By Matt Doiron
Jana Partners, founded in 2001 by Barry Rosenstein, is an event-driven value fund which often engages in activist campaigns. Rosenstein has an MBA from Wharton and has worked in merchant banking and private equity. We have had the chance to review the fund's recently filed 13F as well as a letter that the fund sent to investors which explained the logic behind its investment positions at the time and here are some themes which we see in its recent investment activity:
Agrium. Jana Partners is attempting to force fertilizer company Agrium (AGU) to split up its wholesale and retail operations into two separate businesses to increase shareholder value. As a result, between April and June, it accumulated 6.5 million shares of the company to give it some credibility in this activist campaign. Agrium's stock is up 37% this year due to beating earnings expectations and a drought plaguing the U.S. However, the company has recently rejected Agrium's campaign and announced its plans to keep the business together. The stock currently trades at ten times earnings, though it is very sensitive to the broader market with a beta of 1.9.
Spring cleaning. Part of the funds to take such a large position in Agrium came from Jana Partners scrapping two of its largest positions from the end of the first quarter- Marathon (MPC) and DirecTV (DTV)- entirely and cutting its stake in Expedia (EXPE) by more than half. This could be seen as merely the fund needing cash to make its new investment, but it is also possible that Jana did not want as much of the macro risk that comes with, for example, oil prices and travel demand. Investors should pay attention to these big sales.
Repositioning in oil & gas. As we've noted, Jana sold out of its position in Marathon. The fund also saw its investment in El Paso Corporation come to a close as that company was acquired by Kinder Morgan (KMI); however, Jana's position in Kinder Morgan at the end of the second quarter was fairly small. Instead, Rosenstein and his team initiated a 2.6 million share position in Phillips 66 (PSX); we had discussed the possibility of Jana moving into Phillips 66 in order to take advantage of that company's exposure to the European retail market in our analysis of Jana Partners' recent stock picks. Phillips 66 trades at only five times trailing earnings and pays a 2% dividend yield, meaning that even though its Europe-related business is a risk, it still trades at value levels.
Coca-Cola Enterprises. Coca-Cola Enterprises (CCE) is another company with quite a bit of European consumer exposure, as the distributor for Coca-Cola products on much of the continent. Coca-Cola Enterprises also looks like a potential value stock if an investor can get around the Europe factor: its trailing price-to-earnings ratio is 13, and based on forward earnings estimates the P/E is 12. We would, however, worry about the fact that the company's revenue and earnings are both down compared to a year ago.
It's hard for us to point to areas where investors should be sure to follow Jana. It sounds to us like Agrium may be firmly committed to keeping the business intact, so an investor might not be able to realize any gains from shareholder value from a breakup of the company even if Jana's analysis is correct. Of course, the stock doesn't look particularly expensive and given its industry may be a good investment as is. Phillips 66 and Coca-Cola Enterprises may get rejected offhand by a number of investors due to their European operations, though Phillips 66 looks like it would be a good value stock in any case.
Disclosure: I am long PSX.