About Me

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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Tuesday, December 16, 2014

What a $72M prank says about investing

As everyone knows by now, NY Mag got punked. But behind the story is a cautionary tale on investing.

In its 10th annual "Reasons to Love NY" article, New York magazine listed as #12, "Because a Stuyvesant Senior Made Millions Picking Stocks."


http://nymag.com/news/articles/reasonstoloveny/2014/mohammed-islam-stock-trading/


The fawning piece provided a glimpse into the supposed celebrity lifestyle of Mohammed Islam ("a cherubic senior with a goatee and slight faux-hawk") and his two friends, Damir Tulemaganbetov ("The son of a Kazakh oligarch ... tall, slim, and cocky, like a cigarette wearing a fedora") and Patrick Trablusi ("a more serious Chuck Bass").


It's hilarious, these banal descriptions normally reserved for celebrity. And why the celebrity? Because someone thought these three had made $72M on the stock market while seniors at Stuyvesant High School and that they were going to start their hedge fund when they turned 18. What NY Mag loves about NY is rich people doing rich people things that poor people aspire to.


Obviously, the whole thing was a prank played by these kids on the New York reporter Jessica Pressler (and the New York Post, which also picked up the story).


http://observer.com/2014/12/exclusive-new-york-mags-boy-genius-investor-made-it-all-up/


But how does an established magazine with a credentialed factchecking department allowed itself to print a completely bullshit story? And what it can teach us about investing?


First the obvious ...


People want to believe investing is easy money (and other fairy tales).

Magazines have to fill space with stories in order to sell ads
Greed breeds stupidity.

... and the absurd ... 

There's a whole segment of the biz-fo-tainment industry for puff pieces about rich people. Towit: The article's author is leaving NY Mag to join Bloomberg's "investigative unit" to write "long-form stories about financial personalities and the culture of wealth and money." 


... but the prestige is how the story got picked up in the first place, as it seems most compelling from an investor's perspective. As per Ken Kurson's Q&A between him and the kids ...



"Observer: What was your first contact with the New York magazine reporter?"

"Mohammed Islam: My friend’s father worked at New York magazine and he had the reporter contact me. Then she [Jessica Pressler] called me."

... it seems to me that the credibility provided by a weak connection (so-and-so's father) was apparently strong enough to short circuit a reporter's natural cynicism (if she had any) and the established process to keep bullshit out of the magazine. 

Some kind of cognitive bias was at work here, though its name escapes me, but I'm reminded of the saying: "beware the strength of weak connections."  These connections enable us to provide trust where none is due. And all commerce is at some level based on trust and confidence in the integrity of the system. 


Some of the things investors do based on this trust from weak connections includes ...  

looking to see who else own their stocks as a sign of confidence in their decisions  
talking to analysts because of the "pedigree" of their education of their authority from working at an investment bank 
believing that a "diversified" portfolio contains non-correlated entities because it's called "diversified" by some "expert"   

... but truly, the only thing one should really trust, at the baseline, is that the entire financial industry is set up to separate a person from their money and collect a fee for doing so. And the media is an enabling factor in the process through its authority and credibility shaping mechanisms. It thrives on weak connections. 

So what's an investor to do? The same as what this writer should have done, which is seek the facts, and knowing them, make decisions that provide other people with opportunities to learn more about the companies they invest in and perhaps even about themselves. 

Sunday, October 5, 2014

5775: "We pile up possessions, but don't know how to account for our lives"

"We pile up possessions, but don't know how to account for our lives"

The annual Jewish fall festival is upon us. It's a period of reflection and renewal. the quote above - from the special prayer book we use this time of year - stuck with me. it's not our "things" that define us. never has been.

but what does define us?

In the midst of a 25-hour fast, I'll answer another question: why do we have an annual ritual of cathartic slate cleaning and resolutions? maybe because we're defined by our effort to define ourselves. from there we can pretty much go wherever we want.

and that gets me to a (Jewish) new year resolution; take a bit more care of my wits and ideas, not write them off as silly, stupid, impossible or replicable by anyone. i don't think there's much unique or unusual about me but even small differences matter. if I have an investment position to take that's diligently researched and well thought out, or if I see an opportunity to benefit that other's don't, there's no harm in pursuing it.

a 25-hour fast and long day surrounded by one voice singing will amplify all kinds of crazy ideas, but reinforcing that one isn't such a bad idea.

