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Olympic Entertainment and AMC Entertainment: Two Contrarian Investment Ideas

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Consumer Discretionary, Deep Value, Equities, Europe, GARP, Ideas, North America, Small Cap

Steve Gorelik of Firebird Management presented his in-depth investment thesis on Olympic Entertainment (TSE: OEG1T) and AMC Entertainment (NYSE: AMC) at Best Ideas 2018.

Olympic Entertainment is one of the largest casino operators in Eastern Europe. Operating in six countries, including Latvia, Estonia, and Slovakia, the company differentiates itself as a provider of higher-quality gambling experiences. Olympic’s spacious halls, attractive bar areas, and modern slot machines give revelers a reason to spend more time at the establishments, resulting in higher gross gaming revenue and profitability. Since 2010, Olympic has been growing revenue and EBITDA at 11% and 17% per annum, and ROIC on new investments (organic and M&A) usually ranges between 40 and 60%. Despite strong growth and profitability, the company trades at 5.5x EV/EBITDA and a 5.5% dividend yield. The attractive valuation is explained by the relatively low liquidity of the Tallinn stock exchange and some regulatory concerns. A number of significant recent investments have started bearing fruit, with nine-month 2017 EBITDA increasing 26% over last year; it should continue to drive near-term profit growth. Olympic trades near the bottom of its historical EV/EBITDA trading range and should generate mid-30s IRR over a two- to three-year holding period.

AMC Entertainment is the largest owner of movie theaters in North America and Western Europe. AMC shares were down 50+% in 2017 as the market became concerned about weak theater attendance data, relatively high leverage, and the possibility of changes to the 90-day exclusivity window enjoyed by theaters. Steve believes the market has overreacted to the challenges and is overlooking the fact that movie theaters have pricing power, as demonstrated through steady 3-4% growth in average ticket prices. Margins are improving steadily as a more significant proportion of revenue comes from higher-margin concession sales. AMC generates about $400 million of free cash flow (as compared to a $2 billion market cap), with most of the spare cash deployed into high-ROIC projects designed to improve customer experience. AMC’s operating cash flow before working capital changes is up 60% since 2013 because of these investments. An improving movie slate in 2018 and spending on customer experience improvements at newly acquired chains should lead to positive re-rating of AMC shares within 12 to 18 months. The multiples paid by Cineworld for close comparable Regal suggest 60 to 70% upside in the private market.

About the instructor:

Steve Gorelik is the Fund Manager of Firebird U.S. Value Fund as well as portfolio manager of Firebird’s Eastern Europe and Russia Funds. He joined Firebird in 2005 from Columbia University Graduate School of Business while completing education from a highly selective Value Investing Program. Prior to business school, Steve was an operational strategy consultant at Deloitte working with companies in various industries including banking, healthcare, and retail. He holds a BS degree from Carnegie Mellon University as well as a CFA (chartered financial analyst) charter and a membership in Beta Gamma Sigma honor society. Steve serves on the boards of Teliani Valley (Georgia), Arco Vara (Estonia), and Pharmsynthez (Russia). He speaks Russian, English and his native Belarussian.

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US Concrete: Constructions Materials Company Becoming More Vertically Integrated

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Equities, GARP, Ideas, Materials, North America, Small Cap

Michael Rome of Long Focus Capital presented his in-depth investment thesis on US Concrete (Nasdaq: USCR) at Best Ideas 2018.

US Concrete is a construction materials company focused on Texas, California, New York, and New Jersey. Through the acquisition of aggregates assets, the company has become more vertically integrated and has improved the mix. Michael believes this should be rewarded with a higher multiple.

In addition, USCR sales are entirely U.S.-based and benefit from corporate tax reform. Michael views EPS estimates as too low, as sell-side analysts forecast $6 in 2019. Michael expects EPS of $9 in 2019. With high short interest, a reasonable valuation, and rising estimates, the stock could double within two years, according to Michael.

About the instructor:

Michael Rome started his career at DLJ equity research. He then worked as an analyst at Capital Research based in Los Angeles. Since then, he has worked as a long/short equity portfolio manager at several hedge funds included SAC, Diamondback and Nomura. He has covered various sectors but is most experienced within the industrials/materials space. He received his MBA from Wharton, a BA from Washington University in St. Louis and has a CFA. He is now working with Long Focus Capital, which is a family office hedge fund run by John Helmers.

