Macquarie Infrastructure (MIC) Post-Dividend Cut

Macquarie Infrastructure eliminated its dividend yesterday.
Shares are now undervalued by at least 50%.
The company owns real assets that generate real cash flows.

Macquarie Infrastructure (MIC) eliminated its dividend yesterday, sending the shares down sharply today. The shares closed down 24% at $18.25.

Interestingly, even after the post-dividend-cut run for the exits, the shares are still 46% above their March panic lows.

While I’m disappointed to see MIC slash the dividend, I understand their reasoning for doing so. No one knows how long quarantine conditions will last or how long it will be until life returns to something resembling normal. Hoarding cash isn’t an irrational strategy here.

Last month I did a quick and dirty look at Macquarie Infrastructure, noting that “The biggest risk to MIC shareholders is that the dividend gets reduced or eliminated for a couple quarters. That happened during the 2008 meltdown, and it could easily happen again. But the underlying infrastructure assets are solid and, once life more or less returns to normal, will be back in demand.”

I noted that even if the company’s aviation business went to zero — which is ridiculous — the stock was still worth at least $22 per share. That hasn’t changed post dividend. Adding any sensible value for its other businesses gets you a conservative value north of $40 per share.

At any rate, Jeff Middleswart of Behind the Numbers published a report on MIC drawing similar conclusions. Some of Jeff’s conclusions:

We initiate coverage of MIC with a BUY recommendation as we continue looking for more potential bargains from the sell-off wreckage. This is an infrastructure company that normally has very stable to growing cash flows, but it will be impacted by coronavirus in two of the three units. MIC has also been looking to unlock shareholder value by selling the entire company as a whole or in pieces. We believe the two units hurt by coronavirus will recover and trade on the normalized results. We believe the sum of the parts could be $43-$49 per share vs. the current price that is bouncing around the high teens to $22…

There are two issues looking at the dividend in the short-term. First, the company is in the middle of its heaviest year of planned growth capital spending. It was already planning to boost its net leverage by spending cash on hand to offset the impact of that growth investment. Second, the company wants to keep leverage under 4.5x EBITDA. The operating units were forecast to grow EBITDA and 1Q was shaping up well to offset net leverage rising via lower cash levels. Now, as 2Q and 3Q are impacted by the economy being turned off – not only is net debt increasing, EBITDA will be falling and driving up the ratio much faster. Retaining cash from the dividend offsets that problem.

We believe MIC will restore a smaller dividend later this year.

Behind the Numbers, April 3, 2020

Charles here. I agree that the company should be able to reinstate its dividend later this year. I also think it’s very possible they will opt to retain the cash instead since they are planning to sell the assets anyway to unlock value.

Either way, it’s not unreasonable to expect the shares to double from current levels and likely do a lot better than that. These are real assets supported by real cash flows. The economy doesn’t go to zero. This panic will end, whether that day comes in weeks or (more likely at this point) months. And when it does, cash flowing infrastructure assets will start to look good again.


The Billionaires, Dollar Stores and Soup Companies Cashing in on Coronavirus

I was recently quote by Vice’s Geoff Dembicki in “The Billionaires, Dollar Stores and Soup Companies Cashing in on Coronavirus.”

Here’s an excerpt:

There is no disputing that the coronavirus is a social and economic catastrophe—as many as 47 million Americans could lose their jobs amid a crash some experts fear could rival the Great Depression. But like any crisis throughout history, some people are cashing in.

“In a nutshell, if people are able to use a company’s products or services from their home, then this is a field day for these companies,” Charles Lewis Sizemore, a Dallas-based investment advisor, told VICE over the phone from Peru, where he was stranded due to the country’s airports shutting down because of coronavirus. “Not only are those companies not affected, they actually benefit.”

Among others, we discussed the prospects for Campbell’s Soup and DocuSign. In one case, the benefits are likely to be fleeting. In the other, more or less permanent.:

With millions of people working from home, a company that lets you sign documents without leaving your front door or having to interact with people seems poised for massive gains. “Something like DocuSign is fantastic because it allows business to go on as usual,” Sizemore said. The company’s revenue is up 38 percent since last year and may keep growing even as the pandemic wanes. “Are you going to want to go back to printing out paper and signing it and Fedexing it?” he said. “That doesn’t really make a lot of sense.”

