Turnarounds and Cheap Industrials

by Travis Johnson, Stock Gumshoe | October 2, 2012 10:25 am

Today we’ve had two good presentations at the Value Investing Congress so far — one from Lloyd Khaner with a pretty compelling argument that Jamba Juice (JMBA) has gone through the first three years of turnaround and is ready to ramp up again with much, much better management and strategy, including a presence in public schools, and one from Alexander Roepers, who usually does a great job finding cheap industrial and service companies with boring businesses that should be able to increase their multiple by 50% over a year or few.

I need to take more time to look at JMBA, but the argument was strong that they have turned a company full of “red flags” into one full of “green flags”, with a menu and store turnaround that are much stronger — and not as competitively threatened by McDonald’s or Starbucks as everyone things. They have the advantage of a tailwind from the healthy food market’s growth, and they are small enough (and the stores small and cheap enough) to be extremely nimble, and they have a good opportunity to run up royalties and licensing fees on their packaged products as well as on their increasing franchise count over time.

JMBA sacrificed revenue for margins and a store “cleanup”, we’re told, and is now ready to become a growth company again — Khaner thinks the earnings can go from five cents now to 45 cents in 2015, for a stock price between $6-12 and what will still be open-ended growth at that point. Worth a look, and I intend to take one later, but as you’ll probably notice it’s not cheap based on the five cents in earnings so you do really need to see that growth.

Roepers was the person who got me interested in Flowserve (FLS) last year, which has been one of the better stocks I’ve profiled for the Irregulars, and he has since sold it because it became fairly valued — that’s their discipline, they buy cheap and sell when it becomes average or fairly valued. He’s now re-recommending Energizer but also calling attention to several other stocks that sound interesting to me — particularly Rockwood Holdings (ROC) and Joy Global (JOY).

The argument for Rockwood is that they’re being valued based on the volatile titanium dioxide business, but that their lithium business will become much more critical as lithium batteries become larger in the future (on electric cars, so that is a key consideration — a trend that we all think will come but a timing that’s uncertain). They have several specialty chemical divisions that they could spin off or manage better, and he thinks the sum of the parts value is 50% higher than the current share price, as well as pointing out that SQM, the Chilean lithium giant that’s partly government owned, is selling at a 13X EBITDA ratio but ROC is selling at 5.8X EBITDA. Rockwood has been a teaser target before[1], but this is a good reminder to take a look again.

And for Joy Global (JOY), the argument is basically that coal is not going to die. And if coal doesn’t die, then you’re getting the company for about 10X their earnings just from the profitable and stable maintenance, recovery and overhaul (MRO) business and aftermarket services, the part of the business that is very stable and profitable even when new unit sales dip, so the argument is basically that you get the new equipment sales for free … and new equipment sales are still better than you think they are. The stock is down in the mid-$50s, he thinks it recovers to $105.

He also reiterated his interest in Owens Illinois (OI), of which his fund is the largest holder — a stock with a huge irreplaceable assets and that should be growing. They have an extremely low forward PE and much of their core business is going very well, he thinks they can get back to earning more than $3 a share, recovering to their pre-crisis earnings run rate, and notes that pre-crisis the shares were near $60 — they’re at $19 now.

Off to hear David Einhorn now, should be interesting, lots of ideas that I like so far today — will try to write again later in the day.

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  1. Rockwood has been a teaser target before: http://stockgumshoe.com/tag/rockwood-holdings

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