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SA Editor Samir Patel
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I have departed Seeking Alpha to pursue new opportunities. If you need to get in touch with me personally, you can find me at If you have questions regarding SA Pro, please email the pro team at prohypheneditors @ (no spaces, replace the... More
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  • Seeking Career Alpha (Sometimes, To Do The Things You Love, You Leave The Ones You Love Behind)

    Hey SA users,

    I wanted to let you know that I'm departing from SA to join a hedge fund as an analyst. I'm very excited about the opportunity - I think it's a great next step for my career, primarily because I'll have the opportunity to gain a lot of hands-on experience from a master investor with an awesome strategy and track record - but at the same time, I'm definitely sad to leave all my SA friends behind. I've enjoyed interacting with all of our contributors, and the SA Pro team, obviously, is wonderful.

    Nonetheless, I know that I leave the SA platform in great and capable hands, and I'm looking forward to seeing SA Pro expand and improve. I'm definitely planning to utilize SA extensively as an investor; I also hope to comment and contribute on the site to the extent that my current and future employers will allow. For anyone who wants to keep in touch with me, send me a request on LinkedIn - you can find me here:

    Best wishes to all.

    - Samir

    P.S: Resident SA power user Chris DeMuth Jr. decided to conduct an exit interview that's equal doses tongue-in-cheek humor and serious reflection. I attribute all success to myself and blame all misinterpretations on Chris's interview skills ;) Check it out here:

    Oct 10 8:07 AM | Link | 6 Comments
  • The Rumors Are Over, But The Story's Not: Vodafone Has 20%+ Upside

    Executive Summary: Vodafone ex-VZW appears to be trading at a significant discount to fair value; shares have multiple paths to 20% upside or substantially more.

    (note: images and tables keep disappearing for some reason I don't understand. If there's a random gap and/or a seemingly missing paragraph, that's why)

    (note 2: caveat emptor. This was written in 48 minutes and as such, calculations are not precise. this is a rough overview.)


    Investing 501, a great source of advice for young analysts (not to mention an excellent SA contributor), is a proponent of something they call the one-hour analysis. In their own words,

    The purpose of a one-hour analysis is to quickly evaluate the positive and negative attributes of a company. The key question is how much more time do I want to spend on this company. The job of a generalist is make quick decisions about when further investigation is warranted, and when it is best to move along.

    News broke over the long weekend of Verizon's (NYSE:VZ) $130B cash-and-stock buyout of Vodafone's (NASDAQ:VOD) 45% stake in Verizon Wireless. Rumors leaked Friday, VOD shares went up; deal was announced monday, shares went down today. As a Vodafone shareholder, I was obviously interested in determining whether it's a case of sell-the-news, and if there's any value left here. However, it's a Tuesday evening and I don't have time to analyze everything in-depth, so instead, I'll do an analogous "one-hour analysis" to figure out what's going on here. It's not exactly what Gregg and Tim were discussing, but it's similar enough. Ready, set... go!

    So. There are three major documents I'll be using here. First is Vodafone's press release regarding the deal. Second is Vodafone's 2013 results, third is their quarterly update.

    After reading through the majority of each document, I extracted a few "key" portions. A more thorough analysis would go in-depth on everything, but the whole point of this exercise is to keep it brief. The relevant details are presented below.

    Exhibit 1: Details of Verizon's Payment

    The consideration comprises:

    - US$58.9 billion (GBP38.0 billion) in cash;

    - US$60.2 billion (GBP38.9 billion) in Verizon shares ;

    - US$5.0 billion (GBP3.2 billion) in the form of Verizon loan notes;

    - US$3.5 billion (GBP2.3 billion) in the form of Verizon's 23% minority interest in Vodafone Italy; and

    - US$2.5 billion (GBP1.6 billion) through the assumption by Verizon of Vodafone net liabilities relating to the US Group.

    - The VZW Transaction represents an attractive valuation of 9.4x EV / LTM EBITDA and 13.2x EV / LTM OpFCF.

    Also relevant: the deal, subject to regulatory/shareholder approval, should close in Q1 CY '14.

    Exhibit 2: Vodafone's Plans For The Money

    At completion, Vodafone shareholders are expected to receive all the Verizon shares and US$23.9 billion of cash (the "Return of Value") totalling US$84.0 billion (GBP54.3 billion), equivalent to 112p per share and representing 71% of the Net Proceeds.

    Good to know that shareholders will be getting a substantial portion of the cash back - that de-risks the possibility of poor utilization of the cash through overpriced M&A, etc.

    Exhibit 3: Vodafone's Pro Forma Guidance

    The Group is, therefore, providing revised pro forma guidance(3) for the 2014 financial year, which excludes VZW and includes 100% of Vodafone Italy for the whole year. In addition, this revised pro forma guidance reflects equity accounting for its remaining joint ventures (principally Australia and Indus Towers) consistent with IFRS requirements.

    On this revised pro forma basis, the Group expects to deliver adjusted operating profit of around GBP5 billion and free cash flow of GBP4.5-5.0 billion for the 2014 financial year.

