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Oliver Davies  

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  • SIGA Technologies: Uncovering Hidden Value In Bankruptcy [View article]
    I am not "not accounting" for anything. The only point I'm making is that this Seeking Alpha article has not substantiated the "bear case" scenario, which, as far as I can tell, is $0 once costs and other uncertainties are considered.

    I don't believe you've made the case either. Where's the year by year cash flow in your debt raising scenario, with appropriate interest rates, discount rates, and costs? It's not like this company has a complicated income statement. Saying there are "not terribly substantial burn rates" is odd given the opex is running at $25 million per year.

    I'm sure you have better things to do than run through the numbers on a comment. But what you just wrote does not convince me that "there is simply not much downside at the current $75 mil market cap".

    Like I said: an educated investor might decide the upside is so huge and probable that taking on the risk of 100% loss is the correct decision. But that's not the same as arguing there is no downside.
    Feb 12, 2015. 05:27 AM | Likes Like |Link to Comment
  • SIGA Technologies: Uncovering Hidden Value In Bankruptcy [View article]
    ?

    I am not saying their deferred revenue or cost system is a problem. I'm saying you need to count costs to deliver on the contract -- these are accounted for in deferred costs, which is not a phantom accounting entry, but money that SIGA has actually had to pay. You also need to look at opex. Otherwise, how can you calculate a reasonable bear case? I will gladly dig deeper, just tell me why I should ignore them.

    Also: I think you're missing my point on the deliveries. If BARDA continues buying at the same price, then SIGA will not receive the entire remaining contract value. It is the $54 million for development and support services that makes up the difference.

    By all means, argue a case for the upside, but don't claim there is no downside when you can't actually support it. This stock, until you prove otherwise, is a punt on the upside. Investors beware.
    Feb 11, 2015. 12:44 PM | 2 Likes Like |Link to Comment
  • SIGA Technologies: Uncovering Hidden Value In Bankruptcy [View article]
    OK -- I don't understand why you think manufacturing costs will be reimbursed. Right now they run through deferred costs, so the company doesn't believe that either. And even if there's a chance they were one day reimbursed, I'm not sure it should be part of the bear case.

    Also, while it might be true there are $178 million of other options, these should also not be included in the bear case, as we have no idea when or how these payments trigger -- or at what profitability.

    Anyway: I have done some further work, and would appreciate if you could point out how I'm wrong. Because right now my conclusion is that there is no downside protection.

    THE REVENUE ISSUE

    My first problem is that I can't replicate your $162 million for the remaining deliveries. As far as I can tell, the average price SIGA receives per delivery is roughly $132. If we then multiply this price by the remaining 659K deliveries, we arrive at $87 million.

    The rest of the $162 million in potential BARDA revenue (ex FDA approval) appears to come from:

    a) 20.5 million FDA filing milestone
    b) 54 million for development and supportive activities, which runs until 2020

    Separating the remaining $162 million into deliveries and the rest reveals a number of uncertainties. While deliveries are apparently due by 2016, these other payments might not happen for years. Furthermore, it is possible that development and supportive activities are significantly less profitable than drug deliveries.

    At the very least, we should work out the timing of the cash flows and conduct an NPV analysis -- money received in 2020 is not worth as much as money received in 2016.

    THE COST ISSUE

    The other issue is that any bear case must include an adjustment for costs. SIGA will not receive $87 million for deliveries; after deducting deferred costs on a pro-rata basis, it will receive roughly $70 million.

    Then we have to consider opex. Net of revenue it appears the company is burning opex at about $25 million per year. Maybe I'm missing something, but surely this annual cost is something we'd need to add to a bear case?

    WHAT IS THE TRUE BEAR CASE?

    So now I start asking questions like: what happens if the only money they receive is for delivery? What if the appeal case stretches out for 2 years before SIGA loses? In this case, we'd need to make a few adjustments.

    $75 million is your bear case EV
    $92 million is the difference between your estimate for delivery value vs. my estimate
    $50 million is two years' of net opex

    $75 million minus $142 million is negative $67 million. And, while I know very little about bankruptcy law, we should probably add an interest payment on the delayed appeal.

    I want to like this stock. An investment where the downside is protected and there's significant upside is the holy grail. But I'm having trouble arriving at a bear case scenario that comes close to covering the current stock price.

