Category: Columns

Special Situation Follow up: Bayer Glyphosate Liability $BAYN

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I did a previous Bayer post back in 2019, as the the market seemed to be implying a massive liability for glyphosate. I know how tough it is to clink a link, but highly encourage readers to look at what the market was / is pricing in for Bayer’s liabilities. It made / makes little sense in comparison to other liabilities in the past and relative to what glyphosate is – a chemical which the EPA basically goes to the mat on saying it is safe.

Specifically, the EPA states:

  • No risks of concern to human health from current uses of glyphosate.
  • No indication that children are more sensitive to glyphosate
  • No evidence that glyphosate causes cancer in humans. And they add: EPA considered a significantly more extensive and relevant dataset than the International Agency on the Research for Cancer (IARC).
  • No indication that glyphosate is an endocrine disruptor

I mean, think about it. Glyphosate is the most widely used chemical out there and one of the most studied. I don’t think the government is some evil entity that would hide whether it caused cancer or not. Nor do I think they’d allow it to continue if there was any doubt.

It is highly concerning that a jury can say that a chemical causes cancer, when in fact the evidence shows it does not. That is a slippery ethical slope.

Since then, Bayer has won 3 other cases determining that glyphosate did not cause cancer. I guess in the future one state can say it does and another says it won’t? Hm.

Maybe not. The Supreme Court may hear Bayer’s case. Or they may not. But given this situation I discuss above, it seems like they should!

If Bayer’s case is heard, they could help resolve about 31,000 cases against it AND a huge overhang on the stock.

If Bayer’s case is NOT heard, I think we’re basically in the same situation where Bayer will slowly but surely have to prove its case one by one. That seems more priced in (dangerous words of course).

Bayer currently trades for 7.4x ’23 EBITDA – this is for a pharma and consumer health giant (that also owns Monsanto and legacy Bayer crop protection which is just 40% of EBITDA). Merck and Bristol Myers Squibb trade for around 10x ’23. Is the market implying Bayer’s crop protection biz is worth, like 4x? That is crazy. Especially for me who is someone who thinks the glyphosate liabilities are overblown. They actually announced they are selling a piece of the business for 12x. Hm, maybe just keep doing that?

Last, we have also seen creative ways for dealing with liabilities, like the talc liability and asbestos. To be clear, I think glyphosate is nothing like those. Those actually caused issues! But I am sure Bayer is running through the options to mitigate risk…

I could see 25-30% upside on Bayer from some sort of resolution and even then I don’t think it’d look expensive.

Stay tuned!

$KAR Gets (Less) Physical with $CVNA Asset Sale: I’ll Sell KAR Stock Too

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I wrote up KAR stock back in 2021 when investors were confusing secular issues (auctions are becoming more competitive with online presence) with cyclical ones (there just were no cars to sell!).

Now, KAR is selling it’s physical auction business to Carvana in a $2.2BN transaction ($1.6BN after–taxes). This is great compared to pre-sale market cap of $1.6BN (+$1.9BN of corp debt).

Interestingly, KAR says it will only lose about $100MM of EBITDA (KAR did $481MM in 2021). So they sold the physical auction business for about 22x.

 So Ryan, I believe, from a revenue standpoint, the revenue impact is approximately, I believe, $800 million in the current year. And Eric may correct me if I’m wrong. And the adjusted EBITDA impact in the current year are approximately $100 million. As I mentioned, that $100 million is a combination of 3 numbers, the EBITDA of the business, which is the significant majority of that number, I would say, by far. And then revenue from the commercial service agreement, which is a modest sum in the current year. And stranded costs, which is an even more modest sum in the current year, but obviously, some benefit, we think, over time there as well.

They’ll get about 50% of their EV by selling 25% of their EBITDA. Not bad!

The company has been trying to shift more online, acquiring several online auctions and attending podcasts and hosting an investor day highlighting their focus shift.

Here’s the thing: The core to my thesis was that I thought physical auctions were necessary AND a competitive advantage.

Reminder: I used to buy and sell used cars. I bought a couple lemons online and personally, I swore it off. There are simply too many moving parts on a car to capture it in a picture, especially  those that are coming from a lease.

When a vehicle comes off-lease, if the leaseholder and dealer do not purchase the vehicle, the captive finance company then owns it and sells it. Because finance companies do not have dealerships, they use the wholesale market to sells the cars back to the dealer network. Typically a vehicle will enter an OPENLANE closed online auction (only open to that OEM’s franchise dealer network), if it doesn’t sell there it will move to an OPENLANE open online auction (open to all of KAR’s registered dealer buyers), and if it doesn’t sell there it will be moved to/ sold at physical auction.

So why am I selling?

This sounds like KAR is keeping the great parts? Doesn’t the KAR stock look cheap now with all that cash?

Maybe, but I don’t want to own this anymore. It is against what I firmly believe the industry requires to move volume efficiently. So, so, so many cars actually end up going into physical auction. And I think having this integration is actually valuable. I don’t have the numbers on me, but the last two years are irrelevant anyway.

Online is less capital intensive (theoretically…), but it isn’t clear to me who the “winner” will be long-term. I worry about that. Clearly KAR has acquired several online platforms that weren’t around just a few years ago.

If OPENLANE wasn’t the obvious winner (i.e. they had to acquire other players to augment it), why would it be in the future?

I somewhat doubt that because of this, KAR stock should trade at a structurally higher multiple. Could be totally wrong.

Oh, and last thing, KAR has a pref that converts at 17.75, so share count is going up 29% (my math it goes from 124 to 159-160, could be wrong though). I knew this going in, but given all the moving parts, I am closing out here.

I have the pro forma KAR stock trading at ~9x PF EBITDA ($3bn market cap, $100MM net debt vs. $345MM of EBITDA). That screens somewhat cheap, but I’m not staying along.

