Monte Sol Capital

Contrarian
Monte Sol Capital
Contrarian
Contributor since: 2012
Company: Monte Sol Capital Management LLC
Someone asked me the same question in another forum. This was my response:
"Personally, I don't try to trade around the short-term stuff. If I think a stock is offering the 30-50% multi-year IRR that I want, I just buy it. That may not be the way best way to do things, but it's the way that has worked for me. Personally I have done very well buying extremely cheap stocks regardless of the cycle, and I have done very poorly trying to time the cycle.
Multiples can certainly compress due the industry cycle and the CFPB, but by how much more? Almost all of these companies (including similar but different businesses, such as CRMT) are already down big from their recent highs. CPSS trades at 5x, SC and NICK trade at 7x. What are they going to trade at, 3x P/Es? Maybe, but more likely the E shrinks, especially at the low-margin/high-leverage companies. Also, multiple compression is obviously good for the repurchase scenario."
Thank you, I appreciate it.
Hao,
Thank you for your comment. Your point about the LIBOR floor is a good one. As for the target debt ratio, yes, I agree that if the company were to a pursue another large one-off return of capital, the leverage ratio would need to come down some first.
I believe the new management team is comfortable with the post-tender capital structure. There may be periods of natural deleveraging via retained earnings, but I think the goal will be to return capital to shareholders before any significant such de-leveraging occurs.
Also, your comment about holding since 2009 provides an interesting way to think about just how cheap NICK is. I don't know what your cost basis is, but let's say for argument's sake that it's $5.
Since 2009, NICK has earned about $9.00 of EPS. It has paid about $3.00 of dividends, so the retained earnings are $6.00, putting your "adjusted" cost basis at $11.
When I put this piece out the stock was $12.40, meaning the capital appreciation from multiple expansion has only been $1.40 since 2009. That's less than 1x EPS, while the S&P has tripled! That seems illogical to me. NICK should have experienced big gains from multiple expansion given that its profitability through the GFC demonstrated how robust the business model is. Instead it has experienced virtually none.
Gordon,
Thank you very much, I'm glad you enjoyed reading the research.
I covered interest rates indirectly at various times, but I never discussed them directly.
Right now NICK's is making loans at APRs that are about 150bps below their historic highs (you can find this info in the originations section of the filings). So, if interest rates go up, NICK has some room to raise the rates it charges for its loans, before it starts running into state max rate ceilings.
In addition, as BGDD pointed out, NICK can also demand a higher dealer discount. The discount is not limited by interest rates--it is simply a negotiation between NICK and the dealer. If NICK is charging the maximum APRs and the returns on loans still aren't high enough, it can try to make the dealers sell NICK the loans at larger discounts.
As BGDD also pointed out, higher rates will reduce competition. Consider CPSS. It's earning a 3.5% yield right now, and it finances almost all of its receivables with debt. So if the cost of debt were to rise quite a bit, say 300bps, CPSS would be on the verge of losing money and would almost certainly have to reduce its lending activities in order to refocus on higher-quality loans with loss rates low enough to still be profitable in a higher interest rate environment. This retrenchment would not just happen at CPSS--it would happen across the industry. This reduced competition would allow NICK to make loans at higher yields and/or lower loss rates.
It's hard to say for sure, but in general I agree with BGDD that modestly higher interest rates would probably be a net positive for NICK because of their effect on competition.
Thank you. I will be publishing the remaining portions of the analysis shortly, including a section devoted to the possibility of large value creation through buybacks.
AJ,
1. I chose 13x because that is a modest discount to the 14-16x multiple at which the the average company tends to trade over a long period of time. Mostly a judgement call based on experience.
2. The increase you refer to represents the difference between the average per-store EBITDA that GLN/CPW had generated historically (roughly $170k) and the lower per-store EBITDA GLN was earning at the time of the write-up (~$130K) due to the change in Canadian wireless contract lengths. I was simply assuming that as the effect of the new regulations wore off, EBITDA per store would revert to something close to the historic average.
3. I assumed net debt would fall over time because I was assuming the free cash flow Glentel generated from operations would simply accrue on the balance sheet. In reality perhaps this cash would have been used for acquisitions, in which case net debt would not have fallen much (if at all), but conversely, in that case profit growth would also have been much higher than I'd modeled because of the addition of the profits of the acquired companies. By just assuming that the free cash flow would build up on the balance sheet, I kept things simple.
Nathan,
Yes, you are right that the regulation's effect on consumers has been the opposite of what the government intended.
