Steve Eisman's Sohn Conference Presentation on Housing Plays: Long US, Short Canada

We're posting up notes from the Ira Sohn Conference 2013 in New York.  Next up is a summary of the presentation from Steve Eisman of Emrys Partners (he was previously at FrontPoint).  He presented "Housing: A Tale of Two Countries.  US vs. Canada."  


Long US Housing Plays

US: Fundamentals improving and accelerating. Affordability levels best in decades, Monthly principal and interest, only 14% of incomes. Inventory now at a 30 year low, shadow inventory is fading. Single- family starts should boost public builders. Last year was volume; this year is volume and pricing. California, AZ, NV, and TX are strongest- they were weakest.

3 ways to play it:

1. Homebuilders. Not cheap, but are not pricing in how much fundamentals have improved. Lennar (LEN), Standard Pacific (SPF), Pulte Homes (PHM).

2. Home building products: American Woodmark (AMWD), Fortune Brands Home & Security (FBHS).

3. Land: Forestar Group (FOR). Pure play in land. Colony Financial (CLNY) - real estate loans. Ocwen Financial (OCN) Largest non-bank mortgage servicing company. 25% FCF yield. Growth company, 7x p/e.  OCN seemed to be his favorite pick.  Our Hedge Fund Wisdom newsletter analyzed OCN back in our Q3 2012 issue.  Subscribe to the letter if you want a great company/stock overview to get up to speed.


Short Plays on Canadian Housing

He says that if a housing slowdown comes in Canada, the Canadian banks will really get hit.  "Misaligned incentives and poorly understood housing finance market."

Canada has their own Fannie Mae- called CHMC, which stepped in during 2008-2010 to do almost ALL the loans. Now CHMC is not doing loans, so banks must do it. Says these banks are all over-priced and "over-earning" because the boom from issuing insured loans is over. 

Canadian banks: Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), Royal Bank of Canada (RY), Toronto Dominion Bank (TD).

Short Idea: Home Capital Group (HCG.CA). Listed only in Canada. Largest non-prime mortgage originator in Canada. Carries $8.8B on their balance sheet. Has less than $1B equity, yet 100% of the credit risk on those loans. Trades at twice tangible book, expensive.


We've highlighted some past resources on this hedgie, including Eisman's pitch on for-profit education as well as Eisman's thoughts on insurers.


Check out the rest of the hedge fund presentations from the event: notes from Ira Sohn Conference 2013.

Pershing Square Exits Family Dollar and Fortune Brands Home & Security Positions

Bill Ackman's hedge fund Pershing Square Capital Management just filed two separate 13G's with the SEC.  Both revealed that Pershing has completely sold out of its previous positions in Family Dollar (FDO) and Fortune Brands Home & Security (FBHS).

Each stock has seen material price appreciation and so this could simply be a case of harvesting profits to allocate capital to more compelling ideas.  Pershing exited FBHS on April 27th and FDO on April 19th.

For those interested, we've previously highlighted Ackman's case for FBHS as well as his FDO thesis.

While Pershing has exited its FDO position, Nelson Peltz's Trian Partners continues to be a large shareholder in the name.  They provided an update on the stake in their first quarter letter to investors:

"On March 28th, Family Dollar reported 2Q12 earnings which included EPS of $1.15, up 17% year over year, and comparable store sales growth of 4.5%. Family Dollar also increased the low end of its FY12 EPS guidance by $0.05 and issued 3Q12 comparable store sales growth guidance of 5% to 7%, marking acceleration in comparable store sales growth from the prior two quarters.

The company has also strengthened its management team yet again with the appointment of Mary Winston (previously with Giant Eagle, a $9 billion privately held grocery chain) as Chief Financial Officer on April 10th, a move we fully support. This management addition follows the September 2011 appointment of Mike Bloom as President and Chief Operating Officer. Mike has already made meaningful contributions to the company and we believe that investors and research analysts have rapidly come to appreciate the level of expertise and enthusiasm he brings to his role as a prime driver of operational improvements."

Stay tuned as we'll be posting more excerpts from Trian's letter in a separate post.

For more on Pershing Square's latest activity, we posted Bill Ackman's latest interview up today as well.

Bill Ackman: Long Fortune Brands Home Security (Value Investing Congress Presentation)

At day two of the Value Investing Congress, Bill Ackman of hedge fund Pershing Square Capital gave the case for going long Fortune Brands Home Security (FBHS) in a presentation entitled "You'll Want to Hear This."

Be sure to check out all our notes from the Value Investing Congress.


Bill Ackman (Pershing Square Capital)

Embedded below is his full slideshow presentation:



Ackman has spoken every year for the seven years of the conference's existence. He runs $10 billion now and has an 8-person investment team. His analyst (who presented it) generated the idea.

