By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
With a significant increase in the amount of activist investments, more and more attention is devoted to activist hedge funds and their targets. Below are few interesting value investment ideas from some of the most prominent and successful activists:
Activist Investors: Pinnacle Entertainment
Activist investor Orange Capital LLC recently acquired a 4.5% stake in the company and proposed to create a property REIT and distribute its shares to company shareholders in a tax-free spin-off. Pinnacle Entertainment, Inc (NYSE:PNK) is an owner, operator and developer of casinos and related hospitality and entertainment facilities. In 2013 Pinnacle Entertainment completed the acquisition of Ameristar Casinos, a casino operator of a similar size. Company is currently valued at an estimated EV/EBITDA of x8.3 (estimated FY 2015 EBITDA). Assuming the business will do well, the specifics of company’s capital structure make its equity look substantially undervalued. Activist investor’s proposal to create a property REIT can help unlock significant value. Alternatively, in due course the company should be able to return significant amounts of capital to equity shareholders.
Activist Investors: Chico’s FAS
Blue Harbour Group owns a 6% stake in the company. Blue Harbour Group is known for its activist investments, while working in a collaborative and supportive manner with companies and management (as opposed to more active activist investors who might engage in proxy fights, etc.). Clifton Robbins, CEO of Blue Harbour Group called Chico’s FAS, Inc. (NYSE:CHS) a growth stock being valued as a value stock. Based on media reports (http://www.bloomberg.com/news/2013-10-01/chico-s-luring-activist-seen-as-lbo-target-real-m-a.html), Chico’s FAS is also seen as a potential buyout candidate because it has no debt and provides attractive growth prospects. Chico’s is a specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other items. The company operates through Chico’s FAS, White House Black Market, Soma Intimates and Boston Proper brand names. On the valuation side, Chico’s FAS trades at an EV/EBITDA multiple of x6.6 (2013), has no debt, and has a dividend yield of 1.9%.
Activist Investors: QEP Resources
In October 2013, well-known activist hedge fund Jana Partners, managed by Barry Rosenstein, disclosed a 7.5% stake in shares of QEP Resources Inc (NYSE:QEP). At the time of the filing, the fund disclosed that it made initial investment in shares over a year ago. Company’s shares did not move much since QEP Resources started trading back in 2010 at a price of $34.5. On January 13th, 2014, Jana Partners filed an update in which it disclosed that it has increased its holding in the company and currently owns a 9.5% stake. QEP Resources Inc is a holding company with three major lines of business: natural gas and crude oil exploration and production; midstream field services; and energy marketing. These businesses are conducted through the company’s three principal subsidiaries: QEP Energy acquires, explores for, develops, and produces natural gas, oil, and natural gas liquids; QEP Field Services (which includes the ownership and operations of QEP Midstream Partners, LP) provides midstream field services, including natural gas gathering, processing, compression, and treating services, for affiliates and third parties; and QEP Marketing which markets affiliate and third-party natural gas and oil, and owns and operates an underground gas-storage reservoir.On January 30th, 2014, QEP Resources Inc (NYSE:QEP) provided update on strategic initiatives. These initiatives included appointment of two new board members, which will increase the upstream and midstream expertise of its Board of Directors; authorization of the return of capital to shareholders through a $500 million share repurchase program; divestiture of non-core E&P assets located in the Midcontinent during the first half of 2014; and full separation of QEP Field Services Company (including the company’s 57.8% interest in QEP Midstream Partners LP), from QEP Resources into a stand-alone company. In parallel with the preparation of the required SEC filings to prepare the spin-off, the company and its advisors will evaluate proposals for alternative transactions for separating the midstream assets.
Activist Investors: IHI Corp
In its recently published quarterly letter to investors, hedge fund manager Daniel Loeb disclosed a position in IHI Corp. IHI Corporation is a mid-capitalization ($6.3 billion USD) Japanese industrial company. IHI Corporation (TYO:7013) (OTCMKTS:IHICF) produces ships, aero-engines, turbochargers for automobiles, industrial machines, power station boilers and other facilities, suspension bridges and other transport-related machinery. IHI Corp is listed on Tokyo Stock Exchange and is a member of NIKKEI 225 Index, which consists of 225 leading Japanese companies. According to Third Point, IHI Corps owns valuable non-core real estate: a large land bank in Toyosu, a central district of Tokyo, located in the vicinity of 2020 Tokyo Olympic Village and other real estate that includes office buildings and retail properties. Based on company’s 2013 Annual Report (March 2013), this real estate had fair market value of 252 billion yen. According to Third Point, the firm hired independent appraisers and received a much higher valuation of about 350 billion yen for the same assets. Such valuation implies that this non-core real estate represents 55% of company’s current market capitalization. According to Third Point, a spin-off of these real estate holdings into a separate company can help unlock significant value for shareholders. In addition to real estate, IHI Corp has a number of other businesses that offer attractive prospects, such as aerospace and automotive products. IHI Corp is trading at an EV/EBITDA multiple of x10.5, and a P/E multiple of x19.2, based on results of the fiscal year that ended in March 2013. Adjusting enterprise value by the value of non-core real estate holdings (using Third Point’s estimate), IHI Corp is valued at an EV/EBITDA multiple of x6.7. Third Point put a 1,000 yen target price on company’s shares, which would provide a 150% return.
