Billionaire Nelson Peltz and his firm Trian Partners are among the most successful activist investors in the business. Although the Trian team recently lost a close proxy vote at DuPont, they still made money, and after another profitable investment in Ingersoll-Rand, Peltz seems to be maintaining his focus on the industrial sector.
A May 29th report from RBC Capital Markets highlights that at the EPG Conference on May 19, Nelson Peltz dropped hints during the more informal fireside chat that he was looking at two potential activist campaigns in the industrial sector. Not surprisingly, Peltz’s disclosure led to much discussion and debate among both investors and analysts regarding which companies might be his targets.
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List of possible candidates for Trian activist campaign
After completing their modeling, RBC analyst Deane Dray and team conclude that Emerson Electric is the most likely of the potential activist candidates, followed by Eaton Corp, Tyco International and United Technologies.
That said, they emphasize that there is no “one company within our Multi-Industry coverage that would appear “compelling” based on what we know about Trian’s approach.” Dray et al. note that each company has a number of pros and cons from Trian’s perspective.
The RBC analysts also suggest that the the need for portfolio reshaping makes both Emerson and Eaton top candidates. They also note they have received a lot of questions about whether Tyco or United Technologies might be possibilities. Both companies are certainly possibilities for Trian’s next target, but Emerson models as the most likely. Finally, the team notes that Actuant could be appearing on some other activist investors’ screens, but it is probably too small for Trian to bother with.
Activist investors becoming the norm
The RBC report also highlights that “shareholder activism has emerged from posing an occasional threat to management teams into a mainstream investment class across both the broader equity market and specifically within the industrial sector.” They go on to say that underperforming companies being “confronted by a vocal investor demanding changes to their strategies, management team, or portfolio composition” is becoming the norm. Moreover, in many cases, the mere threat of activism is enough to force BoDs to be more active with portfolio management.
What does Nelson Peltz look for in an activist campaign candidate?
In analyzing potential candidates, the RBC team decided to ask the question “What makes Nelson Peltz’s approach different?”
They started out by noting that shareholder activists are not homogeneous, and each typically has a different strategy and point of view about what is a worthwhile investment of time and capital. One well-known strategy is to carefully look over the balance sheet for excess capital to that could be used for buybacks or dividends.
This strategy, however, risks bringing up the generally preferred to be avoided debate over whether activists are “ruining America” by emphasizing short-term returns at the expense of real, job-creating longer-term growth. Nelson Peltz’s so-called “constructivist” strategy, on the other hand, initially looks at the the P&L to find “new areas of operational growth or margin improvement.” Dray et al. argue the qualities that make a company attractive to Nelson Peltz and Trian include:
- A focus on the income statement rather than the balance sheet: Unlike a number of shareholder activists who will settle for injecting idle cash towards buybacks/dividends, Nelson Peltz and Trian Partners prefers keep their eye on the P&L statement to find areas for margin improvement such as SG&A, sourcing, or productivity. Given the likelihood of operational experience in the sector, if the top line growth is weak, in many cases Peltz will also suggest new growth strategies.
- Turnaround stories are a favorite of Peltz. Companies with a strong history, but poor recent performance, can become “lightning rods for activist attention, with upside potential purely from weeding out the root of the decay.”
- High recurring revenues and significant installed bases: Peltz has stated publicly in the past his personal preference is to invest in companies with strong brand equity and significant recurring revenues and installed bases.
- Too much noncore business in the portfolio: The idea of creating more lean and efficient corporate structures by divesting or noncore businesses is very attractive to most activists, including Peltz.
- A sum-of-the-parts discount over 15%: This 15% discount figure is often thrown around as a benchmark for when activists might get interested in a firm.