|Shares Out. (in M):||21||P/E||8||7|
|Market Cap (in $M):||207||P/FCF||6||5|
|Net Debt (in $M):||185||EBIT||62||71|
Blue Bird Corporation (“Blue Bird” or the “Company”) was written up here last March by rab. Since that time, the Company has delivered on its fiscal 2015 guidance and generated roughly $45mm in LTM adjusted free cash flow, corresponding to a 20% free cash flow yield to equity (on 24mm fully-diluted shares). Fiscal 2016 free cash flow guidance, which at $30-35mm is modestly more muted due to higher cash taxes and some expansion capex projects, still implies a yield to equity of roughly 15%. The business is trading at roughly 6x 2016 EBITDA and 8x 2016 EPS (consensus). After rising as high as $14/shr in mid-2015, the stock has retreated back to under $10/shr. I believe that it is worth another look. This is a business with a strongly cash generative business model, significant macro wind at its back, and very high returns on its invested capital. Due in large part to a lack of other pure-play comps in the public market, I believe that it is wrongly perceived as an asset-intensive heavy manufacturer. This is not the case. 8x EPS for a well-managed, high return, growing business in the sweet spot of its cycle is too cheap.
Blue Bird is a leading U.S. manufacturer of school buses. The Company has annual output of over 10,000 units, which gives it roughly one third of the total domestic market. The U.S. school bus market is an oligopoly. Blue Bird’s two primary competitors, each of which also control roughly one third of the market, are Thomas (owned by Mercedes-Benz parent Daimler) and IC Bus (owned by Navistar).
Blue Bird’s origins as a bus manufacturer can be traced to 1927, when founder A.L. Luce began producing buses as an adjunct to his automobile dealership business. The Company continued to be controlled by the Luce family through the early 1990s, at which time a control stake was sold to Merrill Lynch Capital Partners (“MLCP”). Blue Bird continued to thrive under MLCP’s ownership, with its U.S. market share peaking at 42%. However, following MLCP’s divestiture of Blue Bird to the U.K.-based Henleys Group in 1999, a variety of market, manufacturing, and financial factors led to significant market share losses and, ultimately, a bankruptcy filing. Cerberus Capital Management (“Cerberus”) took control of Blue Bird through this bankruptcy process in 2006, and subsequently drove significant management and operational changes in the business. These changes led to an impressive turnaround, culminating with the Company’s return to the public markets in early 2015. Today, Cerberus continues to hold a 57% stake in Blue Bird.
Blue Bird is the only one of the three primary U.S. school bus manufacturers that is not vertically integrated. This has important ramifications for Blue Bird’s product competitiveness, as well as its financial model. Daimler and Navistar both have significant heavy truck manufacturing operations, while Blue Bird focuses solely on the design and manufacturing of chassis and cabins that are ideally suited for passenger transportation. As a result, Blue Bird is free to design its bus platforms with safety as an overriding priority. Daimler and Navistar, on the other hand, are forced to base their designs on chassis architecture that has been dual purposed for both passenger bus and heavy truck applications, where load maximization is a primary design driver. Safety is generally the top consideration for the municipalities that purchase school buses, and Blue Bird is consistently ranked by those municipalities as providing the safest vehicles.
A second benefit of Blue Bird’s lack of vertical integration is its drivetrain flexibility. Both Daimler and Navistar have in-house drivetrain operations, while Blue Bird does not. This gives Blue Bird the flexibility to pick and choose from multiple potential drivetrain suppliers and choose best-of-breed alternatives for any given application. In many cases, this provides the Company with a major time-to-market advantage and associated first mover benefit given the long lead times associated with drivetrain development. For example, alternative fuel options have become important to an increasing number of municipalities over the last few years. Blue Bird’s drivetrain sourcing flexibility helped it become first to market for propane buses, and over the last five years it has sold roughly 6x as many propane-powered buses as all of its competitors combined. Propane-powered buses, meanwhile, have been one of the highest growth subsegments of the passenger bus market, disproportionately benefiting Blue Bird. In addition, Blue Bird’s strategy of piggybacking on others’ drivetrain development efforts helps it avoid the R&D expense and heavy fixed asset investment required for in-house drivetrain development and production. This operating model has helped contribute to an annualized return on invested capital in excess of 40% for each of the last few years, an extraordinarily attractive level for a business that the public market currently mistakenly views as a heavy manufacturer.
