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Self-Introduction From GrizzlyRock


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Good evening fellow members,

 

I wanted to reach out and introduce myself to this group as a new member.  I run an emerging long / short fund, GrizzlyRock Capital.  I use fundamental value-based analysis to find mispriced securities in both equity and debt.  My background is in HY credit and my focus tends to be situations that are cheap based on cash flow valuations (as opposed to GARPy names or balance sheet catalysts).  I also traffic in event driven investments and shorts. Very little options and no commodities, FX, sovereigns, mortgages - just corporate investments.

 

Of note: I am not much of an "online guy" and have spent no time on message boards investing or other before this.  Thanks in advance for pointing me in the right direction.

 

Lastly, so you can get to know me and so I can share one attractive idea here is my Year End Letter recently forwarded to my clients: http://grizzlyrockcapital.com/GrizzlyRock_2012_Year_End_Investor_Letter.pdf

 

Looking forward to meeting many of you online,

-Kyle

 

Kyle Mowery

Managing Partner

GrizzlyRock Capital, LLC

www.grizzlyrockcapital.com

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Welcome to the board.  I see from your letter you have had and have an investment in an undervalued broadcaster.  I have found a few of these including TVL, GTN, NXST, SALM and EMMS.  What I have observed is the debt of these firms are at quite low yields versus the FCF of the equity.  Same set of cash flows, two different valuations.  What do you think could be causing this large discrepancy other than a market mispricing of the equity?

 

Packer

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ScottHall - Tell you what.  In the spirit of good faith for this forum I'm willing to post most of the report (16 pages)  It should get you directionally what you are looking for and if you want more we can hop on the phone: http://grizzlyrockcapital.com/GrizzlyRock_Liberator_Corner_Of_BRK.pdf

 

Hielko - Fair question.  3 reasons: (1) I am an idea junkie and was told that this group does a reasonably high level of conversation (2) As an emerging fund manager working by myself I am both trying to grow my online presence and business.  Online is leverage. (3) as a "lone wolf" analyst / PM, it is nice to have a forum for conflicting ideas & viewpoints.

 

The reason I don't typically do much online is that I can't stand short form analysis and snide comments (i.e. trolls).  I hope this forum has none of that.

 

You will always get an unvarnished opinion from me and if I have no opinion I won't act like I know everything.  Much of investing is knowing one's weaknesses & strengths.

 

Cheers

GrizzlyRock_Liberator_Corner_Of_BRK.pdf

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Packer16 - "I have found a few of these including TVL, GTN, NXST, SALM and EMMS.  What I have observed is the debt of these firms are at quite low yields versus the FCF of the equity.  Same set of cash flows, two different valuations.  What do you think could be causing this large discrepancy other than a market mispricing of the equity?"

 

Sure.  So I do think many of these equities are cheap but many are cheaper than others.  I came to know these names when I was focusing exclusively on HY bonds & levered loans.  Media has historically produced very stable cash flow levels and thus have been HY favs for awhile.  Broadcasters went through the 2008 debacle very clean proving the businesses were more resilient than many thought.

 

The knocks on the broadcasters are as follows: (1) who even watches TV any more?  Especially "the news"? Much of the content that the local stations provide is low quality at best (2) at some point the TV monopoly on the living room fades and operating leverage takes overdue to TIVO/internet/roku/netflix (3) this ultimately is a melting ice cube but no one knows when the cube begins to melt faster.

 

People are substantially underestimating retrans fees growth (100% margin) for the broadcasters as well as the sustainability of small DMA TV stations.  (i.e. how many people in Mobil Alabama have iPads?)  The better operators rise to the top by creating duopolys to sell ads and manage stations inexpensively. Just look at the retrans fights.  Who has won?  Its not the MSOs and Dish/DTV.

 

PS: you mentioned the name I own.  I'll give you a couple hints: small DMA focus with solid duopolys, excellent management, retransmission consent leadership, cheap for an extraneous reason, and highly leveraged.

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ScottHall - Tell you what.  In the spirit of good faith for this forum I'm willing to post most of the report (16 pages)  It should get you directionally what you are looking for and if you want more we can hop on the phone: http://grizzlyrockcapital.com/GrizzlyRock_Liberator_Corner_Of_BRK.pdf

 

Hielko - Fair question.  3 reasons: (1) I am an idea junkie and was told that this group does a reasonably high level of conversation (2) As an emerging fund manager working by myself I am both trying to grow my online presence and business.  Online is leverage. (3) as a "lone wolf" analyst / PM, it is nice to have a forum for conflicting ideas & viewpoints.

