Understanding Businesses

Long/short equity, value, special situations
Understanding Businesses
Long/short equity, value, special situations
Contributor since: 2012
Just to reiterate the point, handing over EC to the banks would be pretty darn favorable to shareholders right now. EC actually weighs on the Essex Rental's overall financials, and the financials of just CC look much, much better without EC in the picture.
Great article, Terrier.
I've learned the hard way that looking for value first, instead of finding high quality interesting companies, is the most certainly the wrong way to go. It is incredibly tempting, and the 'fear of missing out' concept certainly contributed to that as well.
I think your process is much more efficient, and clearly your influx of articles shows you are much more interested in learning about new companies, rather than trying to find value.
This is brilliant. Seriously.
I don't think a lot of investors have really zero'ed on the investing strategy they want to focus on. Will so many different styles out there, it's hard to really figure out the perfect one for your personality. This is certainly something I experienced myself.
At the end of the day, we all invest to get some kind of feeling. And you're right, that feeling will vary by person. I completely agree that it's extremely important to understand what kind of feeling and lifestyle we're after. Once we understand that, it's much easier to identify our optimal investment strategy.
Looking forward to this column going forward. Don't see many of these around that combine philosophy, psychology and investing all in one.
Excellent job!!!
Great article bud!
It's a negative working capital business too, so that just makes the cash even less steady as the company keeps declining
Great article!
Kinda going off Mark's question here, but can't you say the same about any vertically integrated chemical company? I don't think being capital intensive exactly provides a moat. From what I've seen, cap-light specialty chemical companies have much better returns on capital.
Also, what makes their Specialty Black different than a competitors? Is it really that 'special'? I think Eastman's Crystex chemical for tires is a pretty good example of a specialty, niche chemical for tires. Can't really see the same thing applying OEC's Specialty Black.
Great article J!
Two things: Are they primarily met or thermal based?
Also, how much of that liquidity actual available? I tend to doubt they could utilize all of it before busting a covenant and going into technical default. Not sure what kind of financial covenants they have, but I would guess they have some fixed cost, or leverage covenant that they would breach at some point before utilizing the full draw down.
I think something will get done, but time won't help our IRR. Holding on as well
Saw this earlier:
I like it.
1) I think its great sign that they paid a premium over cash to buy from BD. Shows that they see more value than just the cash.
2) I don't know much about B Riley, but the seem much bigger, and may be able to make some magic happen here quicker
3) Hate that we have to pay Blazek severance for nothing. Ugh. At least we dont have a CEO anymore that we have to pay.
Unfortunately, I have no idea what the time for this is now. But at least they see a $1.20 of value in this
$24.2mm as of Q2, probably about $23.9mm as of Q3
Sorry for the delayed response guys.
Also surprised with the lack of anything happening.
Looks like Becker Drapkin is giving up on these guys.
Huge volume of stock sold today. About 6.3mm, which could only be Becker Drapkin.
The stock is still trading below cash value though. It will be interesting to see if another fund picks up the shares.
Great commentary Strategic. I thought the $15mm discrepancy was odd too. I also agree banks have more of an incentive to keep the Essex side alive, vs foreclosing or liquidating. I've been waiting to see some sort of private placement / equity infusion as well. Casey Capital has been oddly quiet since their proxy fight.... Let's hope they have something up their sleeve.
Well if you look at the press release for the forbearance agreement, they give a total OLV number for the whole company, so it looks like he might've taken a look at Coast too. If you add the drop in Essex OLV to the total company OLV they provided, it comes out somewhere around $330mm I think, which is still $15mm higher than the total OLV number they provided in the Q. I just figured that $15mm increase must be coming from the Coast side.
Agreed. Coast has the value. Although, I get a bit worried seeing their borrowing base availability under $1mm lol
I think the banks are incentivized to keep them alive though. Why force the liquidation and risk impairment when they can just manage them as a going concern? Gotta love those default fees. Most likely why they went for the forbearance. But I do find it odd that they did such a short term agreement. Maybe they expect something to happen before the 11th?
That drop is solely attributed to the Essex Crane subsidiary assets though. It actually looks like the appraiser valued Coast Crane's assets about $30mm higher than in the last Q.
Great article Adib! What are your thoughts on the company's recent tender offer? Looks like a pretty decent chunk, so you'd think management must believe shares are undervalued.
Nice work!
I've been buying the whole way down. Makes no sense at all. Even Coast Crane alone is worth close to triple the market cap in liquidation. No cross-collateralization even bolsters the argument further.
