As I mentioned previously, I decided to go back to school for my MBA at the University of North Carolina with the intentions of pursuing investing full-time.
I joined the Investment Management Club, and just finished participating in the internal stock pitch competition – and I ended up winning 1st place!
The goal of the competition is to introduce students to the mechanics of delivering an effective stock pitch – developing a thesis, performing a full valuation, presenting in front of judges, etc. – and was designed to be a “low-pressure” way to practice for the more high-profile competitions.
We had 7 minutes to deliver the pitch, with a 3-5 minute Q/A session to follow. Stocks had to be in the Industrials sector, with a minimum market cap of $500m.
I ended up choosing Applied Industrial Technologies (AIT), a $1.2b industrial distributor. I’ve included my presentation below:
[scribd id=73944220 key=key-1ne3g7jmml3dxra99bwe mode=list]
Next up: UNC will be hosting the Alpha Challenge in November, one of the premier MBA stock pitch competitions.
Needless to say, I’m looking forward to it!
Disclosure: No positions.
good job- I’ll give you some feedback. if i was on the panel, I’d want to see more on the balance sheet, capital structure, etc.
also “shares down 10% despite record FY11” isn’t convincing to me- stocks look forward. In 2008, all companies were record earnings right before the estimates collapsed. How visible are earnings for this company? backlog? Is the revenue booked, how much is recurring? how confident are you in the earnings if we “double dip”? in other words, durability of earnings is question. in 2009, eps at this company collapsed from 2.02 in 2008 to 1.12- will that happen again?
great job- i’m just trying to help you “bullet proof” your pitch since i want you to win!
Dasan,
Thanks for the suggestions/comments. I tried to keep my slides as simple/straightforward/uncluttered as possible, so much of the details had to come out in the discussion and presentation. I’ll try to post up a bulleted list of my talking points, as it should hopefully round out the thesis.
A few thoughts:
– AIT’s balance sheet is rock-solid, and they just finished paying off the last of their debt in 2011 (which was at unattractive interest rates). The majority of their competitors have debt-to-equity ratios of 60-80%, so AIT is much more conservatively run.
– The company’s revenues are correlated with the MCU index, but usually on a 6-month lag when the MCU is rising. The latest MCU results (75.5 from July 2011), are the highest in 3 years and should translate into increased earnings growth for AIT in the coming quarter or two. Other indicators like the PMI are still showing expansion as well, and the company saw growth in something like 24 out of 30 markets in the previous quarter. Overall, they are tracking for 5% industrial growth in 2012 and 4% the following year.
– Since most orders are not capital-intensive large purchases, AIT doesn’t track backlog. As long as industrial machinery runs, parts and materials will need to be replaced. In addition, a growing portion of the business is made up of Fluid Power (20% of sales, think hydraulic/pneumatic fluid). Industrial companies can certainly put off new capex purchases…they can even put off repairs for awhile…but it’s hard to put-off the basic elements like fluid that are required for running the machines, so I think this new segment will continue to be a growing (and recurring) portion of the business going forward.
– Earnings dropped in 2009 due to a goodwill impairment charge which knocked $0.54 off EPS. The writeoff occurred after cash flows in the newly acquired FPR business were off 80% in Q4 2009 – however, profitability in the segment has more than doubled since then and margins have continued to improve. For the most part, the company has a solid history with acquisitions.
It was my first live stock pitch, so the Q/A also brought out a lot of these points. Hopefully the pitches will only continue to improve from here!
outstanding Adam!
Now next time, you gotta get your classmate to record it with their phone or something and put that up as well.
Sorry about that downtime btw. Something I need to fix.
Thanks Jae! This was an informal competition, but hopefully I’ll have a chance to participate in the Alpha Challenge, where we might be able to get some video of the event.
The SmartMoney problem has been annoying, but I was finally able to pull out the needed evaluations – a big help as usual! I know things have been busy over your way, but looking forward to future updates…
Hey Adam,
Just wanted to ask what was that calculation that you did to calculate the “true asset value”? and did you also do it for the rest of the companies mentioned in the same graph?
Second, did you use WACC on purpose? (meaning: ‘not because that’s what they teach in MBA’) I don’t know, it always hurts my head when people use WACC, you know, with Beta and everything.
Anyways, I would have loved to listen to you ‘perform’, you should seriously consider video-taping the next part of the competition.
Good luck!
Ziv,
For the true asset value, I basically adjusted book value to compensate for assets that were being carried on the books for less than their true cost. In the case of AIT, the company uses the LIFO method of accounting for inventory, meaning sales are matched to the most recently purchased/created inventory. That means there is a significant amount of inventory that had been on the books for awhile (read: years), and would cost significantly more to be replaced.
In addition, AIT owns over 100 locations, many of which were purchased prior to 1980. The buildings have been fully depreciated, and often the land values have increased in the 30+ years, but they are still held at historical cost.
I did not do these same calculations for the competitors, since they did have the same ‘hidden asset’ value on their books. Regardless, even if the adjustments were not made, AIT is still the cheapest on a P/TangBV basis.
I did use WACC on purpose, as it is standard in the MBA curriculum. For my own investing purposes, I usually just use a hurdle rate and stay consistent with that same discount rate across all of the stocks I look at (very similar to Buffet). But, it’s a competition at b-school, so it’s best to use the standard practice.
Congrats Adam. Way to go!!