Arik Ahitov and Dennis Bryan of FPA Capital Fund (Trades, Portfolio) seek long-term capital appreciation through investing in companies using a fundamental, bottom-up, deep value approach. During the second quarter, the fund managers invested in Allegiant Travel Co. (ALGT, Financial) and trimmed their stakes in several positions, including Western Digital Corp. (WDC, Financial), Aaron’s Inc. (AAN, Financial) and Dana Inc. (DAN, Financial).
Allegiant Travel
Ahitov and Bryan purchased 65,410 shares of Allegiant Air, a Las Vegas-based airline that connects passengers from small cities to world-class leisure destinations. The airline’s share price averaged $146.58 during the quarter.
Allegiant reported strong passenger traffic results for May, including scheduled service revenue passenger mile (RPM) growth of 10.5% year over year and available seat mile (ASM) growth of 12.0% year over year from the prior-year month. These results contributed to a operating margin of 23.19% and a return on equity of 42.80%, outperforming 94% and 85% of global airlines.
Company management expects an ASM growth of 12-14% year over year for the second quarter according to the June 7 press release. As the company has good margins and returns, GuruFocus ranked Allegiant’s profitability a 9 out of 10.
Western Digital
The fund managers axed 348,200 shares of Western Digital, trimming 48.11% of the position. The hard disk drive manufacturer’s share price averaged $87.81 during the quarter.
Western Digital’s financial strength and profitability rank a modest 5 and 6. The company’s interest coverage of 1.27 is below Benjamin Graham’s threshold of 5 and underperforms 95% of global competitors. Additionally, Western Digital has moderately weak Piotroski F and Altman Z scores, the former driven by declining current ratios and higher leverage over the past four quarters.
Aaron’s
Ahitov and Bryan chopped nearly half their stake in Aaron’s, selling 588,040 shares for an average price of $35.44.
Aaron’s, a specialty retailer of furniture, consumer electronics, computers, appliances and household accessories, reported slightly lower consolidated revenue and cash from operating activities in the first quarter of this year compared to the prior-year quarter. The company’s business revenues tumbled 13.4% due to a 9.3% decrease in same-store sales.
Aaron’s margins and returns are below the 10-year historical median despite outperforming about 60% of global competitors. The company’s operating margin dropped, on average, 8.4% per year over the past five years. Additionally, Aaron’s share price is near a 10-year high and has a dividend yield near a one-year low.
Dana
The Capital Fund managers sold 629,730 shares of Dana, a supplier of driveline, sealing and thermal management technologies for conventional vehicles and alternative energy power trains. Dana’s share price averaged $20.31 during the quarter.
Although Dana’s profitability ranks 7 out of 10, the company’s revenue declined about 5% per year over the past three years while earnings before interest, taxes, depreciation and amortization (EBITDA) nosedived approximately 11.3% per year. Dana’s predictability rank is a flat one-star as the company had negative EBITDA during three of the past 10 years and a 10-year CAGR of sales of -5.10%.
Dana has a Beneish M-score of -1.81, driven by high values in the following “Beneish Indexes”: days sales in receivables index, asset quality index and depreciation index. The company likely manipulated its earnings results as the M-score exceeds the -2.22 threshold.
See also
Ahitov and Bryan trimmed their stake in a significant number of companies, including Avnet Inc. (AVT, Financial), Oshkosh Inc. (OSK, Financial) and AGCO Corp. (AGCO, Financial). The fund managers also eliminated Akorn Inc. (AKRX, Financial) and 25.38% of their position in Houghton Mifflin Harcourt Co. (HMHC, Financial).
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Disclosure: The author has no position in the stocks mentioned.
