Year end review

Happy new year! I took some time to disconnect over the last two weeks and enjoy the holidays. For the first post of 2013, I thought it might be a good to review all the picks from the last 3 months to see how I fared.

AIG (AIG)

AIG is still one of my top picks. It is up about only $2 from the price I paid for the stock. However, I feel it still has significant upside. Mainly all the arguments I made previously still apply:

  • It trades at half of book value.
  • The government completely sold AIG shares at the end of 2012. It now only holds warrants in the company.
  • AIG sold its stake in AIA. It also has agreed to sell a majority of its stake in ILFC.
  • The company can now focus on its core insurance operations and improve its return on assets.

Dean Foods (DF)

I sold Dean at a little bit of a loss. I still think Fresh Diary Direct segment is undervalued. However, the volatility of Whitewave was too much for me to take. I think the best way to play Dean is to wait for them to distribute the Whitewave shares and buy it before the distribution date if the current prices remain as they are.

General Motors (GM)

GM is one of my biggest winners. It is up nearly 50% for me. The government sold off 200 million shares of its stake in the company to GM recently. This should have a positive impact on EPS. If the economy improves in US and Europe and vehicle sales return to a normalized state, earnings could easily be over $5 over the coming years. Also, it is slowly removing the overhang of the pension liabilities. This could also be a big boon.

With the stock to almost $30, I might cut my position in half and book some profit. The auto industry is very capital-intensive and very competitive.

Orchard Supply Hardware (OSH) & Sears Hometown & Outlet (SHOS)

I have written a lot about these two Sears spin offs and I am short both. As I mentioned in my previous articles, I am convinced Orchard will go under. So far, it has been a very profitable short for me. I am not 100% convinced on Sears Hometown, so I only have a small short position there. Both of these plays are a bit risky, since they are cheap on a revenue multiple basis. Sears Outlet is a wild card for SHOS. If it can grow that successfully, the stock may have upside. I have no faith in the Sears Hometown business as it has had negative same store sale numbers for years. I know a lot fellow financial bloggers are long SHOS and I am open on seeing their analysis. So far, I have been wrong as SHOS. It has bounced nicely from $30 to $35 recently.

Xerox (XRX)

I bought Xerox around $6.50. The stock is around $7.20 today. Nothing fundamentally has changed about the company since I wrote the bullish case. It still trades at a significant discount to FCF and has increased its dividend. I still think there is significant upside.

Genie Energy (GNE)

Genie was a quick arbitrage trade on its offer to exchange common shares for prefered shares. I booked little less than a 10% profit on the trade. I still think there may be an opportunity on this type of trade in Genie in the future. Nobody will exchange the common for the preferred as the common is trading higher than the preferred.

Pandora (P)

I have a small short position in Pandora. So far, it has not been a good trade as the stock has shot up from $8 to $10. I continue to believe that this company will not exist in the future. It really has no barriers to entry, no competitive advantage, and is not profitable. Obviously, a lot of Pandoras profitability depends on the outcome of the Internet Radio Fairness Act. However, there is no doubt that there will be more competitors in this space in the future. I will keep this short position.

Susser Holdings (SUSS)

Susser is up about a $1 from what I bought it at. It may take some time for this stock to go up. However, it should be able to expand a lot faster after the spin-off of SUSP. I have a small position and will keep that position.

Others

I also missed out in some of my other bullish calls such as Facebook, Lumos Networks, Nacco Industries and Einsteins. I wrote a bearish case on Western Union, but the stock has been up since then. I still believe in the bearish case. I believe that Western Unions biggest competitor Moneygram will have a tough 2013 due to Western Unions price cuts. I will be looking to short in 2013.

DIsclosure: I own or am short most of the positions

Sears, Genie, and IPOs

Lot of upcoming events and most of them are this week…

Sears

Sears (SHLD) , which owns 95.5% of Sears Canada, will distribute about 44.5% of its interest to its shareholders. The distribution will be made on November 13 to shareholders of record on November 1. For every one share of Sears, investors will receive 0.4283 share of Sears Canada. The current price of Sears Canada is $11. So, investors will receive almost $5/share in distribution. After the distribution, Sears will still maintain 51% ownership in Sears Canada.

