Envoy Global Research

Long only
Envoy Global Research
Long only
Contributor since: 2005
The liability of MEPPs is real, and a reason why YRCW wii never get acquired, but it is also one of the reasons they will never allow YRCW, to go bankrupt. So it's a blessing and a curse, and I believe ultimately a wash. I don't even think the off balance sheet MEPPS liability plays any role in the company's debt covenants, from what I recall, which goes to show you that nobody takes the worst case scenarios of these MEPPs seriously. So yes they are a liability, but the current price of the stock is not really a reflection of that liability. It's more about fear of a major recession and a terrible market. If ( should I say when) the market realizes that a major recession will not happen in the US, YRCW should soar. I just hope it's not at $3 when this happens. For the record, I'm long YRCW from $15, so what do I know, usually I'm 3 years early in most value plays
The liability is much less now than the worst case estimates mentioend above, because of legislation passed last year by Congress regarding multi-employer pension plans. Basically, it's quite clear that these multi-employer pension plans are "too big to fail" and hence the liability is in essence not YRCW's liability in the worst case. The US government will bail them out, in a worst case. That said, the valuation metrics do need to take into account the multi-employer pension plans, just not to the extent mentioned here.
The investment makes sense for Tai Hot, because like many other Chinese investors they want to get ,money out of China and park it in US business or real estate. They don't care per se what they pay, as long as the company has enough cash flow which can be extracted to protect the initial capital. So the share price is meaningless for Tai hot, because unlike minority shareholders, tai hot will find other ways to make money here aside from share price appreciation. The stock can go to 0, and tai hot can still do well. That said I am unfortunately long here also, and hope that at least for a few years Tai hot will pretend to care about minority shareholders , because there is certainly a lot of value her that can be extracted and certainly huge potential for aiq services in china. Certainly, if Tai hot is honest, this stock will appreciate considerably, but their intentions are still unclear.
I think you are the one who doesn't understand. These executives specifically tell investors they don't want to spend on R&D. The prices have no relationship whatsoever to R&D. I assume you think that mafia tactics is also capitalism, and those who are against the mafia are socialists?
Nonsense. The prices charged far exceed any reasonable profits needed for research and development. Even the executives admit the prices charged have no relationship whatsoever to R&D expenses to develop life saving drugs. How much does Shkreli spend on R&D? What about Valeant? Actually, Valeant's whole investment appeal is that they don't spend much at all on R&D. All the price hikes flow down to the bottom line. The prices are simply made up to gouge customers, increase stock prices, and pay huge executive salaries.
Nobody is saying to nationalize anything. The argument is simply that prices are excessive and price gouging is simply wrong and antithetical to a well functioning capitalist system.
Yes, you are correct. The transaction does nothing for the balance sheet whatsoever. The Chinese company is just buying the shares of another shareholder.
If an author writes an article about wage growth and the US vs. other countries, it surely has political implications, which the comments are right to expose. The politics of a country determine how employers treat employees, how foreign trade is conducted, what the minimum wage is, what social safety net is available, how workers pay for healthcare, how we treat the unemployed, and how a country, in general, treats the rights of workers. All of these large and small decisions are invariably political, and effect wages to a much larger degree that some vague assertion of "automation".
Yes, you are correct. The US healthcare system is completely broken, because the private health insurance lobby in the US, combined with the pharma lobby, is huge. The Canadian system, and every other system in the civilized world is far better than the US healthcare system.
Anyway, it is a fact that stagnant wages over the last 2 decades in the US is 100% correlated with the exponential rise in healthcare premiums. Even Warren Buffett mentioned the cost of health insurance as his biggest business expense. How can businesses give higher wages when insurance costs rise 10% every single year? Basically, corporations are giving a 10% raise every year to employees in the US, but it shows up in the health insurance premiums, not the wages.