Tuesday, August 12, 2014

the $100,000 day

about a year ago, i met with a former utilities analyst who lives in my neighborhood. it was a real networking meeting - a friend of a friend of my in-laws - but i'm talking to anyone even remotely associated with the business. 

so here's this former buy side analyst in his late 50's, now retired and managing his own account, and over eggs, he said something that really stuck with me. 

he said: 

"it never gets boring making $100,000 in a day"

that got my attention. 

I've been investing since the mid-1990's and i've had good % returns over that time, but i've never made that much money in a day. 

that comment re-scaled for me just what the fuck I was doing. i was suddenly aware of a higher target than i'd ever considered and it contributed to changing the way I invest.

in order to make $100k in a day, particularly in a small account like mine, you have to make bigger bets. and in order to sleep well while putting more on the line, that means doing a little more research, saying "no" a lot, and making only the investments that have the opportunity to return 2x, 3x, etc. 

there's really no point in wasting time with anything else. 

find companies with multiple ways to win (ie sales growth, margin expansion, balance sheet leverage, competitive advantages, and least of all, multiple expansion) that isn't factored into the current price. do the research, say "no" a lot, and then invest in companies with the best opportunities for the highest growth that are mis-priced for any number of reasons. then let time be your friend. 

i still haven't had a $100,000 day but with ESWW, which I wrote about a few weeks ago, up ~120% it's the kind of day that I hope will never get boring. 







Wednesday, July 16, 2014

OTCM: Commanding Marketshare and Scaleable Growth at 9x EBITDA

Here is a company with 14M shares authorized and 10.8M outstanding trading at $12.50 ($10 when I started this) for a $135M market cap.

Over the last three years, revenues have grown 9% CAGR,  EBITDA 17% CAGR and shareholder equity 26% CAGR without debt or acquisitions. The company has more than $15M in net cash. According to Factset, there are 25 US listed companies with metrics as good or better than these trading for less than 10x EV / EBITDA.

Now throw in the fact that each year over the last 3, more than 70% of EBITDA has rolled down to FCF (before accounting for the ~2% div yield), and yes, how many companies like this even pay a dividend?

The universe has shrunk to three companies.

You have heard of two of them: AAPL and QCOR. The third one is OTCM, and while you may not have heard of it, if you're an investor, it sits right under your nose.

OTCM is a financial services company that enables companies to list on the over the counter (OTC) market, brokers / dealers to make quotes on the OTC market and investors to get information on the OTC market. Also called the "bulletin board" market or traditionally the "pink sheet" market, the OTC maret is a decentralized marketplace where quotes and trades are negotiated between broker / dealers.

In the minds of many institutional investors, the BB / OTC market is viewed as a backwater market of mis-priced pink sheets. As in Star Wars' Mos Eisley, it is viewed as "a wretched hive of scum and villainy."

To carry that analogy a bit further, OTCM is "The Cantina" at Mos Eisely. That is the place where pilots and traders meet, and where Luke and Obie Wan meet Han Solo. Let me emphasize. OTMC is "THE" cantina. According to its annual report, since 2009, "our share of the quotes of securities on our marketplaces has risen from 74% to over 99%."

If you want to quote, trade or know about unlisted securities, the OTCM trading system is the only show in town.

The company actually offers three primary services ...

Issuer services (26% of 2013 revs) >> provides companies that want to be public but don't met the NASDAQ, NYSE or FINRA thresholds the ability to trade as a public company
Trading services (32%) >> allows broker / dealers to access quotes and trade unlisted securities, via its electronic trading platform ("OTC Link ATS")
Market data services (42%) >> provides news, quotes, data and statistics to Bloomberg, Thomson and other agencies that consolidate and report financial information

... and a fourth "Corporate Services" that I view as ancillary to issuer services that basically upsells outsourced IR, reporting and communications functions to its listed clients.

This company is on track to do $36M revenues and $12M EBITDA in 2014, implying annual growth of 7% and 20% for the year. A price increase in the company's "Market Data Services" should accelerate revenue and profit growth in 2014 and 2015. While the company is investing in its technology, it still throws off cash and pays a dividend. It is a scaleable business.

