James Telfser is partner and portfolio manager at Aventine Management Group. His focus is Canadian equities.
AerCap Holdings N.V. (AER.N)
AerCap is the world's largest aircraft leasing company, with over 1,700 owned or managed aircraft in its portfolio. We believe that the aircraft leasing industry represents some of the best value in the market today, and AerCap is our preferred exposure in this sector. The shares are currently trading at 6x 2016 EPS or 0.8x book value, which is significantly below its historical average. The discounted valuation is a result of investors' fears that a global economic slowdown will significantly reduce the demand for air travel and place AerCap's customers under financial hardship. Given the current industry and management commentary, recent earnings results and the continued strength in the aircraft leasing market, we believe these fears are misplaced and present a compelling opportunity to buy AerCap at less than book value. AerCap operates with a 99.5-per-cent utilization rate and currently has commitments on 85 per cent of aircraft purchases for delivery through December, 2018 (avg. lease of 12 years). In addition, they were also recently upgraded by S&P from high yield (BB+) to high grade (BBB-), which should lower financing costs and further improve the company's return on equity, currently sitting at over 14%.
AirBoss Of America (BOS.TO)
AirBoss is a rubber compounding company involved in the manufacturing process for tires, anti-vibration auto parts, and military grade gas masks and rubber gloves. Their business has benefited greatly over the years from diversifying into adjacent verticals, both organically and through acquisition. While this was a relatively unknown company a couple years ago it was pushed to unsustainable levels in 2015 as their earnings growth and attractive valuation caught the attention of investors. We previously owned AirBoss as a core holding but sold it last summer in the low $20s after a big expansion in the stock's earnings multiple. Since then, the stock has sold off from $24 to $15, and we believe that at the current valuation, AirBoss once again presents a very attractive risk/reward opportunity. Recent negative earnings surprises have come as a result of the defence division, which has always been very lumpy and not indicative of a breakdown in overall fundamentals. We believe management will be active in diversifying the business through joint ventures or M&A, which will grow value for shareholders. As the existing defence contracts mature, we expect them to become a material driver of earnings, and this will result in the multiple expanding again from current levels .
Concordia Healthcare (CXR.TO)
It is hard to believe that Concordia is trading at the levels we see today, given what the business has transformed into over the past couple of years. This transformation has come through a greater geographical reach, product diversification, and also through significantly higher earnings. For example, their expected EBITDA for 2016 is expected to be $800-million, which compares to the 2014 EBITDA of $78-million, more than 10x higher. Given the acquisitions executed to achieve this growth, they currently have a large debt load, but it is manageable given the high-margin nature of the business. Aside from the leverage, this is a healthy, diversified business that is going to generate a significant amount of free cash flow. Their most recent quarter demonstrated the earnings power that is possible at Amdipharm Mercury, their most recent acquisition, which came in ahead of ours and most analysts' expectations, a huge positive in our view. At 4x 2016 EPS, the stock is not reflecting the fundamentals, and we believe investors who can ride out the volatility will be rewarded at these levels.
Past Picks: June 17, 2015
Then: $19.88 Now: $18.08 -9.05% Total return: -6.94%
Mitel Networks (MNW.TO)
Then: $11.29 Now: $10.41 -7.79% Total return: -7.79%
Clearwater Seafoods (CLR.TO)
Then: $12.34 Now: $12.52 +1.46% Total return: +2.61%
Total Return Average: -4.04%
When we look at our portfolio for the Aventine Canadian Equity Fund, we couldn't be more excited about its prospects. The portfolio is expected to grow earnings by greater than 20 per cent in 2016, and we are only paying 11x earnings for this growth. Given the expected catalysts that we see on the horizon, coupled with the multiple expansion opportunity, it should be easy to see why we are excited. In addition, for the first time in a long while, our stock-specific research is being complemented by a more positive macro outlook.
Notwithstanding that market level valuation concerns exist, trends in risk assets have turned positive on the exceptionally strong rebound we have witnessed over the past seven weeks. Indeed, nearly every major category of asset we track across equities, credit, FX and commodities has showed an incredible level of resilience. Flow of funds data also suggests long positioning remains very light and that the recent rally was missed by the majority of investors, which is often a precursor for the continuation of a trend.
In both Canada and the U.S., our risk model turned positive in March from extreme negative readings earlier in the year. As a result, our confidence in the sustainability of the recent market surge off of the Jan/Feb lows is rising. Generally speaking, our exposure to the market has risen significantly in the past few weeks, and we expect to maintain this level of exposure (approximately 90 per cent) to the market over the medium term.