PRO Weekly Digest: Focusing On Activist Targets

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Includes: AYI, CVA, GSIT, IESC, KMX, LCUT, PCOM, WPC
by: SA PRO+ Editors
Summary

We highlight several notable Sohn Investment Idea contest entries and use the Idea Filter to search for activist targets.

Revisiting the bullish thesis on W.P. Carey.

Welcome to the latest issue of the PRO Weekly Digest in which we publish highlights from our PRO coverage. Comment below or email us at pro-editors at seekingalpha.com to let us know what you think. Find past editions here. PRO subscribers can access interviews by following the SA Interviews account and view past interviews under the same account.

Click here to read the interview with Livermore Partners.

PRO idea playing out

GSI Technology (NASDAQ:GSIT) is up ~90% since Jim Roumell shared his bullish thesis in July 2016, as upside was driven by its exciting new technology and improving cash flow/op income, while downside was limited due to the strong balance sheet, legacy chip business, possibility of another tender offer and high insider ownership. Subsequent earnings reports validated the key parts of the thesis (4Q gross margin >guidance due to favorable product mix, litigation expenses dropped 95%+, continued investments in new category of products, continued share repurchases).

Call from the archive - WPC

W.P. Carey (NYSE:WPC) is up ~5% since Thomas Lott made a compelling relative valuation case two months ago. The market appears to be coming around to the bullish thesis, as evident by the strong rebound since 1Q earnings were released (in which management affirmed 2017 AFFO guidance and increased the dividend). With an additional 35% upside to the midpoint of his price target, this may be worth another look.

Noteworthy PRO articles

We wanted to highlight one of our PRO editors' favorite PRO ideas this week.

SA Editor John Leonard, CFA: Pluton Research effectively argues that Covanta (NYSE:CVA) is not a safe dividend play, as it will face a significant headwind over the next few years as hedges roll off. Misleading non-GAAP metrics obscure cash burn, capital intensity and true profitability, while it has become highly levered after borrowing to sustain the dividend.

Notable Sohn Investment Idea contest entries

CarMax (NYSE:KMX) by Altheia Value: published on June 6, 2017. KMX is the weakest among peers due to higher exposure to the U.S. second-hand auto market, yet trades at implied valuation multiples consistent with expectations for increased market share, revenue and EBITDA growth and free cash flow generation it doesn't have; KMX could drop to ~$30 next year, driven by a 30% decline in EBITDA.

Acuity Brands (NYSE:AYI) by Beta Dodger: published on June 7, 2017. Investors have been quick to forget that lighting has historically been a hyper-competitive business - Chinese upstream manufacturers integrating downward could result in aggressive cost-cutting. We are likely at a peak in the LED lighting cycle, while investors largely predict secular growth unencumbered by slowdowns in the economy.

Idea screen of the week

Each week we use the PRO Idea Filter to find potential ideas based on a recent news event. This week, PRO Editor John Leonard, CFA, looks at activist targets.

All too often, there is a big difference between what a company can do to maximize shareholder value and what it actually does. Enter the activist investor. To help avoid those situations where value extraction is always a day away, I ran a screen of PRO long ideas with the Activist Target opportunity tag.

Three ideas turned up in this screen that might be of interest (prices as of June 8 close).

Lifetime Brands (NASDAQ:LCUT) by Thomas Niel: published on May 14, 2017, ~unchanged since publication, author's price target at the midpoint offers ~45% upside. While Mill Road Capital (which already made a takeover offer, which was rejected) may be not an activist in the traditional sense, its presence should ensure the discount to intrinsic value closes (or at least does not widen). Even if LCUT fails to attract another offer from Mill Road (or another financial/strategic buyer), there is still a compelling relative valuation thesis here.

Points International (NASDAQ:PCOM) by Laughing Water Capital: published on April 12, 2017, up ~20% since publication, author's price target at the midpoint offers ~75% additional upside. Notable activist Cannell Capital is involved here. Even if PCOM is not sold at a significant premium, the standalone case is still compelling (large moat, asset-light business model, stable revenue, high operating leverage, significant growth opportunities, changes to the way that the company reports earnings will isolate the value of the core business).

IES Holdings (NASDAQ:IESC) by Donald Marchiony: published on April 7, 2017, down ~10% since publication, author's price target offers 100%+ upside. While this is not a typical activist situation, Tontine Capital Management does own ~60% and has begun to implement the same acquisition strategy that it successfully executed at Patrick Industries (NASDAQ:PATK); IESC is underfollowed and positioned to benefit from macro tailwinds, enjoys double-digit organic growth, and trades at a ~10% FCF yield.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Check with individual articles or authors mentioned for their positions.