FKA, still falling, LYLT

Investing Strategies Falling Knives
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I wonder if there is a bottom, or if it’s just going to slide down to zero?

Consensus EPS for next year: $1.57, up 38% from 2022.
Current price: $2.94 per share.
So, forward P/E is under 2.
Admittedly only 3 analysts bother with them, so there is no real consensus: the target prices range from $4 to $19.

It traded at ~$35 when it was spun off last November, but nobody is interested in owning a spinoff.
Not this one, anyway.
I thought it was going to bottom around July 5 when it was ejected from the small cap index, a guess which held for about 2.5 weeks.
But…nope! Down to the next sub basement it goes.

Jim
I’m in at $3.47, in case anybody cares : )
That will teach me the foolishness of buying at such a high P/E. Over 2!

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Consensus EPS for next year: $1.57, up 38% from 2022.
Current price: $2.94 per share.

…

Jim
I’m in at $3.47, in case anybody cares : )
That will teach me the foolishness of buying at such a high P/E. Over 2!

Seems like a reasonable bet - I’m in for about 2/3 of 1% of my portfolio, average price $3.18. Just a hair of a multiple of 2, although the most recent purchases were under.

Maybe we need a special dictum for falling knives that are spinoffs: never try to catch the spinning blade that has flown off a machine, even if it has almost stopped spinning. It could still cut your hand.

BTW, any thoughts on what a tax efficient divestment might mean, in this context?

“Alliance Data will retain 19% of the outstanding shares of Loyalty Ventures common stock, which Alliance Data intends to divest in a tax-efficient manner.”

dt

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BTW, any thoughts on what a tax efficient divestment might mean, in this context?
…
“Alliance Data will retain 19% of the outstanding shares of Loyalty Ventures common stock, which Alliance Data intends to divest in a tax-efficient manner.”

No, no idea really. I didn’t know about that, though of course it doesn’t actually change the value of a share of Loyalty.
The only thing that springs to mind is a share swap with another entity.
The most reliable method is a spin-off, but they’ve already done that.

Of course selling at today’s price would be excellent for tax purposes.
Not much tax on a realized loss.

Jim

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In at 3.58. We’ll see…

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I purchased at $3.7 and $3.21.

Back in 2017 I obtained a share or two (I think) of TRRSF as a spin-off (from BAM?). A few months later I purchased more. It went no where for over two years, then started to move up a bit. I sold for a profit of 15%/yr compounded, not bad. It then went up another 500%.

500% on LYLT from here doesn’t seem crazy, although just saying that seems crazy.

John

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“Alliance Data will retain 19% of the outstanding shares of Loyalty Ventures common stock, which Alliance Data intends to divest in a tax-efficient manner.”

No, no idea really. I didn’t know about that, though of course it doesn’t actually change the value of a share of Loyalty.
The only thing that springs to mind is a share swap with another entity.

Agreed, I only mention it because it may (or may not) have added to the selling pressure that we anticipate when these spinoffs occur, as shareholders dump the insignificant and unwanted new shares.

By the way, I found this interesting list of recent spinoffs, containing some ideas that might be worth looking into: http://thezenofinvesting.com/recent-spinoffs/

At first glance, there are a couple of the most recent spinoffs in that list that look interesting:

Embecta (EMBC), the diabetes franchise spun off from Becton Dickinson
Zimvie (ZMVI), spine and dental businesses spun off from Zimmer Biomet, although it doesn’t look like a profitable business
Constellation Energy (CEG), a sustainable energy generation unit spun off from Exelon (which kept the public utilities), although this one has traded up with the recent price increase across the sector
Douglas Elliman (DOUG), a real estate brokerage firm spun off from Vector Group, a tobacco and RE company - maybe worried about legal costs from its toxic history?
OceanPal (OP), a 3-vessel company spun off from Diana Shipping.
Orion Office REIT (ONL), spun off from REalty Income (O), a much bigger REIT, and trading at about 80% of tangible book value.
Loyalty Ventures (LYLT), from ADS, which we have talked about.

In addition to LYLT, EMBC and DOUG in particular look like they are cheap (6 times earnings), have sold off since the spinoff, and might be perfectly good businesses waiting for a rebound in their share prices, like LYLT.

dtb

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By the way, I found this interesting list of recent spinoffs, containing some ideas that might be worth looking into…

Good idea.

