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  • TransDigm: When Is A Large Moat Worth More Than 30x Earnings? [View article]
    Excellent point in your final paragraph and it really hits at the heart of the investment thesis. I completely agree on the holding period because of their propensity to payout cash over uneven periods. It's not necessarily a bad thing (great for existing shareholders as it's slightly more efficient assuming dividends will be used). TDG is a great company to pay a dividend as they can only reinvest so much in profits.

    Recent special dividends will cut into this future available profit by ~$500m. Thus, if over the next 10 years TDG's average NI is $800m - $900m ($8b - 9b cumulative NI) then it represents ~6%. Not too expensive of a penalty. I agree that I'd like to see the stock drop, otherwise I'd be interested at this price after a year or two of deleveraging.
    Apr 4, 2015. 10:06 PM | Likes Like |Link to Comment
  • TransDigm: When Is A Large Moat Worth More Than 30x Earnings? [View article]
    Thanks for the comment Talig.

    I'm not sure I follow your comments completely but the P/E on Yahoo Finance (for example) is indeed overstated because of the structure of the comp options. I see the payments as relatively small for reasons El Luchador touches on.

    As to the "as defined" profits, they are related to EBITDA and purely adjust for refinancing costs. They seemed reasonably supported to me so I reported on them. I think I have a history of reporting what I feel is correct vs blindly reporting what companies state, whatever that is worth to you. I even project lower EBITDA as defined in my "earnings power" comment than FY14 amount. I hope this gives you some indication of my conservative approach.

    To be fair to the COO, Mr. Laubenthal has worked for them for nearly 10 years and has consistently increased margins for nearly all of their acquisitions. I actually believe the recent turnover of senior executives may end up having the opposite effect of your claim. That is, the turnover will actually help avoid complacency. The outgoing CFO, Greg Rufus, put in a nearly 2 year notice at resignation which seems to indicate to me that management has goals in life other than TDG/wealth. If any company can be run by ham sandwiches then TDG would be near the top of my list of candidates.

    Either way, I always enjoy challenges to my investment thesis.
    Apr 3, 2015. 09:22 PM | Likes Like |Link to Comment
  • TransDigm: When Is A Large Moat Worth More Than 30x Earnings? [View article]
    Thanks for the comment.

    Your issues with the company are probably the largest contributing factors to why TDG is undervalued or on the low-end of a FV range.

    TDG trades at 65x trailing P/E because of the special dividend. As you allude, I would only buy TDG if I was absolutely certain I could hold for at least 5 years because of their special dividend tendencies vs a regular dividend. There is also an additional issue of vested stock options being entitled to dividends. This cost shareholders $125m and $170m in 2014 and 2013, respectively (5,652,615 additional shares included on div payments - less during FY14; p. F-12 AR). However, with TDG it is all about earnings power and it's how I think it makes sense to value them.

    *Considering recent acquisitions and 8% organic growth (mgmt proj), "true" FY revenue is currently between $2.9B - $3.0B.
    *53.4% gross margins (same as FY14 - should be higher in FY15)
    *SG&A and Amortization are same % of revenue as FY14 (too much time to get more accurate estimate)
    *Interest should be ~$360m with recent purchase
    *taxes at same 31.6% rate

    With these assumptions, [estimated] earnings power gives:
    - NI: $555m (~$10/shr)
    - EBITDA: ~$1,050m (~$18.7/shr) [cont ops only - not "as defined"]
    - EBITDA (Def): ~$1,100m ($19.5/shr)
    - FCF: ~$650m (~$11.55/shr)
    *EV (as of 12/14 - 1Q15): $11.5B MC - $1B cash + ($7.2B LT debt + $750m LT debt for Franke/Telair) = ~$18.5B

    EV/EBITDA = 16.8
    P/FCF = 17.7
    P/E = 20.7

    At 15% - 20% growth and one of the best businesses of all publicly listed stocks seems cheap.

