National General Holding Corp Notes Cheap

In this low interested environment, National General Holding Corp. Subordinated Notes (NGHCZ) are really attractive.

National General Holding Corp. Subordinated Notes

  • Symbol: NGHCZ
  • Principal Amount: $25
  • Coupon Rate: 7.625%
  • Call Date: 9/15/2020
  • Mature Date: 9/15/2055
  • Distribution Dates: Quarterly
  • Current Price: $25.17

“National General Holdings Corp. is a specialty personal lines insurance holding company. Through its subsidiaries, the Company provides personal and commercial automobile insurance, health insurance products and other niche insurance products. It operates in two segments: Property and Casualty and Accident and Health. Its property and casualty insurance products protect its customers against losses due to physical damage to their motor vehicles, bodily injury and liability to others for personal injury or property damage arising out of auto accidents. Its accident and health business provides accident and non-major medical health insurance products targeting its existing P&C policyholders. The Company is licensed to operate in 50 states and the District of Columbia, but focus on underserved niche markets.”

NGHC (the parent company) is in a stable insurance business:

  • It is pretty safe company. It has a market cap of $2 billion+ and a tangible book value $1 billion+.
  • It is profitable and earnings are growing.
  • Manageable debt at $528 million.
  • It is growing both organically and acquiring companies.
  • Their investment portfolio looks conservative and does not fluctuate widely to interest moves.

The risks with a longer term debt maturity is that when interest rates go up – the price of the security will go down. However, at nearly 8% interest a year – this security seems underpriced.

Disclosure: I am long NCHCZ

Penn West Petroleum (PWE) has 50% upside

Penn West Petroleum Ltd. (PWE) explores for, develops, and produces oil and natural gas properties in western Canada. The company had been mismanaged and changed it’s CEO in 2013. Dave Roberts, the new CEO, has been trying to cut cost and sell non-core assets in order to deleverage the balance sheet. 

However with the crash in oil prices, investors have not been rewarded. The company has taken a huge hit the last couple of years. It is trading at $1.36 as of today. It had been trading over $20 a couple of years back when oil was trading at much higher prices.

Recently, there was talk that PWE would breach its financial convents at the end of quarter 2. It has to be maintain a total debt/EBITDA ratio of 5. It was at 4.4 at the end of quarter 1. The stock went below $1 and hit a 52 week low of $.45. 

To make sure this would not happen, the company sold some non core assets and sold one of it’s key core asset. It sold its Viking light oil assets in Saskatchewan to Teine Energy for C$975M ($763M). It was a much higher price that analysts had expected. With the sale, it removed any chance of a breach for 2016 and the stock shot up to its current price of $1.36. However, it still seems the company is undervalued based on the assets that are left. Let’s take a look:

Currently the company has a market capitalization of C$870 million. It has a net debt of C$600 million after the asset sale. Here are the assets still left:

  • It’s crown jewel – Cardium area. The Cardium area produces 50% more boe/d than the Saskatchewan assets and has a lower operating cost and higher netback. If  Saskatchewan assets sold for C$975M – Caridum is worth more and close to the full enterprise value of C$1470M – if not more. Cardium still has plenty of prospective areas where PWE can do additional development.
  • Non core assets worth C$100 million – C$200 million that company plans to sell. After the sale, its asset retirement obligation will be reduced to C$100 million.
  • Alberta Viking area – which currently only produces 1,000boe/d but according to PWE has the potential to be like the assets it just sold over the next couple of years.
  • “The Peace River area is focused on our Peace River Oil Partnership (PROP) with our joint venture partner. We expect this area to remain a stable production and cash generation vehicle for the Company, as approximately 90% of our operating and capital costs are paid for by our partner. Our first quarter net production at Peace River was approximately 5,000 boe/d, 98% weighted to crude oil, with operating costs of $1/boe(3).”
  • The company has also has some oil production hedged into 2017.

I am not an oil expert and do not know these areas and their worth, but it is safe to assume that the value of all these pieces exceed the enterprise value of C$1470 million. It is more like they exceed C$2B easily at the current oil prices. The price of $PWE should approach $2/share as investors start to realize this.

Disclosure: I am long PWE


Time to Shop at Macy’s

The whole consumer retail sector has taken a beating. One stock that I have picked up recently is Macys (M). It has gone from a high of low 70s last year to low 30s currently. I picked some up for the following reasons:

  • Valuation is cheap. After lowered expectations, it trades around 10 times earnings. From a free cash flow prospective, it is even cheaper. A year or two ago, it had FCF of around 2 billion. Right now it trades at a marked cap of 10 billion.
  • David Einhorn has bought into the stock recently – before the latest collapse. From Greenlight:
    • “We established a position in Macy’s (M), the operator of about 900 Macy’s, Bloomingdale’s and Bluemecury stores, at an average price of $45.69. Earlier in 2015, with the stock at $70, an activist argued that the store real estate could be separated to unleash a valuation in excess of $125 per share. Management determined a whole-company REIT wouldn’t provide the required operational flexibility. 

      Now, with the stock closing the year at $34.98, the math might make more sense. While it’s unlikely that management will reverse course on its own, it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value privately. 

      Even if this doesn’t happen, the shares are cheap at 5x EBITDA, 7x equity free cash flow, and less than 9x 2015 EPS, with a healthy balance sheet and strong history of share repurchases. We think a portion of the recent sales weakness was driven by unseasonably warm weather and a strong dollar impacting tourist business, which should set up for favorable comparisons in 2016.”

  • Starboard Value has also picked on it and has called Macy’s to break up the real estate portion from the retail.  Here is the presentation.

Macy’s is listening – so something could happen in the near future:

We are continuing the previously announced process for maximizing the value of the company’s real estate. Under the leadership of Douglas W. Sesler, our new senior-level real estate executive, and with the help of our advisors, we are evaluating proposals from potential partners for joint ventures or similar arrangements involving Macy’s flagship locations and the company’s mall-based store portfolio. These complex transactions are being thoroughly explored. Meanwhile, the company will continue its work to monetize unproductive real estate.

A couple of ways to play this is to either buy shares outright – you get a nice dividend while you wait or to buy options in the hopes that it Macy’s sells the underlying real estate portion.

Disclosure: I am long M