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Credit Acceptance: Auto Financier with Strong, Interested, Shareholder-Friendly Management

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Deep Value, Equities, Financials, GARP, Ideas, Jockey Stocks, Mid Cap, North America, Small Cap

Rick Fujimoto of Silverado Investment Partners presented his in-depth investment thesis on Credit Acceptance (Nasdaq: CACC) at Best Ideas 2018.

Credit Acceptance provides financing programs and related products and services to automobile dealers in the U.S. It advances money to dealers in exchange for the right to service underlying consumer loans for a fee. It then partners with dealers on the additional collection of payments. CACC also purchases consumer loans dealers have originated, whereby it collects and keeps all customer loan payments. CACC enjoys solid competitive advantages over peers evidenced by its superior performance and returns on capital.

Management has a proven track record of creating shareholder value by fueling growth and repurchasing shares below intrinsic value. Management also collectively owns a significant share of the company.

While the quality of CACC’s business and track record of growth suggest it deserves a premium market multiple, it trades at a substantial discount to the market average.

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.

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Steel Partners: Publicly-Traded LP Transforming into Owner of Operating Businesses

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Equities, Financials, Ideas, Jockey Stocks, North America, Small Cap, Special Situations

David Fleer of Bristlecone Value Partners presented his in-depth investment thesis on Steel Partners Holdings LP (NYSE: SPLP) at Best Ideas 2018.

Steel Partners Holdings LP is a publicly-traded limited partnership in the process of transforming itself from a collection of minority stakes in public companies into an owner primarily of operating businesses. Steel Partners now owns a diverse collection of industrial businesses, an oil and gas services business, and a most unusual bank, alongside significant remaining non-operating assets (and liabilities). The company is managed by capable owner/operators with significant alignment of interests through 52% insider ownership. David believes the market—to the extent it’s paying any attention at all—may be mispricing Steel Partners due to its complicated structure and less-than-transparent accounting. As the company simplifies, the discount to intrinsic value may narrow; absent that, David believes operating results and good capital allocation will allow value to compound at an attractive clip.

About the instructor:

David Fleer started his career in investment management in 1996. Prior to founding Bristlecone in 2004, David was a Senior Vice President and US equities portfolio manager/analyst at Oppenheimer Investment Advisers. David grew up in North Carolina, then moved to Massachusetts, where he earned a Bachelor of Arts degree in history from Amherst College (Amherst, MA) and a Master of Arts degree in art history from Williams College (Williamstown, MA), with a focus on Italian Renaissance. Researching and discussing investment ideas around the conference room table, it turns out, is not all that different than discussing Leonardo around the seminar table. David now lives in Los Angeles, California, with his wife, son and daughter. David has managed not to gain too much weight eating at Clementine, his wife’s bakery café, attempting to burn off the calories by playing and coaching (and sometimes just watching) soccer, among other pursuits.

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Clarus: Well-Financed, NOL-Rich Outdoor Equipment Rollup with Insider Alignment

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Consumer Discretionary, Equities, GARP, Ideas, Jockey Stocks, Micro Cap, North America, Small Cap, Special Situations

Dan Roller of Maran Capital Management presented his in-depth investment thesis on Clarus Corp. (Nasdaq: CLAR) at Best Ideas 2018.

Clarus is an NOL-rich holding company run by an owner-operator with an enviable track record of creating value through both M&A and organic growth. Its core asset is Black Diamond Equipment, an outdoor equipment business with a heritage that dates to 1957. Black Diamond is number one or two in most of its product categories and is growing rapidly, with numerous organic opportunities ahead.

Its president has built and sold several multi-hundred million dollar consumer brands. Befitting its acquisitive nature, Clarus recently purchased Sierra Bullets, a seventy year-old, family-run, premium bullet manufacturer, for around seven times cash flow, which will be significantly accretive in 2018 and beyond. Clarus continues to look for additional M&A opportunities to grow value and utilize its large NOL.

Dan believes Clarus can be a “three-year double,” with further upside over a longer-term time horizon. The clean balance sheet, significant insider alignment, top- and bottom-line growth, and undemanding valuation, create a solid margin of safety.

About the instructor:

Dan Roller is the founder of Maran Capital Management, a boutique investment manager based in Denver, CO. Dan has a firm commitment to disciplined value investing with a focus on inefficient areas of the market. He takes a long-term approach, concentrates in his best ideas, and is committed to keeping the fund small and the firm lean. Dan has been connecting dots and unearthing value for over fifteen years. Prior to forming Maran, he honed his investment philosophy and process for over a decade working in analyst and portfolio manager roles on the buyside in New York. Dan received a BSE in electrical engineering, with a second major in computer science, from Duke University in 2003. In addition to being a passionate value investor, Dan is part husband, part parent, part reader, and part mountain athlete.

