VIC — John Mirshekari

"Say on Pay" and big gains from incentive changes at the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 16, 2013

John Mirshekari is a fund manager at Fidelity, specializing in industrial stocks, and he’s talking about capital allocation and incentives.

He started by talking about a mistake — Pinnacle Airlines, which was written up as a value stock dozens of times … the CEO had little incentive to help investors.

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He thinks that capital allocation is the one area where there’s hidden value in the market — and that management incentives are huge in influencing capital allocation. Incentives drive decisions, and inflection points where the incentives are changing can create opportunities for excellent returns.

“Watch the cannibals” — companies that repurchases huge amounts of their stock create amazing returns over the long term.

Example: Henry Singleton was at Teled8yne for 18 years, but did poorly for almost a decade when he had huge increases in number of shares, but in the decade following he bought back 90% of the company and became a legend.

Incentives drive decisions — most CEOs are incented to create growth, net income, and EBITDA … NOT per share numbers.

Autozone example — the CEO’s beneficial interest in the company is 25X his annual cash compensation, so he is perfectly aligned with shareholders. And he has bought back 75% of the shares over 13 years. Modern day cannibal poster child.

What are the opportunities when incentives change? Like buying Autozone 13 years ago.

AECOM (ACM) is one that recently had a catalyst to change incentives, and the blueprint for his idea (we get to that in a moment).

Big company, $3 billion market cap, decent valuation that has already moved because they had a declining “say on pay” approval vote from shareholders. ISS voted against the compensation structure, and they started to try to change. They replaced EBITA growth in management incentives with EPS, CFO per share, and FCF per share — approval rating improved to 89%. And they said they’re likely to include future goodwill impairments in the incentive plan — giving them less incentive to make stupid or expensive acquisitions.

At AECOM, they’ve dgone from being a M&A factory to a large share repurchaser. And the stock has almost doubled since they started to engage shareholders on “say on pay” and started buying back stock. The underlying business hasn’t changed that much, but now investors are paying a much higher multiple (still attractive) because ...

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