It is also an "owner / operator" business. Decisions are made by a principal or owner, as opposed to an agent or hired manager. The emphasis is on creating long term value and long term rewards not a short term mentality of a hired manager. And the CEO, not surprisingly, is the largest shareholder. [As a side note, there are two classes of securities; the bulk are Class A but there are 130,000 Class C shares that convert at $19.62 / share to Class A shares. There are no other classes of equity in the capital structure]. 

The company has no debt and $1.60 / share in net cash. And despite being a growth company with a scaleable business, it is trading at only 9x EV / EBITDA (using annualized 1Q EBITDA). And finally, there is - at latest check - no institutional ownership.

The biggest risk to the company - it would obviate its entire MO - is FINRA QCF, which proposes to "create a Quotation Consolidation Facility (“QCF”) for OTC Equity Securities for regulatory and transparency purposes that would serve as a data consolidator for all quote data in the over-the-counter equity market; (2) delete the FINRA Rule 6500 Series, which governs the operation of the OTC Bulletin Board Service (“OTCBB”); and (3) modify the position charge from $6.00/security/month to $4.00/security/month." 

http://www.sec.gov/rules/sro/finra/2009/34-60999.pdf

The company will fight this tooth and nail. I am an owner and will share more as time permits.

Sunday, July 13, 2014

The "everything bubble" - except in labor and wages - is investable not a solid foundation to build on

Seen some recent surprise lately in the financial press that the consumer economy isn't growing so fast - perhaps even shrinking - and companies are cutting back production globally. Central bankers seem surprised by rising asset prices. Even the NYT got into act with a recent opinion "Welcome to the Everything Boom, or Maybe the Everything Bubble."

http://www.nytimes.com/2014/07/08/upshot/welcome-to-the-everything-boom-or-maybe-the-everything-bubble.html

The article unfortunately neglects to highlight the one asset not in a boom or bubble. That asset is labor.

Six years into the recovery from the great recession, employment levels still remain far below precrisis level when looking at various participation rates. Our foundation remains shaky.

None of this is seems exceptionally surprising (or newsworthy). Low interest rates incentive speculation and speculation causes asset prices to rise. From the perspective of a patient investor, at this stage of the recovery, the hint of rising rates is leading to increased industry consolidation at high multiples using inflated assets like equity and still cheap debt. Hooray for asset holders!

But what about the non-capital owners?

Savers and marginalized workers - especially the young and indebted - have not participated in this recovery. That's not necessarily unique. It took 10 years for post-depression employment levels to return to pre-depression levels according to a 2012 essay from the Richmond Fed ...

https://www.richmondfed.org/publications/research/economic_brief/2012/pdf/eb_12-11.pdf

... and we should expect a long slog until a solid foundation now.

The investor in me remains bullish about opportunities to invest in companies. But until we start to incentive savings and invest instead in variable costs like labor (and maybe do away with the depreciation tax shield) the consumer economy - the entire economy - will remain driven by speculation in asset prices. It is a very investable theme but it is not the recipe for a stable economic foundation to build on.

Tuesday, June 24, 2014

OLED: my gut says overlooked value but i'm bumping up against my patent competency

Here is a company that has compounded shareholder equity by 95% & 45% annually over the last 3 & 5 years with little debt, little dilution and incremental EBITDA margins in the 50% range. In short, it has grown its assets materially faster than its liabilities, but the stock has generally traded sideways for the last two years and down from the initial euphoria of "the next big thing". This "next big thing" is a way to generate light and displays - including but not exclusively televisions - more efficiently and with less power while still improving visibility.
The company is universal display and the ticker is OLED, which stands for organic light emitting diode

The company does not manufacture but merely develops and licenses new technology related to this "next big thing." "We generate revenues primarily by licensing our OLED technologies and selling our proprietary OLED materials to display and lighting product manufacturers."
So this is an opportunity to own intellectual capital of the "next big thing" with little required incremental capital. An R&D play of sorts. In theory at least; shareholders have not been rewarded of late as high hopes seem to have long ago given way to a more cautious and even a negative outlook; shares short represent 30% of the float. 
The caution and fear is the residue of a few things, primarily ...

