Commentary

In mid-February, we shared our research report on AMERCO (UHAL), the deeply undervalued and underfollowed holding company that owns U-Haul, the nation’s dominant moving equipment rental company. At the time of our report, we outlined why investors could have acquired AMERCO for only 11x EPS despite the fact that its U-Haul truck rental business has a dominant and unassailable competitive lead in its niche industry, is earning record profits, and is taking market share as a result of its lower cost base, larger fleet and expanding network. In addition, we also highlighted how investors may have overlooked the fact that AMERCO generates nearly 30% of its free cash flow from its very valuable and steady self-storage real estate portfolio…

Yesterday, ServiceNow's (NOW) largest shareholder, Sequoia, filed a Form 4 disclosing its first major divestiture of NOW shares.  The May 1st filing discloses a 6m share distribution that Sequoia quietly made to its limited partners on Monday (April 29th). This reduced Sequoia’s stake to 18.3m shares and transferred ownership of the 6m shares to an assortment of pension funds, endowments, and fund-of-funds that make up Sequoia’s limited partner base. While a direct share distribution partially absolves Sequoia from market timing decisions, it can place heavy selling pressure on a stock. This is because limited partners are typically not equipped to analyze individual public securities, preferring to instead sell shares immediately upon receipt. Since Monday’s 6m share distribution, NOW’s share prices has fallen by 7.8% on an average of daily volume of 2.4m. It can then be argued that this abnormal volume and price activity is the direct result of Sequoia’s distribution. As Monday’s distribution only represented 25% of Sequoia’s total ownership stake, additional forced selling may lie ahead…

Over the past few weeks, we’ve shared our EZCH investment opinion in a pair of articles, outlining our belief that EZCH’s $717m market capitalization, 8.0x 2013E revenue multiple, and 32.7x 2013E GAAP P/E (adjusted to include $0.39/share of stock-based compensation) are wholly unjustified. The Bull case depends on EZCH growing well in excess of the overall router market thorough 2016, a challenge we believe is unrealistic given an avalanche of near- and long-term business risks. Customer concentration is dangerously high, newly introduced competition from Broadcom could pressure design wins, Huawei’s recent order delay proves that in-house design risk is ever present, and weak end-market demand will pressure EZCH’s self-imposed 30% revenue growth hurdle (slide 8). To justify EZCH’s almost 2x valuation premium to the S&P 500, it must overcome this hurdle each and every year through 2016. Most EZCH investors discount these risks, instead trusting a management team that has over-promised and under-delivered for years, growing the revenue by just 11% annualized between 2009 and 2012. But since some took the time to reply to our article, we feel a response is due…

Mellanox (MLNX), a stock that we've previously written up as a short recommendation, announced disappointing Q4 2012 results yesterday and gave catastrophic Q1 2013 revenue guidance. Though the stock initially dropped 22% after hours to $41, MLNX shares eventually rallied to $51 signifying a mere 1.4% decline for the day. Given three quarters of massive revenue declines ($157m in Q3 2012, $122m in Q4 2012, and ~$80m for Q1 2013) this is a stock that should be trading at a much lower level. With analysts having issued downgrades en masse and no longer supporting the stock with blind optimism, MLNX should reverse its intraday gains and fall to the $30s…

Mellanox’s third quarter earnings report, released yesterday after the market close, has given us an opportunity to provide an update on the situation. While the Company’s third quarter top-line results were slightly above analyst estimates, beating revenue guidance by 3.5% ($156.5m actual vs. $153m consensus), the Company’s fourth quarter guidance severely underwhelmed expectations. Towards the end of the prepared remarks, Mellanox’s outgoing CFO gave Q4 revenue guidance of $145m – $150m, indicating a sequential fall in revenue from Q3. As a company that traded at 8x forward revenue just before the earnings call, the anticipated slowdown in Mellanox’s revenue is catastrophic. This is particularly true because MLNX is undoubtedly a fast-money growth stock. Even worse, Mellanox expects a Q4 increase in non-GAAP operating expense of 6% – 8%, indicating that earnings per share will be hit by a double-whammy of lower revenues and rising costs…

In this post, we’ll profile an interesting case study that illustrates the potential dangers of owning shares within a dual class share structure where insiders benefit from owning a majority of the class with supermajority voting control. Recently, for instance, we profiled Urbana Corp, which has common shares and A shares. The public shareholders predominantly hold the more liquid but non-voting A shares whereas insiders own a majority of the voting common shares. In this dual share structure, insiders don’t own a majority of the company’s equity, but effectively control the company via owning a majority of the voting shares. Sometimes, insider supermajority voting control can add value; an insider can make decisions that may be unpopular to short-term-oriented public shareholders but beneficial for the long-term interests of the company. Other times, as in the case of MIM, supermajority voting shares by insiders can substantially destroy value for public shareholders…

