Elevator Pitches, Issue #6: 8 New Ideas
New Stock Ideas from Investment Professionals
We’re back with another issue! With global markets down double digits so far this year and the NASDAQ just experiencing its worst single month since 2008 (!), there have to be some babies get thrown out with the bathwater. Let’s find out. We have 8 new ideas ready to go.
Disclaimer: Nothing here constitutes professional and/or financial advice. You alone assume any risk with the use of any information contained herein. We may own positions in the securities listed. Please do your own due diligence.
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We start this issue with an excerpt from Mindset Capital’s pitch for cannabis multi-state operator (MSO), MariMed. Click through for more detail.
MariMed (MRMD) from Mindset Capital: (special situation)
MariMed might be the best kept secret of any cannabis multi-state operator (MSO) with more than $100 million in revenue, but it probably won’t remain that way. The company trades at 7 times trailing 2021 EBITDA, 5 times this year’s estimate and approximately 3 times my estimate for 2023 and this is all with no leverage.
Besides being one of the most undervalued, MariMed is the only major MSO that beat estimates last year, and that was off guidance that the company had previously raised. And the company’s numbers are likely too low again, especially for 2023, as analysts may not be considering what will happen when MariMed consolidates its Maryland operations, nearly doubles its cultivation footprint in the state and opens a new dispensary right in front of the state approving full adult use in November of this year.
Not only can most investors not invest in MariMed due to Federal illegality, but because MariMed only trades over the counter (OTC) and does not have a Canadian ticker, the few sizable cannabis investors can’t invest either. The MSOS ETF, which has over $1 billion of assets and dominates the cannabis landscape, doesn’t own any shares of MariMed. The MSOS ETF can only own plant touching cannabis stocks with Canadian tickers, they cannot own OTC shares, due to the swap structure they use to get around the rules that prohibit NASDAQ listed companies to invest in cannabis businesses that touch the cannabis plant. But this should soon change, as MariMed has filed for listing on the Canadian Securities Exchange to rectify this, so that the ETFs and other investors can buy.
The stock also trades below $1 per share and of the few professional investors that can invest in MariMed, some are restricted by prime brokers because MariMed is deemed a “penny stock,” simply because it trades below $1 per share, even though its market cap is over $300 million.
Also, the company only recently in the last six months started a concerted investor relations effort, as the company was trying to restructure after an ill-fated bet on hemp and CBD in 2019. A cleaned-up balance sheet and a renewed emphasis on its regulated THC cultivation and dispensary business has led to a remarkable turnaround for the company
I believe that the company trades at approximately 3 times my EBITDA estimate of $75 million for 2023, a remarkable number for a company that has more than doubled revenue in the past two years, with over 30% EBITDA margins and with no leverage. This is an absurd valuation in an industry that is already absurdly undervalued, but frankly is par for the course in a capital constrained sector with little institutional involvement.
If MariMed traded at 7 times my estimate of EBITDA in 2023 it would more than double from its current stock price. And that says nothing of where MariMed could trade to if the broader investment world were able to invest. In my opinion, SAFE Banking has a good chance of passing this year, which would give financial firms legal cover to invest and bank with plant touching cannabis firms. SAFE Banking could also possibly provide a path for cannabis stocks to trade on the NASDAQ or NYSE. MariMed could easily trade for 20 times EBITDA in that scenario and would go up by more than 8 times its current price.
Atento (ATTO) from Farrer Weath: (turnaround)
Atento is a bit out of left field for us with regards to the industry, and thus, is one of the most unique positions in our portfolio. Atento is a player in the BPO (business process outsourcing) space, and predominantly operates in Latin America. It used to originally be part of Telefónica (largest Spanish telecom company, also still their largest customer) to deal with customer relationship management (CRM). Atento was spun out of Telefónica and sold to Bain capital in 2012 for $1.3bn. This deal was backed by lenders, who in May 2020 (five years after IPO) were handed the share via a payment-in-kind note when Bain wanted out. The lenders (GIC, HPS, and Farallon) are now stuck with the shares until the middle of this year when their lockup expires. We think that to get an adequate return on their investment they would need to sell the shares for $55 (current share price is around $25). Considering the lenders own over 60% of the company and liquidity of the stock is quite poor, selling their share in the open market is out of the question, they must find a buyer for the company. Now the question becomes why anyone would want to buy Atento, so we’ll touch on the business fundamentals below.
