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Greenhaven Road Capital 3Q17: ETSY, FCAU, LMB, RKN, TRIP, EVI

Greenhaven Road Capital 3Q17 Letter, October 24, 2017

  • 3Q17 gross returns of 12%, bringing YTD returns to 38%, net of fees
  • We are 9 years into a bull market, the S&P 500 has been up 19 of the past 20 months, and volatility has disappeared

Etsy

  • One of the healthiest companies I know of that replaced CEO and CFO and laid off 20% of workforce
  • Despite all this turmoil, still guiding to revenue growth of 18-20% this year and showed growth in the number of both sellers and buyers on the platform
  • New management is pursuing a coherent strategy of focusing on growing the core marketplace, with strategies to improve the frequency of purchase and conversion of browsers to actual buyers
  • CEO purchased $1 million in shares this past quarter

Fiat

  • If Marchionne and team continue to execute, and the new car market does not fall off a cliff, I think we can earn multiples on our investment
  • Despite share price gains of over 80% this year, believe company remains substantially undervalued
  • In 2014, company’s 5-year plan outlined significant investments that would lead to the accumulation of significant net cash position by the end of 2018 plus the generation of €9Bn in EBIT, up from €7Bn this year and €3.8Bn in 2014
  • Publicly confirmed the forecasts; may have reconfirmed the plan since it was built on the US new car market of 16 million units (SAAR), which will likely prove conservative for 2018 given the current run rate and replacements from hurricanes
  • Also indicated that Fiat is working on spinning off the parts business, which grew revenue in excess of 10% last quarter and generated a full-year run rate EBIT in excess of €500 million. If we put 8x multiple, spinoff would be worth €4Bn. Add to that anticipated net cash of €5Bn, and we are left with a core auto business that will generate €8Bn in EBIT next year
    • Fiat’s share price is currently below €15. At the end of 2018, cash and parts business would represent €6+ per share and core business should add a bit over €5 EBIT per share if it generates €8Bn in EBIT overall. So if the plan and share price both hold, Fiat’s core business will be trading below 2x EBIT
  • If they come anywhere close, there remains an enormous amount of value in Fiat Chrysler
  • As the balance sheet strengthens, buybacks or dividends become real possibilities and the company would be an accretive acquisition to any number of manufacturers

Limbach Holdings

  • Another boring quarter of improved revenue, margins, and backlog
  • Over time, reasonable chance at revenue growth, margin expansion, and multiple expansion since the company trades at a discount to peers
  • One of Limbach’s board members joined the management team as EVP of M&A and Capital Markets this quarter
  • Company’s long-term success will ultimately be driven by organic growth and customer satisfaction
  • There is the opportunity for acquisitions in neighboring geographies as well as adjacent service offerings such as fire and electrical

Redknee

  • Conducted a rights offering and will use proceeds to fund their restructuring, which includes significant layoffs and product investments
  • Rights offering was fully backstopped by ESW Capital, a growth private equity firm focused on business software companies
  • ESW has invested $100 million into Redknee and placed the CEO
  • Under previous management, copious amounts of money were spent on R&D to expand beyond the telecom market. ESW plan is to focus the company entirely on telecom and have customer needs drive the product investments
  • Would expect Redknee’s short-term earnings to be between dismal and horrible as tens of millions of dollars of restructuring costs hit the income statement
  • Over time, ESW has a very good chance of building the company into a profitable business that could be a successful acquirer in the telecom software vertical

TripAdvisor

  • Net of cash of less than $5Bn, we own TripAdvisor’s reservoir of more than 500 million reviews visited by 400+ million unique users per month, and an audience which has grown at a compounded annual rate of 18% over the last 4 years
  • Annual worldwide travel spend is estimated at $1.3T. TripAdvisor’s excellent website, and #1 travel app are influencing hundreds of billions of dollars of spending
  • Company is in an attractive market with secular tailwinds and a very robust product but has not yet perfected the process by which they will convert traffic into dollars
  • TripAdvisor has transitioned business models from one where traffic was sent primarily to Priceline and Expedia (which paid the company per click) to one where more traffic is booked directly from the site
    • Transition has not been smooth and has stunted revenue growth, which was previously topping 20%/year but in fact declined by 1% in 2016
  • Appears that Priceline, the largest customer of TripAdvisor, is creating a headwind for TripAdvisor by bidding less aggressively for traffic. At the same time, competitor Trivago is finding their TV advertising less effective, which over time should be beneficial to TripAdvisor
  • Ultimately, Liberty Media and its CEO John Malone are the largest shareholders of TripAdvisor, and if current management cannot properly monetize the traffic, there should be numerous acquirers who are well-positioned to do so
  • Interestingly, company management did not renew their share buyback after completing it last quarter. Most plausible explanation is that the company was in possession of material information, such an offer to be acquired, and was therefore restricted from additional purchase
    • Time will tell, but ultimately an EV of less than $5Bn seems quite reasonable for this collection of assets
  • Even with monetization challenges, the company grew revenue 8% y-o-y last quarter and generated $320 million in operating cash flow over the first 6 months of the year

Envirostar

  • There was a 20% decline in a matter of 3 days after the quarter ended and more than 35% over the course of a week. Share price decline coincided with a short seller putting out a report
  • People who quickly followed the short report author into a non-cyclical, non-levered, extremely high insider ownership short may ultimately regret not doing more work
  • Envirostar is attempting to do a roll up in the commercial laundry space. Strategy is to buy within the fragmented industry at reasonable multiples using a combination of cash and stock. Strategy is then to materially improve the purchased business over time
    • If strategy is successful, over time, should see rapid revenue growth and expanding operating margins
  • Short report did not venture to project future revenue or margins, but looked back at the first year of a multi-year buy and build strategy. Effectively taking the least favorable time period, where acquisition related expenses have the largest impact, and because companies were acquired as the year progressed, only a portion of their full year revenues are reflected in the income statement
  • Valuation may have gotten ahead of itself but if the company continues to be successful buying companies at 5x EBITDA using cash and stock at 10x EBITDA and improving those companies, today’s prices will appear to be quite reasonable
  • Insiders own 70% of the company and the founders of companies they acquire agree to lock their stock up for multiple years
  • CEO has experience implementing a buy and build strategy, and is a jockey to be supported over the next 5 years
  • Almost doubled our position after the short report

Image Source: Greenhaven Road Capital

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