As for employees, most people stay in dead end jobs in the US, for one simple reason: they get healthcare. Why leave a job which puts food on your family's table, albeit an abysmal wage which provides you with no ability to save, when that job pays your insurance? Would you put your health and the health of your family at risk?
Obamacare was supposed to change this, but of course, it did nothing because most of the ACA language was written by the insurance and pharma industry, contrary to Republican propaganda. In the end, the government has zero ability to negotiate either health insurance premium or drug costs, under the ACA, so premiums (deductibles), drug costs etc. continue to soar.
Didn't have time to read all the comments, so not sure if I'm repeating anything. But the issues in the US is that health care insurance costs have soared over the last two decades and now comprise a significant component of costs for companies that are not included in traditional wage figures. This has two effects: 1. Businesses are unable to raise wages significantly for employees in the US, because the money that could have been used to increase wages is diverted to the health insurance racket. 2. Wage comparisons between the US and other countries is misleading because the comparison excludes the cost of health insurance as a component of wages. If you include health insurance as part of wages (which the IRS does, by the way, for those who are self-employed), I think it wage growth in the US would be comparable to anywhere else in the world, if not greater. The problem of course is that employees don't really see any benefit from soaring health insurance costs that are paid by their employers, so it's not really a wage.
All in all, as healthy insurance costs become an increasingly large percentage of GDP in the US, the entire country suffers. Businesses have increasing costs, which effect their ability to hire employees and pay them fairly. Consumers suffer because disposable wage growth suffers, as more of their compensation is diverted to pay for insurance they will never use and never receive any benefit for.
There is a massive bubble in start ups, with I think over 100 "unicorn" billion dollar companies most of which are entirely worthless and will never generate any cash flow. Funds have alot of exposure there and are beginning to write down some investments. There is still a massive bubble in biotech too. The energy bubble has been popping over the last year with grave effects to the junk bond market. If other bubbles pop there could major repercussions as funds will dump liquid stocks to shore up liquidity.
Nice article. I agree IQNT is quite interesting here. I'm curious as to what your EBITDA expectations are for 2016, more specifically, what do you see the quarterly EBITDA at by the middle of next 2016, following phase down of intercarrier, and also completion of start up costs for t-mobile? Prior to the deal they were at $20 million a quarter in EBITDA.
Nice summary. The guy who is writing these short articles is completely clueless about the history of this company, and he does not understand that they lost the Dupont license and had to replace $80 million in lost Dupont sales and $10 milllion in Brazil sales. Somehow replacing $90 million in sales (basically the entire revenue of the company now) is considered "no-growth".
What company in the world can estimate when the strong US dollar might weaken? Every US company with foreign sales is suffering right now. In fact, some people think the strong US dollar can cause a recession here in the US next year, if it persists. Also, 5% of LAKE's sales are from Oil and Gas. The massive slow down in that sector also hurt them. All in all, to have flat sales considering these headwinds is quite impressive. And there is at least 50/50 chance these headwinds will reverse in the next year.
It's hard to imagine the dollar getting much strong against most currencies. But who knows. If it gets weaker, it's a near certainty LAKE will surprise on the top line.
That said, the important thing is that LAKE orders are increasing, as are margins and free cash flow. The sales have been between $90 - $100 million a long time now and there is nothing to suggest it will be different next year, as 90% of the revenue is recurring. Can you find me a business with 90% recurring revenue at near 40% gross margins trading for 1X sales? I sure can't.
You many not think the CEO sounded good on the call (I disagree, I think the guy is quite smart and has the education to boot), but nevertheless he has delivered. This company was almost bankrupt just 2 years ago and now is on very solid footing. That's why he's optimistic. He just survived a near death scenario, and is finally able to breathe.
Anyhow, I've been in this stock since $5, and there are constant bearish articles on this company. Not one bearish writer has been right ever on this stock over an extended period of time. The time to have been bearish was 10 years during the Dupont days. During the last 2 years, the stock has steadily gone up (ignoring the Ebola hype), since the financials and prospects for the company are improving every single quarter.
