Most Canadian PM's Have Crappy AIM

November 10, 2017 9:55 AM

I previously wrote about Aimia here and here. Sorry in advance for all the numbers but it's necessary...

So, earnings came out Wednesday night and I quickly read through for a few key segments of interest to me (redemptions, card spend, cash build, PLM) and within a few minutes, I was celebrating with a bottle of tequila.


For a quick backstory, AIM has been in the dog-house ever since Air Canada decided to end it's agreement in 2020. At first, there was a fear of a run on the bank (didn't happen and redemptions have stabilized at a few basis points worse than card spend for a slight cash leakage), then a fear that cardholders would leave AIM for other loyalty programs (active cards and spend are both up), then a fear that they'd have to spend massively to buy AC flights at retail market prices (redemption cost is down and margins are up as the business diversifies into non-airline spend), then a fear that they'd have a liquidity crisis (cash is waaaaay up) and now I don't know what the excuse is for the stock to be the cheapest liquid stock in the galaxy, trading at .9x EV/cash flow with half the market cap in net cash and with a seperate business not taken up into the financials that is worth more than today's market cap on a stand-alone basis!!!

While there are a lot of moving pieces to the adjusted numbers due to rapidly down-sizing the cost structure and eliminating unprofitable divisions, the overall result was roughly inline EBITDA, better than expected margins, maintining guidance on cash flow of $220m (market cap is $425m based on Thursday's close) and guiding to increasing EBITDA margin along with acceleration of cost cuts (sure sounds like 2018 guidance will be up from 2017 guidance when released with Q4 results). Normally, meeting guidance and guiding up slightly may lead to a shrug, but we're at less than 2x cash flow, with 1.44 a share of net cash (shares closed 2.80 on Thursday) and .9 EV to cash flow, with cash flow now growing as revenues grow, I just don't get it.

(in $CDN Million)

Cash and Investments         669

LT Debt                             450

Net Cash                            219

Net Cash/Share                 1.44

Cash Flow Guidance           220

Cash Flow Per Share          1.44

TTM Cash Flow Per Share    1.40

Equally important, AIM's 48.9% interest in AeroMExico's loyalty program (PLM) had yet another huge quarter of member and EBITDA growth, going from USD $19m in Q2 to USD $21.2m in Q3 and the 9 mos of 2017 show USD $56.6m of EBITDA vs USD $48.1m in all of 2016. Annualizing the USD $21.2m of EBITDA gets you to USD $84.8m, slapping a 10x multiple on that (I personally think it should be much higher given the runway and growth prospects of a negative working capital business) and you're at USD $848m and AIM's 48.9% is worth USD $415m or CDN $525m at today's fx rate. That's $3.45/shr + $1.44/shr in net cash = $4.89 and you get a pile of businesses that spit out $220m a year in cash flow for free!!!

$4.89 which is roughly today's tangible book value + $600m (3 years of cash flow) + $70m of annual run-rate savings + interest savings and net interest income from accumulated cash reserves + growth of PLM over next 3 years - whatever severance and cost reduction expenses are incurred along the way; so by 2020, you're at roughly $10/shr in tangible book (mostly cash and PLM) and then you have a business that's moderately impaired due to losing Air Canada's business and maybe doing $140m of cash flow a year ($220m current run-rate - $150m hit from customers switching to AC + $70m in cost savings = $140 and I really don't see a $150m hit from customer defections. I'm just trying to be draconian here).

If you're at $140m/yr maybe it's worth 10x that cash flow and you get another $9/shr in value, so put it all together and you're at ~$19/shr in 2020?

Seems pretty damn cheap at ~$3 now, it's mostly de-risked after earnings, management seems to be doing the right things and buyers seem to finally be waking up to the above facts.

Let's just say it's a VERY large position for me.


Disclosure: Long AIM CN

Categories: Current Investments
Positions Mentioned: AIM CN
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When Will The Tesla Stock Promote Finally Fail???

October 31, 2017 8:57 AM

The history of industry leading consumer tech products has not been kind to investors who overstay their welcome. You need look no further than all the hundreds of notable recent failures, to realize that these companies almost always flame out. The list below (in no particular order) is a nice trip down memory lane of former favorites, that are now either bankrupt or shells of their former selves—often consumed by some other entity that fortunately put them out of their misery. Of course, the list below, is just from the past decade or two;

Palm, Gateway, Research In Motion, GoPro, FitBit, Heelys, Handspring, Compaq, BlueRay, Garmin, Delorean, Casio, Sega, Tamaguchi, TiVo, Betamax, AOL, Walkman (Sony), Set Top Boxes (Scientific American), Kodak, Atari, Napster, Netscape, Polaroid, etc.

Let’s just say, it’s hard at the top. You must guess each change in technology, each generation of improvement and design it for fickle consumers, while constantly outlaying capital for research and development that may never go anywhere. All the time, others are constantly trying to overtake you.

