Category: Columns

Hudson Technologies delays 10-Q filing due to covenant negotiations. Disclosure seems positive, all things considered $HDSN

After close on Friday, Hudson filed a late filing notification with the following statement:

Hudson Technologies, Inc. (the “Company”) was not in compliance with (i) the total leverage ratio covenant, calculated as of June 30, 2019, set forth in its Term Loan Credit and Security Agreement, as amended, with U.S. Bank National Association, as agent, and the term loan lenders (the “Term Loan”) and (ii) the minimum liquidity covenant under the Term Loan at July 31, 2019. The Company was also not in compliance with the minimum EBITDA covenant for the four quarters ended June 30, 2019 set forth in its Amended and Restated Revolving Credit and Security Agreement, as amended (the “Revolving Facility”), with PNC Bank, National Association, as administrative agent, collateral agent and lender, PNC Capital Markets LLC as lead arranger and sole bookrunner, and such other lenders thereunder.


The Company is currently seeking a waiver and/or amendment from its lenders under both the Term Loan and the Revolving Facility, which the Company is working to complete on or before August 14, 2019. As a result of the impact of foregoing discussions, the Company is not in a position to file its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (the “10-Q”) on a timely basis. The Company is working diligently to resolve these matters and management currently believes that the Company will be in a position to file the aforementioned 10-Q not later than August 14, 2019.

This should be relatively in line with market expectations, given Hudson is trading at ~$0.50 which implies the market is expecting bankruptcy.

Although Hudson will not comply with its covenants, I think it is relatively positive language that was posted. Clearly, PNC is negotiating with the company. This makes sense. Does PNC really want to take this tiny company to bankruptcy? If it did, it probably would only recover some of its par amount of debt and would own the re-org equity of the company, which would be highly illiquid. Alternatively, PNC can give some leeway, allow the company to continue operations, and hopefully realize a full recovery.

I take it as a positive that they’ll have an answer by Wednesday, August 14th. My base case is PNC will require some debt paydown or higher rate in exchange for relief, but we shall see. Net, net – I “PNC” the light…

Hudson also noted:

For the quarter ended June 30, 2019, the Company’s revenues were $56.0 million, a decrease of 3% compared to $57.8 million in the comparable 2018 period. The Company recorded lower of cost or net realizable value adjustments to its inventory of $9.2 million and $34.7 million during the second quarter of 2019 and 2018, respectively. Due in part to the impact of the inventory adjustments referenced above, the Company’s preliminary net loss for the second quarter of 2019 was $13.7 million, or ($0.32) per basic and diluted share, compared to a net loss of $30.6 million or ($0.72) per basic and diluted share in the second quarter of 2018.

The sales line is relatively in-line with my expectations. I was expecting ~flat sales, driven by 5% lower sales pricing, offset by higher volumes, but my guess is temperate weather reduced demand.

We know net loss is $13.7MM.  From this, we can bridge to what EBITDA likely was:

This seems less than ideal, but remember that PY was negative $2mm so all things considered, I guess we’ll call that improvement. It’s lower than my $5mm estimate, though. Hopefully the company drew down on inventory, which it still has $100mm in value of, to generate some cash and pay down debt. Recall the company repaid $30MM of debt in Q4 of last year, mainly driven by a release in W/C.

What will really matter is Q3 outlook. I presume pricing has not improved for refrigerants, but I also think Q2 was impacted negatively by weather (which was called out by Watsco and Lennox, among other building products names). If Hudson’s Q3 looks more favorable, perhaps PNC will be more lenient.

Deja Vu Part Deux: This Market Seems Eerily Similar to Recent Past $SPY $TLT $GLD $USO

“It’s like deja vu all over again” – Yogi Berra

With China letting the yuan slide and the U.S. labeling the country as a currency manipulator, it reminded me of something I’ve seen before. And not that long ago.

In my last post on this, I noted how similar this market felt to the 2015/2016 market. To briefly recap what I noted in that post:

  • Oil has tanked: Oil was $75 / bbl in last October and now is ~$54 / bbl today. That is nearly a 30% decline. It is also down ~8.5% in just the last five days.
  •  Earnings have been lackluster: While 76% of companies have beaten consensus estimates, they have been a number of earnings revisions lower and pre-released numbers that have guided down expected numbers. The blended earnings decline for the S&P so far has been -1%. If the rest of the market ends up being down, this will be the first time we’ve had 2 consecutive earnings declines since Q1’16 and Q2’16
  • People are concerned about China: This time it is a little different, but what hasn’t changed is that China is a black box and people are concerned this time that the tariffs are negatively impacting the economy there.
  • Interest rates plunged: Due to market concern and fear, the 10 year treasury hit 1.6% in early 2016. It is now at 1.7% after being at ~2.5% for the rest of the year. Notably, the S&P dividend yield also exceeds the treasury yield like it did back then.

