My Favorite Moon Shot Stocks - Part One

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Includes: CVEO, SBSA
by: Silky Oak Capital

Summary

Potential 10 bagger if LNG projects go through or oil recovers.

A levered broadcasting company that is about to monetize hidden assets.

Both are speculative, but with big upside.

Interesting to have as a small % of your portfolio.

I like to allocate anywhere between 5-15% of my portfolio to lottery stocks. Usually they are cyclical or have a lot of leverage. And most of the time there is some sort of catalyst that will unlock value on the horizon. I would not advice large positions in any of these stocks. It is also best not to spend large amounts of time analyzing them as they will be small positions and are depending on some factors that are hard to analyze. My analysis will be largely quantitative.

Civeo Corp

Civeo corp (NYSE:CVEO) is a provider of remote housing for the natural resource industry in Canada and Australia. In 2015 the Canadian segment generated 60% of EBITDA and the Australian segment 40%. Civeo has 19 lodges and villages with an aggregate of 23,000 rooms. Some numbers:

  • Market cap of $210 million
  • Net debt of $340 million maturing in 2019
  • Tangible book value of $485 million (for what it is really worth)
  • Currently cash flow break even
  • Utilization of assets of 65%

This stock is depending on oil coal and gas, but not necessarily all of them. In 2012 the company generated $350 million of operating income at occupancy of 93%. That is a 0.6x operating income multiple! Which seems a bit low. Especially since Australian coal prices have rallied already, and they can probably survive this for a few years.

LNG projects in Canada can be significant here. They had recently been awarded a project by LNGC, but this has been postponed unfortunately. There are two terminals planned which would require 4,500-7,500 rooms (source: CVEO presentation). And several pipelines which would require 8,000 rooms each. They would be multi year projects and could easily get CVEO's utilization rate back to 90%+. Given that CVEO's 3rd party market share is 42%, there is a good chance they get awarded a contract here if construction actually begins. I don't think the market is really pricing that in at the moment.

Catalysts would be a pick up of activity in Australia and price recovery oil/LNG projects announced. The somewhat unexpected approval of the Trans Mountain pipeline gives hope that more will be approved.

Spanish Broadcasting

Spanish broadcasting (NASDAQ:SBSA) is a Spanish language media and entertainment company in the US. They generate very stable profits from their Radio segment of about $50 million a year. Their television segment has been losing money for some time. With the reverse spectrum auction going on, they are selling their spectrum needed for their television broadcasts. Some quick numbers:

  • Market cap of $28 million
  • Net debt of $400 million
  • Opening bids for their television spectrum of $1 billion (more details on what this means below)
  • Operating income of ~$40 million

With increased use of wireless internet, mobile carriers have been pressuring the FCC to free up some television spectrum. In order to do this the FCC has organized a reverse auction. Broadcasting companies have announced opening bids at what price they are willing to sell. So far the total amount is $88 billion. And after that happens, wireless carriers make their bids. And according to this article, Verizon and AT&T alone are expected to spend at least $9-25 billion. This video explains the process quite well.

SBSA will sell spectrum they are using for KTBU (Houston), WSBS-CD (Miami), WTCV-DT, WVEO-DT and WVOZ-DT all in Puerto Rico. The opening bids are shown here (use F3 to search). Adding up the opening bids gets me to $1 billion. But it is very unlikely they will actually receive this amount. But given that broadcasting companies are likely to spend at least $20 billion, and total opening bids are $88 billion in total, that would mean they likely get in the neighborhood of $150-300 million for their spectrum. They have $260 million of NOLS, so they pay little to no taxes on this. SBSA could then pay off part (or all) of their debt and refinance. Assuming a reduction to $200 million of debt at 7.5% would imply $25 million of income before taxes. Putting a 10x multiple on this would mean upside of almost 900%.

There are some moving parts with this auction process though. Here is some more reading material on the mechanism of the auction.

Catalyst will be soon as auctions are finished, probably before year end. If they do not manage to sell a decent amount, there is a good chance that equity holders will be wiped out. But you are handsomely rewarded for that risk. And there is a very quick and hard catalyst here, so your annual return will likely be even higher.

Conclusion

I will write another article soon, as I have several more. Of course do your own due diligence and don't get too greedy!

Disclosure: I am/we are long BXC, SBSA, CVEO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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