A number of folks got together to create a business that would take advantage of a crypocurrency protocol known as bZx that was supposed to be super-duper secure, or, as they put it, no depositor of cryptocurrency should “ever worry about … getting hacked or [anyone] stealing [their] funds.” Of course, that’s exactly what happened: Using a simple e-mail phishing scam, hackers were able to get into one of the bZx developer’s accounts and obtain passphrases which allowed the hackers to steal about $55 million worth of cryptocurrency. This by itself is not remarkable, as hardly a week goes by that I don’t read some article or another about millions in losses due to the hacking of cryptocurrency accounts. But let’s continue, as this eventually becomes very interesting.
The bZx folks did not make good the losses, and so some of the depositors started a class action lawsuit in the U.S. District Court for the South District of California. But who to sue? The bZk protocol isn’t a real person or even a recognized legal entity, but instead is what is known as a de-centralized autonomous organization, known as a “DAO” and which one might describe as sort of a financial anarchy where ultimately nobody claims ultimate responsibility — kind of a legal mist if one wants to think of it that way.
Fortunately for these depositors, the law doesn’t think in terms of either financial anarchy or legal mists, but instead operates to sort things out into discrete pigeonholes. Everything in the legal world goes into one pigeonhole or another; if something doesn’t seem to fit into any particular pigeonhole, particular because it is something new, then the law operates to cram it into a default pigeonhole anyhow, which might be characterized as something like a miscellaneous pigeonhole with a sign above it that says, “Everything else goes here.”
When it comes to business organizations, that default pigeonhole is the general partnership. If something is a business organization, but it is not a corporation, limited liability company, limited partnership, statutory trust (or one of several types of exotic entities), then what the law sees is a general partnership. Or, going back to our sign, everything else goes into the general partnership pigeonhole.
For folks involved with them, general partnerships are bad news for the reason that everybody involved with the entity is deemed to be a general partner, and general partners are generally liable for the debts and liabilities of the partnership. Contrast this with corporations, where the entity itself has liability but the shareholders do not. Contrast this with limited liability companies where the entity itself has liability but the members to not. Even contrast it with a limited partnership where the limited partners have no liability, but the entity itself and only the general partners have liability. With a general partnership everybody is legally responsible for the debts and liabilities of the entities.
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Thus, what the depositors alleged is that the bZx de-centralized autonomous organization is, for legal purposes, just a general partnership. That means that everybody who was involved with the bZx DAO is potentially on the hook for liability. When the depositors sued, they just sued pretty much everybody who was involved with the bZx protocol in relation to the hacking loss — including mere investors who would otherwise have been protected from liability if the bZg group had been organized as a corporation, limited partnership, or an LLC.
The general liability of the general partners in a general partnership means that each and every one of them have full responsibility for liability. If the court finds that they constituted a general partnership (which is determined by a very lax standard), and finds that a particular defendant is a general partner, then that defendant will be on the hook for the full amount of the liability without respect to that defendant’s own actions or inactions in regard to the hacking incident. To say that this is a brutal result would be accurate, but that’s how general partnership law operates.
What has happened with DAO’s is the same thing that has happened over and over with the law for centuries: The law progresses very slowly, almost comically slowly, in relation to technology which progresses very quickly. Thus, technology frequently outruns the law in its development, and the courts then must take whatever technology has done and cram it into one of the exiting legal pigeonholes until the law (in the form of new statutes) is passed by the legislatures. Here, that results in the claim that a very new and sophisticated form of organization in the way of DAOs should be treated as one of the most ancient forms of legal organizations in the form of a general partnership.
Is that fair? Doesn’t matter, as least as far as the law is concerned. The only thing the law cares about is how something is treated under the law as it exists today, and things which seem to require the development of new law are, again, left to the legislatures. As an aside, it strikes me that these DAOs should be organized as Series LLCs, but we will leave that for another day. What is certain is that DAOs are a palpable legal danger to themselves and everybody associated with them, and folks who have something to lose should stay away from them entirely for now. Some bright lawyer is going to have to shoehorn DAOs into an existing legal structure or else the result that seems likely in this case (everybody is liable as general partner) will play itself out with every DAO that is subject, or at least their participants are subject, to American law.
Hat tip to Johnny Lyle who finally talked me into writing on this.
How One Founder Is Helping DIY Investors Navigate Risk
August 14 is National Financial Awareness Day, and I had the opportunity to chat with John Duffy, founder of Trending Stocks, who went from personally absorbing the 2000 and 2008 market crashes to launching a risk-adverse stock market platform for DIY investors. Here, I chat with Duffy about trend following and investment risk management.
WHAT GAVE YOU THE IDEA FOR TRENDING STOCKS?
