Spring 2015

We bought Bank of New York a few years ago because we believed it was under-earning in a few dimensions as a result of interest rates and operational expenses which had room for improvement. The company was re-segmenting its customers in an effort to enhance profitability and we still think there's a discount to intrinsic value.

Our view is that it continues to trade at a double discount, in the sense that if you do a sum of the parts comparison with the public price, that's a discount. Additionally, a number of the businesses it owns have been trading below intrinsic values.

Oracle is the leading provider of relational databases, with a very dominant, stable market share position. Despite concerns about the threat from the cloud, the company has such scale economies in R&D that it was able to play 'fast-follower' and can build out its entrenched platform over time.

Hermès is trading at 35x 2015 consensus earnings estimates, which are projected to be an all-time high. Given the potential for a slowdown in the Chinese economy, which accounts for a significant portion of luxury sales, investors may be disappointed by future revenue and margin growth. Additionally, the technical support for the shares has been reduced following LVMH's failed takeover attempt, increasing the risk of a sharp decline in stock price if the company underperforms.

AIG is very cheap, trading at around $54 while its book value per share is $70. The company has the potential to be an above-average business due to its global scale, and it should at least trade at book value, providing a margin of safety for investors.

Weight Watchers is a poor capital allocator, having issued $1.5 billion of debt to repurchase shares at $82 each, just as competition from free dieting apps began to rise. The stock now trades around $8, highlighting the consequences of their misallocation of capital and the challenges facing their business model.

Altice S.A. is positioned for significant upside due to its strong competitive advantages in the cable and telecom sectors across France and Portugal. With a target price of €180 representing nearly 80% upside, the company is expected to benefit from market consolidation and operational efficiencies under the leadership of Patrick Drahi, who is a proven capital allocator. The company's low broadband penetration and ownership of mobile networks further enhance its profitability potential.

The market misunderstands the potential for cost savings and synergies from migrating DSL subscribers to Altice's cable network, alongside significant operational expense cuts. The consolidation of the European telecom industry presents a strong opportunity for Altice to capitalize on its position as a consolidator, with a favorable regulatory environment and a growing demand for high-speed broadband.

Fiat Chrysler is undervalued due to the market's misunderstanding of its brand portfolio, particularly the value of Ferrari, which could be worth significantly more than the current market cap. With a strong management team led by Sergio Marchionne, who has a proven track record of creating shareholder value, the company is positioned for substantial growth, potentially reaching €30-60/share by 2018.

The investment thesis for Fiat Chrysler is based on its potential for significant earnings growth driven by a five-year plan that includes globalizing the Jeep brand, developing premium brands like Alfa Romeo and Maserati, and improving operational efficiencies through architecture convergence. The company is also positioned for potential consolidation in the auto industry, which could create substantial synergies and enhance its competitive position.

HCA is presented as an attractive investment opportunity due to its position as the largest hospital operator in the US, with a strong market presence that allows for favorable negotiations with insurers and significant cost advantages. The company is expected to benefit from demographic trends and healthcare reforms, with a potential upside of 75% over the next three years, while also having the capacity to buy back a substantial portion of its shares.

HCA is significantly undervalued, trading at approximately 8.5x EBITDA compared to healthcare REITs that trade between 16x and 25x EBITDA. By spinning off its real estate into a PropCo, HCA shareholders could unlock hidden value. The stock has a potential upside of ~75% over the next three years, translating to a 21% IRR, with a favorable risk-reward ratio.

Genuine Parts Company is mentioned as a long position, indicating a positive outlook on its performance.

We recommend investors buy Genuine Parts Company (GPC) with a two year price target of $127, representing a total return of 45%. The investment thesis is based on the strength of the automotive parts segment, a Reverse Morris Trust merger with United Stationers for the office segment, and a tax-free spin of the industrials and electrical parts segments.

We recommend a long position in Precision Castparts (PCP) with a two-year target price of $300, representing ~50% upside. PCP is the market leader in an industry with meaningful barriers to entry and has a history of best-in-class performance.

