By Matt Doiron
Alexander Roepers, who heads Atlantic Investment Management, presented at the Value Investing Congress this week. He offered followers fresh investment ideas based on the information currently available in the market, with no lag time as occurs with 13F filings. Atlantic is a value fund managing about $2 billion which looks for fundamental value in mid-cap stocks, often by taking a large percentage stake.
In his presentation, Roepers recommended buying Energizer Holdings, Inc. (ENR), the $4.8 billion market cap provider of batteries and personal products. His presentation indicated a strong chance of the stock reaching $100 within the next year, which would represent about a 30% increase from the current price. Energizer trades at a trailing P/E of 15. It recently has been seeing earnings growth and strong growth in earnings per share due to a hefty buyback program. (Although we question how sustainable earnings growth is; in its most recent quarter, earnings growth generally came from the lack of expenses the company experienced last year. EPS were up 45% last quarter versus a year earlier. However, the stock price has been lagging, up only 10% since this point in 2011, and so we think Atlantic may have identified a good value opportunity, particularly if the company is able to at least bring in steady increases in earnings per share.
The second long pick Roepers suggested was specialty chemicals company Rockwood Holdings, Inc. (ROC). Rockwood's $3.7 billion market capitalization comes out to 9 times its trailing earnings numbers, and 10 times analyst expectations for 2013. Higher margins helped the company out a lot last quarter. Despite revenue being down, earnings more than doubled. The stock has beaten the market over the last year- it is up 39%- but some of this has been due to Rockwood's exposure to the broader economy rather than micro-level factors. Its beta is 2.5, which suggests that it is a risky investment. In turn, this implies that Atlantic is bullish on the macroeconomy.
As a peer for Rockwood, we would look at Huntsman Corporation (HUN). Huntsman's dividend yield of 2.7%, beta of 2.3, and market cap of $3.6 billion are about even with Rockwood's figures, and the company is also in the specialty chemicals business. Huntsman is also priced at about the same levels as its peer. Its trailing and forward P/Es are 10 and 7, respectively. It is highly favored by Wall Street analysts, whose estimates imply a five-year PEG ratio of only 0.5. Both of these companies look cheap, assuming that an investor is willing to take on the risk of buying stocks so closely tied to economic activity.
Roepers' #3 pick was one which he thought had the largest upside (75%) of all- Joy Global Inc. (JOY). Joy Global provides mining equipment, so it's easy to see why it wasn't his top pick. The downside to the company from a slowdown in global economic activity is large as well. Joy Global's beta is 2.2, and it has substantially underperformed the market over the last year. It is actually down 9% over the same period that the S&P 500 has risen by nearly a third. We can't argue that the stock isn't cheap on a quantitative basis. Its trailing and forward P/E multiples both come in at 8, despite the fact that the company achieved revenue growth of 22% and earnings growth of 12% in its most recent quarter compared to a year ago.
This compares well to market leader Caterpillar Inc. (CAT), which also trades at 8 times forward earnings estimates but is expected to pick up some of its 2013 earnings from growth (its trailing P/E is 10). Caterpillar does have one advantage over Joy Global, however. The larger company increased its revenue last quarter by about the same amount, but also saw a higher margin. This drove net income 67% higher than the second quarter of 2011. We wouldn't recommend a pair trade here, so investors who want to pursue Joy Global would have to find some other way to hedge the macro risk.
We think Joy Global or Rockwood might be a good value play for a portfolio that is not already too exposed to a slowdown in China or the world economy as a whole. We also like Energizer, and believe that even the sell-side is underestimating the company's potential to drive earnings per share higher.