    Hopefully you can tell me where I'm wrong.
    Feb 11, 2015. 06:56 AM | 1 Like Like |Link to Comment
  • SIGA Technologies: Uncovering Hidden Value In Bankruptcy [View article]
    Interesting article. I have some questions:

    1) Do you include costs in your EV calculation? $75 million is compelling if it's the bear case, but what about the money they spend on delivering on their contract, FDA approval, other R&D etc? Opex alone appears to be $30 million, and then there's a footnote, which suggests further COGS:

    "$40.8 million from BARDA for the delivery of product, partially offset by $7.1 million of cash payments to CMOs for the manufacture, development and other supportive activities for Tecovirimat."

    2) Replacement -- you say the drug has a 38 month shelf life and so the government is forced to buy more. But in the 10-K SIGA mentions that they defer revenue because of "replacement" requirements. Do you know whether they are required to replace expired stock as part of the existing contract?

    3) What happens if the appeal is swiftly rejected? Wouldn't that mean the money is due now? Well: regardless of future BARDA payments, they don't have that money right now. Surely the result could be negative for equity holders, as the company would be forced to turn to a debtor-in-possession, negotiate a punitive repayment plan with Chimerix , or raise more equity at rock bottom prices.

    As I said, this article is very interesting. But my initial reaction is that the downside case of $1.40 is not fully supported. Maybe you're right, but I believe further analysis is needed.
    Feb 10, 2015. 07:04 AM | 1 Like Like |Link to Comment
  • Will $0 Down Loan Programs Cripple SolarCity's Lease Model? [View article]
    I'm finding it difficult to follow the logic behind your method. If someone sells their system after 10 years and buys a new one, wouldn't they end up paying almost twice as much as they did for a leased system which they keep for 20 years? Surely the fairest comparison is to assume both the loan and the lease keep the system for 20 years?

    If you did that, the total payment difference (using your assumptions) would be far smaller. (At the very least you should look at the total costs and benefits to a consumer who buys a new system after 10 years.)

    Also-- what about maintenance costs and inverter replacement? In my model I calculate those two expenses at $3,425 over a 20 year period. I guess by selling the system after 10 years you apparently "avoid" the inverter replacement cost. But then you're just passing it onto someone else.

    You (and all the loan advocates) are also creating a straw man by saying SolarCity keeps the tax credits. It's a marketing gimmick. What matters is the total cost to the consumer. SolarCity accounts for the fact it keeps the tax credits when setting prices. By doing everything for you (including maintenance etc.), they ensure the process is frictionless.
    Aug 5, 2014. 06:38 AM | 7 Likes Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    RSA. Sorry for the delayed reply.

    While valuation always comes with a wide margin of error, I believe it is important for investors to develop a retained value model so they can understand how changes in different inputs changes value.

    For instance, if installation cost is only $1/Watt yet SCTY is charging 15 cents per kWh, then retained value is significantly higher than if installation cost is $3/Watt.

    What if retained value is actually higher than SolarCity is saying? Not one bear has considered that. They just start from $1.9/Watt and say "here's why it should be lower than that." These bears do a good job of pointing out risks, but not a good job of making an investment thesis. There's a wide difference between the two. And no, I don't think CA has bridged that gap.

    ITC-- yes it drops to 10% in 2017 but right now you can't model retained value without understanding the mechanics of a tax equity structure. That's all I'm saying.
    May 19, 2014. 12:11 PM | 1 Like Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    TheBanker I totally agree. Electricity is electricity is electricity.

    Black and White picture is not Color picture is not A Color Wide Screen picture.

    How hard is the difference to understand?

    But we should still think about this removal risk. RSA's argument that people will simply want solar panels that can generate more electricity per area makes more sense.

    So what happens if a SCTY customer wants a new system after 20 years? In this case you'd expect SolarCity to lease the new system at a discount to market price, since they already have the relationship. SCTY would have to eat the removal cost, but removing the panels and installing new ones simultaneously will make this cost much smaller, as the men will already be there (How much extra time will they need to do this? Will they use new racking?). When you also consider the fact SolarCity saves money elsewhere for this new lease (it already has the relationship; it already has a design plan; the customer already has training) and will get some sort of value for the old panels (whether scrap or otherwise) then I think the most bearish case you could reasonably make is that SolarCity makes $0 on leases after year 20.

    And so I still can't understand how someone can worry so much about a 30% drop in retained value when they also believe solar costs per Watt will be 70% lower in 20 years. Investors should consider the volume part of the profit equation.
    May 19, 2014. 11:51 AM | 1 Like Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    RSA,

    Sorry yes my fingers erred. If I was using $15/kWh retained value would be many times higher!

    I really don't agree with the idea that there will be unbooked liabilities. I think assuming they will sell the electricity at market price is fair enough. Regardless, I wonder whether SolarCity should look into contracts which say we'll renew at market price or, if not, the homeowner must pay to take down the panels. Alternatively, the panels can just stay on the roof and SolarCity sell the electricity to the grid. If I was management I'd look into options like that. SolarCity could end up with hundreds of thousands of mini peaker plants.

