Lindblad (LIND) is an adventure cruise expedition company that the Fund has owned for several quarters. We think it’s an excellent business at a good price (currently 8x EV/EBITDA). We believe there is a strong moat around Lindblad’s business due to its 50 year operating history, and its exclusive relationship with National Geographic (20% of sales are through Nat Geo and they have an option to purchase 5% of Lindblad) – as we like to say, “no one doesn’t like puppies, no one doesn’t like National Geographic.” That Lindblad, with relatively few amenities, charges 5x (or more) the price of mass-market cruise brands speaks to its reputation and the uniqueness of its experience. The company also has a strong balance sheet, with net cash, and can self-fund its fleet builds. We believe that the balance sheet affords the company the opportunity to make acquisitions, which we expect will prove extremely attractive given the company’s brand reputation, marketing prowess, and operational infrastructure. If acquisitions don’t occur, we’d expect further share repurchases ($20 million was announced, and we believe largely completed, last quarter).

The company’s shares are down 14% year-to-date, although there’s been no bad news – they have yet to report 4Q, but we expect results/outlook to be solid. We suspect that when Lindblad reports, they will announce that they used much of their $20 million repurchase plan to buy back warrants during 4Q. The significant number of warrants (strike price of $11.50) becomes increasingly dilutive as the share price rises, so the repurchase of warrants would be materially accretive if Lindblad executes, as we believe they will.

Lindblad is on schedule to have two new ships, one in 2017 and one in 2018, each with ROICs in excess of 20%, far higher than the mass market cruise lines, and which can be funded from internally generated cash flow.

While we recognize the boom-bust cycle of the cruise industry we simply believe that Lindblad is a very different story. For example, Carnival hosts 11 million passengers per year, Lindblad less than 20 thousand. With an aging population, that is increasingly healthy, wealthy, active, and looking for unique experiences, we believe the underlying demographic trends for Lindblad are strong. We note the recent Pew Research study about the shrinking of the US middle class. While there’s been an explosion of impoverished, there’s also been an explosion of wealth.

Source: http://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/

Source: http://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/

We think Lindblad, with its unique positioning, will continue to enjoy strong demand at high price points.

Finally, for us, the elephant in the room is the company’s cash position, and anticipated cash generation. According to their investor presentation, over the next 5 years they intend to build 3 ships (2 are on order for $10 million total more than originally expected, factored into our estimates), increasing passenger capacity 50%, and doubling EBITDA – while generating net cash of $50-$60 million, by our estimates over that period. Cash is going to go to accretive acquisitions or additional buybacks, both positive outcomes in our view. We consider the current multiple undemanding especially since we think there’s a lot that go right. This is a company that bought a $30 million ship in 2013, the Orion, renamed it the National Geographic Orion, and in 2016 will likely generate over $10 million in EBITDA and almost $10 million in free cash flow. There’s a lot of hidden value to the brand and we’re patient to wait for it to come out.

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The above post has been excerpted from a letter of Dane Capital Management.

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