Read article on Sears here.

Genie

Genie (GNE) Preferred will start trading tomorrow, Wednesday, October 24th on the NYSE under the symbol GNEPRA. Only 1,604,591 (7.5% of outstanding Class B) shares were validly tendered. It should be interesting to see how these trade.

Read article on Genie here.

Dean, Lehigh

Dean (DF) spin-off, WhiteWave (WWAV) will begin trading this Friday, October 26th. I expect it to price at the high range just because of the interest in the healthy food segment and low float.

Read our full analysis on Dean here

Lehigh Gas Partners LP (LGP) will also start trading this Friday, October 26th.  

Read our full analysis on Lehigh here.

Disclosure: I am long DF.

Seadrill Partners Jumps In Trading Debut

First, I was surprised that Seadrill Partners (SDLP) IPO was priced at $22 (high end of the range) and now it jumped to $24.66 on the first day of trading. It is now offering a yield of 6.3%.

I don’t understand what investors see in this stock, but they are starving for income yielding securities.  

Disclosure: I do not own SDLP.

8.75% From Lehigh Gas Partners

Lehigh Gas Partners LPLehigh Gas Partners LP (LGP) announced pricing terms for its upcoming IPO. It expects to sell 6 million common units at a price range of $19 to $21. The underwriters will be granted a 30-day option to purchase up to an additional 900,000 common units.

 

Business

Lehigh does exactly what Susser Petroleum (SUSP) does. (See our article here.) They generate income from “the wholesale distribution of motor fuels primarily by charging a per gallon margin that is either a fixed mark-up per gallon or a variable rate mark-up per gallon.” They also own and rent out gas stations. As of June 30, 2012, it owned 182 sites.

Spin-off

Lehigh Gas Partners Ownership

Details of the spin-off:

  • 6 million common units are offered at the price range of $19-$21 or 6.9 million common units if the underwriters exercise their option to purchase additional common units in full.
  • If the underwriters don’t exercise the option, the .9 million additional units will go to the Topper Group.
  • Regardless of what happens with the underwriters, there will be “7,525,000 common units representing a 50.0% limited partner interest in us and 7,525,000 subordinated units representing a 50.0% limited partner interest in us.”

Cash Distribution

The common units and subordinated units differ on the priority of receiving dividends. The partnership will distribute cash each quarter in the following manner:
  • first, to the holders of common units, until each common unit has received a minimum quarterly distribution of $0.4375 plus any arrearages from prior quarters;”
  • second, to the holders of subordinated units, until each subordinated unit has received a minimum quarterly distribution of $0.4375; and”
  • third, to all unitholders, pro rata, until each unit has received a distribution of $0.5031.”

“If cash distributions to our unitholders exceed $0.5031 per unit in any quarter, our unitholders and our general partner will receive distributions according to the following percentage allocations:”

  • above $0.5031 up to $0.5469 – 85% unit holders, 15% general partner
  • above $0.5469 up to $0.6563 – 75% unit holders, 25% general partner
  • above $0.6563 – 50% unit holders, 50% general partner

Conversion of subordinated units

“The subordination period will end on the first business day after we have earned and paid at least:

  1. $1.75 (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit for each of three consecutive, non-overlapping four quarter periods ending on or after December 31, 2015 or 
  2. $2.6250 (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the related distribution on the incentive distribution rights for a four-quarter period ending on or after December 31, 2013, in each case provided there are no arrearages on our common units at that time.

When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages.”

 Analysis

This IPO is an exact copy of the Susser Petroleum IPO. The fact that Susser is now trading at $25 should be an indication that this IPO will price at high end of range and it will pop during trading. At $20/share and $1.75 dividend, the yield will be 8.75%. At $21/share, it will be $8.3%. The dividend should be very safe because common units have rights over subordinated units.

