Tag: cheap stock

Forced Seller + 25% FCF Yield = Interesting Civeo Stock $CVEO

Reading Time: 4 minutes

Today will be a quick idea on Civeo. The bottom line is that CVEO stock trades at ~25% FCF yield, is only ~2.5x levered, and there is a “forced” seller I think is driving down the stock.

Ok – “forced” seller is kinda click bait. The company completed an acquisition a few years ago, giving the seller some stock as consideration. That seller is now blasting out nearly every day, which I get into below.

Background

Civeo provides hospitality services to commodity industries. So think about remote locations where companies are mining precious metals and pumping oil and gas, Civeo provides lodging, food service, and housekeeping for those companies.

Commodity prices generally have been completely bombed for several years now, particularly where the company participates. This includes oil, liquified natural gas, met coal (the coal used to make steel), and iron ore, though demand has still been OK (as I noted in this oil post). The nature of the business also means they typically are in highly commodity driven areas – Australia (given their met coal and other metals help serve the China / Asia demand), Canada (oil sands) and the US E&Ps.

As you can see, the stock has not performed too well in this environment.

The company currently operates around 28 lodges covering 30,000 rooms. They also own a fleet of modular assets that are typically used for short-term stays in the US and Canada.

“Forced Seller”

ANYWAY –  if you were to look at the company’s insider transactions, it would look UGLY. The Torgerson’s have sold 3% of CVEO stock (almost $7MM) in near-daily blocks since August 2020.

That is until you realize the Torgerson family were the sellers of a company Civeo bought, Noralta Lodge, for $165MM. Of the total purchase price, $69MM was issued in equity to the holders of Noralta.

This was a little over 3 years ago at this point, so no surprise following a COVID scare + some time since you’ve sold your business that’d you would just want to move on.

The Torgersons still own 11% of the company, so there is a long way to go, but I can’t call the end of this technical factor.

Nearly 25% FCF Yield

The seller is obviously not selling because the value of the CVEO stock looks too rich.

On the latest call, Civeo management guided to $55MM of FCF. This compares to a market cap of ~$230MM. Previously, the company used FCF to delever (after levering up for Noralta), but now that it is at 2.5x, there is a bit more flexibility. As I’ve talked about, I like these busted balance sheet names as they start to improve, but are still in the penalty box of equity holders.

When a stock trades at 25% FCF yield, the market is saying there is high bankruptcy risk. I don’t think that’s the case here. The term loan and revolver mature in 2023 and they generate plenty of FCF to keep lenders happy.

Fortunately, the COVID snapback has caused commodities to rip. If they stay elevated, who knows, but I think it will at least help the company extend contracts on existing lodging facilities and maybe sign some new ones (that will also help any concerns with credit facilities, but again – I’m not concerned there).

There is a bit of a spat going on between China and Australia over trade, but I think it’ll be sorted out eventually. Either way – this was included in mgmt’s FCF guidance. Secondly, the company announced it renewed several key Australian contracts on its latest call.

Back to the FCF yield guidance – there should be pretty good visibility. You have a set number of rooms available on site, you talk to your customers about need and what they are planning for the year, and you have a general gauge of commodities (are they up or down, is demand up or down) so you can try to win more business. This makes me believe FCF guide is a decent one to bank on.

Last thing I’ll say, the past 3 years the company actually generated $63MM of FCF on average. There was some working capital movements there, but it doesn’t seem unreasonable at all to me.

M&A Target (Seriously)

Using “M&A target” as an investment thesis is weak… yet here we are.

Typically its weak because its like, yeah sure… in SOME scenarios, this COULD get acquired (especially in a deal hungry private equity market), but any time I hear that, it doesn’t come to fruition.

In this case, Target Hospitality received a buyout offer from TDR Capital. Now, it was apparently a really cheap price of $1.50 and now Target Hospitality is trading at $3.40. Target Hospitality currently trades at 7.25x ’21 EBITDA vs. 6.0x for CVEO. HOWEVER, Target is also pretty levered still at 5x EBITDA vs. 2.5x for CVEO. Their cash flow has also been much less consistent. 

I also think the capital markets are supportive and perhaps this company would be better suited as a private company, rather than a $230MM public company. Just saying.  

KAR Auction Services is Not in Secular Decline $KAR

Reading Time: 7 minutes

KAR auction services, the company that runs used car auctions, looks on sale right now.

KAR has been under pressure from COVID impacts to the business, but unlike other COVID-impacted names (where investors are seeing through the clouds), the stock is still down meaningfully.

KAR reported earnings Q4’20 earnings and guidance last week (on Feb-16) and the stock is down about 24% in the past week.

KAR Auction Services Stock

It seems to me investors do not realize KAR Auction Services current pressures are cyclical, not secular. Today, we’re able to buy a really good business at ~10% FCF yield on depressed earnings.

