Tuesday, September 29, 2015

Special Situation Ideas for week of 28-September-15

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s and other publications

Energizer Holdings (ENR): Energizer Holdings split into two companies on 1-Jul-15, with smaller battery operation, known as Energizer Holdings (ENR), and Edgewell Personal Care (EPC). EPC’s history began when Energizer bought the Schick-Wilkinson Sword razor business from Pfizer (PFE) in FY03 and later built a business with $2.4bn in revenue.
EPC makes 60% of its revenue from razors and shaving cream, and 30% from sunscreen and feminine products. Infant products, including diaper-disposal system and bottles, chip in the rest. Many of the company’s brands command high market shares. Edgewell is No. 1 in sunscreen in the U.S., and in shaving is No. 2 globally behind P&G’s Gillette. EPC shares have  slid 20% since the spinoff. The drop was due to high valuation and slower growth prospects in its first full year as an independent company. Yet, with the shares at a recent $82, it looks like a good time to buy in. EPC owns well-known brands in shaving, sun care, and feminine and infant care that include Schick, Skintimate, Edge, Playtex, Hawaiian Tropic, and Wet Ones. Most of these businesses are high margin, have high entry barriers, and generate stable cash flows. EPC is also unusual in an industry where giants like Procter & Gamble and Unilever dominate. Its market capitalization is a mere $5 billion, which makes it an attractive and very digestible asset for a larger player to acquire. Acquisition multiples in the industry historically have been high. Recent Deals Include Unilever’s 2011 purchase of hair and skin products specialist Alberto-Culver, for 14.4x EBITDA, and the 2010 acquisition of SSL, the maker of Durex condoms, by Reckitt-Benckiser for 18x EBITDA. EPC trades at 12.3x FY16 EBITDA and the buyout potential limits the stock’s downside. Some industry analysts price EPC at $121 implying 16x FY17 EBITDA, and 50% upside. In FY16, starting in September, profits are expected to drop 6% on a 2.5% decline in revenue. The weakness should prove temporary as much of it relates to the transition to an independent company. For the past few years, slowly growing markets, especially in the shaving category, and intense competition have weighed on the top line. Since FY09, organic revenue growth has amounted to only 1.3% annually. However, management has been working to jump-start growth and increased its marketing spending on brands with the highest return potential. There are signs that the strategy is gaining traction. In addition, as an independent company, it’s allowing EPC to rationalize its distribution network and cut costs. In May, Energizer’s board adopted a shareholder-rights plan, or poison pill, that carries over to EPC and will discourage hostile suitors until the end of the year. Its chief aim appears to be to give the new company time to get on its feet. Company characterized FY16 as a “transition year. EPC has a good amount of FCF with $300mn expected in FY16.  It makes about 55% of its sales in the U.S. That makes it an attractive target for a company with a large emerging-markets presence that could enjoy revenue synergies from a combination. Unilever and Colgate-Palmolive (CL) fit the bill.

 Demandware (DMND) sells cloud-based services to retailers and consumer-brands companies used to develop and manage e-commerce across various platforms, including online, in-store, mobile, and social networking. E-commerce sales are expected to grow about 20% annually through FY18. DMND is growing faster yet, with annual revenue up an average of 50% over the last five years. What DMND lacks, however, after nearly a decade in business and three as a publicly traded company, are profits. Moreover, despite falling from $76 to $52.17, shares trade at a sky-high 233x projected earnings. Losses have widened steadily based on GAAP. And Wall Street’s 2015 projections seem optimistic. Then there are high noncash expenses, such as stock-based compensation packages which aren’t going to let up any time soon. Furthermore, other expenses are lately outpacing sales. In the 2Q, subscription sales rose a blistering 45% from a year ago, but costs grew at a 60% clip. DMND gets the great majority of its revenue based on a subscription model, taking a small percentage of customer sales over its platforms. It relies heavily on its ability to add new clients and create new services to further integrate clients into its system. But attracting new customers and developing new features has been increasingly expensive for DMND due to intensifying competition. Some key metrics have slowed. Annual customer growth fell to 31% last year from 35% in 2013 and 50% in 2012. The backlog increase dropped to 37% last year from 67% in 2013. While many companies would love these numbers, the trend is going the wrong way for DMND valuation. Average subscriber revenue grew 4% in the last quarter from the year-ago period, much less than the 13% average of the previous five quarters. That could mean DMND is signing up smaller customers, or prices are eroding. The biggest caveat to the skeptical thesis is a potential buyout. DMND rivals have been acquired in the past two years at 5x – 8x annual sales. But even at 8x subscription revenue that would come to less than $1.5 billion—25% below its current market value.

