The following five companies are owned by some of the most highly regarded investment managers out there. We believe each company's shares are worthy of closer consideration and may deliver investment outperformance:
Fair Isaac (FICO) is 20%-owned by Mason Hawkins’ Southeastern Asset Management, which has added to its stake in recent months. Fair Isaac has leveraged the success of the industry-leading FICO credit score brand to create products in related areas and non-financial verticals. These diversification efforts as well as a variable cost structure have dampened the impact of lower demand for high-margin credit scores. FICO continues to be a fundamentally attractive business with low capital intensity, good normalized margins, and a strong competitive position. Longer term, it remains to be seen how successful the FICO score will be in terms of beating back challenges from rival products. We suspect that the brief window of opportunity that opened up for competing products as a result of the credit crisis may be shut before competitors are able to challenge the supremacy of the FICO brand. In any case, with FICO shares trading at a 10+% FCF yield in a still below-normal operating environment, we believe the shares are too cheap to ignore.
Hyatt Hotels (H), the owner and operator of hotel properties worldwide, was taken public last November by the controlling Pritzker family. Hyatt owns, leases, manages or franchises 120,000 rooms in 415 hotels. Despite investment bankers clamoring for the deal, the IPO appears to have exhibited some of the characteristics of undersold offerings. Recent GAAP financials neither reflect the company’s true earning power nor the intrinsic value of the hospitality assets. The investment case for Hyatt is distinguished by the high asset backing, a net cash position, and an interested and active owner in the Pritzkers. The company should be able to create long-term value by franchising and growing the Hyatt brand in global markets. Bill Ackman’s Pershing Square Capital Management purchased a 6% ownership stake following the IPO. Whether Ackman will seek to convince the Pritzkers of the virtues of splitting Hyatt into a real estate-owning entity and a hotel-operating-and-franchising entity remains to be seen. At a valuation of 1.1x tangible book value stated at historical cost, we find the shares quite compelling.
Investors Title Company (ITIC) is 10%-owned by Tom Gayner of Markel. ITIC is a title insurer providing a non-discretionary service for real estate industry participants, primarily along the U.S. East Coast. As residential and commercial real estate transactions drive demand for title insurance, business has suffered in the real estate downturn. Despite the challenges facing the company, tangible book value per share would be up 50% since yearend 2004 if dividends were added back. While this may point to a potential issue surrounding loss reserve adequacy, management has strengthened provisions materially in the past three years. At 0.8x tangible book value, Investors Title shares appear undervalued based on prospects for an eventual recovery in real estate transaction volumes and/or pricing. The thesis for Investors Title is quite similar to our thesis for Stewart Information Services (STC), which we outlined in the January issue of Portfolio Manager’s Review.
Republic Airways (RJET) is 10%-owned by David Einhorn’s Greenlight Capital. Republic has undergone a transformation over the past twelve months, acquiring two established but distressed branded airlines who were also Republic customers—Frontier in Dallas and Midwest in Milwaukee. The purchases add a branded, risk-based model to the traditional business of flying for major network carriers under their brands. The latter model eliminated Republic’s exposure to fuel prices, fares and load factors, giving it a stable pre-tax profit margin. While Republic retains the fixed-fee business, growth is likely to be driven by branded operations. The new business mix may have prompted some holders to sell, as Republic’s shareholder base had been conditioned to view the company more as a fixed-margin service business than an airline business. The turnover in the shareholder base provides an opportunity to buy a well-run, profitable and cash-generative business at an unreasonably cheap price. We note that only $85 million of $2.7 billion in debt on Republic’s balance sheet is recourse to the company. Unrestricted cash amounts to roughly $5 per share, approaching the recent market price.
British mobile telephony giant Vodafone (VOD) is a new holding of David Einhorn’s Greenlight Capital. Vodafone shares offer a 6% dividend yield, supported by the company’s free cash flow even before Vodafone’s 45% stake in Verizon Wireless (VZ) is considered. The minority interest in Verizon Wireless, the number-one U.S. mobile operator, may be Vodafone’s single most valuable asset. However, as Vodafone’s operating cash flow does not include a contribution from Verizon Wireless—because no cash dividend is being paid to Vodafone—the market may be ignoring this valuable asset when valuing Vodafone on the basis of reported FCF. Revaluation of Vodafone shares could occur following a potential resumption of cash distributions from Verizon Wireless some time this year. Regardless of how Verizon Wireless and other unconsolidated assets are monetized, a sum-of-the-parts analysis suggests that the market may be valuing Vodafone at 4x trailing EBITDA. This strikes us as too low given the company’s strong share in key mobile markets, growth prospects in emerging markets, and margin improvement potential.
Disclosure: No positions