Upload
adam-muntner
View
228
Download
0
Embed Size (px)
Citation preview
7/31/2019 James Chanos
1/22
Value Investing ConferenceOctober 17, 2011
James ChanosKynikos Associates
Beware: The Global Value Trap!
7/31/2019 James Chanos
2/22
2
Classic Short Selling Themes
Booms that go bust
Consumer fads
Technological obsolescence
Structurally-flawed accounting
Selling $1.00 for $2.00
Value traps
7/31/2019 James Chanos
3/22
Value Stocks: Definitive Traits
Predictable, consistent cash flow
Defensive and/or defensible business
Not dependent on superior management
Low/reasonable valuation
Margin of safety using many metrics
Reliable, transparent financial statements
3
7/31/2019 James Chanos
4/22
Value Traps: Some Common Characteristics
Cyclical and/or overly dependent on one product
Hindsight drives expectations
Marquis management and/or famous investor(s)
Appears cheap using managements metric
Accounting issues
4
7/31/2019 James Chanos
5/22
Cyclical and/or Single Product
Cycles sometimes become secular (Steel, Autos)
Fad does not equal sustainable value (Coleco,
Salton, Renewable Energy)
Illegal does not equal value (Online Poker)
5
7/31/2019 James Chanos
6/22
Hindsight Drives Perceived Value
Technological obsolescence (Minicomputers,Eastman Kodak, Video Rental)
Rapid prior growth Law of Large Numbers
(Telecom Build-Out)
6
7/31/2019 James Chanos
7/22
Marquis Management and/or Famous Investor(s)
New CEO as a savior - ignoring Buffetts maxim(Conseco)
The Smart Guy Syndrome (Take your pick!)
7
7/31/2019 James Chanos
8/22
Cheap on Managements Metric
EBITDAArrgh! (Cable TV, Blockbuster)
Ignore restructuring charges at your own peril(Eastman Kodak)
Free cash flow? (Tyco)
8
7/31/2019 James Chanos
9/22
Accounting Issues
Confusing disclosure (Bally Total Fitness)
Nonsensical GAAP (Subprime lenders)
Growth by acquisition (Tyco, Roll-ups)
Fair value (Level 3 assets)
9
7/31/2019 James Chanos
10/22
Current Value Traps
Liquidating Trusts
Digital Distribution Destruction
Mis-Education
Nationalistic Commodity
China Bubble Fuel
10
7/31/2019 James Chanos
11/22
11
Liquidating Trusts: Integrated Oil Companies (IOCs)
Dead hand of government falls on new discoveries
Brazil - only the government benefits from offshore development
Russia IOCs forced to sell assets to state champions
US - Arctic permitting grinds to a crawl
Costs climb while oil production stagnates
Finding and development $22/boe in 2010 from $5/boe in 2000*
Production $15/boe in 2010 from $5/boe in 2000*
IOC liquids production declined in 2Q11
IOCs switch to natural gas despite plummeting prices
Sub-$4 natural gas is the new normal in the US thanks to the shale
revolution Race to secure land leases means uneconomical drilling continues
Slow liquidation via cash return strategies
*Source: DB, Global Integrated Oils, October 2011
7/31/2019 James Chanos
12/22
12
ExxonMobil (NYSE: XOM): Slow Value Leak?
