LICT Corporation (LICT)

LICT is an integrated provider of broadband and voice services. On the voice side, LICT has traditionally operated as both a Rural Local Exchange Carrier (“RLEC”, an incumbent local telephone company serving a rural area) and a Competitive Local Exchange Carrier (“CLEC”, a local telecommunications provider which competes with the incumbent telephone company). It provides high speed broadband (Internet) access through the provision of copper-based digital subscriber lines (“DSL”), fiber optic facilities, fixed wireless, and cable modems. It also provides video services through both traditional cable television services and Internet Protocol television services; wireless communications; and several other related services.

Value investor Mario Gabelli is the CEO and chairman of the board. He directly owns 29.74% and indirectly another 9.27%. Gabelli has consistently stated that he believes shares are undervalued, and has backed it up by repurchasing shares.

On August 28, LICT received its second unsolicited offer (PR) of the year. The first was immediately rejected as inadequate. The board is currently considering the second. The price is not disclosed, but the press release states: "As with an earlier unsolicited proposal which LICT disclosed on February 19, 2014, the current proposal represents a significant premium to LICT’s recent trading price. In addition, the proposed price is closer to the prevailing financial and marketplace dynamics in LICT’s industry than the previous proposal."

Telecom transactions are heavily influenced by EBITDA multiples. EBITDA is used to control for different depreciation assumptions and capital structures. In LICT's Q2 earnings PR, they state their EBITDA guidance for the year, of around $41mm EBITDA before corporate expenses, and including DFT, a business they recently agreed to sell (expected to close in Q4). Adjusting to exclude DFT and corporate expenses (assuming $3.4mm based on the average of several recent years), LICT has around $34mm EBITDA. As illustrated below, LICT currently trades at 4.3x EBITDA.

Share price	4,800
Shares	0.022327
Mkt cap	107.2
EBITDA	34.4	Excluding DFT; 3.4mm Corp Exp
Net debt	41.5	Excluding DFT
EV/EBITDA	4.3

Below is a table with comparable companies and operating metrics and trading multiples. The LICT numbers exclude DFT.

Company	Rev	Mkt Cap	Net Debt	EBITDA	EBITDA Margin	Rev 6M 2014 vs 2013	Net Debt /EBITDA	EV/ EBITDA	LICT Implied Px
LICT	85	107	42	34	41%	6.4%	1.2	4.3x	4,800
FTR	4,667	6,763	7,112	2,040	44%	-3.9%	3.5	6.8x	8,633
CTL	18,136	23,815	20,778	5,793	32%	0.5%	3.6	7.7x	10,015
OTEL	76	5	112	28	37%	-8.3%	4.0	4.2x	4,582
LMOS	203	322	331	84	41%	-4.4%	3.9	7.8x	10,130
Scenario - DFT Implied								5.8x	7,031

LICT's basic operating metrics are strong relative to comparable companies. It has managed to stabilize revenues in the declining parts of its wireline business and is now increasing revenue year over year. Looking at the table, it is doubtful that Gabelli would accept less than 5.5x or so (around where he sold DFT), and 7x+ seem possible, though around 6-6.5x seems most likely. All of these prices are substantially above recent trading levels.

If the deal does not occur, which is quite possible, the price could fall. However given the operating facts, the cheap valuation, and association with Ganelli, I will be comfortable owning the stock for quite some time regardless of the outcome. Though not an important part of the thesis, given the M&A environment, I would not be surprised either if LICT receives additional offers.

LICT is not particulatly cyclical. One of the main risks in owning LICT as I see it is regulatory risk (ICC and USF changes being made by the FCC). I can say confidently that I know less about this than the market. The market though does not ascribe going out of business multiples to other regulated parts of telecom businesses, and I don't see anything special about LICT in this regard.

Conclusion
Though I didn't post much historical financial information in this post, LICT's business is moving along nicely, and the price remains quite cheap. As frustrating as it can be to pay double my original purchase price, I plan to increase my position in LICT, depending on availability of the stock.

