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Amit Chokshi, CFA

 
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  • Blockbuster's Year of the Dog [View article]
    BBI might be a short to zero but between now and then there will probably be plenty of volatility. This stock's been heavily shorted for a few years so recommending a short at $4-$5, basically near its all time low, when a lot of shorts have made significant money on the way down probably requires very tight buy stops (as tight as 5%).

    BBI wouldn't be an attractive buyout candidate, it's currently valued at 6.0x EBITDA which is not cheap for a company that is struggling like BBI is. Icahn is still in BBI as well as other investment managers and they would not give in to a low ball premium like typical dumb money institutions (Fidelity, T Rowe, etc). Leonard Green "won" the war for Hollywood Video at a greatly reduced price and that performance hasn't seemed to be very pretty even with a seemingly cheap price.

    With the leverage on BBI and it's cash flow, there's not a lot of juice left to pay a big premium and that prob won't win over Icahn and other investors. On top of that, there have been other decent businesses like JAG and CSC that couldn't find buyers and there are plenty of good businesses that are cheap relative to the financing PE firms can obtain where as BBI is probably too big of a challenge. Maybe 5 years ago, a deal could have been done to milk the company for cash but at this point with improvements and changes in technology and delivery of content changing so rapdily, BBI's cash production is dwindling at a much faster rate than people probably expect.
    Nov 22 09:33 PM | Likes Like |Link to Comment
  • My Biggest Turkey: Aurora Foods [View article]
    LBO firms utilize the M&A platform in consumer products and foods quite often and it works in the private equity world in that they can pull out some dividends and realize some synergies from centraling SG&A and corporate processes. The idea doesn't always work so well in the public markets. The overlevered, second-rate consumer products companies can get burned when analysts finally get smart. The concept of shorting Jarden ("JAH") is based on the same theme that lost you some money.
    Nov 22 09:11 PM | Likes Like |Link to Comment
  • Retail Discounters: Hope Their Exotic Investments Excel [View article]
    Although Lampert has stated he wants to make Kmart and Sears a success from a retailing perspective no investor is in SHLD for the retail story, if one's even possible. The stock's appreciation is baking in expectations that Lampert will turn it into a modern BRK and will use the cash to acquire other businesses, in some cases far outside of the realm of retail. SHLD filed an 8-K about a year and a half ago that basically spelled this out and said that the company's cash would be utilized for investment purposes including controlling stakes in businesses outside of retail. It's basically on Lampert to milk SHLD for as much cash as he can like he did with AZO and Payless and then use any cash flow to invest in other high return businesses.

    Total return swaps are derivatives and the fact that those drove the EPS figures for SHLD speaks to the lack of "earnings quality" regarding the retail operations. Still, going back to the previous point, I don't believe most shareholders are buying SHLD for the retail angle at all. It's as a lot of posters/bloggers/write... have said, SHLD is a public investment fund with one of the better fund managers running it. So you're paying a fair to premium price on a retail comp basis for SHLD which makes it seem odd/overvalued but then you factor in that SHLD in 10-15 years, maybe even 5, won't be predominatly a retailer as opposed to a company with a variety of holdings across industries with Lampert picking the investments. That's not a bad opportunity given that access to a lot of managers with Lampert's ability is limited to investors. There are a ton of great mutual funds run by impressive investors but with SHLD you get a manager with virtually no investment restrictions or redemption issues and other technical issues associated with most mutual funds. BTW, I have no position in SHLD.
    Nov 18 05:36 PM | Likes Like |Link to Comment
  • R.H. Donnelly: The Stock's a Steal [View article]
    D&A is always a pretax expense, so it's not really any "clever tax structure" that allows for that specifically for RHD. High D&A and low capex is pretty common with a lot of media companies. Also, don't you think the 5.8x p/cash flow figure is low because of the significant debt load? On an enterprise value to ebitda figure, this thing is closer to 20.0x, which is very high even for stable cash flow media cos.
    Nov 17 03:40 PM | Likes Like |Link to Comment
  • Advocat Earnings: Not Good Enough [View article]
    I am a bit disappointed by the numbers and while the stock got hammered in AH trading, I still believe it's a good buy. AVCA's industry doesn't grow their top line on a "same-stores" basis all that much, new centers need to be opened to really drive growth. Even in 2005 the Company had about 6.5% sales growth from 2004. The company is still making the right moves, you noted the restructuring of their convertible preferred which was an excellent move, and they also got a exchange listing.

