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PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Professor Joel Litman
v.2014 04 12
FIDO
VALENS SECURITIES
Credit Analysis for Equity and Credit Investing
Joel Litman
April 2015
Valens Securities
425 5th Avenue, New York, New York 10016
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the
document nor any of the information contained herein may be reproduced or disclosed to any person under any
circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
China (2008 Peak)
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
65%
70%
75%
80%
85%
90%
FY
19
95
FY
19
96
FY
19
97
FY
19
98
FY
19
99
FY
20
00
FY
20
01
FY
20
02
FY
20
03
FY
20
04
FY
20
05
FY
20
06
FY
20
07
FY
20
08
FY
20
09
FY
20
10
FY
20
11
FY
20
12
FY
20
13
FY
20
14
Corporate Cash to Short Term Debt
Percentage of Firms in S&P 500 withMore Cash than FY+1 Debt
Source: Capital IQ, Valens Securities Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
0x
2x
4x
6x
8x
10x
12x1
99
4
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Historical S&P 500 Aggregate Interest Rate Coverage
Aggregate EBITAP/Interest Expense
Source: Capital IQ, Valens Securities Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
-40
-20
0
20
40
60
80
100
0
200
400
600
800
1000
1200
1400
1600
1800
20001
/1/1
99
0
1/1
/19
91
1/1
/19
92
1/1
/19
93
1/1
/19
94
1/1
/19
95
1/1
/19
96
1/1
/19
97
1/1
/19
98
1/1
/19
99
1/1
/20
00
1/1
/20
01
1/1
/20
02
1/1
/20
03
1/1
/20
04
1/1
/20
05
1/1
/20
06
1/1
/20
07
1/1
/20
08
1/1
/20
09
1/1
/20
10
1/1
/20
11
1/1
/20
12
1/1
/20
13
1/1
/20
14
Credit Standards and the S&P 500: January 1990 to
Recession S&P 500 Credit Tightening
May 2014
Source: Senior Loan Officer OpinionSurvey,
U.S. Federal Reserve Board
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
Commercial and Industrial Loans Consumer Loans
Data Frequency - Weekly - January 1980 to June 25, 2014
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2-Ja
n-80
2-Jan
-82
2-Ja
n-84
2-Jan
-86
2-Jan
-88
2-Jan
-90
2-Jan
-92
2-Ja
n-94
2-Jan
-96
2-Ja
n-98
2-Jan
-00
2-Ja
n-02
2-Ja
n-04
2-Jan
-06
2-Ja
n-08
2-Jan
-10
2-Ja
n-12
2-Jan
-14
S&P 500
Source: The Federal Reserve System, Valens Securities Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
0
200
400
600
800
1,000
1,200
1,400
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14
bp
s
IG XO HY
Valens Custom Aggregate CDS Index
Data Coverage: Weekly from Mar-2010 to Oct-2014Source: Valens Securities
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Capital IQ, Valens Securities Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Capital IQ, Valens Securities Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Earnings is a problematic indicator (leading vs lagging)
S&P 500 Earnings and Performance
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
12/3
1/1
988
09/3
0/1
989
06/3
0/1
990
03/3
1/1
991
12/3
1/1
991
09/3
0/1
992
06/3
0/1
993
03/3
1/1
994
12/3
1/1
994
09/3
0/1
995
06/3
0/1
996
03/3
1/1
997
12/3
1/1
997
09/3
0/1
998
06/3
0/1
999
03/3
1/2
000
12/3
1/2
000
09/3
0/2
001
06/3
0/2
002
03/3
1/2
003
12/3
1/2
003
09/3
0/2
004
06/3
0/2
005
03/3
1/2
006
12/3
1/2
006
09/3
0/2
007
06/3
0/2
008
03/3
1/2
009
12/3
1/2
009
09/3
0/2
010
06/3
0/2
011
03/3
1/2
012
12/3
1/2
012
S&
P 5
00 P
rice
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
S&
P 5
00 E
arn
ing
s
Earnings S&P 500 Price
Source: Capital IQ, Valens Securities Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
The Statement of Cash Flows
