ATCO - Atlas Corp

[petec]

That makes sense.

 

Mind you, the contex index is at 808, it's highest level since 2008 and roughly double the average of the last decade, so there is plenty of scope for it to fall but remain above the 10-y average. I do believe the industry has changed. It is clearly more consolidated and disciplined and has worked off the huge capacity overhang that it had a decade ago. It makes total sense to me that the next 5 years look better than the last 10. But I agree the good times won't last forever.

[gfp]

Bing Chen did a zoom interview with a conference yesterday that is available through the Atlas IR presentations page.  Fast forward through Graham's mic / feedback issues to where Bing gets on the call and the interview starts. 

 

Sounds like no new verticals for the foreseeable future "not actively looking" and the primary opportunity they will be putting capital towards in the near term is Seaspan.

 

 

[kab60]

Yeah, I don't disagree with that. But probably only makes a bad industry less bad, I think. Despite liners wanting to grab to grab more of the value, they are stuck between a rock and a hard place. Quiet interesting how much value the freight forwarders grab - now that is a great business.

[petec]

Yeah, I don't disagree with that. But probably only makes a bad industry less bad, I think. Despite liners wanting to grab to grab more of the value, they are stuck between a rock and a hard place. Quiet interesting how much value the freight forwarders grab - now that is a great business.

 

I think your comment (bad industry gets less bad) applies primarily to the liners. I view Seaspan as the liner's banker, akin to Aercap. They're one level removed from the cyclicality. I don't think an upcycle offers them a huge opportunity for outsized near term earnings. But I think it offers the opportunity to lock in slightly higher earnings for 5-10 years. Given the P/FFO the stock trades at today, I think that's quite an attractive thing.

 

 

[kab60]

Agreed on liners, banking etc. But why value it at P/FFO? These are depreciating assets with real residual value risk. Doesn't FFO overstate what can actually be pulled out of the business? Shouldn't net income reflect economic reality pretty well? I think it's nuts they focus so much on adjusted ebitda and FFO where they add back depreciation in an extremely asset heavy business. Aercap often have gain on sales. You could argue there is real platform value there. I don't recall seeing gains on sales here, but I recall a lot of impairments (non cash!) amongst some in this line of business.

[petec]

FFO certainly has drawbacks and I value ATCO in multiple ways. But I can’t escape the feeling that Sokol/Chen allocating 25% of the market cap every year should lead to something good. That’s what draws me to FFO.

[kab60]

That's obviously fair. You know the man better than I do. I've just seen so many of these jockey bets disappoint, because people extrapolate past performance into the future under much different circumstances. They're in two pretty bad industries, and it's not like he's free to allocate capital wherever he wants - picking up listed bargains or what not. He's mainly buying steel in negotiated processes, where as you can allocate freely amongst 40k plus listed stocks. If I had to chooise I'd rather invest in Petec the stockpicker than Sokol the steel guy, but I root for both of you either way. :)

[petec]

Sadly the evidence suggests that would be a poor choice!

[Parsad]

That's obviously fair. You know the man better than I do. I've just seen so many of these jockey bets disappoint, because people extrapolate past performance into the future under much different circumstances. They're in two pretty bad industries, and it's not like he's free to allocate capital wherever he wants - picking up listed bargains or what not. He's mainly buying steel in negotiated processes, where as you can allocate freely amongst 40k plus listed stocks. If I had to chooise I'd rather invest in Petec the stockpicker than Sokol the steel guy, but I root for both of you either way. :)

 

To call David Sokol a "steel guy" is an incredible understatement. 

 

- He was the guy in line to run Berkshire...not part of Berkshire, but all of Berkshire, including investments. 

- He took MAE from $10M to $20B. 

- He created Home Services of America, which became Berkshire Hathaway Real Estate Services...the largest real estate broker in the U.S. 

- He was the guy who scouted out BYD and told Buffett and Munger to buy. 

- He was the guy who turned around Netjets. 

- He found Lubrizol as an acquisition for Berkshire...amongst others. 

- He led Middleburg Financial until acquisition. 

- He invested in Seaspan and turned it into a thriving Atlas Corp. 