"A Homespun Fortune"

Fortune Brands Home & Security (FBHS): Makes faucets, kitchen/bath cabinets. Was just spun off from Fortune brands 2 weeks ago. Own Moen, #1 faucet brand in NA, security Master Lock, #1 Padlock brand in US. Secular winner: industry leader with scale, strong management team. Cyclical winner: when the housing market normalizes, EBITDA can triple from here due to operating leverage. “Platform business” as it can roll-up small adjacent categories. Key is housing starts need to improve, if it does, stock can go to $22, up 70% from today’s price of $15. Classic spinoff, being sold by Fortune Brand investors who don’t want this type of business.

Segments:

Plumbing. Moen faucets. Has held up throughout downturn- low-ticket items that can really improve look of the bathroom, also high install base for replacement sales.

Cabinets. Excess capacity, most vulnerable to housing. Barely profitable while peers are losing money.

Security. Master Lock business. Stable demand in the core padlock market. Can market more aggressively now that it’s separate from Fortune Brands. Windows & Doors. Very leveraged to new home building market. Barely profitable.


2007 had 14% EBITDA margins, now only 5%. But plumbing & security business has, 50% of Revenue, but 80% of EBIT. Currently the Cabinets and Windows/Doors are underperforming due to housing market. If capacity gets reduced in housing sensitive segments, they could get to a 10% EBIT margin overall. Good balance sheet, can make some acquisitions.

Housing market review: Housing starts are at the lowest level in the last 40 years. This is the fifth year of the housing recession, at 600k housing starts. Excess supply today is 2 – 2.5M units. 1M needed every year, building only 600k, 400k reduction of supply every year implies 5.6 years to remove excess supply.

FBHS upside case: With housing recovery- EBITDA doubles. If no recovery, company will have to cut out costs to get back to 10% EBITDA margins. Trades at 9.7X LTM EBITDA, 23x P/E. Looking forward 6.4x 2012E EBITDA.

Whole story depends on how fast housing recovers. Range of stock price outcomes: No recovery: $14, no upside. Partial recovery: $18, 35% upside. Huge recovery: $27 per share, 110% upside.


Q&A Session:

1. Why is FBHS the right way to play the housing cycle? “Low risk way to play it, if we’re wrong, we don’t lose much money.”

2. Ackman says election could be a potential catalyst to help consumer confidence; renting is more expensive than buying in some markets. Says recovery happens much more quickly than 5 years.

3. Question on C: stock off 30% from when started buying the stock, mistake was not using a higher discount rate for the uncertainty of the stock.

4. Talking up the Hong Kong Dollar options - only 1% of the fund, but if they’re right in a year, make 60x their money.

5. JCP: real estate isn’t core to the story. Idea is for management to improve the business. “Retail, when you get it right, can be close to the best business. Look at the wealthiest people in every country in the world- the richest are often retailers.” If you get retail right, it can be an incredible business. Most relevant thing is this “incredibly smart, charismatic guy” is going to run the business. Perfect training for the job- 15 years at Target, then building Apple stores. “Ron is going to re-invent the department store.” Incentives in line, no liquidity on his options for 6 years, and bought $50M of stock himself. Ackman now has 26% of JCP.

6. Justice Holdings. Trades on LSE. “SPAC.” Cash shell. Ackman put up $450M. Idea is to find a business to buy and effectively take public.

7. Howard Hughes, from $35 to $77, back to the $40s- any comment? Owns Ward in Honolulu, South St Seaport, GGP HQ business in Chicago, book value about $50 on a very conservative estimate, zero net debt. Good board and management. “A collection of assets that will do well over time.”

8. His business model is to take big stakes in companies. He has made a lot of money for co-investors, who he doesn’t even know. When he’s in a stock, it sends a very strong message to boards because they know that there are many other investors behind him. Allows him to have influence on how management operates the company.

In addition, large stakes allows him to get a good CEO, who they can “protect” from Wall Street. They get some control without paying a control premium. Free riders actually help him. Better than LBO firms, because they have to pay a huge premium over public market price for control. They also have a private, illiquid, levered position. Ackman’s is less liquid than typical public stock, but much cheaper entry point.

“People making money off our strategy is part of the business, and healthy.” (This is the second time we’ve heard him say this - it’s really the key to what he does.) Tilson piled on, and said Ackman took the best advantages of both Hedge Funds and Private Equity. Says Ackman made more money faster than anyone did in history.

For more from the Pershing Square manager, be sure to head to Ackman's presentation on the Hong Kong Dollar as well as read about how Pershing bought $600 million worth of investments during the August volatility.



Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.