Atento offers services including sales, customer care, technical support, collections, and back office. The company initially started serving Telecom and Financial services. However, over the last few years they have begun to service other industries, including “Born Digital” companies that result in high margin contracts due to the automation involved. Atento is a recognized leader in the CRM BPO space, and on February 16, 2021, the company announced that they have been positioned among the top 4 leading global players in Gartner’s Magic Quadrant for BPO Customer Management. In 2020, the Everest Group has selected Atento as one of the leading companies in Customer Experience Management (CXM) in its annual lPEAK Matrix Assessment 2020 report. This recognition is based on the company’s ability to improve and evolve through the pandemic.
Taking a step back, it’s important to note that the BPO industry was essentially a people heavy, low margin, sleepy business. However, a few things have changed over the last several years to make BPOs far more efficient. These efficiencies have been driven by 1) Management Tools that allow teams to work from home (thus less need for physical spaces) 2) Cloud computing – replacing expensive onsite servers 3) Multi-tasking; such as offering services beyond just basic customer care 4) Increased measurement and data to drive efficiencies 5) Artificial Intelligence – essentially allowing for bots to take over human functions.
Atento has seized these changes and implemented a “Three Horizons Strategy” which is as follows.
Operational Improvements (sales and operational efficiencies, and a reduction in SG&A)
Digital Acceleration (High Value Voice, Integrated Multichannel, and Automated Back Office)
New Growth Avenues (Expanding in non-LATAM markets such as the US and focusing more on high-margin industries such as tech/retail/healthcare).
This strategy was implemented by new management that was installed in late 2019 headed by CEO Carlos López Abadía and CFO José Azevedo. Their strategy has been showing results, and while revenue has been declining through a roll off lower-value contracts, EBITDA margins are increasing significantly as the current/new contracts are much more profitable. This increase in margin is offsetting the revenue decline, and as margins continue to improve and revenue recovers the company will see record EBITDA figures. Further, 2019 EBITDA (postIFRS 16) was 9.0% and we suspect that the company will do an EBITDA of close to 14% by the end of this year, and a few points higher next year. This will bring it just shy of the industry average of around 17%. But the interesting part here is that Atento trades at a 4x EBITDA multiple whereas the industry trades at close to 12x. Thus, as Atento continues to improve its metrics, and brings on higher-value contracts, it should make a juicy acquisition target, as currently even at double the current multiple, it would trade at a discount to its peers. Further, management is well-incentivised to kick off a sale with RSUs worth around $40MM and additional share-based comp based on EBITDA margins, in line with turnaround targets.
Now, a fair question investors should ask is what we are doing investing in a business like this. We have long stated that we look far and wide for interesting investments, and the only real common thread is we look for a company’s growing market share in markets that are growing. Atento fits that definition and is the market leader in LATAM. Pre-covid, they had a 15%+ share of the market, almost 5% higher than the next competitor. It also has a growing market share in the US where new business means less exposure to Emerging Market currencies. Hard currency exposure (ie USD/Euro) now makes up 26% of EBITDA.
As highlighted, there are two parts of this setup. First a proven turnaround story trading extremely cheaply and second, majority investors looking for a sale. There is also a third element, via an activist investor, where Kyma Capital (a UK based fund who owns more than 5% of Atento) and a few other investors are banding together to make changes on the board level, and push for a sale based on Luxembourg Takeover Bid laws (Atento is domiciled in Luxembourg). This third element will hopefully push the board to take strategic action sooner rather than later (Bloomberg has reported that Atento has hired Goldman to explore a sale).
As ‘juicy’ as this investment sounds, it is not without risk. For one, as highlighted, most of the business comes from LATAM which has its own geopolitical and currency risks. Second, toward the end of last year the company suffered a cyberattack which will limit growth in the shortterm (but should recover by the second half of this year). Lastly, as mentioned, liquidity is poor. Considering this, and for the sake of discipline, we have sized the position modestly.
Installed Building Products (IBP) from Giverny Capital: (value, acquisition model)
During the quarter we established a new position in Installed Building Products. It is early days, but our timing was terrible. Our basis is about $109 and the stock finished the quarter at $84.49.
