Uranium plays

With the recent sell off in the uranium markets I thought it was a good opportunity to jot my thoughts and findings down. I found out a lot of interesting tidbits, notably that 1kg of U235 produces the same amount of energy as 17,000kg of coal. Therefore 75000 kg of uranium are required yearly for a 500MW power plant, compared to 1.27 billion kg of coal.
All players in the industry seem very tied to the market price of uranium which has seen some formidable highs and lows.

With this the problem exists that more uranium is used yearly than is mined on a comfortable basis. The remaining uranium is acquired from dismantling warheads and reprocessing the fuel to low enriched uranium (LEU). Big problem here is that the largest contributor Russia, in the Megatons to Megawatts (MTM) program, has its own plans once the program winds down in 2013, I use wheat as an example of the effect that RU can have on global markets.

Spot uranium prices are well off their highs in 2007 and remain stuck around 2005 prices. The current issues occurring in Japan have caused a nice 35% drop in prices for the Global X Uranium ETF (URA) since they peaked in price Feb 2nd. In my eyes the drop was a bit of a fear drop and a broad overreaction. Its tough as always to know if this is an appropriate entry point as prices are no where near the lowest of low points. The more I read though I become convinced that alternative energy is pointless to solving energy shortages and all other uses simply will not fly for either health or a multitude of other reasons. Furthermore there are new techniques on the horizon that will drop the price of processing uranium further increasing the cost efficiency.

On that topic I reviewed USEC, a uranium enrichment company spun off from the US governments nuclear efforts. They are the exclusive agent for MTM for the US and enrich uranium via their gaseous diffusion plant. They also supply transportation and storage systems for spent fuel and consulting services. What really attracts me to them is they are priced at a fraction of their book value and essentially trade as if they are going to die out very soon.

Truth be told they might. All of their success hinges on the acquisition of a $2B DOE loan to continue and enhance their American Centrifuge Plant. Basically its a method of enriching uranium using 95% less electricity. In the processing and enrichment of uranium the majority (>70%) of the costs is derived from electricity usage. Areva (French Uranium giant) is unrolling technology soon that is backed by the DOE. Strange that they back a French company so readily. This leads me to think that USEC's technology isn't quite advanced. Its a deep value play that may warrant further investigation upon a deeper drop. It seems to be a poor play on pure uranium though.

Cameco (CCJ) is an excellant uranium miner, by market share the biggest in the world. Unlike Rio Tinto they operate as a sole uranium miner versus numerous other minerals that Rio goes after. It is by no means a deep value, nor does it share any divergence from URA for the most part. In that respect, despite the great shareholder friendly management that exists I hesitate to add to CCJ, preferring URA as a great way to act as a leveraged play due to broad exposure to miners, processors, and end users. I may initiate a small position as a good long term play in URA. I enjoy the multi currency hedge it offers along with good long term perspectives. No position.

6/10/11: Found some articles by Reuters showing that Saudi Arabia and UAE plan to build a combined 20 nuclear plants by 2030. This could be a tremendous boost to total U consumption even though Germany has abandoned it. I see no way that energy needs can be met safely and adequately via renewable methods.

Telefonica TEF

Overview: TEF is a telecom company that engages in all sorts of access programs, including fixed/wireless telephone services, internet services, and bundled packages (TV and such). Headquartered in Spain they have three main segments existing in Europe, Latin American and Spain. Through investments they have a 9% stake in China Unicom, one of Chinas largest telecommunication providers. Their ARPU ranges from 6.2 Euro (Peru) to 25 Euro(Spain). Their largest growth segment arises from the Latin American business, which comprises over 42% of revenues and 50.6% of assets. Of those about 1/2 originated from their Brazilian business.

Stats: 7.5 P/E TTM, EV/EBITDA: 5.7, 3.0 P/B, 77% FCF payout ratio, 108.4B MC, 183.9 EV. 1.2 P/S. 85 billion in debt and 10.1B in cash MRQ. 11% FCF growth 5years. Piotroski of 6. DCF is 50% undervalued via standard 10yr 10%  4% terminal, 12% Discount rate. Historically valuations are at lows, despite stock run-up of over 25% over past year.

The Good: Excellent growth and continued gain in market share. Directors have substantial holdings in company. Very predictable and stayed profitable through recession and Euro zone crisis. Emerging market exposure but enters as a cost cutter with a reported good network. Future success and growth will be upgrading to smart phones and better plans. Currently majority of users in Latin America use prepaid plans. A significant advantage is their tie to low income persons in L.A. Besides serving a great social purpose this could infer loyalty as these people break poverty and desire for better phones.
Balance sheet also shows plenty of derivatives but all used for the purposes of hedging and all readily tradable. Very low amounts of level 3 investments only 27 million. Loans are financed predominantly with Euro (55%), USD 10%, Brazilian Real 8%. Loans also have an average maturity of 5.7 years.

The Bad: Huge amount of debt, expected interest payments of ~7billion over the next three years. Chairman was charged with insider trading in the past, although those charges were thrown out due to statue of limitations. Most profitable (per capita) markets are very mature and showing decline.

