September 29, 2016

ValuThe Leading Authority on Value Investing eInvestor INSIGHT

Inside this Issue Network Effect FEATURES Some investors have a penchant for high-quality compounders and some for Investor Insight: Mark Meulenberg somewhat-hairy special situations. Mark Meulenberg has an affinity for both. Spanning the risk spectrum to find current upside in Liberty Global, INVESTOR INSIGHT aving graduated from Cornell Liberty LiLAC, Liberty SiriusXM with a degree in business, Mark and Eastman Kodak. HMeulenberg got a crash course in value investing upon joining research firm Investor Insight: Jason Karp Sanford C. Bernstein in 1996. “They fed us Seeking large “expectations gaps” in potential investments and find- breakfast, lunch and dinner at the office,” ing them today in Dish Network, he says. “We were completely immersed.” SunOpta and Leidos. Now Chief Investment Officer at VNB Wealth Management, Meulenberg has put Uncovering Value: Emerson that early education to good use. His En- Industrial-equipment suppliers are hanced Core Strategy since the beginning of boring the market to tears. Is malaise 2008 has returned 13.8% net of fees, com- unwarranted here? Mark Meulenberg pared to 7.8% for the S&P 500. Uncovering Value: Sensata VNB Wealth Management Owning both franchise businesses and Auto-supply firms can repel quality- Investment Focus: Seeks companies an eclectic mix of quirky special situations, conscious investors. This one may be with “sticky” customers and highly recurring he’s finding opportunity today in such areas worth a closer look. revenues at rare moments when -term market sentiment turns against them. as global cable services, satellite radio and Editor’s Letter printing solutions. A thoughtful student of investing reflects on the skills and mindset required to succeed at it.

INVESTMENT HIGHLIGHTS

INVESTMENT SNAPSHOTS PAGE Dish Network 7

Eastman Kodak 17

Emerson Electric 18

Leidos 9 Liberty Global 13

Liberty LiLAC 15 Liberty SiriusXM 16 Mark A. Meulenberg, CFA Sensata Technologies 19 Chief Investment Officer SunOpta 8 [email protected] (434) 817-4237 Other companies in this issue: Alphabet, Amazon, Broadcom, CarMax, 404 People Place, 3rd Floor Christopher & Banks, Coca-Cola, Ctrip. Charlottesville, VA 22911 com, Discovery Communications, Gen- www.vnbwealth.com cor Industries, General Mills, Rosetta Stone, Tailored Brands

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight INVESTOR INSIGHT: Mark Meulenberg Investor Insight: Mark Meulenberg Mark Meulenberg of VNB Wealth Management explains why he holds special situations alongside mostly franchise businesses, why he owns so many John Malone-related stocks, which personal trait he considers central to investing suc- cess, and why he sees upside in Liberty Global, Liberty LiLAC, Liberty SiriusXM and Eastman Kodak. By Ted Crawford

