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 kedar@kedarcap.com
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.
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