Now, a new deja vu candidate has emerged. On Monday, China allowed its currency to dip to levels not seen in over a decade. But wait… Can anyone name when this headline came out?

The S&P declined 4% this day… So when did it come out? This news came out almost exactly 4 years ago in August 2015. Please read each of these articles and note how similar they sound to today:

The interesting thing about the devaluation concern now is that it is much less than the devaluation that occurred back then. It also continued to devalue against the US dollar throughout 2016, but people seemed less concerned:

Note: I nabbed this picture from the WSJ here

Should we prepare for a further sell-off? Or does last time teach us that this news was overblown? Did we narrowly skate by last time and this time is the real signal?

I tend to think that the market is most concerned about uncertainty, which causes this perpetual fear with China. It is a persistent unknown. Does it surprise me that a dominate export country is devaluing its currency (that was long pegged against the dollar) to entice more exports? No. Especially in light of the tariffs.

I think China clearly must be facing some pain, but the fact of the matter is that the US earns very little revenue from Chinese sales. We import from them, we don’t sell that much to them (in the context of earnings in the S&P, that is). I think further concern on China can and will eventually cause a real market correction, but I’ll likely be buying that dip based on US earnings likely being relatively resilient in that situation (outside of commodities, which could get crushed from lower infrastructure building in China).

Thoughts on Apple Given Tariff News $AAPL

AAPL reported Q2’19 earnings last week and they were pretty good. However, given the most recent tariff news, Apple’s stock has declined over 10% in two days. What is the market pricing in?

A simple way of expressing the markets new view is to say, “what is the change in stock price implying about EPS estimates?”

The price change in stock is therefore equal to the change in earnings estimates.

So the market is essentially pricing in a China impact of at least 11.7% to earnings. That could be from a 10% tariff or a retaliation against a US producer like Apple.

After skimming AAPL’s filings, I found that China represents ~20% of sales. Assuming this business is of similar margin to the whole company, that means that ~$10.8BN of net income comes from China, or $2.4 / share. Since the market is implying the earnings estimates need to come down by ~$1.5 / share, one could simply say that the market is implying 62% of AAPL’s China earnings are gone ($1.50 out of $2.40).

Obviously, it isn’t that simple (for example, the market could price in some slowdown in AAPL’s other regions due to a slowing global economy).

I will say though that this seems bold considering what Apple had said on its latest earnings call:

I sometimes like to do this math to gauge how realistic or unrealistic the market is being. Sometimes, like in the case of Bayer and the glyphosate liability, I think the market is pricing in sums that make no sense. Other times, it underestimates them.

Fortunately for Apple, they’ll be able to grow EPS in a lot of different environments due to their cash hoard. Here is a snapshot of their capitalization.

I think people often forget that Apple has a lot of long-term investments in marketable securities on its balance sheet. I would consider that cash for all intents and purposes because the company can (and does) sell some securities for attractive investments or to buy back stock.

Therefore, ~24% of Apple’s market cap is in cash right now. Let’s assume they use all that to buy back stock, but it comes at a premium. Let’s use ~30% premium which is around $250 / share.

At $250 / share, they can repurchase 842 million shares, which is a little less than 20% of the outstanding amount. If I assume net income is unchanged for 2020 (roughly $58BN), then EPS should go from $12.78 to $15.71. A 15x multiple on $15.71 is a $236 stock price, or 22% upside. A 17x multiple foots to 38% upside to $267. At 17x, this is ~1x above the S&Ps P/E multiple, but well deserved in my view given I think AAPL is an above-average company.

At this point, it seems like Apple is well positioned to either return capital to shareholders or invest cash for new projects. While others are concerned about the company and what lies ahead for its future, I think having so much cash at this point provides for a significant margin of safety.


Solid Q1’19 – Maintain Buy on Hostess Stock $TWNK

Hostess reported Q1’19 EBITDA of $49MM compared to $46MM of consensus and my $45MM estimate. Sales growth was the really strong point with 6.7% growth, beating consensus by 560bps.

This is honestly the best news for Hostess stock since the acquisition of Cloverhill. Recall, Hostess bought Cloverhill out of distress (but what I view is a great deal). Cloverhill was an operation with negative ~$20MM in EBITDA (and a bulk of its employees were undocumented workers), but still had strong brands. Hostess management figured they could turn the operation around and get it to $20-$25MM of EBITDA in a couple years from purchase. Since they paid $40MM for it, they essentially bought the asset for 2x EBITDA – in a market where food / consumer companies are going for well into the double digits.

Following the acquisition of Cloverhill, however, quarters optically looked very ugly since the company was negative EBITDA. Even if I didn’t mark it, you could probably guess when the business was acquired.

Now, with this print and clear improvement in Cloverhill (given margins are improving on a quarterly basis) I think Hostess will now start to be appreciated by investors.

