4 Undervalued Companies Led By Great CEOs
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What makes a great CEO? This question has historically opened up into a philosophical discussion over whether leadership is born, developed, or both. In my view, however, it isn't so much what makes a CEO great that is important but, rather, how a CEO can be great. Regrettably, success too often comes with political criticism, burdensome taxes, and, well, jealousy. Too often we talk about compensation as if it is a net negative without positive externalities. In reality, high compensation for great leaders encourages innovation from the bottom to the top, drives efficient risk-taking, and brings in talent.
Seldom do I like to single out individuals for discussion in a bullish investment piece, but occasion calls for me to set the story right. High compensation does not mean reckless leadership. Just the opposite is often true. Four CEOs that I recommend putting your money behind include Bob Iger of Disney (NYSE: DIS), Meg Whitman of Hewlett-Packard (NYSE: HPQ), Henry Kravis of KKR (NYSE: KKR), and Louis Camilleri of Philip Morris International (NYSE: PM).
Disney and Bob Iger
In the two years before Bob Iger became the President of Disney in 2000, there were serious concerns about the future of the media business. The stock looked like it was hitting a plateau with the glory days behind it. Boy, did Disney make a great decision to bring in Iger. Originally, however, he was number two to Chairman & CEO Michael Eisner. Shareholder value fell 15.8% and then he took over as CEO. A few things happened.
First, Iger handled the acquisition of Pixar in 2006, which was then controlled by Apple's Steve Jobs. This was followed by the acquisition of Marvel Entertainment - both of which solidified Disney's leading economic moat in media. He resurrected ABS; launched the multi-billion dollar Pirates of the Caribbean franchise; brought you Ratatouille, WALL-E, Up, Miley Cyrus; and created 74.5% in value since taking the helm.
Going forward, the company looks attractive. Disney trades at just 13.8x forward earnings and is forecast for 13.3% annual EPS growth over the next 5 years. That means 2016 EPS will come out to around $5.05, which, at a 15x multiple, translates to a future stock value of $75.82. Discounting backwards by 8% yields a present value of $51.60. Disney may not have a substantial margin of safety right now, but it has strong upside to the $75.82 future price projection. Moreover, I believe management will create even more value through the Avatar theme park it has acquired rights to. Iger has said that he will exit the role of CEO in 2015, but rest assured that he is laying a solid foundation for his successor.
HP and Meg Whitman
Whitman is most noted for her role in helping eBay (EBAY) grow to stardom. She first joined the now-multi-billion dollar firm in March 1998 when there around a two dozen employees. During her tenure, she took revenue from $4M to $8B in 2008. The billionaire has since taken the role of CEO of HP in September 2011. Thus far, shareholder value has fallen by an unwarranted ~25%. Since she has been in control, however, the company has consistently beaten expectations.
One particular area where Whitman has strengthened market confidence in HP is her approach to takeover activity. She has expressed a disinterest in large billion dollar acquisitions. Another area where she has showcased strengths is her focus on the long-term. She rightfully dismissed her predecessors' consideration to scrap the PC business and recommitted the business to the fundamentals.
Fortunately, HP has plenty of room to appreciate off of. The company generated $8.1B in free cash flow just last year, but oddly trades at just 4.4x that amount. Far from being a "value trap", HP has committed itself to returning free cash flow to shareholders with a generous dividend yield of 2.9%. Downside is fairly limited at 4.1x forward earnings and 5.6% annual EPS growth expected over the next half decade. The company is an ideal turnaround investment. I do not believe that PCs will be replaced by tablets and smartphones, as short seller Jim Chanos apparently believes. Businesses run on PCs, and the "smaller-is-always-better" trend has proven ephemeral in the past. A strong balance sheet and stream of free cash flow will also enable heavy R&D investments for future growth. In a sector with few barriers to entry, HP has the brand and financial power to meaningfully diversify in a way that complements the core PC business.
Henry Kravis and KKR
Kravis is the billionaire co-founder of private equity giant KKR. The company is more accurately described as an asset management firm, or global investment vehicle, that is broadly diversified in several areas, including high-yield debt investing, mezzanine financing, private equity, and broader capital market solutions, among many others. So, the company can tune its business to fit the times and has a direct touch on the "pulse" of the market.
Since KKR first when public in mid-2010, the stock has gained 45.1, roughly doubling the return of the S&P 500 over the same time period. Henry Kravis is one of the best investors who, in my view, has not received enough attention for his business acumen. Top deals from Playtex to Toys "R" Us, Safeway, and Beatrice are all testaments to the powerful KKR brand. But Kravis has expressed in the past how any investor can do a deal and that success should be based on the results. Here's a man committed to value creation and has a successful track record.
There are several reasons why you should think about buying shares of KKR now. While it is hard to value financials, KKR is cheap at 6.4x forward earnings and a generous dividend yield of 4.8%. Too much risk has been factored into the stock - and sector - due to macro uncertainty; but, if you are bullish on the secular trends of the economy, like I am, KKR is nothing but an upside story.
Philip Morris International and Louis Camilleri
Camilleri has a more than three decade experience in the tobacco industry and yielded nothing but successful results. He started off as a business development analyst of Philip Morris Europe in 1978 and took on increasing authority. In November 1996, Camilleri was named CFO of the leading consumer brand. He then became CEO of what is now known as Altria in April 2002. If you go back as far as 1978, Altria gained 6,200% in value. Dating from 1996 to the time he went on to leading Philip Morris International in 2008, the company gained 190% in value. From 2002 to the PMI spin off, the company gained more than 85% in value.
PMI was spun off from Altria in March 2008, so that the former could focus on markets outside of the United States where regulatory risks are lower. Camilleri has also done well at PMI and created over $62B in value, or a 78.4% return for shareholders.
I am excited about PMI's growth curve and potential in smokeless tobacco. With a 3.5% dividend yield and a beta of 0.9, I recommend the firm as a defensive play. It may strike investors as expensive at 17.4x forward earnings, but I believe the brand name and expansion opportunities in emerging markets merit a premium and a "buy" rating. At a 17x multiple of my 2016 EPS ($7.64) estimate, the company is fairly valued right now when an 8% discount rate is applied. It is heading towards $130 under these assumptions and, in the meanwhile, offering a high dividend yield with stability.
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