There is a final advantage of Blue Bird’s sole focus on passenger buses that deserves mention. Daimler and Navistar’s dual-focus on both heavy trucks and passenger buses has led to the development of dealer networks for these competitors that also focus on both classes of vehicles. Over 80% of Blue Bird’s dealer network, on the other hand, focuses exclusively on buses. Dealers with a dual truck/bus focus often prioritize trucks over buses. Blue Bird’s network of dealers, with its more narrow focus, can provide a timelier, higher level of service, ultimately resulting in more satisfied customers.
The school bus industry is fairly cyclical, as the vast majority of school buses are purchased by local municipalities and, as such, are subject to the vagaries of local tax receipts. The collapse of the U.S. residential housing market hit the industry particularly hard. The dual headwinds of declining home values and increasing default rates led to significant reductions in property tax receipts. This reduction, in turn, drove a material decline in municipal capital budgets and, by extension, school bus purchases. Although the steady recovery of the housing market has led to corresponding improvement in demand for school buses, aggregate sales levels are still modestly below their long-term average and nearly 20% below the typical peak level. There is good reason to believe that the next few years may see a return to peak levels of aggregate production. The depressed sales levels of the last few years have led to a national fleet average age of nearly 12 years, versus a long-term average fleet age closer to nine years. Even accounting for a reasonable increase in overall fleet reliability, this dynamic strongly suggests a material level of pent-up demand that should help drive strong sales growth for a number of years to come.
Blue Bird shares currently trade for roughly 8x 2016 EPS and a modestly cheaper multiple of free cash flow. This is an unusually attractive level for a business with multiple demand tailwinds, 40%+ returns on invested capital, excellent cash generation, a strong management team, and a motivated control shareholder. Part of the disconnect between Blue Bird’s current trading levels and a realistic assessment of intrinsic value is its status as the only pure-play North American school bus manufacturer in the public markets. Many investors mistakenly assume that any heavy vehicle manufacturer must necessarily be an asset-intensive, low multiple business. Although Blue Bird’s implicit returns belie this assumption, it has been public for less than a year so the reality of its highly attractive economic model is not widely understood. Continued strong financial performance and incremental investor relations efforts should ultimately help further propagate the Company’s story, leading to multiple expansion and strong stock price performance.
* Market recognition that BLBD is not an asset-heavy manufacturing business, but has a high-implicit-return outsourced model; associated multiple expansion
* Continued, measured growth as aging national school bus infrastructure is renewed
* Continued improvement in US housing market strengthens local finances (i.e. property tax receipts), boosting upgrade cycle
* Continued focus on alternative fuel vehicles disproportionately benefits BLBD
* Sale of business
|Entry||01/25/2016 07:42 PM|
thanks for this. it adds a lot to previous writeups. some questons:
1) why do you say FD sharecount is 24m? I thought basic shares out were 20.88M and there were warrants that if excercised would add 5.75M shares, bringing FD shares to ~26.6M.
2) on the comment thread for HCAC, MSG257 made some comments from his due diligence on the company back in 2006. These led me to wonder if the business model used to be more vertically integrated back then. Thoughts?
|Entry||01/26/2016 07:31 AM|
Sorry for the confusion on share count. There are a number of moving pieces (primary shrs, warrants, convert). In addition, consensus numbers have some adjustments for a reasonably material minority interest add-back as well as exclusion of share-based comp. Everybody has their own conventions on how to treat these items, so I'll lay out some basics and you can do what you want with them.
