Live Nation- Everybody Wants to Rule the World

Date: May 2, 2013 Price: $12.50 Mkt. Cap.: $2.4 billion

An investment in Live Nation (LYV) provides investors with an opportunity to buy into a unique set of assets that provides an ecosystem to maximize that amount of revenue and profits available in the live entertainment industry. Unlike most of our typical investment reports which focus on free cash flow utilization, net asset value investing, mean reversion of margins or special situations, this report will look at the investment merits of a company that generates little free cash flow at the moment and is somewhat of a growth investment if company management is successful in achieving its objectives. Their dominant size is a competitive advantage and the presence of a significant, value creating long-term investor (Liberty Media)  provides additional margin of safety from a liquidity standpoint. The strategy is not without risks and we will discuss those as well.. What follows is our analysis of the merits of Live Nation’s three year plan to grow its Adjusted Operating Income (AOI) by 30-35%.

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Don’t Wait For The Clouds To Clear – Buy ATI Now

Date: May 1, 2013       Price: 26.02    Mkt. Cap.: 2.8 billion

We recommend purchase of the shares of Allegheny Technologies (ATI).  ATI deserves enormous credit for wisely reinvesting in its basic business despite fluctuating earnings.  Too many U.S. industrial companies have increased dividends, made mistimed stock buybacks, or completed silly acquisitions.  ATI is nearing the end of a long capital investment cycle that will leave it well positioned for future growth and sustained profitability. Highly cyclical companies like ATI are notoriously difficult to understand, value, and predict.  However, it has been our experience that investors with patience and courage can profit from owning the shares of volatile companies that are competently executing a solid long-term strategic plan.

We will give an overview of ATI’s business, make an attempt at valuation, and finally discuss some of the “timing” issues involved in our recommendation

DESCRIPTION

ATI is a difficult company to understand.  It is in part a producer of many highly specialized steel alloys that have very interesting growth prospects, and above average profitability profiles.  These products include titanium alloys that have increasing importance in the manufacturing of commercial jet airframes and jet engines.  However ATI is also a large producer of stainless steel products that are closer to what one could call “commodity” grade and cannot really be considered a specialty product.   Stainless steel adds certain alloys (mainly nickel, but many other are used) to prevent corrosion and rust. Growth in these products in highly dependent on economic growth, and competition is higher, and profitability is lower and much more volatile.

The slide below is borrowed from ATI’s 2012 annual report.



Some important things to note:

  1. 79% of sales are high-vaue products, only 21% is commodity grade

  2. potential growth areas like aerospace and oil/gas are 51% of sales

  3. the remainder is widely diversified, withonly an 8% exposure to the cyclical automotive business

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Body Central: Cheap for a reason, isn’t that always the case…

Investors have a tendency to look at stock charts after a stock has significantly increased in value and think the could have made that big return if they had just known about the opportunity at the time. In reality it doesn’t work that way. Most stocks that are near their lows or out of favor are “cheap for a reason”. Here is an example of one, Body Central (BODY), a former high flying growth stock that is now trading at one-third its peak valuation and more importantly less than enterprise to sales ratio of 40% and cash equal to 30% of the market cap. Similar stocks have been acquired at 2X the current multiple.

When stocks are out of favor and priced inexpensively, investors tend to focus on the reasons they are out of favor. When they are in favor and priced fully, investors tend to focus on the reasons they are priced that way. In truth, most of the time those reasons are always present, it is just that investors tend to focus on just the negative when stocks are declining and focus on just the positve when they are increasig.

Here is our take on the reasons BODY is cheap and some thoughts on what the reasons could be  when it isn’t cheap any more….

I have spent almost my entire career in the investment industry, over 27 years of it anyway, as an analyst focused almost entirely on “value” stocks. Most aspiring value investors are intellectually attracted to the investment style because it makes sense intuitively. Buy enough “safe” cheap stocks and thanks to mean reversion or shareholder activism or just plain time, your results should outperform the market. Investors see successful investment results ex-post and believe in “hindsight” they too could have made that investment. However, I believe that, “if you could have you would have.” What most investors fail to understand is that the value stocks that have done well where most likely “cheap for a reason” at the time the potential gains were the greatest and there was no clear reason or “catalyst” to buy the stock at that time. As others have said, “valuation can be its own catalyst.” What follows is an analysis of Body Central (BODY), a stock that is “cheap for a reason” and has no “visible catalyst.” Anyone that is still reading this article after that last sentence, thank you for your support!

Seeking Alpha Body Central Article

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A. H. Belo. Hidden Value or Value Trap?

We have posted several articles on Seeking Alpha. Here is one that analyzes A. H. Belo, the owner of our hometown newspaper, The Dallas Morning News.  We will continue to post articles on Seeking Alpha to help investors improve their analyis process and to provide a framework for further investigation of an idea.

Seeking Alpha

Here  is a PDF version.

Seeking Alpha AHC article