As regards his strategy of investing in distresses companies he says: “We invest in and restructure financially distressed companies and look to create new, world-class enterprises. Our extensive knowledge, insight and longevity offer a distinct advantage when assessing and cultivating new investment opportunities, particularly in niche markets.”
I found very interesting to analyze Wilbur Ross top holdings and his main reasons to purchase those Companies.
EXCO Resources (XCO): Wilbur Ross bought at an average price of 16,95
Exco is a company engaged in exploring and producing oil and natural gas in Appalachia, East Texas, Louisiana, and the Permian Basin. It has been set up in Dallas and is performing greatly.
At the end of 2010, it reported reserves of 1,499 million cubic feet of natural gas equivalent. Exco´s portfolio includes two important assets: Haynesville/Bossier and Marcellus Shale. Both positions are growing. Indeed, with the two the company has significant drilling opportunities.
Wilbur Ross probably thinks that XCO now has two key growth assets in its portfolio--its Haynesville/Bossier and Marcellus Shale positions. Its Haynesville asset is further along the development trail, having grown from next to nothing to 419 mmcfe/d net to EXCO in the third quarter of 2011. With 80,000 net acres prospective for Haynesville and 50,000 net acres prospective for additional production from the shallower Bossier, XCO has the potential of 10 years of drilling opportunities at current activity levels. On the midstream side, EXCO has has a key advantage thanks to its 50% stake in gathering and pipeline business TGGT, which should reduce EXCO's risk of encountering significant midstream bottlenecks in its Louisiana Haynesville operations.
XCO has a negative 3 year revenue growth of 15,24% and a 3 year Net Income growth of 138%. Its average 2010-12 revenue growth of negative 12,05% y/y is lower than the average 76,14% y/y from 2008-12. This shows that sales are decelerating.
XCO has a P/E of 13,5x , P/B of 0,9x and P/S of 2.2x in comparison to Industry averages of 20,5x, 1.8x and 3x. This shows that from a multiple valuation perspective, XCO appear undervalued. Wilbur thesis is based on a price normalization in Natural Gas.
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Assured Guaranty (AGO):Wilbur Ross bought at an average price of 16,46[/b]
AGO is a bond insurer that mostly works with municipal bonds. In 2009, it acquired Financial Security Assurance, a company operating in the municipal bond insurance industry.
Wilbur Ross surely like that AGO did not insure the most dangerous bonds from the housing boom. This conservative decision saved Assured from incurring the severe rating downgrades imposed on industry-leading competitors MBIA and Ambac, which has driven these two former market leaders into runoff. As a result, AGO catapulted into the lead in insuring municipal bonds, a business that could grow if the US economy keeps recovering. With a unanimous AAA rating for most of 2008, Assured wrote more business at better-than-ever prices. In other words, conditions changed in the Industry and now AGO is the market leader. That is the key that Wilbur is watching. The insurer captured 40%-50% of new insurance written on municipal bonds in 2008 and the beginning of 2009, increasing net written premium by 50% in 2008. In 2010, Assured was the only active bond insurer, insuring about 10% of all new bonds that came to market. Muni bond insurance is paid up front, so AGO will have investment income from these premiums well into the future.
AGO has a conservative Debt/capital at 21%, and the firm generates sufficient cash flow to cover interest payments comfortably. Assured balance sheet has recently strengthened from a $1.1 billion settlement with Bank of America over violations of representations and warranties on insurance policies.
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Air Lease Corp. (AL): Wilbur Ross bought at an average price of 22,49 [/b]
AL is a company that purchases commercial aircraft to further lease them to airlines across the world to generate interesting returns on equity.
In 2011, it added new aircraft, thus ending with 79 in their fleet. In terms of customer base, it transacts with 49 airlines in 30 countries. Europe accounts for 35% of the fleet, while Asia, 30%, Central and South America, 15% and US and Canada 10%. Middle East and Africa represent 9%.
The company buys commercial planes from original manufacturers, then leases them to passenger and freight carriers. It currently operates 79 aircraft and serves 49 airlines in 30 countries. In December, it closed a $1.2 billion order with Boeing to buy eight more planes.
After only a year in business, Air Lease has already put together an impressive list of clients, including Southwest Airlines, Spirit Airlines, United Continental Holdings, Air Canada, AeroMexico, Air France, Alitalia, Shanghai Airlines and Korean Air.
Wilbur Ross thinks that airlines value the leasing companies because they provide the means to reduce capital and borrowing outlays, an especially important consideration given frequent bankruptcies (such as American Airlines). As more airlines plan to reduce expenses, AL will increase business by lending the airplanes.
Leasing also lets airlines build fleets when they can't get loans to buy new aircraft. That's especially important in the current credit environment. I think that Wilbur thinks that the world has entered a period where global economic factors will drive most airlines toward leasing solutions, such as AL.
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United Continental Holdings (UAL): Wilbur Ross bought UAL at an average price of 23,63
UAL is US largest airline. The company, based in Chicago, operates thousands of flights on a daily basis to nearly 400 domestic and international destinations from Los Angeles, San Francisco, Denver, Chicago, Houston, New York, and Washington, D.C.
United has also founded Star Alliance, which operates more than 20,000 flights per day through its member airlines. Annual sales amount to $34 billion.
I think that Wilbur Ross holds UAL because it operates one of the most fuel-efficient fleet in the industry. While United and Continental continue to operate as two separate airlines, their integration is going very well. United and Continental s check-in and ticket counter facilities have been relocated at 46 airports and half of the fleet has been
repainted in the new United livery. The merged company is on track to move to a single loyalty program, Mileage Plus, which is expected to be introduced in 1H 2012.
The key fact is that the merged company is expected to generate net annual synergies of $1 billion to $1.2 billion by 2013, with $800 million to $900 million in additional revenue and $200 million to $300 million in cost savings. Approximately 25% of total synergies are expected to be realized in 2012. With the sector' s best cash position, industry-leading revenues and a competitive cost structure, the merger provides improved access from Continental hubs to United's strong Asia network and from United's hubs to Continental's international network in Latin America and Europe.
In terms of valuation, UAL current P/E is just 5.6, compared with 15.8 for the S&P 500. Over the last five years, United Airlines shares have traded in a range of 5-54.5x trailing P/E. The stock is trading at a discount to the peer group as well as the S&P 500 benchmark, based on the forward earnings estimate. I think Ross thinks UAL as the best airline in the world that trades at a very depressed value. If the developed economies keep recovering, UAL could experience a dramatic multiple appreciation.
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