Based on their 2013 projections, the dividend could go above $1.75. Couple things that concerned me in the filing:

  • Based on their 2013 projections, their rental income is negative (free cash flow is positive because of depreciation).
  • LGO, an entity managed by Joseph V. Topper, Jr, the Chief Executive Officer and the Chairman of the board of directors of our general partner, is leasing or sub-leasing 182 sites from the company at an aggregate initial annual rent of 3.8 million. That is $20,0000 per site. This seems really low because each site is worth around $1 million. Yearly maintenance for each site is probably around $20,000.
Either way, I expect this to trade similar to SUSP, around $25/share. Especially, since the SeaDrill Partners IPO priced at the high end of range at $22.
 
    

Buy Dean Foods

Dean Foods LogoAs I mentioned yesterday, Dean Foods (DF) shot up 13% on the announced terms of its spin-off of WhiteWave Foods (WWAV). Based on the initial pricing for the IPO, Dean is still undervalued. 

 

Business

Dean operates three separate business segments:

  • “Fresh Dairy Direct is one of the nation’s largest processors and direct-to-store distributors of fluid milk marketed under more than 50 local and regional dairy brands and private labels. Fresh Dairy Direct also distributes ice cream, cultured products, juices, teas, bottled water and other products.”
  • “Morningstar Foods is a leading warehouse delivery dairy business that produces and sells traditional and specialty items, including cultured dairy products, ice cream mixes, coffee creamers, aerosol whipped toppings, traditional and value-added milks, and blended iced beverages to retailers and foodservice providers nationwide.”
  • WhiteWave-Alpro develops, manufactures, markets and sells a variety of nationally branded dairy and dairy-related products, such as Horizon Organic milk and other dairy products, International Delight coffee creamers and LAND O LAKES creamers and fluid dairy products, and Silk plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave-Alpro also offers branded plant-based beverages, such as soy, almond and hazelnut drinks, and food products in Europe and markets its products under the Alproand Provamel brands.”

Spin-off

Dean is spinning-off its fastest growing unit, WhiteWave. It is expected to raise up to $320 million by selling 20 million Class A shares at about $14 to $16 each. The underwriters also have an option to purchase up to an additional 3 million Class A shares after the spin-off. Dean will still own 150 million Class B shares after the spin-off. The expected pricing date is October 25th.

Class A and Class B are exactly the same except:

  • Class A has 1 vote per share. Class B has 10 vote per share.
  • Class B also can or will be converted into Class A shares under certain circumstances.

After the spin-off, Dean will control WhiteWave because of its majority ownership and the fact it owns all the Class B shares.

Valuation

The value case for Dean Foods is pretty simple. The market capitalization for all of Dean is $3.13 billion. Based on the price range of $14 to $16 for WhiteWave, the range for its valuation is $2.38 billion to $2.72 billion.  That means the rest of Dean is worth between $410 million to $750 million.

Even though the rest of Dean is having trouble growing revenue and maintaing margins, it still makes over 50% of net income. Dean’s 2012 net income will be around $200 million. If we allocate allocate around $95 million of it to WhiteWave, the rest of Dean will make up the other $105 million. After the spin-off, the rest of Dean would be worth at a P/E of 3.9 to 7.1. 

WhiteWave

WhiteWave has been growing thanks to its brands and its focus on healthy foods such as organic milk and plant based milks. Consumers are moving towards a healthier lifestyle and that includes healthy foods.

Revenue for 9 months in 2012 increased 13% from $1.45 billion to $1.65 billion. Operating income has grown at more than 17% from $132 million to $155 million.

The company had pro forma earnings of $.49/share in 2011. If WhiteWave’s earns around $.57 for 2012, it will trade with a P/E range of 24 to 28 based on the IPO price range. 

Although, I would be hesitant to invest in WhiteWave at this type of valuation, it is somewhat in line with other health food competitors such as Hain Celestial Group, Inc. (HAIN), which trades at 25 times June 2013 earnings. It should be noted that Hain has a higher revenue and income growth rate, but their fiscal year ends in June 2013 where WhiteWave’s ends in December 2012. 