 

The reason I don't typically do much online is that I can't stand short form analysis and snide comments (i.e. trolls).  I hope this forum has none of that.

 

You will always get an unvarnished opinion from me and if I have no opinion I won't act like I know everything.  Much of investing is knowing one's weaknesses & strengths.

 

Cheers

 

Hi Kyle,

 

First of all, I'd like to say that I liked your analysis. I do want to say I apologize if I offended you in asking for it - the other document you linked to said to feel free to, so I thought it was alright.

 

I have a few questions about Liberator, and we can take them up offline or here. It does not really matter to me. I kind of view this business as a subscription business, so I think it makes sense to look at it from that perspective. Do you have an idea about the LTV per subscriber and how that compares to Liberator's subscriber acquisition cost? I'm assuming that you do, because you point out what you anticipate the company's advertising spend will be going forward and forecast its sales growth rate on the same page. The reason I ask this is because in your write-up, you seem to indicate that you think this market is potentially very lucrative, yet Liberator is planning on pulling in the reins on its ad spend.

 

Is this because the market is tapped out, because SAC has otherwise increased, or just because the company wants to focus on generating positive cash flow? If it is the latter, and it's not based on the economics of the advertisements, that would seem myopic to me and ultimately counterproductive. I like businesses that have, as Tom Russo would say, the "capacity to suffer," and are willing face short-term headwinds for greater cash flows over time. I'm not saying that is what's happening here, because all I've looked at in regards to this business is the report you graciously shared with us.

 

The other question is that you say this business benefits substantially from economies of scale. I think that's probably true, to an extent, but you also mentioned that the #2 player in this field was recently acquired and has much higher EBITDA margins than Liberator does despite its smaller size. Do you know why that would be? All else being equal, I would assume the bigger guy would have fatter margins.

 

Anyway, welcome to the board. We're always happy to have more intelligent people to share ideas with. :)

 

Best wishes,

 

Scott

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Not offended at all.  Just wanted to post something substantial without divulging everything I give to clients.

 

The client LTVs and cost per add are hard to calculate given the info mgmt has divulged to date.  I have been pressuring mgmt for more disclosure so investors can run their own models with less guess work.

 

Regarding growth rates: Liberator has been suffering and now wants to run cash flow positive.  Of course I want them investing strongly if ROI remains high but putting cash on the B/S means they have optionality later.  Per mgmt, some investors have fears that Liberator is going to have to issue shares at (extremely dilutive) current levels.

 

Regarding 180 Medical: 36% margins were pro forma.  If you know how Charlie Munger feels about EBITDA then you know how I feel about pro forma adjustments.  Perhaps they were selling other, higher margin products.  Don't know enough about 180 medical for solid commentary.

 

Why don't you give me a call in the office next week to discuss more. 773-278-9609

 

 

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Not offended at all.  Just wanted to post something substantial without divulging everything I give to clients.

 

The client LTVs and cost per add are hard to calculate given the info mgmt has divulged to date.  I have been pressuring mgmt for more disclosure so investors can run their own models with less guess work.

 

Regarding growth rates: Liberator has been suffering and now wants to run cash flow positive.  Of course I want them investing strongly if ROI remains high but putting cash on the B/S means they have optionality later.  Per mgmt, some investors have fears that Liberator is going to have to issue shares at (extremely dilutive) current levels.

 

Regarding 180 Medical: 36% margins were pro forma.  If you know how Charlie Munger feels about EBITDA then you know how I feel about pro forma adjustments.  Perhaps they were selling other, higher margin products.  Don't know enough about 180 medical for solid commentary.

 

Why don't you give me a call in the office next week to discuss more. 773-278-9609

 

Hi Kyle,

 

Sure, I'm happy to call. I'll take a deeper look at the company before then. Thanks for the clarification - particularly between the EBITDA numbers.

 

What time zone are you in? I'm based out of Virginia, personally, so I am on eastern time.

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The reason I don't typically do much online is that I can't stand short form analysis and snide comments (i.e. trolls).  I hope this forum has none of that.

 

Hi Kyle,

 

You'll get the occasional snide comment during debate, but no trolls...don't worry about that. 

