ClubCorp Holdings: On The Tee For Gains

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ClubCorp Holdings (MYCC) is the largest owner-operator of private country clubs and business clubs in the United States. MYCC recently completed the acquisition of Sequoia Golf, the third largest owner-operator of country clubs, and now owns or operates over 200 clubs in more than 26 states. Clubs are somewhat clustered in warmer clients with Texas and Georgia providing a strong regional presence. MYCC has been around since 1957 and prior to its IPO was controlled by private equity firm KSL Advisors. KSL still owns just over 50% of MYCC but has indicated its desire to sell down the remainder of its ownership over the next three years. MYCC came public via an IPO during the second half of 2013.

MYCC shares look very attractive trading at just over 8 times 2015 estimated EBITDA. This is a sharp discount to somewhat similar companies in the lodging and leisure industries. The multiple should expand as the company continues to generate steady organic growth and adds more clubs via acquisition. At 10 times 2015 estimated EBITDA, the shares would trade at $23 for a gain of 20%. MYCC also pays a very secure dividend adding a current yield of 2.6%.

More dramatic upside could occur if MYCC converts into a real estate investment trust (REIT). This has been suggested by shareholders and management has acknowledged that it is exploring this option. REITs pay no federal taxes and return most of their cash flow to shareholders. Current valuations on comparable REITs suggest that a conversion could realize value at $30 or above for MYCC with a near doubling of the dividend. Recently, two activist hedge funds sent a letter to the MYCC advocating for REIT conversion. On its most recent conference call, MYCC management indicated it would provide further detail on its Board level discussion about REIT conversion, possibly as soon as December.

MYCC reported slightly better than expected third quarter results last week. The results did a nice job of supporting the long-term economic model for MYCC: 1-2% membership growth, upselling an enhanced membership granting privileges at other MYCC owned clubs, continued acquisitions of country clubs, and occasional start-ups of business or alumni clubs. This model should drive mid-single digit revenue growth. MYCC reinvests heavily to upgrade many of the clubs it purchases limiting operating leverage. Nevertheless, some margin expansion should occur as the company integrates its acquisitions. Sequoia, in particular, should offer some operating leverage given economies of scale in purchasing and much greater regional concentration it provides in several markets.

Besides the general risk related to a weaker economy, I think the biggest obstacle for the stock in the near-term will be secondary offerings as KSL reduces its ownership. KSL has a lot of stock to sell but one offset to the added supply is that KSL has to own less than 50% to allow the REIT conversion. As a result, if a secondary is announced, it will likely trigger speculation that a REIT conversion could happen sooner rather than later, helping to support the shares against the added supply.

MYCC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. MYCC is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Google and Apple: A Tale of Momentum

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Google (GOOG) and Apple (AAPL) reported in the past week, kicking off another round of quarterly earnings reports for stocks held in Northlake client accounts. GOOG and AAPL compete directly on operating systems (iOS vs. Android) and the desire to control the largest ecosystem of online consumers. Northlake will continue to hold both stocks in client portfolios, although as explained below there is currently a divergence in the near-term outlook for the two stocks.

GOOG’s earnings were slightly below Wall Street expectations for revenue and EPS with the major concern being a slowing in paid click growth to less than 20%. The stock fell about 3% after the report adding to the decline in the shares that was part of the larger correction in the market revolving around fears of slowing global growth, Ebola, collapsing oil prices, and ongoing geopolitical tensions related to ISIS and Russia.

AAPL had an excellent quarter and the stock is trading up about 2% after rising 2% the day of the report. Revenues and EPS came in above expectations driven by better than expected shipments of the new iPhones and continued strength in Mac sales. Guidance for the upcoming quarter was inline with analyst expectations. In Apple’s world that is better than expected guidance given the company’s history of providing a conservative outlook.

Both of these stocks are quite sensitive to the trend in growth. AAPL shares pulled back as earnings growth stalled and even went negative. The share recovery in the stock this year coincides with a return to earnings growth, up about 20% in the last two quarters. The outlook for continued double digit growth is good given the gradual global rollout of the new iPhones and the likelihood that margins benefit form economies of scale as the product transition matures.