A different subject, but still on the general idea of inspirations from the rejecta:
It’s possible that an even more fertile hunting ground might be stocks recently ejected from an index.
In an average year there are about 23 new additions to the S&P 500.
Some replace those that are ejected, others fill holes created by stocks disappearing due to mergers and buyouts.
https://www.researchaffiliates.com/publications/articles/832…
" As a result, in the first six months following the rebalance, the additions tend to lag the deletions by 14%, and by month 12, the additions lag by 20%."

Loyalty is in both camps: a recent spinoff, then a few months later ejected from the small cap index.

Jim

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In an average year there are about 23 new additions to the S&P 500.
Some replace those that are ejected, others fill holes created by stocks disappearing due to mergers and buyouts.
https://www.researchaffiliates.com/publications/articles/832……
" As a result, in the first six months following the rebalance, the additions tend to lag the deletions by 14%, and by month 12, the additions lag by 20%."

Do you know where one might find a list of index deletions? I found this, for deletions from the S&P/TSX index: https://www.spglobal.com/spdji/en/documents/indexnews/announ…. And here is the same thing for the US-based indices: https://www.spglobal.com/spdji/en/documents/indexnews/announ….

Loyalty is in both camps: a recent spinoff, then a few months later ejected from the small cap index.

Yes, this must be rare. Let’s hope it gets a multiplicative effect!

dt

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Do you know where one might find a list of index deletions?

It is announced a few days in advance when they do it.
Since the priced tend to bottom around the day it takes effect (a few days after it’s known), you have a few days of notice before buying.

Changes happen mostly four times a year, though I think some things happen any month.

But if you want to predict in advance what will be announced, maybe FactSet is the place to look:
https://insight.factset.com/through-the-looking-glass-predic…
"Since 2018, FactSet has been able to predict over 83% of companies before they get excluded from the S&P 500,
with 2021 again proving to be the best year yet, with 100% prediction accuracy for the 15 companies leaving the S&P 500."
I don’t know what they charge for that analysis. Their “full product” is something like $12k/year.

Jim

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Since the priced tend to bottom around the day it takes effect (a few days after it’s known), you have a few days of notice before buying.

Changes happen mostly four times a year, though I think some things happen any month.

But if you want to predict in advance what will be announced, maybe FactSet is the place to look:
https://insight.factset.com/through-the-looking-glass-predic……
"Since 2018, FactSet has been able to predict over 83% of companies before they get excluded from the S&P 500,
with 2021 again proving to be the best year yet, with 100% prediction accuracy for the 15 companies leaving the S&P 500."

It sounds like having advance notice of which companies will be ejected would not be particularly helpful, for investing in the ejecta, if the shares only bottom around the time of the ejection or even several days after the ejection.

Anyways, for some reason I am more excited about the spinoffs than the ejecta. LYLT gets both nods, but for recent ejecta/spinoffs, I like the look of spinoffs DOUG and EMBC better than ejecta like Under Armour or Yelp…

dt

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In a previous 10-Q

“Loyalty Ventures made a cash distribution of $750.0 million to ADS on Nov. 3, 2021 as part of the Separation. The distribution qualified as a tax-free reorganization and a tax-free distribution to ADS and its stockholders for U.S. federal income tax purposes.”

That gave rise to a big debt load. At present, while the market cap is ~72 mil, the enterprise value amount to ~688 mil. It still looks decent but not screaming cheap in this context (EV/EBIT close to 8).

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forward P/E is under 2

Why do you just consider P/E and not concerned about the heavy debt load that it carries?

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forward P/E is under 2
…
Why do you just consider P/E and not concerned about the heavy debt load that it carries?

Who said I consider “just” P/E?

In this case it’s an interesting number to mention as it shows that the market is in effect assuming the company will go out of business soon.
But the most important thing in this specific case is neither the P/E nor the debt: it’s the likely trajectory of future revenue.
Is the underlying business going to continue to fade?

There is nothing wrong with a cash cow, flat earning power in real terms, at the right price. They can be like high yield perpetual bonds. HPE, maybe?
But nobody wants to own something headed for the grave, however slowly, especially (yes) with a millstone of debt. PBI, say.