Operations
Investing
Financing
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Corporate Profitability and Valuation
Adjusted Earnings
Adjusted Assets
Adjusted Enterprise Values
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Distortion Issues requiring “adjustments”
• The Statement of Cash Flows, Earnings, and Balance Sheet
• M&A accounting through time (including through 1 year)
• Merger Related Expenses
• Pension Expenses versus Pension Service Costs
• Restructuring Charges
• Goodwill Impairment, PP&E Impairment, R&D Impairment
• Legal Settlements, Insurance Settlements
• Gain/Loss on Sale of Investments, Gain/Loss on Sale of Assets
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Performance and Valuation Prime™ Analysis4,058 U.S. companies (non-financial)
7.8% 7.7% 8.3%
4.9%
1.5%
4.9%5.8% 5.8%
6.2%
4.7%
3.3%
6.0%
0%
5%
10%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E Mkt Imp
Asset'Growth
8%9% 9% 8%
6%8%
9% 9%10% 10% 10% 10%
0%
5%
10%
15%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E Mkt Imp
ROA'
1.9 2.0 1.9
1.4 1.51.7 1.6 1.7
2.0 2.1 2.1
0.0
1.0
2.0
3.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
V/A'
21.0 21.1 22.7 22.018.2 18.8 17.2 16.6
18.921.3 21.2
0
10
20
30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
V/E'
Data Date: As of 13-Feb-2015
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
BEAR SENTIMENTBEAR SENTIMENT BULL SENTIMENTPanicDisinterest Hope Mania Despair
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
5
10
15
20
25
30
35Ju
l 1
0
Se
p 1
0
No
v 1
0
Jan
11
Ma
r 1
1
Ma
y 1
1
Jul
11
Se
p 1
1
No
v 1
1
Jan
12
Ma
r 1
2
Ma
y 1
2
Jul
12
Se
p 1
2
No
v 1
2
Jan
13
Ma
r 1
3
Ma
y 1
3
Jul
13
Se
p 1
3
No
v 1
3
Jan
14
Ma
r 1
4
Ma
y 1
4
Jul
14
Management Growth Confidence Index
Data Coverage: Monthly from Aug-2007 to Aug-2014Source: Valens Securities
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
BEAR SENTIMENTBEAR SENTIMENT BULL SENTIMENTPanicDisinterest Hope Mania Despair
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
BEAR SENTIMENTBEAR SENTIMENT BULL SENTIMENTPanicDisinterest Hope Mania Despair
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
LEADING AND LAGGING ECONOMIC INDICATORS
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
0
1
2
3
4
5
6
7
8
9
10
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan
-48
Jul-
50
Jan
-53
Jul-
55
Jan
-58
Jul-
60
Jan
-63
Jul-
65
Jan
-68
Jul-
70
Jan
-73
Jul-
75
Jan
-78
Jul-
80
Jan
-83
Jul-
85
Jan
-88
Jul-
90
Jan
-93
Jul-
95
Jan
-98
Jul-
00
Jan
-03
Jul-
05
Jan
-08
Jul-
10
Jan
-13
Civilian Unemployment Rate
Source: The Federal Reserve System Data Coverage Monthly from Jan-1948 to Jul-2014
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
BEAR SENTIMENTBEAR SENTIMENT BULL SENTIMENTPanicDisinterest Hope Mania Despair
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
LEADING AND LAGGING ECONOMIC INDICATORS
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
BEAR SENTIMENTBEAR SENTIMENT BULL SENTIMENTPanicDisinterest Hope Mania Despair
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
LEADING AND LAGGING ECONOMIC INDICATORS
Credit Worthiness
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Credit Protection Buyer
e.g. Owner of
the bond
Pays for the CDS
Recovers loss if
bond issuer defaults
Credit Protection Seller
e.g. “Insurer”
of the Bond
Sells the CDS
Pays for loss if bond
issuer defaults
Credit Default Swap
bps per year
$$ of loss
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
<->
?
