Latticework Investor

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PNI Media

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Investment thesis on PNI Media (previously known as Photochannel) from BlueCut Capital below. I found it here on KaChing.

Aaron Edelheit of Sabre Value shared a similar thesis at Value Investing Congress in 2008.

Yes, it’s Canadian. And no, you’ve never heard of it.

PNI is a MicroCap, generating free cash flow via its scalable printing platform, that has the potential to significantly appreciate as it expands its: business lines, market share, and presence among investors.

What does PNI do? PNI operates a digital printing platform with many applications. Currently the primary application is for retail photo printing, which is where 80% of revenue comes from.

Here?s how it works. You go to CVS?s website, click Photo, and you are taken to a CVS-Photo branded site. Well, check out your address bar after you click (do it again). You are actually being redirected to PNI?s platform. Once you upload and select your pictures for printing, the order is routed thru PNI to a local CVS that you have selected. Retailers love it, as creates traffic. PNI makes about $.o3 per print. But it sounds like peanuts, right? Yep, lots of peanuts. Their other customers include: Costco US, Costco Canada, Sam?s Club US, King, Fred Meyer, Tesco, Hallmark, Marks & Spencer, FujiFilm, Kodak, etc. Get the picture? (sorry, that was bad.)

Check out Page 6 of their most recent corporate presentation.​9/27/pni-digital-media/

More recently PNI has developed applications for iPhones, Kiosks (big in Asia), and Facebook.

Thru these channels, PNI is hoping to expand high margin Photo Books , business printing, stationary, and personalized chotchkies.

Catalysts for PNI

1. Expanding business lines. In July, PNI announced that they were starting an online business printing platform.

2. Increased focus on Investor Relations

3. Recent iPhone App

4. Margin expansion. As installation costs contract, look for transactional revenue margins to approach 80%

5. Revenue Growth abroad. Outside the US, UK, & Canada there is almost no revenue being generated. China, Western Europe, & Australia are a focus.

6. Winning an RFP from a little company in Arkansas (starts with a W, ends with Mart).

Lets do the dirty; here are the valuation metrics we?re looking at:

Company vs. Shutterfly

Forward P/E: 5 vs. No Earnings

5 Year Compounded Annual Growth Rate : 70% vs 11%

EV/EBITDA: 4x’s vs. 6.5x’s

Tinker with the assumptions in a DFC model any way you want, these guys are growing like a weed. JP Morgan was shooting it?s mouth yesterday, calling for multiple expansion based on SFLY trading at a discount to its peer group average of 11.5x?s EV/EBITDA. While the guy who made that call did much better on his SAT?s than us, with a better platform, that produces higher margins, what about PNI? They trade at less than half that multiple. Why? No one cares about a company that does no banking business and has a market cap of $55m.

Forget about Shutterfly for a minute. Name a free cash flow positive company that has 60% market share, 20% EBITDA margins, NO net debt, has their bobber out for a monster fish, and trades at 5x?s forward earnings. We can?t find one. Not to mention a retail business that grew at 20% last year!

In addition, management is making a concerted effort to tell its story to the investment community. We like that they focused on growing the customer base and improving the technology in their infancy. Management indicated that they are willing to travel anywhere and everywhere to get new business or spread the word. The officers also have a lot of skin in the game, being public was not a liquidity plan, their personal net worth is directly correlated with the stock price. This is important because their on the same side of the table as their investors.

So what?s the draw back?

1. Liquidity. In order for an Institutional Investor to buy enough of this to matter, they have to take a huge stake in the company. Besides being a regulatory hassle, they can?t get out of the stock without crushing the price. Every mutual fund manager?s worst nightmare is having to explain why he?s down and can?t get out. This works out great for us, we don?t run a monster Fidelity fund.

2. Currency. A weak dollar hurts these Canadian boys. We?re not Macro traders, so we don?t know where the dollar is going, but we do have faith that the company will be able to hedge exposure once their size makes it economical to do so

3. Its in Canada, and its a “Penny Stock”. They need to get above $4 to trade on the NASDAQ. To get their they need institutions, but some institutions can’t own anything below $5. So hear we are in ‘no man’s land’. However, earnings tend to speak loudly.

In summary, PNI is a name that we are comfortable holding in our 20% opportunistic “bucket” within the portfolio. We are long, and don’t mean to be SO loud, but we love this name. We have a position in it, and will continue to do so for the foreseeable future. Based on a superior model and margins gravitating toward 80%, we apply a 10 multiple to EV/EDITDA, and look for the stock to trade to $4.


