Combing through 13F filings to try and figure out which shares super investors are buying and selling can be a time-consuming but sometimes lucrative process.
Even though you should never blindly follow investors into positions, as you do not know why they entered the positions or what price and time, 13Fs are extremely useful for finding stock ideas. If you have your own set of investment guidelines and are just looking for ideas, then 13Fs can be extremely helpful in pointing in the right direction. However, if you just blindly follow super investors, you may end up losing more than you bargained for.
One stock that has shown up in recent 13F filings is AdvancePierre Foods Holdings (APFH, Financial). According to the reports, Howard Marks (Trades, Portfolio)’ Oaktree Capital Management acquired 43.3 million shares in the company during the third quarter, and now the holding constitutes 34.5% of his overall portfolio.
AdvancePierre Foods and Marks
Marks is one of the hedge fund world’s most respected investors and has made billions for himself and his investors over the years so what does he see in AdvancePierre?
Well, the company has only been a public entity for less than a year. When Marks entered the position it was likely the shares were trading at around $23.50, compared to today’s price of $28.2. Wall Street analysts have penciled in earnings per share of $1.68 for full-year 2016, giving a forward price-earnings (P/E) ratio of 19.4 at current prices.
AdvancePierre is a relatively defensive consumer goods company. The company is a producer and distributor of ready-to-eat sandwiches and sandwich components. The Foodservice segment's portfolio of products includes breakfast sandwiches, peanut butter and jelly sandwiches, Philly steaks, fully cooked hamburger patties, country-fried steak, stuffed entrees and chicken tenders. The Retail segment sells both branded and private label ready-to-eat sandwiches, such as grilled chicken sandwiches and stuffed pockets. The Convenience segment sells customized ready-to-eat sandwiches, such as breakfast sandwiches and burgers.
Like all defensive consumer goods companies, AdvancePierre is a high returns business. Return on capital for 2015 came in at 14.6%, free cash flow per share was $1.83, and operating profit was up around 100%. Earnings per share for 2015 came in at 56 cents so earnings growth of 200% is expected year on year. That being said, it looks as if the business is a traditional private equity IPO where, before the public offering, all of the group’s earnings were being gobbled up by interest payments.
For full-year 2014 AdvancePierre reported a loss of $38 million, and net debt came in at $1.3 billion. Net debt has since fallen to $962 million (trailing 12 months), and shareholder equity is $-330 million.
What's the deal?
So, what does Marks see in the business? The position could be a play on AdvancePierre’s recovery from a highly leveraged bust IPO to a cash generative public company that offers rich returns to shareholders. Free cash flow for 2015 was around $120 million, which if used to pay off debt would help the group move to a positive equity position within two to three years. However, unlike other highly leveraged struggling businesses, AdvancePierre’s shares are not cheap.
The company trades at 19.4 times forward earnings and an EV to EBITDA ratio of 14.7. Price to sales (P/S) is 1.3 and price to free cash flow 17.9. The shares yield 1.8%.
Even going forward AdvancePierre’s outlook is not impressive. Wall Street analysts expect the company’s earnings per share to fall 13.4% during 2017, which makes me wonder why the market is awarding the business such a high multiple.
All in all, after considering the above it’s not entirely clear why Marks likes AdvancePierre and for this reason, I would stay away from the company. Marks may have his reasons for investing, but as they are not entirely clear, it is not wise to follow him into a position.
Disclosure: The author does not own any share mentioned.
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