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The Violent Capitalist graduated with a BS in Finance and International Business and a minor in Politics from New York University in 2004. He is also a CFA Charterholder (2009) who has held many roles throughout the industry. He has been a credit research analyst at an independent credit... More
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  • Is Seagate Buyout a Steal for Private Equity?
    Seagate is cheap. It's a cyclical stock, one that is still mired in uncertainty due to the commodity nature of its business, the struggles with a fast growth competitor in Western Digital, a new CEO, the cyclicality of storage/hardware business, and now valuation since the whispers of a buyout offer. Nevertheless, it does mean that Seagate is worth only $16/share. And especially not to a consortium of private equity firms that can raise money at rates of 6% to buy the company out. If the new CEO (Luczo) is looking for a quick payout, I'd be extremely surprised that an ex-Sr Managing Director of Bear Stearns Technology Group and a tenured history at Seagate since 1993, will make him devoid of the true valuation of a company like Seagate.

    First off, normalized earnings for a Seagate is about $1 billion. I've accounted for the fact that 2010 was stronger than usual and that they currently are not paying any taxes. Some #'s for my valuation:

    D&A = $800mil
    Capex = $625mil
    OCF = $1.8 billion (my definition is NI + D&A)
    FCF = $1.175 billion
    Invested Capital = $3.05billion
    Cash Flow ROIC = 39%

    Cash = $2.5billion
    Debt = $2.5billion

    Market cap at $16 is $8billion. Since net debt is 0, the enterprise value for Seagate is also $8billion. FCF yield on a valuation of $8billion is 14.7%. That is nuts when you can borrow to buyout a firm at 6% interest rates! In my opinion, this yield should be about 10%, or a valuation of $11billion and $22/share. I also highlighted the ROIC #, mostly because its just insane for a hardware company. The thing is about hard drives, is that its now an oligopoly business run by a few dominant firms (Seagate, Western Digital the runaway leaders). This allows for lower capex investments - which is awesome for any LBO-er by the way - and creates this high ROIC #. If you want a comparison, take a look at semiconductor companies where there are a much larger # of firms competing. Routinely, their ROIC #'s come in at around 20-40% lower and they are probably more cyclical, yet have valuation multiples that are generally higher (Micron Technology would be an example of a lower ROIC operation with a similar valuation). It really makes no sense, and is why I bought into Seagate at prices of around $13/share.

    Now the argument may be that the offer price for Seagate is fair because it matches the multiples of Western Digital. That's all fine and mighty - except Western Digital is cheap too. The buyout consortium has simply made them both equally attractive at Seagate's current price of $15/share.

    My advice: hold firm for an offer above $20. At this price, buyout firms will still be able to make a 20-25% annualized return by my estimates.

    Current price: $15
    Conservative fair value: $22, 50% higher from current price
    Strategy: Sell November puts at strike $14 for $.55, a yield of almost 4% in one month, or even buy shares outright for this one!


    Disclosure: Long STX
    Oct 15 10:52 AM | Link | Comment!
  • F&C Asset Management Attracts Activist Investor
    Sherborne Investors, currently in the controlling position of Nautilus here in the USA, has decided to also take aim at F&C Asset Management based in the UK. Nautilus has not really played out will for the firm, but here's why I think their focus on F&C should prove extremely worthy of their resources.

    F&C Asset management is really a niche investment management company and is geographically diversified. They have about 100billion pounds under management and have offices in pretty much every major money center in the world.

    At 63 pence, the market cap of the company stands at about 320mil pounds. 150mil in cash and 280mil in debt gives an enterprise value of about 420mil pounds.

    The basic rule of thumb for investment management co's is using 2% of AUM (I have my own reservations about this valuation method in that they are firms that deserve premiums to this and discounts to it depending on their main order of business). 2% of 100bil = 500mil. If their EV should = 500mil, that means they should trade closer to 80 pence or about 25% higher.