It took me 14 years to “get even” after two huge downturns in the stock market – first in 2000 (down 50%) and then in 2008 (down 56%). Losing 14 years of investing time and money was the impetus for me to research a better way in the market. I learned about the ancient trend following strategy – and while it worked well – there was no simple software or program to apply it. Spending hours upon hours charting and graphing doesn’t interest anyone, so I programmed and launched TrendingStocks.IO to automate the research time and hassle on the backend.
HOW DOES IT HELP INVESTORS AVOID RISK?
The trend following strategy inherently has a focus on risk management, so I applied that into the new platform. The risk management helps investor avoid riding the market down. You pre-set a fixed stop-loss amount based on your personal risk tolerance. As a stock goes up, which it should based on the trend following strategy’s identification, so does the stop-loss amount; it rides up. While the stop-loss amount fluctuates up and down causally with the stock, if it gets down far enough to cross below a bottom threshold – we flag you to sell and get out.
WHAT’S YOUR BACKGROUND?
Aside from studying finance, economics and business, I’m a Vietnam Navy Veteran. Oddly enough, this was my foray into programming and coding. I bunked with the first IBM IBM programmers in the world. Their expertise interested me, so I asked a bunch of questions and they taught me the science.
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Not to date myself, but this was before when computers could be owned, only leased. IBM recruited me to program after the war, so I entered as one of few who had learned how to program back then.
IS THIS FOR DAY TRADERS OR DIY INVESTORS?
This is definitely not a day-trading solution. Trending Stocks provides analysis at the end of every business day and therefore, it’s not suitable for day trading. It’s after-hours based.
The tech is suited for a long-term, DIY investor and anyone who’s a newbie or wants to get involved in the market. Aside from managing risk, being a diligent trend follower helps with wealth growth over time.
Once an individual has confidence they’re working with good investable trends and a solid risk management process, it’s an easy plan to follow and platform to supplement that plan.
Difference Between CFD and Shares
Contracts for Difference (CFD) trading and share trading vary primarily in that when you trade a CFD, you speculate on a market’s price without acquiring ownership of the underlying asset, but when you trade shares, you must do so.
The main distinctions between a share and a CFD are ownership and leverage. You become the owner of the shares when you purchase shares. Investing in shares is equivalent to acquiring a modest ownership share in a business you support. You must pay the whole share price when purchasing stock shares.
Contract for Difference is referred to as CFD. Without holding the underlying asset, you can speculate on the price of a security by engaging in online CFD trading. A stock, stock index, currency, commodity, or cryptocurrency might all be the underlying security for a CFD. With CFDs, you may join a trade with a lower initial investment because they trade on leverage.
Trading CFDs involves taking into consideration leverage and margin, fees and charges, instrument categories, going short, and asset ownership, which is one of the primary difference between CFD and share trading. Let me elaborate more.
What are Leverage and Margin?
Leverage and margin go hand in hand when trading CFDs. By using leverage, you may acquire exposure to an underlying asset without having to put down the whole amount of money needed to purchase and hold the real asset; instead, you just have to contribute a portion of the position’s overall worth.
The amount you must initially have available to begin a position, known as margin, fluctuates based on the contract size and the underlying asset you want to trade. Margin is not a cost. Based on the pre-determined leverage for the asset class, the first margin need is expressed as a percentage of the contract value. Risk is increased while trading on margin.
When you trade on the Invest trading platform, you must have the full asset value accessible, and you buy shares without applying leverage to your available funds.
Variety of Assets
You may trade on more than 2500 different assets on the Traders Union CFD platform, including shares, forex, commodities, indices, cryptocurrencies, ETFs, and options. You may do this to diversify your portfolio and get exposure to major exchanges across the world.
The Invest trading platform is a marketplace where you may buy and sell stocks and ETFs (ETFs). You may purchase and hold shares of your favorite businesses or any listed ETF on the platform, as well as benefit from the newest IPOs when firms go public, thanks to your access to over 1200 equities and 90 ETFs.
You may acquire exposure to an underlying asset, such as Gold (XAU), Apple (AAPL), or EUR/USD, without really holding it by using a CFD. Due to changes in the underlying asset’s price, you will either gain or lose money. The goal of CFD trading is to bet on changes in an underlying asset’s price. The size of the stake and price changes determine any profit or loss.
In contrast, when you purchase a stock on the Invest trading platform, you become the owner of the physical asset and look for a potential longer-term rise in the asset’s value before selling it.
A Little More About How CFDs Can Differ From Investing
If your position remains open overnight while trading CFDs, you will be charged an overnight fee. While CFD trading is frequently utilized to speculate on near-term events like earnings announcements or the release of U.S. data reports, stock trading is typically favored for constructing portfolios.
In summary, both CFD and share stock trading offer benefits and drawbacks, and both let you profit from price changes that might result in either a gain or a loss. You should be able to choose which Traders Union platform best matches your trading preferences after you have an understanding of your trading goals. Which trading platform—CFD or Invest—does best for you?
