Notes on lending fundamentals

These are my notes on:

• The concepts behind underwriting loans.
• Loans that will likely end in disaster.
• Finding excesses in lending.
• Areas which might lead to unusually high shareholder returns.

Aeropostale (ARO): Teen titan or turnaround trap?

*Disclosure:  No position in ARO.  I’m not interested in buying at current levels.  This post may be a waste of your time.

After Julian Geiger left Aeropostale, his successor (Thomas Johnson) has managed to run the retailer into the ground.  On August 18, Aeropostale announced that Geiger is returning.  During Geiger’s previous reign, Aeropostale’s revenues went from $123.8M in 1997 to $1,886M in 2009.

Suppose that Geiger returns Aeropostale to its former glory several years from now.  Geiger’s last full fiscal year at the company was 2009 (Geiger officially left in Jan 2010).  In that fiscal year, Aeropostale posted GAAP net income for $149M.  Suppose that Aeropostale makes $149M, achieves a P/E multiple of 15, and has 82M shares outstanding.  The share price would be $27, roughly seven times the current share price of $3.87.  Of course, there are risks and other possible outcomes.  It is likely that Aeropostale will face the same secular headwinds affecting its peers ANF and AEO.  The profitability of all three ‘teen titans’ may be significantly lower several years from now.

Thoughts on LVNTA, LINTA, LTRPA

Liberty Ventures is currently in the process of spinning off Liberty TripAdvisor Holdings.

• TripAdvisor shares (normal shares and supervoting shares) will go from Ventures to TripAdvisor Holdings.
• Holdings will take out a $400M margin loan.
• Holdings will pay Interactive $350M for BuySeasons.  (EDIT:  This may be wrong.  See the bottom of this post.)  It will hang onto $50M.

I don’t think that Interactive, Ventures, or TripAdvisor will be that attractive.  TripAdvisor has extremely high growth and seems to be a wonderful business.  However, its multiple is very high (a P/E ratio of 66).  I think that Malone may sell his personal stake in TripAdvisor for something cheaper.

Liberty Broadband valuation spreadsheet

Use this link to access my Google Drive spreadsheet.  It may or may not be helpful in figuring out whether one should buy CHTR or LBRDA/B/K.  Please be careful because the spreadsheet may contain errors…

Spinoffs

They’re gimmicky.  Most of the time they lower the intrinsic value of the business due to legal and accounting fees (which I’m not a fan of).  I wouldn’t bother learning about special situations investing in spinoffs.  But… in rare cases they are worth looking at.

Sold my KMI warrants

The warrants may still be slightly undervalued.  However, my instinct is to sell stocks/securities on rallies and to reinvest the proceeds into stocks that have dipped (e.g. ASPS).

I sold slightly below $4 (which is terrible trading on my part because I sold near the day low).  I still have a few call options which I plan on riding out to maturity.  This trade worked out well.

My thoughts on the KMI merger

I may be completely wrong about Kinder’s reasons for merger KMI with KMP/KMR/EPB.  Here’s my guess.

Things have gotten to the point where the GP/LP structure is becoming unwieldy.  Any investments that the LPs make must be accretive to the LP unitholders.  Because of this, the hurdle for new investments is extremely high (?somewhere around 18% EBITDA yield?).  Because KMP and EPB are so large, there is a limited universe of investments that make sense for the unitholders after paying the onerous Incentive Distribution Rights (IDRs) to the GP.  (In the past, this problem has been avoided by the GP waiving its incentive fees.)  By getting rid of the GP/LP structure, the resulting company has more flexibility to pursue opportunities with lower returns that are still attractive.

KMI announces merger with KMP, KMR, EPB

Wow.

Here’s the press release:  “Kinder Morgan, Inc. to Purchase KMP, KMR and EPB; 2015 KMI Dividend to Increase to $2 per Share”

Here’s my Google Drive spreadsheet that calculates the merger spreads.

I may do a follow-up post with thoughts on the merger.

*Disclosure:  Long KMI warrants and call options.

Insiders giving themselves special pensions

Defined benefit pension plans give pensioned a defined amount of money each year for the rest of their life.  Unfortunately for shareholders, the risks on this liability are very difficult to estimate and can get out of hand.  Warren Buffett explains the relevant concepts in a 1975 memo to Katherine Graham.  Shareholders are likely better off if the company offered its employees a defined contribution plan rather than a defined benefit plan.

When reading a DEF 14A filing (I have a previous post on things to look for in a DEF 14A filing), it may be worth checking to see if management is giving itself a defined benefit plan while the workers beneath them are receiving a defined contribution plan.  I believe that this is an area where management can basically hide some of its compensation.  Intel and TJ Maxx are examples of companies that have defined benefit plans for management.  In the grand scheme of things however, this practice isn’t that bad compared to other ways that insiders compensate/enrich themselves.

*Disclosure:  Long TJX via calls.  No position in INTC.

What Ocwen and Altisource do

Erbey’s empire of publicly traded companies (OCN, ASPS, HLSS, AAMC, RESI) is a little confusing.  Here’s my understanding of what his companies do.