A profitable investor once said: "If you can't take a 50% drop in your stock, you shouldn't be investing." He should know. Once he closed his hedge fund and went all-Berkshire Hathaway (NYSE: BRK-B), he watched the stock drop from $80 to $40 from the end of 1972 to the end of the 1974 crash.
He bought hand over fist for his investors to see the stock more than triple in three years, jump eight times in five, 32 times in 10, and on and on. Buffett discussing that time describes himself more colorfully than a family site such as ours permits quoting, but let's paraphrase that he felt like a randy man in a harem because the investing opportunities were so great.
Back then, when Buffett's Berkshire could still buy undervalued small caps, nuclear waste treatment and disposal company EnergySolutions (NYSE: ES) after Monday's 55% collapse could well have been in the harem. For investors today, I think it's a 1974-style or March 7, 2009, buy, the kind many will look back on and wish they'd bought.
Surface and depth
Let's keep this simple, because the important thing here is that there is no fundamental reason for the decline in EnergySolutions shares for the investor who can look ahead a year, let alone several.
Superficially, the headline is all it took for the sell-off. The company replaced its CEO and CFO and reduced 2012 adjusted EBITDA guidance from $150 million-$160 million to $130 million-$140 million. To those who do not know a company well enough to examine the CEO, CFO and guidance, this means "fire in the hole!" Especially in 2000-02 but ever since, people think "this is just the start, get out now!" Investors have sold first and asked questions later, if at all. Let's ask the questions first.
The new guys
Largest shareholder and activist investment firm ValueAct's board representative, David Lockwood, will take over as CEO with a focus on shareholder value. He's on our side, not least because he is required to buy $3 million in EnergySolutions out of his own pocket. I don't care who you are. If you work for a living, that's a lotta scratch.
Lockwood's been on the board since 2007, was among other things a managing director at Goldman Sachs prior to ValueAct, and clearly knows EnergySolutions' business inside and out. Both the new CEO and CFO are directors at piano maker Steinway, a company ValueAct hopes to turn around. It's not yet performing grandly but is better-tuned and playing higher-quality music. We can assume the experience they have together there puts them in harmony.
The Monday conference call to explain the actions was calm and factual. The company's government contracts business is down, but that's hardly unexpected in these times. EnergySolutions is the domestic leader and growing international power in dealing with nuclear facilities' messy fuel-handling issues.
The investor willing to look beyond today's ADD world can see that government nuclear facilities can't store their low-level nuclear waste on site forever, and sooner or later they will ramp up with their longtime vendor. The reduction in adjusted EBITDA returns the company to a level of a few years ago and hardly to distressed levels given the company's overall business with long-term contracts and predictable cash flows to service debt. Loss of large international customer Magnox at contract renewal in 2014 appears more than priced into the stock today.
Cheap got cheaper
Applying the company's new guidance, the stock today trades at fewer than 4.5 times enterprise value to forward adjusted EBITDA. This is the low level where private equity firms or larger companies seeking business integration circle the vulnerable prey -- probably more the latter because private equity firms prefer low-debt companies they can lever up.
So this is a company valuable to a buyer, but investors should prefer the potentially enhanced value from any return to a normalized business with the government and international and commercial growth potential. Management on the Monday conference call said they had bagged exploring a sale of part or all for now, commenting specifically in trade reports that they were.
A view based on deep analysis of the company's financials -- something most can't or won't do due to the accounting complexities of the long-term contract for decommission at the Zion nuclear power plant -- shows the long-term sustainable advantage of this company's unique treatment and disposal assets.
Sell-offs are never easy
EnergySolutions is but one of many companies sold off on company actions that may or may not have a long-term effect on the business and can hand us once-in-a-lifetime, or at least years, opportunities. Though EnergySolutions is a value stock, this can apply to growth stocks as well, such as major well-known stocks plummeting over the last year, such as Netflix (Nasdaq: NFLX), Green Mountain Coffee Roasters (Nasdaq: GMCR), and more recently salesforce.com (NYSE: CRM), and more.
Was Netflix's pricing and service botch last summer a bump in the road or a more fundamental problem? Was Green Mountain's crash more a fixable problem or the earnings quality dodo coming home to roost? Is salesforce.com really unable to get its SG&A in line with its business churn and growth; was its notorious spending on an expensive San Francisco campus only to bag it and lease even more relatively expensive space a one-time management waste of capital or a smart positioning for the future? The growth investor has a tougher choice but with sexier growth. The value investor has an easier time evaluating the downside but with less of a price-to-dream ratio.
Pay little for a call option
Indeed, EnergySolutions has such a low downside today the upside comes practically at no risk, as if we could buy a call option with no expiration and paying next to nothing. The stock price may or may not be at a higher price in a day, month, year, or five years, but the investor with the stomach to see more than the herd running away may well join the happy few who heed and profit from what no one has put better than value giant Sir John Templeton:
If you buy the same securities as other people, you will have the same results as other people. It is impossible to produce a superior performance unless you do something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.
Buy, sell or hold? If you buy this article, then gird your loins. And I've put my money where my mouth is: EnergySolutions is a buy to look back on happily years from now, and I'm in.