Your portfolio has a mix of what might be This is an example for us of a core shares are worth between $10.50 and $12 considered high-quality compounders and investment, on which we typically only on a stand-alone basis, and probably more somewhat-hairy special situations. How need to take two or three big swings per than that to a strategic acquirer. did you arrive at that approach? year. Businesses with the kind of predict- I should point out that we differentiate able cash flows we prefer tend to be easier clearly in how we size core investments Mark Meulenberg: In the late 1990’s I took to value, so it’s not very often that they versus special situations. We typically a position as a portfolio manager with get mispriced. But sentiment can change hold eight to ten core positions, which in U.S. Trust, where one of my colleagues quickly. CarMax’s shares fell almost 30% aggregate make up close to 75% of the opened my eyes to franchise businesses in portfolio. The balance will be in higher- the Warren Buffett mold. I loved the idea potential-reward but also higher-risk posi- of buying great businesses – generating ON SPECIAL SITUATIONS: tions, which are usually weighted between free cash flow and with high and increas- I mostly own good business- 50 and 200 basis points each. ing returns on capital – that we could hold I have most of my net worth in this for extended periods of time. The problem es, but I also don’t want to strategy and I wouldn’t be comfortable was that as the 1990s went on, franchise leave money on the table by with all special situations. But at the level I businesses had become very expensive, so own them, I can buy things like Gencor In- we broadened our search into more eclec- ignoring special situations. dustries [GENC, VII, October 30, 2015], tic special situations and microcaps. Tap- which makes asphalt equipment, at a low ping both kinds of opportunities for new point in its cycle, when there are concerns ideas and owning each in the portfolio has in a relatively short period of time. That about insular-family control and when it made sense to me ever since. got our attention, and we knew the com- can’t seem to hold onto a CFO. The stock pany well enough to respond quickly. was trading below net cash – a valuation Describe a typical example of each. that forgives a lot of sins – but I wouldn’t A number of people we’ve spoken with want to own 20 5% positions like this in MM: CarMax [KMX] is a relatively new in recent years have expressed interest in the portfolio. I mostly own good business- holding for us, having bought it a bit under language-learning company Rosetta Stone es for the long term, but I also don’t want today’s price [currently $53] in April. It’s [RST] – at times to their chagrin. Is it a to leave money on the table by completely a well-run business that generates roughly representative for you? ignoring special situations. 20% returns on incremental capital. It has a differentiated business model that ben- MM: Yes. The company had been on How do you typically source new ideas? efits from scale and a proprietary pricing our radar for a long time and we ended database, and there’s a long growth run- up investing in late 2014 in the low-$7 MM: Most of our ideas come from the way, with the capability to double its cur- range. We’ve been involved in businesses network of contacts and the company rent level of used-car stores in the U.S. that have made a similar conversion from database I’ve built over the years, some There will be some speed bumps. May- product sales to a software-as-a-service screening and a lot of reading. I should tell be peaking new-car sales will negatively model and seen how the change can ob- you I’ve made quite a bit of money from impact the used-car market. There is also scure value for some time, often exacer- ideas that have come from Value Investor nervousness about subprime auto loans bated because you get heavy turnover in Insight since it first launched. and how that might effect the company. the investor base. I’ve always been a big believer in the But when the price is right we can look Our basic thesis is that Rosetta’s Enter- importance of developing mutually ben- beyond these types of issues. We’re pay- prise & Education segment and the Lexia eficial relationships. To give a simple ex- ing a discount to the market for a high- reading business are now the growth driv- ample, when I interviewed for a new ana- quality business that should grow at twice ers, more than compensating for the wind lyst a couple of years ago it came down the earnings growth rate of the S&P 500. down in the retail consumer business. It to three candidates. One of them I hired. If the story tracks like we think it will, this has an excellent balance sheet to help it The second became a client. And the third is something we could hold for five or ten see the transition through to fruition. I stayed in touch with as he launched a years and ultimately get paid handsomely. We believe as earnings prove out that the fund and we’ve been good resources

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight INVESTOR INSIGHT: Mark Meulenberg