Disclosure: Long LICT, and hopefully buying more soon

Hupsteel Limited (H73.SI)

Hupsteel is a provider of industrial hardware and infrastructure products. It derives it's revenue from sales of pipes and fittings, structural steel and general hardware to the Marine, Oil & Gas and construction industry in Singapore. It is based out of Singapore.

A link to a very interesting write up of the company that someone else put together can be found here. I don't have much to add to that write up.

The balance sheet is below:

	Book	Adjustment	Adjusted	Per Share	Comment on Adjustment
Cash & Equivalents	59,491	0	59,491	0.10
Receivables	41,499	-4,964	36,535	0.06	Additional bad debt reserve
Inventories	45,828	0	45,828	0.07
Securities	15,721	0	15,721	0.03
Other	313	0	313	0.00
Total Current Assets	162,852	-4,964	157,888	0.26
Properties	13,567	64,933	78,500	0.13	Market per AR
PPE, Net	24,934	-12,467	12,467	0.02	50% haircut
Non Current	38,501	52,466	90,967	0.15
All Liablities	8,808	0%	8,808	0.01
NCAV	154,044		149,080	0.24
NCAV + Non Current	192,545		240,047	0.39

A summary of the thesis is simple: Hupsteel is a profitable and cash flow positive net-net with substantial investment properties whose value does not appear to be reflected in the price. Hupsteel also operates in a cyclical industry that is currently experiencing very difficult conditions. When the cycle will turn is unclear but it will at some point, meanwhile the company remains profitable and cash flow positive. 

Disclosure: Long H73.SI

Credit Acceptance Corporation (CACC)

CACC is an indirect subprime auto lender operating since 1972. CACC offers automobile dealers financing programs that enable them to sell vehicles to consumers, regardless of their credit history. Their financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing.

CACC has a remarkable track record, as evidenced by the following:

	GAAP        EPS	% Change	Adjusted    EPS (1)	% Change	BVPS	% Change
2001	0.57		0.57		6.50
2002	0.69	21.1%	0.70	22.8%	7.29	12.1%
2003	0.57	-17.4%	0.55	-21.4%	7.91	8.5%
2004	1.40	145.6%	1.37	149.1%	7.34	-7.2%
2005	1.85	32.1%	1.74	27.0%	9.51	29.7%
2006	1.66	-10.3%	1.59	-8.6%	5.96	-37.3%
2007	1.76	6.0%	2.03	27.7%	8.52	42.9%
2008	2.16	22.7%	2.65	30.5%	10.86	27.4%
2009	4.62	113.9%	4.03	52.1%	15.73	44.9%
2010	5.67	22.7%	5.70	41.4%	15.82	0.6%
2011	7.07	24.7%	7.34	28.8%	20.30	28.3%
2012	8.58	21.4%	8.58	16.9%	24.29	19.7%
2013	10.54	22.8%	10.43	21.6%	31.24	28.6%
CAGR		27.5%		27.4%		14.0%
5 Year		37.3%		31.5%		23.5%
10 Year		33.9%		34.2%		14.7%

(1) See CACC's annual report for the meaning of this term. They adjust for asymmetries in US GAAP treatment of earnings and are adjustments that I agree with.

Business

CACC provides financing to dealers through two programs: (1) the Portfolio Program, and (2) the Purchase Program. In the Purchase Program, CACC buys loans originated by dealers directly. For 2013, the Portfolio Program accounted for 93.5% versus 6.5% for the Purchase Program. Under the Portfolio Program, as compensation for the loan, the dealers receives (a) an upfront "advance", and (b) payments that depend on the future performance of the loan ("dealer holdback"). Subsequently:

• Consumer sends CACC principal plus interest
• CACC is reimbursed collection expenses
• CACC takes 20% of remaining amount as a servicing fee
• CACC uses any remaining amount to reduce advance dollar for dollar (i.e., not according to some "advance" amortization schedule) until the advance balance is zero
• Any remaining amount is paid to the dealer

One can think of CACC owning an ABS with a 20% coupon where the dealer takes the first loss position. Dealers are incentivized to place more loans with CACC by providing that they be able to pool every 100 loans placed and receive accelerated dealer holdback payments related to these loans. 

