Whitney Tilson & Glenn Tongue: Many Ways to Win

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Whitney Tilson & Glenn Tongue: Many Ways to WinNote to readers: I am writing all these posts very informally. I have found that readers like this the best, and it enables me to take the most notes possible and get them up in real time. I will be updating the presentations in real time, and tweeting, so make sure to check back frequently or on Twitter, Facebook or Feedburner. Also you can check out this website announcement Value Investing Congress Website Announcement.

All notes are the speakers, except words in the brackets which are mine.

Whitney Tilson is the founder and a Managing Partner of T2 Partners LLC, which manages three hedge funds and the Tilson Mutual Funds. He is the co-founder of Value Investor Insight, co-authored More Mortgage Meltdown (fantastic book, you can view my book review here-here, and was a contributor to Poor Charlie’s Almanack (considered the best book on Charlie Munger).  Tilson writes a regular column on value investing for Kiplinger’s, has written for Forbes, the Financial Times, the Motley Fool and TheStreet.com, was featured in a 60 Minutes segment in December 2008 that won an Emmy, and is a CNBC Contributor. He is the co-founder and Chairman of the Value Investing Congress.

Glenn H. Tongue is a Managing Partner of T2 Partners LLC and the Tilson Mutual Funds. Mr. Tongue spent 17 years on Wall Street, most recently as an investment banker at UBS, where he was a Managing Director and Head of Acquisition Finance. Before UBS, Mr. Tongue was at DLJ for 13 years, the last three of which he served as the President of NYSE-listed DLJdirect. Prior to that, he was a Managing Director in the Investment Bank at DLJ, where he worked on over 100 transactions aggregating more than $40 billion.

Whitney Tilson-update on Berkshire Hathaway. Most attractive on a risk/reward basis. We put a multiple on normalized operating earnings. Warren Buffett historically puts a 12x multiple. Today we use about a 10 pre-tax multiple. $169,500 intrinsic value.

In absence of all catalysts, Berkshire is 35% below intrinsic value. The only other time it was this cheap was late November 2008, but there were tons of bargains then. The company is also much stronger today.

The share repurchase by Berkshire didn’t set a time limit. Buffett said he will buy under 110% of book value. Buffett has therefore thrown a floor on this stock and there is a huge upside.

Buffett would not be buying back stock unless he thought it was worth about $150k.

He has $77 billion in s/t cash and investments, he always keeps $20billion on the side, with $1 billion pouring in every month. And he could still make a mega acquisition and buy back almost unlimited amounts of stock. The only other time Buffett offered to buy back stock was at the peak of the tech bubble, but it was not a formal offering.

JCP is around fair valuation, but they have over-funded pension!

Were not as much betting on the business here; we have world class management.

They have a good balance sheet. The company has not done well over the past ten years.

Vornado and Pershing Square got in. The stock had a big pop when they announced that they were bringing back Ron Johnson.

We think Ron Johnson is the greatest retail CEOs in the world. He was the key guys in Target’s turnaround. Steve Jobs hired him to lead Apple’s retail stores.

Why did he leave Apple? He gave away $73 million of apple stock for $50 million of JCP stock. He then bought $50 million warrants at market price, which cannot be sold or excersized for at least five years.

He hired Michael Francis who was next in line to run Target. Francis also must have seen something to make him move.

Bill Ackman bought 18% of the company and took his voting rights down to be able to purchase more shares. Now Pershing Square owns 26% of o/s.

Steven Roth is the Warren Buffett of real estate. Steve Roth, CEO of Vornado, owns 9.9% of company, he must see value in the real estate.

The company has been around a long time and the leaving CEO did a decent job.

JCP is in every state, it owns a lot of RE. Revenue has declined since great recession. This has been a bit of a zero sum game for the industry.

EBITDARP (P is pensions) and EBITDA also has not recovered well.

They have a lot of exclusive brands.

Glenn Tongue continues….

JC Penny squares per sq foot are way below peers. Sales have not recovered near 2007 levels. We think sales have a lot of room.

Net promoter score (% of ppl who like the company basically)has gone up tremendously since 2000.

There is a Sephora store in 30% of JCP stores.

They just purchased the Liz Claiborne brand.

They have had flat online sales for past four years. We think there is a lot of room for improvement there.

We think they can get to $180 per sq foot of sales (still below peers), plus there are lots of room for improvement in EBITDAR

JCP has qualified contribution plan. They had some accounting changes based on discount rate which caused large losses on expense statement but were non cash expanses.

If there is 300 bps EBITDA improvement this is $52 stock with $180 per sq foot.

JCP RE portfolio is $12-15 to sell side. JCP “pays itself” $180m for the 38% of company owned stores. They pay $300m of the 62% stores which they rent.

2.3b of RE implied 8% cap rate.

If you put 6x EBITDA rate, the RE value is $13, which added to the $52 per share [mentioned above] would make the stock work $65.

The board can also authorize $900m share buyback. They did that because they realize how cheap the average price of $37 is very cheap.

The opportunity is not over. JCP Net debt/capital is 24.3%. They have room for more buy backs. I do not think they should or do need to do it now, but it could happen sometime in the future.

JCP also owns about $1.40 of reits.

The stock should be worth about $70 a share.


How will business model get better for middle market retailer like JCP? The assumptions we used are not super high, it is basically based compared to comps.

Would you be bullish without Ron Johnson? This is decent business. It is not great. Pershing Square and Vornado got us interested, however, it got a lot more interesting when Ron Johnson and Michael Francis came in.

Glenn says the RE slide says your buying RE business for 4x EBITDA. Would we buy decent retailer for 4x EBITDA of RE business? Yes, and that is super conservative analysis, cap rate of 8% is very low.

How can you realize RE value? The way Bill Ackman did it with McDonalds, where companies that own their own RE are better than companies that don’t.

Companies you have added? Goldman, Sandisk and Citgroup. Bill Ackman also has a position you can ask him as well. GS and C are trading at huge discount to book. Citi has a great international franchise, there is so much headline toxicity, that people dont look at it.

90% of storage will be on discs. Today, flash drives can cost $1 and there is exploding demand for smart phone manufacturers. Flash drives is a commodity business, but not with cell phones. Sandisk has unique capacity and technology.

Whitney thinks Sandisk is similar to railroad consolidation. Sandisk is the main player and demand is exploding, and the pe is only 6. If you own Apple iphone 32GB instead of 16GB ($100 more), that is 90% incremental margin. This is an incredibly valuable product.

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