Indirect Investing
One of the themes that has come up with several companies I'm thinking about or have recently bought is the notion of the "indirect investment", by which I mean the purchase of a company in order to get access to the earnings (or growth,or whatever) of a subsidiary or related company -- either at a discount, or because the subsidiary isn't separately traded, or just for diversification in getting two significant businesses in one package.
Cypress Semiconductor (CY) fits this idea nicely, and I own a few LEAP options in the shares and remain tempted to buy the common stock -- it's a downtrodden semiconductor company which the market doesn't like at all. They haven't had particularly nice margins of late, or anything else to make the Street stand up and cheer, and short sellers are holding about 10% of the float.
Most importantly in my opinion, though, many years ago they bought a tiny company that had technology and designs for manufacturing solar cells, and built manufacturing capacity for that company. They've since IPO'd part of that solar company, called SunPower Corporation, but they still own about 70%. And today, though Cypress is the parent, Both companies trade at similar market caps, with SunPower's enterprise value of about $2.5 billion and Cypress at about $2.6 billion.
So that means, if you buy Cypress you're getting $1.75 billion of SunPower, which means you get the semiconductor business for substantially less than a billion dollars. Now, whether or not the semiconductor business is worth more than that is another question -- but even though it's not growing as fast as solar, there is certainly a market. The Semiconductor Industry Association (they're unbiased, right?) reported 9.2% growth year over year in January, so if Cypress was a proxy for semis as a whole you might be tempted. They do work in many different segments of the semiconductor marketplace, so perhaps there's an argument to be made there.
This may be too widely understood an "indirect investment" to make any money from, especially since Cypress has resisted "unlocking the value" of their SunPower subsidiary by selling it or spinning it off ... Cypress is probably already trading primarily on the value of their SunPower holdings.
In solar power, there's another way that I've held on to a somewhat indirect investment, too -- my shares of MEMC Electronic Materials (WFR) were initially bought because they were cheap, the share price didn't reflect the great position they held in the semiconductor wafer business because of their integrated supply chain and good supply of polysilicon in a tight market. But one of the reasons I've held the shares after a huge advance,and in the face of an uncertain balance between burgeoning silicon supply and hopefully booming demand, is their growing exposure to solar power -- including warrants to purchase five percent of Suntech Power (STP) that they received in exchange for a long-term silicon supply agreement. That doesn't yet move the needle at WFR, but it could very well do so in the future -- or at least cushion any blow from a slowdown in semiconductor demand, should it come.
Moving away from silicon, Naspers (NPSN) is another investment along these lines -- I bought shares recently, and while I like the cash generation of their core media (South African newspaper and pay tv) assets, what I really like is the growth potential of their partially owned division, Chinese IM leader (with the QQ product) and portal company Tencent, and their acquisition spree in emerging markets media and internet companies.
The impact on the market cap is big here, too, since Tencent is roughly a $6 billion company and Naspers owns about 36% ... and NPSN itself has a market cap of about $7 billion, so roughly a third of Naspers' market cap is attributable to their not very profitable (in earnings terms) Tencent holdings, which significantly depresses the company's PE ratio and makes them seem a bit more expensive than they really are.
Tight relationships among corporations can give us opportunities to do this kind of investing in nearly any industry -- Ship Finance Limited, a company I've owned in the past, gets an indirect ride on the profits of former parent Frontline. They own Frontline's ships and get a steady lease rate for them, which they churn out as a high, steady dividend yield ... but if the tanker business takes another turn up they'll get a bonus from a profit sharing agreement whereby they get a portion of all profits over a set level on their tankers. Which is probably why the shares are just about at all time highs while the more leveraged Frontline languishes on the currently tepid prognosis for tanker rates.
This kind of investing is not unusual, of course -- a lot of what professional investors do is try to find hidden values in the companies they're interested in, and many arbitrageurs spend their days figuring out which companies are likely to move to unlock those values in a particular time frame.
Other examples abound -- buying Roche a few years back to get a cheaper bid on the future of Genentech comes to my mind as one example ... and in a related way, biotech and other IP-heavy industries also give us the opportunity to invest in companies because of royalties they receive from successful or promising products.
Using the Genentech example again, this might mean buying PDL Biopharma (PDLI) because of the humanized antibody royalties they get from several of Genentech's big products, including Avastin and Lucentis (though PDLI also has its own issues, including a looming fight with a big investor about their spending habits).
Whatever your focus, it sometimes pays to look a little deeper into the companies that interest you -- maybe the companies that don't appear to be publicly traded are really available for investment as subsidiaries of others, or maybe the shares that look a little too pricey are hiding an unusual gem.
full disclosure: I own shares in Naspers, MEMC Electronic Materials, and PDL Biopharma, and call options on Cypress Semiconductor. I have no position in the other companies mentioned.
