Cohodes Sends Exchange Income Tumbling Again

  • Stock fell as much as 8.6% Thursday and is down 27% this year
  • Model is sustainable with cash reinvested in growth: CEO

Marc Cohodes has done it again: Exchange Income Corp. tumbled after the short-seller called the company’s quarter a "disaster" even as it beat expectations and its chief executive officer laid out his case for the business model.

The Canadian operator of small regional airlines and manufacturing businesses fell 8.4 percent in Toronto on Thursday, the most in almost three years, taking shares down 28 percent this year. Cohodes, the California-based investor and chicken farmer who gained prominence for his short bet on Home Capital Group Inc., has argued the company doesn’t generate enough cash to pay its dividend and isn’t investing enough in aircraft maintenance, raising safety issues.

Short interest accounts for 22 percent of Exchange Income’s float, according to Markit data.

"We’ve generated a dividend for the last 13 years, it’s grown regularly and we’ve done it exactly the same way we are now," CEO Michael Pyle said in a phone interview. "Our results were ahead of everyone’s expectations on every front."

Winnipeg, Manitoba-based Exchange Income reported second-quarter adjusted earnings per share of 77 Canadian cents, according to a report filed after the close of trading on Wednesday. That beat the 62-cent average of 10 analyst estimates compiled by Bloomberg. Revenue of C$273.1 million ($217 million) exceeded forecasts by 13 percent. 

Free cash flow fell 14 percent from a year earlier to C$21.8 million after subtracting investments in aircraft maintenance, but was 21 percent higher at C$51.7 million when discounting those expenditures.

"They exceeded expectations pretty much across the board," said Raymond James analyst Steve Hansen, who rates the stock a strong buy with a C$48 price target. "We think it’s a great buying opportunity. The prospects look better today than they did yesterday."

Cohodes disagreed.

"Make no mistake, this company is a ruse and they will go broke," Cohodes said in a phone interview. "They need to either eliminate or cut the dividend immediately because there’s negative free cash flow here."

Growth Expenditures

Exchange Income’s free cash flow was negative when growth capital expenditures of C$33 million in the quarter are also subtracted. The company has been reinvesting in its businesses because it sees a dearth of attractive acquisition opportunities, particularly in the U.S. Much of the C$310 million it has reinvested over the past 30 months has gone towards acquiring aircraft at Regional One, which buys, leases and sells aircraft and aircraft parts.

"We’re choosing to invest the free cash we generate in growing the business. As long as we’ve got opportunities, we will do that," Pyle said. "Look at our earnings per share, look at our Ebitda per share, look at our free cash flow -- all them them show the investments we have made have been accretive."

Exchange Income sees some potential acquisition opportunities in Canada, where prices aren’t as inflated as they are in the U.S.

"The opportunities we see are of higher quality than in recent periods and we are cautiously optimistic about our opportunity to grow the group of subsidiary companies," Pyle said on a conference call with analysts.

The company may also buy back shares if the stock stays at its current level, which Pyle said is well below its intrinsic value.

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