Professional Documents
Culture Documents
Graham Doddsville Issue 33 v23
Graham Doddsville Issue 33 v23
Mario Gabelli ’67 and Professor Tano Meredith Trivedi with Professor Bruce
Santos, Co-Director of the Heilbrunn Greenwald
Center for Graham and Dodd Investing,
at the 2017 Omaha dinner
Volume I, Issue
Page 23 Page 3
Pershing Square founder William Ackman and the 2018 The judges listen to a riveting student pitch
Pershing Square Challenge judges panel
William Ackman posing with the winning team of Jade Winter Li ’19, Steve Cao ’19, and Tyler Redd ’19 deliver
Hu ’19, Rana Pritanjali ’19, and Asher Jacobs ’19 their 2nd place pitch
Professor Bruce Greenwald and Litespeed Partners’ Columbia Business School professor and Gotham Capital
Jamie Zimmerman have an enlightening discussion founder Joel Greenblatt shares his expertise
Capital Group’s Jody Jonsson (left) and Ryan Brown Conference Chairs Justin Charles ’18 (left) and
discuss navigating the road ahead Harsh Jhaveri ’18 address the crowd
Presented by:
The Heilbrunn Center for Graham & Dodd Investing
2) Shrinking SQ End Markets Leading to Further Margin Erosion: The ongoing consolidation within healthcare industry has
shrunk the customer base for SQ segment, the most profitable business for Stericycle. From 2012 to 2016, the percentage of physicians
that are employees of large hospital groups has increased from 42% to 47%. Given the drastic difference in margin profile for SQ and LQ
(30%+ EBITDA margin for SQ, as compared to mid-teen for LQ), every dollar shifting from SQ to LQ has a decremental margin of 20%.
3) Value Destructive Acquisitions Have Significantly Eroded margin and ROIC and Strained Balance Sheet: Adjusted
ROIC declined to 5.3% in 2017 from 10.9% in 2013 primarily as a result of value destructive M&A in non-medical waste segments, espe-
cially in Shredding since 2015. Take the 2.1bn Shred It acquisition for example. This is a highly cyclical business (50% EBITDA from selling
recycled paper) in a secularly declining industry. There’s limited economies of scale between the core medical waste business and paper
shredding business. We expect recycling margin to face downward pressure as recycled paper pricing comes off its cyclical peak. And yet
it was sold to Stericycle at a 9x EBITDA multiple, including synergies. At the same time, the company has loaded its balance sheet with
debt to 4x net leverage, making it extremely difficult for them to continue the roll-up strategy. Stericycle has close to $750 million of obli-
gations due by 2019. Its credit rating and outlook was recently downgraded. It has $1.2 billion debt maturing in 2020 that’s paying 2-3%
interest rate. We expect that to spike once the company resorts to refinancing. It was also close to tripping its covenants in March this
year, until it obtained a temporary relief from lender through 2019.
Catalysts
We expect continued earnings misses and a large asset impairment (>70% of assets are intangibles) over the next 12-18 months. We also
wouldn't be surprised by further restatements or an SEC investigation into the company’s accounting policies, considering the SEC’s per-
sistent questioning of the company in recent years.
Valuation
Based on multiple valuation methodologies and scenario analyses, we believe Stericycle remains overvalued and offers an attractive risk /
reward. Our base-case assumes continued SQ deterioration and slight shredding growth, with other segments achieving management’s
2018 guidance and stabilizing through 2020. Using a 9.5x forward multiple on 2020E EBITDA, our $38 price target presents ~40% down-
side over the next 18 months. A sum-of-the-parts valuation confirms this price target. Even in our bull case, which assumes stabilizing
operations, the mere shift of revenue to lower-margin businesses limits upside potential. We also believe there is room for further deteri-
oration and continued multiple compression. As such, our bear/bull scenario analysis presents a 3.8x downside/upside ratio.
Key Risks
Activist pressure: An activist investor can replace management or push for a sale/break-up of the business. Jana Partners took a position
in SRCL in 2016 but exited shortly thereafter. Discussions with investors close to the situation have revealed that Jana noticed underlying
problems with Stericycle’s business model - similar to what our research has exposed. At SRCL’s current valuation, we don’t believe an-
other activist will take a gamble. Breaking up the business would also be tough, as Shred-it would receive a far lower multiple than the
core MedWaste business.
