Anticipating Activists
Owens & Minor $OMI looks ripe.
Most of the time, I’m parsing markets for smaller, undiscovered companies that could be worth investigating.
Usually, when I find a big, ugly company, I let it go since it’s not in my wheelhouse. But activists have made a great living following these old, sleepy companies in the past few years.
I stumbled upon Owens & Minor tonight, and it’s a big, fat, underperforming company. Founded in 1882 with over 22,000 employees, it produces stable revenue approaching $11B but is not very profitable. The market cap is just over $1B, and the EV is just over $3B.
The company is embedded in the “healthcare supply chain” and has barely innovated in the last several decades, as far as I can tell.
It’s a typical Fortune 500 “empty suit” management team where the CEO has the following credentials - He places great importance on family and has been married for 25 years with 2 children, is a former CPA, and is a lifelong Cleveland Browns fan.
You might think I’m kidding, but I’m not. That’s it.
As you can see, the stock has been severely underperformed. It’s down from $45 two years ago to $14 now. The valuation is very low, but it needs a catalyst.
I think this is too juicy for an activist not to emerge here. Using some simple back-of-the-envelope math, I believe the company could earn $3/share on cost-cutting alone versus the current $1.50. That would get the shares to $30+.
They don’t pay a dividend and have $2B in debt that can be paid off with excess cash flow from headcount reductions and asset sales.
A sharper pencil could find more justification for this to be even higher. If an activist gets involved, my range is $30 to $45.
I’m always interested in trying a new type of investment. I think the downside is limited here based on the business's valuation and stability. In the worst-case scenario, you have dead money for a while. But how can this plum continue to sit in plain view without being plucked?