Autodesk (ADSK): The stakes are higher this week as its annual investor day on 29-Sep-15. Shares of the design-software pioneer have lost almost a quarter of their value in 2015, and investors are grappling with the company’s plan to embrace the cloud, a major transformation that will dry up earnings temporarily. By the middle of FY16 ADSK will sell its last perpetual license, a fancy term for boxed software. Thereafter, designers, engineers, and filmmakers who rely on ADSK will need to buy subscriptions for the products, all delivered via the cloud. The new business model stretches out revenue over 4 to 5 years, but doesn’t change upfront costs. Thus the hit to earnings, which could fall substantially in 2016. This is a multiyear story but the stock could benefit much sooner. ADSK’s computer-aided design, or CAD, software remains a crucial tool for creating physical objects, which are now brought to life almost universally through software. ADSK’s flagship program, AutoCAD, has a leading share of the market. The company continues to roll out new products, including new ways to manage workflow at construction sites. The shares could jump 50% in the next 18 months as investors get more comfortable with ADSK’s transition to the cloud. The change in revenue model seems to be the right thing to do for the business. The optics of the revenue makes it look worse than it actually is.
Sales could slip 1.1%, to $2.49bn, for the fiscal year ending in Jan-16, as the company trades one-time software purchases for smaller recurring payments. The decline means ADSK could lose report negative earnings for the year which are expected to bottom in fiscal FY17, and then rise from thereon. That’s a long timeline, but investors are used to looking ahead once they understand an opportunity.  The subscription transition has been a recipe for success if it’s done correctly. ADSK already offers products powered by the cloud, and sees a future in which the cloud can offer the vast computing power required by its resource-intense applications.
Vantiv (VNTV), originally a spinoff from Fifth Third Bank, stands to benefit from this industrywide shift as it operates on both sides of the same market: It provides a full suite of payment services to merchants on the one hand; and on the other, it produces the physical cards for financial institutions across the U.S. VNTV is the second-largest merchant acquirer in the U.S., representing an 18% market share in total payment transactions, overtaking a unit ofBank of America (BAC ) in 2014. First Data ranked at the top. VNTV also ranks as the No. 1 U.S. merchant acquirer in PIN debit transactions. An acquirer is a bank or other institution that accepts card payments in the merchants' behalf. On the financial services side, Vantiv holds a 10% market share in the U.S., representing more than 1,400 banking and financial customers. It is the electronic middleman that enables and links electronically retailers and point-of-sale systems to the card brands and to the card-issuing institutions. Major clients includeMacy's (M ),Office Depot ( ODP ),Kroger (KR ),Walgreens Boots Alliance (WBA), In-N-Out Burger,Wendy's (WEN),Comerica Bank (CMA) andFifth Third Bank (FITB). More recent additions include Rabobank,Capital One Financial (COF) and the U.S. Postal Service. The time when customers paid for their purchases by swiping their credit cards and signing a paper receipt is coming to an end. New cards with a microchip and PIN have made their inroads into the financial payments market. The transition to chip cards, or what the industry calls EMV migration, has challenged the industry. October is the target for the so-called "liability shift." After the shift, when a transaction takes place, the party with the weaker technology will bear the cost of the possible hack or fraud. That's why most national merchants, retailers and banks have been working hard to issue the EMV cards and install EMV card terminals. Those cards carry a chip and are accessible with a PIN instead of the classic magnetic cards that require a signature. Chip cards will enhance the security on that end, the risk may shift to the weaker links in the industry: small and medium-size businesses and online users. That's where Vantiv comes in. In addition to being a leader in the EMV transition, Vantiv also has taken steps beyond it. Vantiv has been growing via acquisition. It has made three acquisitions in recent years. At the end of 2012, it acquired Litle, an independent e-commerce payment processor for Internet and direct-response marketing transactions. Its customer base includesOverstock.com (OSTK), Ancestry.com and Wayfair (W). The other two acquisitions relate to the integrated payment space. The company is certainly benefiting from a positive secular trend. Payment security at the small and midsize merchant level is a key driver of growth for the larger, more sophisticated merchant processors like Vantiv. Vantiv also plans to use its large cash position to consider offshore acquisitions, grow its core business and return capital to shareholders. 