Apollo Buying Tenneco $TEN – Highlights Value in Auto Suppliers

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Here’s something you don’t see everyday in efficient markets: A company being acquired for a 100% premium.

Tenneco is being acquired by Apollo private equity for 100% premium to yesterday’s close. It’s not a premium to is 30 day VWAP or the premium 90 days ago before a rumor of a sale came out. 100% overnight. Amazing.

Tenneco was trading at 3.8x 2022 EBITDA coming into today. Tenneco was pretty levered ($5BN of debt compared to $1.5BN of ’22e EBITDA is 3.4x levered for a business trading at 3.8x, so the equity was a stub). So it isn’t like this multiple is crazy.

Similar to many auto suppliers, they often look optically cheap, but in what I highlighted in my prior posts on suppliers, I actually think THEY ARE CHEAP driven by fundamentals and improvements in FCFs, etc. etc..

It gets better.

What does Tenneco do? They serve a lot of internal combustion engine (ICE) parts! Clean air products (for emissions), powertrain parts (pistons, spark plugs, seals and gaskets for engines).

Certainly interesting to see private equity sees value as well!

Earnings Check-in: I thought people liked it when companies invest for growth? $ABM

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ABM reported a fine Q3’21 – EBITDA increased 20% on a 14% increase in sales and was slightly ahead of expectations. However, the stock is down about 10% since reporting and was down >15% at one point.

Must be a terrible outlook, right?

Well, their EPS guide at midpoint was around consensus BUT only if you exclude costs related to their ELEVATE investment program. Otherwise EPS would be $2.67 at mid-point vs. $3.43.

ELEVATE expenses will be $72MM next year and between $150-$175MM over the next 4 years. About half of the ELEVATE spend will be digital transformation costs, 20% for growth and the rest for workforce and people capabilities.

But that investment seems well worth it.

In return, the company expects margins to exceed 7% (from 4% back in 2017 and 5% in 2019. High margin COVID clean-up work led margins to be 6-7% in 2020-21 which no one believes is sustainable).

So think better price optimization, better sales targeting across business lines, better software. Also more capable / productive labor management, which will be needed in a tight labor market. 

In addition, mgmt expects to acquire another $900MM in revenue (total of $2BN including the recent Able acquisition). That means 2025 revenue will exceed $9BN and EBITDA should exceed $630MM (from $375MM at end of 2020).

All in all, I’m a long-term investor and the company is investing for the long-term. I get the disappointment – maybe on some level this is an admission that the company has some real expenses to be competitive. At the same time, it’s not like expenses have to go up for revenue and EBITDA to be flat (that’s a real issue).

In my prior posts, I’ve noted how ABM is a compounder no one really talks about – they take cash flow from the main business and expand into others or grow their core. The company has solid exposure to warehousing, which will clearly be growing rapidly over the next 5 years with Amazon and Shopify.

As an aside, they discussed getting into more technical positions. Frankly, I know one business called Therma which does HVAC services, but for high-tech areas like labs and semiconductor fabs where HVAC truly is mission critical and limited providers can do it. I’d leap if they got this thing (currently owned by PE). Not really in their current wheelhouse, but not too far of a stretch either.

At the same time, ABM continues to look very cheap.


$ENTG buying $CCMP: Frankly a bit disappointed

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In my original post on Entegris stock, I mentioned “there actually is a second player as well I am reviewing, but haven’t gotten fully comfortable yet.” That player was CMC materials, or $CCMP. I have followed CCMP for many years but it was run somewhat like a “public” private equity fund. Unfortunately, those rarely work out unless you are a titan in Omaha.

CCMP had wood treatment businesses (which they are exiting), electronic chemical businesses, and then bought a business that reduces drag in oil and gas pipelines. There didn’t seem to be much overlap.

That said, I did think the semiconductor tailwinds would lift CCMP and it was optically cheaper than Entegris stock. I didn’t pull the trigger though and now CCMP is getting acquired for ~17.5x (historically traded around 10-11x) and it’s about a 35% premium. ENTG buying CCMP for $133/share in cash and 0.4506 ENTG shares, or ~$197.50/share total consideration (vs. $146/share the day before announcement). And even outside of this M&A take-out, I have been wrong to not pull the trigger on the name.

Entegris says this will complete their product offering, diversify them a bit, but offer a better package to their customers. It will help them reach their customers in more ways as architectures change, become more complex and manufacturers need to increase yield. It may also help them innovate to meet these challenges.

So why am I disappointed?

From my understanding, the etching and slurry chemicals, as well as the pads, that CCMP sells are much less complex and more competitive. The “secret sauce” isn’t that secret. DuPont is the competition here. So sure, the rising tide might lift all boats, but does Entegris actually need this?

In fact, it actually made me wonder if I am missing something in Entegris. Entegris previously tried to tie-up with Versum, but the the deal was shot down and Versum was taken out by Merck (which was odd too). Why is Entegris “desperate” to do a deal?

Let me be clear – this is paranoia on my front. Entegris has executed phenomenally, but file it under “things that make you go hmmmm.”

To sum it up, I have Entegris doing a deal that seems dilutive from a technology perspective and I have CCMP that was buying and O&G pipeline chemical business just a few years ago and now they are tying up??

Even the answer on the call left much to be desired:

ENTG commenting on CCMP acquisition rationale

I’m staying long $ENTG and think this is a positive, multi-decade story. That said – I understand why Entegris stock is down ~5.5% at the time of writing! The company will also be 4x levered at deal close. They should¬†sell some of the non-core assets within CCMP, but we will see. Whenever a company gets above 3.5x leverage in public markets, volatility follows. As readers know, I love good company / bad balance sheet set-ups. So we shall see!