    This article doesn't touch on the reasons "forever" stocks are worth so much. The tax savings from less portfolio turnover amounts to more than 2.5%/yr for most folks. Reinvestment risk (periods of holding cash after sales). Just to introduce the thought process behind quality investing.
    Apr 1, 2015. 04:33 PM | Likes Like |Link to Comment
  • Senvest: Serial Capital Compounder Trading At 54% Of TBV (Multi-Year Low) With Near-Term Catalysts [View article]
    You yourself admitted that you expect the stock to trade at a 65% - 70% discount to NAV. The upside is much closer to 20% - 25% + future growth and not the 100% upside that it appears to be at first glance. There are also reasons to believe the stock is trading near FV.

    As I mentioned before, this is actually a very well-followed idea in the value investing community so it is not being ignored as you mention. I would never invest on the basis that the market is ignoring information. It seems arrogant in my mind to assume you have found something that no other investor has found/considered. As the great Bruce Greenwald often mentions, "why is the market providing you such a seemingly great investment opportunity?". If the answer to that question is the market doesn't understand the investment then I would keep searching. In my opinion there is a lot of hair on the dog that you are glossing over (compensation, risk profile of portfolio, ect).

    Good luck with this and I'm sure I'll read your future work. You should really check out COBF to see what others are writing about Senvest. You could probably add to the discussion over there. EDIT: I should clarify, I'm only commenting because it's a decent, well-written idea. I'm a very picky investor.
    Apr 1, 2015. 01:01 PM | Likes Like |Link to Comment
  • Senvest: Serial Capital Compounder Trading At 54% Of TBV (Multi-Year Low) With Near-Term Catalysts [View article]
    I fully understand your thesis. You are assuming that the current discount is "incorrect" and that the market will realize your "correct" discount when next results are published. You are speculating on future P/TBV discounts or "Price Multiples". Their portfolio is highly speculative and diversified, they have underperformed for very long stretches in the past, management pays themselves outrageous fees (~7% in good years when they beat the benchmark), and FX gains tend to break even in the long-run unless realized (not sure they could without taking on different risk).

    The currently "low" discount is could very well be due to the market believing the FX gains to be temporary. You may realize a higher P/B ratio but it will more likely occur if NAV decreases. If it weren't for the greatest bull-market in history Senvest may not look as strong as they currently do (another possible reason for larger TBV discounts in recent years). You should look at my above post on where returns come from. You cannot escape this formula no matter what wording you use to phrase your investment thesis. Returns come from realized discount expansion/contraction and NAV growth. NAV growth can be monitored and evaluated, but discount expansion/contraction is purely speculative. You may not like the fact that the conversation has strayed away from "your thesis" but it's because I don't think your thesis is as strong as you propose.

    EDIT: This all ignores the fact that you called Senvest a "serial compounder" (I understand the need for clicks) when it is an investment fund. Investment funds are not really what Buffett/Munger had in mind when they talk about "serial compounders" (e.g. consumer staple that can reinvest significant % of earnings). Have you seen the historical returns? It is extremely choppy and by no means 'continually reoccurring'. If not for the outperformance since 2009, Senvest was underperforming over the period of 1996 - 2007 vs. S&P (while taking on significantly greater risk and lower liquidity!).

    Here are some discussions on Senvest that may be interesting to you (first link includes performance and P/B history for life of the firm):
    Mar 19, 2015. 09:58 PM | Likes Like |Link to Comment
  • Senvest: Serial Capital Compounder Trading At 54% Of TBV (Multi-Year Low) With Near-Term Catalysts [View article]
    The reason for the discount is the fees. Nearly all public AMs have similar discounts. You are purely betting on future returns net of fees. However, in this case, you are relying on very well-paid stewards who will likely increase their pay whenever and wherever possible. Good luck, but there are so many better companies out there.
    Mar 19, 2015. 07:01 PM | Likes Like |Link to Comment
  • Senvest: Serial Capital Compounder Trading At 54% Of TBV (Multi-Year Low) With Near-Term Catalysts [View article]
    First, great well-written and articulated article. I'm just trying to get to the core of the idea, your work is great.

    With that, isn't the article title misleading? You state the "normal" discount is 65% - 70% of TBV yet the current discount is just 54%. Isn't that the same discount as a stock with a normal P/E range of 11.7 - 13.0 selling for 10x? Arbitrage upside seems like 16% - 30% with all future returns coming from Senvest's performance. The 1.16 - 1.3 multiple really doesn't provide much upside to the actual operating results of Senvest in the long-run. What leads you to believe Senvest can "compound" capital faster than a market index after 40% of fees is taken out (on what appears to be inflated salaries).