CACC insists on a margin of safety in pricing the loans as illustrated by the following:

Consumer Loan Assignment Year	Forecasted Collection %	Advance       %	Spread       %
2004	73.0%	44.0%	29.0%
2005	73.7%	46.9%	26.8%
2006	70.0%	46.6%	23.4%
2007	67.9%	46.5%	21.4%
2008	70.1%	44.6%	25.5%
2009	79.2%	43.9%	35.3%
2010	77.0%	44.7%	32.3%
2011	74.1%	45.5%	28.6%
2012	73.5%	46.3%	27.2%
2013	73.3%	47.6%	25.7%

The spread is a very important metric to track. The trend of late has been downward which is a concern. This is a function of the competitive environment, which I discuss further below.

The forecasted collection percentages shown in the table above are based on a statistical model. Accurately forecasting collection rates is critical to their business, and the following illustrates their forecast performance:

	Forecast as Of			Variance from
Consumer   Loan Assignment  Year	Dec 2013	Dec 2012	Initial    Forecast	Dec 2012	Initial    Forecast
2004	73.0%	73.0%	73.0%	0.0%	0.0%
2005	73.7%	73.6%	74.0%	0.1%	-0.3%
2006	70.0%	69.9%	71.4%	0.1%	-1.4%
2007	67.9%	68.0%	70.7%	-0.1%	-2.8%
2008	70.1%	70.3%	69.7%	-0.2%	0.4%
2009	79.2%	79.5%	71.9%	-0.3%	7.3%
2010	77.0%	77.3%	73.6%	-0.3%	3.4%
2011	74.1%	74.1%	72.5%	0.0%	1.6%
2012	73.5%	72.2%	71.4%	1.3%	2.1%
2013	73.3%	--	72.0%	--	1.3%

On average, their forecasts have been conservative by 1.3%.

Discipline is critical for any lender. As Charlie Munger mentioned, "The first chance you have, to avoid a loss from a foolish loan is by refusing to make it; there is no second chance." I think the following table tells the story of a disciplined underwriter.

Year	Average Unit    Volume Per Dealer	% Change
2001	52.5
2002	59.1	13%
2003	64.7	9%
2004	61.2	-5%
2005	46.2	-25%
2006	41.3	-11%
2007	37.7	-9%
2008	37.2	-1%
2009	35.0	-6%
2010	42.7	22%
2011	44.5	4%
2012	35.7	-20%
2013	31.6	-11%

There's some noise in this table (e.g., 2008 and 2009 volumes per dealer decreased as a result of capital constraints rather than the willingness to write business), but it shows that CACC is more inclined to grow unit volume by adding dealers rather than by adjusting pricing to drive per dealer volume levels. Of course, all else equal, they would prefer to see per dealer unit volumes increasing.  But I think management behaves prudently.

The below table shows the total unit volume and active dealer growth through time.

	Unit Volume	% Change	Active Dealers	% Change
2001	61,928		1,180
2002	49,801	-19.6%	843	-28.6%
2003	61,445	23.4%	950	12.7%
2004	74,154	20.7%	1,212	27.6%
2005	81,184	9.5%	1,759	45.1%
2006	91,344	12.5%	2,214	25.9%
2007	106,693	16.8%	2,827	27.7%
2008	121,282	13.7%	3,264	15.5%
2009	111,029	-8.5%	3,168	-2.9%
2010	136,813	23.2%	3,206	1.2%
2011	178,074	30.2%	3,998	24.7%
2012	190,023	6.7%	5,319	33.0%
2013	202,250	6.4%	6,394	20.2%
CAGR	10.4%		15.1%
5 Year	10.8%		14.4%
10 year	12.7%		21.0%

Growth has been very strong, but has of late been slowing. This too is a function of the competitive environment which I discuss below.

