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Sir Perfluis

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  • “Man Muss Immer Umkehren” And Scrabble [View instapost]
    I concur with the acquire comment - it is my favorite game of its type as well.
    Also, if you are not familiar with Boggle, the strategy bears some resemblances to Scrabble's. Boggle is my personal favorite word game (although really it's a pattern recognition game relying upon optimal use of suffixes and prefixes that happens to require knowledge of words).
    Aug 27 01:49 PM | 2 Likes Like |Link to Comment
  • Greystone Logistics: A Classic Valuation Gap [View article]
    Yes - the quarter also came in about where I expected. I read through the 10-Q and didn't see anything to spark any sort of reaction one way or the other.

    I would appreciate an update based on what you hear from your discussion next week.

    Again, thanks.
    Apr 24 11:39 PM | Likes Like |Link to Comment
  • Greystone Logistics: A Classic Valuation Gap [View article]
    So, just thought I'd check in and see your thoughts after yesterday's shot downwards. I can't claim to be an expert on the stock, but I did not note any particular changes that would warrant a 25% decline (though it's a very illiquid stock that's seen a huge recent run-up). Thoughts and commentary appreciated.

    Thanks for the article btw; thought it was quite interesting.
    Apr 24 11:35 AM | Likes Like |Link to Comment
  • United Online - Spin Off To A 40%+ IRR [View article]
    It's sustainable from an earnings perspective; however, when I talked to management, they had not made any decisions regarding post-spinoff dividend policy. So at this point there's not a whole lot of transparency into forward dividend policy. Still no form 10 yet, which should highlight management's expected dividend policy.
    Apr 5 07:09 PM | Likes Like |Link to Comment
  • United Online - Spin Off To A 40%+ IRR [View article]
    It's all good - if I've gotten something wrong, I want to know about it as much as the next guy (probably more, actually).

    For comps for the communications division I'm not exactly enthusiastic about their direct applicability (looking at companies like FTR, FRP, HCOM, and ATNI which were generally wireline spinoffs at some point in time). These trade for 4-5x pre-capex EBITDA (mostly 4.5-5), but also tend to have varying degrees of broader diversification beyond wireline compared to UNTD's division. However, given that these figures are pre-capex as compared to my post-capex valuation for UNTD's division, I'd say it's ballpark accurate. If you have a better comps set, I'd like to know - I'm not enormously enthusiastic about these, and do not consider myself a wireline telecom specialist by any means.

    FLWS is interesting in that its capex requirements are high (and one of its goals is to be able to lower capex spend) - how this turns out sill be awfully important to the relative analysis. Right now, FLWS trades on ~a 7.8x pre-capex EBITDA multiple - but more like a 13.5x post-capex EBITDA multiple (using TTM figures) which I feel is the more accurate comp figure. At a 13.5x post-capex EBITDA multiple (which - right off the bat I think is too high), we're looking at a $1B+ EV for FTD (subtract off ~$230mm in debt, add in $45mm in cash, and back out some overhead attribution...say we assume 1/2 of overhead goes to FTD - which I think is too high, but we will see shortly - this comes out to ~$200mm in value reduction when capitalized at a 13.5x rate). So, FTD comes out to $615mm in equity capitalization by itself. Now, 2 things there: 1) I think I overestimated overhead to FTD here and 2) I think FLWS' valuation based on cash generation net of necessary capex is probably rich (hence shorting FLWS). Some of this uncertainty regarding cost attribution is why i have the disclaimer about having a starter position - how the unattributed overhead costs get split is awfully important to the valuation, but in my article I had to essentially make an educated guess. The other thing here, of course, is FLWS' attempts to reduce well they can do that will swing this relative valuation in their favor (although they realistically would have to cut capex in half IMO before it'd start making IRRs unattractive on a relative return basis).

