Atlas Corp. (ATCO, Financial) is the largest holding in the portfolio of Prem Watsa (Trades, Portfolio)'s Fairfax Financial Holdings (TSX:FFH, Financial), according to its latest 13F filing (though investors should note, 13Fs only include long holdings in U.S. stocks and American depository receipts).
This investment is interesting for a couple of reasons. First of all, there's the fact that it is the largest U.S. equity investment in Fairfax's portfolio. Watsa has been called the Warren Buffett (Trades, Portfolio) of Canada due to his insurance investments and skill as an investor. As such, I think it is worth watching his holdings closely.
The second reason why I think this business is worth a closer look is the fact that it is managed by David Sokol, a former Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) manager, who was once tipped to take over from Buffett himself.
Sokol helped create Berkshire Hathaway Energy. Unfortunately, he fell out with the Oracle of Omaha after an insider trading scandal a few years ago. After moving away from Berkshire, he joined Atlas, which was formerly known as Seaspan.
Global infrastructure company
Atlas is trying to build a global infrastructure company similar in structure to Berkshire Hathaway Energy.
There are a few core differences. Atlas has a global outlook rather than focusing on the U.S. energy market. It has built a portfolio of maritime assets, namely container ships, and it owns mobile power generation assets under the APR Energy brand.
The company has been growing at breakneck speed over the past couple of years. The value of its assets has increased at a compound annual rate of 15% since 2016. Revenues have grown at a similar rate.
However, quite a lot of the growth has been funded by issuing new shares. As such, book value per share has declined from $24 in 2016 to $15 at the end of 2021.
This company is still in the growth phase, and management is investing heavily to expand operations. Last year, the corporation executed agreements for an aggregate investment of $7.6 billion toward newbuild containerships backed by long-term lease contracts. It also expanded into the Brazilian mobile power generation market and increased its footprint in the U.S.
Atlas is copying the strategy Berkshire Hathaway Energy has used to grow over the past couple of decades. The company is investing all of its profits into growth.
It has also used a lot of borrowing to fund its expansion, with the level of net debt to total assets exceeding 50% at the end of 2021. This is not necessarily the same strategy Berkshire Hathaway Energy has used, but Berkshire's businesses have the funding of their parent company. Atlas does not, so it has to rely on other funding sources.
Still, Atlas has the backing of Fairfax. One of the key differences between the Canadian insurer and Berkshire is the fact that Watsa does not tend to buy businesses outright. The corporation tends to acquire a significant stake in publicly traded businesses as an alternative to buying the company outright. While Atlas is not owned directly by Fairfax, it is possible that it could gain its financial backing and access to resources if need be.
Valuation
At the time of writing, Atlas' stock does look like an attractive investment considering its depressed valuation. It is trading at a forward price-earnings ratio of just 8 and a price-to-tangible-book-value ratio of 0.95. The shares also support a dividend yield of 3.5%.
Suppose the corporation is able to wean itself off using shares to fund growth and concentrate on building shareholder equity rather than diluting investors. In that case, this could be a book value growth play. This is something I will be keeping an eye on going forward.
The company has a solid management team, robust financial arrangements and attractive growth plans. If its strategy changes over the next couple of years and management is able to focus on expanding the company within its means, I think this could become an attractive investment opportunity.