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Moody’s Investors Service, Inc.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
Intrinsic Credit Default Swap (iCDS 5yr)
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
ADJUSTED PAYMENT CUSHION
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
ADJUSTED CASH TO DEBT LEVELS
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
ADJUSTED DEBT REPAYMENT SCORE
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
ADJUSTED ROA’ TREND
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
ADJUSTED TOTAL DEBT & RECOVERY RATE
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
0
200
400
600
800
1,000
1,200
1,400
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14
bp
s
IG XO HY
Valens Custom Aggregate CDS Index
Data Coverage: Weekly from Mar-2010 to Oct-2014Source: Valens Securities
iCDS (Intrinsic CDS) is market-relative
Adjusted factors drive a specific iCDS above or
below the market CDS
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
Intrinsic Credit Default Swap (iCDS 5yr)
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
Add: Quantamental & Fundamental Forensics™
?
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission. KENNEBEC RIVER CAPITAL | PRIVATE AND CONFIDENTIAL
Performance, Valuation, and Credit Cash Flow Prime™Unparalleled Attention to Removing GAAP Distortions
Credit and Cross-Capital Analytics™Early Identification of Mis-pricings Across the Capital Structure
Financial Red Flags™ and Forensic AccountingThe Foremost Financial Statement Expertise in the World
Earnings Call Forensics™Audio and Linguistic Based Cognitive & Emotion Analysis™
Incentives Dictate Behavior™Uncovering Drivers of Debt/Equity Actions and Returns
Market Phase Cycle™ Powerful Market Macro and Sector Analytics
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
GAAP distortion examples as of March 2015
DAL
• Capitalized leases of 398mm vs. 1,200mm
• Pens Exp 885mm vs. 603mm vs. ZERO
• ROA of 6% versus Adjusted ROA’ of 14%
• P/E of 9 versus Adjusted P/E of 20.5
Source: Valens Credit Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Delta Air Lines, Inc. (NYSE:DAL)
Stock Price USD 44.57 - Market Cap 36.7B Data Date - 3/9/2015
Industrials - Airlines Fiscal Year - 12/31/2014 - Current Quarter - Q42014
x x
-8%
-23%
19%14%
-8%-2%
1%
15%
0% 0%
0%
-30%
0%
30%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 5Yr CAGR
Asset'Growth
0%
0%
0%
-3%
2%
9% 8% 9% 10% 9%
14% 16% 14%
-10%
0%
10%
20%
30%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Mkt Imp
ROA'
1.2 1.1 1.2
1.7 1.7 1.7 1.7 1.8 1.7
2.32.1
0.0
1.0
2.0
3.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
V/A'
-270.9
1780.2
-35.0
75.8 20.1 23.4 19.4 14.9 19.6 15.0 20.8
-1000
0
1000
2000
3000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Fwd V/E'
0.0
1.0
2.0
3.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD
TSRr
Source: Valens Credit Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
DAL:
1/20/2015 - CEO Anderson generated multiple highly questionable“sandbagging” markers when saying they expect to have their adjusted net debt below $6bn by the end of 2015 and achieve a $5bn target in 2016
Management generated highly questionable “sandbagging” markers when talking about their debt reduction plan and hitting their debt reduction targets.
Considering how strong cash flows are, these markers look like sandbagging, meaning they think they’ll hit their debt reduction targets more easily than they let on
Source: Valens Credit Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
DAL – Incentives Dictate Behavior
A strong compensation framework for both credit and equity investors.
Promotes focus on ROIC, Return On Invested Capital for capital efficiency.
Promotes pre-tax Income and TRASM for revenue growth. Promotes Operating Income Margin for efficiency.
Focus on service and customer enrollment in loyalty program promotes sustainability of the above.