2016 guide = $72-75mm adj EBITDA; this includes add back of roughly $2mm in shr-based comp + roughly $3mm of equity in affiliate, net of tax; note that this compares to $74mm consensus; I am using an adj EBITDA of $71mm (i.e. assumes the $2mm of shr-based comp is a real expense) and a GAAP EBITDA of $68mm (i.e. $3mm of equity in affiliate is below the line)
My reconciliation of EBITDA to NI: $68mm EBITDA - $9mm D&A = $59mm EBIT - $11mm int expense = $48mm pre-tax, 37% tax rate yields $30mm NI pre-equity interest + $3mm equity interest = $33mm net income (reported)
21.2mm primary shares
5.75mm warrants w/$11.50 strike
$50mm convert @ 7.625% and $11.75 strike (4.3mm converted shrs)
I use treasury stock method on the warrants. At my target price (lets say $20/shr) this yields about 2mm shrs of dilution (from the warrants). Thus, my 24mm shr count was assuming 21.2mm primary + 2mm dilution + a little extra for conservatism = 24mm shrs. I did not assume conversion of the convert for purposes of my current FCF yield since i) company guide on FCF assumes paying interest on the convert (i.e. it has not converted), ii) on a "current" basis it has not converted. I understand that some may want to treat this differently, i.e. on a PF/as-converted basis. In any case, numbers don't move around so much.
Example with everything converted:
shrs = 21.2 primary + 5.75mm warrants + 4.3mm from convert = 31.3mm
EV = 31.3 x $9.76 = $305mm + $188.3mm debt 12/31 - $52.9mm cash 12/31 - $66mm cash from warrant conversion = $375mm EV; @ $71mm adj EBITDA = 5x
Net income (detailed above...assumes conversion) = $33mm w/31.3mm shrs = $1.05/shr; @ $9.76/shr = 9x; using treas stock method FD shrs assuming conversion = 28mm yielding $1.18/shr EPS = 8x
Example w/convert as debt:
shrs = 21.2 primary + 5.75mm warrants = 27mm
EV = 27 x $9.76 = $264mm + $188.3mm debt 12/31 + $50mm convert - $52.9mm cash 12/31 - $66mm cash from warrant conversion = $383mm EV; @ $71mm adj EBITDA = 5x
Net income (detailed above...assumes conversion) = $30.5mm (b/c addl $2.5mm in after-tax interest expense from convert) w/27mm shrs = $1.13/shr; @ $9.76/shr = 9x; using treas stock method FD shrs assuming conversion = 23.5mm yielding $1.30/shr EPS = 8x
So, bottom line (from my perspective) is that it's cheap and the nums (multiples) don't move around materially even varying assumptions regarding dilution.
With respect to past vertical integration, the quick answer is that I don't know definitively. However, I think it's a good bet. The ownership structure was a little bit more nuanced than I referenced in the original writeup. Prior to the bankruptcy and control shift to Cerberus, BLBD was owned by the UK-based Henleys Group (as referenced in original writeup). They were a fairly large European bus manufacturer. A large minority interest at this time, however, was also owned by Volvo Group. Volvo obviously has large truck manufacturing operations, so I would guess part of their ownership strategy was to drive component volume through the Henley/Blue Bird operations. There was actually a fair amount of speculation at the time of the Henley blow-up that Volvo would attempt to fully take over Blue Bird, but this didn't happen.
To your point/reference about cost competitiveness, there is some validity. Blue Bird is NOT the cost leader. As a result, they are willing to walk away from the very large contracts that are based primarily on price. This is a risk to the extent the other competitors go on a market share binge. This has not been the case in recent years, and the oligopoly structure should imbue the industry with a measure of rationality, but it is a possibilty.
Blue Bird routinely puts the following slide in their presentations, which addresses cost competitiveness (as well as other purchase decision drivers):
|Entry||01/26/2016 11:29 AM|
Any idea why the backlog is down YOY from 1554 to 1069 (units)?
|Entry||01/26/2016 11:56 AM|
Other than 10-K disclosure of "lower dealer sales backlog", I don't have additional color. Not trying to be glib here, but there are a few reasons that I don't pay much attention to backlog. First off, majority of company's buses are built-to-order since many/most municipalities want very specific chassis/powertrain/options configurations. As such, buses being built for dealer inventory are only very loosely correlated w/overall demand. Second reason is that business is highly seasonal, with about 60% of sales in the back half of the fiscal year (Jun and Sep Qs, corresponding to the Qs just prior to and concurrent w/start of new school year). So, backlog at fiscal year end (that which is disclosed in 10-K) is effectively a look at ST demand heading into the seasonally weakest quarter of the fiscal year. On 4Q call mgmt guided towards even higher than normal seasonality for fiscal 2016; this likely is reflected in those weaker backog nums that you are seeing. All that said, I probably should have pointed out the expected higher-than-normal seasonality projected for 2016 as a risk factor.
|Subject||Re: Re: backlog|
|Entry||01/26/2016 02:16 PM|
Makes sense. Thanks.
|Subject||Why does this opportunity exist? / Cap Allocation / Sponsor & Exit|
|Entry||02/10/2016 02:07 AM|
ZZZ007, thank you for the write up. Would you mind touching on these few issues?
