Vanguard Mid Cap ETF: Cheap Valuations And High Quality (NYSEARCA:VO)


In this world nothing can be said to be certain, except death and taxes. – Benjamin Franklin

The Vanguard Mid Cap ETF (VO), a fund that is focused on mid-cap US stocks, has not been loved in recent years. It has had an impressive Covid-recovery, finally turning positive for the year, but remains below all-time highs made in February. Of course, this is not new for mid-cap investors. In the last three years, despite overwhelmingly positive equity markets and a risk-on sentiment, mid-caps have outperformed large caps, as measured by the Vanguard S&P 500 ETF (VOO). And by a significant amount, with a gain of 47.29% for the latter in the last 3 years to a gain of only 29.38% for the former.

Looking at the holdings of the ETF, the top 10 holdings account for only 8.1% of the portfolio, as much of the company-specific risk has been diversified away. Sector-wise, the holdings are balanced, with the top 3 sectors being Technology (21%) Financials (20.6%), and Industrials (15.3%). That gives a nice balance to the ETF in growth industries and value industries, which lets you hedge out the bet on which strategy will win out over the long term after more than a decade of growth stocks flourishing. Eventually, value investing can return, and you will have exposure to those types of companies with this holding.

Source: Vanguard

Thoughtful Selections

While the Covid crisis has many challenges for the mid-cap space, the portfolio has some excellent picks. For example, Lululemon Athletica Inc (LULU) is in a unique position, as their demand has likely increased with more consumers looking for comfort while working from home, a trend that the athleisurewear company has been excellent at capitalizing on. DexCom Inc. (DXCM) recently smashed earnings expectations in late July, with revenues gaining 34%, and earnings up a whopping 541%. SBA Communications (SBAC) managed to keep their dividend and beat FFO by $0.45, also beating on revenues, in their recent earnings report as more internet was used during the stay at home period. These, among other mid-cap plays, are extremely interesting in the ability to pivot and capitalize in a poor economy and should rebound stronger if the economy can continue its up leg.

Potential Risks

  1. If the economic recession is worse than thought, mid-caps may not have enough resources to weather the storm. Bankruptcies have been happening at an increased rate, especially when you go down the capitalization ladder, and could pose trouble throughout the rest of 2020 and into 2021, especially if government stimulus fails to gain traction in Congress. Many of these companies depend on a strong consumer.
  2. The dividend yield of VO could be under pressure here, especially if there is some movement on the political side to halt buybacks and shareholder payouts. While this remains a far-off risk, it is not implausible, and should be discounted as a risk when investing in these companies. With balance sheets that are inferior to larger-cap companies, there could be more pressure to keep free cash flow for future economic pullbacks and/or business pressure, lowering the dividend yield.
  3. This holding has 357 holdings currently, with a median market cap of $18.9 billion. While you are not going to be worried about diversification, you may suffer the effect of over-diversification with that many holdings. There have been studies done that say the proper amount of holdings for accurate diversification should be around 20-50 holdings only – at 357, the number is much higher.
  4. General market risk remains high after a Federal Reserve (Fed) fueled rally in 2020 off the March lows. If the Fed fails to stoke inflation, or they do not provide enough stimulus, stock markets are at risk of another major pullback. We saw some of this in the price action in early September, when tech stocks spurred a significant decline.

The ETF VO, and its underlying holdings, have shown a great ability to weather a downturn in the recent months. Although valuations remain elevated, at 25.3x P/E, the earnings growth rate of 13.7% should make up for that level over time. This is a great fund to get domestic exposure, as its foreign direct exposure remains 0%, and with a relatively low turnover of 15.2%, you should be comfortable holding this ETF long term.

While highly diversified, there are enough excellent ideas within the portfolio that can push the ETF to new highs, eventually. Whether the overall economy and markets remain in their uptrend is a huge question, but if you are looking for a 10- to 20-year investment, VO fits the bill. The nimbleness of mid-caps should allow them to adjust to the new normal economy, and if there is progress on a vaccine in late 2020 or early 2021, many will flourish.

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Health Catalyst – Looks Cheap But Where Is The Catalyst? (NASDAQ:HCAT)


I covered Health Catalyst (HCAT) when the company went public in the summer of last year. At the time of the offering, I noted that the company seems an interesting play to bet on health care improvements as the company combines data, technology and experts, resulting in rapid growth of the business, although accompanied by big losses. Fast forwarding a year it seems that the company sees stable growth, yet has real work to be done on the margin front, as the situation, that of relative appeal which was apparent at the time of the IPO continues to be the case.

