December 22, 2009
Pacer: Change of Mind
December 17, 2009
Lear: Post bankruptcy Equity
This is a very interesting idea. Lear (LEA) has just emerged from bankruptcy that it entered early in summer of 2009. The bankruptcy was voluntary.
Lear is a supplier of car seating and some electronics to car makers. Lear has a very dominant position in the seating market. However GM and Ford makes the bulk of its sales. In fact GM makes 23% of its sales while ford makes up 19%. Management is focused on diversifying this mix. They are focusing on sales into Asian countries where sales growth did not skip a beat in the last 2 years, unlike European and North American which sales plummeted.
What is good about the company is the following:
- Bankruptcy. Although it sounds bad but Lear has shed a lot of debt that was kept on its balance sheet after sales of some units to Wilbur Ross.
- Management owns a lot of stock. In fact management owns 2.4% of shares on fully diluted basis upon exit from Ch. 11 and the CEO has a big chunk of it. I think management will do whatever it takes to increase business value.
- There will be a lot of forced selling and a lot of technical overhang that could pressure the stock in the next 12 months. the selling pressure will be from:
- CLO funds. Lear debt and loans was wildly held by CLOs. CLOs do not hold equity; their charter do not allow it.
- Preferred stock conversion. Right now preferred are in the money and the company can force its conversion.
- Warrants exercise also in the money.
- Warrants and preferreds conversion will cause 35% dilution.
- The quick exist from bankruptcy limits lawyers and advisers fees.
What is not good about the ideas:
- The auto market has a lot of capacity still. even after all the bankruptcies not a single car maker disappeared, well only one Saturn but Saturn is made by GM so capacity is still there. We need to see some liquidation in the space.
- Margins are very thin right now below historical norm. This may change with more sales.
- GM and Ford make the bulk of its sales. Enough said.
- Economic risks of decline as so far recovery is shaky.
- Valuation is not cheap enough. I figure a good entry is between $48 and the high estimate of $55. If I am right about the selling overhang it will get there within a year, although it does not look like it as the stock price is on a tear lately.
December 3, 2009
What is wrong with this picture?
December 1, 2009
Cloud Peak Energy...not so Peak Value
Rio Tinto IPO of Cloud Peak Energy (CLD), sort of a spin off, came with no great fan fare. The IPO has gone down some 10% so far. There are good reasons why the stock is down. Some are due to industry dynamics and other, in my opinion, is due to the corporate structure of the mines.
- Miners are cutting coal production in 2010 due to decrease in demand that will stabilize pricing
- Mountain top mining in the states is in jeopardy as a source of cheap thermal coal due to environmental issues.
- Mountaintop mining in West Virginia, Kentucky, Virginia, Tennessee and parts of Pennsylvania and Ohio accounts for 6 percent of U.S. coal production.
- The end of mountaintop mining in Appalachia would remove about 70 million tons a year from the market, increasing demand for coal from Colorado, Montana and Wyoming.
- EPA has been holding mining permits with more frequency under new president.Natural gas pricing, is it firms up then utilities that switched to nat gas will switch back to the cheaper fuel, coal.
Transaction Specific Issues
- Rio Tinto still owns some 49% of the mines. However its ownership is at the limited partnership level rather than the holding company CLD. The public owns 100% of the holding company which in turn owns 51% of the limited partnership. That will make for conflict of interest between the public holders of CLD and Rio.
- Pretty much CLD is controlled by Rio as its board of directors is made of RIO executives. Moreover, CLD is governed by agreements that needs Rio's consent.
- Funds from operation will go to Rio and the holding company, CLD, but not to shareholders. I would rather see RIO and the public holders get the same treatment makes for better alignment of interest.
- Tax reimbursement agreement where CLD pays Rio any tax savings due to higher assets base level making depreciation and amortization higher thereby reducing taxes on income.
- Debt that got loaded onto CLD'd balance sheet to pay Rio for the assets is a bit high and will saddle the CLD with interest payments for some time to come.Most of the proceeds of the IPO goes to Rio.
November 14, 2009
Liquidity made me do it

- AOL spinoff from Time Warner
- Madison Square Garden (MSG) spinoff from Cablevision
- Cloud Peak Energy coal spinoff from metals giant Rio Tinto
- Pharmaceutical Product Development, Inc. (PPDI) Spinoff of Compound Partnering Business.
- SixFlags post bankruptcy equity
- Lear Corp post bankruptcy equity
November 10, 2009
Exit from Peyto
I sold out of Peyto Energy @ $12.26 (35% return) due to changes in competitive structure of gas supply. Pipelines are raising significantly their fees to carry natural gas. This will spell increased operating costs for gas producers and will lower asset values.
- New shale gas basins that are coming online are much closer to northeastern states like natural gas from the mega Marcellus shale play that extends to west virginia, is likely to grow to 1.0 Bcf/d.
- LNG gas coming from overseas as Europe does not need as much gas as previous years due to economic slow down.
