David Chan

Long only, value, growth at reasonable price, mid-cap
David Chan
Long only, value, growth at reasonable price, mid-cap
Contributor since: 2012
I'd say most of that is based on leverage and cashflow.
DAL is free cash flow positive by 3.5 bil for this year. They've pretty much digested the Northwest merger completely and are in debt paydown mode.
AAL is cashflow negative and is only going to be cashflow breakeven-ish over the next few years as they bought a whole bunch of new planes to refleet. Their profitability is fantastic tho.
Both are decent firms, and really industry metrics suggest all 3 mainline legacy's should do fine over the coming year. Its just how much risk on leverage you want between DAL/AAL
I've tried to write recently, but honestly, I feel a bit frustrated with Seeking Alpha's editors. I had a extensive article on Apache recently that went into review but was rejected on the basis of grammatical issues by one of their editors. Grammatical.
I've timed Apache well but working around the editorial staff simply wasn't worth the time to publicly make the pitch. DAL on the other hand, is practically 70% of my equity position right now, and I'll gladly defend the trade.
Yet with the influx of new writers, things has been interesting. The general consensus with this article by the notes of the other commentators is that it is weak on the financial analysis. But here we are, it went thru editorial and we are discussing it here.
I may give it one more try to expand my response into a proper piece. But this is more a SA thorn I would be picking at.
I'm sorry.
Personally, I am heavily long Delta, in an investment size that I had never produced a thesis stronger than any of my past ones, written or otherwise not posted here on Seeking Alpha. So putting it out there, I am HEAVILY long this position.
I believe Delta is a fantastic story in a fear mongering, gas-collapsing market that we have found ourselves to be in the last several weeks.
I think management has the right shareholder directives in debt reductive and cash flow generating focus to drive the company forward. Like several other commentators here, anyone who quotes a 3x P/E simple doesn't understand the business.
Let me summarize my thesis:
-Delta trades at around 13x FORWARD P/E on CURRENT earnings. Business is forward looking.
At 13x it is 30-40% under transports like UPS and railways. Management believes they can run airlines like an INDUSTRIAL QUALITY TRANSPORT. If the market believe they can do it, the multiple will expand to match the 18x+ any of the other firms are trading at.
-To get to an industrial quality firm they are working on fixing up their balance sheet. Delta is the first in class of the 3 legacy carriers in their debt rating to 1 grade under investment grade at BB.
-The way they are doing so is by their MASSIVE cashflow generation from a moderate capex plan of retiring their fleet slower than them retiring their debt. A higher debt rating would also help lower their interest expense and improve profitability as a massive financial engineering turnaround.
Delta generates over 3.5 billion a year in free cash flow and they are on track to get their long term debt to 7 billion by end of 2015 and 5 billion by 2016. A fraction of their old debt load of almost 20 billion just a few years ago.
-Incremental and regular buybacks are also reducing share count to boost the earning potential of retaining owners.
-While Delta hedges fuel the current fall in energy prices may last for a while. The above figures all uses figures when oil was trading at about 100. The longer low oil prices persists, DAL will slowly capture that benefit and provide additional margin of safety to the measures we have here.
-Shareholder friendly management, top-of-industry performance metrics, focus on margin and price over market share....
-PRASM or passenger revenue per available seat mile has been rising and figures released today of 3% is above analyst expectation pre-ebola fears. In other words: They outperform ON TOP OF completely ignoring the fearmongering of ebola.
Blend this all together, you have a company thats expected to make around 3.30 this year. I believe DAL has room to outperform this figure with oil prices falling and they are expected to make over 4 bucks a share next year.
Even if the P/E multiple doesnt expand and stays at 13x, you have a 52/share target on next years earnings. It would be insane to not expect multiple expansion if they improve debt quality/rating and interest expense that will flow straight into the bottom line.
Look at cashflow. The company has plenty of firepower to buy back shares or new planes once debt restructuring is over and do it organically. No other legacy carriers are projecting much if even a positive cashflow generation AT ALL. You are also trading at 60-70% the cashflow multiple of UPS/Railway firms. If they can achieve industrial quality, this discount shrinks. Again, that suggests almost a 50% upside from here if they can do it.