This company falls into the “unexpected windfall” category. A year ago, Campbell Soup posted a quarterly net loss of $59 million, in part caused by the longer-term trend of people wanting to eat fresh food instead of canned meals. But with all the panic-buying, hoarding and stocking up taking place because of COVID-19, the company’s fortunes are temporarily turning around, resulting in it recently posting net income of $1.2 million in its most recent earnings report. This is probably just a one-time bump, however. “When life gets back to normal we’re not going to be eating canned goods in our houses anymore,” Sizemore said.

To read the full article, see The Billionaires, Dollar Stores and Soup Companies Cashing in on Coronavirus.

To My Newsletter Readers

If you’re interested in learning about my new newsletter, The Sizemore Income Letter, please email me at info@charlessizemore.com or fill in the form below.

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It’s been a pleasure writing for you all these years, and I look forward to working with you on the next project.

And you know the drill. Until next time, keep cashing those dividend checks!

Charles

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Energy Transfer (ET): We’ve Been Here Before

The following first appeared on InvestorPlace.

As I sit down to write this, my pick in InvestorPlace.com’s Best Stocks for 2020 contest — pipeline giant Energy Transfer (NYSE:ET) — is smack-dab in last place and nursing losses of over 60%.

I’m not too thrilled about that, as you might imagine. But we’ve been here before.

In the Best Stocks for 2016 contest, Energy Transfer was my pick. It struggled at first, and toward the end of the first quarter I was down more than 70%.

But then, a funny thing happened. The stock finally hit bottom and proceeded to rocket higher. I finished the year with a 53% return.

Now, history never repeats itself exactly. I have no idea if ET stock is going to mount an epic rally over the next nine months of 2020. But I know that, given the stock’s valuation, it very easily could.

To keep reading, please see Best Stocks for 2020: Energy Transfer Stock Has Been Here Before.

Business Continuity Plan In Action

I’ll spare you yet another “Business Continuity Plan” email. You’ve no doubt gotten dozens of those by know from everyone from your banker to the local donut shop. You don’t need another one from me.

That said, the Covid-19 lockdowns have been an interesting experience in seeing an business continuity plan in action. It’s nice to know your plan actually worked when it needed to.

All About the Cloud

I moved all of Sizemore Capital’s critical functions to the cloud at firm inception. I was using the cloud before “the cloud” even existed as an expression. I simply couldn’t imagine running a company any other way.

Sizemore Capital was founded in 2008, and from day one all critical files were archived online. Today, I don’t archive online. The active files actually live online via Microsoft’s business version of OneDrive.

I can access my files from any computer in the world with an internet connection. If my hardware conked out on me today, I could have a new computer expressed delivered to me and be back in business in short order. Or, if that wasn’t possible due to coronavirus delays, I could even run the company for extended periods of time from my phone. It’s not ideal. But I could do it.

We’ve been calling clients, trading client accounts, meeting redemptions, wiring funds and doing all of the things you expect money managers to do… uninterrupted.

Communication With Key Personnel

As I write this, I’m stuck on a ranch in rural Peru and likely will be for another couple weeks. I was in Peru prospecting when all hell broke loose and they shut the country down. The airport is closed until after Easter.

It’s barely slowed me down. I’ve had minimal service interruptions and have been able to carry on remotely more or less as if nothing had happened.

My partners are geographically spread out. One is in Dallas, one is in Houston, one is in San Francisco and one is in Lima, Peru. We’re accustomed to communicating remotely, so this hasn’t been much of an adjustment.

I find face to face meetings to be a lot more valuable and productive. But if I get stuck on the ranch for months and my partners are stuck in their respective locations for months, we can keep this up. Indefinitely.

Shortcomings?

I haven’t had access to my office for a few weeks, and I know I have a few undeposited checks sitting in the office mailbox. It may be a while until I’m able to deposit those. But I would emphasize that those are not client checks. Client funds are deposited directly with the custodians we use, and that service has not been interrupted.

So, the worst that has happened is that I have been unable to pay myself a handful of checks.

That’s it.

I don’t have a lot of sympathy for firms that weren’t ready for this. Sure, few people saw coronavirus happening. I certainly didn’t. But it doesn’t matter. Look at the natural disasters that seem to be happening every other day: hurricanes, floods, tornados, etc.

If you weren’t already prepared for widespread business disruptions… what exactly were you waiting for? The tools have been around for over a decade now.

Clearly, there are industries that simply couldn’t prepare for this. If you’re a barber, a dentist, a bartender, a dry cleaner or another number of other professions that require face to face contact, there was really nothing you could do about this. Zoom and Skype aren’t particularly useful in these cases.

But to paraphrase an old Warren Buffett quote, now that the tide has gone out, it’s time to see who was swimming naked.