John Mirshekari: Inflections in Incentives

John Mirshekari: Inflections in Incentives
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The 9th Annual Value Investing Congress is underway. Now speaking is John Mirshekari, Fidelity Investments, on the topic of Inflections in Incentives.

John Mirshekari: Inflections in Incentives

John Mirshekari is a co-PM of Fidelity Low-Priced Stock Fund, as well as managing five other value funds for Fidelity. Mirshekari specializes in industrials, where he manages concentrated sub portfolios of 10-20 stocks with an absolute value orientation and focuses on long-term capital appreciation. Prior to his current role, Mirshekari spent seven years as a research analyst at Fidelity covering various industries.

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John Mirshekari live coverage

Talking about:

Investment mistakes (Pinnacle Airlines (OTCMKTS:PNCLQ)  –CEO had no skin in the game

lessons in capital allocation (watch the cannibals, incentives drive decisions, inflections in Incentives)

applying what I’ve learned (presenting a stock he thinks can double from here)

Watch the Cannibals–they buy back large amounts of their own shares

7 of the 8 CEO’s outlined in “Outsiders” bought back at least 30% of their outstanding shares

Most company CEO’s are incentivized by size of company, not Return to shareholders

Inferior metrics: Revenue Growth, EBITDA growth and nEt income

Superior Metrics: (ROIC, 3 year Relatives TSR, EPS growth)

Uses Autozone (NYSE:AZO) as a case study for CEO buying back shares.  bought back 75% of shares in last 13 years

Inflections in Incentives:

Case study: AECOM (NYSE:ACM) —very undervalued, he is long

ACM has new metrics announced in 2013: EPS, CFO per share and FCF per share.  Declassifying the board of directors, now including goodwill impairments in future (ie they will stop overpaying for acquisitions)

He thinks ACM is at a major inflection.  FCF is now being used to buy back shares at less than 10x earnings.  Bought back 15% of market cap in august 2012, and another 20% in February 2012.  Stock has revalued from 6x to 12x

Stock is still very undervalued and prcining in 0% growth into perpetuity.  Base case target price is $51, bull case is $55 and bear case is $41.  Current Price is $28.81 (as of 9/4/13)

Stock Pitch:  URS (NYSE:URS)

Good business, mis-priced from bad capital allocation decisions in the past

Conditions now in place to repurchase stock in a highly significcant way

Capital allocation commitment should reduce agency costs.

Expects a double in next 2 years

Trades at 9x 4-year trailing FCF and Aadjusted 4-year FCF at 7x….$7.16/share in FCF. In the past they have spent the FCF on over priced acquisitions

URS currently trades at 6.2x EV/EBITDA, while paying nearly 11x for most acquisitions

Their short and long term incentives have been based on Net Income, but just this year they changed to Total Shareholder Return (TSR) and EPS

Starting to look like ACM before it turned the corner with an emphasis on share repurchases and de-emphasis on making acquisitions

Potential 2-year FCF could equal 1/3 of market capitalization with base case 2015 cash EPS of $7.00 and a target price of $98 at 14x (stock trades at $50 as of 9/4/13).

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