1. Why does this opportunity exit in your view (other than small cap)?
2. What's the Co is doing with the free cash flow?
3. Debt: any concerns there?
4. Exit: I believe Fortress PE fund owns a big stake. What's the exit strategy for them? Sale to a strategic or another PE shop (you list a sale as a potential catalyst)?
I would assume that BLBD is in harvest mode from Fortress perspective. Do you have more color on this?
5. Industry data.
You refer to some interesting industry data points re: numbers of buses sold and long-term trends / averages. Would you mind pointing out to primary sources (would love to read more on this)?
|Subject||Re: Why does this opportunity exist? / Cap Allocation / Sponsor & Exit|
|Entry||02/10/2016 06:51 AM|
1. I believe the opportunity exists as a result of limited liquidity (difficult to build meaningful position for most funds), lack of public comparables and associated misunderstand as to limited capital intensity (and associated attractive ROICs) of business, and leverage (and associated sustainability in a downturn)
2. Company will use free cash for next couple of years primarily to delever; have talked previously about a $100mm gross debt target; possibility of some investment for establishment/purchase of foreign JVs; further out likely to consider return-of-capital options (repurchase, dividend)
3. Yes, Company is levered. Everybody has their own pressure points in this regard. With demand tailwinds (favorable property tax trends) I am comfortable. Currently covering @ roughly 4x. They also have $40mm+ in pension obligation liability.
4. Not Fortress, Cerberus. They currently own >55%. They have done well on the investment...have pulled a couple hundred million out through combination of dividend recap and monetizing roughly $100mm through the SPAC transaction. They've already been involved for longer than is "typical" for them, but Cerberus is one of the most flexible of all the PE firms w/respect to holding periods. Allegedly, a number of folks inside Cerberus really like the business which is why they decided to retain a major stake through the SPAC transaction. Their interest is both an overhang and an opportunity. Their stake limits liquidity and ensures continued concern over when/if they become a seller. On the other hand, the limited liquidity also may drive them to be the catalayst when it comes to monetizing the entire company for the benefit of all shareholders. This is all speculation...Cerberus plays it pretty close to the vest.
5. Best source for primary data is RL Polk industry registration stats. Check out some of the Company's IR presentations...they are pretty good about disclosing both this data, as well as other relevant primary drivers.
As an aside, stock sold off modestly on 1Q earnings yesterday. As announced during 4Q earnings call, seasonality this year expected to be more pronounced than has been typical in recent years, so 1Q was down Y2Y. 1Q is the seasonally weakest Q. Quoting activity is very strong (+80% Y2Y in last 4 months) and win rates are up as well. +4-6% volume guidance for year confirmed by mgmt.
Hope that helps.
|Subject||Re: Re: Why does this opportunity exist? / Cap Allocation / Sponsor & Exit|
|Entry||02/10/2016 11:57 AM|
zzz, thank you for a detailed response. Much appreciate it.
And sorry about Cerberus (not Fortress). Thx for pointing that out.
|Subject||Re: Re: Re: Why does this opportunity exist? / Cap Allocation / Sponsor & Exit|
|Entry||02/10/2016 12:06 PM|
At this point, no. They have delivered to-date so I am giving them the benefit of the doubt. They had clearly signaled on the 4Q earnings call that they expected increased seasonality this year vs. what they have seen the last few years and the Y2Y decline in 1Q units sold actually had a materially favorable delta (-23%) to the Y2Y decline in fiscal year-end backlog (-31%) disclosed in the 10-K. That said, it does appear to me that seasonality is more pronounced than even they were expecting, given that on the 4Q call they had guided to a flat first half and they're now guiding to a down 4-6% first half. I would probably be more concerned with the hope-and-prayer-for-a-strong-back-half if it wasn't for the disclosed metrics on quoting activity and win rates. On 4Q call they said that quoting activity was +50% fiscal YTD. On yesterday's call they said that it was +86% YTD, and that win rates had improved. This is a pretty big deal from my perspective. It doesn't guarantee anything with respect to results for any given quarter, given that the quote-to-build-to-sale process can be 9 mos+, but it should be a strong indicator of future demand.
