Special Situation Investing

Wednesday, January 31, 2007

Altria Group (MO) to Spinoff Kraft (KFT)

Altria Group has finally announced that they will be spinning off the remaining chunk of their Kraft ownership (88.9% of outstanding shares). Nothing new here as they have been talking about it for years. The spinoff is to happen on March 30.

From the article:

We continue to view the spinoff of Kraft as a wonderful thing for Altria shareholders but an extremely disruptive event for Kraft shareholders," wrote D.A. Davidson & Co. analyst Timothy Ramey in a research note.

The analyst said that the more than $50 billion of Kraft equity will need to find a home all at once, likely causing an extended oversupply of the company's shares.

"It is such a huge amount of equity, equal to about 40% of all the market capitalization of slow-growth large-capitalization food companies currently owned by institutions and investors," Ramey added.


The spinoff also frees up Kraft to pare its portfolio more aggressively. The company has been shedding businesses to focus on core categories such as biscuits, cheese, coffee and refrigerated beverages.

now has a strong buy rating on MO and strong sell on KFT.

If I was a gambling man I would probably buy June MO calls and June KFT puts but such short-term speculation just is not my style.

If anything, I will just sit and watch this one out. If KFT really does get nailed post-spinoff then at some point I would definitely buy. However, at current prices the company seems fairly valued. Kraft is low-growth, already has a ton of debt and expenses are going to rise post-spinoff due to fewer shared costs. The only thing I'll give the company is that margins aren't bad. I am actually fairly sceptical that you will see the much prophesized selling in Kraft shares, given the massive liquidity in the system right now.

Anyways, March 30 is the day, keep an eye on it.

Tuesday, January 30, 2007

UPS (UPS) - Established a Long Term Holding

I continued purchasing for my taxable account today, picking up UPS (UPS) at $71.41 after less than impressive guidance knocked the stock back a touch. The company is only predicting earnings growth of 6-10% in fiscal 07 and this has some investors worried. Personally, I think management is just being cautious, and I think that's a good trait. I am buying this stock for the future so I could really care less what happens in 07 or 08 or even 09. So long as the company can perform in the long-run. I will also just mention that if UPS has a bad year, a LOT of other companies are going to have bad years.

My main rationale for buying the stock is similar to Western Union. I think the company has a dominant market position with margins to back it up. The sheer number of drop-off points, the massive logistics system and the brand name are not easily duplicated. On top of that management is buying back stock (~2.75% of outstanding shares last year), paying a dividend of ~2.1%, and staying focused on their core business. There is also a tradition at the company of grooming management from within, in my opinion that tends to accumulate value to the firm.

There is still plently of room for growth in the international market, consider that international revenue was $2.5 billion compared to $8 billion in the US alone. The company is also segwaying into providing supply chain solutions. The results have been less than spectacular to date but I have faith that management will turn it around or else cut it loose (spinoff?).

To summarize, I am buying quality with UPS and for a reasonable price. Not a special situation, not an amazing deal, but it has the potential to deliver. Barring economic ruin, with stock buybacks, dividends, earnings growth and an increase to the PE ratio, I have the potential to double my money over the next 4 to 6 years with reasonable downside. Even better, I can probably hold it for a lot longer than that if I continue to like what I'm seeing. For a taxable account, I think this is a good deal.

Monday, January 29, 2007

NCR (NCR) to Spinoff Data Warehousing unit

NCR will be spinning it's data warehouse division, Terradata.

NCR, which manufactures a range of products including ATM machines and bar code scanners, said the move should be tax-free and will help each company better focus on their own individual customer base and business strategies.
In 2005, Teradata generated $1.5 billion in revenue and $309 million in operating income, NCR said.
is expected to be completed in 6 to 9 months..

Another article adds..

NCR's total revenue fell 2% to $4.55 billion in 2005.

Check out NCR on yahoo here.

The SEC filing on the spinoff is here.

From the SEC filing:

Following the spin off, Bill Nuti will continue to serve as president and CEO of NCR, and Mike Koehler, currently senior vice president of the Teradata Division, will serve as president and CEO of Teradata.

Wikipedia has a lot on teradata here.