We remain excited about the prospects for IBP. The company is one of two large installers of fiberglass insulation nationally. The insulation goes mostly into new homes, but also into commercial buildings and other structures. Installing insulation struck me at first blush as uninteresting. But the glass companies that make insulation are operating large furnaces that they cannot turn off and on at will. Their volumes are locked-in and they need large, reliable buyers. We think IBP buys insulation for about 20% less than regional installers. It enjoys similar savings in freight.
That’s quite a competitive advantage. Importantly, when IBP buys a mom-and-pop local operator, it can move the acquired business to its pricing structure. That makes acquisitions very attractive as IBP can boost profitability almost overnight, without great effort and without cutting jobs. In fact, the company has retained local management at many acquired companies.
Further, many of the large national and regional homebuilders are trying to outsource more work to subcontractors, to reduce their labor force. IBP in recent years has begun buying installers of things like rain gutters, closet shelving, window blinds and garage doors, to become a preferred subcontractor to homebuilders. Not surprisingly, the more parts of the home that IBP installs, the more profitable it becomes.
CEO Jeff Edwards has done a masterful job over many years of growing IBP both organically and through acquisitions. He also owns 15% of the stock. Over the five years from 2016 through 2021, operating profit grew more than 20% annually and earnings per share more than tripled, to $5.44 last year. We bought the stock believing that earnings could continue growing rapidly for some time, but rising interest rates may hobble the new home construction market. The market certainly thinks so as IBP now trades for about 12 times the 2022 earnings estimate of $6.50 per share. It is possible that IBP’s earnings growth will be not meet our original expectations if housing endures a prolonged downturn.
Currency Exchange International (CURN) from Greystone Value: (emerging compounder)
During my time working for the Spurs, I waslucky enough to spend considerable hours learning from some of the best talent evaluators in the business, who taught me to search for things in players that others didn’t care about or wouldn’t see. Because the Spurs regularly won a lot of regular season games, they tended to receive draft picks toward the end of the 1 st and 2nd rounds. For those not familiar, players selected toward the back end of each round are typically not All-Star caliber. As a result, we made it a point during scouting evaluations to highlight lesser-known skills or intangibles in the pursuit of an impact player. There was a phrase for players who were less skilled overall but played hard or made an impact in other ways, consisting of ‘he plays bigger than he is’. This implied that the player’s effort level and impact made on the floor outshined his actual skillset or physical abilities. ‘Punching above his weight’ would be the boxing equivalent for our non-basketball fans.
In the case of Currency Exchange, I’m convinced that both the company and management are punching above their weight by quietly attacking a number of profitable initiatives while operating in a forward-thinking manner set to capture several highly attractive opportunities. I’m partial to management teams that ‘play bigger than they are’ and I believe we’ve found one such group.
One element of my research process consists of ‘spending a year’ with a company early on in my due diligence. This involves examining how the business results unfold over time, and what a typical year might look like from start to finish. In the case of Currency Exchange, I spent a few. Typical with microcaps, few seem to be paying attention, but CURN’s efforts began long before our involvement as shareholders. While toiling away in obscurity for the past decade, management’s clear strategic vision about what they wanted to accomplish has started to unfold and to date CURN has nailed every operational and strategic target they’ve laid out. For a business somewhat tied to international travel, COVID provided a large step back, but the business emerged stronger than ever and in my view is at a major inflection point as of this year. The Currency Exchange business model has a few moving pieces, which in my view is partly why the mispricing exists.
Currency Exchange is a provider of foreign currency exchange services in North America, with several adjacent business lines in addition to their core. Currency exchange ‘provider’ comprises several things, but the majority of revenue today comes from selling foreign banknotes. Selling banknotes takes place through the company’s retail and wholesale channels, and there is also an international payments business, an online FX service for home currency delivery, and a retail business within airports that CURN has entered into via agency agreements with existing providers. For those less familiar, think of CURN’s banknotes business as the exchange of US dollars for foreign banknotes (or vice versa), where customers pay a small fee to undergo the transaction. The payments business also offers transaction-based check cashing, wire transfers and FX forward transactions, mainly for import/export activity.
Revenue segments are currently broken out into Commission Revenue and Fee Income, but I believe it makes more sense to look at CURN through their Banknotes segment and Payments segment. Banknotes comprises retail and wholesale transactions, the airport agency business, and Online FX, while Payments consists of the company’s international payments business with financial institution customers.
