We have been digging into various names that legendary investor Michael Burry owns. We went over his ownership in Geo Group Inc. (GEO), the prison company. Burry originally started purchasing shares under $6 per share. Today the stock is over $10 and likely to go higher given the growth and zero competition with BI Incorporated.

Burry doesn’t miss. He’s a value investor at heart and knows to swing hard when there are undervalued assets. So when we saw that Burry loaded up on a stock trading for $1.75 per share, we got pretty excited.

After doing our initial due diligence, things look pretty hairy, but the setup is just too compelling to pass up. If the thesis plays out the stock is a ten-bagger. Here is our thesis:

The stock has gotten hammered. Prior to COVID-19 the stock price was flirting at $20 bucks per share. Today the stock is close to one dollar and trades like it is about to go bankrupt.
A new management team has been installed. The management team is rapidly cutting costs, selling assets, realizing insurance proceeds, paying off near-term debt maturities and focused on driving free cash flow.
There is $6.2 billion of debt, but all but $545 million is fixed at an average rate of 4.74% and the nearest maturity is $214 million due in 2023, which will be paid off with the recent asset sale. The next maturity is a $600 million note due in 2024 which the company should have enough cash on hand to take out before maturity.
In addition, the company has $2.7 billion in revolver capacity and the company calculated net leverage is only 2.00x. The debt should not be an issue like the market is perceiving.
Adjusted EBITDA has historically been in the $2 billion range. The market cap is only $676 million and the enterprise value is $5.9 billion, resulting in an EV/EBITDA ratio of only 2.95x.
Historically, the company has always generated $1 billion plus in unlevered free
cash flow, resulting an a historic enterprise value to cash flow ratio of less than 6.0x. Once inventories are worked through, we don’t see why these cash flows shouldn’t return.
There are over $1.7 billion of inventories and $1 billion in accounts receivable, offset by only $977 million in accounts payable. There could be a large positive working capital swing into cash balances, significantly de-risking the thesis.
There is an estimated $170 million of cash that will hit the balance sheet in Q4 from two asset sales concluded after Q3 2022 quarter-end. In addition, management stated on the recent call that they might get significant proceeds from “business interruption proceeds” from a fire at one of their facilities last year. As a note, $280 million of insurance proceeds were received from this fire and we expect proceeds in the hundred plus million range could be possible for business interruption proceeds.
The stock is beaten down from a tough inventory liquidation year, a $2.7 billion non-cash impairment, a material weakness in the financials, sky high inflation (management has not raised prices this year) and a new management team taking over the ship. The bad news is out and any good news will re-rate the stock higher than the current valuation. Over a multi-year period, the equity could ten-bag.
Michael Burry bought more than 5 million shares of the company's stock in the last quarter.

We think this stock has significant upside and have bought into the equity. Michael Burry usually doesn’t miss. And when there is significant upside like we see in this stock, we want to share a piece of the pie with the legend himself.

Hope you enjoy our research report.

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