We believe PCP is well positioned to continue to grow through M&A, driven by strong secular tailwinds in the commercial aerospace market. Despite concerns over slowing organic sales growth, we see limited risk of a sharp pullback in deliveries, and PCP's strong cash flow generation supports its capital allocation strategy. Our SOTP price target of $300 implies significant upside from current levels.

Rolf Heitmeyer believes that American Axle is undervalued due to its strong market position and potential for operational improvements.

Heitmeyer sees Bed Bath & Beyond as a turnaround opportunity, with significant asset value that is not reflected in its current stock price.

Heitmeyer considers Hermès a strong brand with pricing power and growth potential, making it a solid long-term investment.

National Oilwell Varco has a very strong market position and about $12 billion of backlog and net cash on the balance sheet. Despite challenging short-term fundamentals due to the price of oil dropping, the company is well-positioned to emerge stronger from this crisis and has the potential to improve its position in its core segments.

CDK Global is undervalued due to market misperceptions, and its strong position in the automotive retail technology space provides a solid foundation for growth. The company has a robust cash flow and is well-positioned to capitalize on industry trends, making it a compelling long-term investment.

Groupe Bruxelles Lambert is undervalued compared to its intrinsic worth, with a strong portfolio of assets and a disciplined management approach. The company’s ability to buy back stock at a discount enhances its value proposition, making it an attractive long-term investment.

Oracle is a stable cash flow machine with a high retention rate on its maintenance contracts, making it less volatile than typical tech stocks. The company's management is aligned with shareholder interests through equity incentives, and its consistent buybacks and cash flow growth present a solid investment opportunity.

VimpelCom operates primarily outside of Russia and Ukraine, yet its stock has traded in correlation with the Russian index, creating an opportunity for investors. The fundamentals of the company remain strong despite the geopolitical concerns affecting its stock price.

Investing in Pixar was based on the belief in its management and creative process, which consistently produced successful films despite skepticism about its business model. The company's strong intellectual property and disciplined management were key factors in its value creation.

Amazon is expected to improve transparency and focus on profitability, particularly in its retail and AWS segments. The company’s shift in strategy to care about share price and the potential for AWS to be spun off as a separate entity could significantly enhance its market value.

The multiple gap for CBS has narrowed compared to peer media companies, and while there are concerns about the television ecosystem, CBS still provides significant value to distributors. The stock is currently well-balanced in valuation relative to risks, but if it were to decline significantly, it would be an attractive opportunity.

Facebook is not an expensive stock given its earnings potential, with estimates of over $3 per share next year. The company has significant assets like Instagram and WhatsApp that have not yet been monetized, presenting a large opportunity for future growth.

MercadoLibre has established itself as a dominant player in Latin American ecommerce, successfully navigating a complex landscape and achieving profitability. The stock was initially undervalued due to concerns over its Venezuelan revenue, but the company has shown resilience and growth potential, making it a compelling investment.

Tencent is expected to trade in the teens next year with accelerating revenue growth, particularly from advertising, which has higher margins compared to mobile gaming. The monetization potential on Tencent's platform is significant, indicating strong future performance.

Telecom Italia is well-positioned to benefit from the consolidation of the European and Brazilian telecom industries. With its significant ownership of TIM Participações, it is a strategic asset that could attract M&A interest, especially as the market consolidates and improves network quality.

Telecom Italia's stock is currently priced at €1.08, but we believe it is worth at least €1.50 due to its potential for high-margin revenue growth and the value of its 67% stake in TIM Participações in Brazil, which will become more valuable upon consolidation in the Brazilian telecom market.

After initially being short on BlackBerry, we reversed our position and went long due to the impressive turnaround strategy presented by CEO John Chen, which we believed would gain investor confidence despite the company's challenges.

We regret not owning Altice or Numericable, as we were impressed by their management team and their aggressive consolidation strategy in Europe.

Investing in Surgutneftegas during the Russian voucher privatization program was a major opportunity, as we believed it was undervalued compared to its oil reserves, which were comparable to Mobil's but priced significantly lower.

The Bank of Georgia was acquired during a time of political change and economic stabilization in Georgia, and it has since cleaned up its balance sheet and grown significantly, eventually listing on the London Stock Exchange with a strong investor base.

