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Relational Investors, founded by Ralph Whitworth in 1996, employs a block investing strategy. Block investing is a spin on "activist" investing, being a more "company friendly" approach to enacting change at companies. These investors generally purchase large blocks of shares and engage with company management to unlock shareholder value.
Relational made a couple of notable investments during the fourth quarter, including buying up a notable crane company and having over 14% of its portfolio invested in an equipment company; let's see what else they bought and sold last quarter.
Relational dumps apparel and flow equipment
The investment fund sold off its entire stake in FlowserveCorporation(NYSE: FLS) and Abercrombie & Fitch(NYSE: ANF) last quarter. Flowserve had made up 5.5% of Relational's portfolio and Abercrombie 2.3% during the third quarer. Flowserve is a developer and manufacturer of precision-engineered flow control equipment. The company posted strong fourth quarter numbers, with earnings up 25% year over year, and booking activity remaining strong. So why did Relational sell? Valuation might be a driving factor.
Compared to major peers, Dover, Colfax and Xylem, Flowserve trades on the high end with respect to price to earnings and price to sales. Flowserve's P/E is 19.5 and its P/S is 1.77, compared to Dover P/E (16) P/S (1.61), Colfax P/E (n/a) P/S (1.61), and Xylem P/E (17.9) P/S (1.4).
Abercrombie & Fitch is the popular apparel company, with two major brands driving revenues, Hollister (50% of revenues) and Abercrombie & Fitch (30%). The bad news for the company includes a string of negative comp sales numbers -- with comp sales growth having been negative for the past four quarters. Management is also expecting a decline in comp sales in the high single digits for the current quarter. However, the company is looking to help with these poor same store sales number by closing down underperforming stores, upwards of fifty in the U.S. this year. This is a positive and although Relational no longer likes the company, if comp sales start to improve the company could well be a solid buy in the apparel industry. Analysts' expect the company to grow EPS at an annualized rate of 18% over the next five years.
Relational buys up cranes
Manitowoc Company(NYSE: MTW)was one of Relational's only new additions to its portfolio. The company has a lot of exposure to the crane industry, with almost 70% of its revenues derived from this segment, which in turn gives the company exposure to a number of industries, including energy and infrastructure development -- road, bridge, airport, commercial and high-rise residential construction. With the construction industry showing signs of turning around, this exposure will a positive for the company (see why both Manitowoc shines in 2013).
The company levered itself up in 2008, reaching a long-term debt load of $2.4 billion, after taking over Enodis. The company has since worked its long-term debt down to $1.7 billion, and grew EPS to $0.71, after having posted negative earnings in both 2009 and 2010 and EPS of only $0.21 in 2011; a turnaround is underway, with room to move higher as the stock is still down almost 50% over the last five years.
Relational has 20% invested its top two
Illinois Tool Works(NYSE: ITW) remained Relational's top stock despite a 15% sell off in shares owned. The company is quite diversified across the industrial and equipment market, with eight major segments, including industrial packaging and electronics. What's most notable is that not a single segment accounts for more than 20% of revenues.
Illinois Tool is also anticipating operating margins and return on invested capital to be above 20% by 2017, with a 12% annual earnings growth rate targeted for beyond 2017. The company also has a robust policy of returning capital to its shareholders via dividend payments and share buybacks, paying out $865 million in dividends and spending $2.0 billion on share repurchases in 2012, with a $1.9 billion of share buyback authorization pending (check out other high yielding industrials).
Hess Corp.(NYSE: HES)moved up to second in Relational's portfolio, from fifth, after the firm increased its shares owned by 63% last quarter. The most notable news of late for the company includes the fact that billionaire investor Paul Singer and his hedge fund, Elliott Associates, is looking to shake things up at Hess (read more about Singer's plans).
Part of what Singer is pushing for, and what Hess moving toward, is a transition from an integrated oil and gas company to an exploration and production company. This includes its exit from the New Jersey refining business. Now the company is focused on high-impact exploration areas, which includes its Bakken presence, where production was up 87% in 2012. For 2013, its exploration budget will be focused on monetizing its impressive asset base, including the Gulf of Mexico, Southeast Asia and West Africa (see why Hess is a buy).
Don't be fooled
Relational runs a niche portfolio, owning less than 20 stocks. Both of the fund's top stocks are set up to perform nicely going forward, with Illinois Tool growing off the rise in industrial spending, and Hess is making an impressive transition away from refining to become an E&P company. Illinois Tool is also a high conviction pick for relational, with over 14% of the firm's funds invested in the stock, compared to 6% for its second pick Hess. I agree with Relational selloffs, which include Abercrombie and Flowserve, where Abercrombie has been facing poor same store sales and Flowserve is overvalued. Meanwhile, Relational did add Manitowoc to its portfolio last quarter, which should perform nicely on the back of a rebounding economy.