Hey /biz/, I'm a member of a very exclusive investing club, dedicated to finding undervalued companies. As a new year gift, I'm going to tell you about our top 3 value investments. Many people would pay serious money for this information, but I'm giving it to you for free. What you do with it is up to you.
WILLIAMS PARTNERS LP (WPZ)
Williams Partners, LP (WPZ) is an MLP that operates regulated interstate gas pipelines, gas gathering pipelines and processing plants, NGL fractionation plants, and a petrochemical cracker (which consumes ethane and propane to produce ethylene and propylene)
Despite having an irreplaceable asset based built around one of the single most valuable pipelines in North America (Transco which is a regulated gas pipeline connecting the Northeast with the Gulf Coast), WPZ is trading at ~.5x book value, 8x EBITDA (not a tax payer) and carrying a 14%+ dividend yield (that is classified as a return of capital and therefore pays no tax). The stock is down 54% YTD and is trading at multi-year lows…despite EBITDA estimates for 2015 being revised less than 10% over the last year. For perspective, EBITDA is growing 25-30% this year and for the next couple of years.
ADVANCED DRAINAGE SYSTEMS (WMS)
ADS is the largest plastic drainage pipe and fittings manufacturer in the US, with 61 plants, 29 distribution centers, 650 trucks, and 1,100 trailers. 83% of revenue is levered to new construction, primarily commercial construction but also residential and to a much lesser degree, infrastructure. About 13% of revenues are located internationally. The company boasts that it is 10x larger than its nearest competitor in the plastic pipe market, although I don’t really know if that matters much since scale is more about local rather than national presence. I would point you to the company’s website to get a better understanding of their products, but I dunno, they’re pipes and fittings [shrug].
Plastic pipes have been taking share from traditional reinforced concrete pipes as the technology has improved and the strength of the pipes has gotten better. The all-in cost of plastic pipes is slightly higher and carries more liability than reinforced concrete because they need to be buried more delicately since they rely on surrounding soil integrity for strength.
The company was founded in 1968 and has changed private equity hands a number of times over the years. Most recently, American Securities purchased their stake from Berkshire Partners in 2010, although I don’t believe they did remarkably well on the investment (I think they bought in at ~$14/share). ADS had its public offering in July 2014, selling 15.1 million shares at $16, which was down from its targeted range of $17-19/share. American securities sold 8 million of their 27 million shares in the IPO and another 10 million shares at $21.25/share in a secondary last December (slightly troubling that this was done essentially during the time that accounting problems were likely emerging internally). University of Notre Dame’s endowment was also a very long-time shareholder but sold all of its shares shortly after the IPO.
I think ADS is good short because the company is materially overvalued. There are two parts to the bull story that are responsible for the (now fading) strength in the stock. First, plastic pipe made from high-density polyethylene (HDPE) is taking share from traditional reinforced concrete pipe. This is true although it’s a little difficult to estimate the organic growth rate for plastic pipes since this is still a cyclical business. Some of the market share gain by plastic is likely because concrete prices have risen substantially in the last few years (see the chart of US Concrete - yikes). In any event, this part of the story has some merit, if you’re into buying ultimately cyclical companies with very poor returns on capital. Second, people are fixated on the notion that lower polyethylene prices will drop to ADS’s gross profit margin line. I believe this is not the case for two reasons. First, ADS’s gross margin over the last six years has been pretty stable at around 20% (with some short-term fluctuations) despite polyethylene prices bouncing around all over the place. There’s no evidence that rising or falling polyethylene prices help or hurt ADS’s gross margins at all. Second, even though ADS is the largest plastic drainage pipe manufacturer in the US, this is far from a monopoly, and they still compete against a number of other plastic pipe makers as well as reinforced concrete. So to the extent ADS would benefit from lower polyethylene prices at all, it would be very, very short-lived.
Aside from the bull story being fairly questionable, ADS looks plain-old overvalued when doing an honest analysis of its financials. ADS is yet another in an increasingly long line of companies that abuse adjusted EBITDA like a rental car. If a company has a gigantic delta in its adjusted EBITDA vs cash flow, there is probably something strange going on.
HORIZON GLOBAL CORP (HZN)
Horizon Global (HZN) - a market-leading manufacturer of automotive accessories including towing, trailer, and cargo management products – is an orphaned, small cap spin-off trading well below intrinsic value. Thanks in part to indiscriminate forced-selling from legacy holders of its parent company Trimas (TRS), HZN trades at a double-digit FCFE yield (at the midpoint of management’s FY15 guidance), with the potential to more than triple FCF by 2018 in our base case.
This upside will be achieved mostly through straight-forward supply chain optimization and through very strong cash flows allowing HZN to rapidly pay down the debt that they were spun-out with. This debt pay down will bring net debt/TTM EBITDA from 3.6x to 0.6x by 2017 in our base case, or alternatively to management’s 2x target, resulting in available cash to return to shareholders or do accretive M&A, creating a potential 4-bagger for equity holders.
We believe the earnings power potential of this business (once its cost-cutting initiatives are complete) is for EBIT margins in excess of 10%, which is more in-line with peers (and more than double HZN’s 4.6% 2014 EBIT margins excl. special items). We model EBIT margins of 9.3% by 2018 in our base case. Further, HZN’s sizeable aftermarket/replacement and retail businesses help to insulate them from the full vicissitudes of Recreational Vehicle (“RV”) and Truck/SUV production cycles. Numerous low-hanging fruit cost cutting opportunities before HZN will make their go-forward trough margins higher, and further insulate them against any potential cyclical headwinds in their end-markets. Finally, we believe HZN is incorrectly perceived by the investment community as a business akin to that of an auto OEM parts supplier.
HZN, however, has large retail and aftermarket businesses that comprise ~2/3 of its sales and operating profit. This combined with its overall lower capital intensity allows it to convert EBITDA to FCF at ~4x the rate of their OEM supplier peers.
Our base case has HZN generating $2.84 in FCF per share in 2018. Applying a conservative multiple of 12x to that, HZN would trade for $34, nearly 4x its current share price. This equates to an 80%+ IRR.
>Total Debt 19.14B
>Operating Cash Flow 3.19B
>Free Cash Flow -713.38M
This company is a sitting duck. For bankruptcy.
>investing your hard earned savings on troll advice on an anonymous morrocan milkshake board
I really hope that you're trying to meme right now and not serious for your portfolios sake.
It's a capital intensive business. That means taking on large amounts of debt to purchase and maintain assets. Their debt is equivalent to about 70pc of the total equity in the company. That level of debt will require regular interest payments, so the focus on positive cashflow becomes all the more crucial.
Are you quite literally retarded? You invested money because some sekrit knowlij troll thread on 4chan?
Fucking hell. If I had a pound for each time some chucklefuck came to 4chan and made a thread about some secret and exclusive knowledge they had, I could ave bought 4chan.
>implying that the 4chan rules are never violated
If you actually invested 3k because an anonymous user spouted some bullshit with no proof of tgeir expertise then youre definitely too stupid to be trading in the first place