Takeout: Waste Management or a competitor may acquire Stericycle. Although WM has made multiple unsuccessful attempts to enter
the MedWaste market, it is extremely prudent when allocating capital and seeks stable revenue/earnings. We don’t believe it will pay a
11x multiple (or >$8bn) for a business facing pricing pressure/contract resets simply to acquire customer routes and incinerator/autoclave
infrastructure. Conversations with former WM executives have confirmed this belief, and lead us to believe that WM may acquire regional
competitors to compete with Stericycle now that SRCL’s balance sheet is constrained.
Page 18
Steve is a 1st year student believe the risk-reward is now favorable with Cash 8 Short Interest 19%
Enterprise Value $ 9,163 Dividend Yield 0.0%
at CBS. Previously, Steve 71% downside in our bear case and 30% upside Book Value $ 1,536 Cost to Borrow GC
was an Associate at Gold- in our bull case, or a downside/upside ratio of
man Sachs Private Equity 2.4x. We project EPS to decline by 13% to $21
Group (PEG). This summer Key Financials
per share in 2020, 30% below street consensus, Historical Projected
he will be interning at driven by flat growth in new loan originations, a (US$M) 2015 2016 2017 2018E 2019E 2020E
AllianceBernstein Arya declining yield, and an increase in provisions for
Partners in New York. He Revenue $ 825 $ 969 $ 1,110 $ 1,259 $ 1,382 $ 1,498
holds a BA from Rutgers credit losses. growth 14.1% 17.4% 14.5% 13.4% 9.7% 8.4%
EPS $ 14.28 $ 16.31 $ 24.04 $ 26.65 $ 30.23 $ 34.00
University. growth 19.8% 14.1% 47.4% 10.9% 13.4% 12.4%
Business Description Book Value $ 928 $ 1,174 $ 1,536
$ $ 1,803 $ 1,957 2,136
CACC is a $6B market cap subprime used car P/E 13.1x 11.8x 10.4x 9.2x
auto-lender based in the US. The company op- P/B 4.0x 3.4x 3.1x 2.9x
Winter is a 1st year stu- ii) Loan-level metrics indicate secular challenges: Bears and “Loan-Level ROIC” Comparison
dent at CBS. Previously, he bulls diverge on whether declining metrics, such as Holdback per
was an Investment Associ- dealer, are signs of secular challenges in the business or simply
ate at MFS Investment
symptoms of the late stages of an industry cycle. We lean towards
Management, where he will 9%
also be interning this sum- the first camp (holdback per dealer was 120% higher in 2007, a
similarly buoyant time in the previous cycle). On the surface, 4%
mer. Winter will serve as 21%
the Co-President of CSIMA Credit Acceptance’s adj. ROIC in 2017 (11%) is comparable to
15%
in 2018-2019. what the company produced in 2007 (12%). However, CACC has 12% 11%
gained considerable operational scale in originating and servicing
loans over the last decade. We estimate that an adj. ROIC of 11% 2007 2017
Page 19
Expctations at Origination
As a % of Total Loans
30% 60%
increasing the amount of capital it advances to its dealers by 10%. The company is increas-
ingly deploying capital to its Purchase Program where it takes 100% of losses. These loans 50%
are no longer performing just as the company has increased its Purchase book to record 20% 40%
levels. The dollar value of Purchase loan pools which are underperforming original expec- 30%
Collections and Advance Rates is at record lows, especially in the Purchase book. CACC % of Total Loans (LHS)
% of Loan Pools Not Performing to Expectations (RHS)
ended 2017 with 40% less reserves than in 2007.
ii) Attractive Reward: Near-term downside: CACC reported a 4Q17 provision 2x above street estimates and at the highest level
since 2008. Importantly, CACC management stated that the increased provision was purely due to the timing of cash flows. CACC ex-
pects to collect the same amount of cash flows as before, just at a later time. We believe further provisions are likely as the company
recognizes loan losses. Additionally, management is sending mixed signals to the market. Over the last 18 months, two long-time insid-
ers—President Steven Jones and founder and former Chairman Don Foss—have left the company. Since leaving the company, Foss has
sold $450+ million worth of shares. Management’s share repurchase activity has also decelerated and the company has not repurchased
shares above ~$220, which is 30% below today’s stock price.
iii) Limited Risk: Valuation remains high, but growth is becoming more challenging: At CACC’s current valuation of 12x P/E
and 4x P/B, we believe there is limited upside to the current stock price. CACC’s ROIC is declining and its cost of capital is increasing,
resulting in flat growth in economic profit. Rising interest rates and lower loan IRRs are squeezing
net interest margins. Short interest has declined meaningfully following forced covers of existing
short positions, resulting in a low cost to borrow for current investors.