 

David Sokol is arguably one of the most successful business people in America over the last 30 years!  Net worth might now show it, but his experience and successes do.  Cheers!

[petec]

Pity Prem didn’t just get him on board to run Fairfax’s investing operations!

[Parsad]

Pity Prem didn’t just get him on board to run Fairfax’s investing operations!

 

He essentially does run $1B now through Atlas Corp.  Cheers!

[kab60]

Yeah, agree with Petec. He could probably do go with a broad mandate. No idea.

 

But under these circumstances he could be the second coming of Christ, and I would still be sceptical. I hate citing Warren Buffett, but there's that thing of a bad business and great management and something something reputation. It's difficult to earn great returns when you're plowing all your money into floating steel (or steel on land for that sake), and isn't that what they've done? They recently bought more ships I believe. So it's not like he's about to let the bank runoff and turn this into a broad investment company. In the real world that's difficult to do and the reason why banks keep trading way below BV instead of being liquidated. It's not like they're even buying shares below TBV but instead they're buying newbuilds at market value.

 

I also found the APR deal sleazy. If one likes transportable power generators, Aggreko PLC has been on sale for ages. Makes no sense for Seaspan shareholders to own APR and pay fair value (if that's what they did) when it'll always trade with a discount inside a completely unrelated company. If investors want diversification, that's what plus 40k listed stocks are for.

[petec]

I’m not so sure it’s impossible to earn good returns buying ships.

 

Most people don’t, because they don’t have the discipline to do it well, and the cycle kills them. But smart counter-cyclical operators can do very well in low ROIC industries, especially if they can use leverage. I’m not sure MidAmerican is a great business but good capital allocation and judicious leverage produced an extraordinary ROE over time. By my estimates (based on admittedly limited disclosure) ATCO is getting 15-25% ROEs (depending on the length of the lease - lower returns for longer leases and vice versa) on capital deployed in ships at the moment. And I have a feeling the IRRs might be higher in some cases although I can’t prove that.

 

When the cycle is humming I fully expect them to stop deploying capital, hunker down, and rake in the cash.

 

If they can do that they’ll make a very respectable return through the cycle and I don’t think the stock reflects that.

[Saluki]

I’m not so sure it’s impossible to earn good returns buying ships.

 

Most people don’t, because they don’t have the discipline to do it well, and the cycle kills them. But smart counter-cyclical operators can do very well in low ROIC industries, especially if they can use leverage. I’m not sure MidAmerican is a great business but good capital allocation and judicious leverage produced an extraordinary ROE over time. By my estimates (based on admittedly limited disclosure) ATCO is getting 15-25% ROEs (depending on the length of the lease - lower returns for longer leases and vice versa) on capital deployed in ships at the moment. And I have a feeling the IRRs might be higher in some cases although I can’t prove that.

 

When the cycle is humming I fully expect them to stop deploying capital, hunker down, and rake in the cash.

 

If they can do that they’ll make a very respectable return through the cycle and I don’t think the stock reflects that.

 

As someone smarter than me once observed about shipping "it's a place where firms usually make a living and occasionally make a killing."

[Nelg]

Everyone has their own comfort level (however justified) on how much to bet on management. I own some shares and am betting on him, and we'll find out over time whether it is a good bet or not. In the meantime, all anyone can do is make an educated guess and analyze capital allocation decisions as they are made.

 

As previously mentioned, it is entirely possible that a good manager can make better-than-industry returns by buying low and selling high (or at least, not buying high). It's no different from an investment manager doing better than average by doing exactly the same. You can get a sense of Sokol's hit rate by carefully scrutinizing the publicly available facts...but even for that, one can overweight Sokol's genius by simultaneously underweighting Abel's contribution. Abel joined MidAmerican/CalEnergy in 1992, after all.

 

The positives on Sokol are well-known and hopefully not overstated. To me, some of the negatives are:

1) there was a history even within MidAmerican of...shall we say, a JV/partner ownership dispute where MidAmerican management was in the wrong (at least as determined by a judge). Combined with his unceremonious exit from BRK, is this more than just an isolated incident and/or is this a relevant data point? Maybe, maybe not.