    Anyway, hope this attempted clarification isn't too convoluted. Kind of sick at the moment, and not exactly running on all cylinders here. I'd like to see what you come up with for relative values if/when you get around to doing it.
    Apr 5 01:24 PM | Likes Like |Link to Comment
  • United Online - Spin Off To A 40%+ IRR [View article]
    On the topic of deriving equity value without subtracting out debt - the reasoning for that is that the debt will be headed to the FTD division post-separation, while the cash will remain with legacy UNTD. I value FTD using an earnings multiple rather than an enterprise valuation - and I actually think the FTD division is underlevered - it would unlock value if management would lever it up more and return the cash to shareholders. Given that FTD is underlevered relative to its 'ideal' capital structure, I don't see anything wrong with applying an earnings-based valuation to the equity rather than an enterprise value-based valuation.

    On the 4x EBITDA multiples for the other divisions, I'll start with communications. The communications division has been in long, slow decline and has been managed as such. The recent significant downturn in earnings represents growth expenditures made as part of the 4G relationship with Clearwire (rather than acceleration in the business' deterioration), which can be turned off it it doesn't yield positive results. I would caution that recent results understate the earnings capacity of the division. I don't have a strong opinion about whether the 4G endeavor will work out in UNTD's favor or not; it will or it won't. However, what I don't want to do is penalize the company for making growth expenditures. Management has historically done a good job of managing expenses as revenues have declined, and I don't think a 6x after-tax earnings figure is very over-the-top for a company that should remain profitable for many years (albeit at declining rates), based on a TTM figure depressed by growth expenditures for which the expenses are incurred immediately but results won't be seen for a longer period of time. Quite clearly, I disagree with your statement here that the division will be EBITDA negative in 4 years, given the ability to cut costs as revenue declines.

    The content and media division was admittedly difficult to value, and could be worth significantly more or significantly less. It makes sense from a strategic standpoint to sell it off and, as I mentioned in the article, I do not think its traffic is being properly monetized and believe an acquirer could remedy that. This is probably a binary outcome - it will either be sold or otherwise monetized, or it will continue generating cash flow for a while, and then the content will be monetized. I agree with you that this business, without some significant changes, will probably not be EBITDA positive in 4 years, but my valuation was really an attempt to pick a mid-range outcome (somewhere above what it would be valued at today from a pure cash-flow-production basis, but below acquisition value to a competitor). Time will tell here, but the division is very much a call option on (I believe very viable) strategic alternatives, but I would not value the business at $88mm based on its current and projected earnings profile.

    And if I came across as trying to use an EBITDA-based valuation because of lack of debt - if I came across that way, then I most apologize for my unclear communication. The intent behind mentioning lack of debt was really just the implication that all cash flow generated by the business will benefit the equity (no covenant issues, interest costs, etc.).
    Apr 4 07:31 PM | 2 Likes Like |Link to Comment
  • An Open Letter To Bob Benmosche [View article]
    As a fellow AIG holder, I hope your recommended policy is implemented.
    Apr 4 12:21 PM | 6 Likes Like |Link to Comment
  • United Online - Spin Off To A 40%+ IRR [View article]
    Thanks for the comment, and glad the article was at least thought-provoking for you.
    Apr 4 10:40 AM | 1 Like Like |Link to Comment
  • United Online - Spin Off To A 40%+ IRR [View article]
    Glad you like the idea. Thanks.
    Apr 4 10:36 AM | Likes Like |Link to Comment
  • United Online - Spin Off To A 40%+ IRR [View article]
    Much appreciated.
    Apr 3 05:32 PM | 1 Like Like |Link to Comment
  • United Online - Spin Off To A 40%+ IRR [View article]
    No problem, and glad you like the idea.
    Mar 28 04:43 PM | 2 Likes Like |Link to Comment
  • What Has To Go Right For Gamestop [View article]
    Thank you for the kind words about the article. As for the likelihood of a substantial dividend raise - I think it's fairly low. Firstly, because it doesn't play nice with executive option comp - to some degree they'd be shooting themselves in the foot switching over (although option comp has been significantly declining over the past couple years - 2012 level was about half of 2010's). Secondly, because as I implied and you directly mentioned, it could be considered an indication of lack of confidence in the future direction of the business.