Written by latticework01

January 5, 2010 at 5:34 pm

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2009 Baupost Annual Meeting

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Here are some notes from the Baupost 2009 Annual Meeting. I found them here on

Seth Klarman – Portfolio Manager

  • They recognized 18 months ago that the opportunities were about to get really good. This was as they started seeing panic sellers and limited buyers.
  • They were able to source large lumpy offerings for securities. Especially mortgages.
  • There currently is a large and GROWING supply of distressed securities.
  • Typically illiquid and highly complex.
  • In early 2008 it was an advantage to have a large amount of assets under management.
  • Feels it is the most interesting time in his career to be an investor.
  • Risks continue to be numerous and enormous. Makes for great opportunities.
  • Cards of the economic future have not been dealt yet.
  • Stimulus will eventually have to be removed.
  • In this environment they prefer debt to equity – less risk.
  • Cash is building in the fund – around 30%. May raise more in the future.
  • With the market rallying, it is creating a huge amount of pressure on the investment community to perform and keep up. This will create opportunities as people chase returns – not Baupost’s game – will not play it.
  • It has been hard to stay away from the crowd.
  • Baupost’s Goal – remain excellent.
  • Value approach – always looking for bargains.
  • Over the long run, the crowd is always wrong.
  • Hold cash when opportunities are not presenting themselves.
  • Great investments don’t just knock on the door and say “buy me.”
  • What is their edge on a name?
    • Must have superior information.
    • Complexity – limits competition.
    • Ability to be long term.
    • Well founded contrarian view.
  • Flexible approach – will look at ALL asset classes.
  • Like to have a catalyst – reduces dependence on the market.
  • Distressed debt inherently has a catalyst – maturity.
  • Not market neutral.
  • Risk management must be a 24/7 365 job.
  • Risk is NOT volatility.
  • Volatility is GOOD.
  • NOT true that higher risk leads to high returns.
  • And.. NOT true that high returns only come from high risk.
  • Risk is the probability of losing money and the amount you can lose.
  • They don’t worry about career risk.
  • As Jean-Marie Eveillard says.. they would rather lose half of their clients than lose half of their clients money
  • No forced selling anywhere right now.
  • In down markets they sow seeds, in up markets they harvest.
  • Future always unpredictable.
  • Need a margin of safety.
  • Limit Risk with:
    • Deep analysis.
    • Bargain purchase.
    • Sensitivity analysis.
    • Don’t use any recourse leverage on the portfolio.
    • Need a catalyst.
    • Great majority of personal assets in the fund.
  • It is crucial in a sound investment process to search a mile wide than a mile deep with they find something – also.. never stop digging for information.
  • In employees, he values investment curiosity and intellectual honesty.
  • Need to rigorously separate fact from fiction.
  • Team based collaborative culture.
  • Avoid organizing investment team into silos.
  • Team of generalists.
  • Always look for forced urgent selling.
  • Don’t short many stocks. Instead they hedge for tail risk with CDS and options.
  • They are happy to incur illiquidity.
  • Illiquidity risk is a risk they LOVE.
  • Comfortable holding cash for tomorrow’s opportunity.
  • They find it is hard to un-train people so they try to hire young.
  • Learning organization.
  • Can’t let client pressures or market pressures distract them.
  • An understanding that their clients expect certain times of underperformance.