Monday, September 21, 2015

Special Situation Ideas for week of 21-September-15

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s and other publications

TransUnion (TRU) TransUnion whose services include providing credit scores for consumers went public on June 25. TRU TRU provides risk and information services to businesses and consumers. It offers consumer reports, risk scores and analytics to businesses, primarily in credit risk management. Businesses use its information services for a number of functions, including acquiring new customers, assessing a consumer's ability to pay for services, measuring and managing debt portfolio risk, collecting debt and verifying consumer identities.Consumers use its services to view their credit profiles and access analytical tools that help them understand and manage their personal information and take precautions against identity theft. TransUnion has operations in more than 30 countries. TRU has been doing well in the U.S. amid a strengthening housing market, rising auto sales and a brightening jobs picture. All of these trends have led to increased demand for financing and the credit checks. TRU is also positioned well in some good growth markets internationally, and they've gotten into some other domestic areas that have growth, like public records data and parts of the health care market. TRU is one of the 3 largest global credit reporting bureaus, and the last to go public. Other two are Equifax and Experian. TRU filed for an IPO in 2011 but withdrew the offering a year later after it was sold to Advent International and a unit of Goldman Sachs TRU’s core service is consumer credit data, but it has extended into data sets underutilized" by the consumer credit reporting agencies. They include public records data such as court judgments, bankruptcies and driver history data, including traffic tickets and other court records. An improving economy and jobs picture usually means more consumer debt, which increases demand for TRU products. TRU also owns majority stake of 55% in Credit Information Bureau CIBIL, biggest credit bureau in India. TRU is a bit smaller than Equifax and Experian in terms of market share, but it's still a major player. TRU is well diversified in its customer base. It offers services to customers in financial services, insurance, health care, real estate and other industries. Acquisitions have helped TransUnion broaden its lineup. For example, last year it acquired an 87.5% ownership interest in Drivers History Information Sales, which collects traffic violation and criminal court data.
Vitamin Shoppe (VSI), racked up same-store sales growth of more than 5% from 2006 to 2012. However this year sales at stores open at least a year are expected to grow by less than 1%, as demand for vitamins and supplements has weakened. VSI also has had trouble integrating the acquisition of FDC Vitamins. At about 6.5x EBITDA, below larger rival GNC Holdings at 9x—the shares look to be discounting ample turnaround potential.A new CEO, Colin Watts is a veteran of Weight Watchers and Walgreens. Watts is focused on cutting costs, overhauling stores, and completing the integration of FDC. Those actions are expected to lead to earnings growth in FY16. With a negligible $15m of net debt and a 7% free-cash-flow yield, VCI is well positioned to step up the pace of stock buybacks. Industry analyst put its value at $47, implying 9x FY16 EBITDA. VSI operates about 700 stores in 45 states; Puerto Rico; and Canada. Vitamin and supplement demand has been weak, due in part to negativity surrounding an investigation earlier this year by the NY AG’s office into herbal supplements. VSI, in particular, has seen sales of weight-management products fall sharply. As Vitamin Shoppe moved manufacturing from third-party contracts to FDC Vitamins, known as Nutri-Force, sales disruptions occurred, resulting in some out-of-stock products. Management has been remedying the issues, and expects any negative impact to be resolved by the end of FY15. In the next 3 yrs, the company plans to move 40% of the manufacturing of private-brand products in house, helping increase Gross Margins. While 20% of VSI sales come from higher-margin private brands, GNC’s private-label business chips in 55%. Management announced a $100 million buyback in May, and has $117 million authorized in total, equal to about 11% of shares outstanding. In April, activist investor Carlson Capital disclosed a stake in Vitamin Shoppe that now totals 6.6%.
Clifton Bancorp (CSBK), with $1.2 billion in assets, operates 12 branches in northeast New Jersey. The bank completed its $170 million conversion in April 2014. At a recent $13.99 the stock trades for 1.04 times tangible book value, a discount to peers that go for closer to 1.2 times. The dividend yield is 1.7%. Clifton is the second most overcapitalized bank in the country, with tangible common equity standing at 30% of total assets. As the bank deploys its capital into stock buybacks, earnings per share will rise. In time, the stock’s discount will narrow. In April, Clifton passed the one-year restriction on making share repurchases that follows an offering, and has since been aggressively buying its stock. By the end of June, it had bought back 1.5 million shares, reducing its share count by 5%. More buybacks over the next few quarters are likely. This year, Clifton is expected to earn $8.5 million, or 33 cents a share, on $30 million in revenue. Credit quality is pristine. Nonperforming assets are less than 1% of total assets. Residential mortgages account for nearly 90% of total loans, but Clifton plans to build out its commercial lending business. Success there would also provide a lift to earnings and its shares.

