Relational Investors LLC is an activist investment fund based in San Diego, California. Founded in 1996, Relational invests in and strives to create long-term growth in publicly traded, underperforming companies that it believes are undervalued in the marketplace. Through intense and focused research, Relational develops an engagement plan to unlock value in its portfolio companies. The Firm seeks to engage the management, board of directors, and shareholders of a portfolio company in a productive dialogue designed to build a consensus for positive change to improve shareholder value.
The portfolio is composed of 11 stocks with total value of $2,372 Mil.
On July 7, 2015, the hedge fund sold 688,885 shares of Esterline Technologies (ESL) to the company, as a result of a stock repurchase agreement. The sale was done at $92.65/share with a total cost of about $64 million. After this sale, Relational owns 1,464,658 shares (4.75% of outstanding shares). The investment fund went below the 5% of ownership, while at the end of Q1 2015 he was holding the 8.04% of outstanding shares of the company.
The company designs, manufactures and markets highly engineered products. The Company serves the aerospace and defense industry, mainly in the United States and Europe. It also serves the industrial/commercial and medical markets. Its current business and strategic growth plan focuses on the continuous development of these products in three key technology segments - avionics and controls, sensors and systems, and advanced materials. It reported first quarter with income tax rate of 24.5% compared with 20.2% for the prior-year period. This difference is primarily a function of the timing of recognizing discrete tax benefits and expenses. The company continues to forecast a full-year average tax rate in the 22% to 23% range.
Gross margin for the quarter was 32.7%, adjusted gross margin in the second quarter was 33.6%, compared with last year's 35.1% and adjusted SG&A as a percent of sales was 19.3% in the second quarter of 2015, compared with 17.5% in the prior year period.
| Â | Last fiscal quarter | Same quarter of the last year |
| Income tax | 24.5% | 20.2% |
| Gross Margin | 33.6% | 35.1% |
| SG&A | 19.3% (of sales) | 17.5% (of sales) |
Encouraged by a strong backlog and improved visibility, they are confident that Esterline will achieve stronger, sustainable rates of revenue growth and enhanced profitability. They also expect to see accelerating performance through the next eight months, with second quarter EPS a little lighter than the third and fourth quarters.
The company last month announced that it will redeem all of its 7% Senior Notes due 2020 that remain outstanding on August 4, 2015. It also announced a Long-Term Supply Agreement with United Technologies Corp (UTX). This agreement will support production at UTC’s aerospace business them to continue growing their business with UTC in a mutually beneficial manner.
Curtis Reusser, Chairman, President and CEO of Esterline said "This is an important step in further developing our long-standing relationship with UTC. We are very pleased to have been selected to design and manufacture critical components and systems on key programs like E2, MRJ, B787, S-92 and A350. We appreciate that UTC recognizes the value we bring to the partnership and these programs, and this agreement will allow us to continue growing our business with UTC in a mutually beneficial manner."
And by the other side, Sam Abdelmalek, Vice President, Global Supply Management and Integration of United Technologies, confirmed "We are very pleased to announce this agreement with Esterline and commend them for their commitment to meeting UTC's high standards for quality and performance, as well as contractual governance and UTV2 savings. UTC's aerospace businesses are well positioned for growth over the coming years. Suppliers like Esterline, who commit to our new contractual standards, meet our demanding performance requirements and satisfy our UTV2 cost-savings initiatives, will have the opportunity to share in this growth for years to come."
ESL has null returns with ROA of 1.98% and a ROE of 3.45, but its profitability and growth rate is 7/10 thanks to its EBITDA that during the last 5 years grew by 8.90%, its revenue that grew by 6.30% and earnings that grew by 7.10%.
The price of the stock has dropped by 17% since the beginning of the year (and 19% over the last 12 months) while it has risen by 93% over the last 5 years. It is now trading with a very high P/E(ttm) ratio of 46.55 that is ranked lower than 69% of other companies in the Global Aerospace & Defense Industry.
One of the sector’s main companies is Boeing Co (BA) (a Market cap of $98.14 billion) that is trading with a cheaper P/E(ttm) of 17.76 and with a price that during the last 5 years rose by 121%. BA has very strong 5-year growth rates; revenue grew by 6.50%, EBITDA by 15.60% and earnings by 24.60%.
| 5-year growth rate | ESL | BA |
| EBITDA | 8.90% | 15.60% |
| Revenue | 6.30% | 6.50% |
| EPS | 7.10% | 24.60% |
| P/E(ttm) | 46.55 | 17.76 |
| Dividend Yield | 0 | 2.31 |
During the first quarter of 2015, Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Signature Select Canadian Fund (Trades, Portfolio) reduced their stakes while Steven Cohen (Trades, Portfolio) bought few shares with an impact of 0.03% on his portfolio.
At the end of Q1 2015, the main Guru holding ESL was Michael Dell (Trades, Portfolio) with 5.27% of shares outstanding that was the 22.96% of his total assets.
