Mittleman Brothers, LLC, a New York-based investment management firm, released its Quarterly Report – a copy of which may be downloaded here.
In its Quarterly Report for September 2019, the firm reported that its Mittleman Global Value Equity Fund – Class P underperformed the MSCI ACW Total Return Index by 2.8% during the third quarter.
The top contributors for the portfolio in the quarter were Revlon Inc (NYSE: REV), AMC Entertainment Holdings Inc (NYSE: AMC), and International Game Technology PLC (NYSE: IGT).
REV is an American multinational cosmetics, skincare, fragrance, and personal care company headquartered in New York City was founded in 1932, based in New York City and was listed on the New York Stock Exchange. We have reported on the stock extensively in the past, not just on its financial returns but also on its operations. Check out our coverage regarding the stock and its animal testing processes. It’s interesting to note that the company does not have a position in other major beauty companies such as Unilever plc (LON: ULVR) and Estee Lauder Companies Inc (NYSE: EL).
Mittleman Brothers had the following to say in its quarterly report regarding the stock:
“Revlon (REV) Revlon’s share price rose from $19.33 to $23.49, for a return of +22%. After Revlon’s Chairman, Ron Perelman, bought a significant amount of stock in Q2 as high as $23.75, the stock plummeted to as low as $13.58 in August after reporting Q2 results that were mediocre. On the back of these results, MIM slightly reduced its estimate of fair value (from $43 to $40) and bought more shares in the mid to high teens during Q3, raising the exposure to the company (as a percent of shares outstanding) from 4.4% to 5.2%. On August 16th Revlon confirmed it had hired an ‘advisor’ to consider ‘strategic alternatives’ in a filing with the SEC. An article in Bloomberg claimed Revlon had appointed Goldman Sachs as the advisor. Goldman Sachs is an optimal choice to run a global auction for Revlon. Procter & Gamble hired Goldman Sachs in 2014 to sell Covergirl, Max Factor and a collection of other brands. These which eventually sold to Coty (a sophisticated buyer backed by JAB Holdings) in a $12.5B deal (2.6x sales versus the 2x sales multiple MIM is using for Revlon at $40). Goldman secured a very good price in a weakening environment for mass-market brands. Perelman has used Goldman over the past 30 years on various occasions. Revlon is a once-in-a-generation opportunity for any buyer trying to make a significant leap in market share and distribution. There is strategic value here beyond the normal capitalization of cash flows. Estee Lauder is doing amazingly well in prestige cosmetics, but it has no mass-market brands (L’Oreal has both). It is a potential suitor for Revlon, albeit there are more than a handful of potential buyers for parts or all of the company. By MIM’s estimates, Perelman should get a fair ($40) to higher than fair price. If no deal materializes the stock may well sell off again, but the business appears to be improving, with run-rate EBITDA looking like $400M by year-end (according to an analyst at Imperial Capital). This is a level of EBITDA production that has not been seen on an annual basis from Revlon since 2016 when the stock was as high as $38. So, if there is no big deal to come from this process, any set back in the share price is expected to be transitory yet again.”
Pixabay/Public Domain
Meanwhile, the investor also offered commentary on AMC Entertainment — a multi-nation-owned movie theater chain headquartered in Leawood, Kansas, and happens to be the largest movie theater chain in the world as well.
“AMC’s share price rose from $9.33 to $10.70, for a return of +17% (dividends included). Box office receipts were down -5.5% YTD through 9/30/19, but a strong slate of movies on deck in Q4 (including the final Star Wars movie) might be enough to get the full year numbers closer to flat from last year’s record results. Regardless, the stock is very cheap at its quarter-end price of $10.70, with a 7.5% dividend yield. MIM purchased more AMC shares recently in the $9s and has crossed back up over the 5% ownership threshold again. The minimum fair value estimate for AMC is $27 per share, which is 2.5x the quarter-end price of $10.70. $27 would be an enterprise value to EBITDA multiple of 9.7x EBITDA of $800M, and a market cap to free cash flow multiple of 12x FCF of $300M. Both of those multiples are substantially lower than the market indices trade at today. Note in particular: – AMC is the largest movie theatre chain in the world. – It is a recession-proof business (sales barely flinched during the post-GFC recession period). – We are in a world where content and distribution are rapidly coming together (for example: AT&T’s (distribution) buy of Time Warner (HBO, content) last year for 14x EBITDA, or Disney’s (content & distribution) buy of Hulu (distribution) from Comcast earlier this year at a valuation of $27.5B, or $982 per each of Hulu’s 28M subscribers. – While movie theatres are not growing attendance like streaming services are growing members, the box office brings in nearly $12B per year in ticket sales in the U.S. and Canada each year, a generally growing number. – Subscriptions are growing rapidly in the movie theatre industry. AMC’s Stubs A-List subscription program grew from 0 to 1M members (paying $21 to $24 per month) in just over the past 18 months, not including concessions (food & beverage) purchased separately at each attendance (about 2.8 times per month). AMC also represents a major potential acquisition for any production studio willing to test the extent to which the US Justice Department will continue to enforce the Paramount Decrees from 1948 that caused the break-up of theaters from their former studio owners. AMC recently initiated a streaming service. While not groundbreaking (Cineplex in Canada has been doing it for years), it is a smart way of getting more out of the existing franchise and monetising the value of AMC’s loyalty program. As an aside, the loyalty program is now colossal (over 21M AMC Stubs members now, versus just 2.5M when Adam Aron took over as CEO in 2016). Just over a year ago a highly regarded private equity firm, Silver Lake Partners, made a $600M investment into AMC at about $19 per share through convertible bonds yielding 2.95%. As a smart global private equity firm, known for its technology investing, Silver Lake will similarly be expecting a greatly increased share price.”
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Our calculations also showed that AMC isn’t among the 30 most popular stocks among hedge funds. At the end of the second quarter, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from one quarter earlier.
Disclosure: None. This article is originally published at Insider Monkey.
