Hayman Capital's Top Picks Favoring Expansion and Restructuring
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hayman Capital Management is a hedge fund owned by its employees. It manages assets worth $1.1 billion and uses fundamental analysis to design its portfolio. The primary investing policy of this fund is focused on public equity and fixed income securities. It invests in companies that keep changing their strategies as per the market conditions to derive higher returns. According to its last 13F filing, the fund reported its top holdings in the following companies.
In my quest to identify the investment opportunity, I decided to analyze these three companies. Let's analyze whether these companies have successfully implemented the expansion strategies.
Expansion strategy will boost revenue
Nationstar's portfolio is comprised of almost $23 billion of unpaid principal balance, or UPB. UPB is the outstanding balance that needs to be paid on the principal amount of a loan. The company also has a residential mortgage loan facility on government-sponsored organizations.
For the expansion in its mortgage service, Nationstar acquired the mortgage service segment of Bank of America. BoA's residential mortgage service rights were acquired for approximately $10.4 billion in the first quarter of 2013. It will give Nationstar operational duties on existing customers of BoA, which includes loan holdings of the bank, public bodies, non-government investment funds, and proprietors of mortgage loans and securities. The company already has more than $430 billion worth of mortgage service rights to add, and after this deal it will be the largest non-bank mortgage service provider in the U.S.
Nationstar, in the mortgage segment, provides direct lending facility to customers and has also initiated the wholesale-lending segment. To expand in this segment, the company has acquired the origination platform and unfunded loan network of Greenlight Financial Service. This deal closed on June 3, 2013 for $75 million. The acquired company has 65% of its operations in California and has a license to operate in another 40 states. This acquisition will increase the services of the company by 50%, amounting to $312 billion in the unpaid principal balance segment.
Capturing market with new product range
Tempur-Pedic acquired Sealy in the first quarter of 2013 for $1.3 billion. Sealy reported a net sales increase of 8.8% year over year, amounting to $339.6 million in its first quarter of 2013. The acquisition was done to increase Tempur’s product range and for brand building. After acquisition, the company changed its name to Tempur Sealy International.
With the enhancement in product range, the company is expecting to supply almost 70,000 new bedding products in the second quarter of 2013. As a result, Tempur expects an increase in its sales by 5% in the second quarter of 2013. From this acquisition, the company is expecting to generate a cost synergy of around $15 million in 2013, which is expected to further increase by $40 million through 2015.
Tempur also announced a restructuring plan in March 2013, with the aim to reduce its interest cost by $10 million annually. This will contribute $0.06 to EPS in 2013 and $0.11 in 2014. Tempur made $125 million of voluntary prepayment by the end of May 2013, reducing the debt amount to $742.8 million. The company has the ability to pay $1 billion to decrease its debt, which it accumulated from its international cash flow.
On the path of growth with increasing market share
Huntsman’s polyurethane segment is the key driver of its revenue, as it has grown by 7% to 8.5% every year. Polyurethane is an organic elastomeric that is used in the manufacturing process of products like foam seating, insulation panels, and automotive. The demand from this segment is increasing, as there is a rise in the demand from the furniture and construction industries. Polyurethane demand is expected to rise to $66.4 billion by 2018, from $43.2 billion in 2012.
Polyurethane's key revenue-driving product is methylene diphenyl diisocyanate, or MDI. The demand of MDI is growing in the Asian-Pacific region, which is now the largest consumer of MDI. It also has demand from North America and Europe. In 2013, it is expected that there will be construction of more than 900,000 houses in North America, which will increase demand of MDI. In the year 2012, this segment generated revenue of $43.2 billion, and it expects to generate $46.39 billion in 2013.
In order to boost its profitability, Huntsman has planned for cost restructuring. The company will save more than $165 million annually over the next few years. This plan will focus on free cash flow generation, or FCF, and repayment of loan amounts. It has already generated $360 million of FCF in 2012, which will be used for loan repayments. Huntsman expects that restructuring will generate earnings of approximately $190 million by the end of 2014.
On the other hand, Huntsman has initiated two restructuring programs called "advanced material program" and "textile effect program." It will reduce the cost of material used and will increase production efficiency. The advanced material program is expected to end by the middle of 2014. It will generate profit of $40 million in 2013 and $70 million in 2014. The textile effect is expected to be completed in 2013. This plan will generate profit of $75 million by 2014.
Huntsman has reported a growth in the polyurethanes segment, which is a result of increased demand from the Asian-Pacific region. The company has restructured to make the loan payments and reduce debt.
Nationstar acquired the mortgage service segment of BoA and is receiving additional UPB rights. With increased rights, there will be higher growth prospects in front of the company.
Tempur has acquired Sealy to increase its product range. After the acquisition, the company has made plans to increase its presence internationally. It has even adopted a restructuring strategy to cut down its interest payment.
I recommend buying all three stocks.
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Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Tempur-Pedic International. 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!