Scout Capital Management's Ideas at the Value Investing Congress

Adam Weiss and James Crichton of Scout Capital Management are speaking at the Value Investing Congress and they are talking about two of their best ideas, Williams Companies, and Sensata Technologies. Weiss and Crichton have kept a low profile, and according to Whitney Tilson, this is the first time the two are speaking publicly. The first name mentioned during Weiss' speech is Williams Companies WMB, which is currently splitting itself into three companies. It is made up of pipelines, midstream, and an exploration and production company, the tenth largest in the country. Scout Capital has a base case of $37 per share, which represents upside of 50% from current levels. The high end of the valuation is $47-$50 per share, which is almost a 100% over current trading levels. Williams' business model has many benefits, including an inevitable product, invaluable service offered at a low cost to its customers, and offers benefits of scale and scope. Williams Companies also has a favorable competitive environment in its businesses. 20% of the company's EBITDA comes from natural gas margins. Weiss said that he sees 7-10% EBITDA growth from its 2011 mid-point. Breaking down the segments, the midstream offers 9% compound annual growth rate, CAGR, pipelines offers 3-5% CAGR, and midstream pipelines offers 7-10% CAGR. The new CEO took a different approach to the company, and broke up the business into three companies, which the previous CEO had refused to do. This is seen as more shareholder friendly, according to Weiss. The new CEO has also added exposure to Marcellus Shale, which is an important area of growth going forward for the company. Weiss said that Williams is misunderstood because of the spin off and break-up of the company, and several sell-side and buy-side coverage issues, due to the nature of the business. Lastly, the new CEO, re-capitalization uses of capital and the hidden assets in Williams are reasons for the market not valuing Williams properly. He delved more into how he arrived at his valuation target. Weiss believes the infrastructure assets are worth $25-$30 per WMB share, and the dividend yield could be between 4 and 4.5%, with a dividend growth rate of 19.4%. Weiss believes the exploration and production sector of the company could be worth $9 per WMB share. Midstream Canada & Olefins could be worth $3 per WMB share in the base case, based on a 4.5 multiple. The segment is growing at 20% CAGR, and eventually could be worth $6-$8 per WMB share in the bull scenario. The company could also recognize value from the strength of its balance sheet, buying back stock. This could be worth $2-$ per WMB share over the long run. He cited MLP valuation risk as a potential reason for not hitting the valuation target. Natural gas liquid stability could also be a potential risk, and regulatory changes, including changing the taxation of MLP's is a potential negative, especially given government budget issues. Irrational M&A was also cited by Weiss as a potential negative. The company could raise its dividend in the next six months, which would be the third time in the past year. James Crichton talked about the second idea, Sensata Technologies ST. The company operates in the automobile, commercial jet, and large HVAC segments. Sensata is less levered to economic cycles than its peers, and has a "powerful moat" with an inevitable product, that is easier for the consumer, and friendlier towards the environment. The company sells its products engineers to engineers, and has a high switching cost. Crichton cited the fact that 65% of its revenues are sole-sourced. Sensata has also become a low cost manufacturer, compared to its peers. Every $1 in EBITDA for Sensata could mean 70 cents worth of free cash flow. The incentive program at Sensata is very shareholder friendly, as management cares more about the share price of the company, then management's cash compensation, and has gotten better since its IPO. Weiss believes that Amphenol APH is a appropriate competitor, and should trade to at least Amphenol's valuations, if not more. Weiss believes that Sensata should be able to earn $3.37-$3.85 per share by 2013, 25% above Street estimates. Management has been able to move capital into accretive acquisitions, although it historically has not been allocating capital to dividends or share buybacks. He thinks it could eventually be worth $60 per share.