GOOG has 20% growth and, in my opinion, reported a quarter that had little impact on the overall bullish thesis. However, GOOG is seeing slowly moderating growth as search battles for ad dollars with Facebook and in app searches on mobile devices. GOOG also continues to invest heavily to sustain its growth but that is serving to depress margins while new businesses develop.

Investors in growth companies like AAPL and GOOG pay for growth and are especially sensitive to momentum in growth in the short-term. For now, that means investors are willing to be optimistic toward AAPL but cautious approaching GOOG. Over the balance of this year, I think that likely means that GOOG shares continue to struggle while AAPL breaks out to new all-time highs.

For the long-term, I see both companies well positioned, with GOOG arguably in a better position given a clearer path to sustained and consistent double digit growth in revenue and earnings.

I see AAPL trading to north of $120 as earnings estimates for 2015 move toward $8.00. A 15X multiple plus a little credit for over $20 in pre-tax cash per share should support another 20% upside in the shares over the next six months.

GOOG now trades at 17X 2015 earnings estimates without given any credit to over $100 in pre-tax cash on its balance sheet. I believe it will take a slight reacceleration in growth for GOOG shares to move significantly higher and the catalyst for that is likely next quarter’s earnings report. If growth expectations firm up, investors will look ahead to 2016 earnings of around $35 and give the P-E multiple a boost, setting up a move to $600-700 over the next 18 months.

GOOG and AAPL are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. GOOG and AAPL are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Large Caps and Value Remain Favored Themes

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There are no changes to the recommendations from Northlake’s Market Cap and Style models for October. The Market Cap model is recommending large caps for the second consecutive month. The Style model is sticking with value, which was first recommended in April. With no changes to the favored themes for October, client portfolios using the models will continue to hold the S&P 500 (SPY) and the Russell 1000 Value (IWD).

The Market Cap signal looks pretty firm at large cap. None of the underlying factors shifted from September to October. Large cap seems like a good place to be with the stock market pulling back in September and lots of issues that are worrying investors. Large cap stocks are less volatile than small cap stocks and should hold up better if a larger correction is underway. Key to performance of the model will be to make a timely move back into mid or small caps to capture the next move up in the market. So far this year, there has been a sharp divergence in the performance of small and large cap stocks. The S&P 500 has gained about 6% through September, while the primary small cap index, the Russell 2000, is down more than 4%. Small caps are not the only volatile sector suffering this year as Emerging Market and non-U.S. Developed market indices are down at least as much the Russell 2000.

Although it is still recommending value, the Style model has undergone a gradual shift toward growth over the past two months. The first shift occurred in August after the current value signal reached its strongest level at the end of July. September saw another shift in favor of value and the model now sits at a spot where a growth signal could occur for November. Recent strength in growth stocks relative to value stocks has shifted the heavily weighted trend indicators to favoring growth. Insider activity has also shifted to growth over the past two months. The only indicator moving toward value has been the U.S. dollar. Dollar strength historically has led to better relative performance for value stocks as growth stocks produce a greater degree of revenues abroad.

As an aside, the strength in the dollar has been one of the issues pressuring the stock market with a lot of programmatic trading set to avoid risk (as in sell stocks) when the dollar is strong. Dollar strength of late is due to a rush to safety from geopolitical issues, the Fed gradually taking its foot off the accelerator when the European Central Bank is easing further, and the emerging weakness in European economies at least partially due to the tense situation with Russia over Ukraine. The Ebola epidemic in Africa could even be supporting the dollar as it is another reason to move to what is perceived as the world’s safe haven security.

The Market Cap model did its job last month as it saved client’s money in a down month. The S&P 500 fell -1.4% last month, holding up much better than -4.7% and -6.1% decline for mid and small caps. The Style model did not fare as well. IWD declined by -2.5% last month, more than the -1.7% decline for the major growth index. Both models have struggled this year, producing appreciation of about 4% vs. more than 6% for the benchmark S&P 500.

SPY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.