One of the things that I have noticed is that when researching a security, there is a strong temptation to only do a skimming bit of financial research. By this I mean scanning over the financial statements. If they meet your criteria, only then do you examine the SEC filings for a corporation. Finally, if this proves worthy, then you might Google items on said company, talk to management, etc. Often times, just looking at financial statements will give you a great company that is obviously cheap, such as International Baler (IBAL). But other times, looking at more interesting, complex investment ideas will give you other potentially rewarding ideas.
Here is an example from my own portfolio, One company that I am glad I didn't look at its financials and then take a pass: Nevada Gold (UWN).
Looking at the previous financial statements is not enough with this company. Frankly, the last 3 years of financial statements look horrendous. But there is a lot more to the company than some bad results. It is in the midst of a turnaround that really is more like the late stages of a restructuring. Here are some videos where Robert Sturges talks about it: 1, 2, and 3.
We are not done with acquisitions... We are going to remain disciplined on purchase prices...
The acquisition environment does remain robust.
Other than the Northeast, I wouldn't preclude getting involved in any area of the U.S. and even beyond.
Where we think we have a real opportunity to lever our operating expertise... We are not buying as a well oiled machine, but rather, a machine that needs to be fixed.
Many times, I believe that expansion, using debt, is a dangerous strategy, however, it seems that from looking at Nevada Gold's past performance and the changes the company is making at the newly acquired casinos, the company will do a good job at fixing whatever comes its way. A reputation for fixing problems in casinos will also go a long way in landing management contracts in the future. When looking at capital allocators that make a living of fixing problems, you can do quite well.
When looking towards acquisitions, Nevada Gold will go up to the $20 million EBITDA range, with the help of the company's senior lender. The lender has indicated that under the right circumstances it would step up to the plate for the company. Sturges notes that the company's debt to the lender went from $55 million, down to $6 million and that the lender is happy about that. This should be very true when so many companies have recently defaulted on their debt.
To put this in perspective, if the company is able to buy a huge place, at nearly 2x what it has been paying, its acquisition is going be for $120 million; while there are a lot of factors when converting EBITDA to owner earnings, there are many ways of going about it, however, I am not worried about Nevada Gold covering its interest charges, check out the following numbers
All numbers are based on EBITDA of $20 million for a potentially acquired entity.
6% = $3.6M
8% = $4.8M
10% = $6M
15% = $9M
6% = $4.8M
8% = $6.4M
10% = $8M
15% = $12M
6% = $6M
8% = $8M
10% = $10M
15% = $15M
Now, even if Nevada Gold screws up on the acquiring front, levers the company to the hilt, interest rates soar, AND it can't make the acquired entity more efficient, it will still roughly double what looks to be the coming year's EBIDTA. And that's even when you account for interest. Put that in comparison to the company's market cap, and we see that its EBTDA (remember, we accounted for interest) is roughly its present market cap. To me this represents one of the worst possible scenarios for the company; and it isn't terrible. If and when an acquisition does happen, I am not too worried about it being a terrible one. That's because the Wynnefield Partners are involved in the company and UWN already has an established track record with the last 2 acquisitions.
One concern that may be out there in the investment community is of the company being able to repay the recent debt that was taken on to buy all of the Washington mini-casinos. If you take a look at this presentation, page 25 shows that there shouldn't be any real concern about the company covering said debts. The cash flows from operations and cash on hand, without any of the company's proven initiatives, will cover all of the debt. The debt is already bearing a high interest rate (over 2/3 is @ 11%). I think that this will also help when going to bankers to justify a transaction: If the bankers see that Nevada Gold can cover interest and principle at 11%, it should put them at ease for funding a new transaction.
Another item that came up in the conference call, is that there is still a chance that there will be a new management contract, as well as equity share, which may happen by year's end. Furthermore, there are a lot of strategies and synergies that are not reflected in the company's results for the newly acquired casinos.
The development of the Las Vegas Speedway is getting ready to go to the capital markets. It's a pretty big project, one which has a ton of potential for UWN.
The bottom line with this company is that there are a ton of things that can go right for it- any of which will be big news for the stock. While I don't know exactly what the company will be earning in a year's time, I am sure, provided there isn't an interest rate shock or a bunch of horrendous legislation passed, Nevada Gold will be in business and earning money for a substantial amount of time (even without any more acquisitions). Given the leverage that this company is taking on, I view this as a classic Pabrai "Heads, I win a ton, tails, I probably won't lose much."
Disclosure: I am long UWN and IBAL. This is not investment advice. Do your own research before doing anything that I so much as write, talk, or even so much as think about.