    The tax benefit did mask what the real operating performance was but keep in mind the same thing happened in Q2 with a big reversal in professional liability costs. This stock's valuation relative to Kindred and other competitors is very attractive so while I'd prefer to see some better growth I'm content with solid cash flow and the changes management is making.
    Nov 9 08:35 AM | Likes Like |Link to Comment
  • Now's A Good Time To Buy Mueller Water and Walter Industries [View article]
    I am looking at MWA as well but haven't done all of my due diligence yet. The shares that will be spun from WLT are Class B shares that have more voting power from what I understand. I haven't done any real research yet so I could be wrong there but that's what I've gleaned so far. Do you think the MWA shares will be a good value relative to the MWA.B shares? Or is one better off waiting for the spin to occur and then wait for the B shares to experience the usual volatility associated with spins before buying?
    Nov 6 02:08 PM | Likes Like |Link to Comment
  • Two Compelling 'Cash Hoard' Stocks [View article]
    Why do you feel PLAY is worth $24 per share when they don't have the Apple business anymore? When it was providing the SOC chips to AAPL it could barely support itself stock wise and picking up incremental business from SanDisk and Creative Technologies won't do much to make up for that loss.

    They also rely on just one type of SoC platform that's really targeted towards PMPs. They are going into the cell phone business and there are rumors about Zune picking them up since PLAY's SoC will be in SideShow but the impact of all this is extremely difficulty to quantify. I'm not sure I believe Vista is going to spawn some notebook computer explosion where laptops equipped with sideshow devices will be flying off the shelf. I don't see a lot of differentiation between what SideShow devices can do relative to the next-gen handhelds which can synch to your computer as it is. PLAY's SoC costs more and is a higher end product which is fine but I think as PLAY goes downstream into other devices they'll run up against guys like SGTL and Action Semi that can price them out.

    Nonetheless, the cash balance should give you some safety but tech cos can be notorious from going through cash flow to cash burn. Also, the forward estimates are not that attractive, PLAY is really selling for at least 30x next year's EPS.
    Oct 10 12:01 PM | Likes Like |Link to Comment
  • Bristol-Myers' Board Behaved Responsibly in CEO Dolan's Departure [View article]
    Don't give kudos to the BMY board, they oversaw Dolan take this ship down from about $60 to $20-$25 per share. It's about time some funds with some real capital start taking these directors to task. Tens of billions of dollars of shareholder value are disolving and these directors are supposed to be watching out for shareholders and are generally perceived as more "sophisticated" than the average investor. If that's the case many of these board members should be held criminally negligent. In some cases these board members get paid six figure salaries and are granted company stock at shareholders' expense for meeting a few times a year to what? pat the CEO on the back and grant him/her more compensation?
    Oct 10 11:38 AM | Likes Like |Link to Comment
  • Big Media vs. Blogs Take-Two: Neither Has Cornered the Market on Bad Advice [View article]
    I wonder what Teresa thinks about investors that follow sellside research. Investors would lose a lifetimes of savings following most sellside analyst recommendations.
    Oct 9 07:46 PM | Likes Like |Link to Comment
  • Blockbuster Offers Big Upside Potential [View article]
    Why do you figure the worst is behind them? I love a contrarian play as much as the next person but in BBI's case, do you think it's just an issue of reducing store count and streamlining working capital to milk the business for cash? That might have worked for Autozone and some other retailers where there's not really a technology wall against them but I think BBI and MOVI are value traps.

    VOD is going to continue to grow, so as a viewer you can pay $2-$4 to get a movie into your home rather than go to BBI and pay the $5 and have to worry about returning it. I just think the business model is under too much pressure. Plus from just a simple valuation metric rundown, according to Yahoo Finance the stock is trading at 15.0x fwd earnings, 5.9x EV/EBITDA, and 1.3x book. In this market that seems fair to expensive for a company that's in the type of long-term trouble BBI is in.

