Category: Columns

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!

Interesting Opportunity in “Series i bonds” – Government Rates Greater than 7%

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The WSJ wrote back in May 2021 of the “The Safe, High-Return Trade Hiding in Plain Sight“, which discussed Series I bonds.

Series I bonds are 30-year US treasury bonds that earns fixed interest with an adjustment to the rate to account for inflation (changes in CPI-U, semi-annually). However, they differ from TIPS in many ways. They are not marketable, they have a limit of $10,000 per person per calendar year, and taxes are due at maturity vs. on an ongoing basis. Oh, and Series I bonds interest rates cannot go below zero, unlike for TIPS. You have to buy them on an ancient looking website, though I will say the security guards looked up-to-date.

However, one issue for Series I bonds is the rate can go down if inflation cools. Right now, the “fixed” portion of interest is literally zero. So the interest is 100% made up of the inflation measures in CPI. So if CPI goes to 0%, there is potential the rate is 0%.

And if you redeem within the first 5 years, you lose the last 3 months of interest. So if you are like me, and think inflation statistics will move lower over time, then the rate you earn in a couple years may not be satisfactory.

At the time of writing, the WSJ wrote:

However, now the Series I bonds rate is much higher:

So if you held for 1 year, now the rate you’d earn would be more like 5.34%. Yes, that is “the catch”. But that is for a US government security! Literally no default risk. By comparison, look at the median corporate bond yields from 1 year+

In addition, while you can only invest $10,000 per person per year, we’re close to the end of the year, so I can stuff an extra $10,000 in there early next year. And my wife can do it. Kids can do it.

Normally I don’t think I’d write much about an “opportunity” like this but it definitely is interesting. If you’re one that thinks inflation will spin out of control, you probably are in some other “hedge” investment, but I like this as a modest hedge (though I will likely cash out early).

Personally, while I want to say I can constantly find equities that will beat this hurdle, it doesn’t seem terrible to me to have some portion of the portfolio in these I bonds. This certainly beats my cost of debt threshold on my mortgage!

Earnings Check-in: $STRT Some things you think are priced-in…. are not

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Strattec just reported FQ1’22 with sales of $100MM vs. $126MM PY and basically break-even on the net income line vs. $8MM PY. The stock is down ~7% on the news.

I am a bit surprised this wouldn’t be priced in more pre-earnings, but I get it: it is a microcap and actually seeing the poor results may be stark realization of what is going on.

As I mentioned in my first post,  as well as American Axle, investors are stepping out of the way of any of these names due to the semiconductor shortage that is causing auto OEMs to shutdown plants temporarily.

Here’s the company’s reasoning for the results and it is obvious:

Sales to Stellantis / Fiat Chrysler Automobiles (FCA) and General Motors Company in the current year quarter decreased over the same period in the prior year quarter due primarily to lower vehicle production volumes for which we supply components due to the continuing impact of the global semiconductor chip shortage.  Sales to the Ford Motor Company in the current quarter increased primarily due to the increased content on the F-150 pick-up truck for which we supply components. Tier 1 Customers and Commercial and Other OEM Customers were down in the current year quarter compared to the prior year quarter due to lower production vehicle volumes relating to the semiconductor chip shortage referenced above

Short-term, results will be ugly! Long-term, this bodes well for an elongated up cycle.

The reason why used car prices continue to make new highs is simply because people can’t get new cars. As new cars are continuously delayed, the existing fleet will continue to age, resulting in a large restocking cycle down the road of new cars. It isn’t that people don’t want cars – it is that they can’t get them. I’d much rather have that alternative than the latter.

Case in point, check out Lithia Motors inventory numbers lately and look how limited new vehicle inventory is (and used for that matter). They typically have 77 days supply of new cars, but instead now just have 24 days! 

Long-run, I still think Strattec stock is going for <3.5x normalized EBITDA, which is not too bad!