KAR Auction Services FCF Yield


Why is the stock getting hammered?

For one, disappointing guidance. The company expects EBITDA of at least $475MM in 2021 as they continue to recover from COVID.

Consensus was expecting $566MM – ouch.

Kicking the Can? The other issue with guidance is it is 2H’21 weighted.

In my experience, this can be a “kick-the-can” move for management. In other words, they know 2021 EBITDA has the chance of being lower, but they’ll wait for Q2 earnings to break that news or maybe things will turn around.

Fingers crossed. This isn’t always true, but just my experience.

Management left wiggle room – they did say at least $475MM. They also explicitly said the guide is conservative. That’s not something I’m banking on. I also don’t really care about 2021 earnings in isolation. That’s way too short-term focused in a year that will continue to be impacted by COVID, as noted further below.


Why the weak guide?

Car values are high right now. During the height of COVID, the manufacturers pulled back in the face of a new, deep recession. Plus, they had to reset manufacturing processes during a global pandemic. Lo and behold – demand for cars held in. This is known as the bull whip effect.

Supply < Demand = really high used car prices.

Manheim Used Car Price Index

Normally, this would benefit KAR Auction Services, because their auctions would be earnings higher auction fees on cars. But there is clearly lower volume going through the lanes.

Not just from the shortage of cars, but also when residual values are high, you will see less lease returns as the customer decides it’s a good deal to buy out the lease at the value that is better than current market. There has also been less repossessions, another volume headwind.


What is the Street Missing?

Number one, the stock looks cheap when you bridge using the current FCF guide.

Yes, there is risk the guidance, but I don’t actually think KAR’s go forward earnings potential is limited by this year’s factors. The things I mentioned all seem cyclical.

Second, they are caught up on secular changes versus cyclical.

KAR’s earnings are being hit by cyclical issues that I think will abate.

Every investor is trying to see how COVID will change the world and how technology will reshape it. A lot of investors are saying KAR’s barriers to entry have been lowered now that auctions are online. I do not think that is true.


I read one note expressing concern that a survey revealed a lot of dealers are looking to buy and sell cars via online auctions this year. Given KAR Auction Services has a strong physical presence, this caused some concern. Pardon my French, but my response to that is – No Sh*t, Sherlock.

We’re in a pandemic. Of course dealers are looking to buy and sell online. They have to. And this was definitely the case during 2020.

If you read my About Me page, I used to have a dealer’s license. I know a thing or two about buying used cars and I used to go to Adesa all the time. It truly is a great business, which I’ll go into some brief detail later.

But anecdotally, I can tell you buying cars online is not easy. You’re buying a car with limited info, no ability to drive the car to see how it feels, how it sounds, check the oil, etc. The cars I bought online (as opposed to the seeing it in person online) were some of the worst purchases I ever made and I pretty much vowed to never do it again because it was a waste of time.

“But Dilly D”, you’re asking, “can’t this be improved?”

Of course, this could be improved with technology and better disclosure. You need to realize, though, that these online platforms are turning over thousands of cars. And as much as cars may seem like a commodity, used cars really aren’t.

Think about all the options a car has and then fold in a good versus bad service record. The band of prices could easily be +/- 10%, which is thousands of dollars we’re talking about.

But Adesa is also one of the biggest players. And they’ve had an online presence for at least 15 years (just speaking from my memory). They, along with Manheim (a private competitor), do a decent job at it. Adesa also has invested heavily in inspection services to make it better and faster process, as well as other services.

So I’m not too concerned about any upstarts or anything like that. Upstarts don’t have access to the same supply the big players have. And the dealers, like I was, like Adesa and Manheim because they get the supply plus the best prices because they are essentially getting a bulk discount. And you know competition is somewhat limited as a dealer because you have to have a license to access the auction.


This leads me to why Adesa is a great business.

As I was just leading into, Adesa is a great business because it connects sellers with buyers and just takes a fee off the top. The fee goes up or down based on the sale price, but has large enough bands that if used car prices fall, let’s say, 10%, it doesn’t hurt their earnings that much.

Sellers want access to a large supply of buyers who are committed to buy their product (i.e. they are selling to dealers who need the supply). This way, they can offload slow inventory or lease vehicles quickly and achieve good prices for them. This frees up working capital to re-deploy in their business.

Buyers want access to a large swath of cars at good prices that they can sell at a profit. For me, having a wide array of cars to pick from helped me find “hidden gems” that I could quickly turn.


The same note I mentioned above (which was absurd) highlighted online competition from Copart, which has been a “competitor” for forever and is really more a competitor of IAA, the insurance-loss auction spin from KAR. Copart is no doubt a great business, but I think it’s comparing two different markets.

