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FPA Capital Fund, Inc. FPPTX
February 2, 2016
Fourth Quarter 2015
Webcast Presentation
Presented by: Arik Ahitov, Partner
Dennis Bryan, CFA, Partner First
Pacific A
dvisors,
LLC
FPA Capital highlights
■ Absolute value – Seek genuine bargains among smaller companies and hold cash when opportunities are
scarce.
■ Benchmark agnostic – Go wherever the opportunities are.
■ Bottom-up – Select and value companies based on fundamentals. Buy market leading companies with a
history of profitability and pristine balance sheets.
■ Downside focused – Avoid low quality and high leverage. Buy only when there is a compelling risk/reward.
■ Research-based – We perform deep due diligence and we do that not only prior to purchase but throughout
the life of the investment.
■ Concentrated – Focus on best ideas - typically 20-40 holdings. Average holding period of 7+ years.
■ Shareholder aligned approach – Fund has been closed for 17 of past 31 years. Significant manager co-
investment.
1 First
Pacific A
dvisors,
LLC
Performance Section I
First Pacifi
c Advis
ors, LLC
3
Performance (%) as of December 31, 2015
* Inception for FPA Management was July 11, 1984. A benchmark comparison is not available based on the Fund’s inception date therefore a comparison using August 1, 1984 is used. A redemption fee of 2% will be imposed on redemptions within 90 days. Expense Ratio as of most recent prospectus:0.83% Calculated using Morningstar Direct. The chart illustrates the performance of a hypothetical $10,000 investment made in the fund since inception. Figures include
reinvestment of capital gains and dividends, but do not reflect the effect of any applicable redemption fees, which would lower these figures. An investor cannot invest in
an index. This chart is not intended to imply any future performance of the fund.
Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents
past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it
may be worth more or less than its original cost. Current month-end performance data may be obtained by calling toll-free, 1-800-982-4372.
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Russell 2500 $300,284
FPA Capital$487,419
S&P 500$284,371
As of Date: 12/31/2015 QTD YTD 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years Since
8/1//84*
FPA Capital -3.37 -17.16 -17.16 0.14 2.14 3.82 8.73 9.62 13.31 Russell 2500 3.28 -2.90 -2.90 12.46 10.32 7.56 8.08 9.53 11.42
First Pacifi
c Advis
ors, LLC
Outlook
■ This is not the first time the strategy has underperformed to this extent. The two prior market cycles were followed by robust performance for the Strategy.
■ We do not see any reason why this time should be different:
■ We have ample liquidity
■ Our portfolio is defensively positioned
■ Most portfolio companies are doing well operationally
■ Our holdings are cheap and carry strong balance sheets
■ Our process remains the same as we deployed over the past three decades
■ Cash level is lowest since December 2003
■ Our stocks have already taken substantial hits:
■ Energy underperformed Russell 2500 by 30% in 2014 and by 20% in 2015
■ Education underperformed Russell 2500 by 13% in 2014 and by 19% in 2015
4
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
FPA Capital minus Russell 2500
FPPTX - R2500
4
Source: Capital IQ, Mellon, and Morningstar Direct. Past performance is no guarantee of future results and current performance may be higher or lower than the
performance shown.
FPA Capital Outperforms
FPA Capital Underperforms
First Pacifi
c Advis
ors, LLC
Portfolio Section II
First Pacifi
c Advis
ors, LLC
Equity summary data – as of December 31, 2015
6 6
P/E (Price/Earnings) is the price of a stock divided by its earnings per share. P/BV (Price/Book Value is the market price of a stock divided by the book value per share. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The S&P 500 is presented for illustrative purposes and should not be considered the primary benchmark comparison to the Fund.
FPA Capital Russell 2500 S&P 500
Average P/E Ratio 15.9x 27.7x 20.5x
Average P/BV Ratio 1.4x 2.3x 2.8x
Median Market Cap (billions) $2.2 $1.0 $18.1
Weighted Average Market Cap (billions) $4.5 $4.1 $140.4
Weighted Average Market Cap (billions) without the Two Largest Companies
$2.9 N/A N/A
0.538Weighted Return on Average Equity (ROAE) 12.4% 10.7% 17.7%
Weighted Total Debt to Total Capital 28.4% 47.8% 53.8%
First Pacifi
c Advis
ors, LLC
Sector components – as of December 31, 2015
7 7
Portfolio composition will change due to ongoing management of the Fund. References to individual securities are for informational purposes only and should not be construed as recommendations by the Funds, Advisor or Distributor.
