COWN - Cowen

[ratiman]

Cowen is an interesting opportunity but I'm  not sure if it's a long or a short. Cowen is a combination of an asset manager and ordinary investment bank with about $5.70 of tangible book value (though probably about $4.50 in tangible book ex the NOL asset). Earnings power is around 25-35c. COWN currently trades at $3.37. Current earnings power is nowhere close to 10% ROTE (not to mention 10% over an entire cycle) and management doesn't seem to be very concerned about that. The stock is trading below the lows of 2008-2009.

 

The biggest asset at Cowen is a very valuable biotech banking franchise that does about 80% of the bank's revenues. Unfortunately the biotech boom may be over. Cowen focuses on low-margin brokerage revenues but has little in high margin advisory; it did no advisory deals last quarter. To put that in context, JMP, a much smaller bank, did $12M in advisory revenues last quarter.

 

The asset manager (Ramius) generates fees on $13B of AUM but doesn't consistently earn a profit, and relies heavily on proprietary investment gains and incentive fees. Leucadia is trying to build a similar platform and Ramius may be worth more than current returns indicate. Valued at 1% of assets, it's worth about $1.25/share. Close to 95% of the bank's $800M of assets is invested in the bank's proprietary funds. That capital generates a poor return; it's like investing in a closed end fund but with much higher fees. One interesting asset in Ramius is probably Starboard, the activist hedge fund, of which Ramius owned about 30% before selling a portion back to the managers. If a seeded hedge fund has a particularly good year, Ramius can earn a lot of fees as a 20-40% owner of the fund, as happened recently with Starboard. In any case, an asset manager with $13B of assets should generate much better returns than Ramius does.

 

In its current form, maybe Cowen isn't worth more than $2.50 if earnings power is 25c over a full cycle. Or maybe the stock is worth much more than $3.37 if it were to buy back shares, sell  the asset manager or reduce costs substantially, and put the focus on boosting the stock. In a best case scenario, I think the stock could be worth $7.50. There are a lot of valuable assets at Cowen (the biotech franchise, Ramius, lots of capital, a decent sized broker-dealer) that aren't being used properly. Right now I don't own shares but it's a good one to keep an eye on especially if management were replaced. Lots of 13Gs have been filed recently and it's a good target for activism (but not from Starboard).

 

Here is last year's performance, from the 10K:

 

http://65.media.tumblr.com/347a91c5c949172126bcd7b81ef8751a/tumblr_o6obimzxOA1qm0t57o1_1280.png

[ratiman]

I forgot why I got interested in this in the first place. It has a big asset in Linkem, a wireless broadband company in Italy that will be the dominant broadband company in Italy in a few years and will probably be taken public later this year. Cowen owns about 33%.

 

"Our goal is to get this company by kind of 2018, 2019, up to 1.8 million to 2 million subscribers. We would expect to be public long before that, but the EBITDA associated with that is quite, quite substantial. And any kind of reasonable valuation on that given our stake, it would have quite an impact, meaningful impact, on our investment value."

 

http://seekingalpha.com/article/3388065-cowens-cown-ceo-peter-cohen-discusses-q2-2015-results-earnings-call-transcript?part=single

 

So when you add up $1 or more for Linkem, $3 for the bank, $1-$2 for the asset manager, $1 for tax asset, $2 for excess cash that should be returned to shareholders, then you get to the $7.50 range I was talking about. I know people have gotten critical of "sum of the parts" valuation, but in this case I think it makes sense, especially if management receives some pressure to boost the stock price, which I think is coming. The recent proxy statement is fun reading because management has clearly been hearing from shareholders.

 

It's also interesting that in 2014 Cowen issued preferred stock that converts over $6.57, so clearly management is optimistic that they can convert into stock and grow their vast empire of underperforming assets.

[benhacker]

Ratiman,

 

I also think the Linkem asset is interesting, and I've been poking around this more (due to LUK owning a stake as well).  I don't think it comes public prior to 2017 personally, but I do agree that it's a real potentially valuable asset, way above implied cost, and the recent growth has been strong, and their expansion into major cities, while adding cost for buildout, I think should drive a valuation higher.  I think their subs are now in the 370k range... not sure they reach the 2m mark in the 2019 timeframe, but probably reasonably close to that.

 

For COWN, I think the LKM stake is a much bigger deal relative to valuation than for LUK, so it begins to be very interesting if you see a big swing relative to cost of the value of that asset (which I do)... thanks for sharing your thoughts...