Capital and exploration costs consistently higher than expectations
In 2006, upstream capital expenditure was $16bn; by 2010 it had reached
$27bn Guided 2011 capital expenditure climbs to $37bn versus $32bn last year
Guided 2012-15 capital expenditure of ~$35bn/yr versus prior estimate of~$28bn
XTO purchase = expensive bet on natural gas
XOMs reserve replacement ratios (RRR) are not as good as they look
2010 RRR of 212% - 55% without the XTO purchase
2009 RRR of 230% - 82% if the definition had not been broadened
XOM borrows to keep its buybacks going
FCF after capex, acquisitions, dividends and buybacks is regularly negative
$3.0bn in 2008, ($19.8bn) in 2009, $3.6bn in 2010, ($0.6bn) in 1H11
XOM goes from net cash of $25bn (4Q07) to net debt of $6bn (2Q11)
7/31/2019 James Chanos
13/22
Digital Distribution Destruction: Video Games
Media retailers that were cheapgot cheaper
Music HMV
Forward P/E of 7.5x before bottoming at 1.8x in June 2011 Multiple unsuccessful diversification attempts to offset music declines
Movies Blockbuster
Forward P/E of 4.1x before declaring bankruptcy in September 2010
Unsuccessfully competed against DVD-by-mail service and online digitaldistribution
Video games undergoing digital transition
Digital distribution is still constrained by large file sizes and slow downloadspeeds
Evolution of devices such as smartphones and tablet PCs changing thegaming industry
Packaged games pressured by growth in casual, mobile and social networkgames
13
7/31/2019 James Chanos
14/22
Gamestop (NYSE: GME): Next Video Game Victim?
Looks cheap at first glance
Forward P/E 8.2x versus 10.6x average forward P/E over last 5 years
Over $3 TTM FCF/share as of end of FQ2 2011 Used games facing increasing competition and margin pressure
NPD data: packaged games shrink while digital games grow
Software sales were -9% YTD September 2011; -5% in 2010 and -10% in 2009
Digital game estimated sales growth of 23% in 2010 2014 expectations indicate GMEs digital opportunity is overstated
2/3 of digital revenues to come from mature PC games
88% of expected revenues from physical games, hardware and accessories
Digital transition adds incremental risk to GME
Improving quality of low-priced digital games threatens traditional $60 price point
Game publishers are increasingly direct competitors
Fewer trade-ins to maintain used game business
14
7/31/2019 James Chanos
15/22
15
Mis-Education: For-Profit Colleges
Stocks trading at cheap valuations
Forward P/E multiples range from 7.8x to 13.2x*
Trading at large discounts to 5 year average forward P/E multiples (11.1x -27.8x*)
Returns on assets comparable to best companies (Google, Microsoft, Coca-Cola, Apple)
Business model under increasing pressure
Product sold not bought marketers not educators
Traditionally high churn rates create enrollment issues running out ofprospects?
Regulatory scrutiny of industry continues
Program Integrity Rules implemented (incentive compensation, stateauthorization, misrepresentation accountability)
Gainful employment rules still have teeth
Congressional support is waning
*Source: Based on Bloomberg estimates for APOL, BPI, CECO, COCO, DV, EDMC, ESI, STRA
7/31/2019 James Chanos
16/22
16
ITT Educational Services (NYSE: ESI): PEAK Earnings?
Looks cheap at first glance
Forward P/E 7.8x*,EBIT margins over 35%
Cash conversion over 140% (FCF/Net Income) Structural earnings issues
ITTs programs are considered expensive even in the for-profit universe
New student growth has been negative for three consecutive quarters
PEAKS Private Student Loan Program raises questions and enhances free cash flow PEAKS is an off balance sheet entity used to finance student debt
ITT guarantees PEAKS debt - not consolidated on its balance sheet
PEAKS reserve rate appears below historical industry default rates
Next tranche of PEAKS necessary to maintain student lending
Regulatory pressure is increasing
2009 2-year Cohort Default Rate rose 83% year over year (22.4% from 12.2%)
Securities and Exchange Commission has inquired about PEAKS
*Source: Based on Bloomberg estimates
7/31/2019 James Chanos
17/22
17
Nationalistic Commodity: Iron Ore Countries for Sale
Leveraged to Chinese growth
Growth in iron ore demand is driven by Chinas fixed asset investmentboom
Chinas share of global iron ore consumption is 59% (June 2011) up from52% (June 2008)*
Iron ore extraction becoming more costly
Major growth projects lie in increasingly difficult to access geographicallocations
Enormous investment in rail, port and energy facilities required to accessnew projects
Governments use companies as extension of public policy Exploit the industry as a source of revenue and taxes
Capital deployment at the suggestion of government officials
*Source: Macquarie, October 2011
7/31/2019 James Chanos
18/22
18
Vale (NYSE: VALE): China or Bust?