2) based on Sokol's MidAmerican share sales to BRK + his generous but well-deserved compensation, he was worth $200m++ prior to exiting BRK. No idea what his compounding has been like since then, but let's say he's worth $400m now. He owns about $40m of Atlas Corp now, and about half of his shares were granted (I think around $6 or $7), with the rest purchased with his own capital. So he has almost certainly put only a very small percentage of his net worth into Atlas/Seaspan. 

 

For #2, I would ask why? It's hard to believe 95%+ of his net worth is completely tied up in illiquid assets. It looks like he has purchased (very) minor amounts in the open market around ~$8/share, but if Atlas is truly the bees knees, then why hasn't he purchased more when there have been multiple opportunities to do so? I don't have a good answer. But I don't have good answers to a lot of questions for other companies I own, too.

[matthew2129]

Holy cow another ten 15,000 TEU newbuilds with 12 year charters already in hand coming down the pipeline...contracted TEU capacity up over 25% since December alone

 

https://money.tmx.com/en/quote/ATCO:US/news/8422434714321278/Seaspan_Announces_10_DualFuel_LNG_Containership_Newbuilds

[bluedevil]

Wow. Playing offense when the market is hard - love it.

 

[petec]

Holy cow more or less my response also!

 

The fact they’re LNG-powered suits my position in Cheniere too. Win win ;)

 

The call will be fascinating.

[petec]

Contracted TEU capacity up over 25% since December alone

 

 

Keep coming back to this thought. I thought a hard market was coming but...wow. Let's hope they've kept their discipline on returns.

[ValuePadawan]

Hopefully it is raining gold for them because they are bringing out the bathtub not the teaspoon.Wow I like the initiative but as others have mentioned I'm curious to see what the return parameters are like.

[ourkid8]

Bing recently gave some guidance on the analyst call.  Capital allocation is governed for high single digits unlevered returns with rigorous risk management.

 

Hopefully it is raining gold for them because they are bringing out the bathtub not the teaspoon.Wow I like the initiative but as others have mentioned I'm curious to see what the return parameters are like.

[petec]

Bing recently gave some guidance on the analyst call.  Capital allocation is governed for high single digits unlevered returns with rigorous risk management.

 

Hopefully it is raining gold for them because they are bringing out the bathtub not the teaspoon.Wow I like the initiative but as others have mentioned I'm curious to see what the return parameters are like.

 

Can you recall what call this was?

 

The 3q balance sheet assets/equity was 2.5x so an 8% unlevered return suggests a 20% ROE. That would do.

[ourkid8]

The recent Stiefl 2021 presentation: https://ir.atlascorporation.com/events-and-presentations

 

Agreed and this is exactly why Atlas is the largest position in my portfolio.  I also have a very large position in Fairfax as well so I am definitely enjoying the ride.

 

 

Bing recently gave some guidance on the analyst call.  Capital allocation is governed for high single digits unlevered returns with rigorous risk management.

 

Hopefully it is raining gold for them because they are bringing out the bathtub not the teaspoon.Wow I like the initiative but as others have mentioned I'm curious to see what the return parameters are like.

 

Can you recall what call this was?

 

The 3q balance sheet assets/equity was 2.5x so an 8% unlevered return suggests a 20% ROE. That would do.

[kab60]

Can anyone explain why net income doesn't capture the economics of the ship leasing business pretty well? And how on earth they expect to do 20 pct plus ROE, when avg 5 year ROE is a tad below 5? Maersk is a customer, they struggle to earn their cost of capital yet are still investment grade. Their financing is much cheaper than Seaspans. If these things did unlevered HSD returns, I think they'd put much more om their own balance sheet. Perhaps I'm not smart enough, but I struggle to make the pieces fit.

[petec]

I think most of the answers to your questions circle around where you are in the cycle. Capital deployed at one point in the cycle earns a very different return to capital deployed in another.

 

I also think cash flow timing needs to be considered as well as net income. Net income captures long term economics well, but you can have situations whereby due to the cycle and capex timing these things just gush cash flow for a period and that can be quite valuable.