Medallion Financial (Taxi) is a leading lender to individuals and companies seeking to own and operate yellow cabs through the purchase of a medallion, which is bestowed by the New York City Taxi and Limousine Commission and allows drivers to pick up passengers who hail them on the street. In all, there are only about 13,000 medallions available, which has at times made them a very secure commodity to lend against. At their peak in 2014, New York City medallions went for $1.3mn. However, Uber pulled up in 2011, and its influence began to grow with the popularity of smartphones. Uber’s promise of easy hailing of a car via smartphone and the possibility of a lower fare have proved extremely attractive to riders—and devastating to medallion prices. Recently, a medallion was valued at $875K, down about 30% from the peak. TAXI currently trades at 6x FY16 earnings and sports a dividend yield of 15.7%. The selling seems overdone, amplifying Uber’s effect, and obscuring the rest of Medallion’s business. Total yellow-taxi cab ridership has declined, but it hasn’t plummeted. The number of rides slid 8%, to 165m, in FY14, from a peak of 179m in YY12.  TAXI amid the volatility limited its risk by tightening its credit standards. In addition, TAXI diversified more than a decade ago. TAXI began lending to dry cleaners and laundromats, and bought a firm specializing in high-interest financing making home-improvement loans. The company also provides credit to recreational-vehicle dealers, and offers some medallion loans. A year later, TAXI bought an RV and marine lender from Leucadia National (LUK). Consumer loans accounted for 40% of managed loans and 64% of Medallion’s earnings in the second quarter. Cab medallion loans, about 70% of them made in New York, remain a significant line of business at 51% of managed loans, but account for just 19% of interest income. The loss rate on Medallion’s total portfolio is 1%. The firm also raised the stock-buyback authorization to $26 million, to counter a large short position of 3.3 million shares, or 15% of the float. New York’s cabs have faced all kinds of rivals—from limousines, to green cabs with limited travel parameters, to rogue drivers. Uber will take its share of the livery market, but is unlikely to wipe them out.
Procter & Gamble (PG) stock fell in July  to $82 from $94 and it started to look interesting. However, another 15% drop since then, to $69.94—below the high of the previous bull market—the stock is beginning to look cheap enough to discount a pretty gloomy future. Given its nearly 4% dividend yield, PG’s stock could provide a relatively safe, if unglamorous, return for a patient, income-seeking investor with a long-term outlook. PG could deliver an attractive return, especially if the broad market’s volatility continues or worsens. PG’s problems are known. The rising dollar is a drag, with the household- goods giant getting 60% of its sales from overseas. Yet that’s probably a short-term head wind, and few investors seem to acknowledge that a stronger dollar can also help P&G’s cost side. The company has shaved its brand portfolio significantly since mid-2013, selling noncore assets and cutting costs. It cut its portfolio to 65 brands from 180 a few years back. PG trade for 18x FY16 earnings $3.83, a share, not a bargain yet but lower than the historical ratio of 19x. An investor mentions that he noticed inflection point with an uptick in the operating margin to 19.7% in the fiscal year ended in June from 19.3% in FY14. Similarly, returns on equity and assets have inched up. P&G’s stock isn’t going to be a home run or even a three-bagger, but for an income investor seeking stable ballast in a future when markets might not be as cooperative as they’ve been for the past six years, P&G shares at this level represent a potentially attractive refuge.
Dollar Tree (DLTR), has seen an interesting trend lately. The discount variety-store retailer. Saw several company insiders purchasing shares lately, and the stock—down some 20% to $66.65—is worth a look, given the firm’s various attractions, such as average annual EPS growth of 15% over the past decade. The stock drop has mainly to do with the $9bn acquisition of Family Dollar. After some integration pain, that addition will contribute to Dollar Tree, whose long-term fortunes seem brighter than the stock price implies. When the integration is in the rearview mirror, the stock could give a double-digit return. Family Dollar chain needs upgrading to Dollar Tree’s higher operational and efficiency standards. The market isn’t looking beyond the speed bump caused by the acquisition. The company continues to expect $300 million in annual synergies within three years. In recent weeks, four insiders began buying shares and those purchases are a significant buy signal, given the number of insiders involved, their track records, and the size of transactions. An analysis of the longer buying history of the other two shows that their purchases were followed, on average, by the stock up 12 months later 93% of the time, and by an average return of 28%. The fundamentals need to pick up, but that doesn’t seem as unlikely as the market would have it. The $4 or so EPS consensus for the next fiscal year seems possible once Family Dollar starts hitting on all cylinders, and the forward P/E is 17 times, lower than Dollar Tree’s long-term average of 22 times. The shares can potentially rise 30% over the next 18 to 24 months, with 10% downside risk.