- revenue concentration. Samsung Display represents 60% of revenues under a technology license that expires in 2017
- manufacturing problems. said client is having difficulty manufacturing large panels using the technology and is therefore
- market lag. LG, which is using a different technology for its OLED televisions, has been quicker to get to market than Universal Display technology users.
- fear of obsoleseence. it would be a severe headwind to the company and its value if they are not on the cutting edge of "the next big thing" with a marketable and producable technology.

... On the face of it, I suggest that too much emphasis is placed on the success or failures of the television panel business - the failure of which has been well reported - but overlooks opportunities for solid state general lighting. case in point, the general lighting market for example is estimated by McKinsey at ~$70B poised to grow to $100B in 2020. backlighting is a fraction of this.

http://www.ledsmagazine.com/articles/2011/08/mckinsey-releases-lighting-market-report.html

as I've dug a little into this, I'm faced with a problem of capital allocation. In this case, the capital is my time and the problem, for me, is a lack of resources:

- I don't know enough about the patent market to understand who owns what patents and what they're worth

- The opportunity cost of learning the patent is high. I think I can generate better bang for my buck sticking to my knitting at the moment

- I'm not a physicist. I'm sure I can find articles that would explain some of the technology and the probable outcomes, but it would take a long time to really understand this.

... in short, I'm bumping up against the edge of my competency, and I don't like to invest there.

So while my gut tells me the market is overly bearish on single items like the Samsung manufacturing issues and overlooking potential long term value in lighting, I need to take a pass.

Where the rubber meets the road in this business is where fundamental due diligence and analysis can test the gut's hypothesis. without this capability, I have to leave this discussion on hold for another day.

-END-


What is in current assets? what is up with the Plextronics convertible note? how do they value their patents? 


Licenses: We have licensed our OLED technologies and patents to several manufacturers for use in commercial products. In July 2012, Samsung Mobile Display Co. Ltd. (SMD) merged with Samsung Display Co., Ltd. (SDC). Following the merger, all agreements between us and SMD were assigned to SDC, and SDC is obligated to honor all pre-existing agreements made between us and SMD. In 2011, we entered into a new license agreement with SDC for its manufacture of active matrix OLED (AMOLED) display products, which agreement superseded our prior license agreement with SDC. We also have license agreements with Lumiotec, Inc. (Lumiotec), Pioneer Corporation (Pioneer) and Kaneka Corporation (Kaneka) for the manufacture of OLED lighting products, as well as a collaborative arrangement with Moser Baer Technologies, Inc. (Moser Baer) to support its development and manufacture of OLED lighting products. Additionally, we have license agreements with Showa Denko K.K. (Showa Denko) for its manufacture of OLED lighting products by solution processing methods (2009), Konica Minolta Holdings, Inc. (Konica Minolta) for its manufacture of OLED lighting products (2008) and DuPont Displays for its manufacture of solution-processed OLED display products using proprietary OLED materials obtained through us (2002).

LG seems to use another technology: May 13, 2013 (Herndon, VA) – Global OLED Technology LLC (“GOT”) and LG Display Co.Ltd. (“LGD”) have signed a patent licensing agreement that gives LGD access to GOT’s patent portfolio, including intellectual property related to Active Matrix Organic Light Emitting Diode (“AMOLED”) display technology.

PPG appears to be a contract manufacturer: PPG Industries currently manufactures our proprietary emitter materials for us, which we then qualify and resell to OLED product manufacturers. We record revenues based on our sales of these materials to OLED product manufacturers. This allows us to maintain close technical and business relationships with the OLED product manufacturers purchasing our proprietary materials, which in turn further supports our technology licensing business. >> results in low capital overhead 

PPG has been a great stock; what's driving it? 

PPG 2013 annual report: "Opened a world-class organic light-emitting diode (OLED) materials production facility at PPG’s Barberton, Ohio, plant, expanding production capabilities for Universal Display’s Universal PHOLED® materials."

