The Best of the Roundtable: Macquarie Infrastructure [MIC]
I came across an interesting stock idea in this week's issue of Barron's, which contained its always interesting Investment Roundtable. This one was brought to us by Meryl Witmer, who by far had the most SPOPY stock ideas in the last Roundtable issue. Her idea this time was to go long Macquarie Infrastructure [MIC]. I actually wrote something on this trade several months ago. Here it is for anyone who's interested, followed by a portion of the write-up from this weeb's Barron's:
"A new type of special situation, Invest in companies before they significantly increase their dividend
I am constantly reading anything that I can about investing in "special situations." I recently came across a great quoted on one variety of special situation that comes from many people's favorite value investor, Warren Buffett:
The buying opportunity that Warren exploits is this: after the company announces that it is going to convert into either a royalty trust or a master limited partnership, which means that its future dividend payout will increase after the conversion, the stock market won't recognize the increase until the conversion is completed and the dividend is actually increased and paid out. This creates a short period of time, between the announced reorganization and the actual date of the conversion, in which the company's shares are undervalued in relation to their future increase in value, due to the increase in the dividend payout that occurs after the conversion.
Why does this window of market inefficiency exist? These companies, because of their small market cap, are usually not well followed by Wall Street or the general public. Also, investors have a preference for valuing an interest-bearing security on the basis of what it is paying today, not what it might be paying tomorrow.
The popular members-only investment idea website, SumZero, recently published a write-up on a company that fits this description in the "free" section of its site for the unwashed masses of non-members like myself.
MIC ($21/shr) >> Big Upside, Limited Downside, and a Near-term Catalyst
The company that was discussed is called Macquarie Infrastructure Company (MIC). Macquarie is an infrastructure company that ran into trouble at the height of the Great Recession when one of its subsidiaries was forced to file for bankruptcy and it had to eliminate its dividend. To compare it to a company that Fooldom is familiar with, think of MIC as a mini Brookfield Infrastructure Partners (BIP).
Macquarie owns things like bulk liquid storage tanks, a Hawaiian natural gas utility, a company that services private jets, and a water utility.
To make a long story short, you can read the great write-up for the details, the author not only believes that MIC is undervalued on a sum-of-the-parts basis but that the company's stock price will surge once it reinstates its dividend, which MIC has mentioned will happen some time in early 2011. They peg MIC's fair value at around $36/share, approximately 50% higher than its price today and that the catalysts in place will enable the company to reach that target level within the next six months.
Like many of these ideas, the time to buy this stock was several months ago, it has rallied 75% since late last year, but I'll take a 50% gain on a company that may begin to pay a substantial dividend in the near future. I have not bought MIC in real-life, but I did add it to my CAPS portfolio at $24.05/share.
Is anyone out there familiar with this company? I'd love to hear your thoughts."
Here's what Ms. Witmer had to say about the company:
We have been buying Macquarie Infrastructure [MIC], an infrastructure fund with ownership interests in four businesses: International-Matex Tank Terminals, Atlantic Aviation, the Gas Company and District Energy. International-Matex, or IMTT, is the most exceptional. It is one of the largest bulk-liquid storage-terminal businesses in the U.S. Macquarie owns half.
What makes it so exceptional?
The company can store more than 43 million barrels. They store petroleum, vegetable oil and commodity and specialty chemicals. The main storage facilities are in Bayonne, N.J., and St. Rose, La. Storage contracts last from three to five years, so the business isn't particularly sensitive to the economy. The Bayonne facility is strategically placed on the Kill Van Kull, a tidal strait near New York Harbor. The facility is able to load and unload ships quickly due to the depth of the water in front of its docks. Competitors' docks can't handle large ships; products have to be transferred to barges before docking. That increases costs. IMTT's advantage will increase because the Port Authority of New York and New Jersey is dredging the Kill Van Kull even deeper so New York Harbor can be accessed by larger ships being built to take advantage of the widening of the Panama Canal.
We estimate IMTT will contribute about $1.50 of after-tax free cash flow in 2012 to Macquarie. The division deserves to trade at about 15 times free cash, which makes it worth 22 a share. Macquarie is trading for 24.75.
So you're getting the rest of the company for less than $3?
Correct. The next-largest asset, Atlantic Aviation, operates gas stations and terminals for private planes. It suffered during the financial crisis, but has been cutting costs and the business is improving. Last year it contributed about $1.20 per share of after-tax free cash flow, and could earn about $2 a share if the business returns to earlier levels. We value Atlantic at about $10 to $15 a share.
The Gas Company operates the only private gas utility in Hawaii. District Energy operates the largest district cooling system in the U.S. Together the businesses earn 55 cents a share. Along with some tax assets, they're worth about $7 a share.
.How will Macquarie unlock this value?
The game plan is to pay out dividends. The company pays 80 cents a share, giving it a 3.2% yield. In a few years they could pay as much as $3 a share, if not more. There is no debt at the holding company. Executive compensation is tied to the stock's outperformance relative to a particular benchmark. For management to receive extra performance fees, the stock needs to reach the mid-30s. Macquarie is worth 40 to 45 a share.
This is exactly the type of situation that I am in love with right now. I have been trying to add the stocks of companies that I believe will substantially increase their dividends, and likely as a result in turn their share prices, in the future. Along these lines, I currently own UAN, SEMG, ROIC, and PEB and I am always actively looking for more. I may see if the Barron's pop fades in a few days and pick up a little MIC if I like what I find when I dig into it a little more.