I'm not as concerned as you with the leverage vis-a-vis the seasonality of the business. They have $45mm of availability and the weakest quarter is now in the rearview mirror. I do, however, certainly remain cognizant of the leverage in conjunction with the potential cyclicality of the business. If I didn't have a reasonably bullish view on housing (and, by extension, property tax receipts) in combination with a more sanguine view of the overall US macroeconomy than the broader market seems to have right now, I wouldn't like the name as much.
Hope that helps,
|Entry||02/10/2016 03:41 PM|
would you mind sharing your math on how you get to 6x EV/EBITDA and 8x P/E? I am a bit lost here and I think numbers would depend on including pensions and what EBITDA you use for 2016.
BTW, did the Co say that it would increase CapEx?
|Entry||02/10/2016 04:01 PM|
Take a look at comment #3 in the thread for my math. There are a lot of moving pieces due to the warrants + convert, and everybody likes to treat these differently (i.e. as converted or not...FD shr count at current mkt price vs. target price).
I am not explicitly adding the pension liability into my EV as charges for the underfunding should already be flowing through the income statement.
If you have additional questions after looking at comment #3 let me know and I will be happy to answer them.
|Subject||Re: Re: Multiples|
|Entry||02/11/2016 01:12 AM|
Thank you, zzz. I actaully read the entire thread last night and then asked this question :(((( Thx for answering.
|Subject||Re: Re: Re: Multiples|
|Entry||02/11/2016 06:50 AM|
Ares...guess I'm still not sure from your reply whether you want additional clarification or not. If so, please let me know what (explicitly) you're looking for on the multiples calculation that isn't included below. Multiples have dropped a bit vs. response #3 given a stock price of $9 instead of $9.76.
Forgot to answer the capex question. The Company has not given explicit guidance on fiscal 2016 capex, however, they did bridge the difference between 2015 FCF and 2016 FCF (decline of $10-15mm) by calling out increased expansion capex and higher cash taxes. So, I would assume that capex will rise moderately from levels booked in fiscal 2015.
|Subject||Re: Re: Re: Re: Multiples|
|Entry||02/11/2016 12:39 PM|
zzz, you have answered everything very well. My previous post was criticism of myself :) thx again!
|Entry||05/24/2016 11:24 AM|
2Q modestly shy of consensus w/respect to P&L; as telegraphed last Q seasonality is becoming more pronounced. 3Q and 4Q have always been the big money quarters for BLBD, and this back-half weighting appears to be increasing. Mgmt had provided guidance (on the 1Q call) for 1st half volumes, and it fell short of the implied 2Q volumes. 150 completed units were sitting in inventory at quarter-end awaiting customer approval. Had approval been received by quarter-end these units would have been in the P&L and 1H volume guidance would have been met (albeit at the low end).
Typically, I'm skeptical of "just wait until the back half" narratives, but all BLBD builds are for firm orders given the highly customized nature of school buses to meet requirements of various municipalities. Thus, they have very good visibility into the manufacturing pipeline. Company expects 20% Y2Y volume growth in 3Q. Backing out the aforementioned 150 units in inventory, Y2Y growth for 3Q would still be a very robust 15%.
Quoting activity remains robust w/YTD activity +50%. Propane bus sales are doing great, and Company is releasing the only Type C gasoline-powered bus on the market in 4Q. Interest is reportedly very strong for the gasoline option.
