Note to readers: I am writing all these posts very informally. I have found that readers like this the best, and it enables me to take the most notes possible and get them up in real time. I will be updating the presentations in real time, and tweeting, so make sure to check back frequently or on Twitter, Facebook or Feedburner. Also you can check out this website announcement Value Investing Congress Website Announcement.
All notes are the speakers, except words in the brackets which are mine.
Adam Weiss is a Co-Founder and Co-Portfolio Manager of Scout Capital Management, L.L.C., a $2 billion hedge fund established in 1999 that makes concentrated, long-term investments in high quality businesses that it believes to be misunderstood and incorrectly valued by the markets. Prior to starting Scout Capital with James Crichton, Mr. Weiss worked at Dan Loeb’s Third Point Advisors as a Research Analyst, and began his investment career at DLJ in the Merchant Banking Group. Mr. Weiss received a B.A. from Harvard College, and a joint J.D./M.B.A. degree from Columbia University.
James Crichton is a Co-Founder and Co-Portfolio Manager of Scout Capital Management. Prior to starting Scout Capital with Adam Weiss, Mr. Crichton worked at Zweig-Dimenna Associates as a Research Analyst, and began his investment career at DLJ in the Mergers & Acquisitions Group. Mr. Crichton received a B.S. from the United States Military Academy at West Point, and an M.B.A. from Harvard Business School.
Whitney Tilson says that Scout Capital likes to keep a low profile, but he persuaded him to speak.
We are global long short investors.
We are presenting two ideas:
We look at risk
Quality
What the market is missing about the company.
Adam:
Williams Companies (WMB)
It has pipelines, E&P and midstream.
It gets the gas and transport it.
New CEO in February announced a breakup. He increased dividend by 85%.
We think significant value will be created with breakup
E&P should be worth $9 per share. Hidden asset worth $3-4 a share. Midstream is worth $3-5 a share, excess balance sheet $2-3 per share.
It is currently trading at $24 a share and we see $47 a share upside.
Quality
Long distance pipeline/Transco makes it more valuable.
It has favorable competitve enviroment since new pipelines are very expensive.
It is a low cost producer, it was $129 per mile for pipeline today its $55 million.
There are risks; it is capex intensive.
7-10% EBITDA CAGR should be attainable. Most of the business is fee based.
Midstream-is driven by gulf of Mexico, Marcellus shale
Pipeline-Transco is the best pipeline
Midstream Canada-Oil sands is growing.
New management has agreed to split up the company. And appears to be shareholder friendly.
Why is misunderstood?
Spinoff/breakoff is misunderstood by investors.
New CEO.
Hidden assets just labeled as other.
Infrastructure worth $30.00. Management guided to $1.03 for 2012 dividend, we think it will be $1.14. Coverage is still good at 1.2x. We assume a 4-4.5% yield which gives us $25-30
E&P – $9 per share based on NAV. It owns 4 trillion acres of natural gas. Also owns stakes in other companies with nat gas assets. Proved MCF is $1.24, giving us $9 a share for the whole E&P business.
Hidden assets is the Williams’ Canadian Midstream. We apply at 5.5x EBITDA multiple, this is for a non cyclical company- we get to $6 a share.
We try to hedge the risks, so what is the risk?
MLP valuation risk. Without access to markets MLPs cannot fund themselves.
NGL stability- Roughly 20% of EBITDA is from commodities.
There is always regulatory risks. But we think this is paced down to customers.
Risk of irrational M&A
Upside
We think the seperation will happen within first month of 2012
We expect dividend raise
Discovery of the hidden assets.
James Sensata Technologies
It makes various safety products for cars, planes, large HVAC systems.
The company has been around for 90 years.
James Sensata Technologies has risk of regulator risk of safety and emission standards, industry/cyclical risk. Emerging market growth of 10% over next few years for the company. It makes safe and environmental friendly products which are essential.
Sensata makes more efficient products for markets. It makes a sensor for planes that cost $1,000, less than 1% of the cost of a plane for a needed part.
Company only has to invest 15 cents of $1 of cash flo to grow business.
There are high switching costs. There is no alternative for customers who want to switch once it is installed.
Most of the costs are variable
It has low labor costs, and production costs; making it low cost provider.
Every $1 in EBITDA= 70 cents of profit.
Management is good
Sustained ROE of 25%, enabled by financial leverage.
Management increased shares owned from 0 to $100m worth.
Why is it misunderstood?
Market is ignoring change of management incentive, which currently encourages building shareholder value.
While liquidity is low, it should increase overtime.
We think based on industry comps.
$3.25 modeled EPS versus $2.82 street consensus. With share buy backs this should add 20% to EPS.
Sensata is trading at 7.3x EPS, 36x FCF, cumm total cap appreciation of 55% (all 2013 numbers).
If macro environment improves and it goes to 16x earnings (using excess capital) it can be worth $60 a share.
Where could we be wrong?
Management needs to execute
Valuation multiple might not expand.
Leverage is high.
Q&A:
We use comps even though it is levered bc we think it is very manageable. They can safely cover their debt with huge FCF left over, so this is a diff type of company.
M&A- Usually pay 7-9x cashflow. Most of the companies they are looking at are not publicly traded. They have done past successful M&As.