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C&C Group: Moaty European Beverage Company with Turnaround Progress

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Consumer Staples, Equities, Europe, GARP, Ideas, Small Cap, Wide Moat

Javier Echevarria of Invexcel Patrimonio presented his in-depth investment thesis on C&C Group (Ireland: GCC) at Best Ideas 2018.

C&C is a small European company that produces and distributes alcoholic and non-alcoholic drinks. It has a strong and diversified portfolio with leading beer and cider brands sold in 60+ countries. C&C is also a leading supplier, distributor, and wholesaler of beverage products in Ireland and Scotland, its core markets, where it generates ~85% of operating profit.

Some well-known value funds are the major shareholders, with a large position (~39% of the capital) built over the last two years, giving long-term support to management’s business plan. The stock performance during the last five years has been -37%, mainly due to a mixed capital allocation record, weakness in core markets, and intense competition.

Javier believes C&C has left behind the worst-case scenario. It is a company with strong and durable competitive advantages, a long-term partnership with AB InBev, and a strong record of cash generation (ten-year average of 64% vs. 46% for European peers) and returns on capital employed (13.6% vs. 10.8% for European peers).

At recent prices, the valuation seems compelling, with an FCF yield of 8.5% (vs. peers at 4.5%), P/E of 12.3x (vs. peers at 23.6x). Financial leverage is also below that of its peers (1.6x vs 2.4x).

About the instructor:

Javier Echevarria has specialized in Equity Investments and Wealth Management since 2007. He worked in Bestinver’s sales team (2007-2009). He coordinated the Anatha charity project in Cambodia (2009). He joined Excel Corporación as Markets Analyst (2009) and Invexcel Patrimonio EAFI (2010). He holds a Degree in Law (Universidad Complutense de Madrid) and a Master’s Degree in Stocks and Financial Markets (Instituto de Estudios Bursátiles).

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Franklin Covey and School Specialty: Two Underappreciated Small-Cap Ideas

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Communication Services, Equities, GARP, Ideas, Micro Cap, North America, Small Cap, Special Situations

Patrick Retzer of Retzer Capital Management presented his in-depth investment thesis on Franklin Covey (NYSE: FC) and School Specialty (OTC: SCOO) at Best Ideas 2018.

Franklin Covey is a global training and consulting company specializing in organizational performance improvement. The company has high gross margins and high levels of free cash flow, which enables it to buy back stock consistently, having bought $62 million in the past eleven quarters. FC is transitioning from a traditional sales revenue model to a subscription-based model. This process often initially depresses the stock price because reported results “look” unimpressive as revenue from new sales is recognized ratably over many months rather than once upon the sale. Ultimately, however, the subscription model leads to higher multiples and stock prices due to expanded margins and recurring revenue. In the last couple of quarters, the company has reported results that demonstrate it is through the toughest part of the transition and now likely in a period in which GAAP revenue, deferred revenue, and unbilled revenue show increases, as do adjusted EBITDA and earnings. This emergence is often when multiples and stock price show upside, as the company shows in the 4Q17 investor presentation. FC has reached four inflection points on different facets of the business that should also accelerate growth. Guidance for fiscal 2018 is for GAAP revenue growth of 14%, deferred revenue growth of 36%, and adjusted EBITDA growth of 30-95%. As the company reports higher margins, smoother results, and higher levels of recurring revenue over the next year or two, Patrick expects the stock price to double.

School Specialty is an under-the-radar company with a strong competitive position in the K-12 education industry. The real estate crisis decimated school districts’ budgets and SCOO was forced into reorganization, which upon emergence wiped out much debt and shrunk the market capitalization. New management, with a proven record of success, was brought in to streamline the business and position it for growth. Revenue troughed in the 4Q14 and has grown 5% while SG&A has shrunk 8%. The company has essentially been rebuilt and is positioned to grow organically and through modest acquisitions that leverage the company’s market presence. Despite revenue approaching $700 million, the market capitalization is only ~2.2x adjusted EBITDA and 18% of revenue. According to Patrick, the business has a wide and deep moat and several catalysts ahead. Management has shown tangible results since arriving at SCOO. The new “21st Century Safe School” initiative has received widespread interest and is well-timed given the current state of U.S. public education. Listed on the Pink Sheets, management appears anxious to “up-list” and broaden the investor base. Within five years, revenue may grow to $1 billion, adjusted EBITDA may reach $11 per share, and cash from operations could be $8.50 per share.