for each other since. I have tremendous re- double. If the business doesn’t improve in will figure out how to best monetize their spect for the quality of his research. We’ll the next 12-18 months we will probably assets, that media businesses in the U.S. talk later about our investment in East- lose some money, but we don’t think the will fare somewhat better than most peo- man Kodak [KODK], which was an idea downside is much lower and we’ll get out ple think, and that international efforts that came from his original work. if we see no signs of progress fairly soon. will prove much better than anticipated. I’ll give you another example about the This is typical of a special situation for us. For example, Discovery Communications’ importance of maintaining relationships, [DISCK] management recently said they this one from outside the context of idea expect its international-affiliate revenue generation. Before the credit crisis fully ON MEDIA: to grow at a low-teens rate over the next unfolded, I was working in Charlotte, What’s not well understood – couple of years. I just don’t think that’s be- North Carolina at a . One of ing priced in with a U.S.-centric view. the partners had been at Bank of America in content and distribution – and knew the mortgage space very well is the above-average growth You made the bullish case a year ago for and had contacts everywhere. He spoke Discovery [VII, September 30, 2015] at often with a friend whose firm aggregated potential internationally. $24.70. With the shares now around $26, data on loan performance for all the big is the thesis still intact? banks, and that friend was concerned that when he’d raise red flags around poorly Characterize your opportunity set. MM: Given the non-U.S. performance, performing subprime and alt-A mortgag- we’d argue the company’s prospects have es, the bank clients would say, “No, we’re MM: In our core names we focus on busi- improved more than has been reflected in fine. It’s the other banks that will have nesses in which the outcome is dependent the share price. The foremost risk is that difficulty because they don’t know how on management’s ability to execute and Discovery will be hurt from the trend to- to underwrite.” The problem was that all where outside influences don’t dictate suc- ward “skinny” channel bundles, but we banks said the same thing, which gave us cess or failure. That means we try to avoid believe – as does management – that Dis- a front row seat to what was happening. commodity-related businesses and those covery channels will be included in most When I joined VNB in early 2008, that in- that are heavily regulated, like healthcare slimmer packages and that the economics sight helped me steer clear of a lot of toxic and many areas of financial services. of such packages could actually be better investments other value investors made. We gravitate toward companies provid- for them. It’s also important that the in- ing essential products and services, with vestment cycle for its Eurosport content You invest up and down the market-cap sticky customer relationships and highly in Europe is coming to a close, which will spectrum. How did a tiny company like recurring revenue streams. Over the years drive free-cash-flow growth. At today’s $55-million-market-cap Christopher & that’s led us to things like technology-ser- share price we’re paying 13x earnings for Banks [CBK] get your attention? vices companies, software providers and what we expect to be low-teens earnings media companies. growth. That’s a much more attractive MM: I’ve invested in a number of apparel The special-situations portion of the value proposition than the overall market. retailers over the years, including Stein portfolio is usually filled with things like Mart, Chico’s FAS and Bebe Stores. CBK turnaround stories in retail, microcaps in You will invest in debt in addition to eq- is a women’s apparel retailer with close to almost any sector, and companies in ‘ug- uity. Have you found much to do there? $400 million in annual sales, a strong bal- lier’ industries like shipbuilding or steel. ance sheet and an enterprise value of less MM: Our rate-of-return thresholds are the than $25 million. That combination got Your portfolio is heavy in media, one of same for equity and debt. In this interest- our attention. The story is fairly simple. many industries transitioning in a way rate environment we’re finding very little They haven’t been on the right side of that creates uncertainty. Is that a big part to do on the debt side, but every once in a fashion trends over recent periods and are of the attraction? while something crops up. We always look working to turn things around through a where relevant at the debt of any equity product refresh, changing store formats MM: There’s no question there is uncer- we own and a couple months ago the debt and by pushing a private-label credit-card tainty in this industry in the U.S. What’s of a company whose equity we’d held for and loyalty program. If the company can not as well understood is that the industry a couple of years got priced down into the increase same-store sales by just 3-4% – both in content and distribution – has low $80s due to some key drivers on the and achieve gross margins in the mid-30% above-average growth potential interna- operating side moving against them and range, it would generate around $18 mil- tionally, driven by broadband Internet probably some liquidity concerns. We de- lion of EBITDA. At a peer-retailer mul- penetration. In general, we believe the cided to swap our equity for the debt be- tiple on that, the shares would more than management teams of companies we own cause we thought the asset coverage was

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight INVESTOR INSIGHT: Mark Meulenberg