Now Im not naive enough to think the street will love airlines, but no matter how you cut it, at high 30s and low 40s theres still money to be made if you blend forward P/E or cashflow multiple valuations together. I am not even going to contemplate oil price benefits too extensively here because who knows whats gonna happen....
To say P/E is 3x
8 quarters of beats
Analyst ratings all positive
None of that is to say:
P/E is skewed by 1 time tax benefits
They can still miss as a risk factor
Analyst ratings ever be right?
If you want to pitch a story, pitch it objectively. Readers who blindly follows this is going to be disappointed once they see that P/E skyrockets several folds, and as a commentator I believe you have to be comprehensive. You dont need luck with future articles. You need facts.
Bottom line:
DAL is best in class operator of the 3 legacy airlines. You are buying this as a future industrial transport, and also into their insane cash generation power.
You buy AAL if you want to play oil as a hedge trade. They dont hedge their fuel.
You buy UAL if you want straight up cheap P/E. They are highly leveraged and has execution risks as they are still struggling with the Continental merger.
All 3 airlines I am bullish on as sentiment is turning increasingly positive towards airlines. The XAL or airlines index is also breaking above resistance level last seen in the mid 2000s and the charts for all 3 airlines are suggesting they are about to break through their own resistance levels also.
So, work harder, give us a more complete picture of a firm with their balance sheet, cashflow, catalysts to future earnings growth, etc, and you will probably offer solid advice to the SA public.
And to DT001: call it for what it is. If you believe DAL is truly a good investment, this article doesnt cut it.
By the sound of it you make it seem like COH is going straight to bankruptcy. Tell us something that we DONT know. They have beat the street. The company is turning around, abit slowly. 2014 is a horrible year for COH holders, but nothing we see from this report suggest their turnaround isn't under way.
Sometimes good things, takes time.
Hi Jennifer, thanks for your thoughts.
I'm wondering whats your take on energy prices the last 2 weeks. Ever since the ISIS chatter in Iraq died down, we've seen Brent falling to the upper 90s today. The lack of supply disruption seems to keep prices trending down the past 2 weeks, and market technicians are making increasing bearish views on this with projections to see it going to the mid $80s.
We've seen practically every one of the majors shares take a pause in this timeframe too. How much of the pricing action in the last month did you take into your projections into the next 12 months?
Also, I am not suggesting any improprieties here. Creative accounting isn't exactly a bad thing, but if this is the way CBI has been able to smooth out their earnings, I would wonder if there is a moment of reckoning where they simply run out of track on their accounting legroom. Earnings reserves hasn't exactly been a new concept.... (see anyone in the financial sector with their legal and loss reserves, you get the idea.)
Question is, how long can it last before you look under the hood and see the balance sheet is on its last legs.
And a savvy investor should also be bold enough to point out the emperor has no clothes.
Enron was everyone's favorite stock in the late 90s until it wasn't. I am looking at CBI's Shaw acquisition and cashflows and it sure has a few areas that begs for more questions.
What you described above with the magazine sounds perfectly fine. But that's not what this report has raised. The maneuver I have issues with revolves around the acquisition between CBI and Shaw. CBI has revised the value of Shaw multiple times over 1 year and turned that into Goodwill, something completely intangible and just a balance sheet item.
If it was just a question of cashflow, all that would happen would be adjustments between their assets and liabilities. However, this does not address the inflated Goodwill stated in the report.
Care to give us your rebuke concerning their revaluations of CIP and Goodwill?
If you prefer analogies, this is how I see it:
Company A purchase Company B for 3 billion. Company B's liability is at 0. Assets of 2 billion. Goodwill is $1 billion.
Over a 1 year timeframe, Company A revise these figures on their balance sheet. Company A now assets Company B has "an underfunded pension" (whatever subjective item you can use to tinker with your accounting that you can massage into the GAAP 1 year rules) liabilities of 1.5 billion. But they also revise Goodwill up by 1.5 billion on the basis of the above said GAAP adjustment rules. Everything is now kosher and consolidated on the balance sheet of Company A.