If SRC is able to monetize their stake, at the valuation Maple is paying, that would be quite a windfall for them, seeing as I have them going bankrupt in my worst case scenario. Although, I think the most important part here is that the proceeds are going to be used to pay down debt, which should (hopefully) alleviate my concerns about bankruptcy within the year. Either way, this increases my value of Long Run
I don't believe its a tender. SRC just said they'd vote in favor of the shares being issued to Maple. The high price paid for the shares should probably offset the dilution to Sprott. Plus, its always good to see a boost of confidence like this from another company.
Nothing jumped out at me. Glad they FINALLY gave some color on RII. I couldn't find anything on them before. Good to hear there is some extra value there. Rather have them understate the asset vs overstate it.
I'm torn on the buyback program. They really have no cash to do it. They'd have to draw on the revolver to do anything sizable. Really hope the can sell UAG in the 2nd half and get some extra cash. They're behind schedule on this though, and its somewhat weak performance doesn't help. Might take longer than expected.
It's good to hear the deal flow is strong, but they'll need some extra funding to do anything. No better time than now to buy distressed assets though.
I'm no expert when it comes to guessing commodity prices. It's hard to tell. But when oil and coal are at levels where prices are barely above the cost of production, it's hard to imagine things getting much worse. Then again, it might take a few big players going bankrupt, and an extreme decrease in supply before things turn around. I think coal is closer to this point than oil and gas.
SPOXF is Sprott Inc. It's essentially the parent 'Sprott' company. That's who SRC pays its management fees too
Hi Geoffrut,
Thanks for the commentary. Always appreciate it on tricky companies like this.
I did back out SRC's outstanding debt in my valuation, which lowered their EV by the $12mm or so that's outstanding.
While I agree that the company's calculation of NAV is rich, my bear case scenario incorporates a worse case scenario for each investment happening all at the exact same time. It's much more likely that a few end up doing better than expected, and the company trades high.
I don't believe it's purely speculating on oil & gas prices going higher as well. Oil & gas prices can remain completely flat and SRC would still appreciate in value if for instance: OEF continued to grow due to demand in Organic & Natural foods, ICD was able to maintain utilization even in a terrible pricing environment, or Corsa is able to grow by consolidating the coal industry as competitors go bankrupt.
While SRC would certainly benefit from increased oil & gas prices, their value isn't completely tied to that industry, and they could benefit from success in their other investments.
Thanks again for the commentary. Great points.
Let's hope so! I have a feeling it will be harder for management to sell then they think. Hopefully we'll get some good news soon.
Thanks for the comments Ken.
I see what you mean regarding the NAV. Yes, it's definitely trading at the highest gap in its history, but I think that's primarily because some of the company's valuations on its investments (particularly InPlay and OEOG) are a bit lofty. If they were to lower the pricing tables they used in the reserve supplement, that should probably chop a good chunk off their value. Some others probably warrant a discount as well. I'm curious to see if the make any changes to their valuations in Q2.
UAG is certainly tricky. I tried to dig into them a good amount, but could barely find anything. I'm really curious as to why they backed off their previous IPO. Them going public right now would be a fantastic thing for SRC. Let's hope the mutual funds' valuations on UAG aren't too off the mark either. I knew they have been trying to sell their stake for awhile, so hopefully there's not some negative reason as to why they haven't sold it yet (losing money certainly wouldn't help).
I definitely had a good laugh trying to value those cows!!! In all seriousness though, I think OEF could be huge for them if they pull it off right. It's definitely a growing, and very hard industry to break into, due to all the regulations around Natural and Organic. I think that will play out very well for them in the future.
Thanks again,
Thanks for the comments.
They certainly haven't made the smartest decisions in the past. The dividend was a pretty terrible idea. The best we can hope for in the short term is a sale of UAG and the proceeds going toward a buyback or acquisition at dI stressed prices.
Fingers crossed.
Thank you!
They seem separate enough to me. One of Sprott Inc's subsidiaries 'manages', SRC, and sends ideas over to them. Most of the ideas are private company based, and held at SRC. Sprott Inc's subsidiary basically makes out by getting the management fees from SRC.
Very true! Looks good to me.
Thanks again!
It's certainly hard to see things going lower at this point, unless oil/coal somehow continue their downfall. I think that's already built into the stock price, and once those fears start to go away, the shares should benefit.
No problem! Happy to hear you enjoyed it
Yes, you're correct. I believe it was $500k for 2015.
Maybe we'll get lucky and they'll up it to $1mm in 2016!