more than sufficient and the yield to ma- characteristics, geographies and manage- not as popular there because of the preva- turity at the time was around 17%. This ment teams. lence of free-to-air broadcasting channels, actually worked out more quickly than we so Liberty Global’s growth will primar- expected – the debt today is priced at $97, Starting with the biggest cable business, ily come from an increase in broadband so the IRR has been quite high. describe your investment case for Liberty subscribers and by expanding its footprint Global [LBTYK]. and its offerings. As data consumption Do your macro views influence the com- increases and as the types of media con- position of your portfolio in any way? MM: The company has been at the fore- sumed require more bandwidth, the de- front of the consolidation of Europe’s mand for faster speeds should drive both MM: Many investors have a hard time fragmented cable industry and we think as penetration rates and average revenue per getting used to where monetary policy is a result benefits from many scale advan- user [ARPU] higher. The penetration rate right now and the impacts of that down tages, including in technology and capital for broadband subscribers in Germany is the road. I can’t help but be influenced by spending, in cross selling, in marketing just 25%, for example, versus the low- things like that, but I try to stick to com- and in negotiating with content providers. 40% range in the U.S. Liberty Global’s pany fundamentals and valuation and Europe is a fundamentally different ARPU is around $45, less than half the have those drive our investment decisions. market compared to the U.S. Pay TV is level in the U.S. Over time we expect the There is great macro uncertainty and we are in unchartered territory, but I don’t INVESTMENT SNAPSHOT think that’s an automatic precursor to a Liberty Global Valuation Metrics dramatic drawdown. The fact that mon- (Nasdaq: LBTYK) (@9/28/16): etary policy is going off the rails doesn’t Business: World’s largest provider of pay- LBTYK S&P 500 change our view that R-22 refrigerant is television and broadband services, with opera- P/E (TTM) n/a 24.8 going to be in short supply and that Hud- tions in 30 countries across Europe, Latin Forward P/E (Est.) n/a 18.4 America and the Caribbean. son Technologies [HDSN, VII, July 29, Largest Institutional Owners 2016], the largest reseller of it, will be a Share Information (@9/28/16): (@6/30/16): huge beneficiary. Gencor Industries should Price 32.84 Company % Owned see a windfall of business from increased 52-Week Range 25.86 – 44.90 T. Rowe Price 6.9% infrastructure spending in the U.S., regard- Dividend Yield 0.0% Eagle Capital Mgmt 5.5% less of whether or not the Fed tightens. Market Cap $30.51 billion Capital Research & Mgmt 4.9% That said, we do have about 20% of SPO Advisory 4.3% Financials (TTM): Dodge & Cox 4.2% the portfolio in cash today, a level that has Revenue $18.86 billion doubled since the end of the second quar- Operating Profit Margin 14.0% Short Interest (as of 9/15/16): ter and is at the higher end of our histori- Net Profit Margin (-2.2%) Shares Short/Float 2.0% cal range. That’s primarily a function of reducing or exiting positions without hav- LBTYK PRICE HISTORY 20 ing enough compelling investment ideas at 60 60 the moment to replace them. 50 50 15 You have a large number of John Malone- related securities in your portfolio. What’s 40 40 the high-level rationale for that? 10 30 30 MM: The common theme across Liberty entities is tax-efficient compounding of 5 20 20 capital, with one of the great capital al - 2014 2015 2016 locators of all time in John Malone at the helm. I would also say there’s a cer- THE BOTTOM LINE tain level of complexity – from tracking The company has been at the forefront in consolidating Europe’s fragmented cable in- stocks, related-party transactions, spin- dustry and is now well positioned to benefit as increasing bandwidth usage drives de- offs and mergers – that we think can lead mand for broadband connectivity, says Mark Meulenberg. At 15x his $3 to $3.50 per share estimate of 2018 free cash flow, the shares would trade in the $45 to $50 range. to misunderstanding. In the end, though, we’re looking at all the companies on a Sources: Company reports, other publicly available information stand-alone basis, with their own business

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight INVESTOR INSIGHT: Mark Meulenberg