    Exhibit 4: Vodafone's Balance Sheet

    As of July 19, 2013,

    Net debt including joint ventures £24.9 billion... net debt, exluding joint ventures, was £23.0 billion.

    Exhibit 5: Vodafone's Performance By Geography

    From the annual:

    Exhibit 6: Vodafone's market cap:

    $156.6B USD.

    Exhibit 7: Quick Stats on Peers

    (click to enlarge)

    I would note that I don't really like peer comparisons for several reasons: first, being the "best of a bad bunch" (or worst of a good one) hardly says anything about valuation, since the valuation of entire sectors can be out of whack for long periods of time. That being said, this is supposed to be a quick and dirty analysis, and the main point here is that, as Einhorn said, 10-12x cash earnings isn't an unreasonable valuation for a European telco.

    Tying Everything Together

    The first thing I want to do is put everything in terms of USD, because the deal's in USD.

     FCF lowFCF highDebt

    We'll set that aside for a moment.

    The first thing I want to do is explain why I believe it's justified to subtract the vast majority of the $130B Verizon payout from Vodafone's current market cap when calculating the pro forma value of Vodafone. First, roughly 45% of the deal is in cash, and roughly 45% is in Verizon shares. I won't get into the specifics of the collar, but suffice to say that a small change in the price of shares would not be extraordinarily material, unless you're talking about a market-wide plunge, in which case your holdings aren't prone to do too well anyway. Similarly, you'll note that the balance is for Italy as well as some Verizon debt; a thorough analysis would assign risk-weighted value based on bankruptcy probability, etc, but again, as Heitman/Jahnke lay out, a one-hour analysis needs to focus on materiality. The material point is this: all Verizon shares and a good chunk of the cash will go directly to VOD shareholders; the balance of the cash will be invested by VOD in emerging markets and/or LTE at a rate of return that will hopefully be attractive. In any case, the value of the cash will offset net debt, so here's what I'm going to do: I'm counting it as $125B to factor in the reported $5B tax Verizon has to pay. There are small nits to pick like change in exchange rate, etc etc - again, these are things which should be covered in a more thorough analysis, but are not likely to move the needle here for the sake of an initial go-round.

    Given Vodafone's closing market cap today of $156.6B, the value of Vodafone's equity minus the $125B adjusted payout from Verizon is $31.6 billion. Adding the $35.4B (roughly) in net debt, we find that Vodafone's pro-forma EV is $67B. What's left of Vodafone, as an enterprise, is trading at 8.7x - 9.5x forward FCF. Note that I'm not actually projecting pro forma EV, net debt, etc for VOD - I'm trying to figure out what the "residual value" is of VOD once you take away the adjusted payout from Verizon, so we can see whether or not VOD's current market cap properly accounts for its "standalone" value. This is an important distinction.

    Is that a reasonable valuation? You have to view it in context. EMEA is by no means a super-hot market, but core declines are being offset by strong growth in developing markets (see Exhibit 5). I'm not bullish on Europe, and I'm not going to pontificate about the macro, but I think it's reasonable to assume that Europe is in the "down" part of the cycle and will see better days at some indeterminable point in the future. On the other hand, emerging market growth hasn't lived up to promises, yet Vodafone has seen exceptional results thanks to secular tailwinds. So again - looking at it from a materiality perspective - a valuation of 10-11x on what I'd guess is depressed free cash flow does not seem unreasonable at all. Increasing data usage, a stabilizing situation in Europe, and consumer adoption in emerging markets all combine to mean that FCF shouldn't plunge dramatically. Again, I hate to use peer comps, but I don't think 10-11x is totally out of line. (I think it's on the low end, but I like to be conservative.)

    Assuming a midpoint of 10.5x FCF, it doesn't seem like there's a major delta between that and the current ~9.1x midpoint. Only 15% upside to the EV/FCF multiple. But here's where Vodafone's substantial debt load actually accelerates returns: even if you assume 10.25x EV/FCF off $7.4B in free cash flow, which is the midpoint of guidance, you get an enterprise value of $75.85B. Backing out the $35.4B in debt, Vodafone's market cap is now $40B. What's that against the current $31.6 billion ex-VZW pro forma market cap? A nice 26% gain. If you think Vodafone's cost-cutting and strength emerging markets can expand margins and re-ignite growth, it's not hard to argue for an enterprise value north of $80B. This scenario suggests the ADRs could be worth north of $40. A very quick DCF as well as EV/EBITDA and P/E suggest similar results.


    With my (admittedly very rough) fair value estimate at $38 somewhat conservatively, and ADRs trading at a mere $32, there appears to be a significant disconnect between the market's estimation of Vodafone and mine. Maybe investors think the deal won't close? Maybe they don't trust Vodafone's management to deliver on their promises? Maybe they think Europe will fall apart? Maybe they aren't willing to assign market value to Verizon shares? Maybe I'm just totally crazy? This is certainly not a risk-free thesis, but I'm surprised that shares didn't pop after the market finally received confirmation of what everyone's been expecting for a year.

