Hi Marco
My analysis has changed over the 45 years I have been investing. I now do an initial screen after hearing about a company using AI. I ask AI to prepare a value proposition analysis with all the related metrics.
Before AI, I would look at PE, Debt and Paul's favorite 10 years of positive FCF.
More recently in the past 5 years, I have focused on FCF and FCF yield as a quick screen. I want growing FCF at a reasonable price (PE<15). I look at PEG <=1 is really good but I want that at a reasonable price too.
Becareful w/ companies that have too much debt and make sure management has a plan to reduce that debt. The losers I have seem to originate from the company running into too much debt and not enough FCF to pay it down.
Also, I want to see a catalyst for a change: an aqusition, new product or service, new partner, new management and/or a plan. An 'Exit' strategy too especially if you are in a position w/ an activist investor. I own XRAY w/ Carl Ichan now on the board who is a large 9% investor. He will force change and has an exit plan.
PAHC mentioned here an animal health company. I was building a position in 11/2023 at $9.50/share. They took on a huge amount of debt after the acqusition of this animal product portfolio from ZTS.
In October 2024, Phibro Animal Health Corporation (PAHC) completed a significant acquisition from Zoetis (ZTS). This move was a major strategic shift for Phibro, focusing on expanding their livestock health portfolio.
The Deal at a Glance- The Asset: Phibro acquired Zoetis’ entire Medicated Feed Additive (MFA) product portfolio and certain water-soluble products. This included over 37 product lines (such as antibacterials and anticoccidials) and six manufacturing sites across the U.S., Italy, and China.
- The Cost: The purchase price was $350 million in cash, subject to customary closing adjustments.
Debt and Market Capitalization Phibro funded the acquisition primarily through new debt, significantly altering its leverage profile.
- Amount of Debt: To finance the $350 million purchase, Phibro entered into new credit facilities. According to financial reports from late 2024, the company’s total debt jumped to approximately $800 million (up from around $500 million prior to the deal).
- Market Cap at the Time: When the deal was announced and completed (April–October 2024), Phibro's market capitalization was approximately $900 million to $940 million.
- Debt-to-Market Cap Ratio: At the time of the transaction, the new debt taken on for the acquisition ($350M) represented roughly 37% to 39% of their market cap. If looking at total debt (~$800M) relative to their market cap (~$937M), the ratio was a staggering 85%.
Leverage Impact Because Phibro is a smaller company than Zoetis, this was a "transformative" deal.
- Net Leverage: The company's net leverage ratio (Debt / Adjusted EBITDA) rose to between 3.5x and 4.0x at the close of the deal.
- Goal: Management stated their intention to use the increased cash flow from the new products to pay down this debt and bring leverage below 3.0x by June 2027.
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Every situation is different and the companies I buy must have a story, have good assets & management. If it's a turnaround situation, management is key. I follow activist investors as they can force change when needed.
FWIW PAHC hit an all time high today but only have 20 shares left as I scale into a new position and scale out. I typically will start to scale out when I reach a 35% or higher CAGR.
Also, I am always learning new ways to view a company. I have been doing this 45 years and still learning. |
