gm5 10.06.2015

05/02/2023 TexasUSIT.org

USIT Lost and Found• 1 Gray Water Bottle

• 1 Black Mini Umbrella

• 1 Notebook from Analyst Orientation

General Meeting #510.6.2015University Securities Investment Teamtexasusit.org

Agenda• General Announcements• Market Update• Austin Partridge

• Portfolio Update• Cliffe Kim

• Lecture: Good Pitch, Bad Pitch• Vishal Bhat

• Stock Pitch: Alcoa, Inc. (AA) • SCG Director: Mark Albin• GM’s: Brian Minkus, Yash Samant, Reese Davis,

Clayton Kurpiewski

General Announcements

• First TWO meetings are free!• Analyst Groups: Senior Analysts will be reaching

out this week• Email vicepresident@usiteam.org for WSJ log-in

information• UCF Workshop: Introduction to Options• Thursday, Oct 1st – CBA 4.328, 7-8pm

USIT Social! • The Picnic• Friday, October 16th • 6pm – 8pm • Transportation/bus details to come• RSVP on Facebook!

USIT Career Panel• Thank you to all the

USIT seniors for participation on the Career Panel!

• Keep an eye out for USIT Spring Career Panel!

05/02/2023

Upgrade Capital

Roden Case CompetitionTopic: Disaster ReliefPrize Money: $3k to 1st, $2k to 2nd, $1k to 3rd

Sign up now!: goo.gl/forms/8qaFJ9fUbJFacebook: http://tinyurl.com/omqozxn

Dates• Accenture Case

Workshop: October 8th, 7pm-9pm @ JGB 2.216• Deadline to sign

up: October 9th, 11:59pm• Competition:

October 17th, 7am - 9pm @ SEA

Recruiting

• Goldman Sachs – Special Situations Group• Dallas office• “…principal investing arm

specializing in underwriting debt and structured equity.”• Information Session

• Date: Thursday, October 8th

• Time: 5:30-6:30pm • Room: UTC 3.102• OCR Resume Drop Deadline:

October 12th • Ross.Yudkin@gs.com

Recruiting

• Juniors interested in investment banking • New York/Houston offices• Summer Analyst Presentation• Date: Thursday, October 8th

• Time: 7-8pm • Room: UTC 3.104

Market UpdateAustin Partridge

TRANS-

Trans-Pacific Partnership

TPP Winners and Losers

WinnersVietnamJapanAustralia

LosersChina

??USA??

