Finding Value in Roy Disney's Shamrock Holdings
Dec 17th 2009 3:00PM
Updated Dec 18th 2009 10:46AM
%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Through his firm, Shamrock Holdings of California (100% owned by Roy and now run by his daughter Abigail), Disney, with the help of Stanley Gold, would buy up stakes in companies they considered undervalued and poorly managed and rough up management to make the changes needed to unlock their company's value. Shamrock's best known activist situation was on Disney itself where its efforts succeeded in ousting then-CEO Michael Eisner. Bob Iger took his place. Shares of Disney (DIS) have outperformed the S&P 500 by about 20% since the ouster.
It's worth looking at Shamrock's current holdings for two reasons.
One, Shamrock looks for deep value situations that are not the usual low P/E stocks you find with other value investors. Second, because of its activist efforts, we (the retail investors) actually get to see why they think a stock is undervalued by the marketplace and how the company can improve its efforts to get valued at a higher price by the market.
Texas Industries (TXI), is a textbook case of a Shamrock activist position and it is Shamrock's largest position. TXI is one of the largest cement producers in the country with $766 million in sales. The company should ultimately be a beneficiary of the Obama stimulus packages. Shamrock owns 10% of the company as of its latest quarterly filing and that position makes up 22% of Shamrock's portfolio.
In late October, the company won a proxy fight allowing it to put three directors on the board and winning it various corporate governance concessions from the company. It's educational to read the presentation Shamrock made when beginning the proxy fight. With most investors we don't get such a blow-by -blow account of why they like an investment and think its deep value.
Here's the link to the presentation titled "The Case for Change at Texas Industries (NYSE: TXI)"
From reading the presentation, we can reverse engineer Shamrock's valuation process. It starts off by saying:
• TXI operating margins and return on invested capital (ROIC) consistently lag peers
• TXI stock has underperformed its peers over a 1-year, 3-year, 5-year and 10-year period
It doesn't get more basic than mixing cement. Shamrock's entire premise is that if TXI was managed in a similar fashion to its peers, its margins would be higher, its return on investment capital would be higher, and hence its earnings would be higher. Then, since all of these stocks trade as a group with similar P/E (price-to-earnings) ratios, the stock price would trade higher. Shamrock provided detailed graphics describing the performance of TXI relative to its peers.
Part of the reason, Shamrock claims, that management underperformed, is that its executives weren't held accountable by shareholders due to poor corporate governance. So, Shamrock's proxy fight involved changing the corporate governance, forcing more elections of the board, putting Shamrock's nominees on the board, and ultimately (we'll see) ousting management. The story is still in process, with Shamrock just getting its 3 nominees on the board and it should be interesting to see how it plays out.
Other Shamrock plays worth looking at include Arris Group (ARRS), which makes cable, broadband, and telephony equipment. Shamrock first filed a 13D (the SEC filing used by activist investors to disclose their holdings and their grievances) in December, 2008 when it announced a 5.7% position in the company. The stock at that time traded at $6.28. Shamrock stated in the filing that the company should return cash to shareholders (right now the company has $260 million net cash on a $1.3 billion market capitalization), as well as improve corporate governance.
But Shamrock didn't stop there. It listed seven methods for the company to improve its corporate governance. Again, the 13D is worth reading just to get a lesson in corporate governance. ARRS right now trades for just ten times forward earnings, has enormous excess cash in the bank, is generating a decent level of cash and was recently upgraded by UBS. The stock trades above $10. In the UBS upgrade, it stated that the stock has a free cash flow yield of 14% for 2010 and trades at an enterprise value over EBITDA ratio of 4.4 times and that the stock at these prices looks "compelling".
I like looking at the significant positions of activist investors because I know they are not looking to quickly flip out of them. They are typically long-term investors who have done significant research and are in there to make the changes necessary to unleash value. Shamrock, started by Roy Disney, has been consistently one of the best and is well worth paying attention to.
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