Monopoly For Sale
A company I have followed for years reported earnings today. The stock crashed. I don’t think the stock crashed on the earnings they posted today, but rather from the overall market selloff that hit almost every equity I follow. Things are looking pretty good for this company and there are a few near-term catalysts that could increase revenues and profitability — substantially — from their current 2023 full year guidance.
A few notes on the assets:
The assets are irreplaceable real estate and almost impossible to build in today’s ESG haywire crazy marketplace. Replacement value for the company’s assets imply substantial upside from the current valuation.
The company paid down $70 million in debt in Q1 and plans to pay down $200 million per year. At the end of 2024 the company should be trading at a net-debt-to-EBITDA ratio closer to 2.0x. This leverage ratio will allow them to rapidly repurchase stock and/or pay a large dividend.
The company has a monopoly revenue stream under a long-term government contract (through 2025 but I expect this to be extended as the tech is extremely sticky), with 55% operating margins and growing rapidly. At current run-rate EBITDA levels this tech segment could be carved out or sold for a substantial premium. I estimate it could be worth $3 billion, which is more than the current enterprise of the combined company.
There are a few near-term catalysts including the federal government leasing up additional real estate assets from the company — revenue that should be almost 100% incremental to the bottom line — and the lifting of a major political barricade that could add substantial bottom line cash flows.
Michael Burry has been a long-term owner of the company. The stock price has gotten whacked since the last time Burry filed but the thesis remains in-tact. Should Burry increase in position in the company the next time he files a 13F there could be some short-term upward price swings.
Hope you enjoy the update on this name. I own the name and remain constructive on the thesis, despite the downward move in the stock price. Things are playing out liked planned and substantial de-leveraging should occur — which will result in more cash flows going to equity owners.
Keep reading with a 7-day free trial