TECHNOLOGY 27.45% EDUCATION 10.66%
Arris Group 6.78% DeVry 5.12%InterDigital 5.01% Apollo Group 4.95%Western Digital 4.59% Houghton Mifflin Harcourt 0.59%Avnet 3.80%Arrow Electronics 3.32% RETAILING 4.73%
Veeco Instruments 2.21% Aaron's 2.70%Cubic 1.75% Undisclosed 1.06%
Foot Locker 0.98%
OIL FIELD SERVICES 13.24%
Helmerich & Payne 5.07% AGRICULTURE 3.58%
Rowan Companies 4.26% AGCO Corporation 3.40%Patterson-UTI Energy 3.91% Sanderson Farms 0.18%
OIL & GAS EXPLORATION & PRODUCTION 11.50% BASIC MATERIALS 1.09%
Noble Energy 4.79% Reliance Steel & Aluminum 1.09%Cimarex Energy 4.62%SM Energy 2.09%
BONDS 0.97%
INDUSTRIALS 7.80%
Dana Holdings 3.31% CASH 18.98%
Babcock & Wilcox 2.28%Oshkosh 2.21%
First Pacifi
c Advis
ors, LLC
Security changes in portfolio (net) – QTD
From September 30, 2015 to December 31, 2015
8 8
New Securities Added to Exisiting Securities Reduced Securities Eliminated Securities
Houghton Mifflin Harcourt Co Aarons, Inc. Arris Group BWX Technologies (formerly Babcock & Wilcox, Inc)
Sanders Farms Inc AGCO Corporation Arrow Electronics Inc. Federated Investors, Inc.Atwood Oceanics Inc 6.50%
02/01/20Apollo Group, Inc. Avnet, Inc.
Babcock & Wilcox, Enterprises Cimarex Energy Co.Undisclosed Foot Locker, Inc.
Dana Holdings Corporation Helmerich & Payne, Inc.DeVry Inc. Interdigital, Inc.
Noble Energy, Inc. Reliance Steel & AluminumPatterson - UTI Energy, Inc. Rowan Companies plc
SM Energy CompanyVeeco Instruments, Inc.
First Pacifi
c Advis
ors, LLC
9
Apollo Education Group (APOL)
FPA Analysis:
■ Largest for-profit education company in the U.S. with a small but growing global business
■ One of the cheapest stocks in our universe even assuming very draconian outcomes for their core business
■ Clean balance sheet with almost no debt and a net cash position of $7/shr
■ Relatively variable cost structure provides flexibility
■ Global business improving and nearing profitability
9
Apollo
Source: Yahoo.
The holding above does not represent all securities purchased or sold. Past performance is not indicative of future results.
APOL
SOTP
Analysis
Down-
Side
Up-
Side
Commentary
UoP $1 $13 DOWN: Enrollment shrinks to 65k, pricing cut 20%, margins fall to MSD, 6x multiple on OE. UP: Enrollment shrinks to 110k, pricing cut 5%, margin stabilizes at 15%, 9x multiple on OE.
Global $2 $17 DOWN: Despite growth & improvement in profitability, assume profitability stuck at 5% mgn, 8x multiple on OE UP: 15% top-line growth for 3yrs, 15% margins, 14x multiple on OE
Net Cash $7 $10 DOWN/UP: Existing net cash on B/S but different share counts
Buyback
+ Acq
-$1 -$4 DOWN: $1/shr for CPG acq UP: $2/shr for CPG acq and $4/shr of buybacks
Total
Value
$9 $36 DOWN: 10% below the current mkt px. UP: 395% above the current mkt px.
$5
$15
$25
$35
$45
$55
$65
First Pacifi
c Advis
ors, LLC
FPA Analysis:
■ Leading data storage company competing in both Hard Drives (HDDs) and Solid State Drives (SSDs)
■ Consolidated industry with WDC controlling 44% market share and the top 3 players virtually 100%
■ Net cash balance sheet and a history of returning capital to shareholders via both buybacks and dividends
■ Transforming the business via its acquisition of SanDisk and its partnership with Unisplendour
Western Digital
Western Digital Corporation (WDC)
10
$5$15$25$35$45$55$65$75$85$95
$105$115
Source: Yahoo.