    Also, the article linked hints at the volatility of their returns as does the invest in Bank of Cyprus. Senvest seems like a classic case of high risk/reward manager seeking a big salary with little incentive to protect investor capital. (

    Compounded Long-run Returns = ((1 + PM) * (1 + OR)^N) ^ (1/N))

    N = years held
    PM = Price Multiple expansion during that period
    OR = Operating Returns or TBV returns (compounded) over period N

    Then you really need PM = .3 (30%; TBV = 70% * NAV) and N <= 2 years to have any shot of outperforming Senvest itself.
    Mar 17, 2015. 08:08 PM | Likes Like |Link to Comment
  • Self Storage Group: REITs Can Be Terrible Investments But This New REIT Could Soar [View article]
    I think you might have been right that this stock will not move unless the $1 is distributed. I don't mind waiting out another year but the poison pill means any activist effort will need to be concerted.
    Mar 16, 2015. 11:16 AM | Likes Like |Link to Comment
  • Waiting Patiently For A Wide Moat REIT Bargain [View article]
    Agreed, they have $7.1m ($0.97/share) in cash/stocks due to the slow conversion from Investment Management Firm to a REIT. They can do about $1.8m in CFO and the dividend is $2.8m annually. I due think they'll grow into their dividend since occupancy was 80% for 2014 when the industry averages 90% and 5/6 storage facilities were at 93-98% (one at 60-80%). Effective price will be $19m with over $50m in dividends paid since 2000 and CFO expected to be $2m at normal-occupancy growing at 6%.

    Once the cash is returned you are buying the stock effectively at $2.70 (dividend has alot of return of capital % thus far) which would make the yield 10% that can be safely paid for 3-4 years while the CFO grows into it. This is the safest real-estate sector with all of their facilities being 'top-of-the-line climate-control facilities' with price increase potential given the demand. Seems to have pretty high potential of 15%+ compounded returns over a long-period.

    I like a lot of your past work on REITs; I generally don't like anyones' work and hate the RE sector so I suppose it's saying something. I know this is quite small and a outside your REIT specialty, but I'd be very interested in your opinion if you ever look into this in detail.
    Jan 1, 2015. 04:47 PM | 1 Like Like |Link to Comment
  • Waiting Patiently For A Wide Moat REIT Bargain [View article]
    Do you like SELF? Trading well below book and it's a self-storage company (which seems to usually receive a premium).
    Jan 1, 2015. 09:42 AM | 1 Like Like |Link to Comment
  • More Great News For Pacific Health Care Organization [View article]
    7 articles in less than 3 months is scaring me off more than convincing me. Is the volume of articles necessary? It's a $40m company, there is very little new news to write about. Look forward to your next idea.
    Dec 23, 2014. 11:31 AM | Likes Like |Link to Comment
  • My 2 Cents In The Cash Flow/Capital Leases Debate [View article]
    Bad link. Here it is again.
    Dec 12, 2014. 02:46 PM | Likes Like |Link to Comment
  • My 2 Cents In The Cash Flow/Capital Leases Debate [View article]
    As previously discussed, this article provides no new information and is actively tricking investors of this website. I'm not an AMZN shareholder nor much of a bull, but, on this issue, I completely disagree with Paulo on this. I'd like to qualify that by saying I generally enjoy Paulo's work and I hope he looks to new investments for me to read about.

    I don't want to go line-by-line but a great deal of this piece is incorrect. If you use FCF = OCF - CapEx (using 2013 AR) for AMZN then FCF = $5.5B - 3.4B = $2B, which would be incorrect given the Capital Leases employed. If you take the additional step of subtracting out LT Debt repayment/Capital Leases of $1B then you get FCF = $1B (2013 AR), a number incredibly close to the adjusted FCF reported by AMZN themselves. Any differences likely due to LT Debt repayment during 2013. $1.0 - $1.1B is the "true" FCF for AMZN in FY13. This matches the value purported by AMZN itself.

