Nick Clayton

Deep value, contrarian, long-term horizon, event-driven
Nick Clayton
Deep value, contrarian, long-term horizon, event-driven
Contributor since: 2013
J. Cohen,
I am amused because this may be the first instance in the history of Seeking Alpha where the comment is longer than the actual article! I will do my best (or not) to respond in an appropriate manner. You are correct, I stated a fact about the return. It is not intended to be anything more than that. A 20% return is a 20% return. Feel free to over analyze it all you want.
I agree with you that speaking with insiders MAY strengthen investment analyses and I am sure you have read Philip Fisher's "Common Stocks and Uncommon Profits" and can define the word "scuttlebutt" more eloquently than I can. The reality, however, is that most insiders would likely not give an insignificant investor like myself the time of day. I prefer to read through SEC filings to get a majority of my research. You would likely have to show up on their doorstep to make any type of progress. People have a much harder time saying "no" to your face than they do over the phone. I have tried. I have emailed and called insiders on multiple occasions to no avail. And because I am an amateur, making the flight to do in-person research is not logical because at minimum there would likely be at least an 8% "research fee" on top of trading costs. ($400 airline ticket/$5000 investment). But frankly, I am not too concerned. At the end of the day, the investment performance will speak louder (or quieter) than any "thorough analysis" can provide. I write for Seeking Alpha more for sheer enjoyment than anything else, which is why I don't make a living doing it. If I did, I probably wouldn't enjoy it as much and I probably wouldn't even be allowed to write these words due to some kind of "conflict of interest."
I always try to emphasize the importance of diversification and for investors to either conduct due diligence themselves or seek professional advice before making any investment decisions.
Thank you for your honest analysis, it makes Seeking Alpha (and the world) a better place to have contrary opinions.
-Nick Clayton
Honestly, I didn't see Mr. DeMuth's analysis before I wrote this article and my analysis goes into a little bit more detail on the risks of macro economic events such as China and why smaller investors have a distinctive advantage in these kinds of deals. I follow Mr. DeMuth and he is not only a much more experienced but also a much more talented investor than I. I only write about opportunities that I think have a high likelihood of producing satisfactory long term profits. I think a well diversified portfolio of arbitrage opportunities provides that.
Thank you for your comment. A majority vote in favor of the merger is required for successful completion of the merger. In order for the vote to be carried out, a majority of the total shares (36,845,219) must be cast at the meeting. This is known as a quorum.
Thank you for your comment. The 16% spread equates to a 50% annualized return if the deal closes as anticipated.
Thank you for your comment, I think SMFG is definitely a buy at current levels. The bank's valuation is directly affected by global currencies rates. For example, a strong dollar makes it more enticing for Americans to invest in Japan. Moreover, SMFG has the largest exposure to foreign lending. In countries where SMFG lends where the currency is stronger than the yen, SMFG can lend, realize profits in the stronger currency and convert back to yen.
Thank you for commenting and for reading!
Old Rick,
Thank you for reading and for your kind words.
Noah Research Partners,
Excellent point, thank you for reading.
Thank you for your comment, you bring up a good point. I make the assumption that at the very least free cash flow should grow along with the consumer price index. Long-term CPI growth should be virtually identical to both the long run GDP and inflation growth rates. The opportunity cost for investors is the real investor return - average stock return less the inflation rate. If an analyst uses 9% as the discount rate, then they are assuming that there will be ZERO inflation over the next 10 years. This is by no means a flawed approach because I think the more conservative an analyst is when conducting a DCF analysis, the better. If we assume there will be no inflation for the next ten years then NOV is likely fairly valued or slightly undervalued.
Thank you for your comment. To be frank, I have used up all my funds on my four or five best ideas. I feel at this time the opportunity cost with NOV is particularly high and I am considering trimming one of my other holdings to initiate a new position in NOV. In three of my current holdings, there is a near-term catalyst that will likely unlock substantial value in the next 6 - 12 months. Once these catalysts take place, I will take profits off the table and NOV is on my short list of compelling investment ideas.
Thank you for your comment. When I mention Tandy to investors, they often mention Radioshack. Tandy Leather is thankfully in a much stronger financial position than Radioshack at the moment!
Thank you for your question. You raise a great point.
