Last week’s post looked at the spinoff from Xerox called Conduent. The new company trades as CNDT. Since last week’s post, CNDT rose 48 cents representing a 3.4% increase in value over the week. If you want to see the first post look here. This week’s post will look at the cash flows for the company and consider some of the motivations of those in charge of the company. This post will attempt to determine the appropriate value of the company per share.
I sit on a lot of boards…I don’t have to watch Saturday Night Live anymore, I just sit at the board meetings. I will tell you it’s a sad commentary that we have an inability to compete. You can blame unions to some extent. But the real problem is that boards – there’s a symbiotic relationship between boards and CEOs today. And as a result, there is no way to hold these guys accountable except when someone like myself comes along or some other person who is really well to challenge them. But you have to go through contortions. There is no corporate democracy. –Carl Icahn
According to ValueLine, the business represented in CNDT for the spinoff is the growth business for Xerox (XRX). Icahn is one of the main shareholders at XRX, and as a result, he cares that the company makes its shareholders money. Icahn and another major shareholder Darwin Deason are the main beneficiaries of the CNDT spinoff. Before looking at the price, let us see what kind of deals Icahn and Deason received from this spinoff.
Vincent Intrieri, Courtney Mather, and Michael Nevin are all connected to the Icahn Group. This means that on the eleven member board, Icahn has three individuals placed in order to protect his interests. The Form 10 filing also notes that Icahn will maintain one seat on the board at XRX post spinoff. His interests represented 9.8% of XRX pre-spinoff. In the Form 10 filing, he required XRX to spinoff CNDT no later than March 2017. He also requires special benefits to individuals holding more than
Deason, like Icahn is a self made billionaire. In October, he filed a complaint with the courts alleging that the spinoff would violate certain provisions of Xerox’s Certificate of Incorporation. His stake in XRX represented 6.1% pre-spinoff. Deason dropped his charges against XRX with an exchange agreement where he relinquishes 300,000 shares of preferred stock in XRX for 180,000 shares of XRX preferred and 120,000 shares of CNDT preferred after the spinoff. The payout of these shares is 8%. These preferred shares have a conversion right at any time to get 44.9438 common shares per one preferred share of CNDT. This reflects a conversion price of approximately $22.25. Mr Deason has given himself a beautiful golden parachute in this spinoff. He is probably trying to protect his cash flow from the preferred shares that he had with the XRX preferred investment. His actions indicate that the real value is in CNDT’s business, not XRX. Why else would he insist on a 40% stake in his preferred holdings when everyone else gets 20%? It is possible that he wants to use the conversion rate which is much higher than the current price-considerably higher, like almost 50%.
Deason and Icahn both appear to be jumping on the CNDT bandwagon. It appears that this is where the money is to be made. This, coupled with the statement by ValueLine that the company represents the growth segment of XRX’s business pre-spinoff, does make it that much more attractive.
There are many places to look for value on a stock. Price to earnings ratios are one. Personally, the best pulse on a company comes from operating cash flows. This is typically an erratic number, but it has less to do with taxes and more to do with actual cash coming into a company. In the case of CNDT, the company’s net income according to Form 10 was (414)M in 2015, (81)M in 2014, and 182M. The company therefore has started its life with a negative earnings track record. However, the company’s operating cash flows over the past three years has been 493M, 665M, and 379M-all positive numbers even with a 216M charge for recent litigation in 2015. On a per share (anticipated number of 202.8M shares) basis this means CNDT’s current price to past cash flow was between 4.4 and 7.7 over the past three years. CNDT’s most recent price to cash flow is 5.9. Even at the high end of this range, the company trades in the bottom 10% of the market on a per share valuation with the average valuation over 16 times cash flow.
Reasons for Buying
The market’s reaction to CNDT is weak, it appears to have little interest in this next generation growth stock. The thing that makes me interested is that 9.77% of its shares are owned by institutional investors however Darwin Deason, Carl Icahn, and the CEO Ashok Vemuri all have vested interest in its success. When the institutions begin purchasing the company’s shares it should rise dramatically. After this analysis, I plan on investing in CNDT. I am looking at about 1/8th of my portfolio to be exposed to this stock at less than $15/share. This is with an expected 2-4 year holding time.