Activist investor Nelson Peltz (Trades, Portfolio)’s Trian Fund Management recently disclosed its 13F portfolio updates for the second quarter of 2022, which ended on June 30.
Founded by Peltz, Peter May and Ed Garden, Trian is an activist firm that concentrates on building significant stakes in a small number of companies and pushing for meaningful change to create value for shareholders.
According to its latest 13F, Trian added to its stake in its top holding, distribution company Ferguson PLC (FERG, Financial), in the second quarter. What’s even more interesting is that, according to the 13Fs and quarterly reports of other gurus, Trian was not the only one buying Ferguson; in fact, there was a significant spike in guru buying of the stock in the second quarter.
Investors should be aware 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
About Ferguson
Ferguson is a British-American value-added distributor of products for a variety of industries, including infrastructure, plumbing, appliances, HVAC, fire, fabrication and more. More than half of its revenue comes from product distributions for residential end markets, so its business has been getting a boost in elevated housing starts.
On top of the generally good business conditions, Ferguson has shown its strength by improving its margins and growing its market share in recent quarters. Its operating margin of 10.17% is higher than 74% of industrial distribution companies.
Gurus pile into the stock
In the second quarter, six of the Premium gurus followed by GuruFocus were buying shares of Ferguson. This is a huge spike compared to the past couple of years. The stock historically has not generated much interest with gurus, so this shift is quite eye-catching.
While Trian and Chris Davis (Trades, Portfolio) were adding to existing holdings in the stock, there were four new buyers: Lee Ainslie (Trades, Portfolio), Steven Romick (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and First Pacific Advisors (Trades, Portfolio).
We know that Peltz’s firm began building a position in the U.S. listing of Ferguson in the first quarter of 2021.
However, before then, back in June 2019, Trian independently disclosed that it had built a 6% stake in Ferguson. Since the holding did not show up in the firm’s 13F reports back then, we can assume that when it first bought shares of Ferguson, it bought the London Stock Exchange listing.
Unlocking value
Back when Trian first reported its holding in the stock, analysts were baffled about what the activist investor’s reasoning could be, claiming that Ferguson’s management had already done the work an activist investor would typically want to push, such as selling off non-core assets to focus on its core market in the U.S.
One theory tossed around was that perhaps Peltz and the team wanted to move the company out of the U.K. and into the U.S., since it makes most of its money from the U.S. anyway and Britain faced the uncertainty surrounding Brexit. Perhaps misconceptions about the company’s true revenue source were what was keeping it at a lower valuation that American peers.
Regardless of whether it was due to the involvement of Peltz and company or management’s own initiatives, Ferguson has managed to improve its margins and market share in recent years, both of which are encouraging signs. The company has a three-year revenue per share growth rate of 6.5% and a three-year Ebitda growth rate of 24%.
The disconnect in valuation between Ferguson and U.S. peers may have been part of the reason why Peltz and Davis bought, but what about the four new buyers?
One possibility is that at a price-earnings ratio of 13.78, Ferguson still looks rather cheap compared to its historical median price-earnings ratio of 22.30.
Considering the macroeconomic situation is liable to take a turn for the worse in the medium term, another thing contributing to the sudden guru bullishness on Ferguson is the strengthening U.S. dollar. Ferguson is still headquartered in the U.K., but around 90% of its profits come from the U.S., so it will benefit from favorable exchange rates.
See also
Trian Fund Management’s other second-quarter trades included additions to Invesco Ltd. (IVZ, Financial) and General Electric Co. (GE, Financial) and reductions to Sysco Corp. (SYY, Financial) and Mondelez International Inc. (MDLZ, Financial). You can see the firm’s trade history here.
As of the quarter’s end, the firm held shares in eight U.S. common stock positions valued at a total of $4.55 billion. The top holding was Ferguson with 31.21% of the equity portfolio, followed by Invesco with 19.77% and Janus Henderson Group PLC (JHG, Financial) with 16.47%.
By industry, the firm was most invested in industrials, followed by financial services, consumer defensive and consumer cyclical.
