I don't know if I'm not comfortable enough with high debt, or if you're too comfortable. But a Net Debt/EBITDA of 6.4 is quite something. Looking at it from an Enterprise Value perspective EV/EBITDA is 8, which doesn't seem super cheap for a no to low-growth story.
But with proper capital allocation I can see the appeal of the 20% yield.
I agree, the debt makes me somewhat uncomfortable. But the stability of the underlying cash flows makes a net debt to EBITDA of 6.5 much less dangerous than it would be if they weren’t franchised.
It’s something I plan to monitor quite closely, and if the balance sheet starts moving in the wrong direction, I will sell out quite quickly.
I should re-emphasise that this is not a high-conviction pick for me - there is definitely meaningful upside here, but with current management and a significant debt burden there are certainly risks. Just a note of caution!
Cash flow is yielding 20% and most of that can be put into buybacks and dividends so even with no re-rating, the shareholder yield should be in excess of 15%. Re-rating would just be the cherry on top.
The big question is whether earnings are gonna drop.
Let’s assume no earning growth… then what? Stock drops further but the fcf payout vs dividend is still less than 50% so they can maintain for a year or two… then what?
This was a great piece. Management must be studying EAT turn around
Nice write-up!
I don't know if I'm not comfortable enough with high debt, or if you're too comfortable. But a Net Debt/EBITDA of 6.4 is quite something. Looking at it from an Enterprise Value perspective EV/EBITDA is 8, which doesn't seem super cheap for a no to low-growth story.
But with proper capital allocation I can see the appeal of the 20% yield.
I agree, the debt makes me somewhat uncomfortable. But the stability of the underlying cash flows makes a net debt to EBITDA of 6.5 much less dangerous than it would be if they weren’t franchised.
It’s something I plan to monitor quite closely, and if the balance sheet starts moving in the wrong direction, I will sell out quite quickly.
Yeah that's fair.
Oh I think they can, was just thinking through next steps
You’ve convinced me to go long
Glad you found my writing helpful.
I should re-emphasise that this is not a high-conviction pick for me - there is definitely meaningful upside here, but with current management and a significant debt burden there are certainly risks. Just a note of caution!
Can I ask a question what’s the end point for this stock? Re rate the pe?
Cash flow is yielding 20% and most of that can be put into buybacks and dividends so even with no re-rating, the shareholder yield should be in excess of 15%. Re-rating would just be the cherry on top.
The big question is whether earnings are gonna drop.
Let’s assume no earning growth… then what? Stock drops further but the fcf payout vs dividend is still less than 50% so they can maintain for a year or two… then what?
Cash flow is roughly 2x (dividends + buybacks). Why do you think they won’t be able to continue paying dividends / buybacks?