Pat Stout

Macro, contrarian, bonds
Pat Stout
Macro, contrarian, bonds
Contributor since: 2012
If GM was confident that their stock was undervalued, then why haven't board members been buying stock with their hard earned money?
Why didn't GM perform a Dutch tender to provide all owners the same opportunity to sell shares back to the firm?
GM repurchased 102 million shares at an average cost of $34.49. That works out to be $2.19 per share, using Jan 28, 2015 shares outstanding.
tut666,
<quote>"Some of these comments tell you that they do not understand valuation or fundamentals. It is clear this stock is a tremendous value. Huge sustainable dividend, free cash flow and great balance sheet."<endquote>
That sounds a lot like the activists case when they talked GM into giving owners money to departing owners. Some in the activist group have reduced shares. If GM was undervalued at $38, where GM first began buying shares, why would the investors sell shares at a lower price? Stock is now $28.40.
The buy back increases the debt per share, thereby increasing the risk for remaining investors. It would appear that investors are selling stock to get their hands on the cash the board approved to buy stock with. Haven't noticed any insiders or board members buying stock with their money, have you?
Pat
LuvMyBonds,
Just showing what the $277 million could purchase at current levels. As a number of the bonds were/ are trading below 15 cents on the dollar.
Pat
Dr. Pharma,
Can you provide a link to your article?
Thanks,
Pat
Cliffs announced an exchange offer for senior notes.
Details: http://tinyurl.com/jl3...
Activist Stocks,
As of September 30, 2015, per 13F, Starboard held 0 (zero) common shares of Staples and options for 8 million shares. Looks like they changed their mind on the $37 value.
Source: http://tinyurl.com/gn9...
Pat
Mikael,
<quote>I welcome your input since I am currently writing a bullish article on this stock.<endquote>
The stock has been under pressure, closed Nov 12 at $62.06, closed Jan 25, 2016 at $45.18.
Are you still bullish?
Pat
The buy back authorization expired December 31, 2015.
<snip>On August 25, 2014, the Board of Directors authorized a new share repurchase plan pursuant to which we may buy back our outstanding common shares in the open market or in private negotiated transactions up to a maximum of $200 million dollars. No shares have been purchased through September 30, 2014. The authorization is active until December 31, 2015. <endsnip>
Source: http://1.usa.gov/1nFRXZr
Pat
Alex,
The 20% ROIC is GM's target. The share repurchase plan began in March 2015, so that was the starting point. The time horizon does not matter, what time frame would you use?
Starting value $38.03 with 20% get year 1 end value of $45.63
End value $45.63 with 20% gets year 2 value of $54.76.
So far the results of the share repurchase program have been poor, wouldn't you agree?
Pat
Thought this article might be interesting to some.
GM/Ford Credit Risk Surges To 2 Year Highs As Fitch Raises Auto Sector Concerns
http://bit.ly/1Q59rYi
Silent_Meme,
When GM was an auto leader, they paid a yearly special dividend and enjoyed a rock solid credit rating. The stock performed well too.
What makes you think the Ford special dividend is a one time dividend, and not a special yearly or quarterly payout?
Pat
The GM US pension fund is underfunded by $11 billion in 2014. Is it prudent to use cash to repurchase stock while the pension fund is not fully funded?
Source: http://1.usa.gov/233fEeB
Silent_Meme,
Interesting comments. When an investors sells shares, they no longer own the shares. Thus they are a former holder of the shares. Agreed? The former owners got $3.5 billion in cash.
When a firm does a buy back, they exchange cash for shares, right? The capital (cash) goes to a former owner of the shares.
Last I looked Ford had a larger market capitalization than GM. And Ford did not take (or require) a government bailout.
Did the $3.5 billion of cash out the door at GM get a higher stock price? No. How about increased market capitalization. No. The cash is gone and in the hands of those that sold stock.
Pat
Vlae,
<quote>Most institutional investors prefer share repurchases to dividends, because they have to pay taxes on dividends whereas repurchases are not a taxable event at the corporate level.
<endquote>
If institutional investors do not have a taxable event when selling stock, that means they have a loss on the shares, right?
Why does private equity mainly pay dividends and not repurchase shares if it is not tax efficient?
Pat
pesteele,
Good point. However, the buyback increases shareholder risk, therefore investors may pay a lower p/e for shares. This can depress the share price. The stock price has declined since buyback was announced, that hurts warrant holders.
Pat
rrose39,
$3.5 billion of cash was used to repurchase shares. What do you feel is the aggregate amount of cash the sellers of the stock received?