    My general argument is just that

    a) assuming a 30% renewal rate doesn't make SCTY expensive.

    b) If installation costs are truly as low as resident industry experts say (making purchase systems so attractive relative to leases), then retained value is actually significantly higher than SolarCity is stating (using SolarCity assumptions for the other inputs). The lower the installation cost, the higher the spread SolarCity makes on its leases. But to work that out you need to have a model that calculates retained value (including the tax equity component). I think if more people on these threads used this method they would have a more credible investment thesis (and might even question their case). After all, what is an investment case without a valuation? Unfortunately the bears on this site just take SolarCity's number as a starting point, and then point out flawed assumptions and how the number should be much lower. A solid investment case would involve building the retained value model from the ground up and inputting your own assumptions.
    May 16, 2014. 01:54 AM | 3 Likes Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    Yes, sorry. I feared my use of "DIY" would invite an attack. I understand people don't literally have to install it themselves. I just meant SolarCity gives a peace of mind these other methods don't.

    The other point naysayers are missing is that, if installation costs are truly now below $2/kW, then SolarCity is massively sandbagging on the retained value of its residential systems.

    At a $15/kWh PPA, a 2.5% annual step (with 0.5% annual panel degradation), and staying with SCTY's assumption of 90% renewal rate, I calculate a retained value per Watt (before tax) of $3.05 when the cost per kW is $2. (Yes, I'm using a 6% discount rate.)

    Using the perhaps more realistic 1% step, and inputting CA's assumption of a 70% renewal drop off into the equation, and the retained value value (before tax) falls to $2.16.

    Cut the PPA to $10/kWh and the retained value (before tax) drops to $1.10. That's keeping the 1% step and 70% renewal drop off.

    Given what these lower prices would mean for volumes, I really don't understand how someone can be so unconditionally bearish at this price, even if they do think the renewal calculation SCTY gives is bunk. SolarCity will keep selling at these prices until it has to cut prices. And when it does, it will still make a bucket load of money.

    If SolarCity keeps up the (apparently actual) $3 per Watt retained value for only 2 more years, it will add roughly 1,600 MW * $3 = $4.8 billion of incremental retained value. Add that to the $1.2 billion of retained value today, and your retained value after 2 years is $6 billion. Let's say $4 billion after tax. That means shareholders are only paying roughly $1 billion now (market cap minus $4 billion) for whatever happens after two years in a market that will still be heavily underpenetrated. Given SolarCity will be installing at least 1MW, and probably 2MW the year after, that seems very cheap indeed, even with a retained value (after tax) of 70 cents (0.7 * 2MW = $1.4 billion in incremental retained value). And at these slimmer margins, scale will matter even more. So to me it seems insane to short, even knowing everything the industry experts are saying. Do you really want to bet SolarCity won't keep this racket going for 2 more years?

    PS While it's somewhat of an aside, my personal macro view is that interest rates have only one way to go: down. This outcome would also boost retained value higher.

    PPS Also, for that poster who keeps saying scale doesn't matter. Yes, I believe scale does matter. SolarCity can put more dollars into marketing and R&D, and buy raw materials in bulk. It can also leverage distribution centres. Finally, it can provide a better quality service, which is very important when consumer facing.
    May 15, 2014. 09:31 AM | 1 Like Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    Nice article, but here's why I disagree:

    1) Let's assume you are right about the renewal rate and low solar costs mean SolarCity can only charge a 30% of what it does today. What does that mean for future demand for distributed solar? How does demand for solar change if it becomes so much cheaper than every other current offering out there (fossil fuel prices rise over time)? I think it's fair to assume storage will make sense by this time, so you're looking at every house in America (barring those with an issue with the look/shadow on roof etc.) getting solar. Think of all that volume.

    So let me paraphrase your argument: Solar is going to cover every roof in America, but because retained value is roughly 23% lower than SolarCity is saying (33% * 60%), don't buy SolarCity. I personally think that logic is flawed. In this scenario, I believe you want to own the scale player, which SolarCity is rapidly becoming.

    2) Customers being duped-- doing it yourself is cheaper. This one always strikes me as funny. You could make the same case about any project which you manage yourself. SolarCity makes things easier, and it charges for it. It's been a while since an analyst I met prophesized the end of auto repair shops ("you know how much cheaper and easier it is to do it yourself?"), and it still hasn't happened. Maybe the premium needs to come in, but that doesn't make SolarCity a bad investment.