    Ironically, though, if they did institute such a policy I think the inherent value of Gamestop goes up fairly substantially - and people like me start needing to more seriously consider the low valuation in our investment decisions (after all, it doesn't take a whole lot of years of high dividend yield for IRRs on a short position to be too low to be worthwhile). I still think it would be overvalued (even without assuming a price spike on the announcement, which I would expect for short-covering reasons. Paying a high dividend yield on a short position that may not come to fruition for years is not an enviable proposition) - but by significantly less. I would be hard to argue that an ineffective capital allocation policy being changed to a more effective one does anything else, right? I still wouldn't want to be long the stock, definitely (unless against my expectations the stock craters substantially post-announcement) - but the short position looks much less enticing.
    Mar 28 10:56 AM | Likes Like |Link to Comment
  • What Has To Go Right For Gamestop [View article]
    As for your first point (downloading is a time saver) - i agree with your point wholeheartedly. I had intended to come across that way in the article - if I did not, then I failed to adequately communicate some of my points. I thought the inclusion of something about it sometimes being more convenient to do some sort of placeholding activity for a while instead of going elsewhere. Re-reading my own section, I think you are right and this point was made poorly.

    For your second paragraph, it's an interesting thought exercise - but I think a difficult one dependent largely upon timing. The least expensive games (ie used ones) provide higher profit margins than the more expensive newer games. So less expensive games may actually offer higher profit margins (and actually probably dollar profits) - at least in the short run. In the long run, this flips - if there are fewer expensive new games purchased, then there will be fewer popular older titles from which to make high-margin sales down the road (as the value of holding a title in inventory declines over time as people move on, systems become obsolete, etc.). I honestly think we'd need some sort of statistical study (involving a survey of parents when they buy games, analysis of margins changes based on 'trading down', tracking these parents' later trade-backs relative to trade-back tendencies from other buying segments over time). It would be interesting to see what the results of such a study would be.
    Mar 27 12:07 PM | Likes Like |Link to Comment
  • What Has To Go Right For Gamestop [View article]

    Your thoughts I enjoy hearing. I agree with you that manufacturers do get some advertising value from Gamestop. This is fundamentally one of the 2 principal reasons why I own DirecTV stock - content owners get so much value from having DTV, DISH do free marketing for them that their incentive is to preserve the status quo (because many content owners would make less money without the intermediaries, despite making higher margins on each individual sale). Actually, I'm considering writing another article about this dynamic. However, I do not consider the free marketing aspect to be so powerful in the case of Gamestop - there are a limited enough number of must-have games coming out that game manufacturers should be able to get away with targeted advertising campaigns (most internet advertising is probably useless - but gamers genuinely like watching ads about the new upcoming games (just anecdotally), and - probably more important - there are various dedicated gaming websites where enthusiasts write about and critics review upcoming/newly released games. There's a lot of free advertising inherent in making a product that people genuinely enjoy buying (particularly when there are few enough excellent new titles that game reviewers can do justice to quite a number individually). So I guess to comment on your comment, I agree that cutting out Gamestop would entail a certain degree of free advertising loss - but this should be a very manageable loss given other sources of free advertising available to the industry.

    I appreciate your take on the whole thing.
    Mar 26 05:56 PM | 1 Like Like |Link to Comment
  • What Has To Go Right For Gamestop [View article]
    Okay, let's try it with another prefaced question: Let's just assume an initial 15% initial cash flow yield on Gamestop, assume a 5%/year dividend (based on initial share price) and assume that the remaining cash is used to retire 10% of outstanding shares per year - with no cash flow deterioration (or, I suppose, improvement) over that entire time period. It will take approximately 11 years for holders to receive enough dividends to recoup their initial investment. What does the business look like in 11 years? What residual value is there? And I think I'm being particularly generous here - starting with a 15% cash flow yield and assuming no deterioration in the physical disk market over a decade+. Given the massive cash flow allocation to share buybacks, the 'what does the company look like in 11 years' question is of critical importance to looking at an investment in Gamestop.
    Mar 26 04:48 PM | Likes Like |Link to Comment