Time is Money: A Personal Lesson

Posted on 26/04/2011

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US founding father Benjamin Franklin wrote that “time is money”, adding that “He that can earn ten shilhngs a day by his labour, and goes abroad or sits idle one half of that day, though he spends but sixpence during his diversion or idleness, ought not to reckon that the only ex-pense ; he has really spent, or, rather, thrown away, five shillings besides.”  While Graham was teaching the lesson not to lie idle or to forgo the chance to earn interest, this advice can also be applied to opportunities in the financial markets.  Mis-pricings and the profit potential that arises from such situations may not survive for long as the company may announce important news or other investors may identify the opportunity and bid-up the shares.  For me, this lesson has been learned twice over during the space of the last month.  Firstly, I read in Glenview Capital’s investor letter posted on market folly that they were long shares of Expedia on behalf of their clients for the following reasons:

  • Healthy organic revenue and profit growth;
  • Recurring revenue streams with repeat customers and strong brand recognition;
  • Highly cash generative, with free cash flow exceeding net income; and
  • Modest cyclicality with an ability to maintain profitability in a downturn.
I decided that this was sufficient to warrant further investigation and I commenced to do some number-crunching on the historical financials.  However, before I got round to reading the management discussion & analysis in the most recent 10-K, the company made the following release:
BELLEVUE, Wash., April 7, 2011 – Expedia, Inc. (NASDAQ: EXPE) announced today that its Board of Directors has preliminarily approved a plan to separate Expedia, Inc. into two publicly traded companies:
  • TripAdvisor, which will include the domestic and international operations associated with the TripAdvisor® Media Group, which includes its flagship brand as well as 18 other travel media and advertising brands, and
  • Expedia, Inc., which will continue to include the domestic and international operations of the company’s travel transaction brands including Expedia.com®, Hotels.com®, eLong™, Hotwire®, Egencia®, Expedia® Affiliate Network, CruiseShipCenters®, Venere™, Classic Vacations® and carrentals.com™
The result was a rapid spike in the share price that can be seen in the chart below:
The second incident related to Central European Distribution Corporation, a NASDAQ-listed manufacturer and distributor of alcoholic beverages in Poland, Russia and Hungary.  I was aware of the business from my time working as a credit analyst (the company is an issuer of high yield bonds) but had recently showed-up on my value stock screens.  However, before I had chance to begin any work on the name, the company made the following release:

Central European Distribution Corporation today announced that it signed and agreed to an amended set of terms for its credit facilities (“the Credit Facility”) with Bank Handlowy w Warszawie S.A. (Citi) and Bank Zachodni WBK S.A. As part of the amendment, the Company has agreed to repay the remaining 122.5 million PLN ($45.20 million) term facility while at the same time retaining the 120 million PLN ($44.48 million) overdraft facility which is currently not utilized.

The overdraft facility will not contain either the Consolidated Coverage Ratio or the Net Leverage Ratio previously required under the Credit Facility. In addition to the elimination of covenants, the revised terms of the overdraft facility provide for an initial 100 basis point reduction in the margin charged to the Company, with further reductions coming over the next nine months, and the maximum amount available for borrowing under the overdraft facility will be reduced over the course of the next nine months as well.

Chris Biedermann, CFO, commented, “Following our strong cash flow generation during the first quarter of 2011, resulting in a cash balance of over $168 million at quarter end, and still having our Polish overdraft facility not utilized, we felt that the best use of our cash was to simply pay off the term facility and fully eliminate all financial ratio covenants associated with the credit facility. With all of our major cash commitments relating to prior acquisitions behind us now, we feel confident that the remaining overdraft facility combined with the cash on our balance sheet and projected cash generation will provide us with adequate liquidity to meet all of our upcoming obligations.”

Management and lenders were both giving the company a big vote of confidence by paying-down loans, reducing interest margins and removing financial covenants, leading to the following response from the company’s shareholders:
The lesson: don’t hang around when it comes to doing your research.  Value stocks especially can see their valuation discount eradicated by a single catalyst such as those mentioned above.  I’ll probably do some more work on both Expedia and CEDC; however, it still hurts a little to know that I left the first 20% of returns lying on the table.
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Posted in: My Thoughts