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  • Warren Buffett's Buyback Math: Why 120% Of Book Value Is The Magic Number For Berkshire [View article]
    Good article and novel characterization
    Aug 13 12:41 PM | 1 Like Like |Link to Comment
  • Are IBM's Earnings Really Low Quality? [View article]
    Interesting article:

    Is the accusation that IBM's earnings are 'low quality' only related to debt-financed share buybacks? Or is the reason more fundamental?

    As I understand it, there are 2 separate, but somewhat related arguments:

    1. One line of argumentation contends that IBM's EPS growth is the result of share buybacks and is not due to actual significant corporate level growth in net income. That is one argument (for example in 2012 and 2013, actual net income was fairly flat at $16.604 and $16.483 Bn respectively, but EPS (assuming dilution per Annual Report) was up from $14.37 to $14.94. Shares outstanding went from 1,117 to 1,054 due to buybacks).

    2. The second argument regarding the quality of earnings is somewhat related but purports that because revenue and total net income is declining, the fact that EPS is rising can only come from a limited number of sources (cost cutting, buybacks, etc), and is not sustainable. The logic here is that in the long term, only by growing top line can you sustainably raise enterprise-level earnings.

    I am not a proponent of either argument. It is my belief that IBM is cheap and is shedding the lower quality businesses while focusing on more attractive and higher margin segments. However, those were the two arguments against IBM, as I understood them.

    Note that I am not referring to any one particular article, just to the plethora of literature I've read regarding the company.
    Aug 11 05:44 PM | 1 Like Like |Link to Comment
  • DC Payments - 9.5% Yield With A 44% Cash Flow Payout Ratio [View article]
    The actual quantity of net working capital is a balance sheet item, which means it is at a 'point-in-time'.

    So I'll assume you mean that you evaluate working capital in 4 individual quarterly installments, and average them. I believe that is a prudent approach.

    As I mentioned, my examples are unrelated to DirectCash. However, it is true that DirectCash's growth has been primarily by acquisition and thus additional working capital would be acquired via the acquisitions rather than being funded by operating cash flow.
    Aug 8 09:35 AM | Likes Like |Link to Comment
  • DC Payments - 9.5% Yield With A 44% Cash Flow Payout Ratio [View article]

    Thank you for your comments and for your engagement of the material.

    Your methodology is perfectly fair. There is no 'right' or 'wrong' metric here, and different characteristics are important to different investors.

    Personally, I do agree that there can be merit to including the changes in non-cash working capital on occasion.

    However, there are many examples in which I prefer to exclude changes in non-cash working capital, and I will explain my logic. Consider:

    This are some examples (unrelated to DirectCash):

    1. Lets say a company has large customers who have payment terms such that they pay infrequently and in large lump-sums.
    In this case you could have a quarter where the company generates a great deal of income via billings, however because the customer has not yet paid, the company will have burned cash (because you still need to pay their bills, restock their inventories, etc).

    2. Growing companies which static working capital ratios (except in the case of negative working capital businesses) will always generate less cash when they are growing, because some the cash they generate must be reinvested into working capital.
    If revenues double, and Days Receivable remains at some number (e.g. 30 days sales receivable), then doubling sales means you have twice as much receivables.
    This sucks cash out of the business. Note payables will rise as well, but in a business with positive net working capital the net effect will be to suck cash from the business.
    The reason you may want to back this out of cash flow is that if the company were to stop growing, it would have more cash generation, but you typically don't want to punish a company for pursuing a strategy of growth.

    Thanks again for your readership and for your contribution to the discourse.
    Aug 7 08:55 PM | Likes Like |Link to Comment
  • DC Payments - 9.5% Yield With A 44% Cash Flow Payout Ratio [View article]

    It's not a Canadian thing, and I certainly agree with you that the company's accounting is atypical; their reporting of operating cash flow is unusual.

    *However, this is why I used the company's metric, "FFO" vs 'Cash Flow from Ops' for my analysis*. FFO does not add back interest expenses like their weird cash flow.

    Please see the company's MD&A for Q1, 2014. Funds From Operations (which is non GAAP, non-IFRS) is defined by the company as:

    Net loss: $ (1,685)
    Add (deduct):
    Depreciation of PP&E 4,385
    Amort. of intangibles 9,898
    Unrealized loss on FX 5,480
    Deferred income tax (3,532)
    Other non-cash 456
    Total 15,002
    Maintenance Capex (1,068)
    Funds From Operations $13,934

    You will note that it doesn't include interest as an add-back.