 

As for analysis, just check out the BAC thread in the "Investment Ideas" section.  That should give you some idea how in depth boardmembers get into analysis.  Also, many board members are fund managers, analysts, executives or investment industry-related, as well as we have some very knowledgeable private investors on here as well.  Enjoy the forum!  Cheers!

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Thanks for posting the report.

 

Just a couple of questions:

-  P1, you state mgmt is prepping business for sale, is there any reason why you think that?  They have almost 25% of mkt cap in NOL's.

-  P2, on dividend or share repurchases, would they be an acquirer?

-  P7, why are their margins lower than 180?

-  On their line of credit, are gov A/R's excluded.  They carry very little inventory and based on the 10-k ~60% of A/R's are gov related.  I know the line of credit is $8.5MM, but based on my borrowing base I come up with max availability of close to $5MM (40% of AR at 80% and no subtraction to dilution, etc.).  Just trying to understand their liquidity, if they grow too fast.

 

Thanks again. 

 

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ShahKhezri - Thanks for the questions.

 

Management at Liberator is in their 60s with the vast majority of their wealth in the business. Further, they have guided investors verbally toward a sale when revenue is closer to $100 million run rate.  My guess is that number is where they estimate the business will be reasonable scaled to show attractive margins and command a fair middle market multiple as opposed to a discount for selling a business with < $10 million EBITDA.

 

Liberator is not actively looking to acquire businesses although they did a tuck-in in 2011 at an attractive price. My guess is that they won't pursue acquisitions here.  Who should be rolling up this industry is a middle market PE shop - not Liberator. 

 

Don't know enough about 180 Medical to comment but I would make 2 points here:

(1) 180's referenced EBITDA margin is pro forma. Who knows what garbage the bankers stuffed back in here. Liberator has never shown a pro forma EBITDA margin calc.

(2) Liberator's margins are currently low as they are spending in tremendous amount on personnel to grow the business.  If/when they decide to sell management has many levers to pull to boost margins. Mid teens or higher EBITDA margins here are well within reach as the business scales.

 

Medicare is 3/4ths of the business. Not sure I understand your question but let me comment on liquidity broadly. Liquidity is not an issue for Liberator. Management sits down weekly to decide on ad expenditures for future clients.  No ad spend goes towards maintaining current clients.  Thus, any week they decide they want to post positive operating CF they can.  The existing customer base is recurring in nature and only requires communication regarding new orders, eligibility verification, order shipping, and Medicare billing (all straight SG&A items) to generate FCF. Now, customers are retained at an ~85% annual clip so ultimately revenue would go down in teh absence of ad spending but there are very little short term liquidity issues.

 

Management is getting more focused on collecting AR in a more timely manner concurrent with the mentioned reduction in ad spending.  As such, this company should still grow revenue ~10% in fiscal 2013 while raising margins and posting strong CF. The merits of this decision are for another post but this is readily achievable.

 

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Great, thanks. 

 

Their cash conversion cycle seems to be improving.  In my previous world we banked a company that looked very well capitalized, great margins and quarter after quarter they knocked it out of the park.  Almost 90% of AR was medicare and one night when regulation changed and the device was stripped of 100% reimbursement to 50% and they stretched it from 60 days to 120 I believe, the Company was on the brink of bankruptcy overnight and had to make a deal with a PEG at very unfavorable terms.  Obviously, different scenario from LBMH, but I just get very uncomfortable when I see gov payments.  We did their ACH and other treasury products because the gov payments were their entire A/R, therefore no borrowing base.  Good luck, I'll keep track and welcome to the board.

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From Your Write up

 

" In the Interim, Liberator contunyes ti acquire customers with a 10+ life."

How do you get that without a 10 years records of operation?

 

Also why dose Liberator feel like a Netflix ?

No product

feels like minor distribution strength

what is the moat ?

Just first mover advantage ?

 

 

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10+ year life is from management estimate. Management has extensive experience in the direct-response-advertising industry so I give them the benefit of the doubt.  Secondly, based on quarterly run-off data investors can get a sense for the life cycles of customer segments (in the report)

 

Liberator is nothing like Netflix - that is a straw man argument. Liberator provides device manufacturers another way to sell product in the B-to-C market place. Liberator's model is direct-response customer acquisition. Liberator owns the customer relationship.

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