Rayonier AM's capital structure is unique because they are financing their assets with almost 100% debt. If the debt is subtracted from the DCF analysis then the equity value would be close to what it is currently trading for. Since Rayonier AM has a dominant global market share and excellent business economics working in their favor, the true equity value is grossly understated if the debt is taken out. This is the case with many companies that have a dominant market share because of a competitive advantage such as being a low cost producer. These companies tend to require minimal capital expenditures, can consistently grow cash flows and typically are able to raise dividends year after year which could potentially be the case with Rayonier AM. The company should easily be able to consistently generate at least $170MM in operating income which equates to almost a five times interest coverage ratio. Thus, they have a sustainable business model that in all likelihood will be able to safely use high amounts of debt to finance operations. If the company operated in a cyclical industry such as shipping or the airline industry, then they would not be able to sustain such a high level of debt because future earnings would be so unpredictable.
Thank you. I agree!
Thank you for your comments Robert. During my research I read that CRC is able to charge slight premiums because of the limited transportation options in the California market. That coupled with the like you mentioned lower transportation costs I think gives CRC a small competitive advantage over some other E&P companies. This should bode well for CRC investors and potentially mitigate the risks associated with a prolonged slump in oil prices. That being said, I hope oil doesn't fall below $50 for an extended period of time because obviously CRC would lose lots of money as would most energy companies.
Thank you for your kind words, I couldn't agree more. Regulators can be quick to point the finger at the potential environmental consequences of oil exploration and production. What they fail to see is that the economic benefits far outweigh any environmental consequences of oil production in my opinion.
Good point. While the timing of the spin-off may not have been the greatest considering the crash in oil prices, I don't know anybody who has consistently made accurate projections about macro events. Once oil prices return to the $100+ level, CRC will be a great long investment.
No problem, feel free to make comments as you see fit. You're probably right.
Great question. That is exactly right. If you notice in my income statement analysis, say the price of oil falls to $50, the company would go from losing roughly $100 million to $1 billion in pre-tax income in a given year for a net loss of $900 million. (-$900 million yearly loss/4 = $225 million quarterly loss) $225 million/$25 drop in oil prices equates to $9 million impact on pre-tax income per dollar change in the price of oil. They would probably lose something like $75 million in pre-tax income for the first quarter of 2015 if the Brent index is around $65-70 per barrel. (approx. -$117 million based on $75 oil price/4 = -$30 million - (5*9 = $45 million) = -$30 million - $45 million = $75 million loss. These are just estimates and can obviously change based on the price of oil and production and selling expenses per barrel of oil. I don't foresee the price of oil falling to $50 levels for an extended period of time but there is a possibility which makes it a very real risk with this investment and many oil stocks in general. I hope this helps.
Thanks for the question.
Well written article. This analysis provides some great insight on what (to the untrained eye) appears to be a significant credit positive event.
Three issues I was hoping you could address in regards to what the company might do with their free cash flow moving forward:
1) How much do you think ALSK could pay out in dividends?
2) Would they strictly use FCF to fund the dividend or tap alternative sources like a revolving line of credit?
While I don't know for a fact, it is likely the company was funding the large dividend with a revolving credit facility pre-2009. They were often paying out anywhere from $30-$40 million during this time despite the fact that in 2005 and 2008 they were FCF negative. I emphasize the dividend because (as I'm sure you know probably better than me) large institutions with the buying power to move stock prices typically buy telecom stocks for their dividends. That is why the market once valued this company at close to $17 per share even though the company was sometimes leveraged 20 to 50 times or even had negative equity when they were paying an 8-10% yield. It was obviously an unsustainable dividend and management has made the necessary moves to turn things around.
3) Would the company be better off increasing their capital spending in the broadband segment which management has projected to be generating 20%+ IRR?
Thank you for the great analysis.
Thank you for the kind words. I plan to build my position over the next few months as I don't see the price moving significantly because of continued stagnation in the oil markets.
You make some great points. Often spin-offs can hold some of the greatest value because the institutions sell off in droves because like you said they are not in any indexes. Consequently, they cannot recognize the value of the very lucrative businesses concealed in the parent companies.
California is not the friendliest of business environments and legislators may continue efforts to thwart business production until they realize where the tax dollars, pension benefits, and university endowments come from. The economic benefits from exploring the Monterey Shale are undeniable.
While California does have one of the most stringent regulatory environments in the U.S, low-risk in this context refers to the fact that 90% of CRC's projects are already online which translates to dependable sources of earnings and predictable rates of return.