Uralkali was purchased at a very low price due to hidden profits, and the investor identified a potential structural supply deficit in potash, leading to a bullish outlook on the resource.

Lukoil has transitioned into a company that runs efficiently and pays big dividends, making it an attractive investment in the oil sector.

Gazprom Neft generates a lot of cash flow and pays a large dividend, with a strong management team that adds value and allows the company to remain independent from Gazprom.

MGM is trading at a significant valuation discount with a 20% levered free cash flow yield. The stock is expected to appreciate as the company continues to pay down debt and improve its balance sheet, with additional upside potential from industry normalization and possible structural changes like an opco/propco split.

The gaming company was trading at 7x EV/EBITDA with a leverage of 5x EBITDA, indicating it is a levered equity. The free cash flow yield on the equity was attractive, and the high-yield markets seemed comfortable with the leverage, making it an interesting investment opportunity.

The MLP has a $10 billion market cap and its revenues are completely contracted, yet it trades at a 25% discount to NAV with a strong current dividend yield. This presents a significant upside potential, especially if oil prices recover.

The ski company is trading at a substantial discount to its peers and has a hidden real estate angle. It is valued around 7x EBITDA compared to its peers at 10-11x, generating a double-digit free cash flow yield and has a manageable leverage of 4x with a term loan.

The spinoff was trading at a 50% discount to intrinsic value and involved a well-respected CEO. The management was announcing value-enhancing catalysts, such as spinning off assets and returning cash to shareholders, making it an attractive investment despite its declining stock price.

We believe Bed Bath & Beyond is an exceptional business with a leading position in the housewares retail category and a return on invested capital consistently above 20%. The company has a strong cash flow and has returned significant capital to shareholders through buybacks, which we expect to continue driving EPS growth. With a target price of $105 per share based on medium-term earnings power of approximately $7 per share, we see substantial upside from the current price of around $75.

American Axle & Manufacturing is perceived as a boring provider of commoditized products, but we believe it has innovative products that are not getting credit in the market. The company has a strong customer base with long-term contracts, particularly with General Motors, which provides visibility into sales and margins. We think AXL's growth potential and its current valuation present a compelling investment opportunity.

American International Group is improving its return on equity through share buybacks and increasing its asset to equity ratio. As the company's ROE mean-reverts to industry averages and the stock trades at a premium to book value, we believe it has the potential to be worth over $100 per share.

AXL has a manageable debt load with net debt at 2.5x EBITDA and a strong free cash flow of about $200 million annually. The company is expected to diversify its customer base and reduce GM concentration below 50% of sales, with an estimated earnings power of $3 per share. Applying a 12x multiple to this earnings power suggests a target price of $36, compared to the current price of around $25.

Vectrus is a defense contractor with sticky government contracts and a potential for margin expansion due to a fixed price structure on renewals. The company has a medium-term earnings power of $3 per share, and applying a 13x multiple gives a target valuation of close to $40 per share, while currently priced at $25.

Investors Bancorp is a small regional bank that recently demutualized and is currently overcapitalized, leading to a depressed ROE. The stock trades at 1.1x tangible book value, while comps trade at over 1.5x. The bank is expected to increase its ROE by growing its loan book and returning excess capital to shareholders, which could lead to multiple expansion post-demutualization.

HCA is well-positioned to benefit from significant industry tailwinds, particularly from the growing Medicare eligible population, which is expected to increase at a CAGR of ~3.0% over the next 20 years. The company's strong free cash flow allows for opportunistic share repurchases, and management has already returned $7 billion to shareholders, highlighting their commitment to returning capital. Additionally, health care reform is expected to reduce the number of unprofitable uninsured patients, potentially adding $1 billion in EBITDA over the next two years.

Precision Castparts is a market leader in providing mission-critical metal components to the aerospace market, with a strong competitive moat due to its entrenched position in customer ecosystems, dominant market share, and low-cost leadership. The company has demonstrated exceptional capital allocation skills, particularly in M&A and share buybacks, which we believe will continue to enhance shareholder value.