Competitive Environment and Market

The competitive environment is characterized by (1) saturation - there are many competitors (NICK, SC, CPSS, commercial banks, savings banks, credit unions, WFC moving more into subprime space etc), and (2) reduced volumes due to trailing off of pent up demand during the crisis. This combination of forces is a concern. Are we at the top of the cycle with a slow motion crash ahead (rates decrease and losses rise slowly, but dramatically)? I'm not one to predict cycles, but I actually don't think this would be so bad for CACC because they strike me as very disciplined, and over time it would weed out weaker players and tighten supply. Anecdotal commentary I’ve read though indicates that (a) on the supply side, while loose historically, it is still tighter than 2006-2007, and (b) losses in subprime credits remain at historical lows.

Overall, while a very legitimate concern, I take comfort in the fact that management has navigated these cycles successfully in the past by sticking to their principles and staying disciplined on price. I also take comfort in the ‘skin in the game’ portfolio program approach CACC takes (rather than outright purchases). This significantly reduces credit risk relative to the alternative, and gives dealers an additional revenue source.

As Don Foss (the founder and chairman) mentioned, while there are not barrier to entries, there are plenty of barriers to making money. Operationally, CACC seems very well positioned relative to its competitors. Below is a table comparing return on assets (unlevered capital) achieved by CACC and it's 'pureplay' competitors.

ROA	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	Latest Qtr
CACC	7.47	11.99	8.72	6.59	6.45	12.63	13.5	12.12	11.29	11.08	10.05
NICK	5.39	7.21	7.81	7.18	5.33	2.43	5.28	7.34	8.88	7.65	6.91
SC	—	—	—	—	—	—	—	3.96	3.75	3.09	3.09
CPSS	-2.52	0.35	0.92	0.69	-1.33	-4.23	-3.74	-1.77	7.2	1.73	1.84

And below is a table comparing efficiency ratios.

	Operating Exp to Int Income
CACC	23%
NICK	35%
SC	18%
CPSS	33%

These two tables combined paint a picture of a company that is extremely well run as compared to it's competitors. While SC has a lower efficiency ratio than CACC, it operates with much higher leverage (which allows it to earn greater interest income; raising the denominator, lowering the ratio) to achieve this. Note their are many competitors that are not listed here (banks etc), but it is still worthwhile to compare figures against the "pureplay" competitors that the data is easy to obtain for.

CACC has a very small share of the market. There are approximately 40 million used cars sold annually, 60 million adults with sub-prime credit scores and 60,000 dealerships. In 2013, 6,168 dealerships originated 202,250 loans with CACC. The opportunities for CACC remain large.

Management

CACC management appears to be quite shareholder friendly, focused, and rational. Their communication and annual letters are clear and full of useful information. They also accumulate commonly asked investor questions and present the answers in writing on their website. From reading managements communication, three themes jumped out at me: focus, discipline, and rationality.

An interesting video with management being featured is here: http://youtu.be/wah9p824nYg. Some of this video seems quite scripted, but it does give a decent picture of the management style. 

Share Repurchases

The company is also a regular purchaser of it's own shares:

	Diluted         Shares
2001	43,150,804
2002	43,362,741
2003	43,409,007
2004	41,017,205
2005	39,207,680
2006	35,283,478
2007	31,153,688
2008	31,105,043
2009	31,668,895
2010	29,984,819
2011	26,600,855
2012	25,598,956
2013	24,009,593

Since year end, the company has purchased an additional 637,420 shares, and announced a tender for 915,750 shares. Repurchases have the effect of raising financial leverage.  Below is CACC's leverage as compared to competitors.

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	Latest Qtr
CACC	2.0x	1.7x	3.5x	3.6x	3.4x	2.4x	2.8x	3.3x	3.4x	3.2x	3.6x
NICK	3.8x	2.6x	2.6x	2.5x	2.4x	2.3x	2.2x	2.1x	1.9x	2.1x	2.0x
SC	—	—	—	—	—	—	—	8.8x	8.5x	9.8x	9.9x
CPSS	11.0x	15.7x	15.5x	20.0x	18.2x	30.0x	163.1x	—	16.9x	14.8x	14.1x

None of these competitors have sticky deposits that would justify obviously higher ratios. So while CACC is quite leveraged, they appear to be on the more modest end of the spectrum.