playbook in Europe to more closely fol- base of subscription revenues. But it may just sold. It’s also hurt the stock that the low what’s happened in the U.S. make some investors uneasy. company hasn’t yet clarified the synergies between LiLAC and Cable & Wireless. What edge does Liberty have over telecom What upside do you see in the stock? That doesn’t concern me – I’d rather have companies in providing Internet service? better information than fast information – MM: We think the company can earn $3 but the lack of detail is probably weighing MM: The basic advantage is speed. The to $3.50 per share in free cash flow by on the share price. most advanced telecom technology offers 2018, up from $2.55 last year. Driving connection speeds of up to 500 megabits that will be low-single-digit annual price Does this type of consolidation strategy per second, compared with up to 1 gigabit increases, increased penetration on the translate globally? per second for the most advanced cable commercial side, continued share repur- technology. Both are improving but the chases, and high-single-digit operating MM: We don’t believe there’s anything on gap is not closing. cash flow growth achieved through scale the structural or cultural fronts that will Another issue for the telcos is that they prevent LiLAC from replicating on some typically have capital-intensive wireless level Liberty’s success in Europe. Latin businesses as well as investor bases that ON CABLE BROADBAND: American markets share many of the same demand high dividend payouts. That lim- dynamics as those in Europe and the U.S., The basic advantage is its the resources they have at any given especially the importance of increased time to make large investments in the speed. Both cable and tele- broadband speeds to accommodate rising broadband infrastructure required to com technology is improving, data consumption. better compete with cable. The returns on such investments, that basically start but the gap is not closing. Are cable assets to acquire in the region from scratch using different technology, priced to sell? are also rather questionable. Google with great ambition in the U.S. began laying fi- and cost efficiencies. For an entrenched, MM: [Liberty Global CEO] Mike Fries ber in some U.S. cities years ago and has market-leading business with a recurring- says there are a ton of potential deals in basically abandoned the project because revenue model, we’d consider a 15x mul- the pipeline already, which indicates to of high costs and low returns. tiple very reasonable. That would put the us that these markets are fertile hunting stock at $45 to $50 in a couple of years. grounds. I would point out, however, that The shares, now around $32.80, are ba- the strategy isn’t contingent on scooping sically where they were three years ago. Describe the opportunity you see in sister up dirt-cheap assets, but is more focused Why the lack of enthusiasm? company Liberty LiLAC [LILAK]. on combining disparate assets that are worth more together than apart. The op- MM: A big issue generally has been eco- MM: LiLAC intends to replicate in Latin erating leverage from scale will make it nomic weakness in Europe, but there has America and the Caribbean what Liberty tougher for others to compete – a bargain more recently been increasing concern Global has accomplished in Europe. It’s in price isn’t essential to generate excellent about the poor performance of the com- the early innings of consolidating highly returns. pany’s 2014 acquisition of the Ziggo fragmented and under-penetrated broad- cable-TV business in the Netherlands. In band markets, and in May it closed on the How do you value the shares, now trading this particular case the company is re- $7.4 billion acquisition of Cable & Wire- around $28.50? sponding by teaming with Vodafone to less Communications, which is a leading offer a “quad-play” package combining full-service communications provider in MM: Due to an already launched capital- voice, data, cable-TV and mobile services. 18 countries in the region. spending plan to upgrade the Cable & That’s what good management teams do, Interestingly, that deal was paid for Wireless infrastructure, free cash flow will respond to the market as it evolves. with a combination of Liberty Global be depressed somewhat at least through I can’t say for certain the impact on the shares and spun-out LiLAC shares, be- the end of 2017. In 2018 we’re estimat- shares, but investing in a consolidator like cause management thought LiLAC’s ing free cash flow per share of over $2 per this often requires a certain level of com- stock was too cheap, at $38, to pay for share, assuming EBITDA growth in the fort with leverage. Liberty Global has $45 everything. But now those shares trade at low teens but not factoring in any acqui- billion of debt, which is 5x EBITDA. Since around $28. We think this is a classic case sitions. We also assume EBITDA margins only 10% of the debt is coming due within of uneconomic selling driving down the expand from current levels by about 300 the next five years we’re comfortable with LiLAC share price as investors who owned basis points, to around 42%, as the C&W that level, especially given the recurring Liberty Global to get exposure to Europe operations are integrated. As a point of

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight INVESTOR INSIGHT: Mark Meulenberg