Within banknotes, as mentioned, there are two main customer types, retail and wholesale. On the retail side CXI operates 36 storefronts in high tourist traffic locations like New York City and shopping malls in parts of Florida. The wholesale business supplies banks and third-party FX retailers with currency to sell through their branch locations. Retail transactions involve the individual customer, where CURN serves as a net buyer of foreign currency, making a decent margin on each transaction. Wholesale transactions involve CURN acting as a net seller of currency to meet the physical FX demands for bulk banknote trading. While the retail business sports higher margins, the wholesale business has much greater scale, higher transaction volumes and can be expanded at a greater pace. CURN earns a profit on the spread between the spot purchase price of the currency and their final sale price. CURN also competes on things like service and compliance, two areas in which they excel.
An examination of historical financials wouldn’t reveal much to get excited about, especially as EBITDA and margins have failed to increase along with revenue growth. This is both misleading and intentional. Instead of issues relating to an unprofitable business model or competitive dynamics, CURN spent the past decade building out their banknotes, payments, and software infrastructure, while navigating the regulatory environment on their way to becoming a stronger, more profitable business. Today, CURN has a competitively advantaged and proprietary software platform, a Schedule 1 Canadian bank charter and a number of adjacent revenue generating opportunities that are inflecting as we speak.
While CURN is somewhat levered to international travel as well as economic activity through their payments segment, efforts to diversify the business away from banknotes have been largely successful and proven beneficial as payments revenue GREW during the pandemic while payments revenues as a percentage of total revenues grew from 7% in 2019 to over 20% today. With relatively low fixed costs, ‘scale’ in the payments business is said to be above $10mm in annual revenues, the current run rate, where incremental EBIT margins come in at 30-40%. Payments have been growing in excess of 30% for the past few years. Inherent in this business in both banknotes and payments is an incredible amount of operating leverage which has just begun to reveal itself following years of the aforementioned reinvestment in building out core and additional services and navigating the regulatory environment.
That last point is important, as the most significant part of this story took place in 2012, when Currency Exchange applied for a Canadian bank charter through their Exchange Bank of Canada (ECB) subsidiary in order to become a ‘banker’s bank’. The importance of being granted a Schedule 1 bank charter cannot be overstated, as it affords the company numerous advantages, including being able to bank with central banks (through the Federal Reserve Foreign Bank International Cash Services Program) in order to source US dollar cost effectively, reducing collateral obligations and enhancing existing bank relationships. Furthermore, the charter being granted serves as a huge competitive barrier (CURN is one of now three banks approved for international distribution through the FED program) and will ignite the operating leverage within the business. With the costs to obtain this license along with the required infrastructure behind them, I expect CURN to both win much larger customers and experience significant cost savings moving forward. It’s estimated that incremental banknotes revenues from here should provide 50% EBIT contribution margins. Normalized international travel, combined with CURN’s other initiatives means it wouldn’t be hard to see the banknotes business significantly exceeding pre-COVID levels this year and beyond.
The management team has roots in foreign exchange dating back to the late ‘80s, when current CEO Randolph Pinna founded Foreign Currency Exchange (FCE), the predecessor to CURN. Foreign Currency Exchange was eventually acquired by the Bank of Ireland, where Mr. Pinna continued growing the business until 2007. The Bank of Ireland, under stress from the financial crisis, started selling off assets, at which point Mr. Pinna bought back a number of forex retail locations and established the current version of Currency Exchange International. During the subsequent few years, the early version of CURN developed a proprietary software platform called CEIFX, used to enhance the trading of currencies and other travel related aids for both retail locations and bank branches. In addition to their bank charter, this is one of CURN’s most significant competitive differentiators and an asset for which I don’t believe they are getting credit, given its built-in and difficult-to-replicate compliance system. CURN’s compliance verification system (CVS) has allowed them to win a large number of bank customers as heavily regulated financial institutions feel safer working with all compliance checks in place and a company with a history of strong compliance practices. The software can be plugged directly into most banks enterprise resource planning systems (ERPs), leading to faster, more secure and more efficient foreign currency management. This has led to significant growth in financial institution customers, and during 2019 and 2021 CURN entered into partnership agreements to integrate their software with Fiserv and Jack Henry’s core bank processing systems. These integrations significantly increase the addressable market for CURN by over 1,000 potential bank customers.
