We're posting up notes from the 2013 Value Investing Congress in New York. Next up is John Mirshekari of Fidelity Investments. His presentation was entitled "Inflections in Incentives" and he also pitched Aecom (ACM) and URS (URS).
John Mirshekari's Value Investing Congress Presentation
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Key is CEOs need skin in
the game. Beneficial interest as % of annual cash compensation. Pinnacle Air was 2x
and Sky West was 39x.
Insider ownership is one
thing he looks at. Capital allocation is one
of the few inefficiencies left in the market. Management incentives
affect capital allocations.
1. Watch the cannibals.
(Share repurchases) Should pay more for a business in hands of a manager with
pro shareholder leanings.
2. Incentives drive
decisions. Why don't managements buy back stock? Because their compensation
schemes encourage size, not stock return. Revenue, EBITDA, income are the
usual, not ROIC, three year relative stock return.
Example: AutoZone (AZO).
Perfectly aligned with shareholders. Share count down 75% over last ten years. AZO
compounds at 21% vs. SPX 3%. Inflections in incentives. Huge opportunities to
make money.
Bullish on Aecom (ACM)
Engineering company that has had this happen. Say on pay is pressuring CEOs
compensation plans. They were hit by this in 2011. So they tried to change.
They replaced EBITDA growth with EPS, CFO per share, FCF per share. Key is
"per share" so no incentive to grow without actual performance.
Include goodwill impairments in comp calculation. Focus on share count means
better use of capital.
They stopped M&A and
shifted to share repurchases. They bought back 1/3 of the shares 18 months
after the say on pay change in compensation. Stock still attractive and up 42%
even in bear case. Bull case is 90%.
URS (URS)
Comp with ACM. Civil
engineering company. Bridges, roads on a cost plus basis. $7 EPS by 2015 could
lead to 100% upside.
Could begin repurchasing
stock over next two years. FCF is $5.38 per share
last four years. Adjusted for a non-recurring WC charge, we get $7.16 per year.
In the past they have done 11 years, at $6B in cash, more than the value of the
company today.
Worst ROE in the industry. But could double it.
In the past compensation
plan was only net income. This year they added relative total share return. They had low say on pay this year.
Amended proxy says they may
use ROE, EPS, and including a future goodwill impairment charge. Management says they will
not do any acquisitions this year.
Could actually do FCF of
$16 on $7 EPS. 14x gets $98 stock price
which is 100% upside.
Says there is no shortcut,
you have to read proxies.
Be sure to check out the other presentations from the New York VIC here.