ment with OEMs is an enormous competi- INVESTMENT SNAPSHOT tive advantage. Liberty LiLAC Valuation Metrics While the installed base of new cars (Nasdaq: LILAK) (@9/28/16): will continue to grow, the next big driver Business: Leading provider of pay-television, LILAK S&P 500 of growth for the company will be pen- broadband and telecommunications services P/E (TTM) n/a 24.8 etration in the used-car market, which in Latin America and the Caribbean, with 10 Forward P/E (Est.) n/a 18.4 in the U.S. has two and a half times the million subscribers across 20 countries. Largest Institutional Owners annual unit sales of the new-car market. Share Information (@9/28/16): (@6/30/16): The incremental return on capital Sirius Price 28.44 Company % Owned realizes through adding users in the used- 52-Week Range 27.00 – 44.95 T. Rowe Price 12.7% car channel is very high as the cost of the Dividend Yield 0.0% Eagle Capital Mgmt 11.5% installation has already been incurred. Boston Partners 11.5% Market Cap $4.90 billion Ultimately, this and other factors should Blue Ridge Capital 7.9% drive EBITDA margins from around 37% Financials (TTM): Dodge & Cox 7.7% Revenue $3.60 billion to 40% and beyond. Operating Profit Margin 12.6% Short Interest (as of 9/15/16): Net Profit Margin (-16.9%) Shares Short/Float 2.7% Why do you believe the tracking stock, which trades at a 13% discount to the un- LILAK PRICE HISTORY derlying equity, is mispriced? 20 50 50 MM: It adds a layer of complexity and 45 45 15 also doesn’t benefit from Sirius XM’s fair- 40 40 ly aggressive share-repurchase program. As for the shares of Sirius itself, they tend 35 3510 to oscillate based on a recurring concern among investors that its business model 30 30 will be displaced as increased connectivity 25 255 in cars allows streaming companies like 2014 2015 2016 Spotify and Pandora to more aggressively compete. We simply don’t think that’s a THE BOTTOM LINE concern. Many cars are already connect- The company wants to replicate in Latin America Liberty Global’s acquisitive strategy ed, and Sirius’ operating metrics haven’t in Europe, but its shares have been beaten down by what Mark Meulenberg considers reflected any competitive weakness. Sub- uneconomic selling after it made its first big deal. Driven by the prospect of consistent double-digit free-cash-flow growth, he believes the stock within two years can hit $40. scribers like and depend on the content. Sirius is also very competitive on price; the Sources: Company reports, other publicly available information service costs slightly more than half of the combined cost of an Internet connection reference, Liberty Global in Europe gener- [SIRI] and this is the tracking stock that in your car and a streaming service. ates EBITDA margins of about 47%. represents Liberty’s ownership interest. We think management will achieve its Sirius XM is the dominant satellite-radio What do you think the tracking shares, goal of sustained double-digit growth in subscription service, offering a broad ar- now at $33, are more reasonably worth? free cash flow per share for an extended ray of music, sports and news content, period of time. That growth profile to much of which is exclusive. MM: We’re assuming revenue growth us would justify at least a 15x multiple, For years the Sirius story has been for Sirius XM at a mid- to high-single- which would put the shares at about $40 about increasing new-car penetration, digit rate through 2020, and the company in the next two years. which drives high incremental margins by won’t be a full taxpayer until then due to leveraging the company’s satellite infra- net operating loss carryforwards. We also From TV to radio, you also own a core structure. It is notoriously difficult to get assume 400-500 basis points of EBITDA- position in Liberty SiriusXM Group auto manufacturers to embed third-party margin expansion, to around 42%, as the [LSXMK]. What’s the story there? technology into their manufacturing pro- company leverages its existing infrastruc- cesses, but around 75% of all new cars ture and penetrates the used-car market. MM: Liberty SiriusXM owns 64% of the rolling off production lines in the U.S. are Sirius is also repurchasing 7-8% of its outstanding shares of Sirius XM Holdings now Sirius XM-enabled. That entrench- shares every year. All in, we think the

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight INVESTOR INSIGHT: Mark Meulenberg