A Look At The Thesis

Little over a year ago I looked at the company which has developed the so-called Health Catalyst Flywheel, a data platform with analytics applications and service expertise. The company believes that all of this should drive measurable improvements in patient outcomes, drive engagement of team members, as the solution is applied in academic medical centers, community hospitals, delivery networks and physician practices. With roughly a fifth of the economy spent on healthcare and the system being full of flawed and ill-thought out incentive plans, the potential to make this segment more efficient is huge.

The company went public last year at $26 per share as the 35 million shares gave the company an equity value of just over $900 million at the time, although valuations dropped to $725 million if we adjust for net cash holdings.

In exchange for this valuation the company delivered on rapid sales growth, although accompanied by fat losses. 2017 sales came in at $73 million on which a $45 million operating loss was reported. Revenues rose 54% in 2018 to $113 million, with losses increasing to $60 million, up in absolute terms, but down a bit on a relative basis.

At the time of the IPO first quarter results for 2019 were known with sales up 70% to $35 million, and losses actually down in absolute terms to $11 million. The company guided for sales of $36.5 million for the second quarter and losses around $10 million, as I noted that the annualized 5 times sales multiple looked compelling given the growth, and the fact that losses were coming down. As shares rose to $39 per share on their opening day, valuations rose to more than 8 times annualised sales which killed some appeal, and while I promised to keep a close eye on the company, interest faded.

What Happened?

By November the third quarter results were released, after second quarter results came in according to expectations, although a touch better than guided for. Reported revenues came in at $39.4 million and while they keep increasing on sequential basis, annualised growth slowed down to 20%. Operating losses ballooned to $20.7 million, mostly cause stock-based compensation increased a factor of about 10 times to about $10 million. With this being the first quarter after the IPO, stock-based compensation typically runs high, as the question is what the real run rate would be.

The company guided for fourth quarter revenues of $40-$43 million and stable results in terms of the losses with shares trading around $35 at the time, as some initial IPO enthusiasm had already faded.

Ahead of Covid-19 the company reported its 2019 results and announced a bolt-on acquisition. Fourth quarter sales rose 21% and came in above the guidance at $43.5 million. Operating losses narrowed to $13.7 million, mostly as stock-based compensation fell back to $4.8 million.

The 2020 guidance looked reasonable with sales seen at $185-$188 million, more or less suggesting 20% revenue growth as (negative) margins are practically stable. By May when the first quarter numbers were released shares were basically flat and back at the IPO price, trading around $28 at the time.

First quarter revenues rose 23% to $45.1 million as operating losses rose a bit again due to higher stock-based compensation expense. For the second quarter the company guided sales of $41-$44 million, a sequential decline mostly due the impact of Covid-19. Over the summer two bolt-on deals were announced, one together with the release of the second quarter results.

Second quarter revenues came in at $43.2 million, still up 18% on the year before as operating losses came in at $15 million, now incorporating approximately $9 million in stock-based compensation. The company continues to muddle through a bit with third quarter sales seen at $43-$46 million and announcing a modest cut in the full year sales guidance. Note that the company can not claim that the business model is to be blamed for modest growth (in the sense that it is moving to a SaaS model) with deferred revenue balances up about $5 million on the year before, creating about 3 points headwind to topline sales.

Current Thoughts

With a share count of 38 million trading at $31 currently, I peg the equity value at $1.18 billion, which given a net cash position of nearly $200 million works down to a billion operating asset valuation. With annualised sales trending around $180 million, revenue multiples at 5-6 times are the same as they were last year. The reality is that growth has been flattish around 20% which is a touch light if this were to be a great solution, and furthermore no real progress on the bottom line ins made in a huge way.

I must say that I am quite surprised that the market has not picked on this stock as anything relating to healthcare, innovative practices in his sector, and usage of smart technology and telehealth is seeing huge momentum runs these days.

