Barron’s recently held its 2019 Roundtable, a gathering of 10 of Wall Street’s smartest investors. Here are the stock picks of Mario Gabelli, chairman and CEO of Gamco Investors in Rye, N.Y.
Q: Mario, it’s your turn at bat.
A: Baseball! Sports, to me, is baseball, football and hockey, so I’m recommending Liberty Braves Group (BATRA), which I have mentioned here before. The stock is selling for $25.There are 60 million shares, for a market cap of $1.5 billion, and $400 million of net debt. The company, a holding of John Malone’s Liberty Media, owns the Atlanta Braves and related minor-league franchises; SunTrust Park, where the Braves play; and real estate around the park. Everyone should own a baseball team, and this is a way to do it cheaply.
Two new developments are noteworthy about Liberty Braves. The Supreme Court effectively struck down the Professional and Amateur Sports Protection Act last year, which limited sports betting. This is a game changer for professional sports. The National Football League recently decided to allow franchise owners to buy another professional team in the same market. Liberty Braves could buy the Atlanta Falcons, or the Falcons could buy the Braves, which is more likely. We look for the stock to increase 50% over the next several years. Also, John Malone is likely to undertake a transaction involving Liberty Braves.
Next, a couple of people recommended Walt Disney (DIS) today. I’m going to recommend new Fox, the company that will be spun off after 21st Century Fox (FOX) is bought by Disney. [Fox and Barron’s parent, News Corp, share common ownership.]
Q: Are you recommending the Class A or Class B shares?
A: I would buy the B. These are the voting shares, and they are cheaper than the A. Fox trades for $48 a share and holders have the option of $38 a share in cash or Disney shares when the deal closes, probably in the next 90 days. You’re creating new Fox at $10 a share. Multiply that by 1.8 billion shares outstanding and the market cap is $18 billion, and add about $4.7 billion of net debt. So what do you get? The Fox television network, TV stations, Fox News, and Fox Business. The 2020 election is going to create a tsunami of advertising for broadcasters.
New Fox will generate about $10 billion of revenue and $2.9 billion of Ebitda [earnings before interest, taxes, depreciation, and amortization] for the fiscal year ending on June 30. I assume the new company will have about $4.7 billion of net debt, and it has some additional assets, including a stake in Roku (ROKU) and some Los Angeles real estate. The spinoff is structured as a taxable transaction.
Q: Will you elect to take cash or Disney paper?
A: I have no problem owning Disney, I expect new Fox to trade up to $18 to $20 a share two years from now.
Q: Are you valuing Fox based on Ebitda?
A: Yes. I am applying a multiple of what I think the TV stations and cable networks and news and sports assets are worth. You can’t get all of this on Netflix. I expect Fox to be a sizable cash generator over the next four or five years.
Next, equipment rental is a $55 billion industry in the U.S. It is growing by 6% a year. Herc Holdings (HRI) was spun out of Hertz Global Holdings (HTZ) 2½ years ago at $33 a share. I recommended the stock two years ago at about $40. It rose to just over $70. Last month, it dropped to $24 and now it’s around $30, partly due to tax-selling pressure and liquidation by a major holder. The market cap is $850 million. The management is terrific; CEO Lawrence Silber has transformed the fleet toward capital equipment that brings higher dollar utilization and infrastructure end-market exposure. The knock on Herc is debt; the company inherited $2 billion of debt when it was spun out of Hertz. Annual revenue is about $2.1 billion. Ebitda in 2019 will be about $750 million, and capital expenditure around $500 million is still elevated for Herc’s fleet refresh. We think the stock could double. The industry is highly fragmented and consolidation has been increasing, with United Rentals (URI) so far being the most acquisitive. Also, we expect incremental spending on infrastructure.
My next pick is MGM Resorts International (MGM). I recommended it last year and the stock fell, partly due to concerns about gambling-license renewals in Macau. They come up in two years, and one question is what percentage of gross gambling revenues the Chinese government might take. That said, MGM has recently completed upgrades in Las Vegas. The stock trades for $25, and there are 527 million shares outstanding. On a marked-to-market basis, the company’s Macau properties are worth approximately $6 a share. The real estate assets, or MGM Properties, are worth $9, so I am creating the rest of the business for $10. The debt on their U.S. operations is $7 billion. Ebitda for the U.S. will be around $1.8 billion this year. The company has 11 Las Vegas properties; it recently renovated the Monte Carlo into the NoMad and Park MGM. MGM opened a casino in Springfield, Mass., last year, and is buying Yonkers Raceway in New York for $850 million and the Hard Rock Rocksino near Cleveland. Now, why would they want to own Yonkers Raceway and the Hard Rock Rocksino?
