Levered Equity Stub That Could Become My Next Multibagger
A bombed out stock that has significant industry wide tailwinds that could supercharge your portfolio
I bought a small stake in this company. I am keeping it small because it is extremely levered. The market cap is $350 million and the enterprise value is $6.3 billion. The enterprise value does not include a preferred instrument that costs the company $53 million per annum. The stock is effectively and equity stub. With the current valuation, the market is implying there is a high chance of bankruptcy. But if bankruptcy does not occur, the leverage to the upside kicks in. If management is able to continue to generate cash flows and paydown debt, the upside could be multiples of the current valuation. As reference, in 2022 the stock was trading at $24 per share. Today it is at $3.00 and change.
Here are some other interesting valuation metrics:
Price to earnings ratio of 1.27x
Dividend yield of 8.58%
Price to book ratio of 0.17x
2024 forward EV/EBITDA of 6.9x (my estimates)
Even better, the company could generate $200 plus million in cash in Q4 and they recently refinanced all of their debt, with the next maturity not due until 2027. Debt is getting paid down too, under par, and I expect management to continue to paydown debt as this business generates significant cash flows. The company also owns $1-2 billion in excess real estate that the company could sell to accelerate debt payments.
Finally, over the next few years, a new technological development could get rolled out, allowing this company to lease valuable assets they own, for in excess of 85-90% incremental margin, potentially allowing the stock to have a multiple re-rating.
Here is my prediction of what occurs over the next few years:
The company continues to pay down debt with every dollar in payments going to directly reduce the interest payables, resulting in more free cash flow — typical LBO model.
The monetization of non-core real estate, via outright sale or mortgage deal, to allow the company to pull forward +$1bn of cash and directly reduce the debt load.
Sweeping regulatory change that allows for a massive amount of M&A and multiple re-ratings across the entire industry.
The continued rollout of an industry wide effort to transition the legacy business into a technological powerhouse.
The continued generation of strong free cash flow resulting in much lower debt-to-EBITDA ratios and the re-rating of the equity valuation.
This is a pretty interesting situation. The current equity valuation is priced like the company will head towards bankruptcy over the next year or so. But I think the market is overly pessimistic. The company should continue to generate strong free cash flows and there are multiple industry-wide tailwinds that could accelerate cash flows, resulting in the valuation re-rating.
The more I dig into this company the more I like it. But given the absolute high levels of debt, I will keep the position small and continue to monitor the situation. If things improve and my conviction grows, I will add, substantially.
Let’s dig into this interesting equity stub.