About the instructor:

Patrick Retzer spent the first several years of his career in public accounting and then developing tax planning software all while earning a Master’s in Taxation. He moved into investment management in 1987, joining Heartland Advisors, manager of the Heartland family of mutual funds in Milwaukee, Wisconsin. While at Heartland, he was portfolio manager of the Heartland US Government Securities Fund (#1 General US Government Fund for the 5 years ended 12/31/93 according to Lipper), he started and managed the Heartland Wisconsin Tax Free Fund (Wisconsin’s first double tax free fund) was co-manager of the Heartland Value Plus Fund, and managed private accounts. In 200,, Pat cashed in his chips as a shareholder of Heartland Advisors and started Retzer Capital Management, LLC and the Retzer Fund I, LP. Pat believes his 30+ years of experience in both fixed income and equity management as well as his background as a CPA and tax specialist give him a unique perspective on the financial markets.

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AU Optronics: Lowly Valued Despite Significant Improvement in Primary End Market

January 13, 2018 in Asia, Audio, Best Ideas 2018, Best Ideas Conference, Deep Value, Equities, Ideas, Information Technology, Mid Cap, Small Cap

Amit Chokshi of Doshi Capital Partners presented his in-depth investment thesis on AU Optronics (NYSE: AUO) at Best Ideas 2018.

AU Optronics is a Taiwan-based global producer of panels utilized in televisions, desktops, notebooks, mobile devices, and commercial applications. AUO and its peers have struggled over the past five years to reign in supply as the primary market of televisions became saturated, resulting in a decline in average selling prices. However, since 2016, the age of TV sets in a number of regions globally has reached a level that has triggered a TV upgrade cycle, featuring larger screen sizes and more features, particularly thinner, bezel-less televisions. These characteristics have allowed AUO to generate higher gross margins and drive operating leverage.

Despite the significant improvement in their primary end market, investors value AUO below book value and less than 3x EV/EBITDA, despite relatively muted future capex. The market may believe AUO is at a cyclical peak with a commoditized product subject to an influx of competition from China and thus deserves a low valuation. While this view may ultimately be accurate, the company’s low valuation and clean balance sheet provide a low carrying cost to see if another thesis plays out. The panel maker market has a similar story to the DRAM market from 2011, whereby a number of competitors left the market and the remaining participants were disciplined on supply and targeting end markets. Chinese competition may re-emerge, but Chinese competitors have not shown an ability to produce panels with the high-level features consumers demand, resulting in highly price sensitive end markets that AUO has deliberately avoided. In addition, bezel-less TVs have allowed AUO to take a larger share of televisions profits as the integrated circuits that were produced by other OEM equipment manufacturers that were typically found in the back of the television panel are now applied directly to the panel itself by AUO through a process called “gate on array”.

AUO is keenly focused on avoiding price-sensitive markets and has focused on flexible OLED applications, the automobile market, and other commercial applications that require a high degree of specification and switching costs that reduce the price sensitivity of products. For example, AUO is already a top two or three provider of panels for the automotive market, and one could expect as technology and panel use increases across cars, the company will benefit. AUO has entrenched itself in a number of specialized end markets, and the peers are doing the same, which should result in more sustainable profitability. If this thesis plays out, market participants may ultimately re-rate the company at several turns above recent EV/EBITDA levels, which could result in a stock price 100-200% above recent levels within two to three years — analogous to what occurred in the DRAM market several years ago.

About the instructor:

Amit Chokshi is the Chief Investment Officer of Doshi Capital Partners, a New York-based single family office, where he manages the allocation of capital across public and private investments. Prior to joining Doshi Capital Partners, Amit was a Portfolio Manager at City National Rochdale (“CNR”), where he managed capital across multiple asset classes for high net worth, ultra high net worth, and family office clients. From 2007 – 2012, Amit was the Portfolio Manager for Kinnaras Capital Partners, a deep value / special situations hedge fund he founded. Prior to Kinnaras Capital, Amit was an Associate in the Leveraged Finance Group of the Royal Bank of Scotland (“RBS”) where he was involved exclusively in financial sponsor-backed middle market and mega cap transactions. Amit started his career as an Analyst at Morgan Stanley. He is a CFA Charterholder and served on the Board of the CFA Society of Stamford from 2006 – 2014. Amit has a B.S. in Finance from Bryant University and MBA from Emory University.

