The Rational Cloning: Weekly Ideas #44
Old West and Alluvial Capital Q2 2022 Letters, Tweets That Make You Go… Hmm 🤔
Welcome to the 44th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Old West Investment Management Q2 2022 Letter
Based in Bethesda, Maryland, Lockheed Martin Corp LMT 0.00%↑ is an American aerospace arms, defense, information security and technology company. LMT employs 115,000 people worldwide, including 60,000 engineers and scientists. LMT is the world’s largest defense contractor. They manufacture the F-16, F-22 and F-35 fighter jets, Sikorsky Black Hawk helicopters, Skunk Works technology, Javelin, Himars, and Tomahawk missile systems and much more.
When evaluating a potential investment, we spend a lot of time analyzing financials and doing intense valuation analysis. Something that sets us apart from other money managers is our focus on the people running the company, and especially the CEO. We want to be sure our financial interests are properly aligned with management, and we look for true leadership capabilities and a history of allocating capital in a shareholder friendly manner.
I was surprised Jim Taiclet applied for the LMT CEO job in 2020. Over the years, we were invested in American Tower (AMT), the owner of cell towers, and the stock was a tremendous performer. During Taiclet’s 17 years as CEO of AMT, revenue grew from $675 million to $8 billion. Net income grew from a loss of $1.1 billion to gain of 1.8 billion, and the share price from $10 per share to $260 per share.
LMT had been very ably run by Marilyn Hewson from 2013 to 2020, and Taiclet had been serving as a board member during that time. Taiclet accumulated significant wealth as AMT CEO. I’m assuming it was the challenge of running the world’s largest defense contractor that made him throw his hat in the ring. Another reason might have been his admiration for LMT as he graduated from the U.S. Air Force Academy and served as an aircraft Commander. He flew multiple missions in a Lockheed C-141 jet during Operation Desert Storm. Taiclet was 60 years old when he became LMT CEO, so it sets up as the perfect way to play out his career. Keeping in mind he has been CEO for only two years, Taiclet owns $21 million of LMT stock. His compensation is heavily stock based where he accumulates an additional $15 million of stock per year as opposed to annual cash compensation of $1.7 million.
We bought LMT shares in 2020 for $350 per share, and the stock is trading at $414 today. Revenue has been growing at 9% per year and net income growing at 12% per year. The stock is selling at 13 times earnings and has a 2.6% dividend yield. The company is expected to generate $6.7 billion in free cash flow this year, which gives it a 5.8% free cash flow yield.
Generating that much free cash flow allowed the company to buy back $4 billion in stock last year, and the dividend has been growing at 12% per year for the past ten years. LMT also has a fortress balance sheet with $9.1 billion of net debt which is only 0.9 times EBITDA.
Another exciting aspect of LMT’s business is their activity in space exploration and tourism. In 2022 their space systems generated over $11 billion in revenue and over $1 billion in profit. LMT’s status as a trusted supplier to the Pentagon and NASA are likely to keep it as a preferred contractor in the future. LMT is currently the prime contactor on NASA’s Orion spacecraft, which is designed for long-duration human deep space exploration. The Orion craft is also the command and control deck for Mars Base Camp. The concept is to transport astronauts from earth, via the moon, to a Mars orbiting science laboratory and confirm the ideal place to land humans on the Martian surface in the 2030’s.
(2) Alluvial Capital Q2 2022 Letter
P10 Inc. [PX 0.00%↑]
In June, I attended the P10 shareholder meeting in Dallas. Co-CEO Robert Alpert presided and did a fine job providing an overview of the company’s initiatives and fielding questions from the handful of investors in attendance. I asked if P10 were considering how to add permanent capital vehicles to its assets under management, and the answer was an enthusiastic “Yes.” So I was pleased to see the company announce a large indirect investment in Crossroads Impact Corp. Crossroads will serve as a growing source of permanent capital for P10’s impact investing platform, Enhanced Capital. The upshot is additional high-margin, recurring revenue for P10.
