2013 | 2014 | ||||||
Price: | 16.50 | EPS | $0.00 | $0.00 | |||
Shares Out. (in M): | 61 | P/E | 0.0x | 0.0x | |||
Market Cap (in $M): | 1,000 | P/FCF | 0.0x | 0.0x | |||
Net Debt (in $M): | 500 | EBIT | 0 | 0 | |||
TEV (in $M): | 1,500 | TEV/EBIT | 0.0x | 0.0x |
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https://www.dropbox.com/s/jja3ltffqy17ofg/GenCorp%20Writeup%20June%202013.pdf
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# | AUTHOR DATE SUBJECT |
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50 | |
lpartners,
Can you repost the original write-up again? Thanks.
You may have addressed many of these points in your write-up, but I am struggling with the following accounting issues:
- I am trying to better understand the environmental remediation estimates. Are the 15 year estimates discounted? Why has 2015 been so much larger than previous years (even after taking into account Rocketdyne acquisition in 2013)? I am modelling as a $100mm-ish liability plus an annual expense of $10mm on a normalized basis, but this year's numbers indicate this is too low. - How does the pension (non-)payment/reimbursement pass onto the balance sheet? There seems to be an off-income-statement transfer where shareholder equity is increased while the pension liability is decreased. I have encountered similar off-income-statement transfers with respect to standard pension accounting, and I hope to get the specifics.
- I see that 86% of pension liabilities are recoverable, but what percentage of the pension assets are already-recovered? Or is this too simplistic? Regardless of when cash payments are required, what is the ballpark amount of the net liability to AJRD?
- How is the pension (non-)payment/reimbursement treated for tax purposes? Looking at the 2013 and 2014 10-K's, it seems to me that the company pays taxes off EBITDA less D&A less interest rather than EBITDAP less D&A less interest. This seems odd and counter-intuitive as the company seems to get a windfall tax shield equal to the pension expense. Am I making a mistake?
- And then I am doubly confused by the Tax Assets related to the "pension plan losses." I am doubly confused because due to the nature of pension accounting and taxation (being above taxation), there should be no tax assets and liabilities associated. And then, as related to the above questions, we seem to already have a windfall in the cash taxes paid.
The 10-K's are not terribly helpful with respect to their odd accounting.
Thanks | |
42 | |
Thanks lpartners. Is it your view then that even in a worst case scenario where the AJ-26 was faulty the financial impact on GY should be minimal? Is this what the company thinks?
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40 | |
Wasn't ORB already looking at alternatives past the current contract? http://www.spacenews.com/article/launch-report/42223orbital-says-it-has-selected-future-antares-engine-but-offers-no
But now, I wonder if there is going to be a fight between Aerojet and ORB about the remaining AJ26 engines under contract (and already delivered but not yet used). Anyone have thoughts on how this plays out and whether it costs Aerojet significant cash costs (or simply write-offs and foregone profits)?
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35 | |
Did anyone catch the MS conference presentation? I was unable to find a webcast or transcript anywhere.
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33 | |
For some reason they've been slow to understand that their shareholders would like to see more investor outreach. This latest effort suggests they remain somewhat tone deaf with respect to effective investor communication. On one hand its frustrating, on the other hand when they fix it the stock should benefit. Hopefully investors will apply more pressure to accelerate this process. | |
32 | |
Whoever picked the music for that video needs to stop drinking so much coffee. | |
26 | |
lpartners,
Thanks for the update. I also spoke with the IR team recently and got a good impression of the company.
---
That said, we are still am not comfortable yet with the risk that Rocketdyne revenue streams in the mid-term (e.g. five years out) could decline. Perhaps significantly.
A large portion of Rocketdyne revenue (standalone, but also as % of GenCorp PF) is via ULA, which has a monopoly-like supplier contract with the DoD to put military satellites into space. I know that the DoD has clearly stated its preference for quality and track record (e.g. ULA) over launch value e.g. (SpaceX) and so SpaceX is not likely to muscle into this area in the next year or two...
But, it is highly feasible that the DoD will stop relying solely on the ULA in the mid-term as SpaceX rockets demonstrate their quality with more launches (assuming one doesn't explode in dramatic fashion, which is always a risk in this business). This might happen by ULA shelving one of the Delta or Atlas programmes, potentially halving the ULA revenue streams. The more we read about Rocketdyne's industry dynamics, the more we're concerned that the business' space-related revenues could decline significantly in the long-term.
Going from a monopoly / sole supplier relationship (as the ULA currently does) to competing against Elon Musk is not an attractive position on first inspection. Musk and SpaceX have shown an ability to do things other rocket-makers do but for a fraction of the costs... We've actually dug quite deeply into this issue but have yet to get confidence from primary research that we're misunderstanding the industry dynamics and that Rocketdyne revenues are, in fact, likely to grow.
What are your thoughts? Have we missed something? I'd love to hear your insights.
---
Also... using the CEO comments of 'doubling of revenue in five years' as a base for your DCF, how much of the growth have you factored in as being inorganic?