The stock price is very volatile, since there are quite a few nutcase traders in it from the Ebola days who think that the stock will shoot up 200% in a day. When it doesn't they panic and sell.
LAKE's historical core sales, without sales from outbreaks, have always been around $90 million to $100 million, so guiding towards that is just being conservative, especially considering the currency pressures. They are not guiding towards any decline. You do realize the company's orders are growing double digits? Sales have just been lower because of currency issues. If the dollar weakens a bit, sales go easily go up 10% next year. But, of course, nobody knows where the currency will go, hence the conservative guidance.
With the stock trading at less than 10X cash flow, the valuation already reflects a flat growth trajectory. So you have a situation where if growth remains tepid, because of the currency, there is not much downside. However, if growth accelerates for the reasons I mentioned, you have at least 50% upside. That's a good long proposition.
Inventory? I suggest you re-read the call. Management is not going to tell you if they have a large pending order or not. It's called insider information. Anyhow, management explained quite clearly why they are bulking up inventory. It's got nothing to do with one order, but a supply issue in the channel. They clearly believe the channel is undersupplied and they can get some incremental orders. You can believe them or not. As they know quite a bit more about the industry than you, I would tend to believe them. In either case, if they are wrong, it won't matter. They just will drawn down the inventory.
"Government preparedness" - Hmm...I won't even address this, because you can't talk in the past, about something which has not yet happened. As well, you are highly inconsistent. When LAKE benefits from one-time outbreak sales you say to short, because of this benefit, and when they don't benefit, you say to short because they will never benefit.
Once again an article based on distortion of facts and complete lies. LAKE management did not guide for decline in the business, in fact they mentioned again as in previous calls that they expect to be able to grow the business 10% a year for the forseable future. The reason why they increased inventories is because they obviously expect a large increase in the business in the year ahead. As management has been in the business for a long time, I hazard to guess their prediction for an increase in business will prove quite prescient, especially given recent merger activity in the industry.
I suspect that a 10% increase in the business next year is certainly doable and will probably be low for the following reasons:
1. Government preparedness for outbreaks will kick into high gear next year as per previous bills, and increasing fears of a bio-terroism attack.
2. Dollar will likely weaken next year, which can cause a dramatic increase in LAKE's sales (this year they were hurt tremendously by a strong dollar)
3. Approval of export of oil in US (now almost a certainty) will help the O&G sector, as will a stabilization of oil prices.
With 90% recurring revenue, a much improved balance sheet, the liability with Brazil now completely gone, and with the equity trading at less than 10X free cash flow, LAKE's stock is an absolute bargain at today's price. Selling here is shorting this kind of stock is absolute lunacy. Who shorts a stock at 10X cash flow with no balance sheet issues whatsoever and growing at 10% a year?
Company will be at $20+ this time next year.
Thanks for the reply. Yes, this author is simply short this name for some odd reason, even though there really isn't a major short argument here any more. He wrote a similar short piece awhile back, and clearly purposely disregards the basic facts about the business. Anyway, I view Q1 this year as the yardstick. They did $0.30 in that quarter. In looking at their statements, they do around $10 million a year in base Free cash flow now. Also, I don't particularly view Q3 as so important per se, I think 2016-2017 will show the growth, because now that Brazil is behind them, they have alot of opportunity to grow the business, both organically and via acquisition. Finally, the multiples paid for businesses in this sector are common knowledge. The current price of LAKE is on the very low end of multiples, so there is potential for expansion in the multiple if results continue to be good.
You can't annualize Q2, as it had some one-time benefits from bird flu.
Nevertheless, this "short" article show little understanding of LAKE's business, and the author has written this up as a short before at around the same price. I've addressed the flaws in a previous article: http://seekingalpha.co...