Fed Update

Other News• Shell exits Arctic

• Google antitrust scrutiny

• Volkswagen bad

• American Apparel bankruptcy

• Russian involvement in Syria

Portfolio UpdateCliffe Kim

Portfolio PerformanceUSIT Portfolio Current Value: $ 11,659.96

10d Performance Index Comparison

(-2.68)%+2.23%(-0.37)%+0.35%

Name Price 5d Chg ($ · %) Mkt Value Total Chg ($ · %) 52wk Low 52wk High

AAL American Airlines 38.13 -39.78 · -7.43% 495.69 46.28 · 10.30% 28.10 56.20

AAPL Apple 111.31 -43.89 · -1.84% 2337.51 879.18 · 60.29% 92.00 134.54

ACC American Campus 37.18 20.80 · 5.93% 371.80 13.50 · 3.77% 32.12 45.38

AGX Argan 35.96 -10.15 · -0.80% 1258.60 499.10 · 65.71% 28.62 42.50

BABA Alibaba Group 63.92 10.25 · 3.31% 319.60 -88.10 · -21.61% 57.20 120

BBRY BlackBerry 6.78 -47.00 · -6.48% 678.00 -359.00 · -34.62% 5.96 12.63

FNMA Fannie Mae 2.41 15.73 · 4.78% 344.63 -174.46 · -33.61% 0.01 3.51

GENC Gencor 9.44 23.50 · 5.59% 443.68 -55.46 · -11.11% 8.90 10.17

GILD Gilead Sciences 97.54 -44.85 · -8.42% 487.70 -25.30 · -4.93% 85.95 123.37

AJRD Aerojet Rocketdyne 17.37 -103.00 · -10.60% 868.50 17.50 · 2.06% 15.11 24.35

IDT IDT Corporation 14.13 -65.25 · -5.80% 1059.75 -291.75 · -21.59% 13.26 23.24

MUSA Murphy USA 55.35 20.85 · 2.58% 830.25 240.75 · 40.84% 47.73 73.97

PTC PTC Inc. 34.03 4.00 · 1.19% 340.30 2.20 · 0.65% 30.53 42.75

RNET RigNet 29.06 3.60 · 1.25% 290.60 -163.60 · -36.02% 23.37 47.37

SLCA U.S. Silica 15.78 -26.85 · -10.19% 236.70 -190.80 · -44.63% 13.48 55.29

SWKH SWK Holdings 1.42 -12.00 · -2.07% 568.00 120.00 · 26.79% 1.17 4.5

TRN Trinity Industries 24.94 8.45 · 2.68% 324.22 -74.88 · -18.76% 21.78 42.08

HLT Hilton Worldwide Holdings 23.79 1.87 · 0.46% 404.43 -34.00 · -7.75% 20.72 31.60

Aerojet Rocketdyne (AJRD)• California-based rocket/missile propulsion

manufacturer• Highly volatile 2-weeks, ended with -10.60%• Was in a fight for ULA contracts last time• Major announcement made last last

Tuesday night

Сделано в России

Atlas V

Vulcan

Orbital ATK: "sole provider" of solid rocket boosters for VulcanBlue Origins: “expand production capabilities for the BE-4 engine for Vulcan”

???AJRD: Currently legacy providerNew engines = More competition

Blackberry (BBRY)• Canada-based mobile communications

company that is slowly dying• Announced new mobile phone – Priv

BlackBerry (BBRY)• Announced Android BlackBerry to

address consumer app shortage for BlackBerry OS• Concerns:

• Will it weaken BlackBerry security?• Oversaturated Android market

• Falling performance numbers• Revenue: Q2 2015: $490M, Q2 2014:

$916M• Handset Sales: Q2 2015: 800K, Q2 2014:

2.4M• Reduced Handset Forecast by Half• Numerous Analyst downgrades

BlackBerry (BBRY)Good News:• Ample liquidity: $3.35B in Cash/Investments

• $1.3B in long-term debt

• Positive cash flows from operations

• 19% Growth in Services/Software

• Aggressive Acquisitions• Movirtu, SecuSmart, WatchDox, AtHoc and Good

Technology

U.S. Silica (SLCA)• Leading producer of industrial minerals,

such as silica sand• Silica Sand: High-purity, durable, and

very round grains

U.S. Silica (SLCA)• Falling Stock Prices: (-27.7%) in

September

• Falling oil prices (-8.5%)• Falling oil rig count• Oversupply in frac sand

• Jefferies: Downgrade, Price Target $14• RBC: Downgrade, Price Target $20

RigNet (RNET)• Leading communications provider for

oil/gas industry

Contract: “premium global offshore drille

Contract: “major European-based offshore drille

Contract: Exclusive distrib

ution agreement

Lecture:Good Pitch, Bad PitchVishal Bhat

Pitching 101

Growth Investing

Value Investing

Pitching 101

Growth Investing

• Not concerned with present valuations

• Future growth potential

Pitching 101

• Things don’t grow forever…

Growth Investing

Pitching 101

Value Investing

• Good business at a great price• Concerned with present value• Need a clear variant view• Need a clear catalyst

Sourcing Ideas• Price is a function of supply and demand• For stocks to be priced below fair value, demand

must fall• What causes a stock to fall out of favor?• Unfavorable macro trends• Success of a competitor• Change in management• Regulatory scrutiny • Negative PR• Randomness

Components of a Pitch• Investment Thesis• Company Overview• Industry Overview• Valuation• Intrinsic• Relative

• Risks and Mitigations

Components of a Pitch• Investment Thesis

**The most important part of any pitch**

• If you don’t understand the thesis, ask questions• If you STILL don’t understand the thesis, don’t vote yes

What makes a good investment thesis?

Clear, logical, and defensible

argument

Stock has a low level of

analyst coverage

Identifiable catalyst for

value creation

What makes a bad investment thesis?

Not a variant view; too obvious

Posing a growth thesis

as a value thesis

Neglecting to address the bear case

Components of a Pitch• Company Overview

What the hell does this company do?

• Checklist:• Do I understand how this company makes money?• Do I understand what this company spends money

on?• Do I trust management?

Components of a Pitch• Industry Overview

What environment does this business operate in?

• Checklist:• Who are the major competitors?

• What’s our competitive advantage?• What are the major drivers of this industry?

