Los Angeles-based Canyon Capital, Joshua Friedman and Mitchell Julis tend to lean toward credit opportunities but do well on the equity side. Canyon Capital has around $19 billion in AUM and its flagship fund returned 10.4% annually between 2002 and 2011, vs. 3.3% for the S&P 500 index. Below are their top picks:
We are not particularly keen on Chemtura (NYSE: CHMT) a specialty chemicals company that produces pool and spa products, niche agricultural products, petroleum additives, and urethane polymers. Given the multi-use nature of its products, CHMT serves numerous markets including auto, electronics, construction, and agricultural. In December, CHMT guided to $5 billion in revenue and $1 billion in EBITDA by 2016 (around triple 2011 EBITDA). We think these estimates are considerably aggressive, but with the pullback last fall we felt valuation was attractive. However, now that the stock is back to the $14 to $16 per share range, we are again negative. Emerging markets and agriculture are bright spots for the company but at 11.0x forward earnings we do not view valuation as compelling.
Cemex (NYSE: CX), also held by Mason Hawkins, Malcolm Fairbairn, and John Thaler, is a cement manufacturer that also produces ready-mix concrete and construction aggregates. The majority of the company’s revenues are derived in Europe (~44%), the United States (~22%), and Mexico (~21%). Looking at geographic segments, US and South American performance has been on the uptick but there has been weakness in areas like northern Europe. On the capital structure front, CX has been actively managing its balance sheet risk; net leverage was 6.4x in Q1, which should come down to the 5.75x max leverage test by year-end 2012. As a result of short-term adjustments to boost profitability and improve its debt management, shares have been up ~30% YTD. Given the YTD performance and historical ten-year median multiple of ~7.2x, we think CX is fairly valued.
Cumulus Media (NASDAQ: CMLS) is the second largest radio broadcasting company by total number of radio stations. CMLS owns/operates 570 radio stations markets. Its stations program a variety of formats, from music to talk radio. Last September, it acquired Citadel Broadcasting and last August, it bought the remaining 75% of Cumulus Media Partners. Its Q1 was rather uninspiring with revenues down 3.5% y-o-y due partially to a decline in trades ads on Citadel stations and the ad boycott of the Rush Limbaugh show. The company continues to delever; it repaid $50mm of its revolver, leaving $2.8 billion in debt at Q1 end. Its covenant leverage is pretty high at 6.8x (7.75x test) but the good news is that management expects to repay the remaining balance on the revolver by Q3. Ultimately, we see a challenging ad market, and we are not sure that station swaps or other M&A activity will jump start sustainable growth in a meaningful way.
Belo Corp (NYSE: BLC) owns twenty television stations and broadcasts in Texas, Arizona, Washington, Oregon, and Missouri. Its stations are very well-run, ranking in the top two for eleven of fifteen for late news and in the top two for twelve of fifteen markets for early news. Margins should exceed 40% this year, which is a strong number, and we think M&A driven by consolidation will likely keep multiples in the high single digits as four major transactions have occurred in the last nine months or so. The real catalysts though are all about the cash. BLC is on-track to generate over $100 million of FCF for the next couple of years that will help paydown its debt. Currently it has $120 million of cash and $887 million of funded debt. And with rates as low as they are, BLC can renegotiate less restrictive debt covenants. We are optimistic on both M&A deals and opportunities to rejigger the capital structure.