Basically, as you mentioned, LAKE had to replace nearly 60% of their DuPont business and deal with huge losses in Brazil over the last 5 years. Now both of these major drags are done and the business is improving very nicely. Ex-Dupont and Brazil, the business is growing at double digit rates, margins are way up, 90% of revenue is recurring, and the balance sheet is strong. At the same time, the valuation is quite reasonable, and actually low on a relative basis when compared to acquisition multiples in the industry.
Well let's see what Q3 brings...
In any case, in 2016-2017 they should see a nice bump in revenues from government programs to boost emergency supplies, in the event of another ebola-type outbreak (Congress has already earmarked funds for this)
Greater than 50% of PTX's sales is now Treximet. Treximet is simply an expensive combination of two widely available generics (sumatriptan and naproxen). Naproxen is the same thing as Aleve. The silly notion that you can combine a couple of cheap generics into an expensive brand name drug, while doing no R&D whatsoever, is now, thankfully, a thing of the past. If you want to invest in healthcare, invest in companies that are doing real R&D, and developing unique drugs.
Longs will tell you it's false. Shorts will tell you it's true. The answer lies in the middle, which I submit is a reason to stay away from this company and any other pharma company that peddles drugs that are nothing but overpriced cocktails of cheap generics.
The equity value of PTX is probably worth $0 in the long-term. If you like PTX's products, buy the debt, not the equity.
EBITDA is meaningless here for an equity owner because they have large interest and debt expenses. PTX has over $300 million in debt, and does not cover debt service costs (i.e. they have no coverage). Even if you want to use EBITDA as a valuation tool, you need to look at Enterprise Value to EBITDA. In this case, EV is $500 million and they expect $30 to $35 million in EBITDA. That is 14X EV/EBITDA. Hardly cheap for a company that has nothing proprietary and has no real R&D (one of their main drugs, Treximet is just a mix of two widely available generics).
Just look at SCTY's interest expense per quarter and the ballooning debt on the balance sheet. Usually companies with these types of financial metrics would be considered distressed and headed to sure bankruptcy. SCTY will never be able to pay back this debt, and their only recourse will be to refinance the debt at significantly higher interest rates, further increasing financial losses! The only reason why SCTY trades for more than $0 is the Musk connection. Otherwise, it's clear the business is not viable, nor was it ever. This has been a game of financial musical chairs (to put it mildly) from the start, and it is finally unravelling.
Thanks for the comment. I really do like your analysis. Treximet is not "price gouging" per se when compared to the previous price of Treximet, but when you consider what the generic costs seperately, then the price of Treximet is absurd. Treximet is nothing but a combo of two drugs that are now generics. There is nothing special about this drug, whatsoever.
The problem is that PTX is simply an "acquisition" story. There is no R&D. Nothing new or unique. Personally, I don't think companies like this will get much attention from investors anymore in the pharma space. It's not a viable long-term business model. All of these companies were simply trying to mostly replicate the VRX model on a smaller scale.
As for the debt, PTX's only hope will be a refinance. But, if the stock is depressed and interest coverage remains low, you can bet the debt holders will put a lot of pressure on the company.
Again, I see this a potential trade, as on some good news, surely the stock will pop. But, I don't see the long term value here (as opposed to something like Foundation, which has tremendous intellectual property, is a leader etc.)
For the record, I really like some of your other ideas, but PTX has always been a head scratcher for me. The problem is that Pernix's drugs, especially Treximet, are nothing but combinations of commonly used drugs that already are available as generics (sumatriptan and naproxen) at a much lower price. This is right out of the VRX playbook. There is no R&D here, just acquisitions of niche drugs that don't really do anything different than cheaper drugs, and an attempt to raise prices. This type of strategy will get significant scrutiny from regulators and investors going forward. It's game over for these types of stories. That combined with the terrible balance sheet at PTX, would make me very wary of making an investment here. Maybe worth a trade on some bounce, but ultimately, I think PTX is headed to $0. Debt holders call the shots here.