Rest of Dean

I went back and worth between valuing the rest of Dean separately or together. Initially, I valued it separately, but it became too complex because:

  • After the spin-off, Dean will have about $2.5 billion in debt. Assigning different amount of debt to each company has an impact on the valuation.
  • Dean does report operating income for each of the segments, but it has “Corporate and Other Expenses” of around $200 million for the whole company. Assigning different amount of expenses to each company has an impact on the valuation.

So, instead I’m going to make it real simple. As aforementioned, the rest of the company should have over $105 million in net income in 2012 if you back out WhiteWale. However the net income does not take into account:

  • Increasing free cash flow for rest of Dean. In 2012, the rest of Dean is decreasing capital expenditure. Based on management’s 2012 projections their depreciation expense will exceed their capital expenditure by $60 million. That’s $60 million extra in cash.
  • Private sale of Morningstar. In late September, the company was put up for sale by Dean to increase shareholder value. A lot of analysts said that it could fetch $1 billion in a private sale. Morningstar’s business is better than Fresh Dairy Direct’s because customers are less likely to switch from a branded coffee creamer as opposed to a branded milk. However, the market is mature and it is still highly dependent on the cost of raw milk and bulk cream. So, a $1 billion price is hard to fathom. It will have $120 million in operating earnings in 2012. If you factor in some interest expense, taxes and other expenses, net income would probably drop down to $70 million. I could see it going for 12 times that or $840 million. Private equity would still have room to load it with debt and flip it for a profit.
  • Although Fresh Dairy Direct makes up a majority of revenue (over 70%) and is a declining business, it is still profitable (over $400 million in operating earnings expected in 2012) and management is focused on cutting cost to increase profitability. 
Conservatively the rest of Dean’s free cash flow will exceed $150 million in 2012. 8 to 10 times that amount gives a valuation of $1.2 to $1.5 billion.
 
Conclusion
 
So, that gives us a valuation range of $3.58 billion to $4.22 billion or $20/share to $23/share. Of course, the final pricing and even post IPO pricing of WhiteWave has a huge effect on the valuation, but currently it is undervalued.
 
I should note one thing I am scared about is the Fresh Dairy Direct business, but the fact that management is focused on increasing shareholder value gives me some reassurance.
 
Nice to have the stock up $1 from when I recommended it yesterday!
 
Disclosure: I am long DF.

Dean Foods Spin-off

Dean Foods (DF) announced its WhiteWave-Alpro division has filed to spin-off into a separate company called WhiteWave. The IPO is expected to raise up to $320 million by selling 20 million Class A shares at about $14 to $16 each. Dean will still own 150 million Class B shares after the spin-off.

Dean is spinning-off WhiteWave to unlock the value of the company. WhiteWave has experienced strong growth over the last 5 years, but it has been hidden underneath Dean. WhiteWave makes Silk soy milk, Land O’Lakes and Horizon Organic.

I did a quick read of the filing, and it seems like Dean is undervalued even though it is up 13% today. 

I have initiated a position at $16.97, but will do more due diligence today and break down the analysis tomorrow.

Disclosure: I am long Dean Foods (DF) 

Seadrill Partners IPO

Seadrill Partners (SDLP), a subsidiary of Seadrill Limited (SDRL), set the price for the upcoming IPO on Monday. They plan to sell 8,7500,000 common units in the price range of $20-$22. The company expects to IPO next Tuesday, 10/23.

Seadrill Partners will own interests in four offshore drilling rigs. The rigs are signed to multi-year contracts (average of 4.1 years left) with major oil companies.

I have analyzed this IPO and I do not expect a pop in these shares.

  • At a $22 IPO price, SDLP will only yield 7%.
  • Unlike Susser, there is limited growth over the next 3-4 years.
  • There is no guarantee that they will be able to sign the next contract after the initial contract expires.
  • There is no guarantee rates will not go down on the next contract.
  • Although all rigs are very new, there will be a time when the rigs will need to be replaced.