    Where I say in my article:

    "the company defines [FFO] as cash flow from operations less maintenance capital expenditures."

    What I could have been clearer on was that I meant it to communicate the following:

    "the company defines [FFO] as what the rest of us think of as 'steady state FCF from Ops' less maintenance capital expenditures."

    Steady-state = no changes in non-cash operating working capital

    I hope that clarifies it. I would advocate assessing the business on the basis of FFO vs Operating Cash Flow.
    Aug 7 06:30 PM | Likes Like |Link to Comment
  • DC Payments - 9.5% Yield With A 44% Cash Flow Payout Ratio [View article]
    Jason, I believe your characterization is inaccurate:
    - In fact the payout ratio it is *not* based on unlevered FCF.
    - The company's MD&A states:

    "DCPayments calculates funds from operations as: Net income (loss) plus or minus depreciation, amortization, deferred income taxes expense (benefit), *NON-CASH* finance costs and unrealized foreign exchange loss (gain) and after provision for productive capital maintenance expenditures"

    - The main finance cost is interest:
    - Interest on the 3 tranches of debt was $16.0 million of the $19.7 million in total "finance costs" in 2013
    - Interest *is* a cash expense, therefore this is the levered FCF.
    - The finance costs which are *excluded* from the calculation are *non-cash* items such as: unrealized loss/gain on FX, and amortized transaction costs.
    Aug 7 01:23 PM | Likes Like |Link to Comment
  • DC Payments - 9.5% Yield With A 44% Cash Flow Payout Ratio [View article]
    The stock fell about 35% - from ~$21.5 to ~$14 when the troubles with Cash Store Financial, a large DirectCash customer, were aired in several news outlets.

    What I believe the market didn't know was that Cash Store Financial was already a diminishing component of DirectCash's contribution

    However, that is just my speculation; I have only been following the stock for a couple months.
    Aug 7 09:27 AM | Likes Like |Link to Comment
  • DC Payments - 9.5% Yield With A 44% Cash Flow Payout Ratio [View article]
    DirectCash operates mainly in Canada, Australia and the UK; I am not aware of any plans to enter the USA.

    Of course there is indeed competition in all of the markets in which they operate, however the sales contracts seems to be relatively long in duration and customer retention seems pretty good.

    The market for non-bank ATM management is fragmented, as is the market for prepaid cards, so there is no monolithic competitor of note. Competition is always a threat but it is not a prominent worry of mine with this stock.
    Aug 6 08:44 AM | Likes Like |Link to Comment
  • The Good News From A Bad Friday [View article]

    Another excellent article.

    It is very astute of you to recognize that Thursday's inter-market action was anomalous in that it had certain characteristics of a panic or liquidation.

    1. Strong correlation in price action between individual issues across all industry groups

    2. More disconcertingly, strong correlations between various markets which typically have negative correlations (equities vs gold, equities vs Treasuries)

    Fortunately, as many traders use the 200-day MA as the threshold for a breakdown of significance, there is still a ways to go.

    Friday's action was indeed more consistent with a typical 'risk-off' down day for equities (except that HY underperformed equities).

    Valuations seem stretched by many historical metrics, but valuation multiples alone have not historically served as an effective mechanism by which to forecast price action (at least, not in the short or medium term).

    The trend appears to remain up for the moment. However, increasingly there are signs that the bull is aging.

    Fantastic article.
    Aug 1 10:55 PM | 8 Likes Like |Link to Comment
  • Mining Investing: Deconstructing Mining Asset NAVs [View instapost]

    The answer is yes.

    There will be multiple asset NAVs in a company with multiple mines. Each mine or fractional interest in a mine requires its own NAV buildup.

    You would then sum up the NAVs of the individual assets (or the owned %age of each partially owned mine), and make the corporate adjustments (adding cash, subtracting debt) to get the corporate NAV.
    Jul 31 09:45 AM | Likes Like |Link to Comment
  • IBM According To Warren Buffett's Annual Letters To Shareholders [View article]
    Great analysis.