Hillenbrand Should Spinoff Their Casket Business. It Would Mean 50% Upside For Shareholders.
As humans, we find death a difficult topic as it brings up a lot of feelings of anxiety, fear and awkwardness. As well as sadness. It’s extremely unsettling to think of our mortality. We tend to put it out of our minds, but as with taxes, death is an absolute certainty, as Mr. Benjamin Franklin so succinctly put it.
Here at The Edge, we to seek out untapped shareholder value as well as underperforming companies for Activist investors. Furthermore, when we find them, we also need to explain exactly how that can be achieved. Sometimes companies are sitting on hidden value and at other times, they just need to be given a push to consider looking more closely at finding and ultimately realizing that value for shareholders.
One company that came across our radar two years ago was Hilllenbrand (HI), currently trading at $45 a share. This Indiana based company is listed on the NYSE and has a market capitalization of just over $3 billion. It has many businesses in the industrial sector that complement quite nicely together. The business it has that sticks out like a sore thumb and that doesn’t fit with the rest of the company is its “Batesville” business, which is involved in the manufacturing and sale of funeral service products, including burial and cremation caskets, cremation containers and urns, other personalization and memorialization products and technology applications for funeral homes. The following is all from our March 31, 2022, report with some recent updates and is available on request.
Timing is Everything. Why Now?
Over the last two years, the management at Hillenbrand HI have continued to progress with the transition away from just selling caskets in the death care business to becoming a large diversified industrial company. At the time, we acknowledged that with the help of an activist investor, the company can come off its 2008 lows and create value for shareholders. However, a lot has happened between then and now that has made a Spinoff of the casket segment even more compelling.
If HI’s stock price hadn’t doubled, there would have been a risk that the market cap size for Batesville would have been too small and been kicked out of the SmallCap 600 Index, and shareholders would have incurred index selling pressure. Likewise, HI’s debt at the time was around 4x and would have presented a challenging split. Now, using the stable and predictable cashflow from BATES, the debt has been brought down to about 1.5x as of Q1 2022. And finally, with someone new at the helm who has seen first-hand what kind of value a Spinoff can create, there is a greater opportunity for a Spin today. This doubling of the stock actually puts Batesville at the right size (larger market cap) and the right leverage point for a smooth break-up;
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HI has increased its industrial focus from a 70/30 revenue split to an 80/20 split. Over the last two years, the management at Hillenbrand, Inc. have continued to progress with the transition away from just selling caskets in the death care business to becoming a large diversified industrial company. The move away from HI’s 100+ year old legacy death/burial business first began after a string of acquisitions starting in 2010. Initially, the Batesville Casket business was the only segment, contributing to 100% of the business. Now, after recently acquiring its Molding Technology Solutions business (Milacron Holdings Corp. (MCRN) for $1.9 billion) which closed on March 30, 2020, this has increased the percentage of the industrial side of the business from 70% of the revs to just over 80% (or on the flipside, Batesville previously contributing to 30% of revs to only around 22% by FY21 and 9M2022).
Revenue Break-Up: Latest Fiscal Year End
Batesville in 2022 is the Right Size for a Spinoff
In March 2020, HI was a $1.4 billion Market Cap ($3.1 billion EV) company. Today, HI is a $3.3 billion Market Cap company, with a $4.1 billion EV. Back in 2020, while the minimum market capitalization restrictions would have been lower than what it is today in order for both the RemainCo and the SpinCo to remain in the S&P SmallCap 600 Index to prevent any near-term index selling pressure, other complications surrounding its debt would have arisen. Therefore, the SpinCo (suggested ticker BATES) is in a much better state to be listed today, creating a pure-play, high free cashflow generating business. See below for our different market cap scenarios.
A separation in March 2020, based on the revenue distribution, would have resulted in a higher leverage for Batesville (BATES) on a standalone basis (4.3x). Furthermore, the split would have led to Batesville leaving the S&P SmallCap 600 in March 2020 as the criteria for inclusion required a minimum market cap of $600 million to remain in the SmallCap Index.
If the management wanted to shift debt in such a proportion to allow Batesville to remain a part of the SmallCap Index, it would have required a 42% distribution of debt, which would have led to a higher leverage of 6.2x for Batesville, making it even less appealing for investors as a standalone company
If HI plans to split the company based on the revenue contribution in today’s terms (as of February 2022), even though the leverage seems more appreciable than in March 2020, the market cap would still lead to Batesville being kicked out of S&P SmallCap 600 Index, as the most recently updated criteria requires the minimum market cap to be around $850 million, which is higher than our scenario putting Batesville’s market cap at around $619 million. However, if we adjust the debt distribution to allow BATES to remain in the S&P SmallCap 600, the below table is the ideal debt distribution scenario:
Based on the above scenario, a 73%-27% split would lead above the minimum $850 million market cap needed for BATES to stay in the S&P SmallCap 600 Index and will also give a leverage of 2x, which is less than the combined Parent’s 2.3x. At a leverage of 2.3x (Scenario 3) or 1.4x (Scenario 2), the leverage is way lower than the peer average of 3.7x (CSV: 5.4x, MATW: 3.8x and SCI: 3.6x). Therefore, this gives HI’s management even more room to manage and distribute debt among the RemainCo and the SpinCo.