Management are also material owners of DAL equity.Source: Valens Credit Analysis
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Valens Credit Analysis
Add: Quantamental & Fundamental Forensics™
PRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
DAL
Moody’s Rating is Too Low
Equity isn’t a compelling value name,
Yet should move up with or outperform the industry
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SD
Sandridge
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SD - Trade Idea as of January 2015
SD – Long 2020 and 2023 bonds; low equity valuations driven bydistressed pricing in the credit markets; substantial equity upside likelyif perceived default risk decreases
Source: Valens Credit Analysis
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Source: Moody’s Investors Service, Inc.
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contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Source: Moody’s Investors Service, Inc.
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GAAP and Ratio Distortion Examples at SD
• Cash Flow From Operations: $669MM • Adjusted Cash From Ops: $813MM
• Moody’s: RCF/Debt: 16.9%• Debt to Avg Daily Production: $40,900
• Debt due in in the next 5 years Zero
Source: Valens Credit Analysis
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Source: Valens Credit Analysis
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SandRidge Energy, Inc. (SD)
Source: Valens Credit AnalysisPRIVATE AND CONFIDENTIAL: This document is confidential and contains proprietary information. Neither the document nor any of the information
contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
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EXPE
Moody’s rating too low
Some near-term issues with equity,
though longer-term could outperform the industry
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GAAP distortion examples seen post-adjustments
EXPE
• Pension exp of $36mm vs Adj of $10 vs. Zero
• Cap leases of Zero vs. Adj Cap leases of $508mm
• ROA of 4.4% versus Adjusted ROA of 19.7%
• P/E of 30x versus Adjusted P/E of 21x
Source: Valens Credit Analysis
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Source: Valens Credit Analysis
Expedia Inc. 2020 5.950% Bond at 112.29 Reference Bond Data date: 3/9/2015
iCDS 144 3.091% Intrinsic YTW Valens Credit Rating IG4+ (Baa1)
Actual CDS 82 3.441% YTW 179 G-STW Moody's Rating Ba1 (XO-)
Debt Maturity Stack
0
1,000
2,000
3,000
4,000
5,000
6,000
2015E 2016E 2017E 2018E 2019E 2020E 2021E
Obligation & DebtMaturity Schedule
Other Uses of Cash
MaintenanceCapex Pension ServicingCosts R&D Maintenance
Dividends
RentalMaintenance Interest Expense
Debt Maturities
Gross CashEarnings'Cash Available forOutlays
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Expedia, Inc. (EXPE)
Source: Valens Credit Analysis
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EXPE:
10/30 - CEO Khosrowshahi was highly confident when saying Q3 2014 adjusted EPS was up by 35% year-over-year
10/30 - CEO Khosrowshahi was highly confident when saying that trivago is growing a lot of share as far as overall traffic to travel websites
2/5 - CEO Khosrowshahi was highly questionable when saying that their customer volume in U.S. travelling to international is strong at 50%, which is offsetting the weakness of the volume coming from international markets-to-U.S. due to forex headwinds
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contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
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contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
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BEAR CYCLEBULL CYCLE
Market Bubble
Capitulation
Bear Rally
First
Stage
Bull
Second
Stage
Bull
Double Top
BEAR SENTIMENTBEAR SENTIMENT BULL SENTIMENTPanicDisinterest Hope Mania Despair
CREDIT EASINGCREDIT EASING CREDIT TIGHTENING
Credit Demand FallingCredit Demand Increasing
DivestingNet New Investing
PROFIT COLLAPSINGCORPORATE PROFIT INCREASING
MULTIPLE EXPANSION MULTIPLE COMPRESSION
LEADING AND LAGGING ECONOMIC INDICATORS
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contained herein may be reproduced or disclosed to any person under any circumstances without express written permission.
Valens Credit and Valens Equities
Reliable, Timely Corporate Credit Ratings
Embedded Expectations of Equity Pricing
Valens Credit Weekly Insights
Valens Equity Insights & Inflections
Valens Market Phase Cycle Report: Equity & Credit
Custom Security, Tranche, Basket, Portfolio Analysis
Education & Training; Strategist Meetings
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