If you look at the lifecycles of these companies, they often follow a similar trajectory from ingenious creation with huge margins, to a few generations of new products with smaller margins, to massive competition as deep pocketed competitors and venture capitalists try and emulate your product, to missing a product cycle, to becoming obsolete. These consumer product companies rarely last more than a decade; often just a few years. In the end, consumer focused tech is vicious and Darwinian, with very few long-term competitive advantages.

Of course, Tesla (TSLA – USA) is something of an anomaly here. While the companies in the above list, all produced prodigious cash while they were industry leaders, Tesla seems to incinerate cash while in the lead—using repeated equity and now debt offerings to plug the hole. While other companies had a huge stash of cash to fall back on when others overtook them, Tesla’s cash balance leaves it only a few quarters from insolvency. Add in a host of questionable related party transactions, convoluted financial statements (what the hell is pro-forma revenue?), the inability to ever hit company guidance, deceptive disclosures and a business that seems to lose more money with each vehicle it produces, is it any wonder that Tesla is one of the most shorted large-cap stocks today? If I had to choose the most obvious pending bankruptcy of a large-cap stock, it is clearly Tesla.


At the same time, I have to give Elon Musk credit. He has created a company that is a rather successful cult, even if it is still a failing auto company. Every time that skeptics ask real questions, he deflects them with futuristic sci-fi pronouncements. What other automobile CEO is obsessed with Mars while his assembly line fumbles along? What other CEO talks of hyperloops, while his main product on auto-pilot will kill you if used as currently designed. This “visionary “status has deferred timelines and made all logical financial metrics meaningless to investors—which may be the point of all his hubristic talk in the first place. Extend, pretend, blatantly mislead investors, raise more capital. It’s the junior mining model—applied to auto production—on a scale that would make anyone in Vancouver blush.

Automobile production is a decidedly unsexy industry, with massive capital outlays, high fixed costs, huge cyclicality and low returns on invested capital throughout the cycle—the technical definition of an awful business. The leading players produce millions of vehicles a year, yet trade at mid-single digit cash flow multiples, due to how awful the industry is. Why is Tesla valued like a high-tech growth stock, where investors ignore accelerating operating losses; if the best-case outcome is that it becomes a cyclical auto manufacturer with depressing returns on capital? A new technology like electronic vehicles (EV) sounds cutting edge, but so was automatic transmission, air conditioning, power steering, fuel injection, etc. All the other auto makers copied these technologies and caught up within a few years—much like what is now happening in EV. So, how has Tesla become such an epic bubble, if it is competing (poorly) in an industry that is notorious for destroying capital? It is clearly the promotional genius of Elon Musk. Naturally, he won’t be the first or last “visionary” to have a comeuppance.

So, going back to my question, which is the genesis of this article; when will the Tesla stock promote finally implode?


Long-time readers of this site know that I no longer short companies. This was a hard-learned lesson from when I was short Research in Motion, about two years too soon and watched as it went up 3-fold on me—before ultimately collapsing as I had predicted. Unfortunately, I was not short much by the time of the collapse as a small position had mushroomed into something pretty large and I was forced to keep covering at accelerating losses—lest I be forced to sell good longs to fund the repeated margin requirements of the short. While my thesis had been right, my timing was wrong. As long as investors believed in Blackberry, it didn’t matter that Apple and Samsung were building competing products that were likely to be better. It didn’t matter that Chinese players were producing low-end models that were likely to be almost as good, but at a fraction of the cost. It didn’t matter that competition from cash rich competitors grabbing for market share would crush margins. No one on Wall Street cared—until the iPhone finally showed up and people realized it was better. Then the Research in Motion collapse began.

For the past year, Tesla was a bet on pending mass production of affordable EV cars. Earlier this summer, we saw the first of the Tesla Model 3s to be produced. Even the normally ebullient journalists struggled to hide their disappointment with the product. This is understandable, dozens of competing EV models are coming, starting as soon as 2018. Will they be better than the Model 3? Based on what we know thus far, they’re unlikely to be worse. As they continue to advance EV technology, auto companies with far greater resources than Tesla, will eventually surpass it—much like with Blackberry. Then again, Research in Motion was coining money while at the top of its game—Tesla consumes money, while racking up debt. This won’t be a game of margins and profits—all the incumbents need to do is show that they can break even producing a comparable vehicle. At that point, the funding for Tesla will subside and its debt will bury it.

I was too early with RIMM and I don’t want to be too early with TSLA. So, I’ve been patient. I’ve been waiting for the competitors to show up. They’re now coming. The Tesla Model 3 is a dud—competing products will begin showing up in 2018 and they look much better. However, I’m not going to short TSLA. I’m going to use long-dated puts—much like I’ve played all subsequent dead-man-walking companies with an uncertain mortality date.