A few things from Wikipedia:

The largest and most prominent customer of this DBMS is Wal-Mart, which runs its central inventory and other financial systems on Teradata. Wal-Mart's Teradata Data Warehouse is generally regarded by the DBS industry as being the largest data warehouse in the world

The company has quite a bit of coverage on it's internal website here.

Hedge Hogging

I just finished reading Hedge Hogging by Barton Biggs the other day. The book was excellent, well worth the read. It is quite succinct but manages to cover numerous investment topics and I think most investors would take something from it.

While it is primarily focused around hedge funds, the book is also an excellent overview of the investment landscape. Value, growth, momentum, charting, gold, macro-economics, the book pretty much covers all the major areas. It is put together using a number of case studies which really drew me in. Not working in the investment field I am always curious how the pro's approach things. What I found from reading this book is that they are not as organized or all knowing as I sometimes give them credit for. In fact, they are very much pushed and pulled by their investors to the point that it may impede their long-term performance.

If anything this book strengthened my view that in spite of the vast number of hedge funds, mutual funds and other investment vehicles out there, there are still inefficiencies in the market. That is the fundamental reason why I invest my money in individual stocks instead of just dumping dumping it into index funds.

I will borrow just one quote from the book, which I found to be particularly insightful:

Tim is convinced that hedge funds, because of client pressure, have become obsessed with avoiding monthly declines in net asset value (drawdowns). As a result they employ stop-loss limits and all kinds of risk-control mechanisms that mechanically make investment decisions for them. Most of these decisions are bad. They never fight the tape and brag about how market neutral they are. As a result, they become short-term, momentum-oriented traders. He argues that this creates an opportunity for an investor who uses leverage, is willing to accept volatility, and who is long term in his thinking. "Accept volatility and concentration", he says. "Diversification is an enemy of performance."

Sunday, January 28, 2007

Western Union (WU) - Took a Position

I established a fairly sizable position, relative to my account size, in Western Union (WU) this week. Western Union is a stock that I had mentioned some months ago when it was first spunoff but which I never actually got into. I've been regretting that decision. It went down right off the starting block and while I wanted a piece I was trying to time the thing. Generally, I never try to time the market, I hate market timers but I did in this case and the stock subsequently took off from $18 to over $24. Well it's started coming back down and I decided to get in when it hit $20.95.

I purchased the stock for my taxable account as I view it to be a solid long-term holding. The company is the dominant player in the North American money transfer business and up there in the rest of the world. It has operaitons in 200 countries, with 285,000 locations. This gives it an advantage of scale and barriers to entry. It earns fat operaring margins of 30%, is growing at ~12% and has a reasonable debt load post-spinoff.

Currently it trades for a P/E of ~18. While this doesn't seem cheap, if the company can perform operationally, continue to grow, pay down debt, repurchase stock basically just take care of business, the P/E will expand. There is no reason that this company couldn't fetch a 25-30 P/E given the 'relatively' low cyclicality. That potential pop in the P/E, in addition to earnings growth (assume 10% per year), share repurchases (2% of net outstanding shares per year), could allow the company to quadruple in size over the next 10 years. That would translate into yearly annual gains of ~14.5%. In reality, the results will differ materially from my expectations but potentially in either direction. For a taxable account where I don't want to be trading, I view the likelihood of the results and the potential returns excess over fixed income to offer an atttactive entry point.

Beyond that, check out the latest quarterly results here.

Triple Crown Media (TCMI) - Sold Full Position

I sold my full Triple Crown Media (TCMI) position on Friday for $10.01. I didn't make a spectacular amount of money off of it but I have become increasingly less interested in the stock.

I haven't seen a whole lot of insider purchasing of TCMI recently. That kind of concerns me. I mean the stock has doubled off of it's April lows in the $5 range and no insider buying on the way up.

Also, I haven't seen the aggressive debt reductions or operational improvements that would justify staying with the position. In fact, debt got loaded up a little further, from $149 M net liabilities to $164 M. TCMI also purchased Pinnacle Sports Production in the most recent quarter. As an investment, I don't want a company this loaded with debt to be making acquisitions. I wanted to see a strengthening of financials and improvements in the core businesses. Check out the latest quarterly report for the details.

I bought into TCMI at $7.41 on August 16/06 and sold it at $10.01. That makes for a profit of 35% on the transaction.