P10 has traded down this year in sympathy with other alternative asset managers. However, the firm continues to grow its base of contractually guaranteed fee revenue. A murkier economic outlook makes fund-raising more challenging, but it will not permanently dampen P10’s prospects. Shares are worth at least $18 (50% upside from here) and more if the company can execute on acquisition opportunities.
Unidata S.p.A. [$UD.MI]
If there is a bull market to be found, it may be in grim headlines from Europe. Energy woes. A looming recession. Resigning premieres. It comes as no surprise that investors have done an about face on several of our European holdings despite dirt cheap valuations and long-term industry tailwinds. But a continental recession, even a deep one, will not bring the expansion of broadband internet in Italy to a halt. Unidata keeps on hustling to build out its network, and the customer list keeps growing. Most recently, Unidata announced a joint venture with an infrastructure fund to codevelop and manage one of Italy’s first energy efficient data centers. Creative moves like this will enable Unidata to roughly double its cash flow by 2025. I expect shares to reach €100 well before then.
Garrett Motion Preferreds [GTXAP 0.00%↑]
Garrett Motion is an exercise in patience. Just as it seemed the global automotive market was about to recover to pre-COVID production, along came Russia, inflation, and the threat of recession. Still, the company is making great strides in improving and simplifying its balance sheet. In June, the company redeemed the rest of the Series B preferred shares it issued to Honeywell when it exited bankruptcy in 2021. With the Series Bs out of the way, Garrett Motion is free to dedicate its cash flow to continued deleveraging or share buybacks. At some point in the next year or two, the conditions will be met for Garrett Motion to convert these preferreds and simplify their capital structure. If the market stubbornly refuses to value Garrett Motion shares at a reasonable price, I believe the company will pursue a sale or merger. Until then, our preferred shares will continue to accrue dividends at an attractive yield. The preferreds are worth at least $15 today, and possibly $20 or more if the company can reduce leverage and/or buy back shares and the automotive market recovers.
TIM S.A. [TIMB 0.00%↑]
Poor TIM. Despite continued excellent results, shares have been trashed as the Polish construction market slows. The market now values TIM at just 4x my estimate of operating income as of June 30. Citing poor market conditions, the company announced it would delay the planned IPO of its e-commerce logistics company 3PL. TIM has gone from “very cheap” to “wildly cheap” this year. The market is too focused on near-term headwinds in TIM’s electronic components distribution business and is missing the continued growth and huge market opportunity at 3PL. Management apparently agrees and has announced a repurchase plan covering 14% of TIM’s shares outstanding. With Polish investors as morose as they have been in years, it could take time for TIM shares to rebound. But the market cannot ignore TIM’s profitability and growth forever.
Copper Property CTL Pass Through Trust [$CPPTL]
We have a new holding in Copper Property Pass Through Trust. That’s a bit of a mouthful, so we’ll call it “CPT.” CPT is a highly attractive liquidation opportunity. CPT was created out of the JC Penney bankruptcy to own a variety of JC Penney’s store properties and distribution centers. CPT is a liquidating trust tasked with selling off all 146 remaining properties within three years and distributing monthly net rents received until then. These properties are on an 18-year triple net master lease to New JC Penney. The reorganized JC Penney is well-financed and profitable.
CPT’s market capitalization is $956 million. The trust has a small cash balance and zero debt. Gross annual rents from JC Penney are $111 million. After the cost of management fees and sales effortrelated expenses, the trust distributes nearly $100 million to holders annually. This 10%+ yield is simply too high for a geographically diversified collection of commercial properties on long-term triple net lease to a good quality tenant. Today trust units are changing hands at around $12.75. Ultimately, I expect us to receive liquidation proceeds of $18 or more within three years, plus $1.30 per share in annualized distributions for an internal rate of return of at least 20%. The faster that CPT winds up, the better the outcome. Know anyone who wants to buy some real estate?
Tweets That Make You Go… Hmm 🤔