Major risks include: Masked organic growth due to highly merger friendly environment. Latin American countries have and probably will default. Venezuela showed to be a hyperinflationary environment recently(2010). Euro zone crisis seems contained but they still exposure to Ireland, Spain, Portugal. The biggest risk is interest rate hikes. Although probably contained a 100 bp rise in rates results in Euro 222 million decrease in consolidated income.
Dividend is subject to 15% withholding tax.

Summary: Again no position. I hesitate to jump in with such a heavily indebted company, despite the growth rates. TKC appears to be cheaper on a whole and with TEF being better understood another (several) look should be taken at TKC. Under 20/share there appears to be adequate MOS. I figure intrinsic value to be roughly 27-29/share based on my own FCF determinations.

TKC Turkcell

Overview: Turkcell is Turkey's leading telecommunications company with operations existing in Turkey, Belarus, Ukraine, Northern Cyprus and Kazakhstan. Services offered include mobile communications (cell phones, mobile internet and the like), fiber optic internet (Superonline), and gambling/lottery (Inteltek). They are one of three major mobile communication providers in Turkey, the other two include Vodafone  and Avea, whom is owned by Turk Telecom(who is majority owned by two Saudi companies).


Stats: 11.4 P/E, 6.87 EV/EBITDA, F-score 4, 6% EBITDA growth in past 5 years. 3.3 billion in Cash. Enterprise value of 11.24B versus MC of 12.61B. P/S of 2.1, 1.8B debt. P/FCF:33.7. Payout ratio is listed as 47% on Yahoo, but FCF payout is averaging over 170% for the past two years.  Share count steady for past five years. 10year BV growth: 23%, FCF growth 13.6%.

Synopsis: Turkcell is known for its quality network covering all of Turkey whereas VOD inherited a terrible network supposedly. With a population of over 73 million, and a growth rate of 1.5%, 26% of the population is under the age of 14. Inflation has been a concern in the past but has stabilized in the past five years to a robust 6-8% annually. A democratic parliamentary controlled economy, stability is well established with few extremists appearing or threatening the doctrine.

Currently the majority of Turkcells revenue is generated from mobile communications in Turkey. These have been adversely impacted by both regulatory decisions and increased competition, which has also eroded gross margins over the past several years. There are 33.5mm subscribers, of which 23mm are prepaid. Revenues generated from postpaid subscribers average 3x higher than prepaid subscribers. The general trend has been decreasing prepaid subscribers and a modicum increase in postpaid subscribers. This offers the most direct catalyst for TKC. As the market begins to mature the number of prepaid subscribers should increase, leading to a more consistent and higher revenue stream. Churn rates show the needed maturation of the mobile market as current rates exceed 33% in 2010. This compares to VZ and T whom average 1-2% churn rates.  

Other ventures/markets have been mixed to say the least. Belarus has seen a 25% subscriber improvement, Ukraine has witnessed a 25% decrease but a mere 3% revenue decrease. For the current time and ease of understanding majority of revenues will continue to be derived from operations in Turkey. Collectively only 450mm in revenues is generated outside of Turkey, ~10% sales.

This could be a good overall hedge against large currency swings. The turkish lyra has depreciated versus the Euro in 2009, versus appreciated in 2010, with the exact opposite effect occurring with respect to the USD. Separated from the Eurozone possible immediate effects of devaluations, loan defaults, etc would be muted. In contrast to the US inflation is higher but overall government debt remains low.

If the trend to postpaid subscribers continues this could be a great opportunity. The concerning factor is the erosion of margins and the inroads Vodafone and Avea (42% postpaid subscribers) have made. Both of which are growing markedly faster than TKC.  It appears the strategy is to undercut and although the network isn't as strong the lower prices seem to make up for it. Some future reading into the two should offer some much needed insight. For now 5/18 I will hold off and read about both competitors and alternatives (TEF). My understanding of accounting in Turkey is lacking too which is why I may be seeing some unsustainable FCF ratios. Under 10/share I think this would be a steal like no other. At 14 I'll wait for a bit. No position.

Microcap EV/EBITDA stocks

Just for my future reference. Thanks to the finder and keeper of the list.

Microcaps

PRXI

Bought some Premier Exhibitions. A great write up was posted here. My research into the facts checked out with remarkable precision. I basically see this as a double or a small loss. As the date (Aug 12, 2011) approaches I will probably begin setting stop losses in case of some weird knee jerk reaction. I liked it because the catalyst seemed very clear and the upside also seemed very well defined.

Looking into Sellers Capital previous holdings they were a deep value turnaround play style of hedge fund. A few losses were highlighted in their previous investments but for the most part he generated great returns all the way up to 2008. He shut his fund down in 2008 supposedly because the losses were just throwing him off (crude translation).

This is pretty straight forward and I don't have much to add. I figure if the asset sale/liquidation is incredibly against them then yes the stock could drop but I doubt significantly due to A. The ruling already being set to the fair market value of 110,000,000 and B. its alread priced as if the business is crappy (which it is). I intend to unwind the small 3% positions I hold ASAP upon clarification.
Long PRXI

3/29/2012: Exited this position for the most part today. I did a lot more research on this one throughout the last 6 months. Didn't post due to laziness. Anyways, took 3/4 of the position off the table today. Upside is now a question of greater fools theory IMO.