Proforma Downside Upside
Revenue $20,234 $19,222 $20,234EBITDA $5,062 $4,809 $5,262CapEx $1,110 $1,110 $1,012Tax expense $651 $740 $850OE 3,302 2,959 3,401 OE/shr $10.51 $12.07Multiple 8.0x 14.0xEV $23,676 $47,608Net debt $10,406 $9,700 $9,700Market cap $13,976 $37,908Wtd Avg Diluted 282 282 282
Value $50 $135
The holding above does not represent all securities purchased or sold. Past performance is not indicative of future results. First Pacifi
c Advis
ors, LLC
Market Overview Section III
First Pacifi
c Advis
ors, LLC
Saudi Arabia oil production
12 First
Pacific A
dvisors,
LLC
Global spare capacity is low
13
Source: Raymond James – January, 2016
First Pacifi
c Advis
ors, LLC
Global oil demand forecast
14
Source: IEA 01/19/16
93.6 93.9
95.4 95.1 94.7 95.1
96.4 96.5
First Pacifi
c Advis
ors, LLC
Oil supply response
15
E&P capex cuts: • 2015 E&P capex budgets were down 35-40% on average; further significant cuts expected in 2016 • The oil-directed land rig count has dropped by ~1,000 from a peak of >1,500 in Oct-2014
Onshore rig cuts:
Reduced well completions:
Source: Baker Hughes, Simmons & Co., KLR Group First Pacifi
c Advis
ors, LLC
Estimated change in regional E&P spending 2015 (%)
16
Source: JP Morgan – 09/21/15
First Pacifi
c Advis
ors, LLC
17
Source: EIA 12/31/15; FPA Analysis
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
8,800
8,900
9,000
9,100
9,200
9,300
9,400
9,500
9,600
9,700
01/02/15 02/13/15 03/27/15 05/08/15 06/19/15 07/31/15 09/11/15 10/23/15 12/04/15
Blue: U.S. Crude Oil Production; Red: YoY Production Change (%); Green: YTD Change (%)
Total U.S. crude production
First Pacifi
c Advis
ors, LLC
Global oil inventories will go lower
18
Source: Cornerstone Analytics – January 14, 2016 First Pacifi
c Advis
ors, LLC
Portfolio energy company debt levels are in good shape
19
Note: PTEN also has debt but no quote is available as it is either bank debt or private placement .
Ticker Earliest maturity YTW (12/31/15)
RDC 9/1/2017 5.94%
NBL 3/1/2019 4.12%
SM 11/15/2021 12.83%
XEC 5/1/2022 6.55%
Source: Capital IQ, Jan-08-2016 First Pacifi
c Advis
ors, LLC
20
Energy investments
FPA Analysis:
■ Rig fleet is young and high-spec with significant contracted revenue backlog
■ Newbuild program is funded and complete
■ Company is in a positive FCF position
■ Significant self-help opportunities; LTM EBITDA margins +950 bps in last year; more to come
■ Investment grade balance sheet and unsecured/undrawn revolver
FPA Analysis:
■ Deep inventory of some of the lowest cost assets in the entire industry
■ Best process for valuation creation we have found amongst all E&P companies
■ Very strong balance sheet; upgraded to investment grade in spite of the downturn
■ Unsecured/undrawn revolver
■ History of paying a dividend and raising it consistently is an outlier in the industry
20
Cimarex Energy
Source: Yahoo. Source: Yahoo.
The two holdings above do not represent all securities purchased or sold. Past performance is not indicative of future results.
$5
$15
$25
$35
$45
$55
$65
$75
Rowan Companies
$0
$20
$40
$60
$80
$100
$120
$140
$160
$0
$10
$20
$30
$40
$50
First Pacifi
c Advis
ors, LLC
21
Energy investments – cont’d
FPA Analysis:
■ Biggest and best run land drilling company in the U.S.
■ Superior organizational performance
■ Significant take or pay revenue backlog
■ Net cash balance sheet
■ ~5% dividend yield is sustainable
FPA Analysis: ■ Seven major areas of operation; assets are Tier 1 and have
solid growth potential ■ More capable than most E&Ps of avoiding significant
production declines in a low oil price environment ■ Significant upside potential from Israeli gas projects not
priced into the stock ■ Legacy NBL shareholders likely do not appreciate how
material the assets acquired from Rosetta Resources can become
■ Investment grade balance sheet and unsecured/undrawn revolver
21
Noble Energy
Source: Yahoo. Source: Yahoo.