The reason I ask is that your estimated unlevered FCF margins of c. 8.2-10.7% are quite a bit above ours, and part of that is due to our estimates (based on company guidance) that a substantial amount (50%+) of revenue growth will come from M&A, with a corresponding drag on FCF from 2013-18E (it can easily shave 3% off the FCF margins, depending on what multiple you think GenCorp pays).
Have we missed something when reading through your analysis?
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Last question... building on the M&A question... how do you get comfortable that the CEO isn't going to waste cash (e.g. from monetising the land) on acquisitions (some might even be overseas, which would massively increase the executional complexities / reduce the synergy potential), rather than returning significant chunks of funds to shareholders?
You can easily see the company paying c. $300-400m on M&A over the next five years to meet the revenue growth the CEO is targeting, which is massive in the context of the (a) land bank value, and (b) market cap. of the firm. It's one of our largest concerns...
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Many thanks again for your time,
OMC
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22 | |
The shorts are convert arbs. | |
21 | |
Anyone know why the short interest is so high in Gencorp? What's the short thesis? | |
19 | |
by the company. I happened to be out there anyway
and got a chance to check out some of the property. It's prettier than I was expecting.
If any of you visit the area in person, note that some of the Gencorp buildings on
the property will eventually get taken down. Also, there are some power lines here
and there. When the property gets developed by Easton all the utility lines will
be undergrounded.
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17 | |
nychrg,
Great update. Thanks so much.
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16 | |
angus309,
GY told us they will have an earnings conference call following their quarter ending February 28, 2014. We see this as the next catalyst in what should be a catalyst rich upcoming year for GY. We expect that in early (March/April) 2014 the company will begin a process of reaching out to investors including quarterly earnings calls, investor conferences, potentially an analyst day and/or group site visits, and more sell side coverage. Having had a few quarters to focus on integrating Rocketdyne, we see them becoming more accessible throughout 2014. This transformation from special sit / orphaned security to a regular security will make the stock investible to a much wider group of insitutional investors. Likewise we expect a land transaction to occur in 2014 which should provide a basis for investors to value this non-core asset which currently is worth a meaningful percentage of equity value but generates no income or cash flow. We think the company has been patient about monetizing the first portion of the land as land values have been rising and the first sale will be the basis by which future divestitures will be priced. In terms of the business, while a large portion of their future revenues are secured under long-term government contracts (highlighting the stabilty of their future cash flows), the company has indicated that they see additional upside to estimates from commerical opportunities both organic and via tuck in aquisitions. We should gain more insight into these opportunities in 2014. That said, investors should not be surprised by quarter to quarter lumpiness as the company is selling large propulsion systems which inherently don't lend themselves to perfectly smooth quarterly results (gnerally a buying opportunity when the surprise is on the downside). In terms of deal syergies, they will be huge but the company will likely publically disavow them out of fear of upsetting the DoD. Our view is that the government will reap the majority of the savings, but, notwithstanding their public denials, over time the company will drive cost savings and grow ebit margins by virtue of the consolidation. As we roll into 2014 we like the set up on GY - a high quality business with secure long term contracts, and secular tailwinds trading at a meaningful discount to its intrinsic value for reasons that should be remedied in the coming months. Specifically its upcoming transformation from orphaned equity to regular security, a transaction to provide a value and eventual divestiture of its valuable non-core land asset, and more transparancy about the long term earnings potential of this monopoly business. | |
13 | |
I have a meeting scheduled with the CFO. I'd be glad to relay any questions you guys might have. | |
12 | |
Thanks for posting this idea. I have a couple questions for anyone who might know the answers...
1. Synergies: What is your basis for assuming any synergies? Just the notion that it's a corporate merger, so there must be at least some notional amount of synergies?
Both the company and Oppenheimer have told us the synergies will flow to the government. It reminds me of utility mergers - basically all the benefits flow to the ratepayers and not the shareholders. But, I acknowledge that merging utilities often have a way of creating at least some synergies. It's just that they can't talk about them in public.
2. Commercial: That leads me to my next question - how much commercial revenue are you modeling on a pro forma basis?
UTX didn't appear to break out financial results for Rocketdyne specifically, but based on the two investor presentations on GY's website, it appears Rocketdyne was doing significantly better than the 12-13% EBITDAP margins GY is suggesting we model. If Rocketdyne has a meaningful amount of commercial business, then it would make sense to me that consolidated margins could be >12-13% on an organic basis, with room to find additional uplift from synergies.
Thanks | |
11 | |
The discrepancy might be from a published Reuters interview with the CEO where he alluded to the kinds of growth rates lpartners are using or, in fact, even higher. He also discussed synergies that were, frankly, gigantic, albeit with the DoD likely taking the larger chunk. Away from that interview we always used the low to mid single digit top line growth rates because we have high confidence in them and the stock looks cheap with the more conservative forecast. We don't dismiss the higher forecast as implausible, but we'd need more time with management to get comfortable with those estimates. At this point, we're expecting to get clarity on growth rates and synergies by Feb/March if not sooner. In the interim, given the strong business fundamentals, and the stable nature of the business, we see the abiguity and quarterly "noise" / confusion as an opportunity to add on weakness. | |
10 | |
Very helpful, thank you.
