Richard C. Breeden, born in 1949, is a former Chairman of the U.S. Securities and Exchange Commission. Breeden founded Breeden Capital Management in 2006. The fund applies a concentrated, activist investment approach. Prior to starting his investment firm, Breeden was involved in a number of turnarounds and special situations as an advisor, including the restructuring of WorldCom. He was also affiliated with the accounting firm Coopers & Lybrand, serving as chairman of its financial services practice.
The following are Breeden's top 10 investment ideas, based on our proprietary MOI Signal Rank methodology. Our methodology answers the question, “What are this investor’s top 10 ideas right now?” Rather than simply presenting each investor’s largest holdings as of the recently filed quarter end, we rank the companies in a portfolio based on the investor’s current level of conviction, as judged by our research team. We take into account a number of variables, including the size of a position in an investor’s portfolio, the size of a position relative to the market value of the corresponding company, the most recent quarterly change in the number of shares owned, and the change in the stock price of a position since the most recent quarterly filing date.
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MOI Signal RankTM - Top Ideas of Breeden Capital Management
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Airgas (ARG) ($70 per share; MV $5.5 billion; EV $7.4 billion), based in Radnor, PA, is the largest U.S. distributor of industrial, medical and specialty gases and hardgoods, such as welding equipment and supplies. The company has 14,000 employees and is also one of the largest U.S. distributors of safety products, the largest U.S. producer of nitrous oxide and dry ice, the largest liquid carbon dioxide producer in the Southeast, and the fifth-largest producer of atmospheric merchant gases in North America. Operating income rose 17% from $400 million in the fiscal year ended March 31, 2010, to $468 million in FY11, while revenue increased 10% during the period. The Street expects Airgas to earn $3.90 per share in FY12 (18x P/E), followed by $4.57 (15x) and $5.62 (13x) in each of the next two years, respectively. Airgas has boosted the dividend six times in the last seven years, delivering an annualized growth rate of 30%. Slide 3 of the company's recent investor presentation (pdf) shows a breakdown of the $13+ billion U.S. market for packaged gases and welding hardgoods, with Airgas (25% market share) ahead of Praxair (NYSE:PX), Matheson, and a large number of idependents.
Casey's General (NASDAQ:CASY) ($44 per share; MV $1.7 billion; EV $2.3 billion), based in Ankeny, IA, operates 1,600+ convenience stores in 11 Midwestern states, primarily Iowa, Missouri, and Illinois. The stores carry food, beverages, tobacco, health and beauty aids, and auto products. The stores also sell gasoline on a self-service basis. Casey's is a niche operator, with 60% of stores located in areas with a population of fewer than 5,000 people. Importantly, the company owns the land and buildings associated with almost all of its stores. Casey's acquired 89 convenience stores and constructed 20 new stores last year, in addition to replacing 15 stores and completing 120 remodels incorporating the new store design that includes a larger coffee and fountain offering, made-to-order sandwich program, and expanded cooler capacity. Average retail sales per store rose 11% from $3.1 million in the fiscal year ended April 30, 2010, to $3.4 million in FY11, while total revenue rose 22% to $5.6 billion in the period. The Street expects Casey's to earn $3.06 per share in FY12 (14x P/E) and $3.61 in 2013 (12x). The company has boosted the dividend five times in the last seven years, delivering an annualized growth rate of 25% for the period.
Flowserve (NYSE:FLS) ($111 per share; MV $6.2 billion; EV $6.4 billion), based in Irving, TX, is a leading manufacturer and aftermarket service provider of flow control systems, including precision-engineered flow control equipment for the movement, control and protection of materials in customer processes. The product portfolio includes pumps, valves and seals, which are sold primarily to the oil and gas, chemical, power generation and water management industries. EBIT declined 8% from $630 million in 2009, to $581 million in 2010, while revenue also declined 8% during the same period. The Street expects Flowserve to earn $7.82 per share in 2011 (14x P/E), followed by $9.19 (12x) and $10.62 (10x) in subsequent years. Flowserve has boosted the dividend four times in seven years.
H&R Block (NYSE:HRB) ($16 per share; MV $5.0 billion; EV $4.4 billion), based in Kansas City, MO, is the largest income tax return preparer in the U.S. It operates roughly 6,500 U.S. offices, with franchisees running another 4,500 U.S. offices. H&R Block also has 1,700 international offices, located primarily in Canada. In the B2B market, the company owns RSM McGladrey, a tax and consulting firm serving mid-sized businesses. The number of tax returns prepared by H&R Block and its franchisees increased 6% from 23.2 million in the fiscal year ended April 30, 2010, to 24.5 million in FY11, while revenue decreased 3% in the period. The sell side expects H&R Block to earn $1.63 per share in FY12 (10x P/E), followed by $1.75 (9x) and $1.93 (8x) in the following years. The indicated dividend of $0.60 per share implies a yield of 3.7%. H&R Block has boosted the dividend five times in the last seven years, with a CAGR of 6%. The recent bankruptcy filing of competitor Jackson-Hewitt could enable H&R Block to gain some market share over the next year, but the company continues to face the headwind of greater adoption of Intuit tax filing software and various online services.