Mgmt reiterated full-year guidance. Free cash flow guidance for the year is $30-35mm. 2Q free cash flow was strong. Assuming conversion of the preferred and using treasury stock method for the warrants, this implies roughly $1.15/shr, so stock is trading at 11-12% FCF yield. This continues to be a great stealth play on housing. With ROICs >40% and a single digit cash earnings multiple I really like the setup.
|Subject||Re: 2Q results|
|Entry||05/31/2016 11:08 AM|
Any thoughts on the Cerberus exit? Thanks.
|Subject||Re: Re: 2Q results|
|Entry||05/31/2016 11:48 AM|
I view it as a mild positive, primarily because it removed the overhang. My sense is that there was definitely ongoing concern regarding when and how Cerberus would exit.
I'm neutral on swapping out Cerberus for American Securities. On the one hand, I never like to see an anchor investor leaving an investment, and Cerberus has a solid long-term track record. On the other hand, this investment was clearly closer to Cerberus' core focus when it was a bankruptcy/distressed investment, and had gotten further afield from that core as the situation became stabilized. They had owned it for 10 years, so it was getting somewhat long in the tooth although I do believe that Cerberus has more flexilibility in its capital base (to hold LT investments) than many other PE funds. American Securities is more growth-oriented, so maybe we see some modest new initiatives in that regard. My understanding is that their funding base is also longer-term in nature than many PE firms so overhang concerns should be removed pretty well completely.
It's also somewhat reassuring to know that somebody got in there, scrubbed the books, and felt good about the next few years for this business.
|Entry||07/21/2016 08:52 AM|
American Securities, purchaser of Cerberus' stake, now offering to buy remainder of company for $12.80-$13.10/shr. Proposed takeout price is based solely on premium to trailing VWAP prices (over various time periods) as opposed to any reasonable assesment of intrinsic value. Price seems low to me, as it presumably must to American Securities given that they want to own the entire business here.
|Subject||Re: Re: Proposed takeout|
|Entry||07/23/2016 06:55 AM|
I think a lot of it just comes down to the internal machinations of PE firms. Cerberus has a more flexible funding structure than a "traditional" (money raise for specific fund → fixed fund life → return of capital to LPs) PE firm, but that doesn't mean that they don't have constraints, even if those constraints are less rigid than is standard. Blue Bird was getting long in the tooth, even for Cerberus, and it had clearly transitioned away from their core distressed focus. American Securities may have more of a growthy focus than Cerberus, and their internal buy/sell valuation hurdles may differ as a result.
With respect to American Securities desire to own this outright, I'm assuming that they would simply prefer to have complete control so that they can work their master plan out of both the public spotlight, and without having to worry about selling non-affiliated board members on whatever that plan might be. They may have an aggressive plan for expansion (international, for instance) that represents a material departure from the rescue + stabilize mentality of the last 10 years, and may feel that existing non-affiliated board members would balk at that plan, or that the public markets don't want to have to digest a period of investment and the associated earnings impact that would have. Or, to be a real skeptic, maybe they want the ability to mark the investment value quarter-to-quarter wherever they see fit.
Theoretically, what they are willing to pay for the remaining piece is independent of what they paid for the Cerberus stake. Maybe they think this thing is worth $25 a share in three years under their plan, they can't believe their good fortune at the amazing bargain they got for the control stake, and they still have room to move on the price. Realistically, we both know that in practice they assuredly have a mental reference point on the price they paid for the control stake and don't want to go too far north of that for the remainder. They most certainly have some room to move off the price they laid out in the 13D. Can't imagine they would put their final offer out there on the first go-round. I had an internal target price on this around $17, but have been lightening up into the rally and will likely continue doing so if it creeps up further.
|Subject||Re: Re: Re: Re: Proposed takeout|
|Entry||07/24/2016 07:17 AM|
Ray, thank you. To give credit where it's due, I owe thanks to rab who brought this one to my attention in the first place.
|Subject||Re: Re: Re: Re: Re: Proposed takeout|
|Entry||08/02/2016 12:35 PM|
Would you have any view on the valuation articulated by Spitfire in its 13D/A this morning?
|Subject||Re: Re: Re: Re: Re: Re: Proposed takeout|
|Entry||08/02/2016 01:22 PM|
Spitfire is above me, but if you believe that management can get to a 10% EBITDA margin then their numbers are arguably reasonable. Management has in the past guided to a 3-5 year 10% EBITDA margin goal.
