Idea List: Issue #12
This week I analyzed TTEC Holdings and Curbline Properties
In this post I want to share two stock ideas that appear to be undervalued. These companies came from the “top of the funnel” of my research process, meaning they came from stock screeners, or recommendations from Twitter and Substack. What I want to do here is present some qualitative and quantitative metrics that determine if I should keep researching the stock or take a pass on it. Further, I want to do a basic valuation to verify that the company is actually undervalued. The end goal is to have some semi-vetted stock ideas that I can add to a watchlist and start doing more thorough research on.
TTEC Holdings
TTEC Holdings is a stock I saw in the Toff Monday Monitor, a list of special situation stocks. In the case of TTEC, theCEO owns 58% of the company and wants to take it private for $6.85 a share. The stock was trading around $4 a share and has moved up to a little below $6. This presents a merger arbitrage-like situation.
Before betting on the deal going through, I figured I should get a brief understanding of what the business does and how their financials look. It was hard to figure out what TTEC does by skimming their 10k because of the the jargon and marketing buzzwords, they mentioned AI a lot so I guess they are incorporating that. From what I gathered, it appears they do call centers and other outsourcing tasks for businesses.
The company has made several acquisitions in the last 5 years. As a result revenues have been growing at a high rate, but debt has ballooned. This year the company is facing headwinds in sales, their latest earnings release blamed it on businesses cutting spending to the services TTEC provides do to macroeconomic uncertainty. With so much debt, a decline in sales can put a company in a precarious position. I think another part of the story is that the market thinks AI will make companies like TTEC obsolete. On the other side of the coin, TTEC is touting their AI capabilities so who knows.
The stock peaked around $110 in 2021 and has declined ever since to $4 before the buyout announcement. Probably a good mindset with merger arbs is to buy when you think the company is still undervalued. From my quick observations,I don’t think I would want to own TTEC under normal circumstances.
Since the CEO has control there is no board approval for the deal, and there are no antitrust worries like a normal merger arbitrage. The CEO has to come up with about $115M in financing. Whether or not this arbitrage is a good play depend on how confident you are that he can get the financing. Assuming you buy at $5.85 you get a 17% upside, and if the stock drops back to $4 if the deal busts then you would lose 32%. Probability wise, you would need to be 75% sure the CEO can get financing. I’ll have to chew on TTEC since the last time I made a similar bet with Spirit Airlines it didn’t pan out too well. If I did buy TTEC I would make it a quite small position.
Curbline Properties
Curbline CURB 0.00%↑ is another stock I found from Toff Capital’s Substack, and is a recent spin off from SITE Centers Corp SITC 0.00%↑ . SITE Centers owns strip mall properties, where as Curbline is focused on “convenience real estate”. Convenience real estate are smaller retail strip properties that cater to quick customer interactions, opposed to a large strip center that has anchor big box stores. Think of the small strip that has a Starbuck, Verizon store, and a couple of other retailers. Curbline is the first REIT to be focused on this niche of properties.
Spin offs are (or used to be) a good source of undervalued stocks because often times the spun out company is smaller than the parent and in an unrelated line of business. The large funds that receive shares of the spun off company might not want it because it doesn’t fit their investment mandate, or they would rather focus on owning the parent company. This causes selling pressure for a period after the spin off, causing them to be potentially undervalued
Looking at Curbline’s properties, the new company has 78 properties distributed throughout the country, but an emphasis on the South West. The value of the properties on the June 30th balance sheet was $939M. Curbline was also spun out with $800M in cash, and they currently have no debt. The company has been acquiring properties for around a 6.5% cap rate. I’ll use this cap rate on their pro forma 2024 net operating income to estimate the actual value of their properties. The estimated NOI for 2024 is $88M, dividing by the 6.5% cap rate gets a value of $1.35B. Adding in the $800M in cash gets a value of $2.15B for the company. CURB currently has a market cap around $2.4B, so it appears slightly overvalued.
The company has no debt and a lot of cash and it looks like their strategy is to make a large amount of acquisitions of these types of properties. It seems like the stock is trading at a premium because there is this growth story of being the first and largest REIT in this space. That might be fine and dandy but I’m looking for beat down stocks and so far Curbline isn’t fitting the bill. Another point to note the way the spin off worked was that holders of SITC would get 2 shares of CURB for ever one share of SITC they owned. This resulted in CURB being bigger that SITC, so it appears this is the odd case where the spin off is larger and faster growing than the parent. Curbline could be a decent REIT to own, but I would rather buy it at a discount to its net asset value which might not happen any time soon.
Stocks mentioned: TTEC 0.00%↑ CURB 0.00%↑ SITC 0.00%↑
Thanks for the article. Now that $TTEC has dropped another 10% - have you changed your view? I am looking at peer $IBEX which trades almost 2x turns lower, appears to be more AI focused with net cash and returning to organic growth last quarter. They just bought back 20% of shares to take out their controlling shareholder so now its non-controlled for first time since going public.
Agree with your assessment on Curbline which is already valued at a 5.5% cap.
I assume we hear from the TTEC special committee within the next few weeks?