Hidden Value Stocks issue for the third quarter ended September 30, 2021, featuring interviews with SVN Capital’s Shreekkanth Viswanathan and Blue Tower Asset Management’s Andrew Oskoui.
Welcome to the September 2021 (Q3) issue of Hidden Value Stocks.
In this issue, we have our usual two interviews and extracts from letters of funds previously profiled.
The first interview is with Jordan Zinberg, the President and CEO of Bedford Park Capital. Since its inception in September 2018, Bedford Park’s flagship fund, the Bedford Park Opportunities fund, has returned 26.4% on an annualized basis net of all fees and expenses.
Steven Kiel, the founder, and manager of Arquitos Capital is our second interviewee. Arquitos returned 7.2% net of fees and expenses in the second quarter of 2021, bringing the year-to-date return to 51.3%. Since its inception in April 2012, investors have achieved a net return of 18.1% annually, beating the S&P 500 by nearly 3% per year.
Rupert Hargreaves & Jacob Wolinsky.
Updates From Previous Issues – SVN Capital’s Shreekkanth Viswanathan On HEICO
In the Q4 2020 issue of Hidden Value Stocks, Shreekkanth Viswanathan, the Founder and Portfolio Manager of SVN Capital, highlighted Heico Corp (NYSE:HEI), a diversified aerospace and defense component supplier, as one of his favorite investments. In a recent letter to SVN’s investors, he provided an update on this opportunity:
HEICO is a diversified aerospace and defense component supplier. It operates through two segments. In the Flight Support Group (FSG) segment, it manufactures aircraft parts for sale directly into the aftermarket via third-party parts manufacturer approval (PMA). In the Electronics Technologies Group (ETG), it sells to defense, space, and healthcare companies.
As more airlines nurse their financial wounds on their way to recovery, I expect them to find HEICO’s products, sold at a significant discount to original equipment manufacturers’ cost, to be attractive. Historically, the company has grown through acquisitions; it completed one in 2021 and has completed five in the past year. In this pandemic-impacted travel market, the company is being selective and is finding high-quality targets of various sizes. Even though the stock has almost doubled from its low during the pandemic, I find the PMA business, unique acquisition strategy of not acquiring 100% of the target, decentralized operations, valuation, and cashflow- focused culture of this owner-operated company to be attractive.
Blue Tower’s Andrew Oskoui On Cornerstone Building Brands
Andrew Oskoui, CFA, the portfolio manager and founder of Blue Tower Asset Management, picked out Cornerstone Building Brands Inc (NYSE:CNR) as one of his top two stocks in the June 2020 issue of Hidden Value Stocks. He provided an update on the opportunity in a recent investor letter:
“While Cornerstone has been engaged in several M&A transactions since the formation of the company from NCI Building Systems and Ply Gem, this quarter saw their first major divestment of a subsidiary.
On June 7th, Cornerstone announced that it had reached an agreement with the Nucor Insulated Panel Group to sell Cornerstone’s Integrated Metal Panels business for $1 billion. The Insulated Metal Panels (IMP) business was a legacy subsidiary of NCI and was focused on serving the needs of industrial and commercial clients. The IMP business generated revenues of $349M in 2020.
The EBITDA margin for the commercial segment that contained IMP was 14.2% in 2020. If we assume that the IMP business had the same EBITDA margin as its segment, this gives a 2020 EBITDA contribution of $50M. By comparison, the pro forma Adjusted EBITDA for Cornerstone on the whole is $609M.
This sale appears to be accretive for the value of Cornerstone as their net debt after the transaction is $2.22 billion, down from $2.97 billion at the end of Q1 2021. Therefore, Cornerstone gave up 8% of their total consolidated EBITDA in exchange for a cash payment equal to 15% of their enterprise value. This will decrease their new debt-to-EBITDA level to approximately 3.9×2 and moves up their date for reaching their target debt-to-EBITDA level of 2.0-2.5x by a full year.
The central idea of our investment philosophy is to buy businesses at bargain valuations. As most stocks trade roughly near their intrinsic values, we must always ask ourselves why businesses appear to have been misjudged by equity markets. In the case of Cornerstone, we believe this was due to three main factors.
1) The large transactions and mergers associated with combining NCI and Ply-Gem created many one-time expenses and hid the underlying profitability of the business.
2) The large amount of debt held by the company caused many institutional investors to be unable to invest in the company due to mandate restrictions.
3) We held the belief that the construction sector, a cyclical industry, was likely to outperform the overall US economy as the country had been building an insufficient amount of new housing for at least the past decade.
As the company realizes acquisition synergies, the housing boom continues, and Cornerstone pays down debt, the company’s value will become apparent to investors and share price will rise to meet its true fundamental value. Investors who were previously repelled by the high debt levels will invest at lower leverage levels.
The share price has already tripled from the average price our long-term investors in the strategy composite paid, but we still believe the company has a high expected forward rate of return.”