Sunday, August 20, 2017

Special Situation Ideas for the week of 20 August 2017

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, WSJ, IBD, and other publications. If you have
questions, feel free to write to me on
Barnes & Noble (BKS): BKS is a retailer of books and other content and media, including educational products with a stock market value of $523m. Sandell Asset Management, a well-known activist is urging the board of BKS to take it private. The fund believes that BKS is significantly undervalued for several reasons, including the steep drop in retail valuations in FY17 due in large part to the dominance of Amazon. BKS trades at a lower EV/EBITDAx than nearly every other publicly traded retailer despite being the only truly national bookstore chain. Physical bookstores are not going away anytime soon, and even if they were to decline, the intrinsic value of BKS is still materially greater than where it trades. Recent acquisition of Whole Foods by Amazon and of Staples by Sycamore Partners are two examples of sophisticated investors and operators realizing that retail companies are better off private than public in this environment. Similarly, BKS would be a good acquisition for a financial buyer interested in its cash flow and low leverage, or an internet or media company looking for a retail presence based on its countrywide footprint of stores. Recently, Sandell urged Bob Evans Farms to sell its restaurant business, valuing it at $560m, which was ultimately sold for $565m. BKS trades at 3.2x FY18 EV/EBITDA, with FY17 EBITDA at 170m. If BKS goes private, it can be taken private at $12 a share, a big premium to where it trades currently.

Seagate Technology (STX): STX is a provider of electronic data storage technology and solutions. The Company's principal products are hard disk drives (HDDs). The company has a market value of $9.5bn. What got my attention was the recent invitation by the company to ValueAct Capital, a well know fund, which was invited to serve as an observer on STX’s board. The stock price has declined to $32 a share from $48.96, as early as March, 2017. The fund holds 7.2% stock with an average cost of $35.04 per share. This is an increase from 4% that it held in September, 2016. STX is a good business in a rational industry with strong cash flow—but the company is misunderstood. The market is focused on one of the more visible parts of STX’s business, namely the traditional PC business, which happens to be one of the smallest parts of its operations. It is the hard-drive business that is fueling it’s growth, and it is hard drives that are the backbone of the cloud and other distributive storage businesses. Seagate is one of two big players in this market, and it has valuable intellectual property. The company’s current chairman and CEO (until October), Stephen Luczo, was on the Microsoft board with ValueAct partner Mason Morfit, while director Mike Cannon was on the Adobe board with ValueAct partner Kelly Barlow. STX has a return on Equity of 52%. Current dividend yield is approx. 8%. At 10x FY18 earnings, there is upside to the stock price, if STX can streamline costs and improve end user demand for its product.

Gardner Denver Holdings (GDI): GDI makes pumps, compressors, and flow-control devices. In FY12, GDI, then decentralized and inefficient, was hit by slowing demand for its natural-gas-related equipment and a softening in its key European industrial markets. In FY13, after a push by activist, it was sold to KKR for $76 a share. After 4 years of restructuring, KKR took GDI public at $20 a share. KKR owns almost 75% of the shares. The post-IPO lockup on selling ends in November. KKR emphasized on developing new management talent, expanding margins, accelerating growth, and allocating capital more efficiently. Of its 100 top business managers, 45 are new. Reading into its first quarterly report, it seems like the strategy is beginning to pay off. Cash flow rose strongly in each of its three businesses—industrial, energy, and medical. While the company had a net loss of $146.3m, due to factors related to the IPO, quarterly revenue, at $579m, was 25% above the year-earlier level, and cash-flow margins were up by 4%. GDI trades at 11x Ebitda compared with 13x for rivals. For example, Graco (GGG), fetches 16x Ebitda. The reason for lower multiple might be the market underestimating GDI’s ability to rebound in energy, its second-biggest market behind industrial. Its backlog of bookings to billings in the sector is a respectable 1.3x. Energy is starting to turn up again. Gardner Denver is using its strong cash flow to pay down debt, invest in core products and technologies, and make acquisitions. Net debt/ adjusted Ebitda has dropped to 3.8x from 7.3x a year ago. The pump market is expected to earn $1.42, on $2.44bn of revenue for FY18. With proper execution, shares can rise more than 40% from where they trade right now.

Sunday, August 6, 2017

Special Situation Ideas for the week of 6 August 2017

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. If you have questions, feel free to write to me on

CSTM:  It is a Netherlands-based company engaged in developing aluminum products for a range of markets and applications, including aerospace, automotive and packaging. The company IPO’ed back in 2013 at $15 share, before rising to an all time high of $34/$35. Since then, due to operational issues, financial mismanagement and poor leadership, the stock suffered and traded under $5 per share. To add to the woes was a poor aerospace market. However, recently, CSTM got a new management, which oversaw operational turnaround. The new management team is helped by improving aerospace, auto and can market.
The stock, according to bloomberg had some recent takeover interest.  From what I have known with my own research, the management was not very keen to sell at this price. Longer term, the company has a bright future, and I can easily see this stock double from here, if held for medium to long time. This stock was part of my portfolio when it was trading at $5 a share. I would advise this company should be seriously looked into.
TGNA: Tegna Inc. has a portfolio of media and digital businesses that provide content. The company recently spun-off its segment, and also divested its stake in Careerbuilder, the job hiring portal. What remains with the company is a host of TV stations in important states in the US. With the changing political landscape, especially with the recent election of Mr. Trump, we can only expect increased political spending which will benefit the company. 2018 should start off stronger with the benefit of both the Super Bowl and Winter Olympics at their core NBC stations and could bring the benefits of local consolidation and a stronger than expected political year.

Additionally, with a  pure play within the content transmission and media sector, the company can easily become a takeover target for a larger firm looking to expand via acquisitions.