We began acquiring shares of New Flyer Industries (NFI.TO), a transit bus manufacturer, last fall and as the share price has risen from $13 to $27 New Flyer has grown into one of the Fund’s largest holdings. The “valuation catalyst” behind its recent price surge was the acquisition of Motor Coach Industries (“MCI”) in early November for $455 million. In addition to being highly accretive to earnings and free cash flow, the combination of the leading North American manufacturers in the bus and motor coach industries makes great business sense and the market responded very favorably. NFI announced the deal one day following a great earnings report and in combination, these two events provided a 38% boost to NFI’s share price in the month. We believe this is a truly transformational acquisition for New Flyer, and there are several items in particular which support this view:
- As the equity market cap of a combined NFI-MCI approaches $2 billion, it gets on the radar of many larger investment funds and analysts who cannot buy or cover smaller companies. Achieving this level of maturity acts as a substantial tailwind for companies which are able transition from “risky to own” to “risky to not own”.
- The opportunities for cost savings and other operating efficiencies between the two companies are excellent. New Flyer has proven that they are very adept at driving a tight manufacturing cost structure and given that the companies are practically neighbours in Winnipeg, we expect NFI’s same rigor and results to be realized in the MCI vertical.
- NFI’s growing scale and demonstrated operational stability has enabled them to activate their balance sheet and fund an accretive acquisition of significant size using debt as opposed to equity. This is a big developmental milestone, as well as very attractive for shareholders.
While our strategy of buying undervalued, catalyst-rich companies with strong operating momentum has generated great returns for our investors, there are always going to be some positions inside the portfolio where the stock price moves contrary to our thesis. A company’s stock price can fall for either market related reasons or company specific reasons and we earn our keep by being able to identify the difference. Given how closely we follow our positions, we are generally able to correlate a declining stock price to notable factors such as negative earnings surprise, poor industry trends, management issues or macroeconomic factors. Occasionally however a stock we own will fall for a reason we can’t easily identify, or decline far beyond what we believe is warranted given publicly available information. As active value investors this is our “fat pitch” – an optimal risk-reward scenario. Provided that we intimately know the company, management and industry, we will approach these scenarios with our highest conviction and seek to capture an outsized return as the price distortion corrects.
Our high conviction in Goeasy (GSY.TO) and Concordia Healthcare (CXR.TO) has been on display for several months and we have commented on these two companies extensively in the past, both in print as well as on BNN. The chart below uses our trading activity in Concordia to illustrates this conviction in real-time. As the market turned on CXR we were aggressive buyers, ultimately increasing our shareholdings by over 3x as the loathing peaked. These decisions paid off handsomely for our unit holders as the shares increased 29% in November and almost 100% off the lows. To recap our theses on CXR and GSY:
- Concordia Healthcare: Shares of Concordia Healthcare unjustly suffered from “guilt by proximity” as its larger peer Valeant Pharmaceuticals was eviscerated by short sellers, politicians and the court of public opinion in September. We strongly believed that Concordia’s AMco acquisition was a game changer for the company and continue to expect that it will generate tremendous cash flow for shareholders.