Andrew August

Andrew August
Contributor since: 2011
The point of the article was to highlight the competitive pressures a company faces when it steps into the ring with heavyweights. Starbucks has articulated its desire to stake its claim on the single serve market and it has the mettle to do so. Via recorded $180m in sales in its first year. Starbucks has the excess cash flow to invest in Via and price it aggressively due to the size of the company.
I never mentioned the threat of patents expiring, because the k-cup is not the only way to enter the home market with easy to brew single serve coffee.
The Mexican tax issue will also rear its ugly head in this process. The amount Pride is claiming is $50m.
From the 8-K:
"The Notice states that the Company has failed to pay to Pride credit support fees, which are based on the credit support provided by Pride during the fourth calendar quarter of 2010, that have become due and payable in the amount of $459,215.63. In addition, the Notice states that the Company’s failure to make a payment to Pride in the amount of $260,866.31, which amount represents reimbursement to Pride for payments that Pride made to a third party pursuant to the credit support provided by Pride under the Tax Support Agreement, as requested by Pride in a written letter dated January 6, 2011, has resulted in an event of default under the Tax Support Agreement. In the Notice, Pride also states that it terminates its obligation to provide any additional credit support instruments under the Tax Support Agreement and directs the Company to cash collateralize Pride’s current aggregate credit support exposure under the Tax Support Agreement by paying to Pride an amount in U.S. Dollars equal to 600,136,853 Mexican Pesos.
The Company believes that it has defenses to the claims set forth in the Notice and expects to contest such claims in the Bankruptcy Case. The ability of Pride to seek remedies to enforce its rights under the Tax Support Agreement is automatically stayed as a result of the filing of the Bankruptcy Case, and Pride’s rights of enforcement are subject to the applicable provisions of the Bankruptcy Code."
As of the most recent quarter, only $35m are SBA 7. There's also $30m in SBIC loans - this is different than SBA 7a but it seems like there is some relative safety in these loans as well. The bulk of the loans are just commercial mortgage loans, totaling $170m.
PMC has been writing a lot of SBA 7a loans and selling them on the open market in order to collect income from servicing.
As for no real downside, not because of the SBA 7a loans, but reasons outlined above, I do believe this is a situation with asymmetric upside.
Are you referring to fixed rate notes of floating rate notes when you use "FRN"? I believe they are being held at par because they don't take charges on fluctuations in value and they are being held to maturity.
The loan portfolio can be bought through PCC at 65 cents on the dollar, quite a drastic haircut for a portfolio that has held up well. While one cannot be 100% certain, the relevant factors indicate that this is an overreaction.
It has been a mystery how the Tisch family cannot extract more value out of CNA. 10% of the float is traded on the public market, so the discount is already implicit in calculating the value of Loews.
To the extent that it is a closed end fund, the company's history shows a more nuanced view. The company lent BWP and CNA money during the depths of the financial crisis. Loews has proved incredibly adept at retaining as much value as it can in the parent company. Interest on the preferred and debt instruments goes to Loews, while the equity value is retained by providing capital to the holdings.
I would regard the tax implications in a similar fashion to the Malone Liberty empire. The historical actions of both indicate a lot more savvy when it comes to tax efficiency than say Kraft in its disposition of its frozen pizza operations, of which Buffett was very critical.
While I understand why one would look at a 10-15 year historical record, the company has a wider array of products now than in the past that generate revenue. So while some of the company is affected by cyclical consumer spending, it has incrementally raised its run rate FCF.
Management has 1 more Q until fiscal 2011 is over and they project $3/share, which is ~$90m net income. D&A is going to be about $15m compared to $5m in capex, so $100m in FCF for fiscal 2011. This figure includes very little of the Kaz acquisition, which given management's estimates should be immediately positive for earnings and boost FCF.
FCF should go towards paying down some debt from the acquisition so figuring out how much of the ~$38m in EBITDA becomes FCF is more open to speculation. I'm reluctant to work anything concrete out from the figure b/c I do not know how Kaz matches up to HELE with D&A or capex. I lean towards there being similarity. Management projects ~$3.50/share for fiscal 2012, so you can imagine that some FCF will be generated from Kaz.
Fiscal 2011, HELE is poised to get $100m in FCF. If you look at Fiscal 2008-10, those are really the bulk of real world 2007-2009. If you consider 2010 to be a muddle along year for consumer goods (more modest inventory restocking than steel and similar goods and therefore more representative of what we might see with a sluggish economy) then the company should be firing on more cylinders than the past 3 years, plus have additional cash flow from Kaz. As it did after the OXO acquisition, the company will most likely focus on paying down debt from here on out for a while, which should boost FCF as well.
Hope that clears things up.
The product lines are commodity type products from a production standpoint and could be moved to a more favorable currency climate.
The appeal is that the company has access to a stable of strong brands that it either owns (OXO) or too which it has cheap access. Even if a fan or humidifier is a "commodity" product in your opinion, simply putting the brand Honeywell or Vicks on it automatically increases the appeal relative to a non-branded product. It's just the way humans think.
Even though free cash flow is not returned through dividends, it is invested in business that expand profits. The OXO brand is probably the best example of their success at expanding product offerings under brands.