IDCC Interdigital Communications

Background: Interdigital is a wireless technology developer using its bazillion patents to collect royalties and past dues from companies that inadvertently use their technology. Low capex, high profit and they contain patents covering all sorts of wireless technology. A little overlooked with regards to 3g technology (Qualcomm clearly won that battle), they have pushed forward to acquire patents essential to 4g.
Stats: 2.07 billion MC, 1.57 billion Enterprise value. EV/EBITDA: 7.18, P/S 5.88, 5 year EPS growth of 12.5% giving a P/E/G ratio of 1.28, 564 million in cash/ST investments on hand. 15X average(5year) FCF gives a MC of 3 billion. Piotroski score of 4.
The Good: If 4g is anywhere as close and as profitable as 3g then they could stand for a windfall. With numerous patents it is estimated that IDCC has up to 18% of essential LTE patents. Other major players include Samsung, LG, Qualcomm and Nokia.
During its liquidation Nortel has seen a bidding war emerge over its LTE patent portfolio. Management at IDCC declined to participate saying it wasn't in their best interest as much progress had been made research wise internally and numerous other patents existed to be purchased at a better price. The CFO has stated that every patent that becomes (key word is becomes vs. deemed) essential has a NAV of ~900 million. If we take the link at its word it creates a potential MC of over 15 billion, approximately 7x today. This of course excludes potential oversights the consultant group had and patents they missed.
Initiated a dividend at a rousing 0.10/share (0.9% yield) and clearly intends to grow this down the road. At a payout ratio of ~4% me thinks this will be achievable.
The Bad: I hark back to Michael Burry's post on Qualcomm. He basically said that nobody really knew if Qualcomm was going to be the next greatest thing and if you did say it, you were merely guessing. I find that all too telling here. Nobody has a clear large advantage currently in LTE. I don't want to read through thousands of patents and even if I did my degree in chemistry would bring little advantage to the world of networking and electrical engineering.
Management doesn't seem very aggressive in terms of pursuing litigation. What little it has gone after is perplexing because the biggest suits have been filed against Nokia and Samsung.
Issuance of debt recently, 200 million of preferred convertibles. Convertible price is well above market price, mid 50's I believe. 
Overall: Not being an expert in LTE and lacking time to read 5000 patents I can't feel safe about purchasing IDCC currently. If the market were to greatly overreact and send this below 30/share I would consider a purchase. At roughly 1.3 billion MC you would get the business for cash on hand and the assumed value of 1 essential LTE patent. Otherwise I would feel as if I am guessing and frankly I don't want to buy a basket of 4g companies just to see all but one become obsolete. Given the knowledge from reading the consultants work above and looking at everything from a pure value standpoint I now defer my attention to Nokia as a value play and potential LTE candidate.
7/20/2011 well quite the run up with idcc over the past two weeks between the BOD pursuing alternatives and the nortel sale. Although I missed it all I stand by my lack of information necessary to adequately determine a margin of safety. The alternative, of course, was a permanent loss of capital. In the future a business like this carried an immediate catalyst (nortel auction) and a second boost (BOD seeking alternatives). Recognizing the first could have arguably helped me establish my base of value. On ward we go.
8/28/2011: Through my readings of the patent literature and trying to assign value I've turned around to the potential value that IDCC offers and more importantly the margin of safety currently available. As anyone would have loved to jump into IDCC a few months ago at 35/share (five over my intended price target, grrr...) the run up in my eyes doesn't negate the margin of safety. More light was shed on the potential value so here goes.
What has changed from my original valuation?
1. Bidding war: A confirmed bidding war has emerged that several sources indicate potential for widespread appreciation of patent licensing.
2. Nortel/Motorola valuations. Here are two firm confirmation for the value of the patents. Estimates can vary tremendously but the concluding fact is that a large premium to net present value was paid.
3. Why would management sell out after 35 years? This was something that really struck me. Management has seemed very content to wait and swing for only the big fat pitch. Never in their history have they discussed selling out or "strategic alternatives." All in all rock solid management making good shareholder decisions with no sense of hostile rush.
4. Samsung dropped out due to reports that the price got too high. This leads me to think the price is probably a substantial premium to present MC of 3.14B. Clearly Samsung would have to expect to pay at least a premium to MC...say 4B.
5. Ocean Tomo's reports seem to offer another valuation of patents. Thus far I haven't found any source documenting the poor construction of IDCC's IP portfolio. We know therefore that the IP is worth more than A. Nortel's and B. Motorola's. 

I will not offer a definite price target only the belief that there remains a marked reduction in downside due to the recent patent frenzy. Should management fail to secure a bidder or only a partial bid emerge there would likely be a sharp decline in share price.

Probabilistically I feel good odds on this given the information present and the near term catalyst exposed (Labor day is the expected start to outright bidding).
Long IDCC with the hopes that I'm not anchoring.