[ratiman]

This was a really bullish report from Cowen. It lost $24M on merger arbitrage which means, I think, that the CEO will lose his job and the trading will be shut down and there will be a big buyback. I don't think even a very sleepy board can go much longer with a 70 year old CEO who appears to be senile and who personally lost 7% of the market cap betting on mergers. Big things ahead for Cowen. The status quo is not sustainable, especially when management owns hardly any shares.

[ratiman]

Cowen owns 32% of Linkem. Here is a Linkem employee chiming in during the comments to talk about expanding in Rome and the spectrum. What's a fixed wireless user worth? Apparently it costs more than $1200 to wire a home so presumably a fixed wireless customer is worth $1000? At 25 Euros per month that would value each customer at 3x. At 400,000 customers by eoy that would be about $128M ($1.20/share). Not overwhelming but not bad. Linkem is growing at more than 30% so arguably worth a lot more, not bad for $3 stock.

 

http://www.lightreading.com/mobile/the-return-of-fixed-wireless-access/a/d-id/724820

[scorpioncapital]

Are these guys connected with Leucadia since they also are involved with Linkem? Perhaps LUK will buy out COWN? Both companies have done very poorly so maybe it's a match made in heaven :)

[ratiman]

Yeah, lots of poor performance in the brokerage going on nearly a decade. It will probably take another bear market to drive out all the competitors who should have left in the last bear market. The problem is that too many people want to be in the brokerage industry, and it's not a great business to begin with. At some point though a 50% discount to book value has to count for something, especially when the company is profitable.

 

[ratiman]

This was a really bullish report from Cowen. It lost $24M on merger arbitrage which means, I think, that the CEO will lose his job and the trading will be shut down and there will be a big buyback. I don't think even a very sleepy board can go much longer with a 70 year old CEO who appears to be senile and who personally lost 7% of the market cap betting on mergers. Big things ahead for Cowen. The status quo is not sustainable, especially when management owns hardly any shares.

 

Yep, CEO Cohen gets his contract rewritten, severance limited to $5M. That means that it's cheaper to fire him than pay his salary. They may let him stick around for a few more months to save face but I think he's definitely gone. That is huge news for the stock, the next in line Solomon is competent and will definitely want to please shareholders ie buyback and shut down trading.

[fareastwarriors]

http://www.cnbc.com/2017/03/29/cowen-stock-surges-after-news-cefc-china-buying-20-stake.html

[bianji108]

Does COWN still hold 32% of Linkem?

[ratiman]

Cowen does still own some Linkem. It might own 32% including funds it owns, but shareholders own around $80M. Could be worth quite a bit more if Linkem goes public. Cowen also owns $38M of Formation8, a defunct VC fund that owns Wish.com, which is apparently similar to Shopify and might come public soon. Plus it owns some Nikola so once those stakes are sold Cowen will have a lot of cash to buy back shares but mostly hand out to employees (this is an investment bank). The bank is also doing well, it acquired a large electronic trading firm basically for free  and that is generating a lot more revenue for the bank. The Quarton acquisition ($1M per M&A banker) looked very expernsive but it's performing pretty well. Plus Cowen is a biotech-focused bank and it is doing well as money is thrown at the virus. The incentive fees at the hedge funds are potentially very lucrative. 35% of 20% of the profits of $11.5B of hedge funds is potentially quite a bit of money as long as the hedge funds are over the highwater mark. Incentive fees this quarter were $1.50 per share. So I think this could double from here. Tangible book is $22.50. There was a 4-1 reverse split so this stock really hasn't done anything for ten years.

[ratiman]

Wish.com just filed to go public, which might push COWN over the $18 level it's been stuck for about five years. Cowen got its stake in Wish by investing in Formation8 in 2011. My estimation is that Cowen owns about 2.2% of Formation8 which owns about 10-20% of Wish so yeah its not a big position. But if Cown owns 1/300 of Wish and Wish is worth $30B, then Cowen owns $100M which isn't bad for a $500M stock. "Buy Cowen and get 1/300 of Wish for free!" If Wish goes nuts and is worth $100B as the Amazon killer then Cowen shareholders should do well.

[ratiman]

I realize nobody is interested in Cowen but tangible equity is $24.50 plus around $5 in Wish and Linkem so ~$30 tangible book on a $20 stock. If Cowen cashes out of Nikola, Linkem and Wish in 2021 and earns $3 next year that's $10 surplus cash on a $20 stock.