Jay Van Sciver, Head of Industrials and Materials at Hedgeye, shares his thoughts on industrials and materials in 2023. Automobiles, Elon Musk, rails, Norfolk Southern, geopolitical commodities landscape - this podcast runs the gamut; tune in to hear Jay's takes on it all.
This webcast was recorded on Wednesday, April 19th and hosted by Andrew Walker of Rangeley Capital for Yet Another Value Blog.
Transcript below
Andrew Walker: Hello and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker, and if you'd like, this podcast would mean a lot if you could follow, rate, subscribe, review wherever you're watching or listening to it. With me today I'm happy to have Jay Van Sciver. Jay is the Head of Industrials and Materials. If I remember correctly, you can't forget Materials at Hedgeye. Jay, how's it going?
Jay: Great. Thank you so much for having me on, Andrew. I really appreciate it.
Andrew: Hey, I really appreciate you coming on. Let me start with this podcast the way I do with every podcast. Quick disclaimer to remind everyone that nothing on this podcast is investing advice. That's always true, but Jay, I listened to a prior interview of yours and I loved how you framed industrials. Industrials is the catchall for things that don't fit in any other sector, but because you're the head of industrials and it's the catchall for things that don't fit elsewhere, we could go into a lot of different places in today's podcast.
People should just remember, we're just talking nothing here is investing advice. Please do your own work and consult a financial advisor. Jay, I think you thought we were recording before we started. We weren't recording, but we were having a really interesting conversation about Tesla, which we're recording this on Wednesday afternoon, April 19th. They report earnings after the close, so who knows, maybe the stock's up 50%, maybe it's a 0 tomorrow.
No one knows that. We don't know what the earnings are, but we're having a really interesting conversation about Tesla and then Volkswagen, Porsche, kind of a little bit of how they Volkswagen compares to Tesla and a little bit of the Stub Trade Volkswagen versus Porsche, so I've rambled a lot. I just want to let listeners kind of tune into what we were talking about before we pressed record.
Jay: Yes, and I think from a value perspective, the industrial sector is 1 of the best places to look because the earnings tend to be so volatile, something like truckload carriers over the next quarter or 2 are going to see earnings drop so much. You'll see people panic. The stocks will go down, the multiple will expand, they'll look expensive, but if you actually do valuation, if you actually are in the weeds, you can get wonderful value opportunities in the sector.
On the short side, you get some of the dumbest stuff that's goes on, like truckload carriers with collapsing earnings currently being pretty near all time highs. So we were talking about VW and Tesla, and I think it's an interesting, I would hesitate to call it a pair, although we certainly have it on our best ideas list structured that way, where we have long VW, which trades, as you are alluding to, for less than its public large cap liquid subsidiary trades for its stake in that subsidiary.
VW floated 25% of Porsche. It's not even like a voting controlling stake that trades, and that values Porsche at more than all of VW trades for which owns 75%, so that stake is worth more than what VW itself trades for, and it owns such trivial brands is Audi and Bentley and Lamborghini and VW itself, Scota. It also has a finance subsidiary with I think it's a thirty or forty billion euro book value, and Porsche is only like 11% of revenue, so it's a tiny part of total VW that's worth more than the rest of it combined, and I think that's interesting. I like things like that.
Andrew: I do too. There are a few out there in the stock market. I mean, I've had a couple people come to me with the VW-Porsche trade. I have not put it on, but it's better than all those because a lot of them, like you have real hair at the HoldCo like the former Valiant now trades under I think it's Bosch Health and they spun out BLCO and their BLCO stake is worth like 2 times as much as their market cap is, but like the HoldCo has so many issues and there might be negative value there.
Whereas with VW it's like, there's clearly so much value. I've had people pitch it to me before though, and my first thought is always like, "Haven't people blown up on a Volkswagen-Porsche Stubco trade pretty big, hasn't that happened before?" I think that might be 1 of the reasons to kind of set up exist like that, but...
