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Sunday, January 10, 2016

Fidelity National Financial Ventures (FNFV) - at $10 This is a Buy

Fidelity National Financial Ventures (FNFV) is a tracking stock that mirrors the investment arm of Fidelity National Financial, Inc (FNF). FNF’s management team, led by chairman Bill Foley, has a strong track record of making good investments, including Fidelity National Information Services (FIS), and Sedgwick CMS (now a KKR owned money machine). Management are have strong operating experience, as evident by FNF’s core title insurance business being the best run, highest margin compared to its peers.

An introduction to FNFV’s structure, portfolio investments, and track record can be found here.

The thesis is a simple one – sum of the parts asset play. FNFV's main portfolio investments are American Blue Ribbon (“ABRH”, owns restaurants and bakeries), Digital Insurance (employee benefits platform), and Ceridian (human capital management software). My analysis is shown below. At ~$10/share FNFV has limited downside.





The main uncertainty comes from Ceridian and that’s the variable in my scenario analysis. Other than that, both ABRH and Digital Insurance are fairly stable; while Fleetcor and Del Frisco’s are simply marked at current market prices.

Ceridian

Ceridian “provides human resources, payroll, workforce management, talent management, tax compliance, benefits, employee assistance and wellness programs to more than 100,000 clients in over 50 countries”. Basically it competes with guys like Oracle, SAP, and Workday. Ceridian has traditionally been a strong player in the payroll business but was late to the cloud/software-as-a-service game. It has been playing catch-up on SAAS with its main Dayforce product. Checking around the web, DayForce does have fairly good reviews (an example here).

Note that Ceridian is extremely leveraged at 9-10x Debt/EBITDA. So this is either home run or bust. That’s why I assign value of $0 for Ceridian in my downside case. I do think more likely than not Ceridian will work out though. In the latest earning call, management provided the following comments (emphasis mine):

“I think you’re seeing finally kind of an inflection point and we highlighted this earlier this year…will the growth in the cloud business outpace the decline in the harvest business? The harvest business means that we have a lot of customer – payroll customers are sitting on our service bureau platforms and we’ve been converting those to Dayforce as well as getting net new customers…. But we’re starting to see – as we speak, the growth of the cloud is outpacing the decline in the harvest business.
Basically growth in cloud business is starting to outpace decline in legacy business. This is good news. I also think the entire HCM industry have some growth runway as U.S. now only have ~5% unemployment. 


There are certain factors that made the stock cheap. As a spin-off this is kind of under the radar. Being a tracking stock in a complex FNF corporate structure does warrant some discount. FNFV is not very liquid. All these factors cause me to discount the stock by some ~15% in my base and downside cases.

In the hands of savvy management, however, these can also be upside levers. When the time is right they can provide more color around Ceridian (currently very little). Cleaning up the corporate structure would surely help. Low liquidity also means buybacks can have greater positive effect on its stock price.

2 comments:

  1. Hi Michael,

    Great blog. About FNFV i think it´s an interesting idea, there is also a case for the company doing with Del Frisco the same it did with JAX if they acquire control.

    A couple of question here, why do you think it trades at a big discount to book relative to peers? Maybe due to its large goodwill? And, do you have some rough probability for your upside case?

    Thanks.

    F

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  2. That's a good point about Del Frisco. They certainly have some expertise in the restaurant business which helps ABRH also.

    Regarding discount to book - I wouldnt rely on the BV here. I mean the biggest chunk of book value comes from Ceridian which is highly leveraged. I even assigned a 0 there to show that downside is limited.. As for probability, I usually think of base case scenarios as covering one standard deviation, leaving only ~1/3 probability to split between downside/upside. Its not that precise though. The way I think about it - its not very hard to imagine the upside playing out here, and I think the upside is more likely than the downside

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