Press release regarding the opening of the facility 
http://www.ppg.com/en/newsroom/news/Pages/20131122A.aspx

Crains Ohio on the $9M plant expansion and incremental 10 employees (Nov '13)
http://www.crainscleveland.com/article/20131122/FREE/131129909/ppg-industries-invests-9-million-in-barberton-plant-expansion

customer concentration: We receive a majority of our revenues from customers that are domiciled outside of the United States, and our business is heavily dependent on our relationships with these customers. In particular, one of our key customers located in the Asia-Pacific region, SDC, accounted for more than 60% of our consolidated revenues for 2013. Substantially all revenue derived from our customers is denominated in U.S. dollars.[SDC = In July 2012, Samsung Mobile Display Co. Ltd. (SMD) merged with Samsung Display Co., Ltd. (SDC). Following the merger, all agreements between us and SMD were assigned to SDC, and SDC is obligated to honor all pre-existing agreements made between us and SMD. ]


SDC represetns 60% of revenues but ... 
SDC
We have been working with SDC and providing our next generation PHOLED materials to SDC for evaluation since 2001. In 2011, we entered into a patent license agreement with SDC for its manufacture and sale of AMOLED display products which has a term that extends through December 31, 2017. We also supply our proprietary PHOLED materials to SDC for its use in manufacturing licensed products. Under a separate supplemental agreement, SDC has agreed to purchase a minimum amount of phosphorescent emitter material from us for the manufacture of licensed products. This minimum purchase commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement, which is concurrent with the term of the license agreement.



PHOLED = phosphorescent OLED
FOLED = flexible OLED

types of manufacturing: UniversalP2OLED® Printable Phosphorescent OLEDs
The standard approach for manufacturing a small molecule OLED, including a PHOLED, is based on a vacuum thermal evaporation, or VTE, process. With a VTE process, the thin layers of organic material in an OLED are deposited in a high-vacuum environment. An alternate approach for manufacturing a small molecule OLED involves solution processing of the various organic materials in an OLED using techniques such as spin coating or inkjet printing onto the substrate. Solution-processing methods, and inkjet printing in particular, have the potential to be lower cost approaches to OLED manufacturing and scalable to large area displays. For several years, we worked on P2OLEDs under joint development agreements with Seiko Epson Corporation. We are continuing to develop novel P2OLED materials and device architectures for evaluation by OLED manufacturers, and to collaborate with other material manufacturers who are working on host, and other OLED materials, to match our P2OLED emitters.
OVJP® Organic Vapor Jet Printing
OLEDs can be manufactured using other processes as well, including OVJP. As a direct printing technique, OVJP technology has the potential to offer high deposition rates for any size or shaped OLED. In addition, OVJP technology reduces OLED material waste associated with use of a shadow mask (i.e., the waste of material that deposits on the shadow mask itself when fabricating an OLED). By comparison to inkjet printing, an OVJP process does not use solvents and therefore the OLED materials utilized are not limited by their viscosity or solvent solubility. OVJP also avoids generation of solvent wastes and eliminates the additional step of removing residual solvent from the OLED device. We have installed a prototype OVJP tool at our Ewing, New Jersey facility, and we continue to collaborate on OVJP technology development with Professor Forrest of Michigan.
OVPD® Organic Vapor Phase Deposition
Another approach for manufacturing a small molecule OLED is based on OVPD. The OVPD process utilizes a carrier gas, such as nitrogen, in a hot walled reactor in a low pressure environment to deposit the layers of organic material in an OLED. The OVPD process may offer advantages over the VTE process or solution processing methods through more efficient materials utilization and enhanced deposition control. We have licensed Aixtron AG, a leading manufacturer of metal-organic chemical vapor deposition equipment, to develop and qualify equipment for the fabrication of OLED displays utilizing the OVPD process.
TOLED Transparent OLEDs
We have developed a technology for the fabrication of OLEDs that have transparent cathodes. Conventional OLEDs use a reflective metal cathode and a transparent anode. In contrast, TOLEDs use a transparent cathode and either a transparent, reflective or opaque metal anode. TOLEDs utilizing transparent cathodes and reflective metal anodes are known as “top-emission” OLEDs. In a “top-emission” AMOLED, light is emitted without having to travel through much of the device electronics where a significant portion of the usable light is lost. This results in OLED displays having image qualities and lifetimes superior to those of conventional AMOLEDs. TOLEDs utilizing transparent cathodes and transparent anodes may also be useful in novel flat panel display applications requiring semi-transparency or transparency, such as graphical displays in automotive windshields.

