Value Investing Winners — Short LOCK, Long Ashland

by Travis Johnson, Stock Gumshoe | September 17, 2013 3:47 pm

These are the two presentations made by folks who entered the Value Investing Challenge, one short and one long.

David Swartz is the second place winner of the Value Investing Challenge, he’s from Pacific West Land, a commercial real estate firm.

His suggestion is to short LifeLock (LOCK), he has a longer report eviscerating the company (his words), but he gives his brief summary and says he thinks it’s worth about five dollars a share.

He says they’re a weak company that he thinks is violating the FTC order that restricts their marketing practices. LOCK is still using words like “Complete” and “guarantee” and “comprehensive”, the same things that got the company in trouble three years ago.

LifeLock’s basic product is far from foolproof, and is one of the weakest in the industry. They are not comprehensive.

The primary service is the identify protection monitoring service that’s supposed to alert you when credit is misused, is not even monitoring bank accounts or credit reports. The vast majority of their subscribers get this basic product.

Their $25 product does include account and credit marketing, but it’s still incomplete — and they can’t get much of the information they would need. No evidence of efficacy has ever been presented, and they provide no protection against the most common types of fraud — like tax refund fraud, which they include in their ads but cannot protect against.

They do offer a $1 million guarantee, but according to the actual terms it does not really cover anything — it’s a cheap ploy to make it seem like insurance, which it is not.

A federal judge shut down their primary business in 2009, which was placing credit freezes on all of their clients. They continued to bill those customers even after the main

One of the founders had his identity repeatedly stolen while under protection — Robert Maynard, who was in trouble with the FTC even before founding LifeLock. He was accused of stealing his own father’s identity, has been arrested for theft, and he left lifelock before he could be listed in the prospectus.

The CEO, Todd Davis, pulled off an advertising hoax in sharing his social security number in ads, and it has been used at least 13 times fraudulently without the LifeLock folks even knowing — all they could do was call the police. He has been selling stock every month, too.

LifeLock bought ID Analytics for a ridiculous $186 million last year, which used to be a leader in ID verification tools for enterprises — technology that’s available from a lot of different companies.

LOCK accumulated losses of $200 million before going public, they have a $1.3 billion market cap, and have forward PE of 38 and dozens of competitors. Intersections, a pure play competitor, has a dramatically better valuation — the market values a LOCK subscriber at $400 and and Intersection subscriber at $40.

LOCK is at about $13 now, his price target is $5 and, frankly, from his presentation it’s hard to see how it could be worth that much. But it is actively promoted in what he calls a never-ending road show, and it has six analysts from the underwriters of the IPO and a low float because the venture capital firms who funded them haven’t sold that much.

The assumption is that ‘someday’ the company will cut back on marketing and start making money, and they have huge growth in revenue even though they’re paying smartly for that growth.

So … excellent short pitch, makes me want to do a pairs trade long intersections (INTX) and short LifeLock (LOCK), but I certainly don’t know either one or the business very well.

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And the grand prize winner this year is a long argument about Ashland (ASH), a specialty chemicals business that’s still valued as a commodity chemicals business. It is much better than the market gives them credit for.

Current share value gives little credit for their water business, in a turnaround, or its unique and value branded Valvoline business. He sees an asymmetric path to various returns, their target is $100-$250 depending on what management does (it’s around $85 now).

Favorite chemical assets are ingredients businesses: Design and produce highly formulated and often patented mission-critical ingredients that are a small percentage of the overall cost of a customer’s products. WR Grade is another great ingredients business, they trade at a much higher multiple.

In 2011, ASH sold a commodity business to buy a specialty business called ISP, greatly improving their business.

They have good market share, there are huge barriers to entry, there are large switching costs for their customers, and they have patents on their IP and do a lot of R&D to continue adding to that.

Cash flow is depressed by high debt, high taxes, and high capex, all of which will have less impact in the next few years. They should generate $17 in free cash flow per year, which is a lot for a $90 stock.

They’re levered to growing energy markets, and the emerging markets consumers and pharma markets, all of which should provide secular growth.

The Water business is behind Nalco and GE Water in water treatment, but it has been an under-managed division — they are cutting costs and consolidating and improving management. If they got gross margins like their peers, they could add $5-13 per share in value — but they could also probably sell it for $1.3-2 billion and there would be a lot of buyers (the whole company has a market cap of $7 billion).

And Valvoline is a differentiator. They have strong and innovative brands and strong market share, with almost no CapEx. The US market is an oligopoly, and they have strong market position and customer loyalty in a market where there’s also a shift to premium

They also have Valvoline Instant Oil change centers — almost 900 centers, and the own 200 of them and franchise the rest and get the 5% franchise cut on those with no CapEx. The market is huge and highly fragmented and they only have 5% share, they could be a big consolidator in this business. They are number two in the US, but have no international branded stores yet so there’s big growth potential there as well. The market thinks Valvoline is worth somewhere between zero and $1 billion. He thinks Valvoline on its own should be worth between $3-5 billion.

They’re not going to sell it, because it has low taxes, but they could spin it off to shareholders as an independent company or as an MLP … and they can probably get away with creating a MLP if they want to. If they spun it off as a MLP, the assumption is that it could be worth $4-9 billion, possibly more than Ashland’s current market cap. The stock is reasonable as it is, but you get lots of huge upside potential for free and it’s a huge value if any of those catalysts work out even halfway well.

Too many folks remember the old Ashland as a commodity, low-margin and cyclical business, he thinks it’s a lot better than that and has some great hidden assets that investors aren’t thinking about. Even without big changes or recognizing those assets or spinning anything off, ASH should get a better PE and a share price of $105 or so … and they’re also buying back stock. Downside is limited because private market value is very high, asymmetric risk-reward profile with many ways to win — if they decide what to do with Valvoline and Water over the next year the stock could double if the economy also performs pretty well.


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