The two holdings above do not represent all securities purchased or sold. Past performance is not indicative of future results.
$5
$15
$25
$35
$45
$55
$65
$75
Helmerich & Payne
$20
$40
$60
$80
$100
$120
$0
$20
$40
$60
$80
$100
$120
$140
First Pacifi
c Advis
ors, LLC
Q & A
First Pacifi
c Advis
ors, LLC
Disclosure
23
These slides are intended as supplemental material to the 4th Quarter FPA Capital audio presentation that is posted on our website fpafunds.com. We do want to make sure you understand that the views expressed on these slides and in the accompanying audio presentation are as of today, February 2 2016, and are subject to change based on market and other conditions. These views may differ from other portfolio managers and analysts of the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. Any mention of individual securities or sectors should not be construed as a recommendation to purchase or sell such securities, and any information provided is not a suffic ient basis upon which to make an investment decision. The information provided does not constitute, and should not be construed as, an offer or solicitation with respect to any securities, products or services discussed. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data
represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your
investment it may be worth more or less than its original cost. Current month-end performance data may be obtained by calling toll-free, 1-800-982-
4372.
You should consider the Fund’s investment objectives, risks, and charges and expenses carefully before you invest. The Prospectus details the
Fund's objective and policies, charges, and other matters of interest to the prospective investor. Please read this Prospectus carefully before
investing. The Prospectus may be obtained by visiting the website at www.fpafunds.com, by email at [email protected], toll-free by calling 1-800-
982-4372 or by contacting the Fund in writing.
Statistics have been obtained from sources believed to be reliable, but the accuracy and completeness cannot be guaranteed and is not a complete summary or statement of all available data. The Russell 2500 Index consist of the 2,500 smallest companies in the Russell 3000 total capitalization universe offers investors access to the small to mid-cap segment of the U.S. equity universe, commonly referred to as "smid" cap. Past results are not necessarily indicative of future results. Investments in mutual funds carry risks and investors may lose principal value. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. The Fund may purchase foreign securities, including American Depository Receipts (ADRs) and other depository receipts, which are subject to interest rate, currency exchange rate, economic and political risks; this may be enhanced when investing in emerging markets. Small and mid cap stocks involve greater risks and they can fluctuate in price more than larger company stocks. Groups of stocks, such as value and growth, go in and out of favor which may cause certain funds to underperform other equity funds. The portfolio holdings as the most recent quarter end may be obtained at http://www.fpafunds.com.
The FPA Funds are distributed by UMB Distribution Services, LLC. 235 W Galena Avenue, Milwaukee, WI 53212. First
Pacific A
dvisors,
LLC
Arris
24
Best 2 performers (QTD)
FPA Analysis:
■ Biggest and best run land drilling company in the U.S.
■ Superior organizational performance
■ Significant take or pay revenue backlog
■ Net cash balance sheet
■ ~5% dividend yield is sustainable
FPA Analysis:
■ “Gold standard” provider of communication systems to
cable operators allowing them to offer ever increasing bandwidth to customers
■ Has generated consistent positive free cash flow since 1995
■ Believe a major replacement cycle is around the corner for their products
■ Management has a solid track record of acquiring and integrating companies and recently closed on another large acquisition (Pace)
24
Source: Yahoo. Source: Yahoo.
The two holdings above do not represent all securities purchased or sold. Past performance is not indicative of future results.
$5
$15
$25
$35
$45
$55
$65
$75
Helmerich & Payne
$20
$40
$60
$80
$100
$120
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
First Pacifi
c Advis
ors, LLC
FPA Capital Russell 2500 S&P 500
Best 332.92 238.64 251.12Worst -26.28 -26.59 -29.05Average 102.62 74.28 72.33
How do you look at performance internally?
Rolling 5-year period returns (Cumulative) 08-01-1984* to 12-31-2015
Attractive upside/downside performance
25
* Inception for FPA Management was July 11, 1984. Past performance is no guarantee of future results January 1985 – December 2015. Source: Morningstar Direct.
Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
20.13%
-11.51%
33.18%
21.31%
-6.80%
37.17%
Up Calendar Years Down Calendar Years Year Following Down Market
Russell 2500 FPA Capital
Russell 2500 FPA Capital
Russell 2500 FPA Capital
First Pacifi
c Advis
ors, LLC
Represents all new equity positions added to portfolio during last 3 years (December 31, 2012 – December 31, 2015) as of initial purchase. 1 P/E before extraordinary items (trailing) 2 0% if company was in net cash position 3 Split in Q3 2015 4 Sold in Q2 2015
5 Sold in Q3 2015
6 Sold in Q1 2015
*NM is not meaningful due to negative earnings
Market Cap
(MM) TEV
TEV/
EBITDA P/E1
P/BV P/S ROE
Net Debt/
Capital2
Aaron's $2,097 $1,984 5.5x 14.9x 1.7x 0.9x 12% 0%AGCO Corporation $5,086 $5,324 4.4x 8.7x 1.3x 0.5x 16% 4%
Apollo $2,231 $1,553 1.8x 6.2x 2.2x 0.6x 32% 0%
Undisclosed $1,608 $1,477 4.3x NM 1.3x 0.2x 3% 0%
Babcock & Wilcox Common3 $3,213 $3,277 5.7x 11.2x 2.9x 1.1x 26% 6%
Centene4 $2,356 $2,051 22.4x NM 2.5x 0.3x 8% 0%
Cubic $1,230 $1,237 12.7x 21.0x 1.6x 0.9x 1% 1%
Dana Holdings $3,475 $3,916 5.4x 13.7x 2.9x 0.5x 20% 11%
Helmerich & Payne $2,650 $2,925 12.2x NM 1.8x 2.0x -7% 12%
Houghton Mifflin Harcourt $6,604 $6,323 4.1x 9.4x 1.3x 1.8x 16% 0%
Magellan5 $1,661 $1,552 7.3x 22.1x 1.5x 0.4x 6% 0%
Patterson-UTI Energy $2,008 $2,804 3.1x 31.8x 0.7x 0.7x 2% 21%
Sanderson Farms $1,457 $1,286 5.7x 5.3x 1.4x 0.5x 31% 0%
TWI6 $859 $1,176 6.5x 18.9x 1.2x 0.4x 9% 20%Average $2,507 $2,515 7.2x 14.8x 1.7x 0.8x 12% 5%Median $2,097 $1,984 5.7x 13.7x 1.6x 0.6x 9% 0%
Recent additions (past three years: 12/31/12 – 12/31/15)
26 First
Pacific A
dvisors,
LLC
Is this the first time the strategy underperformed to this extent?
27
-40-30-20-10
010203040
Perc
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tag
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FPA Capital Russell 2500 TR USD
-60-40-20
020406080
100120
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FPA Capital Russell 2500 TR USD
-40
-20
0
20
40
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FPA Capital Russell 2500 TR USD
3/9/2000 – 10/9/2004 Cumulative Return
FPA Capital 94.06% Russell 2500 13.61%
3/9/1998 - 3/9/2000 Cumulative Return
FPA Capital 5.01% Russell 2500 38.68%
Market peak in 2000 was March 9, 2000 and trough was October 9, 2002 for the Russell 2500. Performance shown in A reflects 2 years leading up to the market peak. Performance in B reflects 2 years following the trough.
Past performance is no guarantee of future results.
3/9/1998 – 10/9/2004 Cumulative Return
FPA Capital 101.78% Russell 2500 54.09%
First Pacifi
c Advis
ors, LLC
Market peak in 2007 was July 14, 2007 and trough was March 9, 2009 for the Russell 2500. Performance shown in A reflects 2 years leading up to the market peak. Performance in B reflects 2 years following the trough.
Is this the first time the strategy underperformed to this extent?
28
7/14/2007- 3/9/2011 Cumulative Return
FPA Capital 18.03% Russell 2500 3.48%
7/14/2005 – 3/9/2011 Cumulative Return
FPA Capital 49.60% Russell 2500 38.09%
7/14/2005 – 7/14/2007 Cumulative Return
FPA Capital 26.75% Russell 2500 33.45%
-60
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FPA Capital Russell 2500 TR USD
-10-505
10152025303540
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FPA Capital Russell 2500 TR USD
Past performance is no guarantee of future results.
-70-60-50-40-30-20-10
0102030
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FPA Capital Russell 2500 TR USD
First Pacifi
c Advis
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Non-OPEC supply will be down in 2016
29
Source: Cornerstone Analytics – January 14, 2016 First Pacifi
c Advis
ors, LLC
Portfolio composition will change due to ongoing management of the Fund. References to individual securities are for informational purposes only and should not be construed as recommendations by the Funds, Advisor or Distributor.
