Josh Tarasoff, General Partner of Greenlea Lane Capital Partners, gave a presentation at the Value Investing Seminar yesterday. Tarasoff described his partnership's investment framework and made the case for Ambassadors Group (EPAX), his fund's largest investment. Our notes from his speech follow:
- Runs concentrated portfolio (top 5 positions represent 66% of total fund capital)
- Before investing in a business, asks himself if he would be comfortable if the position was his only asset and he could never sell it (ie the only money he would made is the cash taken out of the business)
- Employs investment checklist with the following criteria: (1) minimal risk of product obsolescence; (2) minimal financial leverage; (3) high return on incremental capital; (4) strong, sustainable competitive position; (5) pricing power; (6) potential for long-term unit growth; (7) demonstrated propensity to return capital to shareholders; and (8) management economically aligned with shareholders.
Investment Idea: Ambassadors Group (EPAX)
- Represents ~20% of Greenlea Lane's equity capital --> single biggest position
- EPAX is an educational student travel company (activities incude home stays, community service, meetings with political figures, general tourism)
- ~90% of revenue represented by international programs travel to >50 countries
- 2008 geographic breakdown: 60% Europe, 17% Asia, 16% South Pacific, 6% Other
- Risks include worsening economy, operational missteps, terrorism, war and health concerns; also possibility that recent enrollment declines symptomatic of long-term headwinds
- Potential catalyst is Q3 earnings release; Josh thinks there is good chance that enrollments will show Y/Y growth based on pent-up demand (due to deferral of trips last year when marketing season coincided with sudden and sharp deterioration in economic environment and consumer confidence) and operational improvements undertaken during past year.
First key question: Is it a good business?
- Unique, non-replicable brand franchise based on a relationship with a non-profit organization called People to People International [PTPI]; one of the core activities of PTPI is The Ambassadors Program which has been outsourced to EPAX since 1983 (this exclusive relationship runs through 2020 on current terms); EPAX is also academically accredited (90% of participants receive high school credit, 10% of participants receive college credit)
- Pricing power ($6,300 average price of international programs in 2008 - no competing programs command comparable prices)
- High ROIC (little tangible capital needed; only $30M of fixed assets on BS) and minimal need to put up capital as the business grows
- Large unit growth potential (29M 11-19 year-olds in the US of which EPAX estimates >20M have financial means to travel; in contrast 2009E enrollments are 35k; marketing domestic programs to students abroad is an untapped market)
Second key question: Why is it cheap?
- Operational trends are negative (critical enrollment season in July-October negatively affected by use of faulty maling list in 2007 and sudden deterioration in consumer confidence in 2008 (led to -20% Y/Y enrollment decline in 2008 and estimated 17% decline in 2009 after 1997-2007 revenue CAGR of 20%)
- Premium, discretionary product which is currently out of favor
Third key question: What is it worth?
- Student acquisition cost, defined as marketing expenditures / number of enrollments, a key metric to gauge potential value
- Thinks average SAC of $1,045 in 2008-09E should return to its 2003-07 average of ~$620 because causes of recent increase are temporary (faulty purchased list name in 2007, recession will end)
- SAC of ~$620 drives FCF/share of $2.38 (5x EV/FCF), whereas SAC of $850 (average of historical and recent) would imply FCF/share of $1.34 (10x EV/FCF); estimated 2009 SAC of $1,167 implies FCF/share of $0.80 (16x EV/FCF)
- Expects 15-20% FCF growth over next 10 years (would be similar to performance over last 10 years) and on this basis believes a private buyer with long time horizon would earn very attractive returns buying EPAX at 20x FCF today
- Depending on above SAC assumptions, 20x FCF/share of $0.80, $1.34 and $2.38, implies per share fair value of $17, $28 and $49, respectively, vs. current share price of $14
About Josh Tarasoff
Mr. Tarasoff is the General Partner of Greenlea Lane Capital Partners, LP, a private investment partnership he founded in 2006. Josh graduated from Duke University in 2001, with a degree in philosophy. He has worked at Goldman, Sachs & Co. and has an MBA from Columbia Business School.
Disclosure: No positions.