All quiet on the board.
The stock continues to trade poorly. I'm adding, as my analysis shows you can buy the operating businesses at 3x earnings or better.
Shall we toss out some numbers?
Market cap today of $408M at a $3 share price
Let's break the business into operating and non-operating pieces.
Non-operating:
Legacy Capmark is down to $53M NAV per the last conference call.
Then there's cash. $163M as of last report. How much can we call excess? Let's call $63M working capital and $100M excess. (This is likely conservative. The SCUSA agreement requires $40M of liquidity, although not sure whether that includes asset-backed revolvers etc. This amount plus $20M looks like enough to run the business)
So for the non-operating business there's $153M of value.
Leaving $255M for the rest: Bluestem and Orchard brands. (We can do this since I believe management kept the debt taken on in these acquisitions recourse to each operating entity. At least they did for Bluestem, I need to double check the $270M term loan for the Orchard acquisition).
What does $255M buy you?
For starters, it's less than the cash (or non-debt) portion of the acquisition price for the two operating assets: $265M for Bluestem ($565M acquisition less $300M term debt taken on) and $104M for Orchard (of the $410M acquisition).
Meaning the market is implying an immediate writedown on these two acquisitions, notwithstanding 1) greater resources and financial flexibility for growth at both companies 2) almost a full year of Bluestem double-digit topline growth 3) synergies between the two companies we should start to see over the next year, and 3) the tax protection the parent company's NOLs bring to the table.
Okay forget history and price paid - what does it buy you today? Last quarter showed $13.8M loss. Let's adjust that for BS I don't care about:
-Subtract AOCI: $0.362M
-Add back amortization of intangibles: $14.76M
-Take out the mark on the warrants: $0.411M
-Take out CRE income and opex (since we already netted CRE out of the market cap: $2,284M
-Add back one-time acquisition expenses: $6.6M
That gets us to a normalized 'cash earnings' of $4.5M for the last quarter. (What I'm calling 'cash earnings' is closest to EBDA)
But wait - Orchard was only in the results for 21 days. If we adjust these earnings for a full quarter of Orchard I get to an estimate of $12M cash earnings for the quarter. Annualizing this is putting us into 19% earnings yield territory (4 x $12M earnings / $255M market value). Not bad.
Of course you can't annualize a retail business. It's hard to say what Q3 and Q4 will look like from an earnings point of view since there are a lot of moving parts from the acquisition. But, we can say what the seasonal pattern of sales looks like, and then use the last quarter as a baseline for expenses.
Bluestem sales seasonality (Q2 = 1)
Q1: .74
Q2: 1
Q3: .93
Q4: 1.98
So Q4 is typically a monster quarter. Plus management is back-loading advertising to Christmas. If Q4 2015 looks like it has in the past, we'd expect to see ~$900M sales in Q4 (assuming Orchard is seasonal similar to Bluestem).
Scaling expenses that scale (COGS, marketing, Bluestem credit expense) and holding constant those that don't scale (G&A, interest) - I estimate between $80M and $95M cash earnings for Q4 (again, with the same adjustments as before like amortization etc.)
Now we can lay out the year
Q1 about breakeven, maybe small loss
Q2 ~$12M
Q3 $5-10M
Q4 $80 - 95M
Which means we're looking at $85 - $115M in cash earnings for 2015.
For a price of $255M. That's a 30-45% earnings yield.
And keep in mind this is before the impact of any synergies from the Bluestem - Orchard tie-up. They've never quantified those but we can imagine there are considerable revenue synergies (e.g., selling Orchard private label on Bluestem's platform) and cost synergies (using Orchard sourcing network for Bluestem private label, returns to scale in G&A, etc.)
(Let's idiot-check this vs. management guidance. At the time of acquisition, they guided to $169M in EBITDA. In the last conference call they stated that they were 'approximately on track' for this number. Subtracting $55M in interest expense puts us at $114M in what I'm calling cash earnings. I'm not sure what management means by 'approximately' but EBITDA 20% lower than guidance still means $80M in cash earnings.)
Risks:
-Credit buying business model may come under regulatory scrutiny as predatory
-Class action lawsuit about Bluestem pricing practices
-Funding risk: only funding agreement for their layaway business is with SCUSA, which is exiting the business. Current agreement nevertheless remains in force through 2020 and they are looking to second-source.
-The usual integration risks etc.
-Poor acquisition. Management is almost certainly shopping for another business and will use balance sheet cash (which is unequivocally not going to be distributed to shareholders) + more debt. I certainly liked the Orchard acquisition a lot less than the Bluestem acquisition. Hopefully #3 does not continue the march down in quality.