I hold the common and intend to continue buying. The downside risk is virtually nil as even in a worst case liquidation scenario common shareholders would most likely receive at least $1.78 per share, a 120% upside from current levels. You are essentially buying a dollar for 30-40 cents depending on your entry point.
Jz 10,
The company would more likely fund a share repurchase with unrestricted cash as opposed to the proceeds from selling ships. A $5 million share repurchase would have a likely effect of boosting liquidation value by almost 17% from $2.29 per share to $2.67. (Assuming the company bought shares on the open market at approximately $0.85 per share) However, this would hinder their liquidity as they would be left with just a little over $3 million of unrestricted cash. This is the most likely reason management is not repurchasing shares at this time. I would be concerned if the company started selling ships as they are the primary sources of both earning power and borrowing capacity. Without ships, the company cannot generate cash or borrow to fund future capital needs. I believe management is positioning itself to buy more cheap ships, lower its cost of capital (ships cost 6-7% to capitalize - equity costs 10-15%), and waiting for the increase in charter rates. Once this happens the few companies that were liquid enough to expand during this downturn will be the one reaping hefty profits when rates recover.
Thank you for your comments!
AWN is paying ALSK $12.5 million per quarter.
Before an acquirer would feel comfortable paying something like $10 to $11 per share, I think they would want to see that all short term financing risks have been abated. I believe ACS needs to reduce debt levels to somewhere around $325-$350 million - required loan covenants that would allow management to pay dividends or issue new debt to retire $318 million in senior obligations due October 2016. That being said, there is a real possibility that they could renegotiate loan covenants before then. After loan covenants have been met, ACS could use the $30-$40 million from AWN interest to pay dividends which could quickly push the stock back up to $6-$8 levels. So yes, the AWN transaction makes ACS more valuable and strengthens their negotiating power. Not sure if AWN protects them from cheap takeovers. Any private equity or larger telco would be getting a bargain paying even a moderate premium to the $80 million equity value.
Rising interest rates make it costlier for corporations to borrow and for consumers to live. Corporate profits decrease and consumers/investors tend to have less disposable income so they have less money to spend and invest. Rising interest rates should gradually bring equity values down to more reasonable levels in the future.
ALSK could refinance their senior obligations before 2016 which would be a smart move given the current historically low interest rates. That being said, ALSK has hedged their interest rate risk with swaps which is necessary given their debt load. I would imagine any amended rates would be somewhere around 5-6%, not enough in my opinion to have a meaningful impact on earnings.
The stock market can be very erratic in the short term and its daily fluctuations are irrelevant in regards to the intrinsic value of a company. Many institutions own telcos for their dividend. In my opinion, many of the large institutions that often drive stock prices have not done a thorough analysis on ALSK. They have overreacted to the entrance of Verizon. ALSK is currently in a stronger financial position than when it was trading close to $17 per share. CFO Wayne Graham said on the latest conference call that debt markets are good. Furthermore, banks often view telcos favorably because they possess very stable cash flows. With that being said, I am willing to bet that they will be able to renegotiate the senior obligations that are due in 2016 on more than favorable terms.
It should be noted that it may take awhile for ALSK's value to be unlocked. It will take one of two important catalysts. 1) Announcement of a dividend or 2) Announcement of a potential takeover or sale to a private equity.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
-Benjamin Graham
Got it, thank you for your contribution.
Tajer, where are you getting $188 million? Box Ships values its fleet at $217 million. As for the shares outstanding, I used the weighted average common shares figure for the period ending June 30, 2014 which is just over 27 million.
Ocean 2026,
I do not know Mr. Bodouroglou and I am not going to speculate as to what his motives are exactly. However, with a close to 17% ownership interest, Mr. Bodouroglou has incentive to maintain liquidity for as long as possible until the shipping industry recovers and charter rates return to normal levels. Moreover, Mr. Bodouroglou has over 35 years experience in the shipping industry and Box Ships have operating margins and debt levels that are more favorable than industry averages.
Thank you for your comment. I would hang on to your position. This is definitely a long term play where patient investors could be rewarded substantially. Again, like I said in a previous post, I believe the major catalyst is institutional buying. The telecom business may not have the most attractive economics (especially Alaska) but the industry has high barriers to entry and once debt is manageable, these companies tend to have stable free cash flows and can kick out solid dividends. ALSK is no different. I don't know if I see $4-$8 in the near future, but it's a definite possibility by mid 2016. That's over 100% upside from current levels.