VIC — COMPOUND Capital (Kyriopolous and Altman)

Two overlooked picks from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 16, 2013

The guys from COMPOUND Capital presented at the last Congress too, and they have had some interesting ideas — they have two stocks to share today. They look for recurring revenue, owner operators, balance sheet slack and limited leverage, undervalued companies or confusing situations. They like names that don’t screen well and have limited analyst coverage.

He likes companies that are serial compounders — companies that can compound “into infinity.” Limited maintenance capex, low headcount.

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First company:

Ascent Capital Group (ASCMA)

$2.5 billion enterpirse value. This is a serial compounder that is a holding company of more than a million alarm annuitieis — it’s a spinoff from a spinoff from Liberty Media, and John Malone is one of the largest owners and it’s run by his M&A team.

“It’s a factoring business in disguise”

It can easily support debt because of the recurring payments from customers. Alarm companies typically break even after three years, and the average customer stays with the company for eight years. Monitronics is the name of the monitoring company that Ascent Capital owns.

The business is completely scalable, 11% compound annual growth rate in number of subscribers, now over a million, and the customers are residential homeowners with good credit. 18% of US homes currently have an alarm, and that’s growing, but ADT is the only big player with 25% market share. Monitronics is more entrepreneurial, uses independent dealers, and doesn’t need a sales network — they are asset-light without infrastructure.

Access to cheap finance facilitates this growth — the industry is so fragmented, and so many “Mom and Pop” security company operators are looking to retire, that they can grow easily as much as the balance sheet allows. Their financings have been oversubscribed, so there’s no problem getting capital to expand.

The monthly payment has grown as homes have gotten smarter, so the average contract is $41 per month — and as alarm systems get smarter the fees should go up, even though this company didn’t invest in creating these more advanced smart homes or smart phone connections.

38% are the “steady state net operating cash flow” (SSNOCF) margins. Alarm companies generally trade for about 10-14X this number for owner earnings, Monitronics is less than 1/5 the size of ADT and has lots of growth runway, few analysts, earns more per customer, and has a ...

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