You wouldn't notice any changes on the balance sheet of company A if you were looking at shareholder equity. The goodwill makes up for the revised liability accounts. But your tangible book value would go down the drain as goodwill is intangible.
Let's look at the numbers:
CBI as of today is worth 7.2 billion.
Its balance sheet has total asset of 9.3 billion dollars
4.225 billion of which is Goodwill.
Another 625 million of Intangible Assets
This G/IA figure increased from 925+165 million in 2013. Thats almost 3.75 exceeding the Shaw acquisition even.
Liabilities today stands at 7.05 billion.
So on paper the company has a net asset value of around 2.3-2.4 billion dollars, where almost 5 billion dollars is allocated to goodwill and intangible assets. Back that out..... well you get the idea.
And operating cashflows has not been particularly strong in the past 12 months and have been on a downward trend.
Doesn't these suggest that the Emperor may indeed have no clothes?
I can't question the valuation thesis of MAYS, after all, New York/Brooklyn real estate has been going gangbusters for the past 2-3 years and I don't see that story changing for years to come with so much cheap money slushing around...
But how is anyone going to do anything with this when there is only 317 shares trading Friday, or an average of 1,823 shares daily over the past 3 months?
The company may be on the verge of doubling, but no one will be able to take a meaningful stake in this thing. Even if you did, you couldn't get out unless Shulman sells and liquidates the whole listing completely.
OXY is another one I liked (and played when it was in the low 80s earlier last year).
They have been facing a different set of challenges (management is somewhat awkward with their PR skills apparently, there has been some public boardroom debacles on executive pay you can look up in the past year). Its not as severe as APA's political risks in 2012 but OXY did get cheap while that happened.
OXY is a fine company I think. Revenues are growing steadily (tho definitely a lot more slowly than the Texas shale boomers), and profits are predictable and up nicely year on year. My only issue is valuations. I loved it at 82, its ok at 96. It might run up some more sure but comparatively APA is just cheaper.
What's interesting is that both OXY and APA has Middle East exposure, and both are playing off the same playbook where OXY wants to spin off California assets and also sell off a stake in its Middle East operations.... maybe APA's CEO left his diary in a cab somewhere.
However, APA gets my focus right now. P/B of 1.05 APA vs 1.73 for OXY with the same 13 P/E gives APA an edge there. While OXY does have organic positive cashflow at the moment, APA should get there in about a year. The market is a forward looking animal, and I would not be surprised to see APA start marching up to where OXY is right now.
I think another consideration in your thesis is also the liquidity of the shares. On Friday only ~8000 shares traded hands and daily volume is in the 15k share range. Thats less than $300,000 worth of volume per day.
Anyone who gets into this name with that kinda volume is taking a gamble that they have a solidly accurate fundamental view on the business. I'd be paranoid about the possibility of surprise misses or shortfalls of any kind.
It is a "possible" dilution. You yourself is stating it is a "absolue" dilusion -IF- we are above the redemption price. So until we are trading above $21.52 it is just a possibility. Neither you or I know for a fact whether it will be trading above $21.52 by then. So until that occurs I am not going to treat it as fact.
LEAP options don't suggest anything. The option market unless there's significant activity on a specific issue wouldn't be telling you anything, and there's hardly any volume in TTWO's long dated options anywhere for me to make that same decisive conclusion.
All I have at the facts in front of me. The bonds are refinanced at a lower rate for longer terms, and there's a possibility we have a dilution at a far higher price. Both of which are favorable for current holders of the stock.
Now, I also have no doubts they will be able to raise the $250 mil at 1%. They've already done so in 2011 issuing 250 mil at 1.75%. That has a conversion price at $19+. You've already stated TTWO is already incredibly liquid, so why doubt their ability to raise more money for highly attractive rates if you also agree they are highly solvent??
Also, senior debt holders are always made whole before common shareholders....... but are you suggesting if GTA5 is not going to perform that TTWO is going bankrupt? As if by loading up another 112 million of cheap long term debt is going to tip it overboard? All at the same time it's sitting on 420 mil cash and looking to generate around 1 billion of GTA5 sales? That's just silly. If GTA5 doesn't perform of course the common will suffer regardless. But that's already a risk that is known. The debt issue didn't change that, and the main point of the article above is to suggest the drop was a massive overreaction.
