TURN preview and long overdue posts schedule
Catching up
It has been nearly a month since my last Stock Talking post and I have no shortage of posts lined up - Q1 earnings (CROX, TGH, NOW, AAPL, LADR and more), the Berkshire meeting (attended live for the first time) and TURN’s buyback announcement. I want to cover that last one quickly as this week has had two announcements on it and another activist letter on COM:
TURN also had its annual meeting on May 9th, which I have not reviewed yet.
So I owe everyone a few posts. For today, a few quick thoughts on TURN:
On Wednesday (5/10), TURN announced it has purchased 373,679 shares at $4.41 - this is a ~3.5% buyback (last share count was a little over 10m+). The announcement IMO was notable since TURN has always said no to buybacks in the several years since I owned the shares, arguing they can invest the capital in smallcaps at a higher return. Rendino addressed this logic directly, basically saying the discount is so wide it can’t be ignored:
“In prior shareholder calls, we have discussed the high bar for use of 180’s permanent capital to buy back its own stock or to issue dividends,” said Kevin M. Rendino, Chief Executive Officer of 180. “When we invest shareholder capital in a new portfolio company, we must believe, if our investment thesis comes to fruition, there is at least 100 percent upside within 3 years. Once we use permanent capital to buy back stock, recycling that cash is no longer possible, and therefore, the hurdle rate for executing a buyback is high. Following our positive preannouncement for Q1 2023 results in early April coupled with the subsequent decline in our stock to a level that is a significant discount to our NAV, we have crossed that bar. Our repurchase of 373,679 shares reduces our shares outstanding to 10,000,141. The repurchase of that stock at $4.41 is immediately accretive to 180’s net asset value, and we will continue to be opportunistic when it comes to further repurchases of 180’s stock and/or distributions to shareholders. We have the luxury of being able to consider and execute on such paths given the strength of our balance sheet that is primarily cash and securities of public companies.”
One way to read this is that the minimum return threshold for an investment in another company for TURN is 100% over 3 years, or a 26% IRR. Therefore, TURN must believe their own stock at its current discount is above a 26% IRR.
We got another announcement on Thursday that the company was authorized for $5m more in buybacks by the board. I don’t really put much stock in authorizations unless companies use them, and IMO the way to read this is the company has the option but not the responsibility to buy back ~10% of its shares. It clearly liked them at $4.41.
We don’t know what current NAV (UPDATE - we do, it’s $6.22) it but the press release notes it was $6.52 as of 3/31. If you use those numbers, the discount to NAV is 32.3% (29% at updated figure). At first glance, this might look “too low” based on the previous 26% IRR number, but remember that repurchases increase NAV/share - I outlined this in a post from Jan 2022 coincidentally titled “What if TURN did a $6.8m buyback?” That post outlines how buybacks cause NAV discounts to increase if the stock doesn’t move up.
One easy example here - assume a company trades at a 50% discount to NAV (NAV is all cash for simplicity) and has two shares at $25 and a market cap therefore of $50 (so NAV is $100). If a company buys back one share, they spend $25 on buybacks; NAV is now $75. However, assuming the stock price didn’t change, market cap is now $25 (1 share * $25) and the discount is now 1 - (25/75) or ~67%. Without price going up, buybacks at discounts beget wider discounts.
So, unless we see TURN stock move up, the impact of these buybacks is to widen the discount. I am still not clear why the discount is attractive to TURN now versus previously, as it doesn’t seem historically wide at 29%.
As a reminder, here is the discount to NAV over time:
UPDATE: I wrote this post without seeing that TURN just released a deck for the call this morning at 9AM - it looks like NAV was $6.22 as of 4/30. This deck at first glance looks very similar to the Q1 deck from early April excepting a slide on the buyback announcement and the new NAV figure.
We will see what happens on the call.