Tuesday, June 17, 2014

ESWW: Financial information to follow up my prior post

I previously wrote about Environmental Services Worldwide. To summarize the attributes that make it appropriate for a patient investor ... 

very small share count, just 125,000 shares outstanding 
very small market cap, less than $10M depending on bid / ask 
strong balance sheet, about 1/3rd of the market cap is net cash 
low valuation, less 1x EV / EBITDA
growing sales / EBITDA / margins 
a real industrial business, manufacturing diesel particulate filters with verification from California Air Resources Board 
shareholders and board dominated by sophisticated institutional investors from Apollo Group (the PE) and Apollo Investment Management (the BDC)

I don't want to overlook the real risk of dilution here; the company's outstanding debt plus recent subscription rights plan can convert to an additional 153,000 shares of stock valued at up to $80 / share when it comes due in 2018. This would essentially double the share count. But even assuming full dilution, and the resulting doubling of valuation, it still remains attractive. Furthermore, since the conversion price maxes out at $80 / share, buying below that aligns shareholders with debtholders interests. 

Here are the company's quarterly financials, courtesy of FactSet: 


Monday, June 16, 2014

my urge to vomit when i watch CNBC

listen to any radio station and every 10-15 minutes you'll hear "the market/S&P/Dow/futures are up/down/flat today." watch TV and the so called '"business news" will report the same. CNBC and Bloomberg were created to track every moment of the market day.

But reporting every 15 minutes on the Dow is as useful for understanding the economy as reporting net deaths and births every 15 minutes is useful for its picture of our population. it's just a lot of noise.

how is it that the direction of an arbitrary and curated market index like the dow or S&P has become such an overwhelming part of our daily conversation?

how is it that this has all become so pervasive yet remains so meaningless? i understand the media's need for soundbites, but so many datapoints can be packaged that are more relevant indicators to the economy ...

- weekly gasoline supplied
- monthly vehicle miles traveled
- average weekly price per click
- weekly rail traffic
- volume or breadth of the market
- number or percentage of stocks hitting new 52-week highs / lows

... the list can be quite creative and endless.

from the media's perspective "the market" is a great way to engage our fear or elation, which sells ads, but there's a harm with equating the market with the economy. people actually mistake one with the other.

when daily changes in the dow or S&P are equated with the economy people can never appreciate the important and occasionally complex issues that impact their jobs, their companies and their household budgets.

as a patient investor, my concern with the market is only relevant for the opportunities it creates to acquire portions of business at a discount to their underlying values. but it should worry everyone with an interest in the long term health of the country that we perpetuate ignorance every 15 minutes of the day.

Thursday, June 12, 2014

ESWW: A $7M Mkt Co Trading at 1x EBITDA Substantially Growing Revs and EBITDA

On a dreary overcast day in NY, there's nothing like a new stock idea to get me excited. Found this company ...

http://finance.yahoo.com/q?s=esww

... while running a screen for small cap companies growing revenues and margins and with net cash representing a significant portion of MktCap.

Environmental Solutions Worldwide (ticker ESWW) makes emissions control retrofits for medium and heavy duty diesel (MHDD) trucks, both on and off-road.

The overall market for on/off road trucks benefits from increased pollution control regulations by state and federal EPA. The trend towards increased pollution control regulations are well documented here ...

http://www.arb.ca.gov/msprog/mailouts/msc1325/msc1325.pdf
http://www.dieselnet.com/news/2013/08meca.php
http://www.dieselnet.com/standards/us/ld_t3.php

The company has a market cap of roughly $7M.
In 2013 it did $17.5M in sales and was breakeven.
In 1Q14 it did $7M in sales and $1.9M in EBITDA.

It trades at 0.3x annual sales, 1x EBITDA and has a pedigreed board of directors including what appears to be two of Leon Black's kids. Unless he's Cronos-like who ate his children, why would he saddle his kids with a crappy company?

The Apollo connection isn't just in the board of directors but how the company operates. Much of the growth in sales corresponds to its "stalking horse" acquisition of Cleaire out of bankruptcy auction in 2013 for $1.4M.

