market folly

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is Alex Roepers of Atlantic Investment Management who presented long Triumph Group, Sulzer, Owens-Illinois, Technip, and Koito Manufacturing.


Alex Roepers' Value Investing Congress Presentation

Takes minority positions for 1-2 year hold period. Longs represent 2-7% equity stake in the company  to become actively engaged shareholder. 95% batting average with their core longs. 

Because so concentrated, tend to trade around positions over time. Found that ~20% of returns come from trading around the positions and 40% of outperformance over benchmark is due to trading around positions.  

Sticks to his knitting: sustainable competitive advantage, predictable cash flows, low cyclicality,   strong balance sheet, low insider control, solid trading liquidity

Since they try to effect change, they see high insider control as an impediment so they avoid those types of names.  Avoids >$30bn mkt cap and <$1bn. Atlantic doesn’t believe they provide differentiated view on mega cap blue chips.  Also avoids areas of idiosyncratic risks (tech obsolescence, product liability, government intervention (utilities, cable TV), and lack of transparency (banks, brokerages, insurance).  Target scale-in price of 7-8x EV/EBIT. 12-24 month hold. Scale out at least +50% upside at 10-12x EBIT.  Mentioned that they are constructive on Japanese equities in next 3-8 years


Recap of ideas presented last year:

• Baker Hughes: Up 37%, still a buy at $65 with a $90 target. Atlantic is still holding

• Faurecia: Auto supply company. Peugot owns 51% but only represents 11% of sales. Fast growing   Asia component. Up 22%, is an “absolute buy” at €27 w/ €40 target. Atlantic is still holding

• Itochu Techno: Up 31%. Atlantic is still holding

• Lanxess: Specialty polymer company. Sold it a few months after recommended at no gain. Timing   wasn’t right, but they continue to watch

• Harman International: Largest maker of infotainment systems or the “integrated brain” of cars. Has   >4,500 patents, sees as takeout candidate. Trading at 10x EV/EBIT on FY2016. Thinks it is worth   $200-250/share (KKR got approved for $150/share takeover before crisis and company is worth   “multiples of that” today). Up 70% and still holding


5 New Ideas:

• 1) Triumph Group: Aerospace supplier of wing assemblies, actuators, etc. Basically a rollup of niche suppliers to major companies including Boeing, Embraer, etc. 

o Thesis: Earnings stabilization and a return to growth. Management is focused on new business opportunities.  Doing well with small bolt-on acquisitions and has a strong barrier to entry due to FAA / etc regulation.  Also a takeout candidate  
o $3.6bn mkt cap, 10x P/E, 8.4x EV/EBIT. Price target based on 11x FY2016 EBIT (+43%) 
o Bought in low $60s


• 2) Sulzer: Pump business similar to Flowserve in the US. Also have chemtech and rotating equipment  services. These are “mission critical systems” and 44% of the business is after-market products

o Thesis: Management vacuum created a buying opportunity. New chairman was Chairman & CEO of Siemens.  Roepers expects company to set new targets in 2 months, thinks we will see margin improvement and the company has a strong balance sheet while you wait  
o €4bn mkt cap, 9.2x EV/EBIT. Price target of CHF 165 (+35%)
o Peers trade in mid-teens EBIT multiples. LT upside CHF>200


• 3) Owens-Illinois: Glass maker, sounds boring but has a huge moat and balanced sales in US, Europe,  LATAM, & APAC


o Thesis: Monopoly or duopoly in all of their markets. Noise created when Chavez appropriated 2 plants and they had some logistical challenges in US.
o Legacy asbestos liabilities also create noise but are actually an opportunity (to be successful as an asbestos claimant, need to have been working in 1958 and there aren't many of those left).  Annual asbestos payments of $150mm/yr, going down 5-10% per year. This is a positive catalyst and a finite issue. $350mm of FCF is after $150mm, so this reduction   represents a built-in FCF growth of 3-4% per year
o $7.2bn mkt cap, 10x P/E and 9x EV/EBIT
o Price target of $50/share (+62%) based on 15x 2015 P/E multiple on $2.80-$4.00 of 2015 EPS 
o At $31/share today great risk/reward


• 4) Technip: Oil services company (64% subsea, 36% onshore/offshore). 54% market share in subsea.   Subsea involves gigantic reels of flexible pipe. They sell these pipe services by the foot and charge   exponentially more as you go deeper for their installation services. 

o Thesis: As low-hanging fruit of subsea oil plays have been plucked, E&P companies have to go deeper.  2015 profits will be higher than market realizes.
o High barriers to entry and high-quality management team
o Petrobras has also caused noise, but interestingly Petrobras stock has since recovered while Technip hasn't
o €15bn sales, trades at €9.9bn EV and 6.9x EV/EBIT
o Price target of €105 (+49%) based on 11x 2015 EBIT 


• 5) Koito Manufacturing: Largest maker of car lamps including LED headlamps. Toyota owns 20% of the  company and represents 30% of sales. Japan and China are its biggest markets

o Thesis: Ride wave of adoption of LED headlamps. In Japan LED headlamps went from 0% to 15%, still just 1% in Europe / US.  Also potential spinoff of KI holdings (maker of airline seats).
o Also a huge beneficiary of Abenomics. Has a history of poor capital allocation (20% of market cap is cash)
o $7.1bn sales, $3.1bn EV priced at 5.4x EV/EBIT
o Price target ¥4,200 PT (+48%) based on trading at 6x EV/EBIT. Thinks it can get to 9x 2017.
 

Be sure to check out the rest of the Value Investing Congress presentations here.