The challenging economic environment in the US has forced many
companies to reexamine the way they do business. Some enterprises
have decided to move into new markets, make management changes or
even recreate themselves. The transition can be painful, but the
upshot is a reinvigorated firm and happy investors. Stephen Lieber
and Sarah Hunt, co-managers of
Alpine Dynamic Transformations
(ADTRX), oversee a concentrated portfolio of 30 to 40 companies
that are either transforming themselves or the way consumers
behave. We recently spoke with them about what they look for in
How do you define transformational investment?
Investing in companies that are transforming their business should
provide exceptional growth opportunities. That gives us wide
Our view of transformational strategies could include Howard
Schultz, the founder of
), waking up one morning and saying "business ain't what it's
supposed to be, I'd better do something different," and closing 900
It could include an automotive company like
deciding that the industry is in trouble and it had better
concentrate on emissions and ride control products. Those are
We're also looking for evolutionary developments in an industry.
) is a classic example.
People are probably familiar with Snap-on's white and red trucks
that visit auto dealers and repair shops selling wrenches and other
car repair equipment.
We bought the stock when management identified auto engine
diagnostics as the greatest growth area in servicing vehicles. Now
Snap-on sells more than $15 wrenches; the firm sells a computer
that you plug into the engine to tell you what's wrong. This major
transformation also involved bringing in a new president and
building an innovation center in Kenosha, Wis.
We see opportunities in fundamentally healthy businesses that
don't have the dynamics management had projected for them, as well
as those that are in a stage of innovative growth. So our holdings
(TSX: WPT, NSDQ: WPRT), which specializes in special emissions
control devices for diesel engines.
Would it be fair to characterize this as a value
It's a combination of valuation, what the company is doing and
whether the markets recognize it yet. The majority of earnings
generated by the companies we hold may come from places that
weren't traditionally a part of their earnings stream. That becomes
a very interesting change in their revenue profile. Sometimes the
market doesn't pick up on this change until it's well on its
), a Swedish-American company that started out as a seatbelt maker,
is an excellent example of changing earnings streams. It went on to
become an airbag maker and now produces sophisticated airbags and
safety-detection devices that use infrared technology. That's
adding a whole new transformative growth opportunity.
What's your outlook for the US economy?
In a recent meeting of our research and portfolio management group,
we used atypical economic language and described the economy next
year as likely to be "creepy-crawly."
Creepy describes a slowly advancing, somewhat struggling economy
trying to overcome unemployment, the reluctance of consumers to
spend and their predilection to save.
Crawly refers to the stimulus of international trade and the
opportunity for US exporters to enter stronger markets.
How does that outlook affect the companies in your
It's a motivational impulse. Let's say you're running a business
that's going nowhere in a struggling economy and you ask yourself
what you can do to get your business going. Often the answer is to
think of how to transform your business and get it back on
That sparks product innovation and operational changes that can
create distinct competitive advantages.
Can you provide some examples of transformational
(CMI) demonstrates a combination of a couple of different factors.
The firm's core business is providing US companies with truck
engines. Navistar International Corp (NAV), a truck manufacturer
and key customer, changed how it sources its engines, which looked
like an issue for Cummins.
In the interim, Cummins had worked on expanding internationally
and adding to its product portfolio. Now half of Cummins' earnings
before interest and taxes come from joint ventures that are outside
of the US, including in India and China.
Additionally, there's a set of global regulatory reforms in
truck emissions standards that's driving a replacement cycle for
truck engines across the world. Cummins adapted to these new
requirements and has an offering for almost any country. The firm
also has entered new markets like marine and oil and gas.
This is a company that responded to a set of business challenges
in a variety of ways changing the nature of its earnings
The stock has reacted strongly to the numbers the company has.
While the fundamental demand in the businesses they serve has
advanced modestly, the firm's stock price and earnings have
Atlas Air Worldwide Holdings
is a company that performed some charter services. It bought a
giant freight charter company in Alaska called Polar Air but wasn't
making money on its regularly scheduled freight service. Management
quickly realized the firm was running like a hamster on a wheel, so
they blew up the company's legacy business model.
Now the company runs planes on a "wet charter" basis for
airlines such as British Airways (London: BAY)
and Singapore Air (Singapore: C6L). Atlas Air Worldwide provides
the crews, and the company pays for fuel and is guaranteed a
certain amount of airtime. The firm has entered some of its planes
into the military flying pool--a highly lucrative business.
Management's moves transformed the company from one that barely
brought in enough money to one that has a more dynamic revenue
steam and is growing earnings.
We've owned the stock for the last 18 months, and the change in
Atlas Air Worldwide's earnings profile has enabled it to outperform
its peers. The firm continues to add planes in this business model
and is branching out into other business models as well.
Traditionally, operators in this space have struggled to make
money, but Atlas Air Worldwide's management has found a business
model that makes it much easier to pay for the planes and grow
: Everyone has read the story about
and [former Hewlett-Packard CEO] Mark Hurd. Oracle has partially
transformed itself from a software company into more of a hardware
company. We think that's a very interesting development, and we're
as intrigued as everyone else by how quickly Hurd moved from
(HPQ) into Oracle management.
We think Oracle's CEO Larry Ellison has run a brilliant program
of constant transformation with the acquisition of 65 companies
over a period of years. But this time he's made a very fundamental
shift as evidenced by the Hurd hiring. He will attempt to increase
margins at the recently-acquired Sun Microsystems, a relatively
low-profit hardware company, from 40 to 60 percent. It's a multiple
Is your investment strategy risky given the weak economic
The opposite is true because we're not starting until the company
has a decent base, and if that base can be transformed into a
growth vehicle, then we've got it. So in a way, you have a value
proposition in starting with a dull company that transforms into an
innovative company. This should result in lower risk than what's
For example, we own shares of a tiny company called
(AMEX: EAR), a retail hearing aid business. They've just started a
deal with the American Association of Retired Persons (AARP) under
which the AARP will promote hearing aids through HearUSA's retail
facilities. It's a small-time business, but nonetheless, it's an
incrementally interesting growth opportunity because the AARP is
known for being able to drive demand.
What's your best piece of advice for investors over the
Going back to our "creepy-crawly" outlook, look for
companies that don't depend on the general pace of the economy for
recovery, but have unique strengths that they can exploit.
We're talking about companies where growth is driven by
something beyond simple GDP growth. Potential drivers include
regulations, a change in the way people do things, or a secular
story that isn't only dependent on volume growth. Companies that
are making sales outside of the US to countries that are
experiencing economic growth are worthy of attention as well.
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