    My own characterization is as follows:
    - A sustained high ROE & ROIC tend to indicate fundamental strength in an enterprise
    - P/E is more about how cheaply the company can be bought, so it's a market-driven metric

    Both should be used in conjunction to establish a fair price at which to enter an investment, assuming you're expecting it to be a long-term hold.
    Jul 16 09:41 PM | 1 Like Like |Link to Comment
  • 3 Reasons Apple Buying Beats Is Smart [View article]
    Other than to the extent that this might signal a new and more acquisitive direction by Apple, the downside risks should be minimal. The market may overreact, but lets put the quantum of this purchase into perspective:

    At $3bn, this is about 0.6% of AAPL's market cap: Put differently, if AAPL put $3Bn into a meat grinder the implied effect would be a decline of 0.6% in its market cap (excluding of course the rather more troubling implications of such a marked shift in management's philosophy).

    Even if Apple overpaid (which I'm not suggesting, as I have no insight into Beats' numbers or prospects), Beats is almost certainly worth something. In reality, whether it is a successful, accretive acquisition or not, it's not even capable of being a disaster, and frankly it's not even material.

    Most companies making an acquisition of this *relative* size (i.e. size of the target vs size of the acquirer) would not even merit an analyst report on the purchase. Even if the analysts assume it's dilutive, what will they do; lower their price targets from $700 to $699? That's about the extent of the possible financial implications (excluding sentiment).
    May 9 08:53 AM | 6 Likes Like |Link to Comment
  • Automodular Corporation: A Special Situation Decoupled From Market Volatility [View article]

    Fantastic article: I've been building a position in TSX:AM for a while now on the basis of a similar thesis.

    As I'm based in Canada, this point does not apply to me... However I think the largest risk US-based investors take in buying AM is in FX. Since AM's cash pile is in C$, US-investors are incurring FX risk, although this would likely be limited in magnitude.

    For funds/sophisticated individual investors, hedging one's USD/CAD FX would be relatively straightforward given the likely liquidation date ranges and relatively well-defined price target expectations.

    I am surprised that more people have not caught on to this trade.
    May 5 04:40 PM | Likes Like |Link to Comment
  • What Is Berkshire Hathaway Really Worth? A Comprehensive Look [View article]

    Thank you for your question. It raises an interesting point. BRK's market cap has risen slightly since I wrote the article, but it is still close to that. Wholly-owned private assets are not the same as 'private equity' in the sense that term is ordinarily used:

    For a variety of reasons, BRK is not comparable to publicly traded private equity firms such as Blackstone, Apollo Global Management, KKR, Onex Corp, etc.

    Reason #1. For starters, most of what is termed "private equity" firms is actually comprised of leveraged buyout-focused firms. These buy companies with large quantities of leverage, and seek to profit from paying down debt, or withdrawing dividends from heavily leveraged entities. This model relies to a significant extent on low interest rates and available credit more than Berkshire.

    Reason #2. The LBO time horizon is radically different than Berkshire. LBO firms tend to like to hold investments for 5-7 years (ideally), versus BRK which prefers to hold them forever or at least for a very long time.

    This is also why Berkshire is happy owning only a piece of Heinz; it knows that 3G capital will soon want to sell the remaining portion of the business.

    Reason #3. Most of the publicly traded private equity firms also have other significant divisions which distort their metrics, because they also invest in credit, own hedge funds, proprietary trading desks, and other asset management.

    Reason #4. Perhaps most significantly, the main reason Berkshire is not comparable to the publicly-traded private equity firms is that these private equity firms do not in fact own the assets held by their funds: it is the limited partners (investors in the funds themselves) who in fact are the legal owners if those assets. The private equity firm is the asset manager which receives a management fee, sponsor fee, and carried interest on the investments.

    The private equity firm is paid based on the fees and carry it receives on the investment.

    This means that when BRK owns a company, it actually owns the whole thing; it owns the company as principal: when a private equity firm owns a company, its investors are the true owners and the private equity firm is only entitled to fees it charges on that entity.

    For those reasons, BRK and publicly traded private equity firms are not comparable, in my opinion.
    Apr 20 10:13 AM | 3 Likes Like |Link to Comment
  • What Is Berkshire Hathaway Really Worth? A Comprehensive Look [View article]
    BRK.A and BRK.B represent fractional ownership of the same company and have claims same assets. The ratio is 1:1,500 (BRK.A:BRK.B).

    The economics of the claims are identical, however the voting rights are not. BRK.B has only 1/10,000th the voting power of BRK.A, despite having 1,500 the economic interest.

    As I indicate in my article, BRK's public portfolio contains about $115 billion of public market equities, in addition to its several billion of value from its Bank of America warrants/options.
    Apr 19 10:27 AM | Likes Like |Link to Comment