Alex Roepers Interview With Capitalize For Kids ~ market folly

Thursday, August 3, 2017

Alex Roepers Interview With Capitalize For Kids

Alex Roepers of Atlantic Investment Management sat down with Capitalize For Kids for their Investor Series and talks about his strategy for beating the market while holding only six stocks.  Here's a few excerpts:

On the current markets:  "From a 40,000 foot level,you know the 10-year treasury yield is around 2.4%, while the S&P 500 dividend yield is around 2.1% and the earnings yield is about 5%, based on an index P/E of 17x. So we see the market as not overly cheap for sure but also not overly expensive. The continued low interest environment remains supportive for the overall market.

Within the market of course, you have many different pockets – it is a bit of a barbell, bifurcated market. On one hand, you have Tesla and the other story stocks that have a cult following and valuations that we think make absolutely no sense. On the other hand, you have many overlooked but solidly profitable companies who have little or no top-line growth, such as General Motors, automotive suppliers, airlines and retailers.We would say the market is full of interesting opportunities, long and short. It is ok on balance as long as rates remain reasonable."

On one of his top holdings Commscope (COMM): "(COMM is) a $5 billion integrated manufacturer of end-to-end solutions connecting wired and wireless networks, including networking equipment like antennas as well as coaxial and fiber optic cables. Solid secular growth is rooted in increased use of streaming data, video and movies and increased use of smart phones and internet mobility in general. Foreign sales are 50% and increasing due to growth in less mature markets, both developed and emerging, which require improved bandwidth and connectivity. We see it as a solid business. Key customers include Comcast, Verizon, AT&T,Charter Communications, Anixter and Liberty Media.

We started scaling into CommScope last October around $30/share. From there, the shares rallied to $42, up by 40% within 6 months. We were trimming along the way to keep the position in check as a percentage of capital. Then, in early May, due to a reduced forecast for Q2-2017, for reasons we deem to be transitory, Commscope shares were knocked down to $35, where we added back the shares we had sold on strength previously.  We see the shares reaching $50 in the next 6 to 12 months on reasonable earnings and valuation assumptions. Given our analysis CommScope has solid downside support here,compelling upside on its own and also takeover potential."

On overlooked value play Diebold Nixdorf (DBD): "They are a leading maker of automated teller machines (ATM) as well as electronic point-of-sale (EPOS) solutions for the retail market. In ATM’s, NCR and Hyosung are key competitors and in the retail vertical it is IBM-Toshiba and NCR mostly.  There are some 3.3 million ATMs installed worldwide, one third of which are Diebold Nixdorf’s.

A key concern is that the proliferation of electronic payments will cause a reduced need for the use of ATM’s. We believe that this concern is overblown as cash transactions and notes in circulation continue to grow even in the United States and Europe.  ATMs remain a productivity tool for banks and an integral part of their customer interaction.While there has been a lot of consolidation of bank branches, the total ATM count in mature markets has actually been stable and now we see the overall banking sector is improving which bodes well for new and upgraded ATMs. The installed base is an important barrier to entry and key driver of business.  About 60% of Diebold Nixdorf’s sales come from maintenance services and software.

In the past two years, Diebold shares had fallen from $40 down to the low twenties. Besides a recent earnings warning in what is “year one” of a transformational merger, another key reason behind the share price weakness was a spell of declining capital spending by banks. The transformational deal was to buy a key competitor called Wincor Nixdorf out of Germany. Wincor, which was sold by Siemens to private equity in 1999, and subsequently listed in2004, generates $2.5 billion in sales, $1.5 billion from ATMs and $1 billion from retail point of sale systems (POS) used by retailers like Ikea, Zara and H&M. The cross-border deal took a year before it closed in August of last year, during which NCR and others took advantage of the uncertainty and inability by the two merger companies to react.  We see significant potential from combining the complementary footprints and capabilities ...  we see Diebold Nixdorf shares reaching over $40/share in 18-24 months, based on 11-12x our 2020 EPS target."

He also gives updates on Harman (HAR) and Owens-Illinois (OI) and chats about other topics.  You can read the rest of the interview here.

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