Hence, I have a gut feeling that shares look cheap, but mostly driven by relative comparisons as the reality is that 20% growth is suboptimal if you have a great solutions and lack of progress on the bottom line is somewhat disappointing. Nonetheless, I am happy to pick up a few shares if they revisit the mid-twenties based on the argument above, although I continue to proceed with some caution.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Value bulls bang drum for cheap stock resurgence on Fed, vaccine hopes By Reuters


© Reuters. The front facade of the of the NYSE is seen in New York

By Rodrigo Campos

NEW YORK (Reuters) – As U.S. stocks hit record highs, some investors are betting the market’s future gains will be increasingly driven by some of its lesser-loved companies.

Value stocks – shares of economically sensitive companies trading at multiples that are usually below those found on growth names – have been among the laggards in the market’s blistering rally from its March lows.

Some investors believe the relative cheapness of value stocks, which include energy companies, banks and industrial conglomerates, will catapult them to leadership if the nascent U.S. economic revival gains momentum, shifting focus from the big technology-related stocks that have led markets during the coronavirus pandemic.

The Russell 1000 Value index <.rlvtri> trades at almost 18 times earnings, up from 14 a year ago, and is up some 45% since late March. By comparison, the Russell 1000 Growth index <.rlgtri> trades at a multiple of 31, up from 22, and has gained over 70% in the same period.

“It’s an important part of validating the market’s rise, to have cyclicals and value sectors move,” said Nicholas Colas, co-founder of DataTrek Research.

“At the end of the day I think value can outperform, but it’s going to be very episodic.”

(Graphic: Russell 1000 Forward P/E ratios – https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/nmovaqqwwva/chart.png)

Hopes of economic healing got a second wind Thursday, when Federal Reserve Chairman Jerome Powell rolled out a sweeping policy rewrite that puts more focus on fighting unemployment than controlling inflation, sending shares of banks like Wells Fargo (NYSE:) and Citigroup (NYSE:) higher on the day.

Investors in the coming week will be keeping a close eye on Friday’s U.S. non-farm payrolls data, looking for a snapshot of how the country’s economic recovery is faring.

Other arguments for a value resurgence have been fueled by signs of progress on a vaccine against COVID-19, which some investors believe could accelerate business reopenings and a return to in-person schooling across the United States.

U.S. President Donald Trump has said a vaccine for the novel coronavirus could be available before the Nov. 3 presidential election, sooner than most experts anticipate.

Some analysts, including those at Goldman Sachs (NYSE:), believe a vaccine could be approved as early as the end of this year.

That could take the S&P 500 as high as 3,700 by year-end and spur a rotation to value names, especially if the news flow regarding a vaccine continues to be encouraging, Goldman’s analysts said earlier this month. The index recently hovered near 3,500.

Plenty of market participants doubt value will return anytime soon, or that such a move can be timed profitably.

Value sectors such as retail have struggled for years with lackluster earnings or business models that are being disrupted in a shift to a more tech-driven world, a process that accelerated during the coronavirus pandemic.

“Valuation alone doesn’t drive stock prices. It’s the combination of valuation and improving fundamentals,” said Richard Bernstein, chief executive officer and chief investment officer at Richard Bernstein Advisors in New York.

“For value to outperform, one typically needs profit growth to accelerate. That’s not happening yet,” he said.

BofA Global Research points out that value stocks have led during the recovery from every one of the last 14 recessions.

Yet it also warns of “value traps” – stocks whose prices are falling faster than earnings are deteriorating. Such stocks have underperformed broader markets by four percentage points a year since 1997, the bank said.

BofA’s model identified energy and brick-and-mortar retail as sectors where value traps can be found.

(Graphic: Performance of Russell 1000 Growth v. Value – https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/dgkplllxjpb/chart.png)

Kim Forrest, chief investment officer at Bokeh Capital Partners, believes resurgences in value may be a thing of the past.

Technology has transformed the way companies deal with their inventory and altered the business cycle, sapping the benefits cyclical companies would receive from an upswing in growth, she said.

“There are some dinosaurs that don’t get that the comet has hit and the (investment) environment has changed,” said Forrest.

Others, like Bill Smead of Smead Capital Management, remain hopeful.

An eventual rise in inflation could boost the shares of energy companies, banks and home builders, which have tended to perform better when consumer prices trend higher, Smead said in a note to investors.

Even longtime value bulls like Smead can have their fortitude tested, however.

“We are patient, but that patience doesn’t last forever,” he wrote.