If you compare IAA to Copart, their results during 2020 were much closer to each other than comparing it to KAR Auction Services – just different markets. Copart outperformed KAR and IAA sales were actually up, though they were able to benefit from improved pricing despite volumes being down. Although Copart discusses their “platform” a decent amount, but personally, I’d say it’s a different market.


Here’s another anecdote to explain why they are different markets: I remember being at an auction and a totally smashed Cadillac Escalade came through. The front was actually fine, but the back looked like it was caved in by an 18-wheeler.

I laughed to myself thinking, “I guess someone will try to part this thing” and lo and behold, the bids started to come in at really high levels. I want to say the car sold for over $20,000, despite being crumpled. I was in person, but the bidder was online and you could see the location. The bidder was in Saudi Arabia. That’s when I learned many of these salvaged cars are worth a lot internationally. Buyers can part them out, but some countries also have less strict rules on piecing cars together.

Anyway, as the dollar becomes weaker, this helps a Copart who sells a lot of inventory to these buyers:

Roughly 35% of Copart’s inventory is purchased by foreign buyers:


Back to that absurd sell-side note one more time: They also highlighted online competition from Carvana. Carvana uses KAR to buy and sell wholesale inventory. They do not provide nearly enough volume as a separate wholesale auction to be attractive. It really doesn’t make sense at all.

CarMax and Carvana really want to sell retail… yes, they get trade-ins they want to sell, but they want good prices on those and want to turn them quickly. Carmax has its own auction because its huge, but it still uses KAR  to fill inventory. Carmax can use their auction to sell inventory they don’t want anymore quickly.

Adesa provides that for everyone. It’s not really different than the marketplaces investors love today, they just have primarily relied on a physical presence. As stated, I think this will continue to be an industry that needs the physical presence.

KAR Auction Services ROIC

B&G 2018 Wrap Up: Not even the Green Giant is immune to food sector challenges. Been wrong on the name so far, but reaction creates solid entry point + high dividend. $BGS

Reading Time: 3 minutes

B&G reported Q4’18 EBITDA of $59MM compared to $69MM in the prior year. While this was partially impacted by the sale of Pirate Brands to Hershey, it was still a tough comp due to input cost inflation (freight, procurement, as well as mix). As a result, EBITDA was 200bps lower as a % of sales than the prior year.

I expect B&G’s stock will react negatively to this (already down 10% after hours to $22) and I am disappointed with the stock’s performance since I wrote on it first in Aug 2017 (down ~25-30% depending on where it opens).

That said, I think there are a few positive take-aways from this quarter that will keep me grounded. Bottom line, I still think B&G is a long-term compounder. Food sector sentiment is particularly negative right now (especially with the KHC news) and 2019 should be an easier comp from a freight and inflation perspective.

  • Green Giant Continues to Grow at Attractive Levels, Despite Challenges in Shelf Stable:
    • Green Giant’s sales increased 4.9% this Q and grew 6.1% for the entire year. This has been mainly driven by new innovations in the frozen food aisle that have countered challenging trends in the canned, shelf stable category (down 8.2% for the year).
    • Part of the thesis in buying B&G is that these managers are good at buying mature assets, harvesting the cash, and restarting the process (rinse & repeat). They sold Pirates Booty to Hershey for $420MM after they bought it for $195MM in 2013. I continue to think Green Giant was a solid acquisition.
    • Given there are many other consumer staple brands struggling to date, I think this is an opportunity for B&G. They repaid $500MM of their TL with help of the Pirates’ sale so that also adds some capacity.
  • Company is managing other mature brands well. Would you have believed me if I said Cream of Wheat increased sales 4.3% this Q? Or Ortega was up 7.2%? Excluding Victoria, which saw a $2.5MM decrease in sales from a shift in promotional activity, I think the company is doing a good job with this portfolio.
  • Continues to generate significant FCF to support dividend. B&G pays $1.90 dividend which based on the after-hours quoted price currently amounts to a 8.6% yield. Typically, dividend yields that high imply the market thinks there is risk of being cut. Setting aside the fact that the company generated $165MM of FCF this year (reduced a lot of inventory), I still think the dividend is covered.
    • Using ~66MM shares outstanding, this implies a $125MM cash use.
    • Based on the company’s guidance range, this implies you are ~1.3-1.4x covered.
    • Said another way, based on my FCF walk, we would need to see EBITDA decline 17% from the mid-point of guidance for it to be 1.0x covered.
BGS Dividend RIsk

Personally, I’d prefer if the company bought back a significant amount of stock at these levels. Unfortunately, the stigma of keeping a dividend out there forever (which is dumb) prevents that from happening (as the stock would get crushed).