Cypress Semiconductor (CY) fits this idea nicely, and I own a few LEAP options in the shares and remain tempted to buy the common stock -- it's a downtrodden semiconductor company which the market doesn't like at all. They haven't had particularly nice margins of late, or anything else to make the Street stand up and cheer, and short sellers are holding about 10% of the float.
Most importantly in my opinion, though, many years ago they bought a tiny company that had technology and designs for manufacturing solar cells, and built manufacturing capacity for that company. They've since IPO'd part of that solar company, called SunPower Corporation, but they still own about 70%. And today, though Cypress is the parent, Both companies trade at similar market caps, with SunPower's enterprise value of about $2.5 billion and Cypress at about $2.6 billion.
So that means, if you buy Cypress you're getting $1.75 billion of SunPower, which means you get the semiconductor business for substantially less than a billion dollars. Now, whether or not the semiconductor business is worth more than that is another question -- but even though it's not growing as fast as solar, there is certainly a market. The Semiconductor Industry Association (they're unbiased, right?) reported 9.2% growth year over year in January, so if Cypress was a proxy for semis as a whole you might be tempted. They do work in many different segments of the semiconductor marketplace, so perhaps there's an argument to be made there.
This may be too widely understood an "indirect investment" to make any money from, especially since Cypress has resisted "unlocking the value" of their SunPower subsidiary by selling it or spinning it off ... Cypress is probably already trading primarily on the value of their SunPower holdings.
In solar power, there's another way that I've held on to a somewhat indirect investment, too -- my shares of MEMC Electronic Materials (WFR) were initially bought because they were cheap, the share price didn't reflect the great position they held in the semiconductor wafer business because of their integrated supply chain and good supply of polysilicon in a tight market. But one of the reasons I've held the shares after a huge advance,and in the face of an uncertain balance between burgeoning silicon supply and hopefully booming demand, is their growing exposure to solar power -- including warrants to purchase five percent of Suntech Power (STP) that they received in exchange for a long-term silicon supply agreement. That doesn't yet move the needle at WFR, but it could very well do so in the future -- or at least cushion any blow from a slowdown in semiconductor demand, should it come.
Moving away from silicon, Naspers (NPSN) is another investment along these lines -- I bought shares recently, and while I like the cash generation of their core media (South African newspaper and pay tv) assets, what I really like is the growth potential of their partially owned division, Chinese IM leader (with the QQ product) and portal company Tencent, and their acquisition spree in emerging markets media and internet companies.
The impact on the market cap is big here, too, since Tencent is roughly a $6 billion company and Naspers owns about 36% ... and NPSN itself has a market cap of about $7 billion, so roughly a third of Naspers' market cap is attributable to their not very profitable (in earnings terms) Tencent holdings, which significantly depresses the company's PE ratio and makes them seem a bit more expensive than they really are.
Tight relationships among corporations can give us opportunities to do this kind of investing in nearly any industry -- Ship Finance Limited, a company I've owned in the past, gets an indirect ride on the profits of former parent Frontline. They own Frontline's ships and get a steady lease rate for them, which they churn out as a high, steady dividend yield ... but if the tanker business takes another turn up they'll get a bonus from a profit sharing agreement whereby they get a portion of all profits over a set level on their tankers. Which is probably why the shares are just about at all time highs while the more leveraged Frontline languishes on the currently tepid prognosis for tanker rates.
This kind of investing is not unusual, of course -- a lot of what professional investors do is try to find hidden values in the companies they're interested in, and many arbitrageurs spend their days figuring out which companies are likely to move to unlock those values in a particular time frame.
Other examples abound -- buying Roche a few years back to get a cheaper bid on the future of Genentech comes to my mind as one example ... and in a related way, biotech and other IP-heavy industries also give us the opportunity to invest in companies because of royalties they receive from successful or promising products.
Using the Genentech example again, this might mean buying PDL Biopharma (PDLI) because of the humanized antibody royalties they get from several of Genentech's big products, including Avastin and Lucentis (though PDLI also has its own issues, including a looming fight with a big investor about their spending habits).
Whatever your focus, it sometimes pays to look a little deeper into the companies that interest you -- maybe the companies that don't appear to be publicly traded are really available for investment as subsidiaries of others, or maybe the shares that look a little too pricey are hiding an unusual gem.
full disclosure: I own shares in Naspers, MEMC Electronic Materials, and PDL Biopharma, and call options on Cypress Semiconductor. I have no position in the other companies mentioned.
This article posted by One Guy @ 3/06/2007 10:24:00 AM 0 comments
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