Capitalize for Kids is pleased to congratulate the Intelligent Investing Challenge winners on their outstanding work, as well as their personal philanthropy. All challenge winners have made sizeable donations to the Hospital for Sick Children, an unexpected and truly inspiring commitment. Please join Capitalize for Kids in congratulating these individuals on their outstanding work! See all three winning presentations tomorrow.
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Capitalize for Kids: First Place – Cecilia Hung – Long Gentex Corp.
Upside to target: 84%
Gentex Corporation (NASDAQ:GNTX) designs and manufactures automatic-dimming mirrors for the automotive industry. It is a $4 billion dollar company with sales of $1.2 billion in 2013. Automatic-dimming mirrors detect headlight glare from behind and automatically dims the mirror to protect driver’s vision. Gentex uses the mirror as the platform, a piece of “real estate”, to integrate a number of proprietary and innovative safety and convenience features. Gentex Corp. is notable for a number of reasons, including: a sustainable and appropriable competitive advantage through superior technology and a cultural imperative of constant innovation, a highly profitable business with strong organic growth funded entirely by its own generated cash earnings, an underapreciated growth runway, a unique ownership mentality among employees, and a compelling valuation.
Assuming a conservative 5% penetration growth in its major markets and entry into emerging markets, we use a 16x forward P/E multiple and estimate a 2-year base case share price of $51, an 84% upside.
Capitalize for Kids: Second Place – Michael Yerashotis – Short Exchange Income Corporation
Downside to target: 50%
Exchange Income Corporation (TSE:EIF) (“EIF” or the “Company”) has registered cumulative cash flow from operations of $32 million since the beginning of 2011. Over this same time period, it has also paid $105 million in dividends, made $200 million in capital expenditures and purchased $165 million worth of businesses. To fund its cash deficit, EIF has significantly increased its senior credit facility and tapped the public debt markets five times. Today, the Company has a net debt-to-TTM EBITDA of 5.3x and too many under-performing businesses.
Top of the list of under-performing businesses is WesTower Communications (“WesTower”), which has seen its EBITDA fall from $34 million in F12 to under $3 million in the most recent TTM period. With WesTower leading the way, the street is expecting a major turnaround in the Company’s profitability and cash flow that we think is unlikely to materialize. We believe EIF has an intrinsic value per share of $8.50.
Capitalize for Kids: Third Place – Shaun Currie – Long Chemtura Corporation
Upside to target: 85%
We believe that Chemtura Corp (NYSE:CHMT) is a misunderstood company whose business today is much different than it was only a few years ago. Once an over-leveraged, broad-based chemicals company, Chemtura has been transforming its business through asset divestitures to improve its balance sheet and become a pure-play on the industrial space. The company’s recent announcement to divest its AgroSolutions business will enable the company to reach a net-cash position for the first time since returning to the public markets in 2010, and will set up the company to pay down expensive debt and return cash to shareholders.
Additionally, we believe that this is still the early innings of the company’s goal to unlock shareholder value – CEO Craig Rogerson has a history of monetizing companies and has openly stated that the rest of the company or its individual pieces could be sold. Our blended valuation, using a public comps analysis and a sum-of-the-parts analysis, gives us a $41 price target, representing 85% upside to the current price.