Selling retailers- upscale and downscale. What’s the most upscale retail store available in the public markets? Tiffany & Co. (NYSE:TIF) at least comes close. Meanwhile, at the discount end of retail, it’s hard to beat Family Dollar Stores, Inc. (NYSE:FDO). Trian owned both of these stocks at the end of September, but it had reduced its stake in each. The commonalities keep coming: Tiffany and Family Dollar both trade at 14 times forward earnings estimates (though this is based on the January 2014 fiscal year for Tiffany and the August 2014 one for Family Dollar) and are even close on a trailing basis with those P/Es in the 17-18 range. They also both saw very low earnings growth in their most recent quarter compared to the same period in the previous year. We like the discount retail industry better, but Family Dollar seems to have considerably more competition from the other dollar stores and from big box retailers such as Wal-Mart and Target. With decent though not spectacular multiples either company could be worth looking at to see if it can somehow get a better earnings growth rate.
Selling asset managers. Peltz and his team also cut their stakes in State Street Corporation (NYSE:STT), a combined asset manager and custodian bank, and asset manager Legg Mason, Inc. (NYSE:LM). Legg Mason looks cheap on a book basis, at a P/B ratio of 0.6, but apparently hasn’t been doing quite so well in monetizing its assets given the trailing P/E of 20. Wall Street analysts do expect the company to become more efficient, bringing the P/E down to 11 when looking at consensus earnings for the fiscal year ending in March 2014, but we’d be a bit concerned about a company depending on that much earnings growth. Its bottom line has been improving- earnings were up strongly last quarter versus the third quarter of 2011- but with lower revenue we’re not sure that the strong growth will continue. State Street is about the opposite in terms of valuation: cheap in the sense that it trades at 11 times trailing earnings, but not as good a deal given that the P/B is 1. Like Legg Mason, it has converted a small decline in sales into a double-digit percentage increase in net income. Viking Global, which is managed by Tiger Cub Andreas Halvorsen, had initiated a position of 7.5 million shares between April and June. If investors want to look at the asset management industry, we don’t think that State Street actually looks like that bad a deal but would certainly want to learn more about what is driving that company’s lower revenues.
Ingersoll-Rand. While Trian was generally selling its top holdings from last quarter, it did hold steady in diversified machinery company Ingersoll-Rand PLC (NYSE:IR). The stock has risen 41% year to date, possibly because of its products’ exposure to construction (movements in the stock price look fairly well correlated with those of homebuilder Lennar, for example). Ingersoll-Rand’s earnings were up strongly in the third quarter of 2012 from a year earlier, though revenue was actually down slightly. It carries earnings multiples in the low teens, suggesting that investors don’t expect much more growth at the company. It probably deserves a closer look due to its pricing. Billionaire Ken Griffin’s Citadel Investment Group had bought the stock during the second quarter.
Peltz didn’t buy much during the third quarter, generally either selling some shares-as he did with the retailers and asset managers- or keeping his position about flat as at Ingersoll-Rand. We think that many of these companies could be good values (leaving out Legg Mason, which seems a bit too dependent on stronger forward earnings given how much the business has been struggling) if they survive due diligence.