Valuation
Based on our underwriting, we project EPS to decline by 13% over the next three years to $21
per share, which is 30% below consensus forecasts. Our forecast is driven by three main varia-
bles: flat growth in new loan originations, a declining yield, and an increase in provisions for credit
losses. We believe the first two variables will be driven by today’s competitive environment, with
the increase in provisions driven by an under reserved loan book. Our price target is $210, 33%
below today’s stock price, with an attractive 2.4x downside/upside ratio.
Page 20
2) Increased Competition From Major Tech Players with Low Barriers to Entry
Spotify currently has a favorable deal with the Big Three record labels thanks in large part to Spotify being the
entire paid streaming market in 2015.
Adam Xiao ’17 Even with their control of the paid
streaming market, Spotify had to give
up 16% of equity and growth cove-
nants in order to get these lower
royalty rates. Since 2015, Apple and
Amazon have launched streaming
platforms, while YouTube has contin-
Michael Wooten,
ued to test the market. Though
CFA ’19
Spotify has 71MM paying users, Apple
Michael Wooten is a 1st has quickly grown to over 40MM
year student at CBS. Previ- paying users and Amazon has recently
ously, he worked as an doubled their base from 16MM to
Associate at Corrum Capi-
tal Management and as an 32MM in only 6 months.
Analyst at Reicon Capital.
This summer, Michael will The major tech players entering the music industry do not care about the profits of their music business be-
be interning at WEDGE cause they are platform companies that extract value from their consumers in different ways.
Capital in Charlotte. With the increasing competitive landscape and dwindling bargaining power, what incentive do the Big Three
record labels have to give Spotify a better deal?
Page 21
Catalyst: Spotify’s Margins Will Fail to Meet Market Expectations Following Unfavora-
ble Royalty Negotiations with the “Big Three” Record Labels in 2019
Spotify needs to renegotiate deals with the Big Three record labels in 2019. Each record label re-
quires individual deals, but the Big Three record labels have a “Most Favored Nations” clause which
ensures that they receive the highest of the negotiated royalty rates. This clause makes the record
labels a de-facto monopoly. Due to the headwind on mechanical rates and high market expectations,
Spotify needs to reduce their royalty rate from 52% to 48% at minimum. In speaking with four CEOs
of record labels, including the CEO of a Big Three record label, we are confident that Spotify won’t
be able to meet market expectations. The CEO of a Big Three record label stated “He [Daniel Ek]
doesn’t have the back catalogs that we have. He needs those to be successful today…He has com-
mitted to using tech to try and beat us. I am determined to not be beaten by him...we’re going to use
all of our levers to control Spotify’s behavior.” Every indication from the record labels is that they
plan to fight Spotify to show their dominance in the market.
Valuation
Based on multiple valuation methodologies and scenario analyses, we believe that Spotify is signifi-
cantly overvalued and offers an attractive short opportunity: In our base-case scenario, we believe
that shorting the stock offers ~50% return by 2020 and the stock will fall from its current price of ~$149 to below $75 per share. Our
base-case scenario assumes ~17% CAGR revenue and user growth, but due to the lack of operating leverage in the business model and
intensifying competition, Spotify’s operating margin will never reach 10% as the company stands today and therefore the intrinsic value of
the stock is half of the current market price. Our base-case model incorporates a 7.5% terminal discount rate and 4.0% terminal growth
rate, and implies a 1.5x forward EV/Revenue multiple. We also used relative valuation techniques, which indicated an intrinsic price range
of $24-$71, depending on whether net or gross revenues were used for comparison.
4 Key Risks
1. Spotify is able to generate original content, although we believe that the threat of the music labels pulling the back catalogs will
mitigate this risk.
2. Spotify’s market share growth exceeds expectations. The current total addressable market for cell phones with payment capa-
bilities is 1.3 billion phones, and the market is expected to grow over 1.7 billion in the next couple of years. Increased competition by
Apple Music, Amazon Music, and others.