Herb Wagner – Head of Public debt and equities

  • Very focused on RMBS, CDS of all kinds, Distressed corp. debt, and equities in US and Europe.
  • When your team is organized into silos, people only recommend ideas in their silo.
  • Find ideas from – reading, sell side analysts, buy side friends, and existing investments.
  • Best ideas are internally generated.
  • Once they have an idea, it flows up to the team leaders. As part of weekly meetings they discuss everything. Everyone knows what each other are working on.
  • They have traders in the office 24 hours a day. Eyes and ears of the firm.
  • The edge they have is figuring out what organizations are having to sell certain securities.
  • Existing Portfolio
    • 60% public
    • 5-8% equities
    • Rest is Debt
    • Structured Finance 22-25%.
  • Next few years will still provide great debt opportunities.
  • 1 trillion corp. debt maturing in next 4-5 years. Lots will be extended and refinanced, but lots will default.
  • Loves RMBS – Most of these bonds will not trade back to par. Limits the buyers.
  • The previous stretch of financial stability lead to more risk being taken. History screwed everyone. I.e. the experts modeled historical returns for home prices. How many times did you hear “home prices don’t go down”?
  • RMBS
    • Technology systems are extremely important in analyzing.
    • Need to have a good sense of where housing markets will bottom.
    • They started in this space by shorting RMBS in 2007 and 2008.
    • INTEX is the best software for analyzing RMBS.
    • During the dislocation calls would come in Friday at 4pm from the dealers who were liquidating mortgage portfolios for mutual funds. They would give them 3 hrs to bid.
    • Need to understand structures.
    • Most mortgage experts don’t even understand the structures. Very confusing.
    • Analyzed housing in different collapses.
    • Looked at affordability than stressed it another 20%
    • Used a rental yield of 10%
    • Attended distressed real estate auctions in CA.
    • March 2008 Peloton blew up and that was their first purchase of RMBS – was too early.
    • They bought these bonds 20% below their mark the previous day.
    • But.. this established Baupost as a player in the market.
    • Bought many mortgages without competing bids.
    • There is still a huge shadow inventory of homes that are still to hit the market. Will drive prices down more.
    • Case Shiller makes people think that home prices have flattened out. Misleading.
    • No slowdown in delinquencies.
    • Prices will trade below affordability levels.
    • On the RMBS they have been buying, home prices can still go down another 40% and they will recover 56 cents on the dollar.
    • Modifications are a huge wild card.
    • Bought IO mortgages in the spring – been a big winner.
  • SIV’s – this is the first firm I have heard talk about buying SIVs.
    • Basically a CDO with highly rated assets.
    • Borrowed short and lent long.
    • Purchased significant medium term notes of SIVs with yields of 15-50%.
    • A SIV is like sausage. Just a bunch of scraps of assets.
    • 200-400 different underlying items.
  • Auto Finance companies
    • They invested 1.8 billion and made 1.2 billion in profits.
    • Ford Motor, Chrysler Finance, and GMAC.
    • First started buying at mid teen yields.. kept buying and in the heart of the crisis they were buying at 50% yields.
    • They love to buy bonds as prices are plummeting. They will just keep buying.
    • Seth has said to the team: “It is not us who is having the bad day as we are buying at lower prices than original purchase. … it is the guy who is selling that is having the bad day”.
    • They found that people pay their car loans. Loss rates remain low. Downside protection pretty good.
    • GMAC was the worst of all. Ford is the best.
  • Hedging
    • Try to hedge if they can.
    • Rarely short stocks.. currently not short any stocks.
    • Not L/S fund.
    • Seek to be dollar denominated.
    • Buy insurance when it is cheap.
    • They like hedging interest rates .
    • CMS caps and if we get double digit 10 yr rates, they will make a 10X return on the hedge.

Q and A with Seth: Conducted by Roger Lowenstein

Q: Origins of Baupost

A: He bought first stock when he was 10 yrs old. Early on in college worked for Michael Price at Mutual Shares. Baupost was first going to be a family office. Started firm in 1982. Almost 30 yrs old.

Q: Is this crisis different than others you have seen?

A: Stands out in terms of magnitude of what happened. Decades of easy credit. Cats and dogs were getting credit cards. The government intervention is different than previous crisis’. It is huge. Gov won’t even let a garden variety recession happen. More bailouts increase risk. Sooner or later that will blow up as well. Big question keep asking himself is “was it really that easy to just print 2 trillion dollars and solve all the problems”?

Q: Interest rate risk? Has the government solved crisis or just taken on all the problems and setting us up for the “Big One”?

A: Impossible to know what they have brought upon us. A sudden and complete melt down is off the table because of their backstop. As long as they can print money we will be ok. All he cares about is being able to buy when others are panic selling. Usually the forced sellers are index funds and mutual funds.

Q: Do you worry about the dollar?

A: Spent a week in NY a few weeks ago. People were oddly optimistic. Money managers play a funny game. In that they are always trying to make money for clients. Baupost plays a different game. Only buy when the markets are getting beat up.. a long term game. Now.. he thinks there is a third game in town. A macro game. People are trying to time markets right now more than he ever remembers.

He has always worried about Fiat Currency. All governments will print money. Jim Grant influenced him greatly on being nervous about fiat currency. Baupost will own call options on Gold sometimes. He is deeply worried now but does not think it is his mandate to own bullion and miners. Will leave it up to his investors. Interesting because bonds, stocks, and gold are all saying different things. The markets are not agreeing.

Q: Last year people said that stock picking did not work. Only macro mattered. Agree?

A: Bought Ford Motor credit bonds at .40 on the dollar when in a depression they modeled getting .60 on the dollar. The main point is how much did people make this year relative to the amount of risk they took. People don’t care about risk adjusted returns anymore.

He thinks it is a tough job for consultants to sort through who was lucky this year.. vs. who was good.

Q: How did you have the courage to buy after the LEH blowup? And .. what did you do?

A: Was buying before Lehman.. after Lehman.. and since than. Also selling here and there. So many money managers need complete liquidity. He does not care if the market opens or not. Has always assumed that with the right type of issue, the market could close for months.