Cyclical peak creates impression of value Forward P/E 5.1x*,operating cash flow margin over 45%
$160/ton iron ore price more than 5x 30-year historical average Capital expenditure inflation is soaring 2011 budget of $24B; up 85% over 2010 Questionable capital allocation VALE Navy
12 Chinamax 400k dead weight ton very large ore carriers (VLOCs) Its not our policy to make money in freight. Jose Carlos Martins, Vale
Executive Officer of Marketing, Sales and Strategy
Enormous exposure to uncertain Chinese demand growth China accounted for 43% of Vales iron ore sales in 2010, up from 29% in 2008 Reliance on continued fixed asset investment growth in China
Brazilian Government influence on strategic decision-making Key driver of economy - iron ore exports accounted for 17% of total exports in 2010*
Recent resignation of CEO Agnelli amid rumored tensions with newly electedgovernment
*Source: Based on Bloomberg estimates
7/31/2019 James Chanos
19/22
19
China Bubble Fuel: Chinese State Banks
Record lending spree now three years strong
Massive 2009 stimulus 14% of GDP fueled largely by RMB 9.6 trillion inofficial lending
Banks lent another RMB 8.0 trillion in 2010 on track to lend another RMB 7.0trillion in 2011
Off-balance sheet lending by the banks adding fuel to the fire
Off-balance sheet lending by largest banks increased by over RMB 6.7 trillionsince 2008
CBRC growing concern push to bring loans back on balance sheet Underground lending may be the most significant risk of all
Estimated at RMB 4 trillion, 10% of GDP
Unsustainably high lending rates in Wenzhou - proxy for China at large?
LGFVs: A restructuring waiting to happen
RMB 10.7 trillion in LGFV lending as of 2010 Official estimates are that RMB 2-3 trillion are impaired
Big 4 banks maintain RMB 1.4 trillion in AMC bonds on their balance sheets asof June 2011, representing 50% of their tangible book value
*Source: Based on China Banking Regulatory Commission, Peoples Bank of China, National Audit Office, Credit Suisse, Sanford Bernstein, company filings
7/31/2019 James Chanos
20/22
20
Agricultural Bank of China (HKEX: 1288):
Leveraged to Frontier Expansion?
Agricultural Bank of China (ABC) apparent value at risk
P/E ratio of 6.3 for 2011, P/BV ratio of 1.5x
Profit headwinds reserve releases ending? ABC is Chinas largest county lender - 30% of total loans, 40% of retail
loans
ABCs relative exposure to rural China has increased in recent boom
Total loans up 74% since 2008, county loans up 100% ABCs current county credit quality understates riskiness of rural lending
NPL ratio of 2%, compared to pre-restructuring level of 32%
Reserve coverage of 210% could prove inadequate
ABC maintains a material LGFV loan exposure 10% of total loans
90% of tangible book value
7/31/2019 James Chanos
21/22
2121
Thank You to theValue Investing Conference
7/31/2019 James Chanos
22/22
Disclaimer
This presentation is for informational purposes only; it does not constitutes arecommendation or endorsement from Kynikos Associates LP. If you wish to
obtain further details about any information contained in thispresentation, please contact us. Any decisions you make based oninformation from this presentation are your sole responsibility. The views
expressed in the presentation were based upon the information available
to Kynikos Associates LP at the time such views were presented. Changes,
corrections, or additional information could cause such views to change.Kynikos Associates LP maintains a copyright on the presentation, aside frominformation, images, and materials contained within the presentation, whichare the property of others and, hence, protected by their copyright.