Any thoughts on the offer for TMH?
Mario Draghi is a Goldman Sachs alumnus, I believe. US central bankers are bit different, but many learned from Greenspan, who made his fortune as a consultant. The influence from Wall Street is palpable.
Yes, I agree about Bernanke, though, and he has repeated many times the need for fiscal policy. Not sure about Yellen.
Nice article, but I'm not sure this is all the complicated. Most leaders at Central Banks, and in government, are schooled by Wall Street in one way or another. So they view the world thru the lens of finance, and are wholly ignorant (or purposively dismissive) of the fact that the real world economy (the production economy) is different than the financial economy. QE basically is a financial mechanism, and has no direct effect on the production economy, as such QE is largely ineffective in reflating the production economy. I'm not sure this is a big surprise. QE is great for the financial folk who live in the financial fantasy world, but does little for the other 99% who struggle in the real economy.
For a strong real economic recovery you need extensive fiscal stimulus, which provides direct investment into the production economy. Unfortunately, political leaders every where are still enamored with the myth of austerity and fiscal budgets (either due to Wall Street education or political biases), so it's been impossible to implement satisfactory fiscal stimulus anywhere in the world. Without fiscal stimulus and a large enough deficit (obviously the deficit can be shrunk with a recovery, but not before), it is simply impossible to jump start any economy.
In addition to the problems mentioned above, in the US at least, there are other substantial social, political, and legal impediments to an strong economic recovery. For example, in the US, publicly traded companies divert excess profits into buying back stock, which does absolutely nothing for the real economy (share buybacks are just another financial transfer scheme). In theory, instead of share buybacks we could use various methods to encourage large companies to actually invest excess profit back into the business, which would help the economy. Other problems in the US, of course, include a takeover of the Republican party by a fringe right group of lunatics, which has made it impossible to implement any logical fiscal policies. For instance, recently the extreme right has simply closed the Ex-Im bank in the US, which is ludicrous on many levels, as any sane capitalist understands.
Nice article. Foundation is a leader and very innovative company, and is surely a company to consider for long-term investment. The problem here is simply, pricing. The tests are now quite expensive, and unlike drugs which are unbelievably illegal for Medicare to negotiate, Medicare can negotiate pricing for these types of tests. So, I'd expect Medicare to negotiate for major pricing concessions for cancer genomic testing and for pricing pressure to be an issue every year, like it is for many other test categories. Additionally, internationally, the pricing for these tests will be much lower than in the US. So, overall you need to take pricing into consideration for future forecasts. That said, of course FMI could make up for large pricing declines with increased volume, but pricing fears may hold back shares in the near term. The other issue is that I expect significant competition for FMI in the future. Already many major hospitals (e.g. Sloan Kettering, MD Anderson) offer tests that compete with FMI.
Finally! Now the stock may get interesting.
Sure, you can review Ansell's acquisitions in the space. I think their last one was Microgard, for a supposed 9X EV/EBITDA and nearly 3X sales.
LAKE TTM EBITDA is $16 million. Free cash flow (EBITDA-Interest less Cap-Ex) is $10 million a year (excluding non-recurring items). 6X EV/EBITDA is around $13. I don't see the downside. Plus, 6X is low-end, when acquisitions are done in this industry at 10X. The stock is up, not because of a one-time event, but because investors recognize that the company's turnaround is complete and the company has substantial growth opportunities over the next few years. I go thru some of these points in my article linked to above.
You can read my reply to this article here:
My price target on LAKE: $22.
Bill Ackman is a billionaire. He lives in a fairy tale world, divorced from the reality of the other billions of humans who live on this planet. It would be no big deal for him if he got charged $10,000 a day for a treatment. He could afford it without problem. What does he care if he spends $2K a month on health insurance for his family and has a $10K deductible. For him that's dirt cheap. So he sees no problem with the VRX strategy, as he is blind to the travails of the rest of society.