Archive for January, 2014

Frank’s International (FI)

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Franks International (FI)
Stock Price: $24.50
Diluted shares: 190.4MM
Market cap: $4.7BN
Working capital surplus: $771MM
Debt: $0
EV: $3.9BN
2013E EBITDA: $428MM ($329MM through 3Q13, and $260MM rev in 4Q13 x 38% EBITDA margins = $428MM)
Multiple: 9.1x EBITDA

Brief overview: After operating for 75 years as a family owned business, Franks went public in August 2013. Following a successful IPO (priced at $22; opened at $26.50 and traded up over $32 in October), the stock got hit in Nov-13 after its first earnings announcement as a public company (analysts were expecting top-line growth; FI revenues declined 8% sequentially and were up only 1.4% Y/Y as 1 customer pushed an order back to 1H14). The recent drop provides a much better entry point into a truly great business (EBITDA margin of 41.3% in the first nine months of 2013; 2 companies – Franks and Weatherford – control >50% of the global tubular services market) with significant scale (90 sales and support offices in 60 countries on 6 continents), a management team that knows what they are doing, barriers to entry via intellectual property (104 U.S. patents and 136 related international patents; 37 U.S. patent applications pending and 111 related international patent applications pending), and operations in a niche that should grow double-digits over the next couple of years.

Given these characteristics, this business deserves a low-teens EBITDA multiple. Minimum.

Mirasol Resources (MRZ)

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Mirasol Resources (MRZ)
Stock Price: $1.04
Diluted Shares: 44.16MM (there’s also 6MM options and warrants with strikes of $2.97 – $4.30)
Market Cap: $46MM
Working Capital Surplus: $22MM
CDE shares: $14MM
Debt: $0
EV: $8MM

I love finding situations where the outcomes are: Heads I win; tails I don’t lose much. Hat tip: Pabrai.

I believe Mirasol Resouces is one of those situations.

MRZ is a prospect generator, which means it recons new mining projects with its technical team, acquires the land rights, then goes out and JVs with a well-capitalized miner who pays MRZ for its work and commits to funding the further drilling and (if it gets there) development of the project. The prospect generator model is interesting because it requires very little capital compared to traditional mining companies (little cost = lower risk of dilution and high probability of avoiding the mining death spiral). You get exposure to early-stage value creation (see the shaded area in the image below) but with long term sustainability that a typical “all or nothing” explorer lacks.

 Mining Lifecycle

The costs in the prospect generator business are primarily exploration, field and management salaries and logistics.

The key to investing in any prospect generator is finding a very savvy geotechnical team. Even better is finding a savvy team with a portfolio of high caliber projects already on the books and paying close to nothing for it (free call options).

Enter Mirasol.

Rent-a-Center (RCII)

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Rent-a-Center (RCII)
Stock Price: $31.05
Diluted Shares: 55.3MM
Market Cap: $1.7BN
Cash: $53MM
Debt: $833MM ($194MM outstanding on term loan [most of which is due in 2016]; $89MM drawn from revolver [expires July 2016]; $300MM 6.625% senior notes due Nov 2020; $250MM 4.75% senior notes due May 2021)
Other Liabilities, not including Deferred Taxes: $307MM
EV: $2.8BN
2013 EBITDA: $334MM
Multiple: 8.4x

How do you make a million dollars? Sell to rich people.
How do you make a billion dollars? Sell to poor people.

– Somebody somewhere

Rent-a-Center is an industry leading brand in the rent-to-own category with more than double the store count of Aarons (#2 competitor) and 5x the store count of competitors #3-#8 combined (RCII rolled-up the industry from 1993 – 2006). Their core customer is a sub-prime borrower (target 35% of US 310MM population; 50% of MX 110MM population) who rents for 4-5 months on average (only 25% choose to buy) – furniture is 37% of rental revenues, electronics are 30%, appliances 18% and computers 15%. Customers pay in advance either weekly (85% of agreements), semi-monthly or on a monthly basis.

RCII is not a new idea – the US “core” is an established business without many growth opportunities that generates significant FCF. But there are two things happening at RCII that many who don’t follow the story (not covered by any major banks) are missing: RAC Acceptance and Mexico.

Pacific Ethanol (PEIX)

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Pacific Ethanol (PEIX)
Stock Price: $3.93
Diluted Shares: 16MM (includes effects for post quarter convertible conversion; there are 8MM warrants outstanding at an avg exercise of approx. $7; currently non-dilutive)
Market Cap: $63MM
Working Capital Surplus: $44.2MM
Debt: $107MM (due June 30, 2016)
EV: $126MM

*Note: this write-up was done on 20-Dec-13.

Why would anyone want to invest in a once-bankrupt, cyclical and hated business like ethanol production with a stock chart that looks like the one above?

Because after this year’s bumper crop, corn prices look like this (corn is the biggest input cost for ethanol producers):

1 Year Corn Chart