I've been following Krones (OTC:KRNNF) (OTC:KRNTY) for many years. This German hidden champion (EUR 1.7B market cap, free float <45% of this) builds large and small plants for filling and packaging, process engineering, and intralogistics as well as IT solutions for the food and beverage industries. Among its clients are the largest breweries (it started its business in Bavaria with bottle labeling machines) and giants like Coca-Cola (NYSE:KO) or Kraft Heinz (NASDAQ:KHC). It has a huge installed base around the globe alongside a network of service centers, which provides a steady stream of maintenance work and income. In fact, in 24 years it has never made losses except once (in 2009, but only due to D&A). Moreover, its market is growing 3% annually, due to the urbanization trend in the emerging markets, which increases the use of bottled beverages and packaged food.
Speaking about 2009, even in this horrible year Krones delivered positive EBITDA of EUR 30m, which after D&A of EUR 60m and taxes led to its only bottom-line loss in the past 24 years at least (I couldn't find figures from periods before 1995). The stock bottomed at ~10x its average profit of the previous 5 years (2004-2008) and close to book value. Which is roughly where it trades now: close to book value and around 10.5x its average profit from the 2014-2018 period. So is this a panic-level valuation?
To provide an answer, we need to understand the probability of future margin expansion. Which mainly depends on the competitive situation and potential changes within Krones' customer base and end markets.
For example, KHS, a large German competitor of Krones, is owned by the Salzgitter (OTC:SZGPF) conglomerate, which has never been strong in preserving margins, preferring the maintenance of jobs to the enhancement of profitability (its major shareholder is the German state of Lower Saxony). Would KHS be a rational competitor in a major crisis?
Moreover, given the recent and projected future strong growth of PET packaging, environmental concerns are growing. Krones is the clear market leader in the PET segment. A changing market could cause a severe headache.
So there is a lot of work to do on Krones, if you like the idea. The risk remains that other folks have a much better understanding of the future evolution of Krones' end markets.
I wrote a bearish article on Kindred Bio (KIN) four months ago, when it traded at $9.21. The stock has lost 31% since then, so it might be time to take another look, especially because in the meantime Elanco (ELAN) has bought Kindred's peer Aratana (PETX) for $245m - which was a quite disappointing price for long-term Aratana shareholders.
Kindred currently has a market cap of about $300m, including estimated net cash of about $90m. So its EV is roughly where the Aratana buyout price was.
Based on my analysis in the article linked above, I still believe that - even at today's lower price - the market price bakes in a lot of optimism for Kindred.
Finally, dilution can be tricky for these small biotechs. The prospected 2019 cash burn of ~$66m will require another capital raise within a few quarters. At the current valuation, $100m of capital raised would dilute shareholders by 33%.
So my advice for those interested in Kindred would be to wait for the stock offering and then reassess.
Theravance Biopharma and the "Woodford basket"
One month ago, I published an extensive update on Theravance (TBPH) as a "Seeking Alpha Pro Top Idea" and so far my thesis has been proven right, as the stock is up ~17% since I have submitted the article. But it still remains close to multi-year lows, which have been reached only because of the combined effects of two "black swan" events materializing at the same time.
One of these "black swans" was the fear of the company's major shareholder Neil Woodford being forced to sell down his stake at fire-sale prices, alongside other holdings which the market already knew he was selling due to substantial withdrawals from his flagship fund.
For some time, I had pondered buying a "Woodford basket;" i.e., a broad selection of Woodford-owned stocks suffering from this threat and trading near multi-year lows. The idea was not bad at all: Given that for the average stock in that selection there hadn't been sufficient fundamental reasons to warrant an extensive sell-off, we should expect that such a basket would recover once the technical pressure was removed.
My basket would have included 11 Woodford-owned stocks, all trading near their lows. But after some reasoning I decided to stick to what I know best, instead of blindly buying a basket of mostly unfamiliar businesses.
This story could actually represent a nice example for Warren Buffett's statement that "diversification is protection against ignorance." While it might feel better (i.e., safer) to bet on a basket of stocks, when you really know what you own, it can easily be the sillier thing to do. Effectively, since inception on 6/10/19, the Woodford basket has returned 1%, the XBI 3.7% and Theravance 15.4%. Only one stock in the list did better than Theravance, but its outperformance was more than compensated by a long list of losers.
The market seems to agree with me that Theravance is one of the safer bets within the Woodford basket and the stock remains a clear buy at its current price of $18. (Also because I have many reasons to believe that Woodford isn't even thinking about selling a single Theravance share.)
But if you don't know anything about Theravance and prefer the basket approach, take a look at these Woodford holdings:
Especially among the more illiquid ones, the real or perceived threat of a major seller in the market might have created bargains for those investors that strictly focus on fundamentals.
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Disclosure: I am/we are long TBPH. 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.