    How much upside do you think BBI offers in terms of share price?
    Oct 6 08:56 AM | Likes Like |Link to Comment
  • Take a Second Look at Take-Two Interactive [View article]
    The P/E multiple needs to be adjusted for R&D and the commensurate amortization costs that come with expensing them or capitalizing them. I am pretty sure ERTS expenses their R&D costs while ATVI and THQI (not sure about TTWO but I would bet) capitalize their R&D, which is why ERTS has such a high P/E. It deserves a premium and one could argue that ATVI does as well but the size of that premium is overstated because of the accounting methods used by ERTS.

    I was long THQI for a while and was rewarded well and still think that offers the best value of all the video game companies from a valuation point and product portfolio standpoint. I'm out of the vg sector for now since it looks overbought but it should offer a good buy-in point after the holidays, even if the PS3 and Wii do well there will probably be a good sell off and if does not do well there could be an even harder sell off.
    Oct 2 10:01 AM | Likes Like |Link to Comment
  • Doral Financial Defines Deal with the SEC [View article]
    Phantom "gain on sale" or derivative profits that don't flow to the cash flow statement are usually good indicators of strong short ideas. Despite all of the fraud surrounding DRL, the worst seems behind it, it's about 33% up from its low, and the $25MM fine is pretty tame. They have a new CEO from GE's Latin Finance group and he's installed some new leadership.
    Sep 21 11:27 PM | Likes Like |Link to Comment
  • The Semiconductor Industry Desperately Needs to Go Private [View article]
    It's rare for a lot of companies to pay out massive cash dividends. The only one I know that really did an excellent job of it is FNF, they paid out $10 per share a year or so ago, and the stock adjusted ex dividend and then continued to ramp back up. If the right shareholders pressured the semis to do so, I'm sure they would have but I think most public shareholders are fine with status quo.

    Also, how easy is it to reduce capex at FSL or other semis? Aren't these facilities multibillion dollar plants, I'm sure the maintenance capex is very high? Sure they don't need to build new plants but most semis don't do that until the top of chip cycles either way so I'm assuming (and maybe wrong) that a lot of that capex can't be shut off.

    I think, having good familiarity with the LBO world from a prior life, that buying a cyclical business like semis is pretty risky for an LBO firm. You have massive fixed costs so when the cycle turns your cash flow will take a big hit, not to mention the capital intensive nature of the business. Oh well, these guys have billions so I'm pretty sure things will work out. As most LBO deals go, the PE firms are going to pay themselves an M&A fee up front which will prob be 0.5% to 1.0% of the deal so they're on their way to making money already.
    Sep 19 09:09 PM | Likes Like |Link to Comment
  • The Semiconductor Industry Desperately Needs to Go Private [View article]
    Why not just have the semis pay out a massive cash dividend then or do their own leveraged recap rather than let a PE firm execute a buyout? ACS did that, they went to the leveraged loan market to do a big share repurchase.

    I don't follow Freescale but I'd expect it has a good amount of capex and is highly cyclical, I have no idea why the PE firms would go after that company, I'm suspecting it's mostly because they actually believe in the "secular growth" in portable media and wireless consumer devices that FSL has a strong niche in. Plus they have more money than they know what to do with. A lot of LBO firms blew up from the 98-00 telecom deals they did, the same will probably happen again.
    Sep 19 05:16 PM | Likes Like |Link to Comment
  • Far From Finished at Finish Line [View article]
    I like FINL as well, although I liked it more around the mid $10s. I think Clinton Group ran a pretty weak analysis for their implied value, however, it was basically "unlocking value 101" with levering up the company to do some share buybacks and then hiring Bucketshop IBank to sell the company.

    I agree that FINL will eventually go up and I like FINL more than FL, but CG's analysis was weak and suggested an inflated value. They used FL's comps which reflect a 20% command of the athletic footwear market, to suggest FINL should be valued at 6-7x EBITDA (FINL has 5% of the market), and then they go on to suggest FINL can go for 8.0x EBITDA in an LBO. If they plan to use Petco and MIK as comparable transactions they can also include BKRS as a public comp since it's a mall based footwear retailer (has a 2.6x EV/EBITDA multiple, guess that's why it didn't make sense for CG).

