Nathan Brooks

Long/short equity, tech, research analyst, ecommerce
Nathan Brooks
Long/short equity, tech, research analyst, eCommerce
Contributor since: 2013
Paying a 10X EBITDA exit multiple on 2019 earnings seems a bit rich. If earnings are flat beyond that point and drop sharply by 2029 when the HCV patent expires then the multiple is going to be more like 7 X net income, not 10 X EBITDA. And that assumes HCV revenues don't decline past 2019, which seems optimistic.
I think this is where a lot of big cap biotech investors are going wrong. They compare biotech valuations with the rest of the market and see them trading lower on P/E basis and think them cheap. But they are cheap because biotech's have little terminal value once their patents expire whereas the terminal value for non-biotech companies is substantial, perhaps contributing as much as half of the present value.
In effect, biotech companies are just the sum of their drugs (plus pipelines if they have any) while the rest of the companies in the stock market have a franchise value that endures beyond a particular product or service.
By the way if you do assume a 7X 2019 FCF exit multiple, shares should be valued at ... $92. At $85, that multiple is 6.5.
Jeremy, what's your theory for why airlines stocks are doing so badly? Might explain why AER is down too.
Thanks for the update Jeremy. Do you think this company will ever pay a dividend? Does it buy back stock?
Another update:
I haven't looked at Ocado in detail for a while, but here are a few comments.
I was tempted to re-short the company a few months ago when the price went over 400p per share on rumours that Ocado was to sign up a international customer. Management in fact said that they expected to announce such a deal before the end of 2015. When that deal failed to materialize the stock fell apart and is now down 40% from where it was.
Is there more downside? Possibly - the stock does still trade for with a 120 P/E on topline growth of about 15%. The reason I would caution against shorting is that the short interest has exploded recently. This site gives the latest figures and shows the short interest has gone up by 60% in the last month and has tripled since the publication date of this article. One has to go back to early 2013, before the company signed the life saving deal with Morrisons, to see similarly high figures. The stock would go on to ten bag over the following 18 months.
If a deal is truck with an international customer, most likely a Canadian or French grocery company, then there may be another powerful short squeeze which could take the stock back up above 400p.
So if I had to take a position, I would probably go long in the expectation of this short squeeze, but this would only be as a short term trade.
Why is the tax rate so high? 38% is much higher than most companies. Is this a temporary thing or what? Thanks.
I doubt there will be a recession anytime soon given consumer debt levels aren't high, gasoline prices are low and there is a lot of pent up demand for autos and housing. On those last two items, the average age of the auto fleet is 11 years ( the historical average is 8) and residential housing construction is only 3.5% GDP - the average is around 5%.
Could still have a bear market anyway of course, which is why I'm neutrally positioned.
Ok, thanks. What about options and restricted stock units?
Nice article, thanks. Your thoughts are similar to mine in many ways. How do you come up with your share count by the way, 137.5 million?
Thanks for the article. Must have taken some work to unravel all the details. What's amazing about today is that the stock was up 15% in PM! Now down 40%
I thinking of starting a position in QCOM as it looks cheaper than any of the other quality names in the semi space. Anyone have any better stock ideas in the semi sector?
Are your calculations affected by the payments in the form of IDR's ETP must make to ETE?
No it charges a small borrow fee, typically around 3%. It's been around for for some time, over a decade. Anyway, this position would only be a small percentage of your portfolio right?
Paulo, you could try etxcapital. Its a spreadbetting service I use.
Albert, in your graph where you compare KMI to MMP and EPD you use P/CFO. You should have used EV/CFO, to take into account the higher debt of KMI. Currently KMI has a EV/EBITDA of 12, higher than all the other mid stream companies.
The most honest man at Enron. Nice line. Could put that on one's job resume.
I don't think the company is signaling more than a 50% cut in dividend. If you read the statement they issued on Friday they said: no more equity issuance and that the dividend could be cut to fund all or some of those equity needs ( I'm paraphrasing). I do agree though that the company wants to get its borrowing costs back down close to the lows recorded earlier in the year and if a 50% cut in the divi isnt enough it will cut again.
Growth capex is usually financed half through equity sales and half through debt. With no more equity sales as per the latest announcement from Kinder that means a dividend cut, or asset sales. Doubt there will be asset sales given they would have to be fire sale. That means dividend cut of about $2bn or in half. Kinder may also cut capex to help reduce the amount of debt issued next year. Currently, the company's debt is trading well below the level it was earlier in the year and that needs to come down.
Why buy KMI when ETP has a higher dividend yield and lower valuation metrics (EV/EBITDA etc)?
Hey, it appears we have been listed on the Nasdaq, is that correct?
Very well written and entertaining article, thanks.
Thanks for sharing your thoughts on the company.
Any comments or observations on Valeant?
You could well be right on your BTU bonds investment, but citing the banks in 2008 seems a flawed analogy. We will always need banks, will we always need coal to the extent we do now? Secondly, clearly there was a panic back in 2008 in all sorts of securities and that panic drove valuations to ridiculous extremes. Where is the panic now? Coal stocks and bonds have fallen steeply, yes, but they have done so in measured way over a sustained period of time.
But what are the engineering reasons why Intel is more expensive? Is it the higher gross margins? Intel has 60%, is that much higher than Qualcomm and Samsung? Is there something about the RISC architecture that makes it inherently more cheaper than x86 chips? I seem to remember arguments on SA before that advanced the line that Arm chips were more power efficient than Intel chips - less of an overhead in the microarchitecture design or something like that - but I don't see why they would actually be cheaper.
You still seem to be comparing Arm chips that go in phones to ones that power PC's. And as you can see from the Intel list of chips, there isn't a linear relationship between performance and cost. A top of the range i7 doesn't have a huge performance boost over a middle of the range i5 but the cost difference is hundreds of dollars. Once Arm chips get to PC level performance I imagine there will also be a very substantial non-linear jump in their cost as well.
Why are ARM chips 80% cheaper than x86 chips? Can you give examples of this? It doesn't seem very plausible that chips with similar performance would differ on cost so much.
Thanks for the comment. Sounds like you know your stuff!
That would be great. Looking forward to it.
Very thorough article, thanks. Off topic, but do you have any thoughts on NovoCure? It was plugged by Cramer, which is no doubt the reason for the share price shooting higher. But it's cancer solution sounds fascinating and very promising.
Good article. One other positive thing that eBay are doing is copying more of the features Amazon has: reviews, Prime like delivery program, how sellers are rated etc.
Stock above $8 on the Aussie exchange.
What happened to the lockup agreement? At the time of the last secondary offering there was to be a lockup until 90 days after or around November 10th.
Our wallets and bank balances maybe on the crucifix of a massive upgrade cycle though.