Currently on my watchlist in no specific order:
- The Michaels Companies ( MIK):
PROS: Stable (unlevered) free cash flows, cheap valuation: FCF/P = 1.5x (Value Line), but EV/UFCF>>10x due to their leverage, of course. Interest expenses amply covered.
CONS: A lot of legacy debt as a consequence of being target of a LBO in '06. The company went public for the second time in '14. The largest shareholder (36% according yo Yahoo Finance) is part of Bain Capital or something like that and reading transcriptions of earnings calls I got the impression debt repayment does not seem to be a priority for management.
- Mediaset Espana Comunicacion ( TL5):
PROS: largest broadcasting company in Spain with negligible net debt, which generates strong and growing cash flows that are used every year for share buybacks and dividend distributions. I think cash flows could be larger than the company itself is reporting, because in calculating their FCF the company itself subtracts not only maintenance CAPEX (i.e. renewal of licenses only) but also CAPEX related to new projects (i.e. growth CAPEX). Besides, last year there have been no major sports events of the order of the FIFA World Cup or the UEFA European Championship which, if I have understood correctly lead to more ad revenue, subscription, etc. As of now, I do not know how much additional FCF these events typically generate for the company, but in any case these events could be regarded as a catalyst, I guess...
CONS: For now: unknown unknowns. More research will create more problems, I am sure.
- Tupperware Brands Corporation ( TUP):
PROS: Extremely depressed valuation: EV/UFCF<5x and FCF/P=1.5x i.e. already assuming cash flows being much smaller than their historical average; market cap equals cash and equivalents on balance sheet as of September '19. Interest expenses are amply covered. As a consequence of multiple impending class action lawsuits there is definitely some indiscriminate selling occurring. In an effort to be able to lower their debt more rapidly, the dividend was eliminated at the end of last year, hence saving a bit more than $50 mln in cash per year: this elimination triggered even more indiscriminate selling, although it shows willingness of the management to suffer short term in order to live long term. Weak pro: no selling of shares by insiders, except for negligible amounts here and there; massive insider buying in August '19 and in lesser amounts in November '19.
EXISTENTIAL CONS: Incited by the company having officially delayed the publication of their FY '19 10-K in order to:
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This triggered the numerous lawsuit initiatives mentioned above: "Allegations against TUP include that: (1) Tupperware lacked effective internal controls; (2) as a result, Tupperware would need to investigate the accounting and liabilities of one of its brands, Fuller Mexico; (3) consequently, Tupperware would be unable to timely file its annual report on Form 10-K for its fiscal year 2019; (4) Tupperware did not properly account for its accounts payable and accrued liabilities at Fuller Mexico; (5) Tupperware provided overvalued earnings per share guidance; (6) Tupperware would need relief from its $650 million Credit Agreement; and (7) as a result, defendants' public statements were materially false and/or misleading at all relevant times." ( source). I do not know how much cash flow the Fuller Mexico subsidiary contributed to the total amount; whether TUP has insured itself against these kind of class action lawsuits, because a large enough claim by angry shareholders could bankrupt the company.
As of now, providers of the company's revolving credit have agreed to give the company some temporary leeway in terms of the company's required consolidated leverage ratio, while also amending a few other requirements in the debt agreement which matures in March, '24 for a total of $325 mln. Another debt issue, i.e. a fixed rate senior note is due in June '21 for a total of $600 mln(!). All in all, bad decisions have been made in the context of capital allocation. However, depending on how the lawsuit develops, i.e. if this initiative turns out to be futile, I will take a position as it is in the interest of the bondholders to keep TUP alive and running. Assuming normalized FCF of about $150 mln the total debt will be halved in 4 years or so. |
