Value Investing Dow and S&P Drop by More Than 4%, Extending Stock Sell-Off

Dow and S&P Drop by More Than 4%, Extending Stock Sell-Off
Korea Aerospace Industries (047810 KS)
In general, how much time should someone spend researching a company before investing?
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A good read on how low vol increases gamma/convexity and can lead to shocks due to delta hedging.
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Dow and S&P Drop by More Than 4%, Extending Stock Sell-Off

Posted: 05 Feb 2018 02:11 PM PST

submitted by /u/Beren-
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Korea Aerospace Industries (047810 KS)

Posted: 06 Feb 2018 01:36 AM PST

Background

Only producer of military aircraft in South Korea
KAI currently manufactures 3 main products: 1. Surion helicopter, 2. T-50 trainer jet, 3. FA-50 Golden Eagle light strike fighter
Currently developing their own 4.5th gen fighter (K-FX) with support/technology transfers from Lockheed which is a superior model to the F-16, but lower cost vs. F-35
Korean government is indicating a total development project size of ~7b for the KF-X and production size of ~27B USD for an initial order 170 units of KF-X
FA-50 currently competing with Saab Gripen for orders from Botswana, Argentina, Thailand and Peru; FA-50 is materially cheaper than the Gripen (20-30%) but lacks the latter's air-to-air combat capabilities
T-50 is also in the running for the massive T-X program in the U.S., which is intended to replace the U.S. air force's current fleet of trainers, which is currently comprised of T-38 Talons (avg age 50 years)
Company also operates an aircraft parts business (supplier to Boeing/Airbus) which has been growing at 15+% for the last 3y

Investment Thesis

1) Secular trend towards remilitarization and increased defense spending - South Korea is in particular need for high-quality military equipment due to their history and location in the world

KAI will see growth in both domestic markets and overseas markets; military OEMs in more developed countries will only see growth from exports; as a result KAI has historically traded at a premium multiple to global peers

2) Half of South Korea's fleet is made up of aircraft developed in the '50s and '60s

A strong KAI is necessary for Korea's national security – the Korean government has been trying to build up their domestic military industry for the last 2 decades regardless of which party is in power
Out of 426 aircraft in the South Korean air force's inventory, 229 (or 52%) are due to be replaced in the next 5y – the Northrop F-5 make up 158 of the 229 and F-4 Phantoms make up the remainder, both models were developed in the '50s

3) Embedded earnings growth from confirmed projects due to where we are in project-life esp for K-FX

Two types of projects – development projects and production projects
For development projects, revenue is recognized based on percentage of completion for project
Development projects last 5-10 years; typically more progress is made in the middle stages of the project's life, so more revenue is recognized during that time
KAI won the K-FX development program in 2015, which will last until 2026

4) T-X program potentially worth more than 25% of current market cap

Co partnering with Lockheed for this bid; main rival is a clean sheet design from Boeing; experts give KAI / Lockheed consortium a 50% probability of winning; main advantages of KAI's bid is lower cost and higher reliability given long track record of the T-50
There have been 1,150 T-38s built since 1960; it is currently in service with the U.S., Turkey, Germany and Taiwan, among other countries
Assuming a similar number of T-50s are built, at a cost of 20M / unit, a KAI share of 70% and 10% operating margins, the entire program will be worth 1.1b USD to the company depending on the discount rate used, which is 25% of company's market cap

Valuation / Trade Recommendation

Historically traded at a premium to global peers
Global peers have rerated as expectations on military spending have gone up since the Trump regime came to power
Company suffered from some one-time (political) issues in 2017 which resulted in temporarily depressed margins; normalized operating margins should approximate 8%
Currently company trading at mid-teens normalized 2018 earnings (which excludes any export wins or T-X) vs. mid 20s for peers, for a higher and more reliable growth profile
Excluding T-X, there should be 20% upside if KAI were to trade in-line with peers
Current valuation also does not price in any probability of T-X win; a 50% probability will result in 10% upside from current prices for a total upside of 30%
We believe that the market will start pricing in probability of T-X win once the company reports Q4 results on Feb 14th; Q4 results will be weak, but removal of this overhang will cause people to start looking forward
Trade is to go in following earnings and get out before confirmation of winner of the bid, which will be in Q2 2018

submitted by /u/pershingcubed
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In general, how much time should someone spend researching a company before investing?

Posted: 06 Feb 2018 03:49 AM PST

Hey, i've been learning about investing (mainly books and Martin Shkreli's finance videos on YT) for quite a while now, and been interested in business and investing the moment I learned they existed.

Would just like to know how long you guys spend researching stocks before investing :) .

submitted by /u/Eckonomix
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Starboard Value Letter to Mellanox

Posted: 05 Feb 2018 11:17 PM PST

submitted by /u/Beren-
[link] [comments]

RIP Ian Cumming

Posted: 05 Feb 2018 05:36 PM PST

https://www.sltrib.com/news/business/2018/02/02/financier-utah-ski-resort-owner-and-democratic-activist-ian-cumming-dies-in-wyoming-at-age-77/

I pulled the Colonial Penn deal details mentioned in the article from some old 10-k's

From 1991: on August 16, 1991, the Company acquired Colonial Penn Group, Inc. ("Colonial Penn") for cash of approximately $128,000,000

From 1997: During 1997, the Company sold its Colonial Penn insurance operations in two separate transactions. In September 1997, the Company sold its life insurance subsidiaries, Colonial Penn Life Insurance Company ("Colonial Penn Life") and Providential Life Insurance Company ("Providential Life") and certain related assets, including its health insurance operations (the "Colonial Penn Life Group"), to Conseco, Inc. ("Conseco") for $460,000,000. The price consisted of $400,000,000 in notes maturing on January 2, 2003 collateralized by non-cancelable letters of credit and $60,000,000 in cash. As a result of the sale, the Company reported a pre-tax gain of approximately $272,000,000. For calendar year 1996, the operations sold, which principally consisted of the sale of "graded benefit life" insurance policies through direct marketing and agent-sold Medicare supplement insurance, accounted for revenues of approximately $230,000,000 and pre-tax earnings of approximately $48,000,000.

 In November 1997, the Company sold the property and casualty business of

Colonial Penn Insurance Company and its subsidiaries (the "Colonial Penn P&C Group") to General Electric Capital Corporation ("GECC") for total cash consideration of $1,018,100,000, plus $14,300,000 for retention of certain employee benefit liabilities. As a result of the sale, the Company reported a pre-tax gain of approximately $590,000,000. For calendar year 1996, the Colonial Penn P&C Group, the primary business of which is providing private passenger automobile insurance to the mature adult population through direct response marketing, had revenues of approximately $592,000,000 and pre-tax earnings of approximately $70,000,000.

submitted by /u/Jsqfunk
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A good read on how low vol increases gamma/convexity and can lead to shocks due to delta hedging.

Posted: 05 Feb 2018 07:42 PM PST

submitted by /u/PhiAlpha1857
[link] [comments]

Fairfax poised to acquire core businesses of embattled Carillion Canada

Posted: 05 Feb 2018 10:12 PM PST

submitted by /u/lingben
[link] [comments]

Capital IQ or The Bloomberg alternative.

Posted: 05 Feb 2018 04:46 PM PST

Is there a cheaper alternative to Capital IQ or The Bloomberg where you can gather market data based on specific criteria?