There are a lot of risks involved with this IPO and I advise investors not to subscribe. 

Disclosure: I do not own shares of SDRL.

Spin-off Unlocks Value of Susser Holding

In my last article, I talked about the spin-off of Susser Petroleum Partners (SUSP) by Susser Holdings (SUSS). Although SUSP is now fully valued, SUSS, the parent, is significantly undervalued.

Business

SUSS operates 552 ”convenience stores in Texas, New Mexico and Oklahoma, offering merchandise, food service, motor fuel and other services.” They also have a 50.1% stake in SUSP with the subordinated units they hold. 

The convenience store business is very competitive and cyclical. Profits are affected by the economy, and the price of fuel. On the merchandise side, SUSS has been doing very well. They have increased same store sales every year for the last 5 years and have increased gross margins since the start of 2010. Fuel margins have been up and down since 2007.

Check out the results of operations for the last 5 years and 6 months of 2012 below. In 2011, they had a one time charge of $24.2 million related to debt refinancing.  

Susser Holding Result of Operations

Susser Holding Result Of Operations


Susser Holding 2012 results

Susser Holding 2012 results

Valuation

At the current price of around $35, SUSS has a market capitalization of around $720 million. However, around $450 million of that value consists of the spin-off, SUSP. SUSS will get over $200 million from the spin-off proceeds, and they have 10.94 million subordinated units which I valued at around $250 million (10% discount to common unit price of $25.34).

So, the market is valuing the rest of SUSS at $270 million ($720-$450). Trailing 12 months, the retail business had a net income of $30 million. However, it also had a depreciation expense of around $50 million. Only $15 million of that is used to maintain existing stores and for the wholesale business. The $35 million would be free cash flow if the company did not use it to construct new stores.

So, SUSS really has about $65 million in free cash flow ($30 million net income + $35 million spent on constructing new stores). That means it is trading at around 4 time free cash flow. If it trades at 8 times free cash flow, the stock price would go to $47/share. 

Faster Growth 
 
One thing that I did not take into account in the valuation is the faster growth SUSS will experience due to the spin-off.  SUSS’s growth has been inhibited by the high cost of constructing stores. It takes about $3 million to construct a store. With the $65 million free cash flow, the company can construct about 20 stores. The company has over 550 stores. So, the 20 stores would only represent a 4% growth in stores.
 
However, after the spin-off, SUSS will do sale-leasebacks with most new stores it constructs with SUSP at a fixed 8% rate of the sale price. This will allow SUSS to grow much faster than it has in the past because it will not need as much free capital.
 
Risks

There are risks associated with this stock.

  • The industry is very competitive. Earnings could fluctuate from year to year. This is why I have only attached a reasonable 8 times free cash flow valuation.
  • They could make irrational decisions with the proceeds from the IPO. However, the company seems to be very shareholder friendly and has made good decisions in the past. I believe either they will buy back shares, reduce the $450 million debt due in 2016 or make an acquisition. 

 Conclusion

I have initiated a small position at $34.85 and will buy more if the price goes down. 

Disclosure: I am long SUSS.

Zillow A Better Investment Than Trulia

Please read part 1 where we do a side by side comparison of Zillow (Z) and Trulia (TRLA).

Valuation & Market 

At first glance, value investors will quickly label both of these companies as overvalued.

  • Zillow trades at an astronomical 15 times trailing revenues, and Trulia is not much far behind.
  • Zillow is barley profitable and trades at a trailing P/E of 164+, and Trulia is not profitable yet.

However, it is understandable why both trade at such lofty multiples.