    Paulo has previously made an argument that "Net Cash" (cash - (LT Debt + Other LT Liabilities); This is coincidentally relevant for AMZN due to persistent negative WC due to the business model (collects cash from sales faster than they pay the suppliers for those very same products), however he does not use it with those assumptions in mind. Through 3Q14 AMZN has experienced a decrease in cash while LT liabilities have increased (and short-term liabilities have decreased proportionally, conveniently left out). The net-effect is on the order of ~$3.5B decrease in cash due to investment in PP&E. This is a nearly identical pattern that was seen at 3Q13 for AMZN when cash dropped from $8B to $3.9B while total assets and total liabilities remained relatively stable (due to cash being spent on Capital Leases for PP&E). Like nearly all retailers, 4Q is the time-to-shine, as this is the largest quarterly revenue totals and for some, all of the year's profits. AMZN had nearly $4B in FCF in 4Q13 alone to bring FY13 FCF to a $1.0 - $1.1B range (as shown above). Similarly, if Paulo were patient enough to wait for year-end results, we will see AMZN collect a significant amount of cash in the 4Q that will greatly influence FY14 FCF. To use TTM FCF is extremely deceiving for a quickly growing retailer with a highly aggressive growth strategy. Paulo's has refused to take into account the business model and historical operating results, leading him to a negative FCF number that is nonsensical.

    * Capital Leases are included on the Balance Sheet ( which renders the example Financial Statements above useless as Paulo did not include Capital Leases on them. If he had, he would have arrived at nearly identical results for 100% CL and 100% CapEx (depending on the complexity of the model used). This is a huge oversight.

    * For AMZN, FCF = CFO - CapEx - Repayments of LT Debt/Leases
    - This will account for the Capital Lease payments made within the year we are referencing!
    - Assume, AMZN agrees to take on a capital lease contract where $X are owed annually over 5 years (arbitrary time period). With Paulo's method, AMZN's FCF in Y1 (when CL contract was agreed to) they would take a deduction of 5*X and additional deductions of X over the remainder of the lease. Beyond the discount disaster created, this would result in AMZN appearing to be paying 9*X when the Capital Lease agreement clearly will require only 5*X over the life of the lease.

    * Although not necessarily make-or-break, by ignoring taxes in his example, Paulo is making the fictitious [100% CapEx] AMZN appear artificially unprofitable since they are unable to take advantage of the $500m in deductions annually from CapEx. A minor detail with major consequences. The higher the tax-rate the larger the benefit to the Fictitious AMZN.

    * Paulo ends up double-counting Capital Lease payments by assuming they are not included on the Balance Sheet (he is confusing Capital Leases and Operating Leases, a common mistake) and is thus making his proposed adjustments. If Paulo were right, every retailer in America would be bleeding billions.

    This debate is a non-sequitur. I do want to recognize that there are numerous other individuals on SA (that I know of, namely Treetis) who have already pointed out much of what I have written above. Some have gone to further lengths to thoroughly debunk Paulo's theory. One should always double-check the numbers from pictures of spreadsheets, invert-always invert, and remember that Caveat Emptor always applies.
    Dec 12, 2014. 02:44 PM | 2 Likes Like |Link to Comment
  • Amazon: Free Cash Flow Not What The Bulls Purport It To Be [View article]

    Where do you see this massive debt build? Between 12/31/13 and 9/30/14 Debt increase marginally. Capital leases are on Balance Sheet. Net Income is so much lower than CFO due to capital leases which is why AMZN quotes FCF as a better metric to guage performance ($1B FCF). They use Capital Leases to lower Net Income and thus, taxes, so there is more to invest into the business. Smart capital allocation. You are basically making up the rules as you go.
    Dec 12, 2014. 09:49 AM | 1 Like Like |Link to Comment
  • Amazon: Free Cash Flow Not What The Bulls Purport It To Be [View article]
    "No, I won't consider SBC or working capital or CL payments"

    This will always be your problem. You are purposely using an incomplete formula to show that the formula is incorrect. This is trivial and obvious. Look forward to copy/pasting my answers so you don't trick everyone with incomplete formulas. You know if you made all the necessary adjustments then you Business School example would be pointless.

    Good luck on your trades.
    Dec 10, 2014. 09:11 PM | 1 Like Like |Link to Comment