Is Cannae Holdings the Next Baby Berkshire?


AMC Entertainment (NYSE:AMC) pops 15% on news of a stock sale and Cloudera (NYSE:CLDR) gets 4.7 billion reasons to go private. On this episode of MarketFoolery, Jason Moser analyzes those stories and weighs in on whether Cannae Holdings (NYSE:CNNE) is the next baby Berkshire Hathaway.

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This video was recorded on June 1, 2021.

Chris Hill: It’s Tuesday, June 1st. Welcome to MarketFoolery. I’m Chris Hill, with me today, Jason Moser. Thanks for being here.

Jason Moser: Hey, happy to be here. Thank you for having me.

Hill: We’re going to talk about a potential baby Berkshire. We’re going to talk about a tech acquisition, but we’re going to start with the movies. Shares of AMC Entertainment were up more than 15% this morning, after the movie theater chain announced it sold more than 8 million shares to Mudrick Capital Management, which is an investment firm based in New York. AMC says it is going to use the money to do a few different things, including upgrade the theaters. Boy, the folks on Reddit are having a party because this stock has more than doubled. In the past week, it’s up more than 1,000% year-to-date. I have no stake in this, I’m not long AMC, I’m not short AMC, but I will say that, as much as any stock in the public market, this appears to be completely divorced from the fundamentals of this business.

Moser: [laughs] You very, very well put, very diplomatically put. I appreciate that. Yeah. It feels like AMC is providing more entertainment just through its share movement alone. It’s providing more entertainment than the movies that it shows in its theaters. It doesn’t seem like it’s going to be ending anytime soon. I absolutely agree, raising money makes sense in this environment when shares are doing what they’re doing. But we need to put some context around what’s been going on with this business because you put it very well and there were some numbers in the release that really offer I think some context here. I’m going to read over these numbers real quick. It’s just mind-bending to think about. 

During this year 2021 to date, daily trading volume for the stock has ranged from around 23.6 million shares to 1.25 billion shares within just that one little stretch of 2021. Within the last seven business days, the market price of the stock has gone from an intraday low of $12.05-$36.72 on May 28th. They also made it a point that they have made no disclosure regarding a change to the underlying business during that period. Just as you said, there are no fundamentals that really should dictate what’s been going on with the stock. I feel like if you’re looking for standards of what a meme stock is, I don’t know there are formal guidelines, but those numbers probably can provide a good start. Like if your stock has done this then you might be a meme stock. But it’s going to be money really sorely needed. It’s going to raise $230 million versus the $11 billion in debt that they hold. Fairly minimal dilution, so you can’t blame them for taking advantage of an inflated share price regardless of the reasons.

Hill: I know that some people are excited about the fact that the weekend box office in total was over $100 million. It’s the first time that’s happened since the pandemic. Depending on how you look at it, there are some indications in terms of the movie industry as a business that you can look at and say, OK, well that’s encouraging. But there is no denying the long term trend of just bodies in the theaters, Jason. You can go back to tooth out like this, the story of movie theaters as a business in this century has been a steady, small, year-over-year decline. Even though some years we have seen the box office receipts bump up a little bit, that’s due to ticket prices being increased, that’s not due to the number of bodies in the theaters.

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Moser: Yeah. It’s nice to know that you have a demographic out there that really still wants to go to movie theaters and you can raise those prices a little bit to offset that diminishing traffic. But I think you’re right. It does seem like this train is only going in one direction and it’s just going at a slow speed. One of those things we always look for in investments, one of those things I always look for, I’m not a value investor so I’m not really looking for mispricing so much, but it does feel to me, we’re always looking for large and growing market opportunities. Even if it’s not necessarily large today, you want the indication that there is a growing market opportunity and it could be substantial. It strikes me with AMC’s market that, yeah, theater traffic is shrinking and this isn’t the market that just goes away, it’s just one that’s going to be smaller, so it may not be as meaningful for investors. It’s important to remember there are ways to invest in market opportunities like that even if they’re not necessarily that attractive and growing if you have one of the market leaders in the space, right? 