it calls Print Systems, which sells commer- INVESTMENT SNAPSHOT cial-printing-related equipment, services Liberty SiriusXM Valuation Metrics and consumables. It also has a number of (Nasdaq: LSXMK) (@9/28/16): smaller businesses, including selling film to Business: Leading provider of music, news, SIRI S&P 500 the entertainment industry, ink and inkjet sports and talk satellite-radio services, primar- P/E (TTM) 34.7 24.8 cartridges for printers, workflow manage- ily through auto OEM agreements, to more Forward P/E (Est.) 23.1 18.4 ment software and 3-D printing systems. than 30 million paid subscribers worldwide. Largest Institutional Owners Most of the businesses have attributes of a Share Information (@9/28/16): (@6/30/16): razor/razor blade model, with nearly 80% Price 32.97 Company % Owned of the $1.8 billion in annual revenues com- 52-Week Range 28.04 – 35.69 Berkshire Hathaway 9.0% ing in on a recurring basis. Other assets of Dividend Yield 0.0% Vanguard Group 5.5% note include the Eastman business park Clearbridge Inv 4.1% Market Cap $11.11 billion in Rochester, NY, a large business park in FPR Partners 3.3% Brazil, an intellectual-property portfolio, Financials (TTM): D.E. Shaw 3.2% Revenue $4.80 billion tax loss carryforwards of $1.6 billion and Operating Profit Margin 28.7% Short Interest (as of 9/15/16): tax credits of $400 million. Net Profit Margin 13.4% Shares Short/Float 0.9% Our thesis largely rests on the company monetizing assets and using the proceeds LSXMK PRICE HISTORY 20 to restructure and de-risk its balance 38 38 sheet. Using management’s guidance for operational EBITDA for 2016 of between 36 36 15 $130-$150 million, we consider debt-to- 34 34 EBITDA in an acceptable range, but the debt does carry a heavy interest burden. 32 3210 To give the most salient example of as- set monetization, Kodak is in talks to sell 30 30 its Prosper inkjet business, which should 28 285 generate $100 million in annual revenues 2014 2015 2016 this year and has been growing roughly 30% per year. Pro-forma for the cost syn- THE BOTTOM LINE ergies available to a strategic buyer, we Mid- to high-single-digit revenue growth for the satellite-radio business underpinning this think this business is on track to generate tracking stock can translate into mid- to high-teens growth in cash flow per share over sev- $35 million of EBITDA within the next eral years, says Mark Meulenberg. If that happens, on his estimates and at the high-teens multiple he believes would be warranted, the stock by 2020 would at least double. two years. At 4x EV/EBITDA, that would bring in $140 million of cash. At 7x, it

Sources: Company reports, other publicly available information would be $245 million. That one deal alone would save tens of millions of dol- company’s cash flow per share can grow at happens, the tracking stock discount dis- lars in interest payments and fundamen- a mid- to high-teens rate over the next sev- appears, which we have factored into our tally change the company’s risk profile. eral years. Even assuming a full tax rate, price target for LSXMK. What is not fac- that puts free cash flow at 40 to 45 cents tored in is the value of the wireless spec- We’re guessing this isn’t a position you ex- per share by 2020. trum Sirius holds, which could add sub- pect to hold for 7 to 10 years. An entrenched, subscription-based stantial upside to our current valuation. business with that kind of growth profile MM: Overall this is not a business we should trade for a premium to the market Leaving the Liberty ecosystem, describe want to be in for the long term. But when multiple, not at a discount as it does to- your interest in Eastman Kodak, which we bought in February we were paying $9 day. As we get closer to 2020, a high-teens we certainly haven’t heard much about in per share for what we thought on a bare- multiple would value Sirius XM at $7-8 recent years. bones basis was worth at least $17, and per share, which translates to $64 to $73 there were multiple levers to unlock value for LSXMK. We believe the two entities MM: That’s part of our attraction to it, in the short to intermediate term. could ultimately merge via a Reverse Mor- that it has long been forgotten. The com- ris Trust, which is a tax-efficient transac- pany emerged from bankruptcy in Sep- With the shares now at $14.70 is the story tion Liberty has used in the past. If that tember 2013. Its largest business is what still compelling?

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight INVESTOR INSIGHT: Mark Meulenberg

