Having single-handedly hounded Home Capital Group – the company which we predicted in 2015 would be “ground zero” for any potential Canadian financial crisis, and has emerged as the Canada’s equivalent to the infamous New Century which in 2007 presaged the upcoming global financial crisis – into near oblivion, noted chicken-farmer and short-seller, Marc Cohodes, over the weekend revealed the full details behind his latest short thesis: Canadian oil and gas service provider, Badger Daylighting.
Badger, for those unfamiliar, is a company which uses a technique called hydrovac excavation, in which pressurized water and a powerful vacuum are used to expose buried pipes and cables.
The company, with the unfortunate Toronto Ticker “BAD“, already had a bad day on Friday when it revealed earnings and revenues that badly missed consensus expectations. Insult was added to injury after Cohodes, who most recently gained prominence for his short bet on Home Capital Group, previewed pages of a negative presentation on Badger to his Twitter feed Friday, saying that the shares are overvalued and that there are low barriers to entry.
As a result, BAD shares plunged as much as 28% to C$22 in Toronto, the biggest intraday decline since November 2006, after previously dropping 4.8% YTD. To be sure, on Friday Badger CEO Paul Vanderberg, without in depth knowledge of Cohodes’ thesis, responded to Cohodes saying “my focus on that is really not to focus on it” during the earnings call and adding that “I don’t agree with the thesis.” Obviously, especially since neither he nor anyone else had seen or read it.
Chief Financial Officer Jerry Schiefelbein also responded, saying Badger is working to train new workers and managers on how to operate more efficiently, which should help reduce costs. He said the company’s first-quarter sales were “pretty good” following a couple of tough years. As for Cohodes’ criticism about low barriers to entry, Schiefelbein was quoted by Bloomberg saying tat Badger’s size gives it an advantage over mom-and-pop shops that would seek to compete with the company. Badger can tackle bigger projects for municipalities, has safety systems that larger customers require and it can move assets to markets where there is more demand, he said. “It’s not just digging holes in the ground.”
After Friday’s fireworks, BAD shares tumbled to roughly 7.7x EBITDA. That may be just the beginning (of the end): according to Cohodes’ thesis which was released overnight, they are likely to drop much lower.
Below are the summary (dis)investment highlights from Cohodes’ presentation on BAD released overnight, and titled “Last One Out has to Turn Out the Badger Daylight“
BAD business
- Tried and failed strategy (e.g. H2X, LLC)
- No moat, anyone can compete or insource, buy out of bankruptcy
- US oversaturated (market already grown > 20x, no longer novel)
- Price pressured, “public utilities can’t afford” to pay BAD’s prices
- Overvalued, NYSE:CLH bought TSX.V:LSI for 1x sales on 5/11, $0.3m/truck; Strong competitor coming in at 20-30% lower cost than BAD’s cost to build
- Real growth?
- 40% fleet idle? Many locations are empty lots, listing driver’s cell #
- Cannibalize the franchise (franchised was 90%, now 20%): liability > $170m; “squeeze ‘em out” once market is proven and local relationships set
- Franchisee bears the risk of overexpansion
- BAD threatens to repo franchisee’s trucks if sales quotas missed
BAD accounting
- Industry collapsing, why BAD’s numbers held up?
- “Other Revenue,” other questionable reserves?
- Is there anything off balance sheet (OBS)?
BAD people
- Last one out has to turn out the Badger Daylight
- Departures: CEO, CFO, VP of OPS (#3), AUDITOR, Member of Audit
- Mass departure coincidence or did they all leave for a reason?
- Who holds the bag?
- Current CFO’s last co. went bust, not an accountant, not a CPA
- Current CEO admits “I know very little about hydrovac”
BAD investors
- What was the purpose of BAD management meeting with investors late March & early April?
- BAD announced earnings 70% below expectations on May 12, 2017
- Did BAD management mislead investors or did BAD management not have the internal controls to know how business performing?
- Turtle Creek Asset Management is No.1 holder (15%)
- Turtle Creek is the largest (19%) holder of Home Capital Group (TSX:HCG)
- Partners: Andrew Brenton, Jeff Cole, Jeff Hebel
- At Feb 15 2017 annual meeting Brenton stated, “First step is picking the right kind of company. We are looking for honest companies… Today we believe, give or take, all our companies pass these tests. … Jeff Hebel is partner on Badger….passed all our tests; now we are trimming – don’t know where share price goes from here…we know what we’ll do at $40 or in teens… We think a lot about tax”
Full presentation below (link)
Finally, for those who wish to hear Cohodes’ full presentation at the 2016 Grant’s Interest Rate Conference, which contained this famous phrase “free speech isn’t free unless you’re a bull; we live in a country where it’s ok to sit down when the nationa lanthem plays, but if you don’t have an opinion that the cartoon netrowk, aka CNBC believes in, you don’t necessarily have rights“, here is your chance.