You can still have a good business in a market that’s somewhat mature and not necessarily growing so robustly. It feels like AMC, if it’s able to work its way through this pandemic time and things get back to some sense of normal in regards to traffic to movie theaters and I think it will. I think a lot of people are really excited to be able to get back out and go do stuff. This could be a good company in a less than compelling market opportunity over the next several years.

Hill: But that’s the difference between this business and some of the other businesses that we’ve talked about over the past few months that have had their stocks knock down sometimes to the tune of 30%, 40% from their highs earlier this year. You look at some of the obvious names, cloud-based stocks, trading on the Nasdaq. Yeah. Maybe they got ahead of themselves and so if you bought at the wrong time, your stock is down 25%, 30%, something like that, but those are still growing businesses in growing industries with increasing market share. I’m as big a fan of movies as anyone I know, but I don’t think anyone should delude themselves into thinking that the business of people going to a movie theater has as promising a future as, say, cybersecurity. 

Moser: Yeah, when you are assessing the market opportunities that you may want to invest in, it’s hard for me to imagine and somehow look at the movie theater experience as a compelling one. I don’t know that anything really necessarily changes that. But it is always a good reminder, you’re investing in a business, this is a business as well as an entertaining story to follow. But there are going to be some investors that try to play into this whole trading thing and mean start thing. There are ways to definitely get out here. When I look at AMC as a business going out five years, there’s no question. It’s not one of those businesses I would have even at the middle of the list as far as opportunities, because it does feel like any upside that they may witness, feels like a lot of that has already been realized and most of it will probably be somewhat short-lived.

Hill: Say goodbye to Cloudera as a stand-alone public company, the Cloud-based data analytics company is being acquired by two private equity firms for $4.7 billion in cash. Cloudera closed last Friday at just under $13 a share. This deal is for $16 a share, so a nice 25% bump for shareholders. I will just add Jason, Cloudera went public in 2017 and it has not had a particularly great life as a public company. It’s going to be taken private at a price slightly lower than where they build.

Moser: Yeah. I’m glad you mentioned that because it is one of those businesses where you look at the name, you’d hear that it’s a subscription Software-as-a-Service subscription model and you would think, oh, this must be one of the suppliers. It’s getting taken out at this mass and premium and I think the stock is going to be valued somewhere to around 7.5 times gross profit with this deal, which is clearly not anywhere close to a lot of those high-flying names that are going for much more expensive valuations these days. I think that’s all just to say the market is clearly telling us something with this one. It’s had a while to try to demonstrate the growth potential there. While revenue has grown at a 30% clip, annualized over the last three years that revenue growth is slowing down. I’m not sure how big this company really gets on its own. It’s been said before, really, it’s data analytics. They deliver this enterprise data cloud and they focus on big companies, big organizations. I think that limits their customer base, so to speak. Even though they are really big organizations, there is a limited number of them. 

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You do wonder what’s the next act for a business like this. Is one that I looked at for a little while for our Next Gen Supercycle services and it was one that I just walked away thinking it has these 80%-90% gross margins. It has a lot of attractive qualities, but clearly it’s not bringing anything down at the bottom line. It’s not profitable even though it’s cash flow positive, there’s a lot of stock-based compensation involved there. I think this is probably the best outcome for investors. What will be interesting to see is if at some point the acquirers don’t try to dump it back on the public markets as they often do, riddled with debt. But I don’t know, it’s KKR and a partner doing the deal and they both have reputations for collecting and running pretty good businesses. Maybe they’ve got some plans with this one.

Hill: Our email address is marketfoolery@fool.com. We got a question from Paul Underwood in Jefferson City, Missouri. “The three of my biggest and favorite holdings are at Berkshire Hathaway, Markel, and Boston Omaha. Recently, someone mentioned Cannae Holdings to me from their website and I will just add the ticker symbol is CNNE. From their website alone, it looks like an interesting, odd mix of legacy holdings and SPAC acquisitions. Would you lump this company into the baby Berkshire category or does its lack of using insurance companies as a foundation and more aggressive moves in the SPAC space cause you to look at it through a different lens? I never heard of Cannae Holdings before [laughs] we got this email. Is this one that has ever popped up on your radar before?