3. Spotify is able to expand its margins. Spotify doesn’t have pricing power and has limited ability to renegotiate better royalty rates
with the big three music labels.
4. Spotify gets taken out. Spotify’s users and data make it a potential target of M&A. We believe that Pandora Radio is a strong case
study showing how much value a music streaming business can lose without being acquired.
Page 22
Business Description
C.H. Robinson is a transportation broker, acting as a middleman for shippers and
Ryan Darrohn ’19 carriers. Two-thirds of the company’s revenues are derived from trucking broker-
Ryan is a 1st year student age services in North America (referred to as NAST). C.H. focuses on dry-van
at CBS. Previously, he was truckload brokerage services, a commodity service. The company does have other
a Captain and acquisitions
revenue streams, but they represent a minority of total operations, have much
officer in the U.S. Air
Force. Ryan graduated lower operating margins, and are irrelevant to this thesis.
from the U.S. Air Force
Academy with a degree in
Business Administration. Investment Thesis
1) Changing market dynamics will accelerate CHRW’s margin degrada-
tion: CHRW takes the spread (“net revenue margin”) between the cost of
truckload capacity purchased and the rate charged to the shipper. It sells truckload capacity on a spot-
contract mix of 35%-65% but purchases 95% of capacity on the spot market, a weakness as spot prices in-
crease. Spot prices have already increased 28% YoY, and are predicted to rise to over 2x the previous record.
With truckload utilization at 100%—the largest driver shortage on record—and GDP growth above 2.5%,
new capacity will not be able to decrease market tightness. The Electronic Logging Device (ELD) mandate,
requiring that all time be recorded electronically, was enforced on April 1, 2018. Immediately, 7% of supply
was removed from the market, compounding an already tight market.
platform, already help carriers fill empty back-hauls and allocate inventory in advance without needing to rely on, or pay, high fees to
brokers. As travel platforms have reduced demand for legacy travel agents, CHRW’s reselling services will have trouble competing
with online portals that directly connect carriers and shippers. Additionally, these platforms will continue to weaken brokers’ relationships
with shippers and carriers through creating a “second-bid.”
Valuation
Since peaking in 2006 at ~35x forward EPS, C.H.’s multiple has gradually de-rated to the current ~21x. We expect the multiple to com-
press to 16x (trough levels) when C.H. misses consensus estimates, as there are a multitude of factors working against C.H. Our research
suggests NAST revenues will only grow at 8% in 2018 and 6% in 2019. Additionally, C.H.’s NAST spread will compress from 15.7% to
14.6% and 14.3% respectively. With Robinson’s hidden operating leverage, the spread decreases are exponentially detrimental to the bot-
tom line. For example, a 1% decrease in NAST spread decreases net income by 13%, while a decrease in the spread from ~15% to ~10%
(twice Uber Freight’s margin) turns net income negative. Using performance results from last year to project forward results, we estimate
2019 EPS to be $4.31. After the release of 2018 results, we think the Street’s 2019 estimates will align with our research. Applying a 16x
multiple to our 2019 EPS estimate produces a $70 price target.
Key Risks
1. If C.H. is able to increase its spot market exposure in the first half of 2018, profitability could surpass estimates.
2. If C.H. can overcome its historical weakness of passing on price increases, net revenues could be higher than estimates.
3. If C.H. is able to convince a tech player that a partnership would be beneficial for both companies, C.H.’s future prospects could invert.
Page 24
Business Overview:
Harvey Norman (HVN) is an Australian- Key Trading Statistics Company Enterprise Value
based, multi-national “big-box” electronics Current Share Price A$ 3.38 Market Capitalization (A$) A$ 3,776 m
Arthur Brousseau ’19
and furniture retailer: 52-Week Range A$ 3.38 - 4.62 Less: Cash (A$) A$ 151 m
Arthur is a 1st year student • U.S. equivalent would be a hybrid be- EV / EBITDA
Plus: Debt (A$)
6.8 x Plus: Minority Interest (A$)
A$ 852 m
A$ 25 m
at CBS. Previously, he tween Best Buy and Bed Bath & Beyond P/E Ratio 9.4 x Enterprise Value (A$) A$ 4,493 m
worked as an Associate at • HVN operates in both Australia and Dividend Yield 7.7%
B-29 Investments. Arthur Short Interest 8.3%
graduated from Princeton some international markets Cost of Borrow (A$ 50m) 0.0% Market Capitalization ($USD) $ 2,899 m
University in 2012 with an • HVN owns and operates 86 stores in Less: Cash ($USD) $ 116 m
Plus: Debt ($USD) $ 656 m
A.B. in Politics. international markets Target Share Price 2Y A$ 2.19 Plus: Minority Interest ($USD) $ 19 m
• HVN franchises the entire Australian Base Case Return 35.3% Enterprise value ($USD) $ 3,724 m
Recommendation:
We argue that HVN is a fragile business at the top of an economic cycle that is facing structural challenges from in-
creased competition and is run by a management team that avoids transparency and lacks accountability.
