Lloyd Khaner At Value Investing Congress 2012: Turnaround Investing [LIVE]VW Staff
Lloyd Khaner is the General Partner of Khaner Capital, a long/short value hedge fund. Khaner Capital has outperformed the S&P500 over the past 21 years (inception), 15 years, 10 years and 5 years. Llyod is speaking at the 8th Annual New York Value Investing Congress.
The topic of Lloyd's presentation is ‘Turnaround Investing – Swinging At Good Pitches.'
Notes on the presentation below:
Khaner is set to come on at 8:20am to discuss his philosophy on turnaround investing. All the early talk on day two centers around Einhorn and speculation over his new idea. Rumors that are floating around the conference include short LL and short DKS.
Tilson announces that the Bill Ackman likely will be speaking at the VIC in Las Vegas that is taking place after the Berkshire annual meeting.
Turnaround investing is the core of what Khaner Capital focuses on. The fund was only down 14% in 2008 and has outperformed the S&P net of fees over 20 years without leverage or illiquid investments.
Khaner pitched SBUX back in 2009 at the VIC and is now giving an update on his investment. He likes SBUX growth trajectory right now, they aren't trying to open 4 stores a day anymore. Now they are focusing more on brand and food, and Khaner really likes the senior management team and the controlled growth pace.
He thinks SBUX is a lot like MCD's turnaround. Maybe its just taking a break before continuing the strong turnaround like MCD did on the way to $100
He thinks the common mistakes for turnaround investing are:
-Swinging at the wrong pitches (too many)
-Being too early
-Not swinging at the right pitch (being afraid)
If the company has too much debt it makes turnaround much more difficult. If management has never led a turnaround before, he thinks you should avoid that pitch. Also avoid weak/impaired industries with dying products. Talent will not come into the industry, also avoid those pitches.
Khaner pulls up a Ted Williams hitting chart, a concept that Buffett and others mention. If investors can avoid turnaround pitches with debt, inexperienced management, and declining industries you should hit fairly well.
8:35 EST: JMBA
Khaner's turnaround pitch for today is long Jamba Juice
Management has turnaround experience, the industry has tailwinds, and JMBA has $29mm in net cash on the balance sheet. AUVs are up to $700,000 and out of small stores, which leads to 20% – 23% unit-level margins for JMBA. He argues that JMBA's units are more than just a smoothie stores, they also sell snacks and food. The Jamba Go self serve unit is planning to have 400 – 500 units in public schools across the U.S. by the end of this year. Currently they have 90 Jamba Go units open.
First of all he thinks their product is great, and its healthy. For a restaurant concept turnaround, Khaner thinks this is essential. Additionally the food is affordable and passes the “veto test” for most families or couples. With breakfast wraps and salads, the concept is very “mom friendly”.
JMBA is working on building a CPG platform: selling Jamba products at retailers. He views this as a growth channel
Key food costs are fruits like blueberries and strawberries. He views this as an edge over restaurant competitors who are dealing with inflated corn, beef, and chicken costs.
What were the issues for JMBA? He thinks they had a poor management team (there is a new management team in now) and they grew the concept too quickly while the unit deteriorated. Using short term debt to fund the company, JMBA added 90+ units in 2007, much too fast from a base of 600 units. Khaner really likes James White, the new CEO of JMBA. White's background at Gilette is a big plus for Khaner. Within one month White put out a new 3 year strategic plan, part of which was forgoing certain revenues to improve company profits.
So far White hired 3 new executives, closed poor stores, re-franchised certain stores, and cleaned up the units. Comps and traffic are positive despite MCD entering the smoothie segment. Khaner thinks MCD entering serves as an advertisement for the entire industry. G&A remains high, but Khaner thinks they have great people now and they are setting up for continued growth. ROIC is projected to turn positive this year for the first time in 5+ years.
Now management is focusing on phase 2.0, which centers around growth. The new worldwide target is 3,700 units with roughly 70% franchised. Management is targeting 1,500 Jamba Go's by the end of 2013, targeting school, hospitals, and other unique venues. Schools are removing the soda machines and putting in the Jamba machines.
He views JMBA as a 3 year turnaround. Valuation metrics look steep today, mostly because they have been under earning recently. In 2015 Khaner projects EPS of $.50 with a 15x multiple, for a $7.00 stock in 2015. He likes it because investors don't need a big multiple for this idea to work.
Khaner has a holding now, but would not have bought in 2 years ago. Khaner likes that management is following through with all their claims and projections, and is confident they will continue. He has just concluded his prepared remarks and is now taking Q&A.
8:58 EST: Q&A
Question from a JMBA shareholder in the audience about other smoothie competitors. Khaner visited Evolution Fresh, SBUX's new smoothie concept. He thinks JMBA has a better product and doesn't see any big smoothie competitors.
JMBA doesn't spend a lot on marketing, and Khaner doesn't think they need to at this point. He thinks in 2013 they will roll out a more aggressive strategy, but for now management doesn't focus too much on it.
He likes the Talbot Tea's acquisition, its a good brand that came with strong managers. He thinks it was a relatively cheap acquisition for them that makes a lot of sense.
About 50% of Khaner's turnarounds come from tracking successfull turnaround CEOs and Directors. For example James White comes from a successful “turnaround management tree” out of Gilette that Khaner follows. The other 50% of his ideas come from examining the business side first.
Thoughts on JCP? He thinks it will be successful, but not a 1 year turnaround. More like a 3 year turnaround. Their debt is manageable, but ultimately they may have to go back to some coupons and discounts. Really its just takes time and investors can't expect it to happen in 1 year.
Khaner is also asked about Canadian Pacific Railway. Khaner has not done work on CP, but thinks they are building off such a low base its should work out well. Tilson adds in that he has been meaning to dive deeper into CP and thinks there is a lot of upside.