Hillshire Brands Co (HSH), Iron Mountain Incorporated (IRM): Billionaire Israel Englander Catapults New Stocks

Published on June 3, 2013 at 9:46 am by The Motley Fool in Hedge Funds

Billionaire Israel Englander is a founding member of Millennium Management, with some $22 billion in assets under management. Englander also runs a $200 million subsidiary fund known as Catapult Capital. Founded in 2006, Catapult focuses on fundamental analysis. Outlined below are Catapult’s top five stocks at the end of the first quarter (check out Catapult’s portfolio).

M&A play

Catapult’s number-one stock was Virgin Media Inc. (NASDAQ:VMED), after adding the stock to its portfolio during the first quarter. Virgin is a merger-arbitrage play, where earlier this year Liberty Media Corp (NASDAQ:LMCA) agreed to acquire 100% of Virgin Media for an enterprise value of nearly $23.3 billion.

In looking at the deal, Virgin Media Inc. (NASDAQ:VMED)’s current enterprise value is $23.0 billion, which puts the upside in the shares to approximately 2.5%. Assuming the deal closes in six months, that’s an annualized return of nearly 5%. However, worth noting is that M&A arbitrage comes with risks.

Even still, Virgin Media Inc. (NASDAQ:VMED) appears to be a compelling company. During 1Q, the company improved its average monthly churn rate to 1.1% from 1.2% in the year-ago quarter. Also, during 1Q, the company added a net total of 171,900 Internet TV customers. Some of this robust growth is attributed to Virgin Media Inc. (NASDAQ:VMED)’s leading entertainment business that offers the first “quad” service of its kind, offering television, broadband, fixed-line telephone and mobile-telephone services in the U.K.

Virgin Media Inc. (NASDAQ:VMED) is the U.K.’s most popular residential broadband and pay-as-you-go mobile provider and the second-largest provider of pay television and fixed-line telephone services. From a valuation perspective, Virgin Media Inc. (NASDAQ:VMED) trades at a P/E of only 3.6 times, compared to some of the other major cable and media companies, including BSkyB’s 13.7 times and Comcast Corporation (NASDAQ:CMCSA)’s 17.6 times.

Consumer staple

The number-two stock is Hillshire Brands Co (NYSE:HSH) after a 657% increase in shares owned. Hillshire Brands Co (NYSE:HSH) manufactures and markets food solutions for the retail and food-services markets, including top brands Jimmy Dean, Ball Park, Hillshire Brands Co (NYSE:HSH) Farm and Sara Lee frozen bakery. Hillshire is the result of a split of Sara Lee, where the interest in Sara Lee’s international coffee and tea business was spun off as D.E. Master Blenders.

Commodity costs have hurt a number of the major meat producers, thanks to warmer-than-expected weather and drought conditions. This pressure could well continue over the interim. Since the spin-off, Hillshire Brands Co (NYSE:HSH) is looking to undertake various cost reductions. Back in May, the company invested upwards of $100 million for cost cutting, and expects to save $80 million annually between fiscal year 2013 and 2016.

However, from a valuation standpoint, Hillshire Brands Co (NYSE:HSH) appears to be a bit expensive. Hillshire trades at 55 times earnings, while peers Bridgford Foods Corporation (NASDAQ:BRID) and Tyson Foods, Inc. (NYSE:TSN) are at 17 times. With this high P/E ratio and only a mediocre expected EPS growth rate, Hillshire has a high PEG ratio at 2.2.

At the end of the first quarter, there were a total of 32 hedge funds long the stock. Richard Perry’s Perry Capital has the largest position in Hillshire Brands Co (NYSE:HSH), worth $203 million and comprising 6.5% of its 13F portfolio. Sitting in the second spot is billionaire Ken Griffin of Citadel Investment Group with a $120 million position (check out Griffin’s newest picks).

Auto rebound

Making up the third largest holding is Advance Auto Parts, Inc. (NYSE:AAP), after a 751% increase in shares owned during the first quarter. Advance Auto Parts, Inc. (NYSE:AAP) operates in the U.S. auto-aftermarket industry, selling replacement parts and accessories. Advance Auto Parts, Inc. (NYSE:AAP) also happens to be the second-leading auto retailer catering to the “do it yourself” (DIY) and “do it for me” customers, with a focus on the DIY market, making up 75% of revenue.

Part of what Advance hopes will set it apart from the likes of AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) is its focus on the commercial customer base.

Over 80% of the company’s stores have commercial delivery programs in place. What’s more is that the company’s acquisition of BWP Distributors will help it to further tap the commercial segment. The acquisition is expected to add roughly $170 million to $180 million in revenue in 2013. The other long-term revenue driver for Advance should be industry tailwinds, where two-thirds of the vehicles on the road are more than seven years old.

At the end of the first quarter, there were a total of 38 hedge funds long the stock. Ricky Sandler’s Eminerce Capital had the most valuable position, worth close to $214.9 million and making up comprising 5.6% of its total 13F portfolio (check out Eminence’s portfolio).

More M&A

NYSE Euronext (NYSE:NYX) was a 214% increase in shares owned and now makes up Catapult’s fourth position in its portfolio. At the end of 2012, NYSE announced plans to be bought by IntercontinentalExchange Inc (NYSE:ICE) for $8.2 billion. Following the acquisition, NYSE will own 36% of IntercontinentalExchange Inc (NYSE:ICE). Investors have three options for the deal, with the best being to receive 0.2581 shares of IntercontinentalExchange, which would be worth $43.86 and is 9.4% upside from where NYSE currently trades. Going forward, even without the acquisition, NYSE should perform well on the back of an improving economy, which will help boost the demand for equity investments and increase the IPO pipeline.

Iron Mountain Incorporated (NYSE:IRM) was a new addition to Catapult’s portfolio and makes up its fifth-largest holding. Iron Mountain Incorporated (NYSE:IRM) provides information protection and storage services, with 73% of revenue coming from records management, 18% from data protection and 9% from information destruction services. The company also has a diverse customer base that includes commercial, legal, financial services, healthcare, entertainment and government organizations.

The big news of late for Iron Mountain Incorporated (NYSE:IRM) is its plan to convert to a REIT at the beginning of 2014. The stock currently pays a 2.9% dividend yield. The REIT structure makes sense given that Iron Mountain Incorporated (NYSE:IRM) has an impressive business thanks to its recurring revenue base. The company derives the majority of its revenue from fixed periodic storage-rental fees, where storage rentals accounted for 55% of revenue over the last three years, having grown at a compounded annual growth rate of 5.0% over the same period.

Bottom line

Billionaire Englander’s Catapult is dabbling in the merger-arbitrage area with bets on Virgin Media and NYSE Euronext (NYSE:NYX), an area most investors don’t have enough capital to deploy to make the strategy fruitful. Meanwhile, I think Hillshire might be overvalued at current levels, but Advance looks to be a solid investment with industry tailwinds. I am also encouraged by Iron Mountain’s prospects given its recurring cash flow and REIT conversion.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Billionaire Israel Englander Catapults New Stocks originally appeared on Fool.com is written by Marshall Hargrave.

NYSE:AAP NYSE:IRM Iron Mountain Inc (IRM)Advance Auto Parts Inc. (AAP)

Hillshire Brands Co (HSH), Iron Mountain Incorporated (IRM): Billionaire Israel Englander Catapults New Stocks

Published on June 3, 2013 at 9:46 am by The Motley Fool in Hedge Funds

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