Jim

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I’ve struggled a little to wrap my head around this business, but I think I’m getting there:

The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service and redemption of an AIR MILES reward mile.

The company knows miles are likely to be redeemed at some future date. The pace of redemption was slow in 2019 and 2020 because of the pandemic, but has accelerated considerably in 2021 and 2022.

from the last 10Q:

AIR MILES Reward Program: Revenue decreased 6% to $66 million, compared to $70 million in the first quarter of 2021, primarily due to the increase in the Collector value proposition implemented in late 2021, and the impact of the decline in AIR MILES reward miles issued during the pandemic in 2020 and 2021. Adjusted EBITDA decreased 19% to $29 million, compared to the first quarter of 2021, due to lower revenue and additions to our business development and technology teams.

The 4% year over year decrease in AIR MILES reward miles issuance related to the non-renewal of two Sponsors in the first quarter of 2021; adjusting for non-renewals, issuance was consistent with the prior year quarter. AIR MILES reward miles redeemed increased 43% compared to the first quarter of 2021, primarily reflecting pent-up demand for travel as COVID-related restrictions abated.

BrandLoyalty: Revenue decreased 16% to $89 million, compared to $106 million in the first quarter of 2021, primarily resulting from the timing of larger programs. Adjusted EBITDA of $236,000 was down year over year due to the lost margin from the decline in revenue but was consistent with expectations.

Meanwhile debt service has ticked up sharply. Note 15 to the consolidated financial statements seems to give a good overview of the company’s debt.

https://www.loyaltyventures.com/node/7101/html#a1DESCRIPTION…

The maturities are mostly out past 2025. They’ve got a number of revolvers and overdraft facilities to draw on. 2021 wasn’t a bad year to take on some leverage.

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That gave rise to a big debt load. At present, while the market cap is ~72 mil, the enterprise value amount to ~688 mil. It still looks decent but not screaming cheap in this context (EV/EBIT close to 8).
To normalize things wouldn’t you need to back out the ‘$64 million, or $2.62 per share of goodwill impairment and strategic transaction costs’ in the spin-off quarter also? That would improve the EV / EBIT (as a normalized EBIT would be $64 million higher).

High debt is (almost always) expected in a spin-off (as why would the parent execute the spin-off and leave it unburdened) & this alone tends to make spin-offs initially look expensive. This also increases the potential gain - when the debt load is paid down the EV improves rapidly as long as the EBIT supports the debt well enough. I’ve not arrived at a conclusion on LYLT yet (still modeling) but manage-able high debt is (almost) a positive (as long as it can be managed).

I need to dig into what insiders are doing, but at first glance management have picked up some options (but not too many, from a quick glance at dilution) which suggests some confidence around the opportunity.

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Insiders have been buying since the spin, most recently in May at $11.45 : http://openinsider.com/search?q=LYLT

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Insiders have been buying since the spin, most recently in May…

Nice to hear, but that glass seems half empty.
A more pessimistic interpretation might be “total insider purchases since last November are only $40k”.
That’s the price of one high end Honda Civic.
Even among small fry companies, usually someone at head office can scrape together more than that if they think it’s a buy.

Jim
Part owner, apparently just for the entertainment value

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A little article on LYLT.
Actually useful information.

https://finance.yahoo.com/news/loyalty-ventures-high-risk-hi…

TL;DR Reports of their death are probably exaggerated.
With the price having fallen so far on the apparent assumption of death, there’s more upside than downside.

Jim

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I’ve taken a small bite. Small enough that I won’t lose any sleep if it goes to zero, but still large enough that I’ll have a small party if it turns into a 5x or 10x return.

I also looked at the insider purchases in May, at around $11. While, Jim, I take your point that they aren’t huge, I think they do show that insiders aren’t seeing impending doom. And I think that counts for something in a situation like this.

Even with my relatively small number of shares purchased, it’s the one time in my investing career that I’ve ever wondered if my purchase might actually nudge the market price a little :slight_smile:

  • David
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As the article suggested, there is a good possibility of takeover by private equity. If that happens most of the upside will disappear.

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