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.