Anyone who is into gaming knows GTA5 will be on their wishlist. As per my previous article, it is smart that they are not releasing GTA5 on new hardware. You have a huge already installed base of the current generation. That means the potential customer base is much larger than seeking out the early adopters of the new generation. A new GTA title is long overdue, it's been 5 years since GTA4. You either delay the release of the title for another year and wait for hardware adoption to catch up or you make the best of what you can right now by catering to the largest consumer base which is the current generation hardware.
And of course the industry is on the decline. We are at the end of a hardware cycle. Stocks are forward looking and the recovery we've had is based on the assumption there is a renewed sense of interest on the horizon with more powerful hardware.
Stocks are forward looking, and I will only make comments that goes with that.
Just hit the wires. The $250 mil is priced at 1% with a redemption price at $21.52.
My talking points:
1) The 2014 dilution is averted.
2) The interest expense is lowered by ~$3.5 million a year.
3) The long term balance sheet debt is now over half cheap debt at 1% interest.
4) The company now has so much cash they have no liquidity concerns even if they were to double their buyback.
1) Overall debt level is increased
2) Possible dilution at $21.52 in 2018.
The stock is at 15.34 as I type this. I still think the near term catalysts and strengths of the company's balance sheet outweighs the long term risks. Again, this is a trading stock, not a buy and hold perpetually. Right now we have a buying opportunity.
My call here is that TTWO could very well increase their buyback in the coming week or in the next earning call just prior to GTA5.
My argument is that yesterday's move is an overreaction to the possible dilution in 2018. TTWO is a fast moving company. Fundamentals by 2018 could be completely different by then. The next GTA would already be right around the corner, and I am not even sure if TTWO will remain a public company by then as I do still feel confident that the firm is still a fantastic takeout candidate.
The market may attempt to "price in" a future dilution in 2018. But that's almost like asking an investor in 2006 whether a Lehman stock buyback in 2011 was going to boost the stock or not.
We are trading in 2013 and TTWO's story is playing out right now. I think anyone following the stock should ask whether the fundamentals of the firm has changed, which I do not believe it has.
There simply isn't any other titles released recently that has the appeal of GTA worth comparing to.
Take a look at the top 50 of this list: http://bit.ly/XsopMD
GTA titles appears multiple times on this list (4 games taking 16, 23, 31, 48), and other than Super Mario and Pokemon I dare say the GTA series probably is the marquee series for video games in recent history along side the Call of Duty series (3 games taking 30, 32, 33, 35, 39, 49). Comparing GTA to anything else outside of COD simply wouldn't do it justice.
Then take a look at the installed base of Xbox 360s from Q4 2009 (around 29 mil units) to today (around 76 million units, supposedly.) If GTA was able to sell to around 50% of the installed base then, I don't foresee selling 18 million copies to <25% of the installed base this year is too much a challenge.
Onto Vivendi-Activision, I do not see that situation resolving itself anytime soon. We are on the cusp of a new hardware cycle and Vivendi has sat itself out for long enough. Mid year 2012, talks to sell ATVI broke down due to the offers all not being high enough. Fortunes for the industry are starting to turn with excitement of the new hardware releases generating interest, along with the share prices of all the players in the sector.
Unless ATVI wishes to buy itself back at an even higher premium I can't see why Vivendi would accept. Also, its an $10+ billion deal at current prices. It's not something that either ATVI or Vivendi can ink easily. Vivendi is most likely stuck with ATVI, and they might as well considering we are coming out of a trough.
ATVI is the most likely acquirer in my opinion of TTWO. Even at current valuations they can still get a deal done for less than what ATVI holds in cash.
As for other acquirers, i am thinking outside the video game industry. Sure, MSFT can buy TTWO just to get the GTA exclusive (and they have showered them with money in the past for deals like that), and they can afford it. But MSFT could have moved in years ago if they wanted to, and I have a feeling they have bigger fish to fry. Sony is in no position to really make a move due to their troubles with their core divisions either.
Looking at the insider transactions recently, I would actually be putting my bet on either privatization or LBO by a hedge fund. The valuations aren't that demanding and given the new hardware cycle, wouldn't it make a lot of sense to re-IPO at a later point when the sentiment improves?