• Porter’s Five Forces

Components of a Pitch• Valuation: Comps

Why is this company a better investment than its peers?

• Checklist:• What are the appropriate metrics to measure the

success of this business?• Is this business cheap relative to its competitors?

• If it is more expensive, is there a clear justification?

Components of a Pitch• Valuation: DCF

• Pros• Quantitative defense for thesis• Educational opportunity• Scenario analysis• Can easily pinpoint where variant view lies

• Cons• Based on numerous “dart-throwing” assumptions• Easy to manipulate• Meaningless in a vacuum

Never let a DCF be the deciding factor in your vote; good to have, good to question,

bad to worship

Components of a Pitch• Risks and Mitigations

What could go horribly wrong with this company?

• Checklist:• Did the team address realistic risks, internal and

external?• Am I comfortable taking said risks?

Q&A• When a pitch is over, what is appropriate to ask?

• Clarifying questions:• Could you explain what a REIT is? (HLT)

• Scenario analysis• Is your thesis valid if interest rates do not rise in the next six months?

(TRV)• Weak mitigations

• You mentioned that a risk would be oil prices falling below $30 – if that happens, how much would the company suffer?

• Valuation concerns• Why is revenue pacing upwards at 20% a year?• Why is this company 2.5x more expensive than its next biggest

competitor?This is YOUR money and YOUR investment –

ask questions and make sure its being put to good use.

Q&A• When a pitch is over, what is NOT appropriate to

ask?• Multi-layered questions• Focusing on the minutiae • Really dumb questions

• What’s the name of the company?• Unnecessarily picky DCF questions

• Your gross margin is 25.47% but don’t you think it should be closer to 25.44%???

Listen to other people’s questions; be open-minded, but don’t change your mind the

second someone asks a question

How to Vote• When to vote YES

• I like and understand the investment thesis• That DCF was clearly made 20 minutes beforehand but I still like

and understand the investment thesis• The Q&A addressed a lot of my concerns, now I’m confident in this

idea• When to vote NO

• The Q&A brought up some very real concerns and I don’t have a lot of conviction in this idea anymore

• I don’t believe in the investment thesis• I still don’t understand the investment thesis• Hilton’s nightly rates are outrageous, I refuse to support them

• When to ABSTAIN• Fell asleep during pitch• Both sides made a lot of good points, idk. • My phone/laptop died, can’t vote, oops.

Stock Pitch: Alcoa, Inc. (AA)SCG Director: Mark AlbinPitch Team: Reese Davis, Clayton Kurpiewski, Yash Samant, Brian Minkus

Alcoa – AA (NYSE) 80% upsideYash Samat, Brian Minkus, Clayton Kurpiewski, Reese Davis – AnalystsMark Albin - Director

Alcoa – AA (NYSE) 80% upsideYash Samant, Brian Minkus, Clayton Kurpiewski, Reese Davis – AnalystsMark Albin - Director

AlcoaThesis

Alcoa is splitting its value chain into two distinct sections. This will allow management

to focus on higher-margin projects

Alcoa sells products not easily commoditized

Long-term contracts are not recognized by a commodity-panicked market

Industry Overview

Jan-10Mar-

10May-

-10Oct-

10Dec-

-11May-

Dec-11Feb

r-12Jun

Nov-12Jan

r-13Jun

Nov-13Jan

-14Mar-

14May-

g-14Oct-

14Dec-

Aluminum Price

Favorable Market ConditionsCommodity Price of Aluminum

Stable

Growth From Specialized Industries

Volatility Protection

Company Partnerships Well Positioned Aluminum Worldwide

China risk minimal

Strong demand in NA and Europe drive sales.

Use overcomes priceAluminum in the U.S.

YOY use of aluminum increases in U.S automobiles.

U.S vehicles must become lighter to meet new emissions standards

Company Overview

Existing Alcoa shareholders will receive stock in both

Delivering Shareholder Value

Value-Add Co. Upstream Co.Premier supplier of high-performance multi-material products and solutions

Positioned to grow in diversified set of growth markets

Robust margins and investment opportunities above cost of capital

Expanded multi-material, technology and process expertise

Robust demand growth of 6.5% in 2015 and 2x between 2010 and 2020

World’s largest, low cost bauxite miner at the 19th percentile on cost curve

Operational flexibility to profit from market cyclicality

Collaborate to produce next-gen automotive aluminum alloys with key

manufacturers

Positioned for growth from horizontal monopolistic structure

Competitive Advantage

Turn Into Aluminum Based Products

Sell to Manufactures

Company 1:Upstream

Company 2: Value-Added

Distribution of Revenue Now

51%27%

7%% Sales - Location

United StatesEuropePacificOther Amer-icas

% Sales - Segment

Global Rolled Products

Primarty Metals

Engineered Products and Solutions

Alumina

Valued-Added Co. Strong Top +Bottom Line Growth Insulated from Market

Dow Jones U.S. Aluminum Index

Isolated from highly volatile market conditions--long term manufacturing contracts and control over cost of raw materials.