MM: Unless something fundamentally INVESTMENT SNAPSHOT changes, we’re very slow to sell out of core Eastman Kodak Valuation Metrics positions. Part of that reflects tax consid- (NYSE: KODK) (@9/28/16): erations for a private client base, but it KODK S&P 500 Business: Provider of hardware, software and also reflects our wanting to fully benefit P/E (TTM) n/a 24.8 consumables to commercial and consumer from great managers of great businesses printing markets; also owns significant real Forward P/E (Est.) n/a 18.4 compounding value. Our goal is to hold estate and intellectual property assets. Largest Institutional Owners core positions for seven to ten years, but Share Information (@9/28/16): (@6/30/16): more often it plays out over three to five. Company % Owned Price 14.67 In contrast, we typically hold special-situ- Blackstone Group 21.0% 52-Week Range 7.56 – 17.31 ations investments for six to 18 months. BlueMountain Capital 17.6% Dividend Yield 0.0% To answer your question, we have Franklin Resources 8.5% Market Cap $619.8 million trimmed our position in Charter Commu- Paradice Inv Mgmt 5.1% Financials (TTM): Contrarian Capital 4.7% nications [CHTR] quite a bit as the shares Revenue $1.71 billion have moved from our cost basis of about Operating Profit Margin 8.5% Short Interest (as of 9/15/16): $120 to $275. We still believe the stock Net Profit Margin (-0.5%) Shares Short/Float 1.9% will move higher over the long term so we aren’t completely out, but the return pro- KODK PRICE HISTORY 20 file is not what it was so the position size 25 25 is correspondingly smaller. We’ve also been reducing our position 20 20 15 in Absolute Software [ABT:CN], a Cana- dian company that makes theft-prevention 15 15 software. We liked the recurring revenues 10 and the clean balance sheet, but they’ve 10 10 been in the midst of a turnaround with- out a great deal of progress over the four 5 55 years we’ve owned the stock. We’ve made 2014 2015 2016 money on it, but couldn’t justify keep- ing a larger position because the IRR has THE BOTTOM LINE compressed as the time horizon has gotten Following a long downward spiral and eventual bankruptcy, it’s not surprising that the stretched. market is paying little attention to the company in its new incarnation, says Mark Meu- lenberg. He believes that if it can successfully monetize a number of disparate assets, the shares on a sum-of-the parts basis could be worth nearly double the current price. To borrow a phrase from Howard Marks, what do you consider “the most impor-

Sources: Company reports, other publicly available information tant thing” for investment success?

MM: I said our $17 value was bare bones, MM: Management has stated that they are MM: I think the most important quality meaning it valued both Print Systems and not expecting the need to make any more for someone managing people’s money is Prosper at 4x 2016 EV/EBITDA, at the contributions to fund the pension liability. to be unemotional. I played football for a very low end of their peer-group range. It Much of that has to do with the fact that time in college, and one thing you have to also assigned no value to the NOLs, tax the discount rate used to value the obliga- learn in sports is not to get too high or too credits, intellectual property or real estate. tions is materially lower than that of peer low. It’s all about how you perform on the If we use the higher end of the valuation companies. Just a modest change in the next play. ranges for Print Systems and Prosper, and discount rate would eliminate the liabil- Trying to keep an even keel I think include conservative values for the real es- ity. I’m not saying this isn’t a risk factor, helps prevent selling just out of fear when tate, NOLs and intellectual property, we but nothing about the assumptions being stocks go against you. It also helps keep can get to an aggregate value of about $27 made to meet the ultimate liability give me you from holding on out of greed when per share. heartburn. things have been going your way. This is an area where your work is never done. The pension is underfunded by about Give examples of positions you’ve sold re- Recognizing when emotion is biasing your $400 million, significant relative to the cently for both welcome and less-welcome thinking and then stopping it from doing market cap. How do you view this risk? reasons. so is a constant battle. VII

September 29, 2016 www.valueinvestorinsight.com Value Investor Insight Disclosures:

No Investment Advice

This reprint is furnished for general information purposes in order to provide some insight into the process and techniques that VNB Wealth Management uses to make investment decisions. It is provided for illustrative purposes only. Opinions and information provided are as of the date indicated. This material is not intended to be a formal research report, and as such, it should not be construed as an offer or recommendation to buy or sell any security, nor should information contained herein be relied upon as investment advice. Opinions and information provided are as of the date indicated. The statistics in the article were obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed.

This article contains commentary regarding a security that has been purchased by VNB Wealth Management on behalf of our clients. Indi- vidual account holdings may vary, and the views expressed herein may change at any time subsequent to the date of this article. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the security referenced in this article. The price and value of the security in this article will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed and a loss of all of the original capital invested in a security discussed in this article may occur.