Thesis:
Franchisee revenue is unsustainable and some loans advanced to franchisees are likely not recoverable.
Opaque financial reporting does not reflect true economic reality of franchise business.
We’ve identified numerous unprofitable locations that should be closed down. These locations are con-
Greg Doger de Speville, centrated in HVN-owned real estate and closing them will impair the value of HVN’s real estate.
CFA ’19 Intense competition, slower consumer credit, and stagnant housing growth will lead to the weakening of
Greg is a 1st year student the already fragile franchise network.
at CBS. Previously, he
worked as an Investment No sell side analyst report includes the proprietary data we analyzed to assess the underlying health of the franchise
Analyst at IPRO Funds network and the sustainability of the franchise network revenue.
Management. Greg gradu-
ated from the University of
Western Australia with The Fake Franchise Network:
First Class Honors in Eco- By using a franchise model, HVN is able to obscure the true economic value of the core AUS retail business.
nomics. • HVN controls franchisees operationally, but has a legal structure to create the illusion that franchisees are
independent so that HVN does not have to consolidate franchise-level financials.
• The franchise network is opaque and complicated; HVN discloses only the franchisee network sales, the
total number of franchisees, and the total number of stores.
• Consolidation would reveal the true economic value of the franchise network.
Wodonga
Mile End
Maryborough
Coorparoo
Mildura
Gympie
Moore Park
Bendigo
Parkes
Port Kennedy
Taree
Rosebery
Bondi Junction
Lake Haven
North Ryde
Armadale WA
Whyalla
Hamilton
Toowoomba
Bathurst
Mt Gravatt
Young
Rockhampton
Port Lincoln
Oxley
Mandurah
Macgregor
Morayfield
Burleigh Waters
Bunbury
Geelong
Mt Barker
Cannonvale
Peppermint Grove
Moss Vale
Alice Springs
Burnie
Cranbourne
Auburn
Albany
Caringbah
Balgowlah
Wiley Park
Freemantle
Noarlunga
Capalaba
Wangaratta
Chadstone
Mentone
Dalby
Alexandria
Cairns
Fortitude Valley
Innisfail
Melbourne City
Liverpool
Fyshwick
Castle Hill
Bennetts Green
Southland
Ipswich
Greensborough Plaza
Preston
Cleveland
Launceston
Warrnambool
Hoppers Crossing
Munno Para
Broadway
taralgon
Chatswood
Ringwood
Karratha
Hervey Bay
indooroopilly
Belmont
50
$ 4.5 Bn
ters in Philosophy from $ 4.4 Bn 0
Stellenbosch University. 2008 2009 2010 2011 2012 2013 2014 2015 2016
Page 25
• Poor disclosure makes it impossible to track the evolution of this receivable A$ 700 m A$ 700 m
on the balance sheet. Receivable from franchisees (A$942m) was disclosed A$ 600 m A$ 400 m
for the first time in the notes to the FY 2016 annual report. A$ 500 m
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
A$ 100 m
Catalysts:
1. Australian Parliamentary Inquiry: Australian Parliamentary Inquiry into the franchise industry scheduled for Sept 2018. Testimony of
franchisees in this inquiry is privileged; therefore, franchisees have immunity to any other legal contracts.
2. Intense Competition: December 2017 launch of Amazon Australia turned out to be a “soft launch.” Amazon will launch Amazon Prime
in mid-2018. True impact of Amazon on brick-and-mortar retailers will only start to show in 2018. Since December, Amazon has cut pric-
es by 15% in electronics relative to competitors.
