Picking Through The Weeds

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Presenter

Heartland Advisors Value Investing Portfolio Manager Bradford A. Evans

Bradford A. Evans

Evans, CFA, is Senior Vice President and Portfolio Manager of the Value Plus Fund and its corresponding separately managed account strategy. He has 21 years of industry experience, 18 at Heartland.

Transcript

Heartland is led by our 10 Principles of Value Investing™. We look for companies that are undervalued based upon earnings, cash flows, book values—typically having very strong balance sheets, with strong management teams, wrapped around a catalyst which we think will unlock the value of the security we’ve identified.
 
You may also know that Heartland Advisors is a contrarian value investor, meaning we like to zig when the market zags.
 

Opportunity in the Agricultural Space

That contrarian mentality has led us to look for opportunity in the agricultural space, a sector that has had a fairly lengthy bear market, spanning almost three years.
 
Our screens have unearthed what we think is a diamond in the rough, American Vanguard, a California-based herbicide/insecticide provider targeting numerous crops: from corn to cotton, fruits and vegetables, and peanuts, amongst others—a very, very diverse portfolio targeting numerous end markets, with very little concentration in any one end market.
 
American Vanguard controlled what they could through to the downturn. They cut costs aggressively, they reduced inventory, and they paid down debt. They got their house in order as the macro environment was fairly hostile. We think this positions the company for significant operating leverage as headwinds turn to tailwinds, as we see three principle catalysts that we think will unlock the value of American Vanguard over the next 12 to 24 months.
 
Heartland Advisors Value Investing Three Catalysts Graphic
 

Catalyst 1: Cyclical Recovery in End Markets

First and foremost, a cyclical recovery is starting for their end markets. We think a cyclical recovery in their various crop chemistries and insecticides will allow for modest organic growth: roughly 5%.
 

Catalyst 2: Industry Consolidation

Also, we see American Vanguard being a beneficiary of significant industry consolidation, which is forcing large players to divest portfolios of ag chemistries.
 
Numerous M&A events have happened in the last 12 months: Bayer buying Monsanto, ChemChina buying Syngenta, and DuPont and Dow merging. This is creating a fertile environment for American Vanguard to deploy their flexible balance sheet to acquire high-value chemistries that fit their portfolio.
 

Catalyst 3: International Opportunity

Lastly, we see American Vanguard having significant blue-sky opportunity as they expand internationally.
 

American Vanguard Valuations

As we think the recovery gains steam, American Vanguard has significant earnings power to this recovery. We think $1-1.50 is a reasonable expectation for normalized earnings, which would yield a P/E of less than 15x.
 
Conversely, under that scenario, we think American Vanguard has the ability to generate over $100 million of EBITDA and significant free cash flows. Under that scenario, less than 6x cash flow looks very attractive to us in the current marketplace.
 
So, at the end of day, following our 10 Principles of Value Investing™, looking for undervalued stocks with low multiples of earnings, cash flow, and book values, with strong balance sheets, and a dividend—which AVD pays a small dividend—we see AVD fitting the bill for us in the portfolio today.

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