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Wanda Sports Group: Too Cheap To Ignore (NASDAQ:WSG)


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Introduction

Wanda Sports (WSG) is a holdco that has recently undergone a troubled IPO process and has been overlooked by investors due to a lack of adequate financial disclosure of the underlying businesses and management’s inability to convey the company’s value to investors. At the time of IPO, WSG held 3 key assets: Ironman, Infront and Wanda Sports China (WSC). WSG embarked on a public offering in order to repay a $400m 1-year bridge loan to its parent company, Wanda Group. The IPO was originally guided at $12-$15, but after muted investor interest was priced at $8 with the number of shares offered downsized by 20%. As a result of the unsuccessful IPO, WSG was unable to fully repay its bridge loan, leaving the company with onerous debt terms. Due to a combination of factors, including the continued deleveraging of Wanda Group and management’s lack of skill in capital markets, in March the firm decided to sell Ironman in order to better capitalize the company and return value to shareholders. Even after the sale I believe there is enormous value left for investors willing to wait 12-24 months. The remaining writeup will focus on Infront, as WSC is a sub-scale mass participation platform in which little of the company’s value lies.

Infront

Infront is a Switzerland-based, globally scaled, full service sports marketing agency. This business is an extremely scarce asset that has been highly sought out, trading hands multiple times in robust auctions over the past decade. Bridgepoint, a private equity firm, bought Infront in 2011 for an undisclosed amount but the price has been estimated at ~€600m. In 2015, Wanda purchased the asset for $1.2B, outbidding mega-fund Providence Equity Partners. Unfortunately, the multiple paid was not publicly disclosed in either transaction.

The business model boils down to Infront acting as a broker for rights owners (sports federations, leagues, clubs, etc.), with the majority of contracts being structured either as full rights buy-outs or commission-based contracts (with or without minimum revenue guarantees). For a full rights buy-out contract, Infront pays a guaranteed amount to the rights owner to acquire said rights. Infront then monetizes the rights by selling services to its global network of “rights-out” partners, including broadcasters, media distributors, and sponsors. In contrast, for commission-based contracts, Infront may guarantee a certain amount of revenue to the rights owner. The company is compensated with a set commission and a predetermined percentage of revenues earned beyond the stated guarantee.

Additional revenues are earned through services provided by Infront’s in-house “Digital, Production and Sports Solutions” (DPSS) capabilities, which include event operation and support, media production, digital solutions, and ancillary services (e.g., ticketing).

Infront typically formalizes relationships with rights owners through multi-year contracts, providing the business with high visibility into future revenues and costs. In 2019, Infront had over 150 partners spanning across both summer and winter sports. WSG is particularly well-connected in winter sports and soccer, with nearly 80% of its partners falling into those two broad segments.

Infront has been managed by Philippe Blatter since 2005. His track record is impressive, starting consultant at McKinsey, where he founded the firm’s Sports Practice before moving to Infront. In 2017 he was included in ESPN FC’s “Football 50 Most Influential People.”

Valuation

Calculating WSG’s enterprise value is a bit of a chore. There are two share classes. Class A is the ADR, and 2 ADRs are equal to 3 shares. After this conversion, the ADRs total to 60m shares. There are ~147m Class B shares, which are held entirely by Wanda’s parent company and possess 4x the voting rights of the Class B shares (~90.75% of total voting). I estimate WSG to have $394m cash on hand, with debt of $595m after the Ironman sale. At the current market cap of $275m, EV totals $476m.

I used 2019 EBITDA to calculate normalized adj. EBITDA. This EBITDA figure comes from a down year with no major sporting events like FIFA or the Olympics, and I expect it to revert upwards just like it has in the past. Nonetheless, I used the 2019 number for conservatism.

Source: 2019 annual report

The key assumption here is the percentage of Adj. EBITDA contributed by Ironman. While it was never disclosed, IR informed me that it is in the 25% range “plus or minus”. I assume Ironman contributed 30% of total Adj. EBITDA. For many of the “one-time expenses” management added back in, I decided to take a very conservative approach and assume they occur once every three years. I believe the final figure is a very conservative estimate of Infront’s Adj. EBITDA and even then, the asset is trading at merely 5.62x EV/EBITDA.

