Newsletter Value Investor Insight carried an interview January 31st with John Osterweis, who's equity fund has returned 15.3% annually over the past 10 years, versus 8.4% for the S&P 500, according to Value Investor Insight. Here's the excerpt from the interview (also with analysts Matthew Berler, Michael Hughes and Sasha Kovriga) in which they discuss Crown Holdings (CCK), a global producer and distributor of spirits and beer under brand names such as Smirnoff, Johnnie Walker, Captain Morgan, Tanqueray and Guinness. Crown Holdings was trading at $22.44 at the time of the interview (current price here):
Is Crown Holdings (CCK) something you’re betting can move well past the turnaround stage?
Sasha Kovriga: When we bought it three years ago, Crown was very highly leveraged, unfocused, considered to be in a lousy core business and suffering from a large asbestos-liability overhang.
The company is one of the leading manufacturers of beverage and food cans in the U.S. and internationally. We started buying Crown at about $9 per share, based on the belief that the market was not recognizing the changed structure of the industry as it consolidated, that the company would start rationalizing its portfolio of businesses and that its asbestos-liability risk was under control and declining.
That has all played out well – they’ve exited poor businesses and paid down debt and pension obligations. The liability risk has declined. The industry structure and pricing are holding up well, and Crown has renegotiated contracts to have more cost pass-throughs for raw materials. As a result of all this, the stock is now over $22.
Congratulations, but what is the investment story today?
SK: We now see Crown as an unrecognized growth story. This is actually a very good example of how we think our strategy differs somewhat from other value investors. The more traditional value approach might be to bet on a company going from broken to stable, at which point you sell to buy something else that’s broken. But we look for companies that can have a further inflection point, from stable to growing again. That’s where we think Crown currently is and that the market isn’t seeing it.
The company has been investing heavily in capacity in high-growth Eastern European, Middle Eastern and Asian markets. As incomes grow in developing countries, the demand for more westernstyle packaging is growing at more than 10% per year. With 20% of Crown’s revenue already coming from these highergrowth areas, that could move the needle for the whole company.
We also like that more than 60% of total revenues are outside the U.S. We don’t make many macro bets, but we’re very comfortable with the idea that the dollar is going to weaken over time, which will benefit companies like Crown.
At $22.50, how cheap are the shares?
SK: The stock currently trades at about 10x the $2.30 per share we expect it to earn in free cash flow this year. From revenue growth, share buybacks and paying down higher-cost debt, we see that free cash flow number growing around 10% per year. For a company with those dynamics, there’s no reason it can’t trade at a 12-14x multiple, which would make the share price rise to as much as the low- $30s within the next year or so.
If you look at the large shareholders, there are still a lot of great value investors we respect – people like Iridian Asset Management, Sasco Capital and Oaktree Capital. As the company continues to deliver, we’d expect a broader investor base to become interested in the stock.