Monday, September 14, 2015

Special Situation Ideas for week of 14-September-15

Supervalu (SVU) operates wholesale and retail grocery businesses. SVU has cut costs, reduced its debt, shaken up management, and sold all of the Albertsons stores it acquired in 2006. Additionally, what can be a positive is a potential spin-off. SVU said in July that it is considering a move to spin off Save-A-Lot, the company’s deep-discount supermarket chain. Separating the discounter would enable SVU to focus on its food-distribution business, which serves about 1,800 stores and accounted for nearly half of last year’s $17.8 billion in revenue. The stock fell about 7.5% last week on news that the West Coast supermarket operator Haggen, one of the company’s newer wholesale customers, had filed for bankruptcy protection in addition to comments by the CEO that SVU is seeing price deflation. An investor believes that Save-A-Lot could generate $ 220m in in EBITDA and can be valued at 10x FY16 EBITDA, or $2.2bn, about equal to Supervalu’s total market capitalization. Save-A-Lot, which owns and operates 431 stores and licenses 903, accounted for 26% of SVU’s revenue last year. SVU’s troubles stated when it jointly bid for $17.4bn Albertsons deal, in which SVU took 1,100 grocery stores and $ 6.1bn of debt. This was followd by the financial crises. SVU  sold 877 Albertsons stores the following year to an affiliate of Cerberus for $100 million in cash and the assumption of $3.2 billion of debt. SVU has cut its debt to $2.2bn from $5.9bn in FY12. It has won back wholesale customers and attracted new ones with better pricing. It’s remodeling 20% of its retail stores annually, adding private-label, organic, and pet- and baby-food offerings, and upgrading its digital platform. Shares could reach $12, more than 40% to 50% above its trading price.

Quanta Services (PWR) is a is a provider of specialty contracting services, offering infrastructure solutions primarily to the electric power, and natural gas and oil pipeline industries. PWR has three major divisions: electric power, Oil & Gas and Fiber Optic. The shares have fallen 14% since the end of 2014. Some of the reasons for the drop are obvious: Quanta is an engineering company that helps energy and power companies with their infrastructure needs, and exposure to energy is a mite unpopular right now. Quanta also has been hurt by bad weather, which forced it to cut annual profit guidance. And, new contracts have been slower to come in than the company had expected. There are certain catalysts in here that require close attention. One of them was the pending divestiture of its Fiber business. On 30-Apr-15, PWR announced the sale of its Fiber business to Crown Castle for USD 1bn. The company will use majority of the cash to buy back its shares. Contrary to popular belief, the Oil & Gas business of PWR is majorly exposed to the natural gas market. This market should benefit as more and more utilities are pushed to use natural gas as a result of changes in regulatory environment. Furthermore, gas exports are expected to increase after 4Q15, which in our opinion will lead to higher demand for capacity resulting in the need to maintain and to build more pipelines in order to transport gas to the export terminals. In addition to pipelines within US, there has been ongoing talk about building pipelines from Canada to the US Gulf Coast. These negotiations have been in limbo for couple of years that we believe should be favorably resolved in late FY16, after the presidential elections take place. In addition to the disposal and higher demand for natural gas infrastructure, there seems to be an urgent need to construct, maintain and upgrade the US power electric grid, where PWR plays a major role. Except for the share buybacks, PWR does not have any immediate catalysts. PWR trades at 10.6x adjusted Fy16 earnings forecasts—below the group’s 12.2 multiple. In the past, PWR, according to my own analysis can go as high as USD 35 per share.