Security changes in portfolio (net) - QTD
From September 30, 2015 to December 31, 2015
30 30
9/30/2015 12/31/2015 % Change
Technology 28.91% 27.45% -1.46%
Oil & Gas Exploration & Production 11.29% 11.50% 0.21%
Industrials 8.19% 7.80% -0.39%
Oil Field Services 10.68% 13.24% 2.56%
Education 9.06% 10.66% 1.60%
Retailing 5.29% 4.73% -0.56%
Agriculture 3.03% 3.58% 0.55%
Basic Materials 0.98% 1.09% 0.11%
Financial Services 0.86% 0.00% -0.86%
Bonds 0.00% 0.97% 0.97%
Cash 21.71% 18.98% -2.73%
First Pacifi
c Advis
ors, LLC
31
Portfolio companies: FPA’s Analysis
As of December 31, 2015
Aaron's AGCO Apollo Arris Arrow Atwood Bond AvnetBabcock &
WilcoxCubic
Market
leading
company
With its largest competitor, they control 2/3 of the market
Top 3 player in all major agriculture markets
Largest for-profit education company in the US
Clients and industry experts view them as the “gold standard”
Global Distributor with $23B sales of electronic products
Long-term track record of industry leading margins and utilization rates.
Global distributor with over $28B sales of electronic products
Market leader in power generation systems & equipment supplying 300 GW to 800+ utilities in 90+ countries
Market leading technology company in the transportation and defense markets
With a history
of profitability
The company has never lost money over past 20 years, grew its revenues through the recession, and has improved its margins steadily
Generated positive EBIT for over 20 consecutive years
Profitable for 20+ years. 25% 10-year average EBITDA margin
Positive free cash flow generation since 1995
Generated substantial profits over the last two decades
Profitable 19 of the last 20 years
Generated substantial operating profits over the past two decades
Profitable every year since its spinoff from McDermott International
Since at least 1990, the company has never lost money
Pristine
balance sheet
<1.0x net debt/EBITDA 1.6x net debt/EBITDA ~$7/share of net cash Solid capital allocation throughout history. Currently, high debt load due to large acquisition, but debt load coming down
2.4x net debt/EBITDA N/A 1.2x net debt/EBITDA Net cash balance sheet Only been in a net debt position four times in its history (last time was in 2005)
Good
management
teams
New CEO, previously CEO of Progressive Leasing a rapidly growing Aaron's subsidiary
CEO has been in place for over a decade and focused on improving margins
The Founder retired and the Company moved from co-CEO to single CEO model
Disciplined management team with deep bench
Focus on having the highest margins in the business
Flag org chart, family culture, history of industry leading operational performance
Focus on EVA, recently instituted a dividend, and have articulated a clear value-oriented capital allocation plan
CEO was formerly with Westinghouse and the chairman, who is very involved, has a great reputation
Management has a history of identifying acquisition targets that sell at low prices
Cheap
Trading at 8.7x P/E (FY16)
Trades at <8x peak earnings
Trading near net cash Initial investment at 12% free cash flow yield and under four times total enterprise value to EBITDA
Purchased initial position at ~9x earnings and at 1x BV
Purchased at valuation equivalent to 7.5x EBITDA assuming 75% utilization and trough dayrates held flat forever
Purchased initial position at 1x BV and 10x earnings
Trading at 5.1x 2016 EV/EBITDA
Trading at 9.1x FY16 EV/EBITDA
First Pacifi
c Advis
ors, LLC
32
Portfolio companies: FPA’s Analysis
As of December 31, 2015
Cimarex Dana DeVry Foot LockerHelmerich &
Payne
Houghton Mifflin
HarcourtInterDigital Noble Energy
Market
leading
company
Independent E&P producer with resources in Oklahoma and Texas
A leader in the production of driveline components for light, commercial, and off-highway vehicles
Most respected US for profit education company with diverse source of revenues
Conceptually equivalent to a Nike distribution franchise
Biggest and most profitable land driller in the U.S.
