A commodity business with not-so-commodity dynamics at 4× EV/FCF

Nearly two years ago, Cathie Wood made a tweet highlighting her fund’s terrible performance in a comical way. By portraying the losses as deferred tax assets, she argued that tax losses were an “underappreciated asset” associated with her strategy. As ironic as this is, the case of using deferred tax assets in turnaround situations presents unique opportunities, such as my newest addition to the portfolio.

The company acts as a distributor of specific goods for construction, infrastructure, and shipbuilding. Following a successful turnaround several years ago, the business is left generating significant cash flows even at bottom-of-the-cycle conditions. Due to the deferred tax assets and net cash position, practically all of EBIT ends up as net profit for the next five to six years. Conservative assumptions indicate that the company will generate its entire market cap and enterprise value in free cash flow over that time period, while aggressive share buybacks, dividends, and value-accretive acquisitions act as catalysts. The management team is incentivized to create value, especially through smart capital allocation.