3. Consumer Credit & Housing Markets Sour: The already fragile franchisee network will be severely and adversely affected by a macroe-
conomic shock. Increase in failed franchisees from FY 2010 to FY 2011 highlights the fragility of the franchisee network.
4. Increased Scrutiny from Auditors & Regulators: HVN has been the subject of a number of regulatory investigations over last two years.
Increased attention from media and vocal proxy advisors has placed pressure on auditors and will likely lead to more disclosure.
Valuation:
Bear Base Bull A$ 634 m A$ 6 m
A$ 22 m
3-year CAGR
Rent revenue 3-year A$ 36 m
-0.3% -0.3% 4.6%
CAGR A$ 464 m
Bond Information
Recommendation
The DLLTD 8.25% Senior Unsec’d Notes due Outstanding $2.0bn Current Price 89.25
2020 offer attractive total return opportunity for Priority Sr. Unsecured Yield-to-Maturity 13.50%
a short-duration (2.5 years) bond with strong Rating CCC+ / NR Issuer Digicel Group Limited
Jingjing Huang, CFA ’19 liquidity ($2bn issuance). Capital appreciation will
Maturity 9/30/2020 Ticker DLLTD
Jingjing is a 1st year student be driven by 1) continued growth in wireless
Coupon 8.25% Net Leverage 6.4x
at CBS. Previously, she data, business solutions, and cable segments, 2)
worked at J.P. Morgan improvements in cost base and FCF generation, and 3) rapid deleveraging potential from current trough
Asset Management as a EBITDA and peak leverage as operational momentum translates into financial results.
fixed income client portfo-
lio manager in Hong Business Description
Kong. Jingjing will be in- Digicel Group offers telecommunications (wireless, cable, business services), media, and entertainment ser-
terning at Morgan Stanley vices to 14 million subscribers in 32 markets in the Caribbean and Central America. Largest markets include
Investment Management as Haiti (16% of revenues), Jamaica (16%), Papua New Guinea (13%), and Trinidad & Tobago (6%). Over the past
a Sustainable Investing
13 years, Digicel has expanded from 8 markets to 32, while increasing revenue from <$500mm to >$2.5bn
Fellow.
alongside a 10x increase in profitability and subscribers. Digicel’s major markets are generally duopolies; com-
petitors vary by market but include incumbent Cable & Wireless and state-owned operators. n 2014, C&W
acquired Columbus, and under the new leadership of Liberty, has become a more competitive player. Digicel
has responded by increasing investments into complementary services to its core wireless offering, including
cable, media, and business services, to offer triple- and quad-play
TTM Capex / Sales
offerings to improve the value proposition to customers. Digicel 26.0%
is owned privately by billionaire Denis O’Brien. 24.0%
22.0%
Matthew Mann, Digicel is coming off a heavy investment cycle to expand product 14.0%
CFA ’18 offerings into cable and business services alongside wireless ser- 12.0%
10.0%
vice improvements to LTE. The bulk of these investments are
Matthew is a 2nd year now complete and Digicel is reaping the benefits with significant
student at CBS. Previously,
growth in earnings and subscribers; these new product areas Subscriber Growth
he was a Portfolio Manager
at ClearArc Capital, Inc. in now represent 16% of revenue. In the wireless business, in- 16 700
600
Grand Rapids, MI. His creased price competition, declining voice revenues, and lower 15
500
coverage included foreign wholesale revenues are being offset by continued growth in data 14 400
currency and emerging usage (smartphone penetration across Digicel markets is 54%, 13 300
market debt. Matthew will versus 49% a year ago). As a result, earnings grow and FCF turns 12
200
100
be joining Goldman Sachs positive in FY18, excluding the impact of recent hurricanes which 11 0
& Co. LLC. in New York. have had a $15-20mm and $10-15mm impact on revenue and
EBITDA for the full year. Total damages (recoverable from in-
total subs cable RGUs
surance, but with a timing lag) are $60-70mm.
and receipt of insurance and lawsuit payouts; net leverage will decline from Leverage 5.6x 6.1x 6.3x 6.4x 5.8x 5.2x
6.4x currently by ~0.5x each year, reaching 5.2x by the end of FY2020.