Q: You tell us.
A: In anticipation of New York State and Ohio allowing online sports gambling. MGM also cut partnership deals with Major League Baseball, the National Hockey League, and the National Basketball Association that give it marketing rights and access to data. And it formed a joint venture with London-based GVC, the owner of Ladbrokes, to create a sports-betting and interactive gaming platform in the U.S. The key to sports gambling for MGM isn’t making a bet on a pitch. It is making a bet on the eyeballs betting on pitches, so that the advertiser stays longer. That’s the big money maker for some of these sports teams.
MGM management has said that for them, sports betting is about using the interactions that sports create to complement the other gaming and entertainment elements of its business.
Next, we like Navistar International (NAV). There are 98.9 million shares outstanding. The stock trades for $27. Carl Icahn owns 16.7 million shares, Mark Rechesky owns 16.2 million, and Volkswagen (VWAPY) owns 16.6 million. Volkswagen is spinning off its truck and bus business as Traton Group. Volkswagen, through Traton, controls 30% of the European 16-ton heavy truck market, selling MAN and Scania trucks. Volvo (VLVLY) has 24%. Volkswagen wants to own Navistar. Why? Because they have no commercial truck presence in the United States and want to leverage their engine technology on a global basis. The U.S. has 2.8 million Class 8 trucks on the road. The average age is six years, a little higher than it had been. This is partly because of tax rules; trucking companies can write off 100% of new and used purchased equipment. We expect Traton to buy Navistar within 18 months.
Q: At what price?
A: I’ll let Carl and the board negotiate that and we’d comment after. I’ll note that cash flow is improving, and earnings are improving dramatically. Brazil and other Navistar markets are improving, and the company has cut an intriguing deal for buses with electric engines.
My next pick is a small-cap— Griffon (GFF), which makes home and building products. The stock is trading for $11.30 a share, and there are 45.7 million shares outstanding. Net debt, unfortunately, is $1 billion. Revenue for the fiscal year ending on Sept. 30 will be about $2.1 billion, compared with $1.98 billion in fiscal 2018. Next year, the company could do $2.3 billion, even with a flattish housing market, in part because it is making acquisitions around the world. Over the next few years, Ebitda could total $800 million, and capital spending about $200 million. Griffon will be able to pay down about $300 milllion of debt. Management has done OK, but not great, with deals. In addition to building products, Griffon has a defense-electronics business that makes surveillance solutions for detection of submarines. If I ran the company, I would sell it.
Q: Is this the same Griffon that made diaper linings?
A: Yes. The company sold that business to Berry Plastics for around $410 million and used the proceeds to fund two acquisitions.
Q: What is the catalyst for the stock?
A: There has been confusion about the changing nature of the business. The stock was dumped at year end for tax-selling concerns. It’s a cheap stock, and we think it could double in the next two or three years as earnings come through and debt is paid down.
Energizer Holdings (ENR) is my last name. The company bought Spectrum Brands’ (SPB) battery and portable lighting business for $2 billion, notably the Rayovac battery brand. Energizer is required to sell Rayovac’s Varta operations as part of the acquisition. We think the operation will be sold for around $550 million. The most intriguing part of the Rayovac deal is a rapidly growing $200 million hearing-aid battery business. Energizer is also buying Spectrum’s auto care business for cash and stock, which will increase shares outstanding to 74 million, pro forma. Debt is $3 billion after the acquisitions. Spectrum Brands, which fell from $100 a share to $40, is also intriguing, but that’s a discussion for another day.
We see enormous Ebitda growth for Energizer, and de minimis capital spending. Over the next three years, Ebitda could approach $700 million and capex around $50 million. Debt will be reduced at a significant rate. The stock trades for $47 and eventually could fetch 18 times estimated earnings of $3.95 a share, or around $67. Management is excellent; they understand marketing and distribution. That’s it.
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