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  • Badger Daylighting: Undervalued Industry Giant With A Clear Path To Long-Term Shareholder Value Creation [View article]
    Badger's services are predominantly used on existing infrastructure. Thus it possesses more exposure to the relatively more stable Maintenance, Repair and Operations (MRO) market than the new-build market.

    Thus, while new infrastructure development creates additional assets upon which Badger's services could be used, new infrastructure development is not required for Badger's continued growth.

    Badger's main attraction is that its service represents a better way to maintain existing infrastructure, and the phenomenon within the industry appears to be that users of maintenance services switching to Badger's proprietary and novel method.

    We believe this is a strong company with solid prospects and relatively modest operational risk. However, the stock is extremely volatile (high-beta), and this makes it ill-suited to the faint of heart.
    Dec 9, 2014. 04:10 PM | 4 Likes Like |Link to Comment
  • Peak Resorts: Neglected IPO Yields 6.5% With Three Catalysts For Imminent Upside [View article]
    I take issue with your characterization of the EBITDA multiple. EBITDA is a capital-structure neutral metric, so you can't just look at P/EBITDA; you need to look at TEV/EBITDA.

    You need to include the debt because EBITDA is before interest payments to lenders, who are capital providers to the business.

    If you read the prospectus (See, it shows the company's PRO FORMA balance sheet Post IPO (see P 16 or p 17).

    This shows that AFTER the IPO, and once they have paid down debt, they will have:

    Cash: 7.1
    PF Debt: 99.9
    Net Debt: 92.8

    With a market cap of about ~122 million, you get a Total Enterprise Value of ~215 million

    With EBITDA of $25.4 million, the TEV-to-EBITDA (post-IPO proceeds) is 8.5x, which might be reasonable but it is not bargain basement. It is probably a tiny bit lower now that the stock has fallen, but not much.

    If you subtract $10 million in capex, then you get to EBITDA-less-capex of 14x pre-tax earnings (20x earnings if you tax them at 30%).

    This is probably how the company should be viewed in terms of valuation.
    Nov 26, 2014. 03:08 PM | 15 Likes Like |Link to Comment
  • BRK - Growing BVPS Allows Safe Writing Of Puts [View instapost]

    Thanks for your comments. I'm sorry this article was so hard to find: I actually submitted it for publication on the main site but because it was about options they said it didn't belong on the main site (strange, I know).

    I think the challenge with what you propose is that it's hard to determine abnormal risk premiums because its hard to determine truly safe values of a stock (which are driven by fundamentals). The trading part is relatively easy. But what is the truly "safe" level below which a stock is unlikely to go? You could say it is book value, but many stocks consistently trade at a discount to book. You'd also have to pro forma in the expected partial period earnings.

    With BRK, remember that BRK's book value is about 1/4 to 1/3 public market securities, so its book value will fluctuate with public markets as well.

    The good news is that if there *were* a very way to discover abnormal risk premiums, then this would be arbed out of the market and the opportunity to disappear. So it's probably to your benefit that they are tough to find!
    Oct 26, 2014. 09:37 AM | 1 Like Like |Link to Comment
  • Bet Against S&P Risk By Investing In Volatility [View article]
    Great chart - I've become an advocate of technical analysis in the last year:
    See my instablog for a number of charts I've annotated:

    If you believe the long-term major uptrend in the S&P has been decisively broken, wouldn't technical analysis suggest you go short until the major trend has reversed?

    I myself use a number of technical tools in addition to the traditional area patterns, so despite the apparent breakdown in the daily chart I'm not yet prepared to go fully short.

    As well, on the weekly chart, a look at a longer term trendline does not indicate a decisive breach.
    Oct 19, 2014. 09:33 PM | Likes Like |Link to Comment
  • Bet Against S&P Risk By Investing In Volatility [View article]

    Fair comment - as for not believing that regular investors should employ any hedges, I believe it depends on the type of investor.

    If someone is approaching retirement and can't afford to lose more than a certain amount and still be capable of this comfortable retirement, they may feel it is worthwhile to spend a small, *predetermined* sum to insure their portfolio against a large, *unbounded* risk.
    Oct 19, 2014. 07:28 PM | Likes Like |Link to Comment
  • Bet Against S&P Risk By Investing In Volatility [View article]
    Thanks for your comments. See what I wrote above to another poster:

    A put won't protect you from weak years (e.g. -5%)

    But if it even once caps your loss at lets say 15% on a year such as 2008 (in which the market declined 38% from Jan to end of Dec), it will probably pay for itself in the long-run.
    Oct 19, 2014. 06:52 PM | 1 Like Like |Link to Comment
  • Bet Against S&P Risk By Investing In Volatility [View article]
    Thanks for your comments;

    I advocate passive indexing for most retail investors (Although I personally invest in individual securities as I'm an active trader).

    I personally believe that in times of calm, as a rule of thumb 1% is the right number in terms of what you should spend on an annual hedge.

    If you'd like to hedge your portfolio in the simplest way possible:
    - Basically, on the first trading day of the year, buy a put expiring on the last trading day of the year.
    - How far out of the money this put (which costs 1% of your capital) will be is determined by the price of risk - could be 10%, it could be 20%.

    I select 1% because it is a number which is
    (1) smaller than the dividend yield of the index, and
    (2) significantly smaller than a mutual fund MER.

    It won't protect you from weak years (e.g. -5%), but if it -just once- caps your loss at lets say 15% on a year such as 2008, it will pay for itself in the long-run.

    By the way I tried to keep my title short and sweet, so I apologize if you think the title didn't communicate my argument.

    Thanks for reading and thanks for your contribution.
    Oct 19, 2014. 06:26 PM | 1 Like Like |Link to Comment
  • Why The 'Buffett Put' Provides Berkshire With Perpetual Positive Asymmetry Hidden In Plain Sight [View article]

    Thanks for your article.

    Several months ago I also wrote about the potential to profit to be made from writing puts on BRK due to the effective floor of Buffet's 1.2x book value rule.

    BRK - Growing BVPS Allows Safe Writing Of Puts:

    Note: the article is on as an instablog because SA would not publish option strategies at the time

    I also think that with BRKs growing book value per share, you can write puts on Berkshire with longer expiry dates and get paid more for essentially taking on less risk (due to the growing BVPS and Buffet's intention to buy back under 1.2x book).

    The appreciation in the share price, especially the more volatile public market component, makes this strategy less attractive at the moment, but there will be a time when it makes sense yet again.
    Oct 7, 2014. 01:04 PM | 3 Likes Like |Link to Comment
  • How Commodity Traders Are Making One Big Bet [View article]
    Great analysis
    Sep 25, 2014. 01:33 PM | Likes Like |Link to Comment
  • 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, 2014. 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, 2014. 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, 2014. 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, 2014. 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, 2014. 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, 2014. 01:23 PM | Likes Like |Link to Comment