Is Heavy Insider Ownership a Good Omen for Investors?
Madhu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some investors have a special liking for those stocks in which management maintains a high level of ownership. Part of the reason for this is that it brings a sense of connection between shareholders and management. With this in mind, one can't skip the buyout of PC manufacturing giant Dell (NASDAQ: DELL). Dell's biggest shareholder, CEO and founder Michael Dell brought in the buyout proposal with a private investment firm Silver Lake for $24.4 billion.
Mr. Dell's stake in the company is around 14%, whereas six other investors opposing the deal together own around 18%. The proposal has been facing opposition from investors, with allegations of improper valuation of the company. The second and third largest shareholders, Southeastern Asset Management, and T. Rowe Price, along with at least four others, are opposing the buyout.
The deal got me thinking: Should an investor follow any stock with high insider ownership?
In this article, I have taken three stocks in which insiders hold nearly half of the total sharesoutstanding, and analyzed their performance. The table below shows the percentage holding of insiders in the company's total capital. Let's discuss these stocks in detail:
Name of the company
Percentage of Insider ownership(~)
W&T Offshore Incorporated (NYSE: WTI)
Campbell Soup Company (NYSE: CPB)
Las Vegas Sands Corporation (NYSE: LVS)
Source: Yahoo Finance
Recent announcements from W&T Offshore included its capital allocation program, and an update about its planned operations for FY 2013. But even the announcement of a new Gulf of Mexico well could not counter the effect of low growth in production on the stock price. Average production guidance for 2013 came to around 48.9 million barrels oil equivalent per day (Mboe/d,) which was less than the consensus expectation of around 52.6 Mboe/d. The majority of refiners in the Gulf of Mexico experienced greater-than-expected downtime in 2012, which resulted in creating a more cautious approach to the 2013 guidance throughout the industry.
Weak onshore locations
The company's onshore locations have been under-performing. The initial two Wolfcamp horizontal wells achieved initial production of 485 and 346 barrels oil equivalent per day (boe/d.) The ultimate estimated recovery from the site’s horizontal front falls in the range of 300-450 million barrels of oil equivalent (Mboe.) These rates are at the lower-end of the range of production by other operators of horizontal wells in the region. It is still early to say whether these numbers can improve in future, but the probability is low. Coming over to vertical wells, the completed costs of wells remain elevated at near $2.3 million whereas its competitors spend around $2 million. The company's profitability remains challenged, and no cost cutting programs are visible in the near term.
The company plans to spend around $450 million (flat YoY) in capex in the year 2013. Drilling in the Gulf of Mexico will use around 63% of capex, while the remaining goes towards onshore projects. In its operations update, the company announced an initial rate of around 2,700 boe/d for the fifth well in the Mahogany field; beating the pre-drilling estimates. In addition, the company discovered an additional reservoir in the region to be retained for future development, increasing the total reserves of the company in the field.
Looking at the mixed bag, I feel that the low rate of production from its horizontal wells, combined with the high cost of the vertical ones, offsets the better-than-expected production from the Gulf of Mexico. I see this stock as a hold.
Meeting the expectations of consensus is good, but beating them is great. In 2Q13, Campbell reported a $0.70 EPS, beating the consensus estimate of $0.66. The company surpassed expectations due to an improved soup business, strong baking and snacks volumes, plus a reduction in taxes, share count, and marketing expenses.
Though soup sales grew modestly, I see this more as a resultant of colder winters and higher incidence of the flu. The company had very low marketing efforts attached to this rise in sales. That being said, Campbell’s new products, like "Go Soups" are ramping up sales very slowly. I feel that cutting back on the marketing and selling expenses (as it did in the last quarter) would not be in the best of interest for the company. The company's marketing, general and administrative expense was ~22% of sales, which was flat YoY. I feel that the cut in advertising spending as a percentage of sales usually helps boost near-term profits, but it will lead to an eroded brand recall and lower sales in the long-term.
Moving on to the baking and snacks business, this segment was up by 6.7% YoY, mainly driven by a strong growth in volume. The company benefited from the bankruptcy of Hostess. With Hostess out of market, Campbell got more shelf space at grocery stores to fill out the gap in demand and supply, and the volume of the baking & snacks business spiked. In the future, the company should be able to continue to capitalize on the gap created in the baking market by this bankruptcy.
Recent performance should continue in the future as well, but low marketing initiatives are a threat to the company's profitability in the long-term. So I would stay neutral on the stock.
Las Vegas Sands
For the quarter ended Dec. 31st, 2012, Las Vegas Sands' net revenue jumped around 21%. The increase in gaming volumes in Macau resulted in a 43% jump in the profit from the region. Although recently, Macau gaming has seen some softness, January 2013 gross gaming revenue (GGR) comps showed a growth of 7% due to the flat VIP win. But I feel that in February, celebration of the Chinese New Year will improve the region’s performance in the short-term. The future demand growth should be driven by continued expansion, and improvements to infrastructure across China and Macau, and also by China’s GDP growth rate of 8%.
With no new competition coming for at least the next two years, Las Vegas Sands’ position in Macau seems strong. The company should benefit most because it is well exposed in the region. It owns around 38% of the total hotel rooms, and maintains 26% of total tables in Macau. The recent trend also shows that while VIP wins were flat, the mass wins accelerated 29% in Macau. To capitalize this opportunity, the company is planning to change the focus of the Four Seasons Hotel towards the premium mass segment, by converting some of its VIP tables to premium mass ones. It could potentially offer more profitability, given the premium mass’s significantly higher margin of 40%, as compared to 10% for VIP.
Furthermore, moving away from the VIP segment reduces the impact of risks associated with the VIP business. The Four Seasons is ideally designed for premium mass, given its luxury hotel rooms, amenities, restaurants, and retail mall. Additionally, the company has also added new rooms to its properties in Macau, and has also obtained approval to add around 200 new tables in the region to cope up with the growing demand.
Macau's performance was somewhat offset by a weaker performance by properties in the Nevada region, but the last month of 2012 saw a recovery, which indicates the possibility of an upward trend in the future. Looking at the future plans of the company in Macau, my take on this stock is it's a buy.
What's in it for investors?
W&T Offshore may have the advantage of more than expected initial production from its fifth well in the Gulf of Mexico. Also, it may have discovered a new reservoir, but the drag of underperformance of its onshore wells brings down the overall profitability of the company. For me, at the current price level, W&T Offshore is a hold.
Campbell Soup, with its improving soup business, along with the baking and snack segment, could help the company in the short-run. But in the long-term, the reduction in marketing and selling costs will hinder the performance of the company. I remain neutral on the company as an investment.
As for Las Vegas Sands, the changing paradigm of Macau, and the company's ability to adapt accordingly, strengthens my faith. Also, the signs of improvement in Nevada’s gaming industry bode well for the future growth of the company.
madhudube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!