About Me

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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Sunday, February 16, 2014

URS and the Phillies: Lessons in Delusion

I'm thinking about the difference between hope and delusion while while reading an article from the Phillies spring training camp. 

The GM Ruben Amarao Jr who signed Ryan Howard to a five year $125M contract in 2010 believes Howard - 34, injured and under performing since - is ready to prove his worth. In the last TWO seasons, Howard has played in only 151 games, hitting .244, with 25 home runs and 99 RBIs Howard, incidentally, agrees that he's turned the corner. 

I love spring training and since it starts in winter, I'm sure its name refers to the eternal springing of hope that an injured veteran or 37 year old pitcher can "return to form". 

LIke most investors, I love hope but I hate delusional thinking. I especially hate that Amaro who has laden the Phillies with awful contracts still has a job giving out awful contracts. This is just sports though. I have an emotional attachment to my childhood team but nothing more at stake. 

In the business world however, the difference b/t hope and delusion can be expensive. Every deal requires a bit of hope but a company that consistently overpays for acquisitions often at market peaks and with little reflection on outcomes suffers from delusional thinking. Price, timing and intellectual honesty separates the two. 

And that gets me thinking about URS Corp. 

URS is an engineering & construction services company, one of about 8 large US companies that offers diversified global industrial and E&C services, similar to but smaller than FLR, KBR and JEC. It typically trades at a discount to its peer group, due to its limited energy exposure, over exposure to federal funded projects and partially to its penchant for destructive acquisitions. 

I was once a sell-side analyst covering the E&C industry and I attended an analyst meeting at URS' offices in the TransAmerica building to discuss its "transformative acquisition" of Flint Energy Svcs, a $1.3B deal meant to redress both its limited energy exposure and penchant for destructive acquisitions. At the time of the deal, URS had a $3.1B market cap and $450M in net debt. 

The meeting was hosted by its brilliant, gracious but quixotic CEO of the last 25-years, Martin Koffel, who in my memory made more "transformative acquisitions" in the E&C industry than any other company. 

Toward the end of the meeting, Koffel solicted questions; "anything you've ever wanted to ask". So I asked what he had learned from the mistakes of the 2007 acquisition of Washington Group. That "transformative acquisition" for $3.1B in cash and stock moved URS into the construction services and nuclear power markets. At the time of the deal, URS had a $3B market cap company with little debt. 

Koffel wanted to know what mistakes I referred to. I rattled off a few about its destruction of shareholder value. He pointed to the opportunities for growth enabled by the acquisition. (Imagine - he'd asked - where the company would be if they hadn't made the acquisition.) 

I'd made a point that these acquisitions were not accretive to shareholders. The most respected analyst in the space (the "II ranked" one) and an exceptionally nice person as well, thanked me for asking tough questions. It made them all look better, he said, though added that I clearly did not belong on the sell side. 

And now today, I'm no longer on the sell side, investing on my own, and URS has a $3.25B market cap (+1% CAGR from the pre WGI deal) and $1.7B in net debt according to Yahoo!. The stock materially sold off last week after pre-announcing earnings citing execution issues in the Flint Energy Services business. Flint's old CEO is fired and the company is reorganizing the division. The stock has vastly underperformed the S&P over the last 52 weeks, by 20% pts. 

That's a pretty severe cost of delusion. 

I'm sure someone will step in and buy the stock on the 12% free cash flow yield, but it's been cheaper. As a long-term investor I look for great management and while the company is a free cash flow generator, as long as its squandered on delusion it has no value for me.