Jay: No, I mean there's hair on everything that's going to end up reasonably valued at least a year ago in this market, and one thing I think that's interesting about it as an event or an anomaly in the market, is that these, the management team is actually distributing real cash to investors, a nineteen euro share dividend, and they actually could sell another 25% of Porsche and maintain control of it and distribute another nineteen, and then there's just within the VW universe itself, the discount that VW preferred non-voting, has to the common is ridiculous. Your vote doesn't matter. You can vote all you want as a common shareholder. Porsche SE controls VW which is totally unrelated, well, it's not unrelated, but it's a different entity from Porsche AG.
I think there's like a complexity to the preferred common Porsche AG Porsche, SE, VW, but just even that preferred common as a former person who sat on a prop desk, I love that kind of a trade. When that spread blows out, you put it on and when it narrows back in, you take it off. You should be able to do that with lots of A/B shares. HEICO being 1 of my most favorite so...
Andrew: Volkswagen and I've seen the deck, I know this way, so you've got the Volkswagen Preferred, which trades at discounts the common, and then both trade at a discount to just the value of their Porsche. Do you like those as the Stub trade or like kind of the hedge trade? Or do you think the discount is just so wide? If somebody's going out and obviously, look, again, we gave the disclaimer up front, shorting, doing stub codes, they have risk. We were laughing because people blew up on this in 2008, but do you think the value is there where you could just kind of go long Volkswagen and just generate alpha that way as well?
Jay: I think so. I could be wrong. We're not allowed to trade personally the stocks that we cover for research, but I mean, I would, that's totally the type of thing I would buy, but I probably have a value bias as an investor to my detriment in say 2021, but whatever, I think that kind of thing makes economic sense, and if you're driving market efficiency, you should be really doing that kind of thing, and there are other pairs you can put against it, so we've had Lucid (LCID), which is an electric vehicle maker that's trying to compete in a market that basically doesn't exist, the ultra luxury.
It's a tiny TAM, highly competitive market. You compare that against it, you compare Tesla (TSLA), which was the other name we're talking about that's going to report today, which is basically a single product company. It is a company that has the Model 3 and Y that makes a 90% of revenue. They have an inventory build problem, they're cutting price repeatedly, and inventories as of the first quarter are still building. The CEO, if you want to talk about corporate governance problems, the CEO, I mean, this is Google-able, which is amazing to me, is that everybody in Tesla should realize that Elon Musk got paid $23.4 billion in 2021.
That's doesn't show up on the income statement because his options got marked at 2018, and for the most part, options marking grant date valuation doesn't matter very much, but it's the difference between I think a $900 million expense of Tesla and a $23.4 billion expense of Tesla, so when you think about how much of the theoretical profit that Musk has extracted from Tesla, it's much more than anything they've earned, or will earned for several years, and then he left to run Twitter anyway, so what do you do with that?
Andrew: I was going to say, on the corporate governance and stock options obviously matter, and you need to adjust for that, but like, it doesn't bother me that Elon gets the largest pay package in human history and it's all options based and like the stock goes up 10X and maybe you and I both probably think the valuation's crazy and all this sort of stuff, but like, that doesn't bother me, but what bothers me is they paid, as they said, like the options are worth twenty three billion. The dude owns so much and you're paying that because you think allegedly you think he's the most talented entrepreneur in the world, and you need to pay him this so that he only focuses on Tesla.
Then as you said, he goes on this quixotic quest to buy Twitter. I think that's really hurt the Tesla brand as we can talk about in a second, but then even more than that, like just in the past week, he's launching this new open AI competitor and he's doing the startup and funding it himself outside of Tesla. Like Tesla's paying him to be the highest paid best entrepreneur in the world. Tesla is allegedly an AI company. What do they always pitch? "Hey, we're going to going to crack full self-driving because we've got all this great data. We build our own chips, we've got this AI."
He goes and builds an AI competitor, which AI could be worth trillions of dollars. He builds it outside of Tesla, like ignoring all the other... the family members on the board, the SolarCity, all that. Like, it's just bonkers to me. It's absolutely bonkers.
Jay: Well, I mean, people who own this must have never really watched any other companies with corporate governance issues. Corporate governance is an important topic that everyone should look at the composition of the board of companies that they are invested in, because it turns out its super important over time and things get very out of control, and you really don't know that much about what happens day to day inside an office, inside the culture, inside the CFO's office with reporting and accounting, and to be honest, you should also care about the $23.4 billion.
