Monday, October 11, 2010

Nevada Gold... Under followed, with a ton of catalysts...

One of the things that I have noticed, is that when researching a security, there is a strong temptation to only do a skimming bit of financial research. By this, I mean, scanning over the financial statements, then, if they meet your criteria, then examining the SEC filings for a corporation. Finally, if this proves worthy, then you might Google items on said company, talk to management, etc. Often times, just looking at financial statements will give you a great company that is obviously cheap, such as International Baler (IBAL), but other times, looking at more interesting, complex investment ideas will give you other, potentially rewarding ideas.

Here is an example from my own portfolio, that I am glad I didn't look at the financials of, then take a pass: Nevada Gold (UWN).

Looking at the previous financial statements, is not enough with this company. Frankly the last 3 years of financial statements look horrendous, but, there is a lot more to the company than some bad results... They are in the midst of a turnaround, that, really is more like the late stages of a restructuring. Here are some videos where Robert Sturges talks about it: 1, 2, and 3.

One of the most important parts of my thesis on the company comes from having listened to management in the 2 most recent conference calls on their website. (1 & 2) Here are some snippets:

"We are not done with acquisitions... We are going to remain disciplined on purchase prices..."

"The acquisition environment does remain robust."

"Other than the North east, I wouldn't preclude getting involved in any area of the US and even beyond."

"Where we think we have a real opportunity to lever our operating expertise... We are not buying as a well oiled machine, but rather, a machine that needs to be fixed."

Many times, I believe that expansion, using debt, is a dangerous strategy, however, it seems that from looking at their past performance, and the changes they are making at the newly acquired casinos, that they will do a good job at fixing whatever comes their way. A reputation for fixing problems in casinos will also go a long way in landing management contracts in the future. When looking at capital allocators that make a living of fixing problems, you can do quite well.

When looking towards acquisitions, they will go up to the $20 million EBITDA range, with the help of the company's senior lender. The lender has indicated that under the right circumstances they would step up to the plate for the company. Sturges notes that the company's debt to the lender went from $55 million, down to $6 million and that the lender is happy about that. This should be very true, when so many companies have recently defaulted on their debt.

To put this in perspective, if the company is able to buy a huge place, at nearly 2x what they have been paying, their acquisition is gonna be for $120 million; while there are a lot of factors when converting EBITDA to owner earnings, there are many ways of going about it, however, I am not worried about them covering their interest charges, check out the following numbers

All numbers are based on EBITDA of $20 million for a potentially acquired entity.

EBITDA Multiple

Acquisition price
$60 Million

Interest Rate/Expense
6% = $3.6M
8% = $4.8M
10% = $6M
15% = $9M

EBITDA Multiple

Acquisition price
$80 Million

Interest Rate/Expense
6% = $4.8M
8% = $6.4M
10% = $8M
15% = $12M

EBITDA Multiple

Acquisition price
$100 Million

Interest Rate/Expense
6% = $6M
8% = $8M
10% = $10M
15% = $15M

Now, even if they screw up on the acquiring front, lever the company to the hilt, interest rates soar, AND they can't make the acquired entity more efficient, they will still roughly double what looks to be the coming year's EBIDTA, even when you account for interest. Put that in comparison to their market cap, and we see that their EBTDA (remember, we accounted for interest) is roughly their present market cap... To me this represents one of the worst possible scenarios for the company; and it isn't terrible. If and when an acquisition does happen, I am not to worried about it being a terrible one, as, the Wynnefield Partners are involved in the company, and UWN already has an established track record with the last 2 acquisitions.

One concern that may be out there in the investment community, is that of the company being able to repay the recent debt that was taken on to buy all of the Washington mini-casinos. If you take a look at this presentation, page 25 shows that there shouldn't be any real concern about the company covering said debts, the cash flows from operations and cash on hand, without any of the company's proven initiatives, will cover all of the debt, which is already bearing a high interest rate (over 2/3 is @ 11%). I think that this will also do well when going to bankers to justify a transaction; if the bankers see that they can cover interest and principle at 11%, it should put them at ease for funding a new transaction...

Another item that came up in the conference call, is that there is still a chance that there will be a new management contract, as well as equity share, which may happen by years end. Furthermore, there are a lot of strategies and synergies that are not reflected in the company's results for the newly acquired casinos.

The development of the Las Vegas Speedway is getting ready to go to the capital markets; it's a pretty big project, which has a ton of potential for UWN.

The bottom line with this company is that there are a ton of things that can go right for it... any of which, will be big news for the stock. While I don't know exactly what the company will be earning in a year's time, I am sure, provided there isn't an interest rate shock or a bunch of horrendous legislation passed, they will be in business and earning money for a substantial amount of time (even without any more acquisitions). Given the leverage that this company is taking on, I view this as a classic Pabrai "Heads, I win a ton, tails, I probably won't lose much."

Disclosure: I am long UWN and IBAL. This is not investment advice. Do your own research before doing anything that I so much as write, talk, or even so much as think about.

1 comment:

Joshua said...

Great post. I enjoyed the attached videos. Definitely watching UWN with interest; listening to the 2011 conference call.