The Rational Cloning: Weekly Ideas #7
Pound the Rock Investing on Thunderbird, Clark Street Value on Consensus Cloud Solutions, Peter Kamin Takes on Psychemedics
Welcome to the 7th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Pound the Rock Investing: Thunderbird Entertainment (TBRD.V / THBRF) (published 9/21/21) (LINK)
Thunderbird Entertainment (THBRF) is one of the more intriguing risk/reward situations I’ve come across in some time, and represents a high quality business with a strong competitive position, phenomenal management team and hidden optionality with the potential for massive upside, trading at a bargain basement price.
The thesis is straightforward; Thunderbird is growing their top line 25%+ with a de-risked business model that is cash generative, and has strong relationships with every major streaming platform during a period of time where demand for content has never been higher.
Furthermore, Thunderbird is at an inflection point within its business model which should have the effect of driving EBITDA growth and margin expansion over the next few years.
Lastly, as a result of their industry position, it would be almost impossible to imagine that this business will not play a large role in the future of content creation over the next few years leading to potential multi-bagger returns for shareholders.
Bull Case: I’ve estimated 30-35% growth in revenues through 2023 along with flat 20% EBITDA margins on the back of 30%+ growth in EBITDA due to COVID related project demand hitting the income statement as well as the continued shift from service work to higher margin owned IP. This would result in the company generating nearly $40mm in EBITDA by 2023, quite significant for a $160mm TEV business.
Base Case: In the more conservative base case scenario, I estimate declining revenue growth rates below 30% as well as flat EBITDA for next year followed by an increase in revenues and EBITDA for FY23 on the back of new show deliveries and again increasing development of owned IP. In this scenario, I have EBITDA margins declining by 15% through 2023, a scenario I view as unlikely. This this scenario with a below market multiple of 11x 2023 EBITDA shares could still be worth greater than 100% of the current price.
Bear Case: My bear case is highlighted by a severe decline in revenue growth rates as well as EBITDA margins on the back of a failed transition to an owned IP mix shift as well as elevated costs weighing on EBITDA margins. Using an incredibly conservative multiple of 8.5x 2023E EBITDA here I still arrive at a share price higher than the current valuation. The bear case assumes a complete deterioration of the business including none of the positive scenarios laid out above playing out. In other words, I believe a lot would have to go wrong for investors to lose money at the current price, indicating the attractive risk/reward here.
(2) Clark Street Value: Consensus Cloud Solutions: Quick Thoughts on Garbage Barge Spin (JCOM) (published 9/22/21) (LINK)
Just to get this out of the way early, I don’t own J2 Global (JCOM) and this spinoff is pretty dicey, but I find the setup pretty fascinating from several angles, more from a case study perspective and want to throw this out there in case others want to share their thoughts as well.
Consensus Cloud Solutions (CCSI) will be spun off from J2 Global in the coming weeks, Consensus is JCOM’s legacy eFax business. It is a high-margin subscription business, one of those that people often forget they even have especially if their employer is paying for it, that allows you to receive faxes in your email.
Over the past decade or so, JCOM has been using the cash flows from eFax to diversify their business by buying a bunch of legacy internet media companies, the parent after the spin will be renamed Ziff Davis (and trade as ZD) which is the old holding company name of PC Magazine.
In one more attempt to extract value from the eFax business, JCOM is effectively selling the company via a spinoff. Their tax basis is too low to just sell it outright for cash, so instead they’re going to encumber Consensus with $800MM in debt, which is about 4x EBITDA. Probably not too different than what they’d be able to sell the business for entirely and possibly more than they’d get after tax. Additionally, they’re retaining just under 20% of the CCSI shares to divest over time, so it’s really economically and strategically a sale from the parent’s perspective. That’s going to leave a levered stub equity in a declining business, the textbook “garbage barge” spinoff.
What makes Consensus different than many other garbage barge spinoffs is while it is a declining business, the business itself has some attractive qualities to it. It’s reasonably sticky (as said earlier, you want to keep your subscription just in case), it is high margin (50+% EBITDA margins) and fairly asset-lite, despite the debt, they’re projecting $100MM of free cash flow to the equity on $200MM in EBITDA.
They plan to de-lever… Could be a great short if management misses guidance early and the market questions the sustainability of their business, but could also work tremendously well if they can steady the business for a few years, de-lever and harvest the cash flows into something with a longer term growth profile. But with the debt, they’ll really need to thread the needle, I’ll probably stay away and just watch as a spectator.
(3) Mispriced Markets: Putting The Shoe On The Other Foot (FL) (published 9/20/21) (LINK)
Foot Locker I believe has a significantly lower valuation at current stock prices than Genesco does and what I think is a better outlook. It is a larger company and more globally diversified. It’s profit margins heading into covid were double that of Genesco’s and it has held up better during the Amazon onslaught of the last 6 years, which perhaps bodes well for its continued resilience going forward.
It is focused on expansion in SE Asia which could be a future growth driver. Over the summer it made two very interesting acquisitions. One is a fast growing non mall-based retailer focused on the Hispanic community and the other is a Japanese based high-end and trend-setting sneaker designer. Both of these acquisitions offer the potential for higher growth and together are anticipated to add about 45 cents to next year’s earnings per share. A minority investment in an online used sneaker reseller that recently secured additional funding at a substantially higher valuation offers another interesting twist on the story.
Foot Locker’s share price has been sliding, along with that of one of its core suppliers, Nike. I believe the recent weakness may be due to news that Nike’s factories in Vietnam are being shut down because of a covid outbreak there. While this could certainly have ramifications in the short term, I don’t believe it affects the intermediate to long-term outlook for either of these companies and may be giving me the opportunity to pick up more shares in a well run leader in the footwear retailing space for a rock bottom price.
Activists / 13Ds / 13Gs
(1) Peter H. Kamin Delivered Letter To Psychemedics Corp’s Board Of Directors (September 23, 2021) (LINK)
For thirty years, the Board has rubber-stamped Mr. Raymond C. Kubacki (“Mr. Kubacki”) as the ideal candidate to manage the affairs of the Company as its Chairman, President and Chief Executive Officer. However, by any measure, the Company has vastly underperformed any minimal expectation of performance and/or profitability under Mr. Kubacki’s leadership. On an inflation adjusted basis, the Company’s revenues are lower and its stock price is less today than when Mr. Kubacki became CEO 30 years ago in 1991. This is wholly unacceptable.
How is it that Mr. Kubacki has remained in the position of ultimate control of the Company, as Chairman, President and CEO, for decades? It’s quite simple – I believe that he has hand-picked his entire Board to ensure his continued reign – the very people who he reports to and who should be holding Mr. Kubacki accountable to meaningful performance standards on behalf of all stockholders…
In addition to failing to oversee Mr. Kubacki, I believe the current Board is vastly overcompensated…
Even more alarming to me than the Board’s failure to govern the Company was its recent decision to downplay an apparent approach from a third party concerning a potential strategic process…
I believe there may be many strategic buyers for Psychemedics and I urge the Board to consider any strategic alternatives that will generate superior returns for stockholders.
Share Repurchases
Lockheed Martin raises dividend by nearly 8%, buybacks by $5 billion
AECOM Board of Directors approves share repurchase authorization increase to $1 billion
Thermo Fisher Scientific Authorizes $3 Billion of Share Repurchases
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