Happy New Year – FLIR Systems Acquired by Teledyne

A good way to start the new year is having one of your companies acquired.

FLIR Systems (Nasdaq: FLIR) was a recipient of a credible takeover offer. It was the first company on the S&P 500 that I made an investment in quite some time. FLIR is one of the smaller components of the index, with a market capitalization (before today) of about US$6 billion.

While I first wrote about it all the way back in 2011, I only bought shares in the company in 2020 during the COVID crisis. FLIR’s niche is in infrared imaging systems, but they have also expanded into military UAV operations. IR imaging technologies will continue to have great use in civilian and military applications.

Assuming the deal goes through, the investment will be about a 70% gain in the past 9 months.

The acquiring company is Teledyne (NYSE: TDY), another S&P 500 component which is a somewhat more diversified manufacturer of instruments and imaging equipment. Their imaging specialties in almost everything other than IR applications, including X-Ray, UV, but also long-band (microwave and RF). The acquisition is quite complimentary in nature and while I wasn’t initially thinking of Teledyne as being an acquirer, there is a certain amount of logic to the acquisition.

The offer was US$28 in cash and 0.0718 in TDY stock per FLIR share, which works out to a total of US$56 per share at TDY’s previous market value. The market does not appear to like the acquisition, however – TDY stock is down about 9% as of this writing, so the total value at present for FLIR holders, minus merger arbitrage, is about US$54/share.

Teledyne, before this acquisition, was relatively conservatively managed. In the past months of 2020, free cash flow was about US$330 million. They also announced preliminary 2020 results with GAAP earnings of about $10.30/share (US$380 million plus $32 million of restructuring, so FCF of ~US$412 million) and they also guided that the net debt position will be US$115 million (their Q3 balance sheet had approximately $450M cash, and $790M debt, so talk about good Q4 collections!).

The industry that Teledyne participates in is relatively stable. Probably the reason that their stock is trading down is because this is a relatively large acquisition in relation to their size, and the leverage on their balance sheet will bloat considerably from their historical norms. When adding FLIR’s earning power, the combined entity is still in relatively comfortable position.

FLIR’s most recent debt issue, an August 2030 unsecured bond with a 2.5% coupon, is still hovering around a 1.9% yield to maturity. The debt market appears unconcerned.

Looking at the Teledyne stock, my real quick paper napkin valuation has the combined TDY entity at around GAAP $12/share earnings, and on a US$358/share price, which gives it a current earnings of 30 times. With the leverage of an additional $4 billion in debt on the balance sheet, while this isn’t ridiculously high, it isn’t what you would consider cheap.

I’ll likely be selling at some point in the future when I’ve identified a better candidate for my USD. The half-exposure to TDY stock is acceptable for now. In the meantime, my current holdings of FLIR effectively is a happy capital parking position.

Year-end review, commissions year to date

It’s usually good to pay attention to trading fees and make sure they are reasonable. Determining trading execution quality is the difficult part of the equation (and I do not have a way of measuring this), but the other side is trading commissions. Commissions are also a reasonable proxy for trading activity.

Let’s set 2019’s entire trading commission paid as 4X.

Thus, an average quarter’s commissions paid in 2019 was X.

Here is the series of commissions paid in 2020:

Q1-2020: 1.54X
Q2-2020: 1.48X
Q3-2020: 0.56X
Q4-2020 (year to date): 0.35X

I’ve been mostly sitting on my thumbs for the second half of the year and for the most part am happy I have done so.

Any of my readers out there would like to comment on your relative activity level for this wild 2020 year?

Tax-loss selling / Atlantic Power

One obvious tax-loss selling prospect was Atlantic Power (NYSE: AT / TSX: ATP).

I can see people thinking to themselves… “I’ll crystalize a loss today, and then 30 days later after the wash sale period, I’ll buy back!”

The market has ways of tricking people:

Today was the highest volume day (over 2 million shares on the American exchange) since June 26, 2020 (which was another conspicuous end-of-quarter date) where over 5 million shares traded.

Days like today tell you what the true liquidity of the stock is.

I’m guessing some portfolio managers are trying to dump this out of their portfolios because it has been a dog on price.

Better times will be had ahead in 2021.

What to do if the Robinhood traders grip one of your stocks

Perhaps my most speculative holding is Centrus Energy (AMEX: LEU). I wrote about their predecessor back in 2013 (they went through a recapitalization and name change) and have been keeping track of them ever since.

I won’t get into the investing thesis (or valuation) but LEU is a uranium processor for nuclear fuel. They originally took nuclear missile warheads and reprocessed their uranium cores into fuel for nuclear power plants, but now they obtain their raw material through Russian and French sources.

However, given the current hype on anything nuclear-related, and especially considering that LEU is one of the few publicly traded companies that are into such businesses, over the past couple months they have received obvious retail activity:

We look at the chart and see a stock that has more than doubled, but also with a serious amount of stock volume (after the secondary offering, there is a float of about 11.3 million shares). Examining the social media, we see that there is clear retail activity.

During these periods of retail mania there are extreme ups and extreme downs. You see this in any stocks that were relatively inactive but then gain a mass following – the daytraders, speculators and short-term technical traders dive in, and then it causes intensive volatility when they jointly decide to buy and sell. These ups and downs are very difficult (if not impossible) to time, but this is where you get people on Youtube making daytrading videos as they scale in and out of such positions.

Sometimes it is right to bail out in these situations, and sometimes you just have to hold on for dear life and get used to the notion of seeing a position in your portfolio gravitate 10% a day. I guess we’re all Bitcoin holders these days, even when we’re not holding them.

AcuityAds Holdings – Part 2

Merry Christmas and Boxing Day everybody.

I can’t get enough of looking at AcuityAds (TSX: AT), which is one of the best TSX performers of the year.

I gave some brief thoughts back in October, questioning the $200 million market capitalization, but fast forward a couple months and look what happened – they quadrupled again!:

Look at the huge amount of volume since December 14th (quadruple over the previous few months of trading). Obviously this got on the radar of the daytraders and pancake flippers, but the straight-line accumulation since July looks to be a steady algorithmic “buy a little bit each day” without regards to price.

On November 16, 2020 the company did a bought deal offering (roughly 3.8 million shares with greenshoe) at $6.10, partly from the treasury and mostly from insiders.

Even the insiders sound surprised at all of this price action, which they been selling willy-nilly since September for roughly $3.50/share. One insider recently got out at $20.69/share, which was pretty damn good market timing considering he cashed out 500,000 shares out of his 542,462 share ownership at the time of sale.

Just imagine if you were one of those people that purchased the stock on December 21st for $22/share. Right now you’re sitting on a loss of 22% for four days of effort.

This is how volatility looks at market peaks. I’m not saying this will not go any higher and resume the course along the blue line that I drew on the chart above. But it is instructive how these kinds of stocks trade.

Note this post is devoid of any fundamental analysis of the company itself – I have no idea whether their technology warrants such price action or not. It could be the case they are the next Google. You’d never see it by reading their financial statements.

Suffice to say, no positions. Also, don’t take advice from people holding the much-worse performing (NYSE: AT) either.