Analyzing Infront on a FCF basis produces similarly attractive results. It is important to note that the business is extremely capital light, with capex comprising only ~1.5% of revenues. I estimate unlevered FCF to be ~$60m, producing a whopping 12.5% FCF yield. Discounting this figure at 8% and assuming a growth rate of 0% (extremely conservative) results in an expected return of 97%.

Given the scarcity in the marketplace of an asset like Infront, there is no list of clear-cut comparable companies. The closest comp that comes to mind is Endeavor. Like Infront, Endeavor is a global platform broker of rights that services many clients in sport, but also has a more diverse customer list that spans across multiple industries such as fashion and entertainment. Infront and Endeavor typically seek to avoid each other in the sports rights arena, but have been known to butt heads from time to time for certain contracts. Endeavor was set to IPO in September 2019 before pulling the plug at the last minute. Luckily for us, we gained an extra data point to help decipher what Infront could potentially be worth. Assuming the IPO could have been priced at $25 per share, Endeavor would have traded at ~18x EV/EBITDA. While Endeavor most likely does deserve a higher multiple than Infront, I believe the difference should be significantly smaller than it currently is. Below is a sensitivity analysis of the potential return given various EV/EBITDA multiples at sale. I have highlighted the range of multiples Infront should realistically garner in a sale process.

Source: Created by author using data from 2019 annual report, Q2 earnings report

On top of the confusing EV calculation, there have been several factors that have collectively worked to further reduce investor interest in Wanda and contribute to such a significant gap between price and intrinsic value. Some key factors to mention: WSG’s financial reporting is in Euros while shares trade in USD, the float is a measly 23.8m shares, there is a significant language barrier between management and analysts in calls/other communication, and financial disclosures are opaque by western standards. WSC operates mass participation events in China but has yet to achieve significant scale. There may be some value here, considering that the Chinese government has recently implemented policies to increase Chinese citizens’ participation in sports and fitness. During the Ironman sale, Wanda was able to negotiate exclusive licensing to operate Ironman and Rock n Roll events in China, a potential key driver for future growth. Nonetheless, for conservatism I assigned 0 value to WSC.

Catalysts

There are 3 distinct catalysts that can crystallize value in the next 12-24 months.

1) When Infront was acquired, Wanda Group bought a 68.2 percent stake in the company, while three co-investors took the remaining minority stake. Given management’s inability to convey the underlying value to investors and the share price continuing to be severely distorted from fair value, I wouldn’t be surprised if the co-investors have started to urge Wanda Group to sell. The typical 5-year life cycle of a co-investment deal is an additional pressure for a sale as this investment approaches the end of its expected timeframe.

2) Wanda Group faces a $5.7B debt bill due in 2020. Given that the parent must deal with such a large obligation while the coronavirus is impacting its core businesses (commercial real estate and entertainment), I expect the parent company to be raising cash wherever it can. I am confident that there is a list of potential buyers who would be highly interested in a business like Infront, as evidenced by the bidding process in which Infront was originally acquired.

3) The financial disclosures post Ironman sale will show a much clearer picture of the profitability and growth of Infront. This will enable investors to become more comfortable with the financials after being scared off by the opaqueness and poor disclosures in the current financials.

Risks

1) The cash burn until sports resume is unknown. As of late August, we have seen the majority of sports back to action. The German soccer league (DFB) and Serie A, for whom Infront manages the media and marketing rights has completed playing their season (without fans).

However, many leagues and competitions are still reluctant to set a return date given the uncertainty around the virus, and it is unknown when there will be more clarity.

2) Management has repeatedly demonstrated ineptitude in communicating Infront’s underlying value to the public markets. If this persists, the share price could continue to suffer until a sale is completed.

3) Infront is unable to renew key contracts (e.g., Fifa, Serie A, DFB). Infront is currently in a dispute with the DFB over a past employee engaging in unethical behavior. A mitigating factor for Serie A, Infront’s largest contract, is that the league’s CEO was a senior employee of Infront as recently as the end of 2018. Nonetheless, contract renewal remains a risk for all major contracts and developments should be closely followed.

Conclusion

WSG is an underappreciated and underfollowed stock holding one of the best names in the sports marketing industry. We expect operations to normalize in the next 12-24 months, displaying the true earnings power of the business. We recommend initiating a long position in WSG.

