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

Monday, March 30, 2015

$ESWW going dark and the stock "into the vault"

ESWW has announced it will deregister its securities and stop filing financial statements. The announcement makes it pretty clear they will not be filing future financial statements.

"Following deregistration, the Company does not expect to publish periodic financial information or furnish such information to its stockholders except as may be required by applicable laws."

http://www.sec.gov/Archives/edgar/data/1082278/000128634515000022/exhibit99_1.htm

However, as I understand it, FL corporations are required to make annual reports accessible to shareholders so I expect to be updated at least once / year. In the meantime this undervalued asset goes into the vault.

Thursday, March 26, 2015

$EVI: Thoughts on mgmt changes (w/ $WSO )

I wrote a bit on EVI back in February ... 

http://thepatientinvestors.blogspot.com/2015/02/the-investing-side-of-personal.html

... then it was a tiny $16M market cap / $14.6M EV* co that distributes commercial laundry and dry cleaning equipment. Now it's at $19M mkt cap / $17M EV* doing the same thing. If you saw Breaking Bad you know what a commercial laundromat looks like, minus the meth lab in the basement. (*In calculating EV, I deduct customer deposits from cash b/c that's really a form of working capital.)

The primary business is distributing commercial laundry equipment through its wholly owned subsidiary Steiner-Atlantic ... 

http://www.steineratlantic.com/

... Michael Steiner was the CEO succeeding his father Bill, who founded the business in 1959. Here's Bill's obit >> http://goo.gl/g3mfs8 << 

It is a very simple and understandable business run well. There are a few tidbits some investors complained about on the investor blogs, such as related party transactions, as the company leases space from the Steiners, and a prior attempted takeunder, but I don't feel those are material today. I've learned over the years there are all kinds of gradations of issues and nothing is simply black & white. (I learned my lesson after I was convinced not to buy MA at the IPO b/c of a threatened European lawsuit. Ugh). 

And like the business itself, my reasons for buying it were simple. It had been run by the Steiner family for +50 yrs and I was reasonably certain that their MO up to that point would continue. The balance sheet was solid. The business, while cyclical, generated cash, and when it did, they returned it to shareholders via a dividend. There was no debt. Growing topline and margins and with that growing returns that had expanded post recession from single digits to 13% ROA and 32% ROA in FY14. In the +5 yrs I'd modeled, there was no equity dilution. The valuation was below the median of its last 10 quarters. Plus, with EV adjusted for the growing EBITDA margin, the stock was (and still is) cheaper per unit of margin than in recent quarters. 

In short, even while other investors seemed to have lost interest, I felt I'd found a small lockbox of compounding cash and I was happy to own part of it, indefinitely.

And then earlier this month, something changed. 

3/9/15: "EnviroStar, Inc. (the “Company”) (NYSE MKT:EVI) today reported that Symmetric Capital LLC, a Florida limited liability company, controlled by Henry Nahmad has acquired a majority of Michael Steiner’s, President and Chief Executive Officer of the Company and Robert Steiner’s, his brother a recognized artist residing in San Francisco, shares of common stock in EnviroStar Inc. After the transaction, Symmetric Capital will own approximately 40.4% of the outstanding shares of the Company, Michael Steiner will retain approximately 8.5% of the outstanding shares, and Robert Steiner will retain approximately 1.4% of the outstanding shares. Additionally, Mr. Nahmad and Michael Steiner and Robert Steiner entered into a stockholders agreement.

Mr. Nahmad has become a Director and Chairman of the Board, and Chief Executive Officer and President of the Company. Mr. Steiner has become Executive Vice President and Chief Operating Officer of the Company, will remain on the Board of Directors, and will remain the President and Chief Executive Officer of Steiner Atlantic Corp., and all of the Company’s subsidiaries. In addition, the Board of Directors will be increased to seven members, with one member being appointed by Mr. Nahmad."

I caught the PR minutes before my off-month visit to Costco with a friend, so I was shopping stressed and searching for whatever I could find on this new CEO + Chairman + Majority Shareholder between pallets of tomato sauce. This did not feel like a welcome surprise. A big part of thesis was gone. I had to find out, why did the Steiners sell and who is this new guy?!? 

In the three weeks since, having done a bit of digging (management due diligence is a key part of my investment process for small cap stocks) my fears have been quelled and my interest has grown. And while there remain a lot of unknowns and uncertainties, I believe at 5x EBITDA, this could now be an even more exceptional opportunity for long term compounding. 

First, why the sale? I believe it is simply a matter of estate mgmt following the death of the family matriarch in 2014 >> http://goo.gl/BMigsp << I was once many years ago an obituary writer so I do revere these things and it stings especially when a name is mispelled - as it appears it is - on the Miami Herald website. And to think I labored as an obit writer under the direction of a former Miami Herald editor, the great Ron King. Whatever was available on this desk that had enough heft to dislodge an eye would be thrown at me were I to make that same mistake. 

As for the the new guy running the business, I draw your attention to the history of Watsco - $WSO - a $4B market cap HVAC/R equipment distributor ... 

http://en.wikipedia.org/wiki/Watsco

... that was founded by the Wagner family and acquired in 1972 by Albert and Aaron Nahmad (Henry's father & uncle). One of the Wagner's subsequently sat on the board of EVI and connected the younger Nahmad to the younger Steiner. 