For modeling purposes in the out years, I am using an 8.5% EBITDA margin target. You could argue that my margin is more conservative, or alternately that I am using more of a mid-cycle margin. I like the setup (i.e. tailwinds) for this business currently, but it is hard to argue that it is not inherently cyclical. Everybody has their own approach to how to value cyclicals, i.e. using either a mid-cycle margin, a more conservative multiple, etc.
I focus on equity multiples as opposed to EBITDA multiples, the rationale being that since I am not in a position to impact the capital structure (like a PE investor), I have to take the cap structure as given. On my numbers, Spitfire's base case $24 target is about 14x 2018 cash earnings. That seems modestly aggressive to me, but others might disagree.
The only other caveat I would make to Spitfire's approach is that it appears (based on their projected 2018 debt levels) that virtually all FCF is going to pay down debt for the next couple of years in their model. So, I would argue that since no free cash is flowing to equity you need to discount their target values by a year or two. Here again, others may differ.
Net-net I come out in the high teens ($18-19/shr).
All that said, I am happy that Spitfire is doing the heavy lifting here. I am content to be a lazy remora.
|Subject||PE pulls bid|
|Entry||09/20/2016 12:08 PM|
At what point does this get interesting?
|Subject||Re: PE pulls bid|
|Entry||09/20/2016 12:22 PM|
From a valn standpoint I think it's interesting here. Stock has traded down to just above the high point of the offer, so you have a theoretical floor. On an absolute basis, I think it's reasonably cheap here at about 10x forward. Attractive multiple for a high return, cash generative business.
On a trading basis, not really sure how long it takes to wash out here. I assume there were some folks in here for a bump on the takeout price.
|Subject||Re: Re: PE pulls bid|
|Entry||09/20/2016 12:31 PM|
Thanks. Kind of a weird line taken by the PE firm. Are they contractually allowed to repurchase shares in the open market per the standstill? On my read of the agreement, I know they are not allowed to formally launch a hostile tender (i.e., the PE must consummate a friendly deal with the board).
|Subject||Re: Re: Re: PE pulls bid|
|Entry||09/20/2016 01:03 PM|
Yes, but they cannot go above 90%. I believe they can purchase in the open market, and I wouldn't be surprised if that was actually the tactic here. American knows that the special committee thinks the value is much higher, and they know a meaningful minority holder believes the fair value is higher. It was going to be hard to get the majority of the minority vote as it was. Why not remove the floor on the stock by removing the bid, create some liquidity, buy the weak hands in the open market, and then come back and pay the premium that you knew you were going to have to pay anyway? Your aggregate dollars go down. A few takeaways, in my opinion:
1) I actually think the special committee helped us here. They rejected the deal on 9/1, and said they'd negotiate. In their letter yesterday, American noted this negotiation...had they been unwilling to move at all, it seems much more likely they would have pulled the offer right away. It seems like the bid/ask was just too wide. What we don't know is if that is because American went to $14 and the special committee was at $18, or if American went to $18 and the special committee was at $25. Different implications I think...but, it is nice to see the special committee didn't budge and they protected value.
2) This sort of makes sense to me. American is a financial buyer. I don't actually believe they think fair value is $13.10, rather, that's the price they were willing to pay (and probably higher based on point number 1) that still gets them an attractive IRR over time. If we believe the stock is worth $19 - $24 and we are also financial buyers, it seems unrealistic to think American would be a buyer when we'd be sellers. I do not believe they are the most likely to buy this company, if it is sold at all.
3) The company has deleveraged significantly and continues to generate cash. I expect value to go up over time, not down.
4) Interestingly, in its letter, American said they would be opportunistic buyers OR SELLERS in the public market or in privately negotiated transactions. Hypothetically speaking, if American is not a buyer above $13.10, but somebody else offers $20, would they be sellers? I think the answer is yes. As it currently stands, nobody won. American clearly wanted to buy the company and shareholders probably wanted to sell, just not at a low-ball price.