The North American foreign exchange market has two major entities, Bank of America and Wells Fargo, and until recently, two lesser players, Travelex and Currency Exchange. As Travelex recently filed for bankruptcy while exiting the Americas, the door has been opened for CURN to capture a significant amount of market share on the retail side and continue growing their agency relationships at high traffic airports, something that should prove massively profitable over time (think of using high traffic airport locations as a partner without the associated rent and payroll costs). In addition to CURN’s software advantages, foreign banknotes sourcing has incredibly high barriers to entry with high returns on capital and limited risk from currency movements. Scaled players should be able to generate EBITDA margins of around 25%, and there has been significant interest in the space from private equity over the years. With advantages in both service and technology, CURN will be able to continue taking market share on the back of deploying their proprietary software platform, growing their financial institution customers, and expanding their transacting locations. As a sanity test for market share gains, revenue growth since 2014 has come in at a 21% CAGR in a low to-no growth industry, helping this sleepy microcap become the largest nonbank distributor of foreign exchange in the U.S. and Canada.
CURN is led by Founder and CEO Randolph Pinna, an industry operator for multiple decades who seems to eat, sleep, and breath his business. This would make sense as he is the company’s largest shareholder who owns around $20 million in stock. Mr. Pinna has seen multiple iterations of the foreign exchange industry including many players that have come and gone, and after surviving the worst two years of his career during the pandemic, CURN is moving forward stronger than ever with a leaned-out cost structure, the approval of their bank license, and new adjacent business lines and services. The business model is also fully funded.
As banknotes and payments grow, online FX is adopted in more states, and cost savings are realized through the Exchange Bank of Canada, EBITDA margins have the potential to expand, and there is a reasonable path to CURN being able to generate somewhere between $20-25mm in free cash flow within the next 12-24 months. The current market cap, excluding the excess cash on the balance sheet is $88mm. Importantly, no heroic assumptions are required to get there, as simple execution with high incremental margins will help layer free cash flow on top of the current $10-12mm run rate.
There are few comps for CURN. They are not a bank, not a true money service business, and not a fintech. Although they have elements of a bank, and payments sports some fintech-type characteristics, I don’t believe shares will ever trade for revenue multiples of 10-15x. However, I also don’t believe that a low single digit multiple of free cash flow is the correct value to place on this business, one with growth, customer stickiness, market share gains, high returns on equity, and a strong balance sheet. Our downside is significantly protected by the nearly $15/share in cash on the balance sheet, while buybacks and adding some leverage to the business to lower the cost of capital are also on the table to help bolster returns. I am optimistic that the price we paid for our shares is a favorable one. At the time of our investment, only Peter Rabover of Artko Capital was pounding the table.
Tweedy, Browne had four new buys this quarter, and they provided a quick pitch on all of them in their latest letter.
Buzzi Unicem (paid approximately €18.70 per share)
Geographically diversified global cement company. Near net cash balance sheet. Material insider buying (€27 million at average price ~€19.50 per share). Negatively impacted by higher energy input prices, but cement is a small portion of the cost of construction projects. A greater risk is overall construction activity. Paid 4x 2021 EBITDA and 6x our estimate of “normalized” EBITDA assuming 10-year average margins. Observed M&A deals at 10x to 11x EBITDA.
Kemira Oyj (paid approximately €11.80 per share)
Global provider of chemicals for water intensive industries. 1.7x net debt to EBITDA. Material insider buying (€53 MM at average price of €13.88 per share). Majority of revenue derived from contractual pricing linked to cost input index. Price increases lag raw material input costs by 2 quarters, leading to short term margin compression in an inflationary environment. Paid under 7x EBITDA. 8 comparable M&A deals at average 10x EBITDA. ~5% dividend yield.
Haitian International (paid approximately HKD$21.60 per share)
Largest manufacturer of plastic injection molding machines in China. 40% Chinese market share, 13% global market share. Net cash balance sheet (38% of market cap). 3% dividend yield. Material insider buying at HKD$20 to $21 per share. Paid under 7x our estimate of normalized EBIT based on 5-year average EBIT.
Thor Industries (paid approximately $94.30 per share)
Largest maker of RV’s in the world. 45% market share in US/Canada, 22% in Europe. 1.5x net debt to EBITDA. Highly variable cost structure resulting in profit every year since 1980, despite cyclical end demand. Material insider buying ($31 million at $107 per share average price). Paid 7x trailing twelve months P/E, or 11x our estimate of normalized P/E (based on pre-pandemic sales and 10-year average margin).
Until next time! - Elevator Pitches