Monday, September 7, 2015

Special Situation Ideas for week of 7-September-15

AFTER a long hiatus, I have decided to start writing again. The writing took a break, since I was busy with trying to establish a small investment partnership. The partnership will now complete its first 2 years, going on to its 3rd, having survived disastrous markets over the last 12 months. Happy reading!!!


TGNA is a media and marketing solutions company that operates through two business segments: Broadcasting and Digital. TGNA is a recent spinoff from Gannett (GCI), after GCI decided to separate its paper publishing business, mainly newspapers. The reason Ilike TGNA is because of certain key assets it holds. Firstly, it owns “cars.com” which is one of the largest websites for car dealers and consumers regarding information they need on cars. This asset should benefit from the recent uptrend in car buying activity, which is usually followed by incremental purchase of used car. In both instances, which define the up-cycle and down-cycle in the auto industry, “cars.com” should generate higher advertising revenues. Secondly, TGNA owns “Careerbuilder.com”, which should benefit from the change in employment cycle and increase in people looking for jobs within the US and outside. Lastly, and most importantly, TGNA owns 46 broadcast stations that are watched by over 33% of the US population. It’s also the largest owner of NBC and CBS affiliate stations, amongst others. With the change in viewing patterns, we believe there is a huge opportunity for TGNA to generate incremental revenue from contract negotiations related to the licensing fees that TGNA gets paid to transmit content (transmission fee).  With approximately 90% of the contracts up for renegotiation within the next 12-18 months, TGNA should be able to demand higher fees when these contracts get renegotiated. What makes a good case in support of higher fees is the upcoming FY16 US Presidential election, in addition to the upcoming US Senate races in key states. With TGNA owning TV stations with viewership in certain key swing states where politicians are willing to spend on pricy TV ads, the firm will be able to negotiate from a position of strength. In addition to the elections, further strengthening TGNA’s hand are the FY16 Olympics in Brazil that should considerably increase TV viewership. What’s more is that both the Presidential elections and the Olympics are happening in the same year. TGNA believes that at current rates, it is still grossly underpaid compared to others, such as ESPN. We believe the shares could rise 30% to 40% from their current trading price by 4Q16.


Patterson Company is a distributor serving three business segments: dental, veterinary and rehabilitation supply markets. My original thesis while establishing a position in PDCO few weeks ago, was that the company will restructure and eventually go private. Since then, PDCO has made announcements to reorganize their business and their management has undertaken certain tangible actions. Of the three business segments, it announced the sale of its rehabilitation supply business to Madison Dearborn Partners for USD 715m. While selling the smallest of the three divisions, PDCO also made an announcement to acquire Animal Health International for USD 1.1bn. PDCO said that it would use the proceeds from the sale of rehabilitation business to pay down debt. The restructuring has enabled PDCO to double its veterinary business and become a leading player in dental and veterinary space. The company is approximately 16% owned by its employees with good cash flows and a stable business model along with a 1.8% dividend yield. I believe the company can be taken private at a higher price than where it currently trades. There were reports last week that the firm is exploring alternatives to be taken private, however, if it happens soon or not remains to be seen.   

HOT operates as a hotel and leisure company worldwide. HOT initially got my attention after announcing a spin-off of its vacation ownership business to its shareholders. Further analysis revealed that, in addition to creating two separate companies, HOT was undervalued on sum of the parts basis to where it was trading. My thesis was also supported by the recent macro events, including lower fuel prices, which we believe would lead people to travel and spend more on vacations. With prime properties in the US and worldwide, HOT was a good name to own in that space. Furthermore, the spin-off of its vacation rental business will make HOT a pure play hotel operator. The two separate firms can help HOT unlock shareholder value, either as standalone entities or as eventual takeover targets thus generating profits for our partners over the next 12 to 18 months. The current spin-off remains on schedule, due to be completed in 4Q15. Since we established our position, HOT has announced that it will move further towards a service heavy model, selling properties around the globe while retaining property management contracts. The company also changed its top management, and retained Lazard in April 2015 to explore financial and strategic alternatives in order to increase shareholder value. In addition to retaining Lazard, what might further accelerate the monetization process is the involvement of certain large hedge funds in this name, which disclosed their positions after we bought the shares. It’s rumored that the funds are pushing HOT’s management to pursue a sale. There have been reports in the media that the company might have initiated a sale process, however such reports are not confirmed. We believe the company is fairly valued closer to USD 90 a share, more than 20% from where it currently trades.