Company Overview: Value-Add Co: Key Businesses

Highly Diversified

Value-Added Co: Increase in Demand for Parts from Key Industries

Company Overview: Upstream Co: Continued Drive for ProfitabilityStrong Growth Despite Falling Commodities Prices

Strengths: Impeding division of the company Diversified set of customers for aluminum products Insulated from volatile commodity prices Horizontal integration of mining and production operations

Weakness: Division execution risk

Threats: Rising energy prices(i.e. natural gas) Global market weakens

Opportunities Automotive Lightening Micro mill alloy produced in conjunction with Ford Increase in demand for aluminum parts from aerospace manufacturers

SWOT Analysis Indicated Opportunities in Emerging Industries

Company Overview

In the NewsCatalysts – 3yr time horizon

Alcoa signed a $1 billion contract with Airbus

Alcoa’s quarterly earnings release on Thursday

2/20/2

7/10/2

4/16/2

9/3/20

1/21/2

6/9/20

3/16/2

8/3/20

5/10/2

9/27/2

2/14/2

7/4/20

4/9/20

8/27/2

1/14/2

6/3/20

3/10/2

7/28/2

5/4/20

9/21/2

10152025303540

Valuation

Company Comps

Ticker Name P/E Total Debt (in mm) Total Equity (in mm) Debt/Equity P/BV NTMTEV/EBITDA NTM 2015 Total Revenue (in mm)

NYSE:AA Alcoa Inc.16.4 8,846.0 14,794.0 0.60 1.80 6.3 24,332.0

NasdaqGS:KALU Kaiser Aluminum Corporation16.3 225.2 758.8 0.30 2.00 9.5 1,415.8

NasdaqGS:CENX Century Aluminum Co.4.4 254.7 1,091.2 0.23 0.40 1.8 2,163.3

NYSE:CSTM Constellium 13.49 1,205.0 (41.4) -29.11 NM 9.1 5,193.7

Nucor16.0 4,360.6 8,075.0 0.54 2.70 7.9 21,105.1

Average 13.3 0.42 1.725 6.9

DCF 2010A 2011A 2012A 2013A 2014A 2015LTM 2015P 2016E 2017E 2018E 2019E

Sales $ 21,013 $ 24,951 $ 23,700 $ 23,032 $ 23,906 $ 24,332 $ 23,062 $ 24,135 $ 25,100 $ 26,819 $ 27,423

% change 19% -5% -3% 4% 4% 5% 4% 2% 2%

Cost of Goods Sold $ (17,116) $ (20,474) $ (20,401) $ (19,277) $ (19,070) $ (18,946) $ (17,988) $ (18,825) $ (19,578) $ (20,918) $ (21,390)

Gross Profit $ 3,897 $ 4,477 $ 3,299 $ 3,755 $ 4,836 $ 5,386 $ 5,074 $ 5,310 $ 5,522 $ 5,900 $ 6,033

Sales, general, and administrative $ (961) $ (1,027) $ (997) $ (1,008) $ (953) $ (928) $ (922) $ (965) $ (1,004) $ (1,073) $ (1,097)

Other operating charges $ (174) $ (184) $ (197) $ (192) $ (218) $ (240) $ (231) $ (241) $ (251) $ (268) $ (274)

EBITDA $ 2,762 $ 3,266 $ 2,105 $ 2,555 $ 3,665 $ 4,218 $ 3,921 $ 4,103 $ 4,267 $ 4,559 $ 4,662

Depreciation and Amortization $ (1,450) $ (1,479) $ (1,460) $ (1,421) $ (1,371) $ (1,322) $ (1,384) $ (1,448) $ (1,506) $ (1,609) $ (1,645)