They bought lots of debt during the LEH crisis. Lots of Auto Finance.

Q: Any investments that stood out or “screamed” at you?

A: Only on the debt side. Equity markets were still expensive. No screaming stocks. If March 9th was really the bottom, it was a very expensive bottom relative to prior cycles… so he stuck with debt.

There was a subsidiary of AIG that was only in the mortgage business. He called them the “Thursday” bonds because he bought them on that Tuesday after the AIG collapse at .47 on the dollar. They matured at par TWO DAYS later.

Also bought another bond at .15 on dollar that has already returned .15 to him in cash and they think is worth .60. pays monthly. It is a structured product that is the senior most piece in the pool. 50% IRR for 5 yrs.

Q: Anything that did not work?

A: Does not see a bargain becoming bigger as a bigger problem. Biggest mistake was holding certain stocks into the crisis. Made them look stupid.

Q: Housing turning?

A: Still huge supply. Prime borrowers have homes that are way below loan value. Will be a long time before market recovers. Base case is another 20% decline… worse case scenario in their mind is 40% down from here.

Q: Stocks are flat for 10 years. Why don’t you own stocks?

A: Try to remain agnostic to stocks or bonds. Only buy stocks when they are cheap. Never got cheap.. certainly not cheap right now. 18X adjusted earnings. Debt however did get cheap.

Q: Do you feel that you have less of an edge in stocks?

A: Always have more of an edge where others aren’t looking or care about. Commercial R/E will get really interesting. Will just go where other aren’t. Stocks are expensive and competitive.

Q: Cash. Why?

A: Cash is more accepted now after last year. Endowments learned lessons on not having any cash. Cash is not a market time call. He uses it to buy assets.

Q: Does the cash position mean that you have too much money under management?

A: Don’t think so. Goal is not to make the highest return possible all the time. Managing 20 billion. Thinks there are advantages to size in this market. Helps in Commercial R/E and Mortgages. The negative is obviously that small ideas don’t move the needle. Will return capital at some point.

The endowment consulting business is screwed up. Endowments all benchmark themselves against how they are doing against each other. … what percentile they are in. this is dangerous because it forces everyone to chase each other and they end up taking too much risk.

The consultants only know how to measure return. They need to focus on risk adjusted return. It is all about generating returns with less risk. That is where the cash comes in.

Q: Do you have a benchmark for your fund?

A: Walked out of a meeting with a client when they wanted to talk with him about what benchmark to use for Baupost. Thought it was a waste of his time and he could not add any value there. He does not want to think about any benchmark other than risk adjusted returns.

Q: Should endowments hedge on their own or leave it to their managers?

A: Hard job for endowments. They have to spend a lot of time worrying about the character of their managers. This is a waste of their time. Its too bad they have to do this because a few bad apples.

Wall Street exists to “rip peoples eyeballs out”. Don’t try hedging yourself. You will get screwed. Also committees are entirely too slow. They will screw it up because they usually want to hedge at times that they feel they need it. This is all wrong. You hedge when you feel you don’t need it. That is when insurance is the cheapest. You want to sell your insurance when others are desperate to buy insurance. This is hard to do.

Finds it interesting that endowment kept adding to their VC and PE managers when it was obvious that it was not a good time to do it. They did it so they would not lose their slot. These asset classes are only good to invest in when people don’t want to be illiquid.

Q: From a public policy standpoint is there anything the government can do to reduce risk?

A: Having a risk regulator makes him laugh. No one will see the risks when things are good. No politician will be able to slow things down when it looks as though everything is good. If anyone would have tried to slow down housing in 2005/2006 they would have been looked at as crazy. Politicians will never take away a punch bowl.

Too big to fail is a disaster for the world. He thought that one positive to the pay czar is it could cause people to not want to be bankers. They need to make higher capital ratios and banks less profitable.

Q: So.. does that mean that JP Morgan should be told it cannot be in the derivative business?

A: The US needs to let AIG go bust. They need to do it NOW. Interventions were well intentioned but highly arbitrary. Let CIT fail, but GMAC gets another loan? That is fishy.

In the past, the reason the US was such a good place to invest has all been wiped over the last 12 months: rule of law, unions benefiting over creditors.. this is hurting our credibility.

General Q & A:

Q: How do you invest your cash

A: Short treasuries

Q: More thoughts on liquidity?

A: thinks it is a great time to make illiquid investments. There is a bubble in people fearing illiquid investments. This is the time to do it because no one else wants to.

Written by latticework01

November 24, 2009 at 5:01 pm

Posted in quote

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