Pat
Here is some info,
<snip>
The old GM Corporation common stock became Motors Liquidation Company common stock in July 2009, and traded as MTLQQ on the over the counter market until the confirmed bankruptcy plan cancelled the shares on March 31, 2011. The stockholders did not receive any consideration for their holdings and the stock no longer has value.<endsnip>
Source: http://bit.ly/1aWseTC
Not sure I'd call the 2% gain a "sharp bounce" higher.
LuvMyBonds,
The rating from Moody's is dated Jan 5, 2016 on Finra.
http://bit.ly/1PM01ko
Pat
AutoNation -- "Expects to report that fourth quarter new and used gross profit per vehicle retailed both declined in the range of $250 to $300 on a year-over-year basis."
Source: http://1.usa.gov/1OAw8oc
Stock is currently trading at $50.23 and hit a low of $47.91 today.
Here is the fine print for the transaction:
<snip>
Surrender of shares in payment of tax liability incurred on December 31, 2015, the date of restricted share units vesting in three equal annual installments to the Reporting Person granted on January 12, 2015.
<endsnip>
LuvMyBonds,
If I were in need of iron ore pellets with spare cash, then I would strongly consider buying some of the bonds, to help lower the cost of pellets. The interest would be viewed as an offset.
It should be an interest year.
Pat
The World Steel Organization pegs North American steel production at 73 million tons through Nov 2015. It further estimates that 1.5 tons of iron ore is needed for 1 ton of pig iron. Therefore, the potential US market is roughly 110 million tons of iron ore with Cliffs supplying under 20% of the market. Cliffs might have a chance at being a growth company if it could find a way to supply the electric arc furnace steel producers with pellets, and displace some scrap metal.
http://bit.ly/1VGphuL
http://bit.ly/1VGpjCI
arbitguy,
Details from SEC filing: http://1.usa.gov/15Jqoml
<snip>
f we declare a dividend for the dividend period ending on February 1, 2016, we will pay such dividend to the holders of record on the applicable record date, as described above. If, on or prior to January 15, 2016, we have not declared all or any portion of the accumulated and unpaid dividends on the mandatory convertible preferred stock, the conversion rate will be increased so that holders receive an additional number of our common shares equal to the amount of accumulated and unpaid dividends that have not been declared (the “additional conversion amount”), divided by the greater of (x) $10.15, which amount represents approximately 35% of the initial price (as defined below), subject to adjustment in a manner inversely proportional to any anti-dilution adjustment to each fixed conversion rate (such dollar amount, as adjusted, the “floor price”) and (y) 97% of the average VWAP per share (as defined under “Description of Mandatory Convertible Preferred Stock — Definitions”) of our common shares over the five consecutive trading day period ending on the second trading day immediately preceding the applicable dividend payment date (the “five-day average price”). To the extent that the additional conversion amount exceeds the product of the number of additional shares added to the conversion rate and 97% of the five-day average price, we will, if we are legally able to do so, declare and pay such excess amount in cash.
<endsnip>
Cliffs will not pay the final preferred dividend in cash, instead it will be paid with increased shares of common stock.
<snip>
The number of Cliffs common shares in the aggregate to be issued in lieu of the dividend is estimated to be approximately 1.26 million. This results in an effective conversion rate of .9052 common shares, rather than .8621 common shares, per depositary share, each representing one-fortieth of a share of Series A preferred stock.
<endsnip>
See Press Release: http://bit.ly/1JTXrEl
Cliffs Board did not declare the preferred dividend, instead they will pay CLV holders more common shares.
<snip>The number of Cliffs common shares in the aggregate to be issued in lieu of the dividend is estimated to be approximately 1.26 million. This results in an effective conversion rate of .9052 common shares, rather than .8621 common shares, per depositary share, each representing one-fortieth of a share of Series A preferred stock.<endsnip>
See the news release: http://bit.ly/1JTXrEl
LuvMyBonds,
Great question. At the moment commodity prices are not expected to surge higher, neither are they expected to continue declining. It could be a year of stable say,+- 5% to +-10%. Of course a supply shock could alter the outlook.
Happy New Year!!
Pat
arbitguy,
Thanks for the comments.
Did you notice that balance sheet has treasury stock costing $277 million, or roughly $45 per share? The current market capitalization is $256 million.
It is a good thing that shares were not repurchased.
Pat
William,
I have had stock with covered calls a month or greater from expiration be called. It is no big deal, puts are then sold to earn income or re-establish the position.
Pat
Sam,
It was a "pair trade" article. It required a long and a short.
Honeywell is increasing debt while GE has been reducing debt. Higher debt increases interest costs, lower debt reduces interest costs. It was a simple macro call, all other things being equal GE would drop more to the bottom line than HON due to change in interest expense.
Pat