Activists: Turnaround Trio

11/18/2016 7:00 am EST


George Putnam

Editor, The Turnaround Letter

Three traits generally attract activists: low valuation, sub-par margins and under-utilized assets, explains George Putnam, editor of The Turnaround Letter

Here are three companies that have attractive valuations where activists with good track records are working to benefit long-term shareholders. Each of these companies have also seen a new CEO put in place.

Activist Trian Partners, led by Nelson Peltz, holds a 2.2% stake worth about $1.3 billion in DuPont (DD).  While unsuccessful in its highly publicized bid to win seats on DuPont’s board in 2013, Trian’s ongoing pressure likely led to the CEO’s resignation. 

The new CEO -- with the full support of Trian -- launched a complex merger with rival Dow Chemical (DOW) last year that will involve combining some units and spinning off others. 

This transaction could unlock considerable value for all shareholders once it clears an extended anti-trust review.  While the shares have bounced from their February lows, the merger could provide a considerable additional boost.

Glenhill Capital, a lesser-known activist fund, holds a 6.4% stake in Houghton Mifflin Harcourt (HMHC), the nation’s leading publisher of educational content for grades K-12 and a major publisher of general interest and reference books.

The company emerged from Chapter 11 in 2012 with a strong balance sheet but facing the challenge of transitioning to the digital world.  This transition has gone poorly, as has a large and overpriced acquisition. 

Last month, the CEO left the company. With activist pressure, a fresh CEO sometime in the near future and very low expectations, Houghton shares could eventually earn high grades.

Starboard Value announced in September that it has taken a 4.6% stake in Perrigo (PRGO), the world’s largest producer of over-the-counter consumer and pharmaceutical products. 

Last year, Perrigo fought off a takeover attempt by Mylan (MYL) at a price that would equate to about $167, versus Perrigo’s current price of $87. 

Along with calls to improve Perrigo’s core operations, Starboard is advocating for the sale of several valuable non-core businesses.  This past April, the CEO departed for a competitor. 

At 13x next year’s earnings, Perrigo’s discounted price plus a strong activist push could be a prescription for strong returns.

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