One last follow-up for nychrg. You mention in your comment that the business is expected to grow "3-5% per annum". lpartners' write-up references mgmt expectations that the business should double over the next five years, which implies a rough 15% top line CAGR. Are you (nychrg) just much more conservative than mgmt, or am I misinterpreting the implication of these two comments?
Thanks. | |
9 | |
GY's management has said they want to have two "clean" quarters ('ie' w/ Rocketdyne) before instituting investor conference calls. From our read the company is 110% focused on integrating the aquisition and working to get their arms around the pro-forma business. Its a home run deal and one that will have large synergies (to be shared with the DoD) but the integration process is sure to be complex. Management's focus on integration is the right long term move but some investor hand holding on a messy quarter could have easily negated today's sell-off. Given the the inherent lumpiness in the business, the addition of Rocketdyne financials for only part of the quarter, and the fact that management did not give the one analyst covering the name any guidance, the set-up into the quarterly release was, to put it mildly, sub-optimal, creating the perception of a "miss". That said, the company has a monopoly position, long term contracts and is expected to grow 3-5% per annum. The lack of analyst coverage and investor engagement, while somewhat frustrating, is a big part of why the GY is trading at such a discount to its intrinsic value. The lack of investor communication is due to be rectified over the next six months, in the words of management, with quarterly investor calls, analyst visit(s) to their headquarters, attendance at investor conferences, and more analyst coverage. Further catalysts in the upcoming quarters should include at least a partial monetezation of their non-core land assets in Sacramento, highlighting the substantial value of this non-core asset and providing more cash to delever or to buy back stock. As such, the sell-off will very likely be, in retrospect, an attractive buying opportunity. | |
7 | |
Although I'm no tax expert, I believe the release of the deferred tax asset is partly a result of Company's expectation of profitability over the next three years but does not assume that all such tax benefit will be utilized over that period, only that it will be utilized before expiration of such benefits. The Company is expected to release the remaining $95MM deferred tax asset in the 4th quarter. | |
6 | |
lpartners,
Following on Fenkell's Q regarding the tax bene taken in the quarter, any addl thoughts on the quarter would be appreciated.
I freely admit to being a lazy ape on this one. Have only been watching from afar, so don't really know how to assess the quarter. Would normally turn to a conference call transcript to get a flavor, but looks like mgmt is still in radio silence mode.
Stock is off, looks like top line missed consensus by a mile, but consensus is only one dude so don't know whether it's even relevant. Really just looking for a quick commentary vs. how things are proceeding vs. your expectations to-date. Also, any sense as to when these guys are going to institute some quarterly calls? If I recall, your expectation was that they'd be doing more outreach post-closure of Rocketdyne, but doesn't appear they had a call this time around.
Thanks,
zzz | |
4 | |
The short interest is roughly 18.5 MM shares, the $200 MM converts are convertible into 22.2 MM shares at $9 per share. My guess is the short interest is virtually all related to the converts protecting their massive gain. My only other guess is that Mercato, Steel Parters and Gamco have large positions in the stock and huge gains on their investment. Maybe someone thinks/knows that one or more of them will try to take profits and is trying to front run them, but I don't know. The stock has good volume and with the Company over $1 billion market cap, I think any potential selling could be taken up by the likes of large mutual funds like Putnam, Fidelity etc. who are not in the stock. But that's pure speculation on my part. I know of no fundamental reason for the recent stock price action. The Company expects to host investors in the fourth quarter and have regular earning call after the december quarter. | |
3 | |
In our analysis, we had assumed $50-$75MM in synergies and a 12% 5yr Revenue CAGR and 3% thereafter which is less than the doubling of revenue over 5 years that Boley indicated in his interview. In our internal conservative case, we assume no synergies and a 8% 5 year revenue CAGR which gives us a $30 share price, which is over 80% from here. The Company has substantial NOL's which result in a lower tax burden. We are modeling 28% going forward. The Company has promised passing on of synergies as a condition of the merger with Rocketdyne, but I have a hard time believing that their monopoly position does not allow them to expand their margins. Today the company announced delivery of solar electric propulsion, here's the excerpt from the Boley interview;"
"He said the company had developed solar electric propulsion technologies that were already being used to power "some very big" U.S. government satellites that he was not allowed to identify. The company was also seeing a huge number of orders from satellite manufacturers, because the technology would extend the lifetime of satellites on orbit.
Not having to haul fuel to outer space would also dramatically lower the cost of launching satellites into orbit since fuel is often the biggest weight item on a satellite.
"It's a game changer. It's revolutionary. It's not just 10 percent more," Boley said, adding that he expected the solar propulsion system to generate billions of dollars in orders."
That's a new product for a Company with less than $2 billion in revenues. GY remains our single largest holding and we expect to keep it for a many years.
| |
2 | |
- The company says "all synergies will be passed on to the government". I find this a bit silly, but was wondering what your thoughts were?
- Cash taxes have been pretty low historically, any thoughts on future tax exposure and if the company has any creative tax sheltering strategies?
- http://www.reuters.com/article/2013/06/16/air-show-gencorp-idUSL5N0ES0ZK20130616 not sure how much weight to put on this guy's comments. any thoughts? |
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