In the company’s annual investor letter, Glenview Capital’s Larry Robbins shared his thesis on a couple of his holdings including Monsanto Company (NYSE:MON), Dollar General Corp. (NYSE:DG) and Global Payments Inc (NYSE:GPN). The letter also discussed Hertz Global Holdings, Inc. (NYSE:HTZ) which was not among Glenview’s long positions until the end of 2013. The letter expands on Robbins idea of owning “convertible equities”, stocks that return like bonds with a base case return. Additionally these convertible equities have “free call options” lined up, such as corporate restructurings, management change, capital deployment, which could boost profits.
Larry Robbins on Monsanto
The value of Monsanto is in its absolute control over the corn and soy farming in the U.S, where over 90% of whatever is planted either brings direct revenue to the company or indirectly benefits Monsanto through royalty revenue. Robbins goes on to say that it is virtually impossible to compete with this agriculture company and infiltrate its moat. In this regard, the letter draws a brief comparison between Monsanto and DuPont, where the latter has been inherently dependent on Monsanto’s technology despite spending billions on R&D in the past 10 years.
“We believe no company can or will catch Monsanto’s lead in agricultural products, as it has invested decades and billions ($1.6B in R&D this year alone) in creating the germplasm that makes up the basic building block of Monsanto seed & trait products – one would literally need a time machine to cross the competitive moat that Monsanto has built up over multiple planting seasons creating a compounding yield advantage.”
Glenview thinks Monsanto is the ultimate type of “convertible equity”, which has the intrinsic factors that will return reasonably over a long period and an impenetrable moat. Catalysts that can bring profits to its shareholders in the near-term include introduction of new GMO soy product — Intacta — in Latin America, that can push earnings growth from 15% to 25% over 3-4 years. Monsanto’s huge balance sheet, with $1 billion in free cash and $15 billion in borrowing capacity, gives the company the freedom to innovate and improve return to its shareholders.
Robbins also mentions Monsanto’s technology-forward initiatives such as “precision-farming”, that are meant to aid farmers in making better decisions based on analytics and computational tools. The company thinks this innovation can bring $20 billion in revenue over a decade. In Glenview’s opinion, it is hard to predict the impact of precision farming with certainty, it is still a “free call option” that could return well.
Larry Robbins on Hertz
The annual letter also discusses Glenview’s view of Hertz Global Holdings, Inc. (NYSE:HTZ), a newly acquired position of the hedge fund. The holding is a significant divergence from the type of companies the fund likes to buy, a fact that Robbins mentions in the letter. In his view, the consolidation of the car rental industry after Hertz acquired Dollar Thrifty Automotive Group, Inc. (OTCMKTS:DTGF) and Avis Budget Group Inc. (NASDAQ:CAR) bought Payless and Zipcar, has multiplied the potential of Hertz. Robbins explains that even thought Hertz shares have lagged over the past twelve months, the value of the holding is tremendous in the long run.
Hertz is also rumored to be under pressure from activists, as the company adopted a poison pill at the end of last year. Carl Icahn and Dan Loeb both hold positions in Hertz, however, neither has publicly given any indication of activism.
Glenview further noted that Hertz can benefit more if it maintains a higher leverage ratio on its car rental business rather than deleveraging as planned. Robbins also thinks that Hertz has the ability to intelligently price its rental cars and even more so after the acquisition of DTG, Glenview notes,
“We note that the economy and consumer spending appear solid in our analytical and prop research work, which forms the backdrop for additional medium-term firmness in pricing. c) With load balancing (Hertz weekday Dollar Thrifty heavy weekend) and the ability to cascade product (newer fleet on the high value business traveler, older fleet for discount consumer) all feed into Hertz’s ability to price more firmly per asset.”
The free call options in regards to Hertz include the spin-off of Hertz Equipment Rental Corporation (HERC) by the end of this year. In Glenview’s opinion Hertz Car Rental and HERC should each trade at 13-14x forward earnings instead of the current trading price which is around 10.5x 2015 estimates.
We will be following up with more from Glenview Capital soon.