John Rogers (Trades, Portfolio), leader of Ariel Investments, disclosed last week his firm slashed its Team Inc. (TISI, Financial) holding by 85.77%.
The guru’s Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Like the tortoise featured in the firm’s logo, Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.
According to GuruFocus Real-Time Picks, a Premium feature, the firm sold 1.9 million shares of the Sugar Land, Texas-based company on Sept. 30, impacting the equity portfolio by -0.06%. The stock traded for an average price of $3.01 per share on the day of the transaction.
Ariel now holds 326,364 shares of Team (TISI, Financial), accounting for 0.01% of the equity portfolio. GuruFocus data shows the firm has lost an estimated 24.5% on the investment since establishing it in the first quarter of 2010.
The industrial services company, which provides an array of specialized services related to the construction, maintenance and monitoring of pressurized piping and associated systems, has an $87.67 million market cap; its shares were trading around $2.83 on Monday with a price-book ratio of 0.52 and a price-sales ratio of 0.1. GuruFocus noted all three of these metrics are close to 10-year lows.
Based on its historical ratios, past performance and future earnings projections, the GF Value Line suggests the stock is a potential value trap currently.
The company reported its second-quarter financial results on Aug. 3. It posted a loss of 57 cents per share, which was down from a loss of 44 cents reported in the prior-year quarter. Revenue, on the other hand, grew 26.2% from a year ago to $238.9 million.
In a statement, Chairman and CEO Amerino Gatti said the while he is not pleased with the overall results, they “reflect a mix of activity recovery and challenging market dynamics.”
“While Covid continued to force project delays, especially internationally, activity levels throughout the quarter were mostly in line with expectations, highlighting improved economic growth across the various end markets in which we serve,” he said. “TEAM faced margin headwinds in the second quarter. We experienced inflation in several areas, such as raw materials, transportation and labor, as well as increased technician training, and lingering COVID-related pricing concessions.”
As such, Gatti noted that the company is “cautiously optimistic” heading into the second quarter.
Team announced on Aug. 9 that Candice Koederitz, a former Morgan Stanley (MS, Financial) executive, had been appointed to its board of directors.
More recently, on Oct. 6, the company revealed Chief Financial Officer Susan Ball will be stepping down in November for personal reasons. She will then serve as a financial advisor and consultant to support an orderly transition process, including the search for her replacement.
GuruFocus rated Team’s financial strength 2 out of 10. In addition to a low Altman Z-Score of 0.81 that warns the company could be at risk of going bankrupt, the Sloan ratio is indicative of poor earnings quality.
The company’s profitability scored a 4 out of 10 rating on the back of negative margins and returns on equity, assets and capital that underperform a majority of competitors. Team also has a low Piotroski F-Score of 3 out of 9, meaning operations are in poor shape. While the company has recorded a decline in revenue per share in the past five years, it still has a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Team, Mario Gabelli (Trades, Portfolio) has the largest stake with 5% of its outstanding shares. Rogers’ firm is second with 1.05%. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also have positions in the stock.
Portfolio composition and performance
The Ariel Fund's $10.64 billion equity portfolio, which was composed of 110 stocks as of the end of the second quarter, is largely invested in the financial services (21.72%), industrials (17.69%) and communication services (16.87%) sectors.
Other business services companies the fund was invested in as of June 30 were ADT Inc. (ADT, Financial), Nielsen Holdings PLC (NLSN, Financial), The Brink’s Co. (BCO, Financial), Korn Ferry (KFY, Financial), Brady Corp. (BRC, Financial) and CRA International Inc. (CRAI, Financial).
The Ariel Fund posted a return of 10.02% for fiscal 2020, underperforming the S&P 500's 18.4% return.
