Textron As Nelson Peltz's Next Activist Target
There's a lot pointing to Emerson Electric as Nelson Peltz and his Trian Partners next activist target, from bullish call option activity a couple weeks ago to comments made by the media. Let's do a deeper dive into this whole idea.
First - Nelson Peltz has alluded to the fact that he's already looking at two potential targets in the industrial industry; making those comments at the Electrical Products Group conference last month. It's worth noting that Emerson Electric was one of the presenters at that very conference - the media might be reading between the lines too much with this one, using a form of recency bias to link Peltz and Emerson.
But, Peltz's central thesis is to look for companies that would be better off broken up. Emerson meets that criteria. It's also in the sweet spot with a $40bn market cap. DuPont has a $60 billion market cap, but with the loss there, Peltz likely won't aim that high again, nor will he try his hand at other industrial targets like Honeywell and United Technologies that could use an activist. Plus, he's still got a lot of money tied up in his other larger cap stocks like Pepsi, Mondelez and DuPont.
Based on his average stake size, you're looking at a 3% to 5% stake in Emerson by Trian. The big opportunity for Peltz at Emerson is to separate out its network power business, which has been struggling due to its energy market exposure. Ultimately leaving its businesses that create remote monitoring, sensors, etc.
But, there's a better / more likely opportunity for Peltz
There's no doubt that Peltz is likely gearing up for another fight in the industrial space, where his fund recently dumped a third of its Ingersoll-Rand stake and took its stake to below 5% of the company. Peltz also stepped down from the Ingersoll-Rand board last year after serving for two years. He booked a win there by getting the company to spin off the security business and raise debt for share buybacks.
Yet, one big caveat is that when you look at Trian's 13D performance for Ingersoll-Rand, the stock has merely performed in-line with the S&P 500 since the fund went active.
Nonetheless, Peltz is in need of a win and the best place to get that is not in the $40bn to $60bn market cap range, but the $10bn to $20bn range. So, by all accounts, he's likely gearing up for a new 13D campaign. It just so happens that the last 13D filed by Trian was with Ingersoll-Rand back in 2012. At the time, Ingersoll-Rand had a roughly $10bn market cap at the time.
One thing we know about Peltz is that he doesn’t put much emphasis on price action (read: doesn't care whether the stock is underperforming or not) and his true specialty is breakups. RBC entered the Peltz-next activist target talk last week, with @valuewalk giving a breakdown of RBC’s thought process on trying to identify Peltz’s next target. Part of that is looking at Trian’s strategy, which includes:
“A focus on the income statement rather than the balance sheet: Unlike a number of shareholder activists who will settle for injecting idle cash towards buybacks/dividends, Nelson Peltz and Trian Partners prefers keep their eye on the P&L statement to find areas for margin improvement such as SG&A, sourcing, or productivity. Given the likelihood of operational experience in the sector, if the top line growth is weak, in many cases Peltz will also suggest new growth strategies.”
“Too much noncore business in the portfolio: The idea of creating more lean and efficient corporate structures by divesting or non-core businesses is very attractive to most activists, including Peltz.”
With all that in mind, the most interesting / likely / intriguing target for Peltz is Textron ($TXT), the $12.6 billion market cap “multi-industry” company, which has its hands in industrial, aircraft, defense and finance businesses.
Ralph Whitworth’s Relational Investors talked about taking a stake in Textron a couple years ago, but never did. Relational is also an industrial aficionado, having waged battles at the likes of Illinois Tool Works, Flowserve and TimkenSteel. Why Relational passed? I’m not sure. And the other headwind is that Textron has been a decent performer over the last few years. But Textron has four distinctly different businesses, with no true synergies. It's also a relatively cheap stock that has