You get a picture, however incomplete, where business pedigree, family mentorship, available capital and a rollup playbook meets a well run under-levered business in a fragmented industry. It does not take a lot of imagination to see where this can go. 

But investing is not based solely on imagination, though let's be honest, a good part of it is. I filled in a few holes speaking with former colleagues of the new CEO. The ubiquity of responses was comforting: "Great guy. Great kid. Smart. Great negotiator. Good family. Did deals. Hard worker. He wants to be an owner. Very ambitious. Very smart. You'll do well with him. Good work habits. Enjoyed working with him. Knows business very well. etc." 

My understanding is that at the last job, there was an expectation that he would grow then acquire the business but at the end there was a difference on price. I would imagine this disappointment stung, but now it is our gain, for we shareholders of this small public co, b/c it seems like we just got a young, smart, ambitious CEO running our company. 

And clearly he's smart, b/c he found the same investment we all like. 

I do own the stock. I expect I will buy more. My near term concerns are primarily about the impact of the exchange rate and also, I would like to see something from the new CEO about his growth goals and expectations but that might have to wait until the next shareholder meeting in Nov 2015.  

Monday, March 23, 2015

a brief comment on the Asian Infrastructure Investment Bank + $ACM

Back in 2010, Xi Jinping, then the VP to Hu Jintao, gave the keynote address to the World Investment Forum, the importance of which - overlooked and ignored at the time - was its elaboration on Chinese investments in overseas infrastructure.

The speech was the initial indication of where the future premier would emphasize his goals and strategies for Chinese growth.

http://unctad-worldinvestmentforum.org/wp-content/uploads/2014/05/WIF-2010_Statement_Jinping_Vice_President_of_China.pdf

Back then, the speech stuck in my mind for awhile, and re-emerged two months later after Chris Christie cancelled the ARC (Access to the Region's Core) project, which would have added a new rail tunnel b/t NJ and NYC.

I actually wrote Christie a letter citing the speech and recommending that the Chinese pay for the tunnel, describing it as a win across the board; for the region, for his national aspirations, for labor and even for our national pride b/c when the project went over budget (as they all do) it would be a chance to really screw them. It was half serious, half tongue in cheek. Had I known he was a Cowboy's fan it would also have been half hate mail.

Now, I'm again reminded about the speech as global interest grows in the Asian Infrastructure Investment Bank, a reflection of President Xinping's long interest in promoting Chinese investment in global infrastructure.

Some European countries + the IMF have just signed onto the bank. The US objects because the bank hasn't done enough to ensure fair labor practices, which is probably the right thing to do. The labor component is certainly a solvable problem and I hope it is resolved so we sign onto it.

I have a narrow interest in the AIIB as a recent investor in ACM, which has a lot of exposure to Asian infrastructure. I haven't mentioned ACM here but on 2/13/15, I wrote the following as a quick idea on sumzero:

"A lot of reasons to hate this company - too many to name here - plus forced selling creates a "margin of safety" around a business that generates prodigious cash under the current CFO."

I didn't write about it here b/c I know the company very well - I covered it for years - and there was no process of discovery for me, which is what I usually like to write about. But there was a brief moment of discovery that I'll mention here, and it had to do with margin of safety.

Late 2014, with the stock in the mid-$30's, I'd talked with a bull who tried to convince me it was a good investment. I scoffed. These guys get paid on EBITDA not cash flow, I said. They'd buy EBITDA and get paid and shareholders got screwed. But that was old news; apparently they'd changed comp structure. So I dug in. The most recent proxy says 35% of ST comp is OCF and 50% of LT comp is FCF. That's new. Before 2012 cash flow was an afterthought but since 2012, cash flow improved dramatically. Amazing how incentives work.

But still, so much to hate. E&C deals always blow up. ACM mgmt has never delivered organic rev growth or promised EBITDA margin expansion. They are destroyers of shareholder equity, obliterators of value. Etc.  

So when I saw the stock in the mid-$20's it was a sad shock. URS once a proud company was now just l/t debt on the balance sheet. The market gave zero value to the combined companies and I was in disbelief.

I weighed all the reasons why I hated the company, which were many, and on the other side, 10x EBITDA against an $800M EBITDA forecast (mine, not the street's). That's a pretty normal valuation. Hold it steady and every $1 in debt paydown is +$1 to equity holders. Plus, a 25% FCF yield. Insane. Then on top of that you had URS stub holders as forced sellers.

It finally dawned on me that all the reasons I hated ACM explained the inexpensive value.

I contacted a large l/t shareholder - a value investor - just to check my pulse and share my revelation: "So this is what you mean when you talk about margin of safety?" It was a bit of a revelation for me.

The thing is, at these levels, ACM  doesn't need growth. It doesn't need margin expansion. Just pay down debt, and there's $4B of it. That's a lot of upside. And with money from the AIIB supporting large projects, it helps my thesis.

But where the AIIB really resonates with me is as a counterpoint to recent criticism among parts of the GOP regarding the US Export-Import Bank, which I presume will be a shrill voice in the upcoming primaries. How different are the directions of our countries when China seeks to promote its growth and power through capital allocation while certain leaders elected officials in the US seek to retract the same?