Risks/Concerns

1. The main risk that CACC faces in my view is funding. They are highly dependent on the capital markets, which no question is not ideal. While I cannot dismiss this risk entirely, the 2008 credit crisis was a very good stress test of their business model, and they passed with flying colors. They grew adjusted earnings per share 30.5%, 52.1%, and 41.4% in 2008, 2009, and 2010 respectively. This is in spite of decreasing loan volume in 2009 due to capital constraints imposed by the crisis. 
2. As discussed, the competitive environment poses a persistent threat.
3. Collection forecasting accuracy is critical to their success. Competition threatens the accuracy of their forecasts by way of adverse selection. They regularly present backtests and have historically been conservative in their forecasts.
4. Specialty finance companies do not sell for premium earnings multiples. I'm not sure if this is due to some stigma, or just the fact that they're balance sheet lenders (commodity). Other than companies in trough/unusual earnings situations, only a couple companies currently trade at earnings multiples in the high teens (e.g., FCFS at 17x).
5. Don Foss (founder and chairman, age 69) is selling all of his shares. Mr. Foss owns roughly 4.4mm shares, and per disclosures in recent tender offers, he intends to sell 100% of these. I'm not exactly sure what to make of this, but I think it's doubtful that he is opportunistically selling based on his view that the price as currently high, and also doubtful that he thinks the company’s prospects long term are poor (after going for 41 years, through multiple cycles, and recent performance etc). Mr. Foss has been selling for a long time, somewhat consistently. I haven't gone through all the tenders, but he was tendering large quantities of shares both in October 2006 and July 2010 (two totally different points of the cycle).
6. Regulation - Dodd-Frank established the Consumer Finance Protection Bureau (CFPB). While the CFPB is a potential wildcard, at the moment it does not seem to be cause of much concern from CACC's perspective. To date their main focus seems to be fair lending practices (i.e., not discriminating based on race, religion etc). Something to keep a close eye on. 

Conclusion

I purchased CACC based on:

• Track record: Their track record is very strong. The last 5y/10y, they have compounded BVPS 23.5%/14.7%, adjusted EPS 31.5%/34.2%, and unit volumes 10.8%/12.7%.
• Management ethos: I am very impressed by management. They (a) strike me as very rational, focused, and disciplined; operate on margin of safety/value investing principles, (b) strong capital allocation; have also bought back a lot of stock (24%/42% of the stock the last 5y/10y), and (c) seem to be shareholder friendly; quite clear and transparent communication
• At 11.9x TTM NI (management’s “adjusted” earnings), the price seems reasonable, or at least not unreasonable. For context, historically CACC has sold for 13.5x-14x earnings on average the last decade; competitors currently trade in ranges of 9x (CPSS) to 15x (SC). My thinking is you're not paying a lot, if anything, for growth which they have delivered plenty of. 

For me, this is a company that I can say that were it to fall dramatically in price, all else equal (mainly management remaining in place, and access to funding), I would feel comfortable allocating a very large percentage of my net worth to.

Disclosure: Long CACC

CIBL, Inc (CIBY)

CIBL is a company I've owned since mid-November 2013, but have not written about it. I sometimes do not write about something I bought/sold because it has been written up all over the blogosphere (e.g., HNFSA/HNFSB, SHFK, SODI, CDU.PT, BRK). This is easy to rationalize because putting a writeup together usually requires a fair amount of effort, and my day job consumes 12 hours +/- a day. However I've realized this is usually a mistake, because one of the main goals for me with the blog is to improve decision making, and writing the thesis out undoubtedly (a) significantly improves focus by forcing you to think about each idea more thoroughly, (b) provides a track record of one's rationale for future scrutinizing / progress tracking, and (c) helps greatly in deciding if it's time to sell something. While writing things down will obviously not eliminate poor/expensive decisions, it facilitates improvement in more ways than one, making it well worth the effort. So there are several other buy/sell decisions in the backlog to write up.