HTZ rents and leases cars and trucks in the United States and internationally. HTZ got my attention because of two major events – an admission of accounting irregularities by HTZ whereby HTZ was obligated to restate 3 years of its financials, and secondly, the announcement of a spin-off of HTZ equipment rental business. A slow but steady selloff in the stock price began after the announcement by HTZ that it will have to restate 3 years of its financial statements. NYSE threatened HTZ with delisting if it did not comply within a given time limit. This coupled with the knowledge that HTZ was struggling to integrate the FY12 acquisition of Dollar Thrifty lead to a massive stock selloff. The price fell from USD 28-USD 30 per share to the current share price of USD 17. The sell-off was made worst by reports that car rental firms will have issues increasing car and equipment rental rates in the short term, while simultaneously facing competition from services such as Uber. Contrary to the popular belief, we bought the shares thinking that over the next 12 to 18 months HTZ should be able to resolve issues and regain its footing, leading to a recovery in its share price. Since our initiating the position, HTZ announced the appointment of a new CEO, John Tague, who is a former United Airlines executive. This appointment comes in addition to 2 Carl Icahn nominees as directors on the board. Carl Icahn is a known activist investor who owns more than 11% of HTZ stock. The CEO’s appointment was followed by certain other key appointments. In addition to appointment of John Tague, HTZ appointed Tyler Best and Tom Kennedy as its CIO and CFO. Both worked for a firm that was owned by Cerberus Capital and housed brands such as Alamo and National. These guys cut costs, restructured the company, and sold it to Enterprise for a price reportedly more than five times what Cerberus had paid.  With this new management, HTZ’s goal is to right the wrongs and grow its core business. To that extent, HTZ took the first step and successfully restated 3 years of its financial statements, putting aside the threat of NYSE delisting and thus engaging many demotivated investors. Management then went on to reaffirm its $1bn share buyback program and announced that it is looking into exiting certain non-core businesses. HTZ also announced that it has furthered its cost cutting initiatives by, increasing its goal of cutting costs by an additional $100M to a total of $300M. Furthering the cost reduction goal is HTZ’s long awaited announcement to fully assimilate Dollar Thrifty acquisition and finally integrate and streamline its IT systems by year-end. Aside from the current ongoing turnaround that should unlock shareholder value, investors often seem to ignore HTZ’s 16% stake in
 China Auto Rental, China’s leading car-rental company. This stake could be worth $900 to $1bn. What remains a key risk to our thesis is the execution by management. This execution risk is mitigated by the involvement of two well-known activists, Carl Icahn and Jana Partners, both of whom own substantial stakes in the company. We believe that on the sum of the parts basis, HTZ could be worth north of $25 a share, which is approximately 30% to 35% higher than where it currently trades.

Axiall is a manufacturer and international marketer of chemicals and building products. The company operates in three basic segments: Chlorovinyls, Building Products and Aromatics. AXLL was formed in FY13, after the company, formerly known as Georgia Gulf merged with PPG’s commodity chemicals business. AXLL got our attention due to number of factors, chief among them is the business reorganization AXLL is undergoing, and the involvement of activist shareholders pushing the company to divest assets or put itself up for sale. This push for sale becomes especially relevant in light of AXLL being the subject of a takeover offer few years ago by Westlake Chemicals. Since we established our position, AXLL announced the appointed of an interim CEO who has taken certain tangible actions. First among them is his reiterating the timeline on the sale of the smallest of the three AXLL segments. The management believes that the divestiture of the Aromatics segment will happen by 3Q or 4Q of FY15.  In addition to this announcement, management announced in the most recent earnings call that it is exploring strategic alternatives for its Building Products segment, including a sale. In response to the question on the sale of the entire company, the CEO commented that “every option is on the table”. We believe that if the two divestitures of Aromatics and Building Products segment are executed properly, then it opens the door for the sale of the remaining company. There have been recent trends indicating consolidation in the Chlorovinyls sector – a segment that will remain after AXLL disposes the other two business divisions. This sector was marred in the past due to overcapacity, which impacted revenues and negated any positive impact from lower raw materials costs. However we believe that the recent sector M&A (eg: Olin merging with DOW’s Dow chlor-alkali division), will lead to capacity reduction in this sector. Sold or not, the remaining AXLL segment should report much better relative performance in late FY16. The execution risk by the management remains, however, once again involvement of several vocal activists mitigates that risk for us. We believe the real value of the company is somewhere in the high 30s, closer to $38 to $40 a share.