ValueAct is led by guru Jeff Ubben (Trades, Portfolio) and acquires large stakes in companies to gain board seats and influence management. The firm tends to take a constructive and cooperative approach instead of the more confrontational style exemplified by Carl Icahn. Just like other activists it does try to find companies that have performed poorly with fixable problems.
It can be interesting to buy into the companies they target when they are just getting on board because you may be able to profit from their campaign for change. Its latest target is Towers Watson & Co. (TW, Financial). It is a professional services company that helps organizations with risk and financial management, offers solutions to manage employee benefits, talent management, rewards, risk and capital management and health care exchanges for retirees and active employees. Clients include 92% of Fortune 500 companies and 84% of the Fortune 1000. Towers Watson also advises insurance companies.
-Jeffrey Ubben in the "Art of Value Investing."
Towers Watson is a typical ValueAct company that is high quality in nature with a sticky customer base and high returns on equity just like Microsoft (MSFT, Financial), Adobe (ADBE, Financial) or American Express (AXP, Financial).
Source: Gurufocus competitive comparison tool
If we review the company and compare it with competitors it looks like ValueAct bought the company at a low relative valuation. Competitors often trade at higher P/E mutliples and P/S multiples, and Towers Watson also trades among the the lowest 29% of all GuruFocus business services companies on a price/free cash flow basis.
Importantly for an activist investor the operating margins also look like they can be squeezed for a few hundred basis points. If ValueAct can both achieve higher operating margins and higher multiples, the stock price will rise in exponential fashion.
Interestingly, Ubben is not the only guru who thinks there is a bright future for Towers Watson. Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Jim Simons (Trades, Portfolio) all own the stock. Baron even commented on the excellent growth prospects of the company in Baron Funds’ second quarter 2015 commentary (emphasis mine):
Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company is poised to leverage its breadth of relationships in benefits and health care consulting to become a leading player in private health care exchanges in the U.S. Our research suggests that private health care exchanges are poised for explosive growth and are projected to represent a $12 billion annual market by 2018-19.
Finally, the company has a rock solid balance sheet with two times as much cash on its balance sheet as it has debt and its EBITDA easily surpasses the debt. In conclusion this looks like a high quality company with a real competitive advantage, a strong balance sheet, strong cash flows and all that at a comparatively low valuation with margins that could improve quite a bit and ValueAct Capital leaning on it. If anything is lacking here it is reasons why you shouldn’t own it.