Guide from the company:

BGS Guidance

Realogy Q2’18 Recap: Some puts and takes, but solid beat sends shares up. Still think the stock looks too cheap despite industry pressures

Reading Time: 2 minutesWhen I told some peers that I thought RLGY might be worth over $40/share, I was told I was nuts. The secular pressure on commission splits was too much to overcome… Realtors are going to be replaced with the internet…. RLGY is losing share… blah blah blah…

OK it is too early to celebrate and all those arguments haven’t been proven wrong yet, unfortunately. But the important thing is that RLGY had a good Q2’18. The company posted $276MM of EBITDA compared to estimates of $268MM. The main reason for the beat unfortunately was some of the more non-core segments like Cartus, the relocation business. NRT, the owned brokerages underperformed again and EBITDA was down 22%, from $78MM to $61MM. The company expects split pressure to moderate in the 2H, but this seems to be a clear issue.

RLGY Q2'18

On the flip side, when looking at Realogy from a behavioral standpoint… every one is trying to avoid the company. It is unloved and the split pressure is known. To me, if they perform moderately better than expected (and continue to buy back stock with their tremendous FCF) then we as investors will do OK, though there may be some significant volatility.

RLGY still trades at 8.7x 2019 EBITDA, which seems too low to me given the cash flow here. Taking a look at another franchisor, Dine Equity (franchises IHOP, or IHOB, and Applebees) is undergoing significant pressure and trades at 10x 2019 EBITDA.

I’m sticking with it… Heck, given all the LBOs that have occurred recently and the enormous war chest PE firms have gathered,  I wouldn’t be surprised to see someone try to re-LBO RLGY. I know, I know, that is a weak argument, but you never know.

-DD

Cheap building products stock trading with at near 12% FCF yield

Reading Time: 3 minutesI’ve written previously about competitive advantages, moats, and investing in high quality businesses. That’s the ideal scenario. But sometimes, the valuation can be so attractive that the investment case is still strong.

I posit that Atkore International (ticker: ATKR) is now too cheap to ignore. Management seems focused on this as well, having repurchased a large portion of stock (26.5% of shares outstanding) from the former Sponsor owner, CD&R.

Atkore is a leading manufacturer of electrical raceway products and tubes that are used in a variety of construction applications.  The Electrical Raceway segment (65% of sales) is a leader in products that isolate, deploy, and protect electric circuitry as it moves through a building. The products include armored cable & fittings, steel and PVC conduit, and flexible conduit and cable trays. The Mechanical Products & Solutions segment (the balance of sales) manufactures in-line galvanized tube, metal framing and fittings, and other mechanical products used in non-residential construction.

I think it helps to see what these products include, as shown below.

ATKR Products

Atkore generates roughly 85% of its sales from markets where it is the No. 1 or No. 2 player. Products are distributed through national electrical distributors such as WESCO, Rexel, and Graybar, independent electrical distributors, industrial distributors including Grainger and Fastenal, and big box retail including Home Depot, Lowe’s, and Menards.

When you look at these products, its really hard for me to see how “secret sauce” is involved with manufacturing these products. However, you would probably be surprised to learn the company has 15% EBITDA margins and capex has averaged <1.5% of sales for the past 5 years. That brings me to one of the metrics I tend to follow and that is unlevered FCF conversion. And by that I mean, (EBITDA-Capex)/EBITDA as a percent. The reason why I like to look at this is to move beyond some business that might have lower EBITDA margins (like distributors with 3-7% margins), but convert a lot of that EBITDA into FCF. Typically FCF conversion greater than 80-85%+ is a really solid business. ATKR averages 90%.

ATKR unlevered FCF

Now you can see that 2015 was not as high as the past 2 years. That is because ATKR undertook a significant portfolio restructuring, as summarized in the company’s slide below. The company divested low margin product and focused on higher margin product where it had strong market share and areas where it could raise price. Raising price is important part of the story here, as that extra price drops straight to the bottom line. EBITDA margins were less than 6% in 2011, moved to 15% by 2017 and their long-term goal is to reach 20% EBITDA margins.

ATKR Transformation

Now to valuation. ATKR trades at a significant discount to peers. Most building products companies right now are trading at 10-12x and a FCF yield of about 5%. As can be seen below, ATKR is trading well below that and will generate a significant amount of its market cap in FCF. This provides flexibility for the company to pay a dividend, acquire additional companies, buy back stock, or even down debt (which builds equity value).

ATKR FCF Walk

One quick comment about the projections – the top line growth expected in 2018 is mainly due to an acquisition and the moderation in 2019 is due to a divestiture. I do not expect much growth in 2020 just as we get to a more mature place in the cycle. Either way, the stock is too cheap to ignore.

Even using a 7% FCF yield, which foots to less than 9x EV/EBITDA, the stock has significant upside.

ATKR Price Target

Now, the risk here is really the non-residential cycle. It could quite possibly be near peak or slowing down, but I don’t think my assumptions are too aggressive.

Let me know what you think.

-DD