech

January 12, 2019 in Audio, Best Ideas 2019, Consumer Discretionary, Equities, Europe, Ideas, Large Cap

Jason Benowitz of The Roosevelt Investment Group presented his in-depth investment thesis on Aptiv (US: APTV) at Best Ideas 2019.

Thesis summary:

Aptiv is the leading Tier I automotive supplier in electrification and autonomous technology. This is supporting strong win rates and pipeline growth above the industry, which Jason expects will translate into future market share gains, outsized growth in content per vehicle, and profit margin expansion.

Last year’s spinoff of the powertrain business has unlocked value by creating a pure-play, focused leader in attractive vehicle technologies, to which investors could ultimately assign a premium multiple. Aptiv management has guided conservatively, setting the company up to exceed expectations in the medium term.

Jason’s valuation analysis implies substantial upside in his base case scenario, while also suggesting that downside is limited, even under a fairly draconian bear case. Investors may have priced in too much concern about the automotive cycle and the U.S.-China trade dispute, while overlooking the company’s leadership in markets with strong secular growth.

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About the instructor:

Jason Benowitz, CFA, joined Roosevelt Investments in 2009 as a Securities Analyst, was promoted to Portfolio Manager in 2011, and to Senior Portfolio Manager in 2013. Prior to Roosevelt, Mr. Benowitz was a principal at Druker Capital, a long/short hedge fund manager, and a Vice President in the U.S. Equity Research Group at Morgan Stanley Investment Management. He was also an investment banking analyst at Merrill Lynch. Mr. Benowitz earned a BA in Computer Science from Harvard College and an MBA in Finance and Accounting from The Wharton School at the University of Pennsylvania, where he was a Palmer Scholar. Mr. Benowitz holds the Chartered Financial Analyst® designation.

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