    So, some would say why do you care if they can get a good pop in the stock price, it helps everyone, right? Well, I don't think pushing FINL into a going private transaction is worth it for public shareholders, especially those considering "long-term value" (another laughable term these days). Public shareholders would be leaving real money on the table because in my mind, an LBO firm won't pay more than 5.5x-6.5x for FINL because there are major expansion plans ahead for FINL in regards to Man-Alive and Paiva that will require real capex.

    Let's run through some basic LBO math:
    They offer 5.5x 2007 EBITDA of say $130mm = $716MM EV. Factor in the $50MM of net cash on the books results in about a $15.50 per share offer. In today's market, an LBO firm will want 70% debt, so they'd be looking at $500MM of financing which will probably carry a financing cost of 8% if not more. That results in about $40MM of cash interest per year. If the LBO firm wants to stop any expansion ideas for Man-Alive and Paiva, I guess they can curtail expansion and reduce capex so they can make room for that $40MM of cash interest but the key issue is that even in 2003 and 2004, FINL was spending over $55MM in capex per year. According to CG, an LBO firm would offer 8.0x EBITDA? That means a PE firm would put need $650MM-$780MM in debt, which would result in $50MM-$60MM+ in annual cash interest??? I really don't see a deal happening at that multiple. I see it much closer to $14-$17 per share

    Secondly, if FINL was worth $18-$23 as a pure play footwear company as recently as 2005, as Man-Alive and Paiva really mature and grow, shareholders could arguably enjoy even stronger returns, $30+ per share, through potential spin-offs, sales of those other businesses. In my view, both of those businesses offer higher valuation potential than FINL once they get some good mass under them. Footwear has the lowest multiples around, I really think Man-Alive and Paiva could be valued independently at the 7-9x EBITDA, 15-18x P/E for MA and 9-11x, 20+x P/E for Paiva once they develop.

    All an LBO firm will do is give shareholders a few extra bucks and then do all of this themselves, grow Man-Alive a bit more and then sell it off in a few years in a private deal or IPO, same with Paiva, and then refloat FINL, if they went through with an LBO. Other retailers like FL might be better LBO candidates because they are mature and don't have real expansion plans that require major capex, so you can lever it up, cut costs, and use the cash flow to cover financing. With FINL, they have just 5% of the athletic footwear retail market so have plenty of room to grow, plus I believe they are looking at $60-$80mm of capex related to FINL, Man-Alive, Paiva, and maintenance expenses based on my models for the next few years. With mature retailers you can basically limit capex to just store maintenance.

    Plus, public shareholders shouldn't view CG as any savior, if you read the 13D you'll see them mention an appetite for participating in a go-private transaction. So public shareholders will think, gee $14-$17 per share, what a deal, and then the deal happens and CG will tender of course and then get some form of subdebt in the deal that will yield them 9-12% and will probably get warrants or some other equity component. They will essentially get a major return that will make the return public shareholders receive from tendering look like a money market account in comparison.

    Just run IRRs on it. Say you buy FINL at $12.50 on 9/30/06, the co is sold and the deal is closed, shares are tendered by 6/30/07 (which would be very quick in terms of hiring an IB, getting the books out, bidding, winner, fairness opinion, and then deal close). Assuming you get one quarterly dividend payment, you're at an IRR of 27.9%.

    Now assume you buy at $12.50 on 9/30/06 and there's no sale but the company fixes problems at FINL and successfully expands Man-Alive and Paiva. At year end 2009, just assume the shares are worth $28 per share. Not a major leap of faith when considering FINL went from about $5 to $20 in two years from 2003 to 2005. Factoring in dividend payments (and not accounting for any dividend increases, just the $0.10 annual dividend), you're at an IRR of 28.5%. Not a huge difference but if you believe in Man-Alive and Paiva, then the $28 is likely conservative. If you believe that management will continue to increase its annual dividend payment, the $28 is conservative.

    Just my two cents.
    Sep 19 10:23 AM | Likes Like |Link to Comment
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