    They also have a book value of about 590mil, subtract out management contracts which are being amortized out and their book value is 390mil. If you think that market cap should trade close to book value, F&C should be worth about 78 pence, or about 24% higher.

    My traditional valuation method is to take a multiple of EV against its free cash flows. Cash flows currently are about 5mil from income + amorization of contracts = 55mil and about 1.5mil being spent on capex. FCF is about 53 million. Taking a 10 multiple of this # and that gives an expected EV of 530mil, a target price of 85 pence or 35% higher.

    Basically I don't think that its a coincidence that 3 different valuation methods are giving the such similar valuations! To throw an extra kicker in the mix, you also get dividends of 6 pence per year. The 30mil dividend payments is easily managed with 50mil+ FCF (please remember my FCF definition is different from the textbook version). The dividend yield is about 10%, so you can theoretically have total returns of at least 75% here in 5 years!

    Current Price: 63 pence
    Conservative Target Value: 80 pence
    Expected Total Returns in 5 years: 75%+
    Time Period: Approximately 4-5 years or sooner
    Strategy: By shares close to 63 pence or lower - purchase 50% of a total allotment and be prepared to double down in the 50's.

    Disclosure: I am long F&C Asset Management
    Aug 17 12:21 PM | Link | 2 Comments
  • KHD Post Spinoff Valuation is Dirt Cheap
    Conservative Fair Value Estimate: 15 euro
    Current Price: sub 6 euro
    Strategy: Buy 2% allocation, double down at 5 with rising Euro volatility

    All #'s below are Euro!

    I obviously have developed a sort of fascination with Michael Smith and his portfolio co's - only because they are some of the best managed companies in terms of 1) efficiency 2) profitability 3) truly maximizing book value, not even to mention the management teams in place.

    So, as most of us know by now, KHD has split itself into 2 entities, Terra Nova Royalty and KHD International (German exchange, symbol: KWG). My discussion here will be on the KHD part of the business. I believed previously this was the main attraction of the company and I still do today. I have previously written a valuation of the original KHD so please check that out if you can, as the explanation below is an update of that Article. One extremely important note of importance, is the fact that backlog now stands at about 200 million, with the company expecting nominal net income over the next 1-2 yrs.

    Recap on Margins
    In 2008 they incurred costs (directly related to progress billed or how much they charge for percentage of completion) of $170 million and earned nothing, I'm assuming this is because of cancellations and other charges they took on their income statement.. In 2007 they incurred costs of $390 million and about $100 million in profit, about a 25% earnings rate on billings.. Taking these into account, I believe that going forward they can earn 20% on future incurred costs

    - Looking at their current operations I estimate $100 million in incurred costs per year

    - Backlog is now 200 million, so the life of their backlog is 200mil/100mil which is 2 years. All my valuations will be projected based on 2 years (I won't discount them back to today)

    - Take 20% of $100 mil for 2 years and that totals $40 million in additional book value from their backlog.

    - With current book value at $170 million, book value is expected to be $210 million in 2 years

    - I am disregarding any valuation from maintenance service contracts, so my minimum valuation for this company is now 210 million

    At this conjecture, KWG is trading at 5.75 euro. No doubt there is some volatility since the spinoff but this price is 100% absurd. At 5.75 and just under 16.5 million shares outstanding, gives it a market cap of 100 million euro. Against 226 million in net cash, Enterprise Value is a negative 120 million. At minimum shares should be trading at 10, where market cap would be on par with Book Value. Account for an additional 40 million in book value over the course of 2-3 years, and they should trade closer to 12-13 euro a share. Account for new orders to start flowing in 2011-2012 generating a positive 10 million in cash flows, and shares can hit upwards of 20.

    For this reason I have sold my TTT and held on to KWG and plan on building that position.

    Disclosure: Long KWG (german equity, listed on Frankfurt)
    May 07 9:26 AM | Link | 5 Comments
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    Apr 15, 2009
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