The problem with puts, is that long-dated puts are expensive. Fortunately, there’s a way to offset this cost, the bear put spread. This is the purchase of a put and the sale of a put at a lower price. By doing this, your gains are capped by the price of the put you’ve sold, but since your cost is much lower, you get to play with many more of them. Besides, you don’t need Tesla at zero to win with these, you just need Tesla’s share price to drop materially from here. If my timing is wrong, my losses are small and I can reload when they expire. Besides, I don’t expect TSLA to be a zero immediately. It is much more likely to limp towards zero, as opposed to imploding towards zero—making the bear put spread even more attractive than straight puts. Let’s just say that for the past few months, I’ve been adding to this position. The net cost of the spread is cheap and the timing now seems increasingly pregnant.

When will Tesla’s stock promote finally implode? When people realize that it’s a cash incinerating vanity project for Elon Musk, at a time when new, better products are coming to the market. That point is coming soon. Very soon.


Disclosure: Long 2019 TSLA Bear Put Spread (250/175)

Categories: Current Investments
Positions Mentioned: none
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Sold My NZME

September 14, 2017 11:20 PM

Back in February, I wrote about NZME LTD (NZM – Australia), the dominant and highly undervalued media group in New Zealand. At the time, I said that “results will probably range between meh and bleh…,” which is what first half 2017 results showed—declining revenue and stable EBIT. While the stock is certainly cheap at about five times cash flow and an 11.5% dividend yield, NZM was always a place-holder for me until something better came along. I’m increasingly finding better opportunities that can increase many times in value, as opposed to a low risk cheap stock with a nice dividend and I prefer to recycle my capital into those opportunities.

Following NZM's most recent earnings release, I’ve reassessed my investment and decided to exit. My average exit price was around 79 cents. I mentioned the stock at 66 cents. The total gain since mention, including the 6 cent dividend along the way, brought the total return to 29% in just over six months (excluding an extra 5% from appreciation of AUD), which is nothing to be disappointed with—though not as good as the return would have been before the earnings release. In any case, NZM was a success for the home team…


Categories: Current Investments
Positions Mentioned: none
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Cheaper & Less Risky...

August 13, 2017 9:13 PM

Part of what makes the stock market so lucrative, is that it often responds in unexpected ways to new data—offering outsized profits to those that take advantage of these opportunities. Take the curious case of Aimia Inc (AIM – Canada) which I wrote about previously. The bear argument at the time, was that the Aeroplan business was permanently impaired by the pending termination of a partnership with Air Canada in 2020. At the time, I made the case that as long as the Aeroplan business did not have a negative value, the rest of the company’s assets were basically worth the current enterprise value, offering plenty of downside protection along with sizable upside if Aeroplan had true value. Aeroplan could only have negative value if there was a run on the bank where redemptions rapidly spiked and forced the current deferred redemption liability to become a real liability.  Meanwhile, there would be substantial cash flow accruing to equity owners over the next three years until the partnership terminated.

Fast forward a few weeks and the second quarter earnings are out. There was indeed an increase in redemptions, $9 million, or a 1% increase in annual redemptions—in finance, this is called “immaterial.” Even better, Aeroplan is not dying. Card spend was up 3% and new card issuance in June was basically in line with prior trends. Basically, the number one fear of equity holders did not happen. All the talk of a crisis at Aeroplan was just a media echo-chamber. At the time, I was an optimist on the business, but even I was surprised at how resilient it has been. Aeroplan is growing—no one expected that.


Why do I bring this up? When I first wrote about AIM shares, they traded for a few pennies over $2.00. Now they trade for about a dime less, yet the investment has been dramatically de-risked. If the market were intelligent, the shares would have rocketed higher to account for the dramatic reduction in risk at the company. Instead, you can buy into a de-risked version of the same investment at a lower price, as the market basically shrugged its shoulders. I added a good deal more and AIM is now one of my largest positions.

Of course, good news can sometimes be “priced in” and that accounts for the lack of price movement. However, I don’t think this is the case as management reiterated guidance of $220 million of cash flow in 2017, with sizable cost savings starting to occur in 2018. This clearly isn’t priced in at a $300 million market cap.

I always ask myself why the market gives you a gift. I think this remains a situation where most logical equity investors are Canadians who are either too lazy or too stupid to actually analyze the company beyond the fact that the partnership with Air Canada terminates in 2020.  In any case, that’s what creates this highly unusual opportunity to buy the same investment, with a much lower risk profile at a slightly lower share price. I tend to REALLY enjoy opportunities like this—they also tend to correct themselves pretty quickly once new investors figure it out.


Disclosure: Funds that I manage are long AIM CN

Categories: Current Investments
Positions Mentioned: AIM CN
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That Was SNAPtacular...

August 3, 2017 10:25 AM

Less than a month ago, I warned of SNAPageddon in SNAP Inc. (SNAP – USA) as venture capital shares unlocked and were dumped on the market. Shares of SNAP have now declined by approximately 30% since then—hence my puts increased in value by a few hundred percent.  


While I expect earnings next week to be abysmal, followed by more share unlocks, I’m cognizant of not being greedy after a few hundred percent gain in such a quick period of time. I’m ringing the register here and exiting the trade.

On a side note, as a result of my research on Snapchat, I learned of a new chart formation, the puking ghost.

puking ghost


Categories: Current Investments
Positions Mentioned: none
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