I think the commission simply thought shorter contract lengths meant more freedom for customers, and perhaps did not consider that carriers would suffer more frequent handset subsidy losses and look to make up those losses elsewhere.
I don't understand how you are deriving your numbers, so it is hard for me to comment. The Q2 2014 MD&A gives an adjusted EPS of $0.24, which is a long way from the $0.45 you're using. Looking at EBIT or EBITDA, the profit in Q2 2014 was more or less in line with past second quarters, and also below the typical profitability for the third and fourth quarters, which benefit from back-to-school and holiday spending, respectively.
Thank you Elliott, I'm glad you enjoyed the research.
Senna,
Thank you for taking the time to read the articles.
I am paid to evaluate "ifs". If you want to avoid all ifs you should be prepared to settle for sub-5% returns. I seek much higher returns.
As for your comments/claims:
"Too many missteps by management"
To the contrary, the company's very long record of strong growth, returns on capital, and robust cash flows show how many of the right steps management has taken.
"The company has been nothing but a value trap"
The typical definition of a value trap is a company whose hoped-for earnings, or asset value, or business turnaround, never materialize, such that the apparent 'value' is never realized. This is not the case with Glentel: even in bad business conditions the company is generating very substantial free cash flow.
"It's close to the bottom of its 5 year price range"
Yes it is, and I couldn't be happier. If the stock was at a 5-year high, it wouldn't be undervalued and I wouldn't be writing about it, much less investing in it. Moreover, to judge a company's future performance based on its past stock price movements is not only illogical, it is counterproductive; a number of studies, including Tweedy Browne's "What Has Worked In Investing", have found that in aggregate, stocks that have underperformed the index for a long period of time go on to outperform it for multiple years thereafter. So, statistically speaking, GLN's recent poor share price performance is a good thing.
Poupou,
Glentel could be bought but I think the chances are low, in part because the Skidmores own a controlling stake, and in part because there aren't a lot of natural buyers. Carphone Warehouse was acquired by a consumer electronics chain--not a business combination I would bet on happening twice. The most sensible acquirer would be a private equity firm attracted to the cash flows, but again, the Skidmores would have say on any deal.
Thank you Phil, I'm glad you liked it.
The release you linked to shows $9M of adjusted EBITDA in 2011. I use $8.4M because I don't add stock compensation back to EBITDA. I do, however, add back the $1M of restructuring and severance, as those costs are non-recurring expense that arise from acquisitions.
Unfortunately I am not aware of any other publicly-traded VNOs. Every public company I know of that offers similar services (Cogent and Level 3 are two examples in the U.S.; Colt is an example in the U.K.) operates an asset-based fiber ownership model.
Illiquidity is a risk inherent in all micro-cap investing.
"Dead money" is a strange term for shares that have spent the past four years rising in linear fashion.
AUTO's agent-based model is discussed in the article. There are a number of 3PL companies that use a mix of agents and salaried brokers, including ECHO and RLGT in the public sphere.
I don't know what price AUTO would take or XPO would offer. I don't want to speculate.
GTLT does not directly compete with traditional carriers. Many of the services GTLT offers are supplemental to the standard offerings from the big carriers. In fact a number of the carriers are both customers and suppliers of GTLT.
GTLT is a middle man between 800+ telco suppliers and 1,000+ customers. It enables efficient aggregation of bandwidth and other telco services. Without a party like GTLT serving as a middle man, this network of buyers and sellers would be exponentially more complex and inefficient (imagine 1,000 customers each contracting individually with 800 suppliers). In addition, GTLT is able to improve the quality and capabilities of the telecommunications network it provides by using select physical assets of its own in order to supplement and improve the services it buys and re-sells.
The carriers still get paid by GTLT. In essence GTLT is finding business for the carriers that the carriers might not other find, and then taking a cut of that business.
Yes. Whether there is a price that would make both sides happy is a different question.
You can find the list of the largest truck freight brokers here:
http://bit.ly/WQBn4m
Of the top ten truck freight brokers, CHRW, LSTR, and ECHO are public but bigger than XPO. Hub Group and Pacer are intermodal 3PLs--not the business XPO is aiming for. Transplace and Yusen are diversified 3PLs that provide numerous services in addition to truck freight brokerage. Freightquote uses an online business model. Total Quality is a pure-play truck freight broker, but it is on the border line of being too large for XPO to acquire.