In the closing days of 2010, The New York Times' Dealbook published an excellent piece documenting how Abercrombie & Fitch Co. (NYSE:ANF) is quietly seeking shareholder approval to reincorporate the company in the state of Ohio. This is an exceedingly rare move, as ANF is currently incorporated in the state of Delaware, a state that is home to 63% of the Fortune 500, 73% of all new U.S. IPOs and more than 879,000 other business entities. American states engage in a form of horizontal regulatory competition, the result of a conflict of laws principle that allows companies to choose their place of incorporation separately from their place of operations. Over the last century, Delaware has emerged victorious as the leader in new business entity formation, as well as attracting existing entities which initially incorporated in other states…

We previously profiled the public debate between Bill Ackman's Pershing Square Capital and Eric Hovde's Hovde Capital over General Growth Properties (NYSE: GGP). Another interesting debate is unfolding over The St. Joe Company (NYSE: JOE), between David Einhorn's Greenlight Capital and Bruce Berkowitz's Fairholme Funds. The St. Joe Company operates resorts and timberland, but its primary asset consists of approximately 577,000 acres of land in the Florida panhandle, 70% of which is within 15 miles of the beach.

The debate over JOE has been ongoing since at least May 23, 2007, when Einhorn used The Ira Sohn Investment Research Conference (an annual forum where select hedge fund managers present their investment ideas to raise money for charity) as a platform to present his short thesis. At the time, JOE was trading at $55 and Einhorn valued it at $15. JOE dropped 10% after Einhorn's presentation and nearly 50% in the subsequent six months (of course, this was during the general market meltdown in the second half of 2007). Notes from the presentation were passed around at the time and we have shown below in full certain notes compiled by BTIG and re-printed on ZeroHedge…

Last month, Blackstone (BX) announced an acquisition bid for Dynegy (DYN), an electric utility company that’s been struggling against weak demand.  The deal is unique because there are no change-of-control provisions on the unsecured debt, so BX can just buy the equity and not have to deal with much refinancing.  After buying out shareholders at $542mm, BX plans to sell assets worth $1.363 billion to NRG.  If BX could then dividend those proceeds to itself, DYN would effectively have required an upfront investment of only $97mm. Fears that this strategy would leave unsecured bond holders even less secured have driven bond prices down 10 points.  We can see in the chart below that the share price went up but the longest duration bonds took a hit when the buyout offer was made on August 13th…

Over the past few weeks, we’ve profiled two of the case studies that we’ll be presenting for our upcoming speech on “Distressed Debt Activism In The Age Of Electronic Media” at the 6th Global Forum on Investing in Distressed Debt. In our first profile, we chronicled the public debate on General Growth Partners (GGP) between the long camp, consisting of Bill Ackman’s Pershing Square Capital and Whitney Tilson’s T2 Partners, and the short camp, consisting of Eric Hovde’s Hovde Capital. In our second profile, we documented Birch Run Capital’s activism on behalf of equity holders in the Chapter 11 bankruptcy case of Energy Partners Limited (EPL).

In our third and final case study, we’ll discuss our own work on Eagle Rock Energy Partners LP (EROC), a distressed master limited partnership that underwent a financial restructuring earlier this year to lighten its debt load and…

Below is the second part in our series on “Distressed Debt Activism In The Age Of Electronic Media”. We will be presenting on this topic at the 6th Global Forum on Investing in Distressed Debt, and thought it fitting to discuss on our blog some of the case studies which we’ll be profiling. Last week, we examined the very public Pershing-Tilson-Hovde debate over General Growth Properties, and next week, we’ll cover our own work on Eagle Rock Energy. This week, we’ll profile the activism of Birch Run Capital in the bankruptcy of Energy Partners Ltd. (EPL), an oil & gas operator that filed for bankruptcy in May 2009…

In September, we will be giving a presentation at the 6th Global Forum on Investing in Distressed Debt on the topic of “Distressed Debt Activism In The Age Of Electronic Media”. We’ll focus on how activist investors in distressed situations are increasingly using internet communication to achieve faster and more meaningful impacts on their targets.

Given that we publish an active blog, we’ll also write posts on the case studies that we’ll be profiling at the conference. We will discuss three examples where the internet has allowed distressed activists to share their analyses with a broader audience, recruit new investors and ultimately increase pressure on their intended targets. Our first case study, which we will profile in this post, is the battle between Pershing Square, T2 Partners and Hovde Capital over…