For one, its becoming more clear that the Cloverhill deal has synergies.

Club was a terrific growth driver for us. We talked about when we acquired the Cloverhill business of not only did it give us a platform to expand into breakfast but it also gave us some access to certain customers and channels to be able to expand that.

We’ve leveraged that in club, not only for the Cloverhill and Big Tex brands but also to expand our Hostess branded business as well as we launched Dolly in club as well as across some other channels. So the innovation of taking that platform and spreading that across multiple channels

The cadence sounds good as well. With a solid beat here, we have to ask ourselves what the outlook is for the rest of the year. Management was pretty clear:

But more importantly, we did expect merchant — the breadth of the merchandising improvements including our largest customer still improve as the year went through. We expected it to get better as we came out of Q1. Across the board we’re seeing that and I expect that to continue and to accelerate as we go through the year.

Is Hostess stock still cheap?

I think it is. Despite Cloverhill pressuring the company’s margins in the short term, Hostess still has top-tier EBITDA margins in the food space. If Cloverhill is turned around as planned, this could step-up to high 20s again. But is that what consensus is expecting? Let’s look at the estimates:

This doesn’t add up to me. Hostess did $230MM of EBITDA in 2017 before it acquired Cloverhill. They said on the acquisition call they expected Cloverhill to contribute $20-$25MM in EBITDA by 2020 (which was re-iterated on the lastest call).

This would imply to me that Hostess should be more likely to do ~$250MM of EBITDA by 2020, well ahead of $222MM expected by Wall Street analysts. Now, there has been inflation across the board impacting food companies, but even if the company did $235MM, that is well ahead of street.

Despite too low of estimates, the multiple ascribed to Hostess is ALSO too low.

Hostess stock trades at nearly a 1x discount to where the median comps trade. If I were to use $235MM-$250MM, the company trades at 10.9x-10.2x 2020 EBITDA. This seems too cheap.

What do you think Hostess is worth?

The company has top tier margins, generates strong FCF, and has great brand value. I think the Cloverhill acquisition also shows management is smart with how they allocated investor’s capital.

Therefore, I think the company should trade for 12.5x-13.0x EBITDA. This would mean the company trades in-line with General Mills, a food giant that has been struggling with organic growth.

At the low end, I think there is ~20% upside over the next 12 months and ~30% upside in a bullish scenario. This seems like a solid return to me with relatively low risk compared to other investments I see today.

CorePoint Q1’19 Recap: Asset sales are the real story $CPLG

CorePoint reported Q1’19 EBITDA of $43MM compared to $40MM estimates and $37MM last year.

Net/net this was an OK result. Obviously, EBITDA beat expectations. RevPar was up 3% according to the company, which is ahead of their 0-2% growth guidance. Unfortunately,  though, excluding the hurricane-impacted hotels of last year RevPar would’ve been down ~1%. EBITDA improved due to these hotels coming back online, but that was to be expected.

April was also looking slightly weak due to oil related market which the company noted was softer than Q1’19 as well as an outage at their call center.

Fortunately, the outlook was also left largely unchanged. The company filed an 8-K that shows they are taking steps to lower G&A (reducing headcount which should save 7% of G&A or $1.5MM).

As I noted in my prior post, the real developing story, Core Point is looking to divest “non-core” hotel assets. They had conducted 2 sales at very attractive multiples when they initially announced this.

They also announced 3 more hotel sales. The hotels carried an average hotel RevPar that was 25% lower than the portfolio average and the average hotel EBITDA margin was 700bps below the portfolio average.

Therefore the implied valuation for these 15x at EBITDAre or 2.5x revenue multiple, per the company disclosure. This is a great result. Let’s take a look at what that means so far for the five hotels sold:

We know from this chart below that there is still a lot of wood left to chop.

Since the 76 non-core hotels were already excluding the 2 asset sales sold for $4.5MM, there are still 73 hotels left worth $132MM of sales and $11MM of EBITDA.

This is important because the sales proceeds / multiples thus far have come well in excess of where CPLG is trading. CPLG currently trades at 9.9x 2019 EBITDA… If it can continue to divest non-core assets at multiples above where it trades, this could be very incremental to the stock, as shown below:

More than likely, the company will probably sell these assets for 2.0x Sales as they move forward, meaning CPLG would be trading at 8.4x on a PF basis. If the stock were to trade at 10x, this would mean it is worth $18.7/share, or 35% upside.

That said, I think that would still be too cheap given multiple ways to look at it, whether it be cap rate, book value, EV/EBITDA, etc. CPLG is too cheap.  Imagine if CPLG just traded at book value… the stock would be worth $21/share.

It seems to me that the reported book value as well as the JP Morgan valuation is looking more and more accurate.

The company has also started to buy back some stock. Per the earnings call, “Our priority has been on paying down debt and opportunistically repurchasing our shares accretively at a discount to NAV.”