12/31/2017
Capital Structure & Covenants
As of: 12/31/2017
share through pricing promotions, though this has now stopped as the com- +Cash
-Secured Debt
195
(1,425)
195
(1,425)
195
(1,425)
Orange
avg
4.8x
7.1x
pany seeks to improve its lagging technology and wireless networks. Still, LTV (%) 20% 15% 12%
irrational pricing pressures remain a risk. Value to Unsec'd 5,076 6,827 8,777
2) Macroeconomic and FX Risks: Many of the markets Digicel operates LTV (%) 55% 43% 35%
in are small with volatile currencies. Hedging mis-matches can result in lower Value to Holdco 2,851 4,602 6,552
translational earnings, and market instability can impact operations (as is -Holdco Debt
LTV (%)
(3,020)
103%
(3,020)
80%
(3,020)
65%
currently the case in Papua New Guinea). Equity Value (169) 1,582 3,532
Page 28
a packaged food industry Tom was a senior manager want to understand how things
analyst and was named in the tax department of work from the ground up.
Chief U.S. Investment KPMG Peat Marwick, While the world was and still
Strategist in 1999. where he worked is replete with rules of thumb
exclusively in the and old wives’ tales, we can
Mr. Mauboussin is the investment services decompose a lot of it.
author of three books, industry .
including The Success For one of my first early
Equation: Untangling Skill Tom is a member of the projects, I remember thinking:
and Luck in Business, CFA Institute and the what do the great investors
Sports, and Investing and is American Institute of do? I built files on Warren
also co-author, with Alfred Certified Public Buffett and Ben Graham and
Michael Rappaport, of Expectations Accountants, and he is on other great investors, just to
Mauboussin Investing: Reading Stock the board of CFA Society study how these folks operate.
Prices for Better Returns. Chicago. He is currently There were some common
Vice Chairman of the CFA threads. They seemed to be
Mr. Mauboussin has been Society Chicago. long-term oriented. They
an adjunct professor of seemed to be focused on cash,
finance at Columbia Tom was an adjunct not accounting numbers. They
Business School since 1993 professor in the Marquette seemed to really value good
and is on the faculty of the University Graduate businesses. Those are the sorts
Heilbrunn Center for School of Business from of things that stood out to me.
Graham and Dodd 2012-2016.
Investing. He earned an Then, in 1987, I had my
A.B. from Georgetown Graham & Doddsville professional epiphany. A guy in
University. (G&D): Can we get started my training program handed
with each of you discussing me a copy of Al Rappaport's
Tom Digenan is the head your background? book, Creating Shareholder
Tom of the US Intrinsic Value Value. It was awesome. There
Digenan, CFA Equity team at UBS Asset Michael Mauboussin (MM): were three things in that book
Management. In this role, I was a liberal arts major in that have remained the
he is responsible for U.S. college so I never studied bedrock of everything I do, and
equities portfolio business. It’s an interesting are things Tom and I have
construction and research. question whether that’s an talked a lot about over the
Prior to this role, Tom had asset or a liability. I came to years. The first was: value is
been a Strategist with the the business world knowing not about accounting numbers,
team since 2001, where he close to nothing. My father it’s about cash. This is a lesson
participated in the analysis made me take principles of that we relearn from time to
and development of U.S. accounting when I was a senior time. The great analysts always
equities portfolios, in college and I got a C+ in the focus on cash.
focusing on alpha class, and only out of the
generation and ensuring generosity of the professor's The second thing was that
client investment heart. competitive strategy and
objectives were met. valuation should be joined at
I started at Drexel Burnham, the hip. It’s interesting, even in
Prior to his role with the which is now defunct but was business school we teach
U.S. Intrinsic Value Equity an amazing place to learn strategy and finance separately.
team, Tom was president about the business. I was in the The strategy professors will
of the firm’s mutual funds training program and was say, “well, you want your
and relationship funds confused for a very long time. I strategy to create value” but
organization. guess I still am confused to they don’t really explain the
some degree, but the virtue of financials. The finance guys say
Prior to joining the UBS being a liberal arts major was “well, it’s good to have a
predecessor organization that I was compelled to go competitive advantage,” but
Brinson Partners in 1993, back to first principles. I always don’t quantify it. As an
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Renjen has been an smartest person on your RR: Yes, exactly. I was
Adjunct Assistant name” and holds each member introduced to Lee Ainslie in
Professor in the Value of his team to a high standard 2011 and we spent a year
Investing Program at of detail with investment write getting to know each other. At
Columbia Business School -ups, financial models and deep that point in my career, my
since 2012 and continues fundamental research. I often thought process focused not
to teach year-round. He is say that Glenview is one of the only on investing but also
also on the Board of best places on Wall Street to leadership and culture.
