The past three-plus years in the market have yielded some tremendous turnaround opportunities for investors. Pier 1 (PIR), Select Comfort (SCSS), Las Vegas Sands (LVS), Sirius (SIRI), and a host of other stocks have yielded huge returns to investors that believed in the turnaround stories. Each one had huge hurdles to jump, whether it was heavy debt loads at LVS or SIRI, or a history of mismanagement at PIR. The market has continued on its bull run for over three years now and while still slow, the economic recovery continues.
Over the past couple of months, I have spent a good deal of time trying to find the next turnaround stories that will be aided by continued economic growth. The two best companies I could find are YRC Worldwide (YRCW) and Nokia (NOK). Both seem like highly unlikely candidates to turn their business around, yet there are enough green shoots to make me think it's worth giving them the benefit of the doubt.
YRC Worldwide had been on the brink of bankruptcy for three years. After several restructurings, negotiations with lenders, reverse stocks splits and an entire new management team put into place last year, it appears that things are FINALLY on the mend. Consider the following recent developments:
(1) Renegotiated pension obligations - obligations over next few years are significantly lower now after negotiations with Teamsters.
(2) Extended terms with its lenders so there are no obligations until late 2014.
(4) Regionals are taking market share away from competitors -- regional revs grew close to 10% last quarter.
(5) New management team has focused on better customer service and improved delivery times. To that end, it has improved on time deliveries from the low 60% level to over 80%.
(6) On a pro forma basis after taking into account the Union Pension Cessation and Cash Interest / LC Fees benefit in 2011, adjusted FCF improved by $46.4M last quarter.
(7) S&P recently gave the company's $400 Million ABL Facility a Recovery "1" Rating, the second best possible recovery rating.
(8) EBITDA jumped almost 10% as a result of a focus on higher margin business at YRC Freight and a reduction in overall costs.
(9) New CEO James Welch has the company focused exclusively on the North American LTL operations, and has divested non-core assets like Jiayu, Glen Moore and excess real estate.
As a comparison, take a look at another heavily indebted company that had negative equity / no equity and was losing money: Sirius. SIRI had no equity and about $3 billion in debt in 2009, and was losing over $300 million. However, it had also just turned an operating profit for the first time in a long time in 2009, and right around that time, the stock bottomed out and proceeded to rise 50-fold over the next three years.
While the negative story sounds like the more articulate one with YRCW, the company has already turned an operating profit and CEO Welch maintains that positive net income is coming in 2013. If this happens, the stock could do a quantum leap higher, as it is currently being left for dead. As it stands right now, at a $50 million market cap, the company trades at 0.01 times sales versus an industry average of 0.35.
Nokia is in an industry where the dead carcasses of many players lie. The consumer electronics industry is highly competitive, and susceptible to rapid changes in consumer tastes. Staying on top is hard. Just ask Nokia, which used to dominate the cell phone business five years ago, and had a stock price of over $40. Now, it is down 95% from those highs and many people have written it off for dead.
However, in taking a look at the sum of its parts, I believe Nokia is worth at least $4 per share:
The company has an expansive patent portfolio, and there is a steady stream of payments to Nokia for the use of its patents to the tune of 500 million euros per year. Nokia owns over 10,000 patent families after investing more than 45 billion euros.
Nokia has one of the strongest and broadest patent portfolios in the industry, extending across all major cellular and mobile communications standards, software and services, hardware and user interface features and functionalities.
We believe Nokia's patent portfolio could conceivably be worth as much as 6 billion euros to an Amazon or a Microsoft.
The patents are normally the hardest to value, except Nokia already generates $600 million in royalty income annually from its patents from the likes of Apple (AAPL) and Microsoft (MSFT). A multiple of 12x annual royalty income isn't that insane of a valuation.
Navteq was purchased by Nokia in 2008 for $8.1 billion. The technology behind Navteq is based on user-observed geographic features as opposed to maps provided by the government. That is, the technology is more open source and provided by users -- similar to Google Maps. Navteq digital map data not only enables door-to-door routing throughout Europe and North America, it contains millions of Points of Interest (POIs), making it easy to locate everything from restaurants to hospitals and gas stations. It holds a 90% market share in the car manufacturing industry, and it has been selected by Garmin, Magellan, Sony, LG and other important PND vendors to enable their devices.
Navteq is a high margin business, and in my opinion, it should be valued at around three times sales. Navteq's 2010 sales grew 50 percent from a year ago to 1 billion euros, while its operating loss narrowed to 225 million. A valuation of three times sales would be around $4 billion euros.
Nokia, By The Numbers
NET CASH: 4.9 billion euros
PATENTS: 6 billion Euros ($7.7 billion)
NAVTEQ: 3.9 billion Euros ($5.0 billion)
NET CASH: 4.9 billion Euros ($6.3 billion)
TOTAL: $19.0 billion
(assumes 1.29 Euros to Dollar conversion rate)
Current market Cap: $9 billion
If you consider the possibility that, with the death of Steve Jobs and the potential for the iPhone 5 to be a letdown versus expectations, the door has opened just slightly for a competitor to step in and take some market share away from Apple.
While I continue to believe Nokia would be much better off just designing the imaging for cell phones and licensing its technology than going up against the iPhone, I do believe that Microsoft will invest as much money as possible into the smart phone business, which will offer Nokia a chance to make some money in what will ultimately become a commodity business. As a result, I think there is a significant amount of upside for the stock.