Over 40% market share in market for K-12 educational materials
Have been working on new inventions since early 70s. To date, they have obtained or applied for ~20k patents
Leading positions in the Delaware Basin, Eagle Ford, DJ Basin, and offshore Gulf of Mexico
With a history
of profitability
Profitable 11 of 13 years since formation
Transforming the business to focus on profitability, not market share
Never lost money. 18%+ 10-year average EBITDA margin
ROIC averaged low double digits at the time of purchase. Today 21% ROIC
Made money every year since at least 1971
Positive unlevered FCF margin 8 of past 9 years
15% revenue and ~60% EBITDA 10-year CAGR
Profitable 14 of the last 15 years
Pristine
balance sheet
1.0x net debt/EBITDA 1.0x net debt/EBITDA 1/3rd of market cap in net cash
Net cash on the balance sheet at time of purchase. Today net cash over $5/sh
Net cash balance sheet 0.7x net debt/EBITDA ~1/4 of market cap in net cash
35% total debt/capital
Good
management
teams
Long history of successfully deploying capital into high return oil and gas reserves
New CEO has a reputation for being a disciplined acquirer and a good integrator
Strong Board; aligned incentives
Solid retail executives with good track record over many years
Owner/operator dynamic, significant tenures with the company
New management team with strong resumes brought in to lead the company's return to the public markets
Prudent capital allocation and disciplined litigation strategy
New CEO was previously COO for 8 years as the company built a highly respected track record
Cheap
All sources NAV is $129/165/202 per share at $50/60/70 oil
Stock trades at 3.9x EV/EBITDA (FY16)
At time of initial purchase, SOTP analysis showed that the main business (60% of revenue) can be purchased for free
Bought initial position at less than 10x earnings
Repurchased the position at ~1.3x tangible book value and >4% dividend yield
Purchased at 12x Base Case free cash flow
Backdoor way to participate in the growth of mobile communications
Trading at a significant discount to NAV, assuming $50 WTI oil held flat forever, and assuming their Israeli projects move forward
First Pacifi
c Advis
ors, LLC
33
Portfolio companies: FPA’s Analysis
As of December 31, 2015
OshkoshPatterson-UTI
Energy
Reliance Steel &
Aluminum
Rowan
Companies
Sanderson
FarmsSM Energy Veeco Western Digital
Market
leading
company
One of the largest specialty vehicle manufacturers that has been around for almost a hundred years.
Second largest fleet of Tier 1 land drilling rigs in the Lower 48. Pressure pumping business is a leader in its two focus basins
Largest North American distributor of steel and aluminum
Founded in 1923. Owns one of the youngest and highest spec fleets of offshore drilling rigs
Third largest chicken processor in the United States.
Top quartile finding costs with conservative reserve bookings
Number one player in the MOCVD tool market
Largest worldwide manufacturer of hard-disk drives
With a history
of profitability
EBIT excluding unusual items positive every year since 1992
Profitable 14 of the last 15 years
Has been profitable every year since going public more than two decades ago
Profitable every year since 2004
Profitable 21 of last 26 years; highest margins in the industry
Profitable 17 of the last 20 years
Outsourced most production, which decreased the fixed cost structure
Average ROIC over the past decade is roughly 16%
Pristine
balance sheet
Decreased net debt from $3b in 2007 to ~$0.9b
1.0x net debt/EBITDA 35% debt/capital and 2.4x debt/EBITDA
2.4x net debt/ EBITDA Net cash equal to >10% of market cap at time of purchase
1.8x total debt/EBITDAX Over 1/2 of market cap in cash
$2.7 billion of net cash, or roughly $12 per share
Good
management
teams
Current CEO has been with the Company since 1996 and served as both CFO and COO
Well respected CEO with >20 years at Schlumberger
Focus on profit margins and inventory turns. The 10-year average ROE is ~13%
First outside team to run the company. Rationalizing costs and assets. New CFO is highly regarded
Best management team in the industry; strong owner/operator culture.
Deep operating experience, conservative approach to the business
The management team is highly respected
Long track record of operating profitable businesses in a very competitive industry
Cheap
3.4x EV/EBITDA, 5.5x P/E at the time of initial purchase
Trading at 72% of tangible book value
Initially bought stock at less than 5x normalized EPS and 50% of BV
Trading at <40% of tangible book value
Under 9x normalized EPS at time of purchase
Trading at 3.8x 2016 EV/EBITDA
1.5x EV/EBITDA, 4.5x P/E at the time of initial purchase
Initial purchase was at less than 6x EPS, 60% of sales, and 1.7x BV
First Pacifi
c Advis
ors, LLC