Moser: Well, first, let me just say this is one of the very few times, I guess I’m glad we’re not actually doing this in the studio together because you promptly reached over and […] for correcting you, I think it’s actually pronounced Cannae. I’m not positive, but I think that’s the way it’s pronounced from transcripts that I had in researching this business.

Hill: Let me just interrupt and say, if I were to slap you, it would not because you corrected me, [laughs] not over pronunciation if you think so.

Moser: But anyway, yeah, like you, I was not familiar with this business. I had never looked at it, had never heard of it. It is a really interesting little history though that split off from Fidelity National Financial, which is I think primarily title insurance, maybe, or mortgage insurance, but businesses like this, I mean, this is a business that essentially it’s very similar like the email said to models like Berkshire and Markel on that they invest in businesses and their primary investments for Cannae include Dun & Bradstreet, Ceridian, which is an employer services, Optimal Blue, which is mortgage software, […], they’ve got a lot of exposure to restaurants, an interesting mix of restaurant businesses in there. 

For businesses like these, maybe even get a real estate and golf community. Chris, this is right up my alley, speaking my language. It is all about leadership with businesses like these. I think in this case, this is a company that’s being run essentially by Bill Foley, who has a long history. This was a split off from Fidelity National Financial in 2017 and Foley has work history that has had him with all sorts of different businesses. He is the founder and chairman of his own wine business, Foley Family Wines, for example. He’s just got a very diverse work history which it seems to me, like in this line of work, he would know a lot of things and that would be an advantage. I think as an investor, it’s similar to Berkshire, but yet it doesn’t have that insurance model business to really rely on investing that float. To me, there probably is a little bit more risk there, but it is essentially like a fund for lack of a better description there and it’s being run by Bill Foley and the stock has done OK. It’s turned 80% over the last three years that’s outpaced the market. I’ve read the shareholder letter that he’s written recently and they’re all really interesting and entertaining reads. 

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The stock today is valued a bit under book value, which is how I would value business like this. It is similar to those businesses. It’s a little bit different as the email noted, which I think makes it a little bit of a riskier proposition. But the flip side is that if you have a good manager, you have a good operator running that business. It seems like Mr. Foley has a pretty good track record. There could certainly be some opportunity there, because they’re going to continue to acquire interest in new business and diversify that portfolio. Actually, I’m going to keep an eye on and talk a little bit more about it with Matt Frankel for Industry Focus: Financials on […].

Hill: Not a particularly big company, just from a market cap standpoint, we’re talking about a $3 billion fund here, not to get overly enthusiastic, but we’ve talked before about Berkshire Hathaway in particular and their inability to just by virtue of the size of Berkshire Hathaway and how much cash they have, they’re somewhat limited in the moves they can make in terms of their own investments. Cannae Holdings is able to note that any business is problem free, but they don’t have that problem.

Moser: No, they don’t. You’re right. I think it gives them the opportunity, particularly now and we’ve seen so much happening in the SPAC space, for example, and Cannae has been investing in that opportunity. It’s interesting they have in their annual report, the letter to shareholders and most recent annual report. They have a nice breakdown on page four that actually they are calculating their intrinsic value per share and they’re basically just adding up the pieces of all of their investments. They just label that from Merrill life. They value at $1.32 per share and they ultimately come to this intrinsic value of just under $53, $52.90 per share, they view their shares at that intrinsic value versus what the market is pricing in at today, which is clearly somewhat below that in the about $38 range or something like that. It’s trading a little bit below book. It’s trading definitely more below their intrinsic value calculation, and as such, they have authorized more in share repurchases because they see some value there. That’s one more way businesses like this can continue to grow that share prices despite reducing that number of shares outstanding.

Hill: Keep those emails coming, people, marketfoolery@fool.com. Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.




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