Helmerich & Payne (NYSE:HP) ($67 per share; MV $7.2 billion; EV $7.3 billion), based in Tulsa, OK, is a contract driller that provides U.S. land drilling, offshore drilling and international land drilling. The company also develops commercial real estate in Tulsa, Oklahoma, including a shopping center with 441K leasable square feet, multi-tenant industrial warehouse properties with 990K leasable square feet, and 210 acres of land. Helmerich & Payne also owns TerraVici, a developer of patented rotary steerable technology for horizontal and directional drilling. The company's number of U.S. land rigs and offshore platform rigs increased 9% from 210 at the end of the fiscal year ended September 30, 2009, to 229 at yearend FY10. Analysts expect Helmerich & Payne to earn $3.90 per share in FY11 (17x P/E), with $4.54 (15x) and $4.86 (14x) in the following years.
Iron Mountain (NYSE:IRM) ($34 per share; MV $6.9 billion; EV $9.7 billion), based in Boston, MA, provides records management services, data protection and recovery and information destruction services to 150K+ corporate clients. While the company has historically relied on acquisitions for growth, it has transitioned to a strategy of expansion via organic growth. Adjusted operating income before D&A and certain impairments (OIBDA) increased 9% from $868 million in 2009 to $945 million in 2010, while revenue increased 4% during the same period. Analysts expect Iron Mountain to earn $1.22 per share in 2011 (28x P/E), followed by $1.49 (23x) and $1.81 (19x) in subsequent years. The dividend of $1.00 per share, an increase of 163% from a year ago, implies a yield of 2.9%.
RSC Holdings (NYSE:RRR-OLD) ($12 per share; MV $1.3 billion), based in Scottsdale, AZ, competes with United Rentals and is one of the largest equipment rental providers in North America. It has 450 rental locations serving customers in the industrial and non-residential construction markets. Roughly 85% of revenue comes from equipment rentals (e.g., fork lifts and aerial work platform booms), with the remainder mostly due to sales of used rental equipment. Original equipment fleet cost stayed roughly flat year-over-year at $2.3 billion at yearend 2010. Analysts expect RSC to earn $0.03 per share in 2011, with $0.76 (16x) and $1.38 (9x) in the following years. CEO Erik Olsson commented recently,
We see continued strengthening in the industrial markets... In addition, improved [Q1] results were widespread with all regions delivering double digit revenue growth. As a result, we expect continued favorable year-over-year comparisons in the second quarter and remain optimistic that these positive trends will continue throughout the year.
Stanley Black Decker (NYSE:SWK) ($74 per share; MV $12 billion; EV $14 billion) was formed through the $4.7 billion merger in March 2010, of two storied American corporations: The Stanley Works, founded in 1843, and Black & Decker, incorporated in 1910. Stanley provides hand tools, mechanical access solutions and electronic security solutions, while Black & Decker makes power tools, hardware, and engineered fastening systems. The Street expects SWK to earn $5.15 per share in 2011 (14x P/E), followed by $6.09 (12x) and $6.93 (11x) in subsequent years. The annualized dividend of $1.64 per share, an increase of 22% from a year ago, implies a yield of 2.2%.
Steris (NYSE:STE) ($36 per share; MV $2.1 billion; EV $2.1 billion), based in Mentor, OH, provides infection prevention and surgical solutions, offering a mix of capital equipment (e.g., sterilizers and surgical tables), consumables (e.g., detergents and skin care products), and services such as equipment installation. The company also owns Steris Isomedix, which provides ethylene oxide and irradiation services. International revenue increased 6% from $308 million in the fiscal year ended March 31, 2010, to $325 million in FY11, while total revenue decreased 4% to $1.2 billion in the same period. Wall Street expects Steris to earn $2.34 per share in FY12 (15x P/E), with $2.62 (14x) and $2.69 (13x) in the following years. Steris has raised the dividend five times in the last seven years.
Whirlpool (NYSE:WHR) ($83 per share; MV $6.3 billion; EV $7.8 billion), based in Benton Harbor, MI, is the world’s leading maker of major home appliances, such as refrigerators and freezers and laundry machines. Unit sales increased 9% from 49.7 million in 2009 to 54.1 million in 2010, while total revenue increased 7% to $18.4 billion during the period. The sell side expects Whirlpool to earn $12.04 per share in 2011 (7x P/E), with $9.88 (8x) and $11.08 (7x) in subsequent years. The annual dividend of $2.00 per share, an increase of 16% from a year ago, implies a yield of 2.4%. Management is guiding for free cash flow of $400-500 million in 2011, which would imply an FCF yield of 6-8% (see slide 22- pdf).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.