Anyways, this is an idea that has been written up by some of my favorite bloggers to track, e.g., here, and here. Shares currently trade around $1,400 (with 19,332 shares outstanding). The idea is fairly simple, CIBL was spun of from LICT late 2007 and has since sold the majority of its operating assets (wireless towers and TV stations), and now consists of the following assets:

	Per Share	Basis
CIBL cash, net of tax (1)	1,030	Book
TV station sale receivable	394	Book
ICTC (39.95% stake) (2)	180	Market
LICT note receivable	25	Book
Solix (1.36% stake) (3)	5	Book
Total	1,633

(1) ICTC is consolidated in the financial statements of CIBL. This item represents only CIBL cash, net of ICTC cash.
(2) At cost, the ICTC investment represents $186 per CIBL share.
(3) The historical cost of this investment is disclosed in Note 4 of the 2007 Auditor's Report.

The above figures do not match the press release linked above because they have been updated to reflect the recent repurchase of approximately 10% of the outstanding common stock at $1,300.  It is worth noting that the board and management of the company elected to not sell shares as part of the tender. Also worth noting is that Mario Gabelli, founder of GAMCO Investors, is Chairman of the Board and has a 34% stake in the company. Mr. Gabelli also owns large stakes in both ICTC (investee of CIBL) and LICT (former parent of CIBL).

ICTC is a telecommunications company not that dissimilar to the pre-asset-sale CIBL, which Mr. Gabelli has been buying for CIBL. Mr. Gabelli also controls ICTC, through a combination of direct and indirect (through CIBL) investments. I believe it is quite possible that he plans to monetize the assets of ICTC in a similar fashion as CIBL. The posts referenced above provide additional insight into the potential value of this investment.

The Solix investment is also somewhat of a wildcard. While on the books at $100k, there are indications that this investment could be worth significantly more than this. One of the blogs posted above observed that Solix has annual revenues around $91m, so for the 1.36% stake, a value of $600k-$1.2m is probably a conservative range ($32-$64 per CIBL share). Depending on Solix's margins and growth rates etc., a value up to $3m ($160 per CIBL share) is entirely within reason.

The operative word for this investment is safe. Given the current asset base, the upside is not tremendous (I estimate best case maybe 35-40%, but most likely only 20% from the recent price of $1,400). However the potential downside strikes me as very limited. For example, suppose ICTC and Solix are both worth $0, there are still $1,403 of after-tax assets per share to cover the price. ICTC is after all in an extremely tough and declining business. The real question is what management does with the cash.  Usually the concern is that management, in one way or another, will set this on fire. In this case, with Mario Gabelli at the helm of capital allocation, this risk seems highly mitigated. More likely, I think having Gabelli manage the capital is potentially a large opportunity. To date, he has consistently acted in a minority-shareholder friendly manner, at both LICT and CIBL. He spun off CIBL which has proved rewarding to LICT shareholders, has monetized assets at attractive valuations, and repurchased shares (both at CIBL and LICT).

Despite the limited upside with the current asset base, the limited downside combined with Gabelli managing the capital were the deciding factors for me. I own shares with a cost that is just about 10% lower, and I have an open order (has been open for maybe two months) to purchase more if shares dip back towards this price.

Disclosures: 

(1) Long CIBY with an open order to purchase additional shares

(2) Long LICT and may purchase additional shares at any time
(3) Considering an investment in ICTG, may purchase shares at any time

*Edit: I should have disclosed that I am long BRK, HNFSA, SODI, SHFK, CDU.PT that are also mentioned.

Immediate about face - Groupe Athena, Inc. (GATA)

Following the recent post related to GATA, I was made aware of some research posted here. It is good disconfirming evidence arguing essentially that GATA is quite possibly a fraud. While this is a pretty serious allegation, the author actually makes some good points and has done a decent amount of legwork. 

The risk indeed seems elevated to me (even more so than other microcaps), but for a few reasons I limited my search to googling people (serves me right for not waiting to hear back from management and looking into the fraud angle as much as usual). Maybe preemptive, and feel a little foolish to do such an immediate 180, but I feel the risk is real and am more comfortable selling quite possibly for good, but at least until I hear back from management about some of my questions that could shed a little light on this.