EBIT $ 1,312 $ 1,787 $ 645 $ 1,134 $ 2,294 $ 2,896 $ 2,537 $ 2,655 $ 2,761 $ 2,950 $ 3,017

Taxes $ (148) $ (255) $ (162) $ (428) $ (320) $ (620) $ (761) $ (796) $ (828) $ (885) $ (905)

NOPAT $ 1,164 $ 1,532 $ 483 $ 706 $ 1,974 $ 2,276 $ 1,776 $ 1,858 $ 1,933 $ 2,065 $ 2,112

Depreciation and Amortization $ 1,450 $ 1,479 $ 1,460 $ 1,421 $ 1,371 $ 1,322 $ 1,384 $ 1,448 $ 1,506 $ 1,609 $ 1,645

Change in Net Working Capital $ 528 $ (63) $ 77 $ 276 $ (795) $ (592) $ (165) $ 10 $ (208) $ (45) $ 78

CAPEX $ (1,015) $ (1,287) $ (1,261) $ (1,193) $ (1,219) $ (1,266) $ (1,153) $ (1,207) $ (1,255) $ (1,341) $ (1,371)

Unlevered Free Cash Flow $ 2,127 $ 1,661 $ 759 $ 1,210 $ 1,331 $ 1,740 $ 1,841 $ 2,110 $ 1,976 $ 2,288 $ 2,464

COGS/Sales -81.5% -82.1% -86.1% -83.7% -79.8% -77.9% -83% 78% 78% 78% 78% 78%

SG&A/Sales -4.6% -4.1% -4.2% -4.4% -4.0% -3.8% -4.3% 4% 4% 4% 4% 4%

Other/Sales -0.8% -0.7% -0.8% -0.8% -0.9% -1.0% -0.8% 1% 1% 1% 1% 1%

D/A Sales -7% -6% -6% -6% -6% -5% -6.2% 6% 6% 6% 6% 6%

Tax Rate -11% -14% -25% -38% -14% -21% -20.5% 21% 21% 21% 21% 21%

CAPEX/Sales -5% -5% -5% -5% -5% -5% -5.1% 5% 5% 5% 5% 5%

DCF and Implied Discount

Beta: 1.11Equity Risk Premium: 6%Risk Free Rate: 2%Cost of Equity: 6.44%Cost of Debt: 4%Cost of Preferred Equity: 5%Dividend: $ 3.75 Preferred Share Price: $ 81.02 Market Value of Debt: $ 8,789.00 Market Value of Equity: $ 12,256.00 Market Value of Preferred Equity: $ 58.00 WACC: 5.42%

WACC: 5.4% Growth Rate: 2% 2010A 2011A 2012A 2013A 2014A 2015LTM 2015P 2016E 2017E 2018E 2019EUnlevered Free Cash Flow: $ 2,127.00 $ 1,661.00 $ 759.00 $ 1,210.00 $ 1,331.00 $ 1,740.00 $ 1,841.39 $ 2,109.73 $ 1,975.72 $ 2,288.21 $ 2,463.80 PV of FCF: $ 9,076.78

Multiple 6.31 PV of Terminal Value (Multiple): $ 22,594.50 % of Enterprise Value: 0.76805928 Enterprise Value $ 31,671.28 Enterprise Value $ 31,671.28 Implied Equity Value: $ 21,811.28 Implied Share Price: $ 18.79

Implied Discount: 80%

Risks and Mitigants

Not Just a Mining CompanyRisks and Mitigants

Demand RiskEmission Standards

Aluminum Prices

Energy RequirementsEnergy Prices

Decreased Reliance

Split Execution RiskMulti-year Process

No loss of coverage

Conclusion

Appendix

Why DCF for mining company? Why not Net Asset Value? Alcoa has so much aluminum in house that it doesn’t even bother

figuring out how much it has in reserves. Most of the company literature is based in EBITDA and their operating performance metrics are on a cash-flow basis

Your Implied Discount is Pretty High....why? The company has been adversely hit by a commodity bust that doesn’t

really affect it’s ability to price Can you tell me more about this split?

The details have yet to be released....the process has yet to be cleared by the Feds, but the project has been years in the making and management has assured equity holders they will get equal rights in both companies

Your comparables don’t seem like they reflect Alcoa Not many companies own their entire value chain....we considered doing

a sum-of-parts analysis, but figured it wouldn’t be appropriate if we didn’t have synergy information from the company yet

We Know You Have Questions...

Vote: texasusit.org/portfolioVoting opens after DCF Analysis

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