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.