These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.
Guy Gottfried has suggested a lot of small cap Canadian stocks, some of which have done phenomenally — so what does he suggest this time?
Holloway Lodging (HLC.TO, HLLOF)– he recommended it at the VIC in Omaha 30 months ago too, but they did something transformation that he thinks makes them a different company.
Was a mismanaged company, stock collapsed when they suspended the dividend. They were run for the benefit of their property manager, not their shareholders. They are at $5 now, were at $150 pre crisis.
An activist investor came in and took control in 2012, and they just completed a transformational deal to buy another hotel company called Royal Host, which has doubled its size.
Combined, the new company is valued at 7.7X unadjusted free cash flow (comparables generally around 12X). On a normalized basis, post synergies, it trades at 5X FCF — abnormally cheap for a well-run, growing business.
It’s undervalued based on the Holloway portfolio alone, the market lets investors get Royal Host for less than zero.
Insiders own a lot and have been buying. Near-term catalysts in the next few quarters. Good runway for growth because hotels are fragmented.
Why is it cheap?
Small and closely held — Only a $100 million market cap. Underfollowed, no conference calls, only one boutique analyst, still stigmatized by the market after their debt recapitalization a few years ago.
Royal Host, which they acquired, has been mismanaged for a decade. No cost management, underinvestment in best assets, leadership vacuum, revolving door CEOs.
Mismanagement anecdotes: Their Chatham ontario hotel paid double the property tax of their nearby, nearly identical competitor. Their London, Ontario hotel had huge terrorism insurance. Huge opportunities for cost cutting — insurance, property taxes, food, energy, benefits, exiting expensive external property management contracts. Major cost savings are already in, but not in the earnings yet because just closed. They also have big tax loss pools.
Some hidden assets — they have hotels that don’t make any money, can be sold for meaningful amounts — they might get $20-30 million in dispositions. Example, a big Travelodge near the Toronto airport that doesn’t make money ($400,000 in annual cash flow), could probably sell it for $15 ...