    3) Customers being duped with fixed prices or escalators. Does Apple dupe its customers each time it sells them an Ipad knowing they'll release a new one in 2 years? Or that the customer will be able to buy that very same Ipad 2 years later for a lower price?

    4) Discount rate. This isn't in the article, but maybe you'll come back with the argument that the discount rate on retained value is too high. I find it hard to believe how people can be so confused about this point. The discount rate is low for cash flows that are already contracted and have lower defaults than mortgages. They are low risk. If the company only owned these cash flows you can bet the P/E multiple would be very high to reflect their safety.

    What IS much more uncertain is how many future operating leases SolarCity is going to sign. Is SolarCity really going to install 2000 MWs in 2016? Who knows? If it does, the retained value will be calculated with a 6% discount rate (I'd make the case for lower). HOWEVER, when calculating the value of those future installations to shareholders today, I would use a much higher discount rate to the present. Say 15%. That's where the high operating risk must be accounted for. Not in the already contracted operating leases.
    May 14, 2014. 07:21 AM | 11 Likes Like |Link to Comment
  • Dex Media: Time Is Running Out For The Yellow Submarine [View article]
    Nice article.

    But you haven't disproven the thesis in the previous article that this slow down in digital is due to merger integration problems. At least the other guy had/pretended to have calls with "industry insiders". It is well known that the digital revenue looks bad and the company is highly leveraged-- that's why the stock is down so much. If, for whatever reason, new data shows this merger integration thesis to be only partly true, then this stock goes flying.

    And it's a little bit disingenuous to look to debt prices. Do you believe the market can be mispriced or not? If not, then why are you short?

    Despite all this, I'm sure this stock is about to fall 40%.
    Nov 26, 2013. 09:57 AM | Likes Like |Link to Comment
  • The Problemas We Found In MercadoLibre's Earnings [View article]
    Yaron,

    You are now confusing relative prices with absolute prices. Inflation is the rise in all prices. What you're describing in 2008 ("and other crises") is nothing to do with inflation. Yes, if property was overvalued already then maybe it won't be such a great inflation hedge (depends on how high inflation is). But if property prices were overvalued by 20%, and inflation is running at 40% per year, it's a pretty good bet to buy property.

    Agree that initial effect is rentiers benefit, but as nominal incomes and prices rise, so will nominal rents (and most importantly, so will nominal property prices). So while you lose out partially on the income from the asset, you will gain fully on the property prices. It is this gain in property price that will offset the currency devaluation.
    Nov 15, 2013. 08:13 AM | Likes Like |Link to Comment
  • The Problemas We Found In MercadoLibre's Earnings [View article]
    Sorry if I'm not being clear. Currency devalues precisely because of inflation, otherwise the weak currency would mean foreigners could buy Venezuelan goods and services on the cheap. In fact, if the currency was "unfairly" devalued (i.e. not a result of inflation), then it is unreasonable to ask the company to use the black market exchange rate, as you are asking them to do-- the exchange rate wouldn't reflect the real purchasing power of the Bolivar. You can't make both arguments at the same time.

    Are you saying lease contracts aren't inflation protected? Are you saying property prices don't rise with inflation?

    You're disconnecting currency devaluation from inflation. They're intimately connected. As the currency devalues due to rapid inflation, property prices rise (and rents eventually follow) as the currency depreciates. This is why property is an excellent hedge against inflation, and the depreciation in currency that accompanies it.

    Don't take this as me shooting down your article. I liked your thesis, just don't think your property hedge analysis is correct.
    Nov 14, 2013. 08:13 AM | Likes Like |Link to Comment
  • The Problemas We Found In MercadoLibre's Earnings [View article]
    Well written report but I feel you lose credibility with your real estate rant. Generally a currency devalues in the manner described because of inflation, so yes, buying real estate is a good hedge because rents and property prices will rise. If currency is devaluing due to huge intervention and inflation for some reason doesn't result, the currency will need to snap back.

    I'm not even in this name but very interesting article.
    Nov 13, 2013. 02:10 AM | Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    Maybe it's the other way round... and price will fall because of competition.

    But, as I've said, price is unlikely to suffer much in a quickly growing industry as there is no need to compete on price to win business.

    And there's enough volume for everyone.

    To my point about elasticity. These businesses cannot ramp up to serve higher volume instantly. So, if there is significant price competition, there will be an offsetting increase in demand which will pressure capacity and reduce price pressure.

    But even if there is price pressure, it needs to be considered against the operating expenses SolarCity pays for each lease.

    There will be a point where all these companies have expanded capacity far too much to service demand, but it is not today.
    Oct 19, 2013. 05:03 AM | Likes Like |Link to Comment
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