As for Rockstar Games, I am not enough of an insider to know what really goes on inside the studio. But I am sure given the creative successes that team is known to generate, unless SZ has some insanely good programming skills at his hands, the football team might have just taken over the principle's office. But that's just my 2 cents.
With you on LF and TTWO. Own both. TITN is on my watch list. Unusual our watch list has that much overlap.
What's your take on basic materials? I don't see any names in that space in your picks. Thoughts on Occidental Petro (OXY)?
Very. I was thinking of going in with 10k shares just as a "all bets on red" sorta thing. Toups had a very questionable history with a few delisted Chinese firms was why I had little conviction other than playing the PR rebound.
But after AIG, you learn to tame your itchy trigger fingers. lol
I bought in at 8.4 also but unloaded *everything* when it failed to break above the moving averages at around 8.2. Tried this twice but the symbol keeps failing to break thru and I took small losses each time.
Is the stock undervalued? Maybe, I am inclining to say it's "cheap". But there's no conviction (me included) to play this name beyond the quick trades. I have a high risk appetite on the limited amount of money I had put into SKUL and I am fine with losses here. I knew what I was in for. It was a technical trade, nothing else mattered. It works, or it doesn't.
However, it seems like a lot of the chatter was to wait for the short squeeze. Buy and hold. Unless there's some sort of fundamental improvement in the business model the chance of that happening is low. Investors need to realize that turnarounds aren't just caused by a positive Seeking Alpha article.
There needs to be catalysts where you have strong convictions in to justify a thesis, especially in the face of strong established downward trends. I don't see any of that here. Management can say anything they want but until you execute some results all that is is just talk and all you are doing is making a gamble. SKUL's management is one that I view has low to no creditability, shown thru insider trading activity and their shareholder friendliness (or lack thereof). I dropped the ticker from my watchlist as a result.
Is SKUL back on my watchlist? Sure. Again, as a technical trade. But will I "invest" in it?
Nope. Never at least according to what I am currently looking at.
I almost bought into this thing a month ago. Even though it ran up 20% or so afterwards I didn't feel like I missed out. The threat of something like this is always there with emerging market tickers.
And this story just shows you cannot trust what you read blindly. I bought AIG in 2007 thinking it was a smart investment. When management deceive nothing matters.
Knowing how weak corporate governance controls are in mainland China, this comes as no surprise. Job well done sir on the expose.
They have released Max Payne 3, Borderlands 2, and NBA Live 2k13 in 2012 to prop their numbers up this year.
These 3 titles are part of the broad roster of titles Take Two has in their armory that illustrates their current content strategy on focusing on building content franchises, rather than 1 hit wonders:
With Max Payne 3 and Borderlands 2, these are 2 titles that are sequels to titles released several years ago that have developed a loyal following. They pick 2-3 of these titles a year to advance, similar to movie sequels to develop new plots/chapters/storylines in the story, and also updating the franchise technologically and content wise to make sure it stays relevant.
NBA Live 2k13 is part of their sports games strategy that keeps churning out updates annually to reflect changes in the real life sporting space. While I am not particularly keen on the annuity release concept, I do think with sports they can get away with the interest corrosion that you might experience with a drama/story driven franchise.
Going forward, Take Two's creative team has shown themselves to be very talented content producers if you look at the reviews of their key pipelines games in the last year or two, most games often score review scores in the 80%+ regions. There are numerous titles in their roster that are due for a new renditions.
The company was able to generate a profit due to these mini-hits. In 2008, if you ask anyone about Take Two, they will respond Grand Theft Auto, with just 1 or 2 titles in the pipeline that gets people talking.
Today, I could name 8 franchises that gets the gaming media excited and jumping around in anticipation for a new release. I believe this number will continue to grow with time, the team at TTWO is capable.
As long as they have what it takes to create relevance in the marketplace, with new hardware just on the horizon, the firm should be able to capitalize on the goodwill and content they are seeding today. The next hardware cycle I believe will renew consumer interest by offering new features and tech upgrades, and with the right content mix, they could very well capitalize on that recovery.