If we assume management decides to assign enough debt on BATES that the leverage trades in-line with peers (around 3.7x), this requires a debt distribution in the ratio of 51%-49% for Advanced Process Solutions & Molding Tech Solutions and BATES, respectively. This would lead to a market cap of around $1.6 billion for BATES and a $1.7 billion Market Cap for the RemainCo (with a favorable leverage of 1.4x).
Enticing Proposition of BATES Expanding Its Business as a Standalone Entity
After HI’s biggest acquisition of Milacron in March 2020, the company’s debt was around 4x and therefore why we mentioned this higher leverage would have presented a challenge for a break-up at the time. However, over the last two years, the management have used the stable and predictable cashflow that Batesville (BATES) generates to bring that debt down significantly to about 1.5x as of Q1 2022. This was made clear in HI’s most recent transcript (Feb 3, 2022), where the management said that “our next strategic pillar is to manage Batesville for cash.”
However, when asked about the long-term shift towards cremation (as peers have been), this topic is never fully explored, and the management highlighted a slight decrease in the revenues was due to an increase in families opting for cremation. In fact, close to 55% of all funerals in the US currently are cremations. The real question is whether BATES becomes an independently listed company and uses this predictable cash to expand and improve their FY22E margins (20% compared to over 30% like its peers SCI and CSV), especially to pivot from the relatively high mortality rate seen in 2020 and 2021.
The table above highlights the high conversion rate of FCF HI has achieved, which proves their superior debt-paying capabilities and ability to manage higher operational scaling (if required) based on its own funds. Furthermore, the management has proudly highlighted they have been able to achieve a 100% FCF conversion rate over the past decade, which shows both BATES and the remaining HI business (Advance Process & Molding Technology Solutions) are high free cash flow generating divisions.
Batesville (BATES) derives 89% of its business from the sale of caskets, whereas its peers have a mixture of casket sales and funeral services, and we believe the services business is helping these peers achieve better operating margins compared to BATES. Currently, BATES is expected to report a margin of around 20%-21% for FY22E, primarily through selling caskets. Peers SCI and CSV are expected to make around 30% and 33%, respectively, owing to their revenue mix. We believe a separation into an independent company will allow BATES to leverage on its operational performance and potentially venture into the higher margin Funeral business and Services as well as the cremation space, thereby improving its operating margins and increasing investor wealth.
HI has Underperformed Its Peers and the Broader Market
From 2020 to 2021, HI’s stock price went from as low as $14.29 (March 18, 2020) to over $45 by the end of February 2021. This was reflected in its 2-year TSR annualized (shown below), but historically HI has always been on the lower-end of the TSR chart versus its peers and Index with respectfully a better performance recently.
Total Shareholder Return: HI Vs. Peers & Index
Finally, the management are no strangers to value creation from Spinoffs. There is a new CEO on board after the previous CEO of HI was there for the last eight years and with the company for 27 years. Joe A. Raver retired at the end of 2021. HI’s new and current CEO (as of January 1, 2022) is Kimberly K. Ryan. Ms. Ryan has been on the board of a company that previously performed a Spinoff. She was a board member of Kimball International KBAL (KBAL) since January 2014, which performed a Spin of its Electronic Manufacturing Services business called Kimball Electronics, Inc. (KE) on November 3, 2014. KE jumped +128% in its first year from the Spinoff, so Ms. Ryan has seen first-hand and can appreciate the value creation potential following a break-up.
With a stock market that has taken a bashing, companies need to think of their shareholders as the economy tightens its belt and further consider how they are going to offer value for the holders of their stock. Hillenbrand seems an obvious candidate for hidden value release.
Our one-year Base case target price is $67.36 for HI, implying a potential upside of +45% from the current share price of $46.57. However, our Sum-of-the-parts target price comes to around $78.99, which implies a potential upside of +70%.
Peer Comparison Matrix for the Advance Process & Molding Technology Solutions
Peer Comparison Matrix for the Batesville Segment
Finally on July 20, the company have announced a strategic review of their Batesville business. We believe the correct route for them is to Spinoff the business to existing shareholders to maximize value.
If you are an Activist investor looking for companies like this or you are a regular investor looking to take advantage of price moves due to corporate change, please contact me and experience our service.
The author owns shares of Hillenbrand Inc.
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