Steve Tananbaum at the 3rd Annual New York Value Investing Congress reported by Marcelo Lima.
Steve Tananbaum at the 3rd Annual New York Value Investing Congress reported by Marcelo Lima.
Steve Tananbaum of GoldenTree Asset Management gave a bone-chilling assessment of the current debt markets, concluding that we will inevitably see much greater credit spreads and a tsunami of defaults in the near future. He doesn’t see a lot of value across the debt spectrum with the exception of CLO debt, which he considers very attractive at these valuations.
His first long idea was Liberty Global, John Malone’s media empire. Steve believes it has upside to $50 at 8x ’08 EBITDA and up to $68 at 8x ’09 EBITDA. Steve has been following the company for over a decade and has seen Malone slip up a while back by overpaying for acquisitions. Since then, Malone’s been much more disciplined about capital allocation. Hence, Steve’s valuation assumes continued stock buybacks.
His next idea was NRG Energy, a pure-play power generation company with assets in deregulated markets. It came out of bankruptcy after overextending itself and Steve believes there’s a secular tightening of supply in energy generation. At around $40, the company is selling at 7.4x EBITDA and 11% FCF (’08 numbers).
Most of the free cash flows that he’s seen have risk as to the direction of the free cash flow – it’s unclear whether it’s growing or declining. With NRG he is confident that’s a growing number, because electricity futures curves are positively sloping. The market for these futures is pretty thin and in the past year prices were underestimated by market participants and he believes the same will happen next year. Hedges roll off in 2009 so FCF should then grow 10-20%.
In addition, NRG’s capital structure is inefficient and that they will continue to buy back stock. His low target price is 30% higher. Each $100m of incremental EBITDA (+4%) is equivalent to $4 of additional share value (+10%).
Marcelo Lima is a securities analyst for the Flexor Fund, at Miami-based Horn Eichenwald Investments. He focuses on running a concentrated value-oriented portfolio.