Disclosure: I am/we are long WSG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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International Flavors & Fragrances: Not Cheap, But There’s A Possibility To Get The Stock At A Lower Price (NYSE:IFF)


Introduction

International Flavors & Fragrances (IFF) (hereafter just ‘IFF’ to keep it simple) has never been really cheap, and even during the COVID-19 related correction on the financial markets, the company never crashed. I have been keeping an eye on the company for the past several years but have never dared to pull the trigger. In this article, I’ll explain my preferred strategy to try to establish a long position in IFF at an acceptable price.

Data by YCharts

A quick look at IFF’s cash flow results

First of all, I wanted to check up on the company’s financial performance. Despite the market-wide crash caused by the COVID-19 pandemic, the company’s H1 performance seems to be quite robust. It did report a small 2% revenue decrease but this was accompanied by a 1% reduction in the COGS causing the gross profit to decrease by just $30M or less than 3%.

Source: SEC filings

Unfortunately, the SG&A expenses increased by almost 10% and the slightly lower R&D expenses barely helped to mitigate the impact on the operating profit. It’s also encouraging to see the restructuring charges are decreasing very fast as just $1.88M was spent on restructuring charges in Q2, and just $6.8M was spent in the first semester. A considerable decrease from $18.7M in H1 2019. The net income in H1 2020 came in at almost $211M, or $1.91/share.

Fine, but that still makes IFF a bit expensive, so I wanted to check the conversion rate of the net income into actual free cash flow.

As you can see below, IFF reported an operating cash flow of $208.4M. However, this includes a substantial investment in its working capital position as the receivables increased sharply.

Source: SEC filings

On an adjusted basis, the operating cash flow was $373M. A very respectable result considering the circumstances. As the capex was just $80M, IFF’s adjusted free cash flow on an underlying basis was approximately $293M in the first half of the year. The capex is relatively low (as the management made the decision to keep a lid on costs), so perhaps we will see the company catching up on some postponed investments in H2 as it sees the free cash flow performance warrants a higher capex.

Indeed, due to the difference between the depreciation charges ($160M in H1 2020) and the capex ($80M), the free cash flow result exceeds the net income performance. And while IFF is quite expensive on a P/E basis, the company appears to have a more reasonable valuation based on the free cash flow performance. The full-year free cash flow per share should now come in at $5.25-5.50/share.

The Tangible Equity Units allow investors to get in at a discount

This still doesn’t make IFF cheap as the current share price represents a free cash flow yield of about 4.5%. Fine, but not exceptional. Fortunately, there is a lesser known way to boost this. Few investors realize IFF has 6% yielding Tangible Equity Units listed on the exchange with IFFT as the ticker symbol. These equity units were issued in 2018 at $50/share and will be converted in 2021 upon reaching the planned maturity date. The details of these TEUs can be found here below:

Source: annual report

Those Tangible Equity Units are currently trading at below $45 each, and if we would run the numbers using the current share price of $123 of IFF, every Tangible Equity Unit will be converted into 0.3839 shares of IFF in September 2021. Applying this ratio to the current share price of IFF, the fair value of the TEU is $47.22. Additionally, TEU owners will receive five quarterly dividends before the maturity date of the securities. If one would apply these interest payments to the purchase price, and assume a net investment of $41 per IFFT share, the consideration paid for an IFF share would be just below $107 ($41 divided by the ratio of 0.3839).

And as long as IFF remains below $159.54, shareholders will do pretty well. Let’s say the share price trades at $140 on conversion. According to the table above, for every TEU of $50, shareholders will receive $50 divided by $140 = 0.3571 shares of IFF.

Of course, this only works for investors that expect IFF to trade mainly sideways. If you’d expect the IFF share price to head to $200 next year, you may be better off buying the stock as the fair value of the TEUs will only increase to $62.68 (0.3134 X $200/share). But considering TEU owners will be better off than the common shareholders if the share price doesn’t make any sudden swings, it definitely is an option to be considered. The average daily volume of the TEUs is almost 60,000 shares, the units are sufficiently liquid to be a valid trading strategy.

Investment thesis

International Flavors & Fragrances isn’t cheap and very likely won’t be cheap anytime soon given its strong competitive position. Rather than buying the stock outright, I think it makes more sense to buy the Tangible Equity Units, collect the $3.75 in payments over the next 13 months and subsequently see the TEUs being converted into common stock.

I currently have no position in IFF but am watching the TEUs with interest.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IFFT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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