market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Alex Roepers of Atlantic Investment Management.  His presentation was entitled 'Corporate Action, Activism & Takeovers: Gaining Momentum.'

Atlantic: $1.8B in AUM, concentrated in 5-7 core positions in US.  Investment grade, mid-sized.  Uses significant minority positions, 2-7% to for shareholder activism.  Strict buy/sell discipline, buy 7x EBIT, sell around 11x.  1-2 year holding period is typical.  Largest fund 5-7 stocks, that’s it!  Averaged 18.5% annually over 20 years vs. 8.5% for the SPX.  

On Investor Activism

Last year he said environment was good for corporate action, activism and takeovers (JANA's Barry Rosenstein agrees).  Today we have:

1. Attractive valuations, because people are VERY gun-shy due to market crashes.
2.  Strong balance sheets now, much better post-2008
3.  Private Equity under pressure to put capital to work
4.  Super low interest rates, easy to make acquisitions
5.  Moderate organic growth due to economy; "Need to buy growth"
6.  Some hostile in M&A, nowhere near record levels of past  

Earnings yield of SPX is 6.8% vs. 1.8% 10 year treasury.  Expect the decade long outperformance of bonds to reverse; stocks will outperform next ten years.  He also showed the same chart of fund flows of investors pulling money from stocks into bonds.  "You will have phenomenal returns in equities if you pick your stocks right."  

PE firms have $400B in dry powder for buyouts. VIX is greatly reduced, which helps create environment more buyouts. Japanese and Chinese are stepping up cross-border M&A.

Atlantic's Approach:

1. Sufficient size and liquidity. >$1B to move the needle, but <$10B or it's too big to get a deal done 2.  Strong strategic franchises with high barriers to entry
3.  Attractive valuations: <8x ebit="ebit" forward="forward" nbsp="nbsp" p="p">4.  Strong balance sheets: EBITDA> 4x interest expense
5.  Predictable and recurring cash flows, high MRO content
6.  Low insider ownership <10 blocking="blocking" by="by" family="family" held="held" management="management" nbsp="nbsp" or="or" p="p" shareholders="shareholders">7. Noticeable activity in a sector; e.g. chemicals, mining equipment
8.  Liquidity.  Take 2-7% ownership stakes, no board seats, so proxy battles
9.  Write detailed shareholder engagement letters and have active discussions with management  

Recap of last year's investment ideas: ENR up 5%, ASH up 59%, FLS up 63% (sold it), MTX GY up 22% (sold it), and ATO FP up 53%.


Roepers' 5 Investment Ideas

Energizer (ENR).  $75.43, $4.9B market cap.  47% of business is batteries; the other 53% is personal care products: Schick shaving, Hawaiian tropic skin care.  Margins should be higher; eps should be $7.50 up from $6.00.  Target price is about $100 in 6-12 months.  

Rockwood Holdings (ROC).  $49.  $3.9B market cap. Specialty chemical company.  Lithium, Advanced Ceramics, TiO2, Surface treatment, Performance additives.  Stock trades on the TiO2 business, but they should IPO or spin this segment.  Real bull case here is Lithium, 8% organic growth without the electric car.  #2 lithium producer in the world.  Sum of the Parts (SOTP) to get valuation.  Catalysts are IPO of TiO2 business. Target price $70/share in 12-18 months based on 10x 2013e EBIT.   

Clariant (CLN VX).  Swiss conglomerate.  Disposal group, pigments, oil and mining services.  Being restructured, de-levering now.  46% capital appreciation potential in a year.  

FLSmidth (FLS DC), Danish mining supply company.  Concerns about China slowing.  Cement, Customer service for mining, and non-ferrous metals.  They help mining companies set up operations.  33% upside at DKK 467/share in 12-18 months.   

Joy Global (JOY).  $59.41.  Coal mining equipment.  Coal is out of favor.  Half surface mining, half underground.  Actually though, a lot of coal buying out of the most green countries, Japan and Germany.  Growth industry, but not in the US as much.  But he says all the switching from coal to gas that could happen, has already.  Stock has dropped in half this year on China slowdown and emergence of natural gas in the US.  Says 2013 is the trough year, but it will grow over time.  Their only competition was bought for 13x by CAT.  Very likely takeover candidate. Price target is $105 in 12-18 months based on 11x FY13E EBIT, 77% upside.


Q&A Session: 

1.  Why did ENR not do well?  Part of it was FX, the Euro. Also they've been slow and shareholders have become disenchanted with management.

2. Still own Owens Illinois?  They own 6.5% of the company, number one glass bottle maker in the world.  40% of business from Europe, demand a bit slow and FX issues, but trades at only 6x next year P/E and they are paying down debt.  Trades at only $18 now.

3.  Will JOY survive the "war on coal?"  It still generates 35-40% of the electricity in the US.  Gas prices coming up. US segment is only 22% for JOY.  He says when being activist "I'll fade out of the stock when you achieve X, Y and Z" which makes people listen to them.

Embedded below is Roepers' slideshow presentation from the Value Investing Congress: 





Check out the rest of the hedge fund presentations from the Value Investing Congress.