by firstname.lastname@example.org | September 16, 2013 11:22 am
Alex Roepers speaks at most of the Value Investing Congress events, and he has often shared excellent ideas of (mostly) larger industrial stocks which can benefit from what he calls “constructive shareholder activism” … he’s planning to share five new investment ideas, but started with “insights from 25 years.”
He is a concentrated investor, typically with a half dozen favorite stocks in the US, Europe and Japan, and they are disciplined about both buying inexpensively and selling.
The Cambrian Fund is their big one, with 6-7 US stocks, no leverage.
Insights from his history as a concentrated value investor:
They review many things with cash flow-generating companies to see how they can change and unlock value through investor messaging, executive compensation, use of capital, corporate structure, restructuring, etc.
Most of the companies are name brand or substantial industrial companies that sound familiar to investors. The five they shared last year were Energizer, Rockwood Holdings, Clariant, FLSmidth, Joy Global, they’ve scaled out at 20-40% gains on most of them. Rockwood and Clariant are still holdings — they’ve scaled out some but still own them. ROC has actively spun out some assets to unlock value.
Five new ideas:
Baker Hughes (BHI) — third largest after HAL and SLB. Problems have been execution and problems in the pressure pumping business (we’ve seen that too, with CJES and CYSVF). He sees support around $40-45, price target of $71. He seems improved utilization of pressure pumping fleet helping, but they’re just starting recovery — should be buying back stock in 2014.
Will new management get them out of the doghouse of energy services companies? He thinks we’re at an inflection point for imrpovement.
Faurecia (France) $24 billion french auto parts companies trading at 25 cents on the dollar. At 22 euros now, target of 31. They’re heavily owned by Peugeot, so they have great guilt by association (Peugeot has been among the most shorted companies in Europe). If Peugeot divests, that’s a huge positive — this is the fifth largest auto parts company in the US, one of the fastest growers in China, France is only a fifth of their sales and Peugeot is less than that.
They’re deleveraging, it gyrates with the euro debt crisis but is an excellent global company.
Itochu Techno-solutions (Japan) — 65% upside potential. Third largest IT services company in Japan. Sticky long-term services contracts. Company is down on its luck, setbacks in earnings. Their areas of strength are retail, telecom, manufacturing. Buybacks are a challenge because Itochu already has a large near-control position. Upside is based on 10X EBIT, would get them close to near-peer Nomura.
Lanxess (Germany) — chemicals and performance polymers (tires). Tires should have a big replacement cycle upturn that was held back during downturn. Destocking in tires should be ending — “cars in Europe are driving on bald tires.”
Also trend toward “greener” tires — improved rolling resistance, etc. — will help. Big plant coming online in Singapore about to start generating (instead of using) cash, and it’s a rumored takeover target for big chemical companies. Target is 75 euros, 2014 is their first recovery year (expected), it’s around 50 euros now and they’re coming out with new updates this week.
Harman International (HAR) — speaker company that has expanded into car and home lifestyle and infotainment equipment and professional equipment for big events. Professional is good growth, but “infotainment” is the big business — they work for half of the big car companies, and they have a $20 billion backlog but just a sub-$5 billion market cap. Margins are going to improve because software is becoming a more important part of their in-car infotainment systems. Earnings are likely to compound at 30% for the next three years, they have no debt and huge buybacks and are a potential takeout candidate. Shares are at $65, the story is partly out and he thinks they should go to $84 or $100 or higher if it catches fire and does very well. KKR tried to buy them at $120 pre-crash.
There is also technology risk with Harman, but Roepers thinks it’s overstated, they have a huge number of patents and there is competition for new ideas, but they have strong acceptance from the car makers and an established level of reliability and effectiveness that’s very important.
He also updated people on Owens-Illinois (OI), a stock that he has talked about in past Congresses and that is his second largest holding and that they have trimmed … they are on a credible roadmap to $3 in earnings in 2015, so at $30 it’s still compelling as a duopoly/monopoly in most of its markets around the world. Could easily be in the mid-$40s.
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