John F.,
LOL on the "newer version of Mike" comment!
I am starting to think that we are getting an incredible opportunity here. I was in buying a bunch more yesterday.
The Market is clearly discounting the worst case: TLC is worth nothing. Fortunately for us, it has a positive value. Even in a fire sale, MAT should be able to blow it out for $1bn. Yes, that is very sad relative to the purchase price, but I am just trying to baseline assumptions here. That would equate to ~$3 per share.
The core business is still a fine business. It just needs a management team capable of extracting the value from the brands. There should be well in excess of $1.50 in core earnings (ex-TLC) in the next couple of years. I would argue that a more reasonable worst-case price should be $18 (10 x's core EPS plus $3 in TLC 'value').
This is a super simple walk-through, but it is somewhat instructive as The Market gets more and more irrational. I tend to believe that the core earnings power of the the business is much higher over the next several years.
I had a long conversation with a smart friend of mine who was making the argument that there was no catalyst in MAT. [Catalyst, in case you are unfamiliar with the industry jargon, is an event or situation which is not necessarily evident that will drive the price of a stock higher. IMO, value players use the word 'catalyst' because they are jealous of momentum players who are and have been in vogue for some time; catalysts allow value guys to get mo'mo' without calling it momentum.] I told him that I would give him a catalyst: JB will be fired. He politely told me that did not qualify. I asked why and he told me that would not count as I did not have any special insight or information. I responded by asking him if she would be running the company in a year or two if the stock continued to languish. He answered no, unless the stock performs, she is out. I said that this is therefore my catalyst.
I think people take far too narrow a view of The Market. Right now the stock price is being determined by a bunch of tired portfolio managers who are looking at a sizeable loss in a now diminimous position, with Street Estimates much lower than a year ago. These folks are willing to sell at any price. The have no foresight, nor do they need to have it. There clients are happy for S&P Closet Index underperformance. These managers can not operate in an environment of uncertainty. Moreover, they can not differentiate between volatility and risk. You could tell them that MAT is worth more than $22 and they would agree. They do not care about the upside, they are terrified about the 'negative momentum' that could take the stock to $8.
This is the crowd of lemmings that currently constitutes The Market. This is only a small cross-section of the real market. This broader definition includes tens of financial buyers who would long to acquire a company like MAT at these and more depressed prices. If the stock goes to $8 (a situation as likely as the stock going to $15, IMO), how long will it take for Apollo or T.H. Lee to put together a bid? The real market is made up of people who actually care that MAT is worth more than $20. I would argue that the people sitting on the bid yesterday also care that the value of the business is north of $20.
I appreciate The Market's pessimism. I also appreciate the opportunity that it presents to me, a long-term investor. The more that The Market vomits MAT, the better prices we receive. I would welcome a full-fledged MAT enema that would drive the stock to Mike 2.0's 'price target.'
--Duker |