The story is similar when you look at the brokers ranked 10th to 20th by size. JB Hunt, Matson, and BNSF are captive subsidiaries of larger asset-based transportation companies. England, Jacobson, and MIQ are diversified 3PLs. TTS specializes in trade shows.
Out of the top 20 providers, Autoinfo, PLS, Coyote, and Allen Lund appear to be the only standalone pure-play truck freight brokers that XPO could acquire without taking on additional debt.
So yes, I think AUTO is a valid takeover target for XPO. AUTO represents one of the best available opportunities to reach scale quickly in domestic truck freight brokerage.
I agree. On the Monte Sol website there are additional articles about 3PL and RLGT specifically.
http://bit.ly/UiRSUH
http://bit.ly/XypS6L
David,
Autoinfo bought Sunteck in 2000. The Autoinfo corporate name is a holdover from the period prior to 2000, when the company was in other businesses. Today Autoinfo is solely a truck broker.
I define cash earnings as the pro forma cash profits of the business as currently configured. My calculations are contained in the middle portion of the final table in the write-up. The primary adjustment is the substitution of CapEx for D&A. I calculate $0.44 of cash earnings assuming a full tax rate, and $0.50 assuming no taxes.
I do not use the LTM cash flow statement, as you are doing, because the trailing twelve month financials do not include a full year's contribution from the nLayer assets, and because they include one-time expenses related to the nLayer acquisition.
Your claims:
1) GTT has 50 million in debt
2) GTT owns "very little" assets
3) GTT is "begging" for a buyer
Claim 1 response: Your claim that GTT has $50 million of debt is simply untrue. The company has $36.5 million of long-term debt and $7.3 million of short-term debt. $36.5 + $7.3 = $43.8. The company also holds $4.3 million of cash. That means debt net of cash is $39.5 million (43.8 - 4.3 = 39.5). I have pasted the liability side of the most recent balance sheet below.
Current liabilities:
Accounts payable $ 14,710
Accrued expenses 10,919
Short-term debt 7,262
Deferred revenue 6,710
Total current liabilities 39,601

Long-term debt 36,455
Deferred revenue 264
Other long-term liabilities 6,029
Total liabilities 82,349
Claim 2 response: GTT's most recent balance sheet showed $99.5 million of assets, or approximately $5.00 of assets per share--2x the current share price.
Claim 3 response: I do not see what reason GTT has to seek a buyer, much less beg for one. To the contrary, selling out now would leave a lot of value on the table and be a poor decision. The corporate strategy is working, the stock price is rising, the company is in fine financial shape, and the industry landscape is still full of attractive acquisition candidates. Moving to NASDAQ will be a significant catalyst for further share price appreciation. GTT management is well aware of each of these points and knows that the company's intrinsic value is substantially higher than the current share price--hence their ongoing stock purchases.
JWG,
GTT is unlikely ever to own traditional carrier assets such as towers, fibre, etc. I believe Mr. Bauer's "more asset-based" comment referred to GTT's IP network.
GTT's acquisition of nLayer was the first, and likely the biggest, step in this transition. Before GTT bought nLayer, nLayer invested significantly to install first-class Junpier routing equipment at its important peering locations. After GTT bought nLayer, GTT quickly started outfitting its important legacy GTT locations with matching Juniper equipment. This is why capital expenditures were abnormally high in the most recent quarter.
These investments created a routing infrastructure that enables GTT to offer a very strong IP transit service. IP transit is a key offering for customers who provide "cloud" applications like SAAS, as well as other high-growth but bandwidth-intensive products such as streaming video. You can read more about the GTT IP transit offering here: http://bit.ly/WyCHbX
In short, I think a lot of the investments involved in this "more asset-based" transition have already been made.
My investors and I own shares in GTLT. We stand to profit from their appreciation. I have no relationship with, and do not receive any compensation from, Global Telecom & Technology, nor any other company I write about for that matter.
Enterprise value: In the valuation tables near the end of the article, "EV" stands for "enterprise value".
Debt: IEC has $30.5 million of net debt. Trailing EBITDA is $16 million, so net debt/LTM EBITDA is under 2x. The company does not currently pay cash taxes, so an additional $4 million or so of cash is available for debt reduction each year until the NOL is exhausted.
Shareholder value: Barry Gilbert was appointed interim CEO on June 6, 2002. The closing price of the stock that day was $0.23. Yesterday's close was $6.42. That means that during Mr. Gilbert's ten-year tenure, the value of IEC stock has increased 27 times, or 38% annually.