There are only 125,000 shares outstanding (yes, thousand) and the company is authorized to issue up to 250M, which simply reflects the recent 1:2,000 reverse stock split and re-listing without terminating shares.

Also, the bulk of the $2.5M in l/t debt is in the form of convertible notes that would be dilutive. But the opportunities I see in buying a profitable cash flow positive company in a regulated growth market offsets my fears of dilution to shareholders, especially since it seems at least that everyone's goals are aligned towards long term growth and profitability.

I haven't nearly done as much work on this as a normally do and I will write more on this later, but the world cup is starting and I need to prepare dinner for my staving kids. Such are the travails of the outofworkanalyst.

Disclosure: I own 200 shares that I acquired today.

Sunday, February 16, 2014

URS and the Phillies: Lessons in Delusion

I'm thinking about the difference between hope and delusion while while reading an article from the Phillies spring training camp. 

The GM Ruben Amarao Jr who signed Ryan Howard to a five year $125M contract in 2010 believes Howard - 34, injured and under performing since - is ready to prove his worth. In the last TWO seasons, Howard has played in only 151 games, hitting .244, with 25 home runs and 99 RBIs Howard, incidentally, agrees that he's turned the corner. 

I love spring training and since it starts in winter, I'm sure its name refers to the eternal springing of hope that an injured veteran or 37 year old pitcher can "return to form". 

LIke most investors, I love hope but I hate delusional thinking. I especially hate that Amaro who has laden the Phillies with awful contracts still has a job giving out awful contracts. This is just sports though. I have an emotional attachment to my childhood team but nothing more at stake. 

In the business world however, the difference b/t hope and delusion can be expensive. Every deal requires a bit of hope but a company that consistently overpays for acquisitions often at market peaks and with little reflection on outcomes suffers from delusional thinking. Price, timing and intellectual honesty separates the two. 

And that gets me thinking about URS Corp. 

URS is an engineering & construction services company, one of about 8 large US companies that offers diversified global industrial and E&C services, similar to but smaller than FLR, KBR and JEC. It typically trades at a discount to its peer group, due to its limited energy exposure, over exposure to federal funded projects and partially to its penchant for destructive acquisitions. 

I was once a sell-side analyst covering the E&C industry and I attended an analyst meeting at URS' offices in the TransAmerica building to discuss its "transformative acquisition" of Flint Energy Svcs, a $1.3B deal meant to redress both its limited energy exposure and penchant for destructive acquisitions. At the time of the deal, URS had a $3.1B market cap and $450M in net debt. 

The meeting was hosted by its brilliant, gracious but quixotic CEO of the last 25-years, Martin Koffel, who in my memory made more "transformative acquisitions" in the E&C industry than any other company. 

Toward the end of the meeting, Koffel solicted questions; "anything you've ever wanted to ask". So I asked what he had learned from the mistakes of the 2007 acquisition of Washington Group. That "transformative acquisition" for $3.1B in cash and stock moved URS into the construction services and nuclear power markets. At the time of the deal, URS had a $3B market cap company with little debt. 

Koffel wanted to know what mistakes I referred to. I rattled off a few about its destruction of shareholder value. He pointed to the opportunities for growth enabled by the acquisition. (Imagine - he'd asked - where the company would be if they hadn't made the acquisition.) 

I'd made a point that these acquisitions were not accretive to shareholders. The most respected analyst in the space (the "II ranked" one) and an exceptionally nice person as well, thanked me for asking tough questions. It made them all look better, he said, though added that I clearly did not belong on the sell side. 

And now today, I'm no longer on the sell side, investing on my own, and URS has a $3.25B market cap (+1% CAGR from the pre WGI deal) and $1.7B in net debt according to Yahoo!. The stock materially sold off last week after pre-announcing earnings citing execution issues in the Flint Energy Services business. Flint's old CEO is fired and the company is reorganizing the division. The stock has vastly underperformed the S&P over the last 52 weeks, by 20% pts. 

That's a pretty severe cost of delusion. 

I'm sure someone will step in and buy the stock on the 12% free cash flow yield, but it's been cheaper. As a long-term investor I look for great management and while the company is a free cash flow generator, as long as its squandered on delusion it has no value for me.