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Infinite Computer Solutions: Founder-Led IT Services Provider Outgrowing the Industry

January 13, 2018 in Asia, Audio, Best Ideas 2018, Best Ideas Conference, Communication Services, Deep Value, Equities, GARP, Ideas, Small Cap

V.P. Rajesh of Banyan Capital Advisors presented his in-depth investment thesis on Infinite Computer Solutions (India: INFINITE) at Best Ideas 2018.

The IT services industry has gone through a paradigm shift in the recent years. Infinite Computer Solutions has navigated the “new” environment successfully and has started growing materially faster than the industry. The founder of the company has a strong track record of taking shareholder-enhancing actions. Core investment thesis: (i) EBITDA margin is stabilizing; (ii) the products business is ramping up and can be a source of significant value in the coming years; and (iii) non-core real estate and net cash account for 30+% of recent market value. On financial and valuation parameters, Infinite Computer Solutions meets most of the metrics mentioned in Ben Graham’s checklist for a defensive investor.

About the instructor:

V.P. Rajesh has been in the capital markets since 1991, first as an IT consultant (at Citicorp Overseas Software) and then as an Investment Banker for over ten years specializing in mergers and acquisitions. During his banking career with J.P. Morgan Chase, Deutsche Bank, Piper Jaffray and Thomas Weisel Partners in New York and San Francisco, he focused on technology, media, telecom and healthcare sectors and completed transactions worth over $27 billion. V.P. relocated to India in July 2007 and started re-investing in the Indian stock market from March 2008 onward. He started Banyan Capital Advisors in New Delhi in November 2011 to manage outside capital using investment principles espoused by likes of Graham, Buffett, Munger, Klarman and Lynch. V.P. is an MBA from the University of Michigan’s Ross Business School with a distinction and has a B.E. (Hons.) degree from BITS, Pilani, India. He is also a Chartered Financial Analyst(CFA) from The CFA Institute, US.

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eDreams Odigeo: Leading Online Travel Agency Based in Barcelona at Discount

January 13, 2018 in Audio, Best Ideas 2018, Best Ideas Conference, Communication Services, Equities, Europe, GARP, Ideas, Information Technology, Small Cap, Special Situations

Thomas Bushey of Sunderland Capital Partners presented his in-depth investment thesis on eDreams Odigeo (Spain: EDR) at Best Ideas 2018.

eDreams Odigeo is a leading online travel agency based in Barcelona. The shares offer an attractive risk-reward in light of the strong business fundamentals and meaningful discount to peers and intrinsic value. The prospect of M&A, brought forth by a recently announced strategic review, provides a near-term upside option. As the online leader in flights in Europe, with ~27% market share, eDreams recently announced the rollout of a “dynamic packages” (hotel) business, which will provide margin accretion and diversify the revenue stream. eDreams is a leader in mobile, with 37% of flight bookings coming via its mobile platform, reducing customer acquisition costs. The fundamental improvements support guided EBITDA growth of ~10% annually over the next three years. In addition to operational improvements, the company’s debt can be refinanced in mid-2018, adding to cash flow growth potential. In light of the strong fundamentals and discount to peers at 6.2x EV/EBITDA for FY19 vs. 14.5x for peers, Tom sees substantial upside. A potential M&A transaction serves as an option that would close the valuation discount.

About the instructor:

Thomas Bushey has over fifteen years of experience managing and investing capital. Prior to founding Sunderland, he was a portfolio manager at Blackrock. Prior to Blackrock, Mr. Bushey was a Senior Analyst for Mayo Capital Partners from 2010 to 2012. Before that, he served a Senior Analyst at Millennium Partners from 2008 to 2009, where he was part of a global industrial investment team. Mr. Bushey began his career as an analyst for Credit Suisse First Boston (“CSFB”) and later moved to HCI Equity Partners (Thayer Capital). At CSFB, he executed and analyzed mergers, acquisitions, leveraged buyouts, divestitures, takeover defenses, restructurings and debt and equity financing for corporate clients and financial sponsors. At HCI, he was a member of the investment team responsible for private equity funds focused on industrial products and services. Mr. Bushey has a BS in Economics from the Wharton School of the University of Pennsylvania.

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