I have posted similar messages regarding the fundamental value of ORCC, but the discussions always seems to veer into bashers and promoters discussing topics that are purely subjective. I am looking for some thoughts on the fundamental value of the cash flows ORCC generates.
If we assume that ORCC will generate EBITDA at the top end of the guidance ($40M) and that capital expenditures and depreciation offset, we can assume EBITDA as a proxy for cash flow. Looking at the EBITDA multiples of similar companies or using a perpetuity formula should provide a range of enterprise values for ORCC.
My main concern with ORCC is not the overall market as I think this market will continue to grow as adoption increases. My larger concern is that ORCC stock is fully valued (possibly overvalued) at current levels once its capital structure is taken into account. I am not a big fan of acquisitions as they seem to usually decrease the value of the acquiring company and I think this has happened to ORCC with the Princeton acquisition. In connection with the acquisition, ORCC incurred debt of $75M and issued preferred stock of $75M. The initial rate on the debt was pretty high, but ORCC recently refinanced the debt with BofA at a reasonable level. The preferred stock continues to increase in value as the dividends accrue rather than being paid in cash.
If you subtract the value of the debt and preferred stock from the ranges of enterprise values (using comparable EBITDA multiples or a DCF), I do not see any upside to the current stock price.
I do not disagree that ORCC will meet guidance or that the underlying market trends are good. My issue is that even if ORCC meets guidance and the market grows as expected, I cannot find a way to value ORCC at a higher level than it currently is unless I assume it could be acquired at a premium. Most of the candidates that would acquire ORCC have made moves in the last two years that seem to lower the chances that ORCC will be acquired.
I would love to have a reasonable discussion on this.
Maybe I'm missing something. As the market grows (as does ORCC's relative portion), shouldn't there be more of a profit base over which to spread the underlying debt service and preferred stock value change?
It seems reasonable to me (assuming no change in capital structure over time) that any increase in the size of the base of their business, there should be more incremental revenue to spread over approximately the same expenses. I realize they will continue to have additional variable expenses added as the business grows. But, unless they restructure or add sites, etc. there fixed expenses should hold reasonably constant. If they are currently profitable (EBITDA) at these levels, then incremental revenue should drop to the bottom line faster and harder than what currently happens.
I realize the scenario above makes a lot of assumptions. However, unless they change their model substantially, it seems plausible.
I agree with everything you write about the market and earnings growing; however, my view is that the current stock price reflects all of that growth. As an example, ORCC has guided to an EBITDA of $40M this year. To get to the current value of the stock, we have to assume that the EBITDA will grow a certain amount each year into the future driven by all of the items you mention in your email. The current value represents a certain level of cash flow / earnings growth from the current level. Even if we assume that the market will grow at those levels, I struggle to see any upside to the stock. So either ORCC will need to grow faster than the currently assumed growth rate or the stock is fairly priced.
When individuals start to claim the stock will go much higher than the current level, I want to understand what growth in cash flow / earnings ORCC needs to justify the higher stock price. It is not enough just to grow, the cash flow / earnings must grow at a higher level than the currently assumed rate.