This is a summary of ideas expressed at the 4th Annual Excellence in Investing: San Francisco Conference, which is dedicated to the support of education and other children’s causes, and presented in partnership with The Ira Sohn Conference Foundation, see notes from Ira Sohn New York here. Great line-up see some of the notes below.
Excellence in Investing
Michael Moe, Chief Investment Officer of GSV Capital
Trade Idea: Buy Twitter (TWTR)
Price Target: Given a $15.5B assumed IPO valuation and a 620mm share count, TWTR is worth $41.16 now, $53.23 in 12 months and $163.68 in 36 months
Valuation: Comparable valuation to Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD) with a smaller user base currently but with a revenue growth pace of 105% vs. Facebook Inc (NASDAQ:FB) at 53% and LNKD at 59%.
Themes: IPOs have changed since the 1990s. There are fewer of them, the companies going public have been incubating longer and therefore accruing more value for private investors than public, since private investors are capturing more of the initial growth. TWTR is arguably more like an older IPO, with more growth ahead for public investors than has been the trend.
TWTR is at the forefront of numerous value-creating changes. As computing shifts to mobile usage (there are 6.5B total mobile phones vs. 1.5B smartphones), TWTR has usage that is already 77% mobile. As video increases as a percentage of data, TWTR has a popular app in Vine. As the second screen becomes a core feature of media usage, 67% of the 18-34 demographic tweets while watching television. As wearable devices develop, TWTR’s mobility and brevity will capture share.
How will this be monetized? In various ways – one powerful example: a 1% shift in current ad spending from TV to mobile implies $2B in new value for social media. The acquisition of MoPub gives TWTR an early edge.
Catalysts: Steady growth at the current trajectory in users, views and tweets will translate into free cash flow – TWTR only needs to achieve half of FB’s users and match its ARPU to achieve valuation targets.
Malcolm Fairbairn, Chief Investment Officer of Ascend Capital
Trade Idea: Buy CF Industries Holdings, Inc. (NYSE:CF), avoid potash companies in general
Price Target: Current asset replacement cost is $280/share and will be $353/share by 2016 millions? Billions?
Valuation: CF Industries Holdings, Inc. (NYSE:CF) is the low-cost producer in the global marketplace and deserves to be valued, at minimum, at replacement cost. It is currently valued at 5x adjusted EBITDA and deserves the 6.5x EBITDA valuation that Lyondell and other cost-advantaged commodity producers receive.
Themes: Despite the shale gas revolution making the US the lowest-cost region for nitrogen fertilizer (feedstock is 70% of costs), the US is still a net importer. 10 world class plants would need to be built to make the US a net exporter. CF has the best cost structure, is the largest US player, second global player and has excellent locations in the mid-continent.
At current trough levels of pricing ($300/ton) CF can earn more than $16/share. At a reasonable recovery in pricing (say $400/ton vs. $4 in natural gas prices as input) CF can earn between $28 and $35/share. It will be able to increase capacity by 25% by 2016.
Catalysts: Holders are getting paid a dividend to wait while the world fertilizer market sorts itself out. In the meantime, CF Industries Holdings, Inc. (NYSE:CF) has $1.9B of share repurchase capacity, can borrow at 4% and buy back shares at 15%, could avail itself of an MLP structure to unlock value (as RNF and UAN) and could also increase its dividend which is now less than 20% of EPS.
Christopher Lord, Managing Partner of Criterion Capital Management
Trade Idea: Buy tower companies – Crown Castle International Corp. (NYSE:CCI), American Tower Corp (NYSE:AMT), SBA Communications Corporation (NASDAQ:SBAC).
Sell 3D printers (ExOne Co (NASDAQ:XONE), 3D Systems Corporation (NYSE:DDD), VOXELJET AG (NYSE:VJET)), Cree, Inc. (NASDAQ:CREE), “communications box companies” (Cisco Systems, Inc. (NASDAQ:CSCO), EMC Corporation (NYSE:EMC), VMware, Inc. (NYSE:VMW)) and certain “second and third tier” CRM cloud firms trading at 20x to 30x revenue multiples.
Price Target: $100 (Crown Castle International Corp. (NYSE:CCI)), $110 (American Tower Corp (NYSE:AMT)), $110 (SBA Communications Corporation (NASDAQ:SBAC))
Valuation: Towers currently receive a REIT discount because of rate concerns. But even factoring this out, towers get a 16x multiple vs. 20x for the better REITs and this despite 15% free cash flow growth vs. 8% for REITs.
Themes: Mobile data has increased 35x in 6 years and will increase 430x over the next ten years to 11.2 exabytes per month. Who wins in data growth? Towers do. It is a real estate business that is neutral to winners and losers among service providers, enjoys 5-10 year leases with price escalators, has nearly insuperable barriers to entry, and has ~100% incremental EBITDA margins and 60% incremental free cash flow margins.
US nationwide service providers are moving from a duopoly of players with fast data capability to 3 or 4 players. Softbank Corp (OTCMKTS:SFTBF) (TYO:9984) is committed to building a superior data network at Sprint Corporation (NYSE:S). This is how Softbank won share in Japan: they believe in the strategy. This means more customers per tower and also densification: more cell splitting and redundancy in networks to enhance them. This means a lot more capital expenditures being directed to towers.
Catalysts: Earnings and cash flow will grow as the market ramps up to 3 and possibly four national rich data players, and the management teams of the tower companies are committed to returning capital to shareholders and will take steps to do so.
Short Idea Theses: 3D printing companies are in an easily commoditized business and trade at 10x revs, DDD is the easiest short. Major data players like Google Inc (NASDAQ:GOOG), Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN) have moved beyond box solutions like Cisco Systems, Inc. (NASDAQ:CSCO) for their needs and will not give these companies 70% margins ever again. CREE’s business can be replicated more cheaply in China and this is happening already. Also-ran cloud salesforce.com, inc. (NYSE:CRM) firms are overvalued and have no competitive advantage.
Christopher Balding, Finance Professor at HSBC Business School of Peking University
Trade Idea: Buy and flip certain kinds of Hong Kong secondary offerings
Sell the higher quality Chinese companies, sell commodities linked to China, sell shares of commodity related companies in linked markets like Australia, sell AUD
Price Target: no specifics
Valuation: Valuations in the marketplace right now are skewed, while 65% of Chinese shares are below HK share historical averages (P/Es are 12x, P/Es of state owned enterprises are closer to 4-6x) these shares are not cheap. There has been a “flight to quality” with the market shifting to more verifiably profitable companies, but these now trade at sky-high multiples (Byd Co – 1211 HK) now has an 1100x P/E.
Themes: All financial data from China is false and manipulated. The provinces report 10.8% GDP growth, China reports 7.8% GDP growth. These are all official numbers, but there is no official explanation for the missing 3% in GDP growth. There has been a 111% appreciation in real estate pricing in recent years while