If I had to guess, I'd say American comes back at some point, though it is tough to know. Or, the Company could just run a process also and see if there's a different buyer. At the end of the day, the stock is cheap on almost any metric and it doesn't have material leverage. Good things usually happen.
|Subject||Re: Re: PE pulls bid|
|Entry||09/20/2016 01:06 PM|
I agree. On my numbers, on a fully diluted basis at the current price of $13.87 (as of this message), I have the stock at just 7.6x EBITDA-CapEx for a business that requires very little capital to grow, has meaningfully delevered, generates tons of cash, and is still growing. FWIW, the comps trade at more like 11x EBITDA-CapEx. If you used 11x you'd get a price of more like $21 today, assuming a FY 2017 (10/1/16 - 9/30/17) EBITDA-CapEx figure of about 62.3mm and today's net debt. Note, my EBITDA-CapEx dings them for stock comp, and I back out equity income also and instead treat the equity investments as a $43mm value (roughly 14x LTM).
|Subject||Re: Re: Re: PE pulls bid|
|Entry||09/20/2016 01:10 PM|
I believe they can be active in the open market. Their letter filed w/the 13D filing states that they may "from time to time in the future, purchase or sell additional shares of equity of the Company at prices it believes are advantageous in the open market or in privately negotiated transactions."
|Subject||Re: Re: Re: Re: PE pulls bid|
|Entry||09/20/2016 02:13 PM|
I thought that the letter attached to the 13D was positive/instructive to the extent that it implied that the BOD and American Securities were far apart on their assesment of intrinsic value. Provides some support for your rough $20 target over time.
|Subject||Re: Re: Re: Re: Re: PE pulls bid|
|Entry||09/20/2016 04:09 PM|
Out of curiousity, what do you think is fair value and how do you get there? Also, any view on whether or not there would be a strategic buyer here that makes sense? Thanks
|Subject||Re: Re: Re: Re: Re: Re: PE pulls bid|
|Entry||09/20/2016 04:49 PM|
I'm close to $20/shr. It's DCF-based. I have them growing top line in the near-to-mid term at 5%, then trailing down to a more sustainable 3.5% further out. The rationale is that in the near-to-mid term they still have the tailwinds of rising local tax receipts (as a function of rising local RE values), and a national fleet that's old by historical standards. Growth assumptions don't really give them any benefit for share gains, which could be conservative given their leading position in propane. I have about 100bp of margin expansion over the coming few years, primarily driven by operating leverage. As a result, EPS (fully-diluted for the convert) rises from $1.30/shr to close to $2/shr a few years from now.
DCFs are, of course, generally not worth much since they're so easy to manipulate in both directions. That's why I take comfort in the fact that this is a very capital efficient business now trading at roughly 10x coming year EPS/FCF, in an industry with reasonable demand tailwinds.
W/respect to strategic buyer, I find it unlikely given that American Securities just put their position in place. I supposed that if somebody came in today and made a knockout bid they'd accept it, but not sure that's likely. Part of BLBD's competitive advantage is its drivetrain agnosticism, so I don't see a drivetrain/engine/OEM manufacturer coming in to buy them.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: PE pulls bid|
|Entry||09/20/2016 09:42 PM|
Not to hijack the thread...but...well...here goes anyway (for the record, I thought zzz007 had/has a great idea. No disrepect meant at all):
I actually think this is pretty reasonable. Key assumptions:
Long story short, I agree with zzz007. This thing is cheap in my opinion. Of course, a DCF can be completely garbage, so do your own research, etc. But, this is also trading at 10x FCF... Would love feedback/commentary if anybody strongly disagrees with this.
|Subject||Re: Author Exit Recommendation|
|Entry||12/07/2016 01:38 PM|
Still own a bit, but closing out for VIC purposes.
|Subject||Re: Re: Author Exit Recommendation|
|Entry||12/07/2016 08:12 PM|
What do you mean when you say you are closing out for VIC purposes? Do you fair value is $16-17/share? I don't understand the urgency to take gains when the cycle has plenty of room to run.
|Subject||Re: Re: Re: Author Exit Recommendation|
|Entry||12/08/2016 06:32 AM|
I think fair value is in the high teens. It is not far from there. I agree that the cycle has room to run; however, as a cyclical I am hesitant to bank on the market putting a big multiple on peak earnings.
On VIC, a position is either "open" or "closed". I was more excited about the risk/reward at sub-$10 (where I posted), than where it is today. I still have a position, but it is materially smaller than where it was when I initiated.