Nov 29, 2023·edited Nov 29, 2023Liked by Vince Martin
"Company C has $1 billion in equity; despite the same valuation, Company A has just $400 million." Is that supposed to say company B in the second part of the sentence?
yeah, we wrote up AGS back in the summer of 2022. it's been a good call so far, and in part because of deleveraging I think the story is still pretty good. looking quickly looks like net leverage went from 4.2x to 3.2x, and they're targeting sub-3x by year-end.
EVRI merging with IGT I think also means M&A remains a possibility - they turned down an offer at $10 last year, maybe not a *terrible* decision with the stock at $9, but in these consolidation waves at some point you need to make a move or you wind up being a tiny fish in a sea with 3-4 sharks. I can see Aristocrat being interested, maybe Inspired comes back, but I would hope they're trying to position themselves for a mid-teen per share offer.
to your second question, I'm probably a bit too positive on deleveraging on occasion, so yes, I definitely think that's possible. DLHC, which we wrote up and I still own, I think is a good example of that. they make a big acquisition which levers them up to 4x-plus, work it under 2x through growth and debt paydown, make another big acquisition, delever, rinse and repeat. Stock is up almost 500% over the past decade, and I think like 2500% since current CEO took over.
so if it works, it can work *really* well. as you know, of course, if the business stumbles, or you make one bad acquisition (it only takes one) you can get in a lot of trouble in a short amount of time.
I agree re acquisition potential; and they said on the Q4 call that they expected to pick up additional business as fallout from the EVRI/IGT merger. I've owned AGS for a some time and while it's nice to see leverage coming down, in my view it can't happen fast enough. (I can easily imagine AGS getting cut in half if a recession hits).
While I'm not familiar with DLHC (I vaguely recall that they suffer from massive customer concentration risk?), and while I share your affinity for these setups, it's worth noting that these stocks can go to zero if they are caught on the wrong side of the economic cycle.
definitely, as I wrote I can be a little too positive on some of these stories.
DLHC does have concentration risk in terms of fed govt departments, but a big part of their strategy has been to diversify within the government, and being a contractor obviously takes away macro risk (though it does introduce other risks). delev not the only reason the stock is a 20-bagger of course
"Company C has $1 billion in equity; despite the same valuation, Company A has just $400 million." Is that supposed to say company B in the second part of the sentence?
yes, thank you, I'll correct momentarily. easy to confuse my own self with this one!
Great article! Are you familiar with AGS? Do you think a "beautiful deleveraging" is possible?
yeah, we wrote up AGS back in the summer of 2022. it's been a good call so far, and in part because of deleveraging I think the story is still pretty good. looking quickly looks like net leverage went from 4.2x to 3.2x, and they're targeting sub-3x by year-end.
EVRI merging with IGT I think also means M&A remains a possibility - they turned down an offer at $10 last year, maybe not a *terrible* decision with the stock at $9, but in these consolidation waves at some point you need to make a move or you wind up being a tiny fish in a sea with 3-4 sharks. I can see Aristocrat being interested, maybe Inspired comes back, but I would hope they're trying to position themselves for a mid-teen per share offer.
to your second question, I'm probably a bit too positive on deleveraging on occasion, so yes, I definitely think that's possible. DLHC, which we wrote up and I still own, I think is a good example of that. they make a big acquisition which levers them up to 4x-plus, work it under 2x through growth and debt paydown, make another big acquisition, delever, rinse and repeat. Stock is up almost 500% over the past decade, and I think like 2500% since current CEO took over.
so if it works, it can work *really* well. as you know, of course, if the business stumbles, or you make one bad acquisition (it only takes one) you can get in a lot of trouble in a short amount of time.
I agree re acquisition potential; and they said on the Q4 call that they expected to pick up additional business as fallout from the EVRI/IGT merger. I've owned AGS for a some time and while it's nice to see leverage coming down, in my view it can't happen fast enough. (I can easily imagine AGS getting cut in half if a recession hits).
While I'm not familiar with DLHC (I vaguely recall that they suffer from massive customer concentration risk?), and while I share your affinity for these setups, it's worth noting that these stocks can go to zero if they are caught on the wrong side of the economic cycle.
definitely, as I wrote I can be a little too positive on some of these stories.
DLHC does have concentration risk in terms of fed govt departments, but a big part of their strategy has been to diversify within the government, and being a contractor obviously takes away macro risk (though it does introduce other risks). delev not the only reason the stock is a 20-bagger of course