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Why Eddie Lampert Likes Acxiom

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May 19, 2009 – Comments (2) | RELATED TICKERS: ACXM , SHLD , AZO

Why Eddie Lampert Likes Acxiom

 (click above for original source)

Conservative Fair Value: $20

Strategy: Sell July strike 10 puts for .55 and/or buy ACXM at $10.50/share or less

Result: approx 5% yield in 2 months via put strategy, potential 100%+ gain on shares within 5 years

 

Eddie Lampert likes Acxiom for the same reason he invests in any given company: cash flows. Eddie is a notorious cash flow feign/addict, so much so that some have argued that his micro managing in increasing cash flows at Sear's has crippled its long-term merchandising/marketing strategies. Nevertheless, I would say that Acxiom's main order of business is in the "information-technology-marketing-data-processing" field. A business whose most significant customers are in the retail businesses, whether it be clothing, financial services, credit cards, or automobiles. Right off the bat that throws some red flags, since retail isn't exactly the sweet spot in today's macro-environment. Despite the run-up in the retail industry over the past 2 months, consumers are still spread thin between the lack of growth and their over-leveraged pockets. As a result, ACXM revenues have so far fallen about 20%, sub par performance but not completely dismal as the industry it serves.

Despite these concerns - revenues, macro-environment, and a failed buyout, all of which were much more prominent risks at the end of 2008 - hedge fund magnate Eddie Lampert still decided to pick approximately $30+ million stake in the company. Now I'm sure Eddie would've added back the one time charges to his cash flow calculations, but in 2008 if we assumed a 0 in net income, operating cash flows would've still been at about $180 million due to depreciation and amortization. Already that's a great number... look back on Acxiom's discussions on strategy and you will see a shift in an asset heavy company that bought the hardware for customers, to an asset light strategy where they allow their customers to purchase the hardware instead - structuring the company more like an IT consulting type company (think IBM or Accenture). Great, Eddie likes management teams that have the same type of cash flow mindset as his own.

With $180 million in cash flows and an expected $50 million in capital expenditures, free cash flow came in at $130 million. At a price of $8/share, an enterprise value of about $1 billion, the EV/FCF ratio stood at less than 8x. Fantastic, shares look undervalued by about 50% in the worse of scenarios said Eddie to himself..

But it gets better. Recently Acxiom released their 4th Quarter earnings for 2009, and guess what? They're profitable again. With few one time charges on the horizon, it looks like Acxiom should be able to repeat their performance of about $20 million in adjusted earnings throughout fiscal 2010. Furthermore, they signed new customers and now expect revenues to increase!

So lets take that $20 million and annualize it to $80 million (btw if you adjust 2009 earnings, you should get a number in the range of $75-100 million depending how you do this). Let's add our $80 million in income to our free cash flows and we geta total of $210 million. Using a recent share price of $10.5, EV totals about $1.2 billion, giving a EV/FCF ratio of just under 6x. Shares now look like they can be worth at least $20!

Oh but wait, there's more to the story...the shares can potentiall be worth up to $30/share. For more on that please see my original post (for some reason I can't cut and paste all the info at once on my Linux laptop)

Disclosure: Long ACXM

 

2 Comments – Post Your Own

#1) On May 26, 2009 at 11:31 PM, Smartguy123456 (50.22) wrote:

Sears burned through $449M in cash since last quarter.  Cashflow at the end of this quarter was $1,173.00 vs 1,622 at the end of last quarter.  Further SHLD saw a 28% decline in cashflow.

Can anyone say “financial engineering” ? Think SHLD could have used that $3B in cash they spent trying to pump up their stock prices since the merger? All that cash going to people who shorted the stock, huge losses going to those who held the stock since the stock has decline from a high of $190 to $57 per share. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.

Again, there is no risk to hedge funds for playing these financial engineering games with corporate coffers. All it does it pump up the stock. They sell into the rise and put money in the bank.  In Eddie's case the plan failed before he could put his strategy in place to spin- off some of Sears assets.

Sears Holdings has generated earnings in recent quarters, helped by areas like credit swaps and reduced inventory.

Those results have allowed Sears Holdings to return more money to investors. However, Sears Holdings continues it buyback program by continually announcing billions more in share buyback authorization,

We have yet to see any fundamental changes to how the business Sears is done as a retailer. There has been one theme to the financial engineering Sears Holdings: strenghten the balance sheet.  At the time of the Merger Sears Holdings had $4B in cash.  Today the company is down to $1.173B.

Eddie calculated that he could borrow cheap money,  while increasing enterprise value through real estate assets that can be marked to an increasing hot market, borrow against the gain and buy something else and do it as many times as possible before cashing out. Its exactly how  REITs in a bull market drove up real estate prices with a few making huge money.

Eddie also saw value in Sears as a brand management company which could engage in licensing, marketing and providing trend direction for a portfolio of owned consumer brands. SHLD owns brands  such as Craftsman, Die Hard, Kenmore, and Lands' End to name a few. Eddie envisioned a strategy where SHLD could  licenses the company's brands
directly to retailers such as Target, Autozone, and Home Depot, wholesalers and suppliers for use across a wide range of product categories, including apparel, footwear, sportswear, fashion accessories, home products and decor, and beauty and fragrance. In addition, to direct-to-retail operations. Eddie envisioned spinoff the $1.8 billion in securities based on Kenmore, Craftsman, and DieHard once his brand management strategy was working.

Eddie then would spinoff Sears retail operations while continuing to sell the brands the Sears and Kmart at a higher market price created by the monetization of the brands through securities and increased distribution channels via other retailers . Imagine if the company’s brands are sold across a range of distribution channels, from the mass tier to the luxury market.

But, the market tanked and one has to wonder if Eddie has the capital and political backing from Sears Management and ESL Investors to pull it off.

In our opinion, the optimal avenue to achieve good corporate
governance and enhance long-term value is to place other shareholders with substantial holdings on the board to ensure the proper coalescence of interests between the board and all shareholders.

Mr. Lampert has not done a good job as Chairman of the board and defacto CEO.  The company has been without a new CEO for nearly 18 months now.

We are disturbed by the present direction of Sears Holdings as
exemplified by its failed vision, failed strategy, failed execution,
and failed board. The amalgam of poor corporate governance, lack of strategic direction, and deteriorating operating and financial performance has led to dismal shareholder returns to date. The stock is down from highs of $190+ in june to just $55 today. To illustrate the mismanagement, corporate general and lack of growth investors only need to know that Sears has shrunk from $60B in revenue to $44B since the merger. In fact, sales are down $1B according to the latest quarter filings.  Just returning to past Revenue and G&A levels at the time  of the merger — on a per store basis less stock buy backs— would
add $7 billion in cashflow and profits company. Clearly, the board has exhibited a lack of discipline about buying back stock, thereby damaging shareholder value. Yet revenue growth and G&A overspending is  only one symptom of the firm’s myriad problems that must be confronted and corrected.

Needless to say, sharesholders should be disenchanted by both the recent and long-term performance of the company. I am not alone; other shareholders have expressed to us a similar degree of disappointment. Consequently, we believe that now is a critical period for the company, so critical it warrants
change of board leadership.

 

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#2) On June 01, 2009 at 10:50 AM, ViolentCapital (97.99) wrote:

um this blog is about ACXM not Sear's. thanks.

Sears has still made a 20x profit for Lampert and made him a billionaire - just fyi - a lot it via the same analysis I'm using above.

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