Trustees of the Excellence train—the analytical rigor is
Community Schools, a tremendous. At Glenview, I I was fortunate to join
charter school observed first-hand how to Maverick Capital in 2012 as a
management organization, manage volatility within a sector head and, over my five
Rishi Renjen and on the liaison concentrated portfolio as well years there, I ran a number of
committee to the DREAM as how to motivate a team sectors—business services,
Charter School and through a challenging period. consumer, and media and
Washington Heights Glenview left a strong mark on telecom. What was critical to
Expeditionary Learning me and my career. my decision is the one-
Schools (WHEELS) as a portfolio approach of
Board Member of the In 2009, I joined TPG-Axon in Maverick, where capital flows
Maverick Capital London as I wanted to truly to the best ideas. I believe
Foundation. understand the global strongly in this investment
component of investing, and approach, and during my time
Graham and Doddsville Dinakar Singh was at the there was asked to join the
(G&D): Can you talk about forefront of that. I spent a Stock Committee and
your background and what led third of my time in Asia Advisory Committee as part of
you to this point of launching covering a range of industries the leadership team at the
your own fund? and dove into investing in India firm.
as that market grew. I had a
Rishi Renjen (RR): I grew up range of experiences in India, Working at Maverick, I was
in the Northeast and had an from visiting IT parks to very cognizant of the legacy I
interest in finance from an assessing land banks while was a part of. Few funds have
early age, which led to my sitting on the board of a built a twenty-five year track
undergraduate path at private real estate company. record at that level across
Wharton and four investment multiple businesses, from
banking internships during my TPG-Axon gave me a deep fundamental investing to
four summers in college. After appreciation for the nuances of venture capital to quant. I have
college I joined Citigroup and global investing as well as for even more appreciation for
then Warburg Pincus, working managing risk, which was a this legacy now that I am
in private equity from 2005 to core component of that firm. starting my own fund, ROAM
2007 which was the peak of Returning to the U.S. as a Global Management. Lee is in a
the buyout boom. Early on, I Partner in 2011, I felt I had league of his own. Sitting next
was taught to take the long made the jump from an analyst to him for five years—my
view in my career, and I covering a single position to an office was right next to his—
consider those first eight years investor driving portfolio-level was one of the most
my foundation in investing decisions – I credit Dinakar for remarkable things to happen in
where I developed critical that. I also began to hone in on my career, not just for
analytical and business skills. my own investing style, which investing but also from a
was rooted in my experiences business and leadership
I spent the next ten years in at Glenview and TPG-Axon perspective.
global, equity long/short but clearly moving in a
investment management. My different direction. G&D: What will you bring to
early days as an analyst at ROAM Global from working
Glenview are still very present G&D: Is that what led you to with three such notable
for me, as Larry Robbins Maverick Capital? investors in your career?
instills in you to be “the
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Page 41
Western Union is a great significant dry G&D: Can you talk about the
example. I was short the stock global aspects of ROAM
for five years and the stock
powder—so even take-
Global?
price hadn’t changed during outs that seemed
that time even as the broader RR: Being truly global is a
market has gone up. It was at inconceivable in the critical way to differentiate.
$18.50 five years ago, and is at Fact-pattern recognition helps
$19.00 today. past may happen.” us find compelling investments.
For example, one of the most
G&D: Isn’t that situation a experience as an investor. I fruitful opportunity sets in my
win? As long as the short was often find that a stock with a career has been connecting
flat, you can fund long high multiple is probably the patterns from developed
investments with that capital, one that has the greatest markets to emerging markets.
correct? continued upside as people are We look for markets
conceptualizing new markets rebounding off cyclical troughs
RR: Yes, and our or growth not apparent in the with accelerating fundamentals,
measurement of success is the near-term cash flows. Tesla is a like in Latin America, or
long/short spread that we great example. Autos investors markets where political
generate. Given the market has assess units sold, track global realignment is complementing
more than doubled over that SAAR trends and apply peak/ economic recovery to create a
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[email protected] Graham & Doddsville Editors 2017-2018
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[email protected] Abheek Bhattacharya ’18