    Finally, I won't say it's going to happen until I see it, but rumors are floating around that AT&T might be interested in picking at what's left of Vodafone. Vodafone's European ops certainly won't command the same premium multiple they got for their stake in Verizon Wireless, but in an M&A scenario, they would undoubtedly receive a higher multiple than the market's assigning them today.

    There are multiple paths to upside - improved investor confidence in the deal, an offer by AT&T, or just good results from Vodafone - but in any case, Vodafone got a great price for their 45% stake in Verizon Wireless. I think shareholders who stick around will be well-rewarded.

    Disclosure: I am long VOD.

    Sep 03 6:48 PM | Link | 9 Comments
  • When "Up 85% YTD" And "Cheap Stock" Aren't Contradictions: The Curious Case Of HP

    The perils of being a value investor: you think slash know a stock's cheap, but you're hesitant to buy more shares because it's trading 40% above your cost basis from a few months ago. And then you watch it go up double digits again. And once that's happened, then you model out fair value, and shares are still trading at a 15% discount to even a conservative estimate, which would normally be enough for you to buy, except you're up substantially on your cost basis and hate buying stocks that are up.

    Sigh. If only I liked riding momo trains.

    The true story above describes my love-hate relationship with HP (NYSE:HPQ). I looked into it last summer as part of my broader thesis that the "death of the PC" was being overhyped, leaving a lot of "old tech" companies (INTC, STX, WDC, DELL, CSCO, MSFT) trading at bargain-bin valuations while "social" darlings like FB, ZNGA, and GRPN were trading at stratospheric multiples. Fast-forward twelve months, and the former group is well on its way to recovering from the extreme pessimism, and the latter group has (mostly) had a reality check.

    Of all the companies I looked into, HP was not high on my must-buy list. The valuation was cheap, but they were on a massive spending spree, acquiring companies left and right. Everyone knows how that went for them. As a value investor, I tend to not like it when companies massively overpay for companies, then discover that not only was the purchase price too high, but that the purchase might have been inadvisable at any price.

    Anyway, to make a long story short, I ended up initiating a small position because it was cheap, and when it got really cheap after the $8.8 billion Autonomy writedown, I substantially increased my position.

    Still, I had serious reservations about the company. I liked Whitman, and the stock was an obvious buy at $13 (or $12, or wherever) but it was one of those moments where "risk is always and everywhere a function of price" came into play. Didn't like the company, but the price was literally too good to turn down - to turn a common analogy on its head, it was like picking up 24-carat diamonds in front of a toy bulldozers.

    Eventually the market realized how inefficient it had been, and HP minted as much cash flow in a half as they'd guided for in a year, and now we're here, 100% upside later. Along the way, I've grown to like Whitman, and think she's doing a great job of turning the company around. While I think PCs will stabilize and servers/services/software will return to growth at some semi-undeterminable point in the future, I'm not so confident in printers/printing. I could talk a lot more about my thoughts here, but this is intended to be a quick blog post rather than an in-depth thesis, so feel free to comment with questions/thoughts.

    That leaves me wondering what to do with my position - buy more? Hold? Sell? Quick multiple checks implied the stock was cheap, but it's certainly not a screaming buy like it was in the teens. So I decided to run a DCF model.

    Keep in mind this is rough; there are still parts of it that need to be fleshed out (there are a few interesting items in working capital, for example) but it substantiates that even under pretty sad assumptions, the stock's still trading at a decent discount to fair value.

    DCF Conclusions

    You may be wondering why I didn't include a bear case. Here's why: the assumptions in my bull case are hardly heroic (you may notice revenue doesn't go anywhere) and the assumptions in my base case are downright pessimistic.

    Base Case Assumptions

    I have some spare capital to deploy, and I already hold quite enough of INTC and WFCWS (see here and here for the respective write-ups). Based on the results above, as well as my intuition that things won't turn out as badly as my overconservative projections suggest... well, HP could still have pretty good long-term upside from here.

    Lest I sound too sad about a stock trading at $26 and change when I started buying it in the high teens and kept buying it on the way down... well, I'm mad I didn't buy more. But hindsight's 20/20, and some say the three most dangerous words in investing are "I missed it."

    Rant of the day over. I promise my next post will be more opportunity-centric and less me-centric.

    Disclosure: I am long CSCO, DELL, HPQ, INTC, MSFT.

    Additional disclosure: I am also long WFCWS. I may add to my HPQ position in the next 72 hours.

    Tags: HPQ
    Aug 17 10:33 PM | Link | 3 Comments
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  • I think $VOD's value is much too low.
    Sep 3, 2013
  • At the after-hours price, $HPQ is trading at a >15% FCF yield according to my model. If it holds, will probably buy more tomorrow.
    Aug 21, 2013
  • Interesting thoughts from McKinsey on making earnings calls more productive:
    Aug 5, 2013
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