  • Growth. Both are growing revenue at almost triple digits. Quarter over quarter revenue growth for Trulia was 81% and Zillow was 75%.
  • Big Market. Any way you look at it, the real estate related advertising market is huge.
    • From Trulia’s S1 filing: “Borrell Associates, Inc., an advertising research and consulting firm, estimated in an August 2012 industry paper that $23.7 billion would be spent in 2012 on real estate-related marketing in the United States.” If this is accurate, Zillow & Trulia would have less than 1% of the market combined.
    • The majority of revenue for both companies come from paying real estate professionals. They both have over 20,000 paying subscribers. However, according to Trulia, there is “2.8 million real estate professionals in the United States.” According to wiki, “In the United States, a Realtor (capitalized) is a real estate professional, usually a broker or salesperson, who is a member of the National Association of Realtors (NAR). There are 1.3 million Realtors, mostly in the United States, and an additional 1 million licensed real estate agents who are not members of NAR and cannot use the term “realtor”.[4] However, the U.S. Bureau of Labor Statistics claims only about 600,000 working brokers/salespersons” Both have captured a small percentage of the potential premium subscriber base.
    • Opportunity for both companies to expand internationally and into adjacent markets such as “rentals, mortgages, home improvement, and agent tools”

Zillow or Trulia?

Zillow is a better investment. Although, it trades at a loftier 15 times trailing revenue, it is better than Trulia in these respects:

  • Zillow is bigger. Zillow’s revenue is almost twice the size and it attracts 50% more unique visitors.
  • Even at its bigger size, Zillow is growing almost at the same rate. When Zillow was Trulia’s size, it was growing much faster.
  • They both have almost the same number of premium subscribers, who contribute to a majority of the revenue, but Zillow seems to be getting more revenue per subscriber.
  • Zillow’s EBDITA is growing year to year. Even as it increases revenue by almost triple digits, Trulia’s EBDITA has gone down as it is making more investments in technology/development and sales/marketing. On the other hand, Zillow is growing at the same rate without as much investment, and it is a larger company.

At the current price, HypeZero cannot recommend Zillow. However, if there is a price drop and the fundamentals have not changed, Zillow will be a better investment.

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Disclosure: I do not own shares of Z or TRLA and I do not plan to initiate a position within the next week.

Trulia or Zillow?

With Trulia (TRLA), the online real estate operator, going public today, let’s look at its main competitor, Zillow (Z) to see which is a better investment opportunity. 

Side by Side Comparison:

 

Zillow

Trulia

Symbol

Z

TRLA

Price

$46.17

$24

Market Cap

1.35 billion

633 million

Quarterly Total Revenue

27.765 million

16.825 million

Yearly Total Revenue (Trailing 12 months)

89.546 million

51.237 million

Total Revenue Growth (1)

75%

81%

Marketplace Revenue (2)

$19.623 million

$11.049 million

Display Revenue (3)

$8.142 million

$5.776 million

Quarterly Net Income

$1.332 million

N/A

Paying Subscribers

22,696

21,544

Active Subscribers

NR

360,000

Average monthly unique visitors (4)

33.5 million (3 months)

22 million (6 months)

Unique visitor growth

61%

64%

Price/Trailing Revenue

15

12.4

 

  1. Total Revenue Growth from quarter ended June 2011 to quarter ended June 2012.
  2. Marketplace Revenue consists of subscription based products sold to real estate professionals. Trulia has 2 categories. Trulia ads enable “real estate professionals to promote themselves on our search results page  and property details pages for a local market area. “ “Our second set of products allows real estate professionals to receive prominent placement of their listings in our search results.” Zillow’s “consists of subscriptions sold to real estate agents under our Premier Agent program and CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders.” “Our Premier Agent program allows local real estate agents to establish a persistent mobile and online presence on Zillow in the zip codes they serve.” “In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals.” 
  3. Display Revenue, for Zillow, “primarily consists of graphical mobile and web advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers”. For Trulia, “we derive media revenue from sales of display advertisements to real estate advertisers, such as home improvement companies and mortgage lenders.”
  4. Average monthly unique visitors are for 3 months ended June 30, 2012 for Zillow. For Trulia, it is for 6 months ended June 30, 2012.

See Trulia’s S1 Filing here and Zillow’s quarterly filing here.

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Disclosure: I do not own shares of Z or TRLA and I do not plan to initiate a position within the next week.