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Vision Research Takes On Voodoo SPAConomics

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Q.  “Anyone…..Anyone”…..”Bueller…..Bueller”…..Is “anyone” on top of what is transpiring in the SPAC market?
A.  StreetFeeds client Vision Research is at the head of the class.

Vision Research has recently launched a unique suite of SPAC research and data products to answer both the demand from their buyside clients for information on this burgeoning asset class, as well as Ben Stein’s character, who asked the eternal (slightly paraphrased) question “Anyone…..Anyone”…..”Bueller…..Bueller”….in the great film Ferris Beuler’s Day Off.

Vision collects data on a universe of over 600 SPACs and growing that has been shown by academic research to be helpful in identifying the SPACs that will materially underperform the market and break below the $10 trust floor, after a deal is approved and the de-SPAC occurs.

Some 70 rows of data are included in the data set such as:

  • dilution
  • promote
  • sponsor and underwriter quality
  • redemption ratio
  • PIPEs
  • multiples
  • safe-harbor projections
  • numerous other data points

Vision offers data feeds of this data primarily to its buyside clientele.  Vision analysts utilize it to systematically analyze the SPAC universe to identify a group of “unrealistic & ill-advised” SPACs that should be monitored for the deal they end up announcing.  Vision first began collecting this deep data set on April 1, 2021. 

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IFF SUFFERS FROM SERIAL EXECUTIVE CHURN SAYS MANAGEMENT CV

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International Flavors & Fragrances: CEO Resignation & Serial Exec Churn

Chairman & CEO Andreas Fibig (59) has announced that he is leaving International Flavors & Fragrances once a replacement is found. CEO Fibig has succeeded in making IFF a bigger entity, mostly via acquisitions over the last six years, but we don’t think that acquisitiveness has translated into increased intrinsic value for shareholders. Unsurprisingly, the CEO’s announcement coincides with increased pressure and a stand-still agreement, from activist Scott Ferguson at Sachem Head after winning a seat on IFF’s Board. Sachem has a 2.6% stake in IFF. New CFO Glenn Richter (59) started last month and will be in the hot seat for the year ahead as he is only the most recent of 4 CFOs at the firm in 5 years. We think Richter will likely bring a good finance centered rapport with Sachem but no real industry expertise for IFF and we worry management’s execution may suffer from all the management changes in recent years.

Management Update: CEO Fibig has led 2 major acquisitions in the last several years that have failed to drive better returns. In 2018, IFF closed on the $7 billion Frutarom acquisition ($4.3 billion cash, $2 billion equity, repaying $695 million of debt at closing). The CEO and his large executive management team (11 EVP’s) then followed that up with this year’s $16 billion all-equity deal to purchase the Nutrition & Biosciences (N&B) business from DuPont (N&B also paid DuPont $7.4 billion upon closing).  Our concerns about his over-reliance on M&A when he was appointed in 2014 have borne out. IFF is how run in 4 major business segments: Nourish (54% of H1 ’21 sales, 20% adjusted EBITDA margin), Health & Biosciences (19% of sales, 30% margins), Scent (20% of sales, 22% margin), and Pharma Solutions (7% of sales, 23% margins). The CEO’s resignation is pending the choice of his successor by the Board. Serial management churn under CEO Fibig has been a red flag for investors. We note the presence of Director Ilene Gordon (67) on IFF Board. Gordon is the former Chairwoman & CEO of Ingredion for a decade ending in 2018 and could make a logical successor for Fibig with minimal disruption to the current operational plans. New CFO Glenn Richter (59) replaced Rustom Jilla (59) after only two years in the role and will do his first earnings call next week with investors. We like that the new CFO is no stranger to complicated turn-around situations but we don’t see that he has actually completed a successful one. We are also cautious that the new CFO’s only prior food Industry experience was back in the ’90s in FP&A for Frito Lay (1990-96) after a two year stint as a consultant at McKinsey following business school. The recent DuPont N&B deal the CFO inherits has sharply elevated IFF’s debt. It was $12 billion as of Q2 ’21, or 4.3x EBITDA. The CFO is also on the hook for a promised $400 million in N&B cost synergies over the next 2 years. We think the CFO’s new colleagues have shown little skill in their past M&A diligence and deal integration and serial turnover remains a problem. Management has missed its promised 5%-7% annual sales growth and 10% adjusted cash EPS growth from 2019 to 2021. We worry the new CFO may need to temper earlier guidance of 26% EBITDA margins, and $2 billion of free cash flow that his lame duck CEO has made previously.

Pay & Incentive Alignment: New CFO Glenn Richter CFO received a larger total pay package than his predecessor due to sizeable equity awards. CFO Richter is paid a $750k salary with a 90% target bonus (higher than most of the other senior officer’s 80%) and an initial time vesting equity award worth $5 million. Richter will also receive a $938k prorated equity LTIP for this year and not less than $2.2 million in 2022. Former CFO Jilla will receive a total severance worth about $2.4 million. CEO Fibig’s salary is $1.3 million with a 120% target cash bonus and he’s averaged about $7.9 million in total pay over the last three years (about 126x the median employee’s). Last year, the CEO’s total pay was worth $7.7 million, $5 million of which was in equity awards. His eventual departure severance will be worth about $12.7 million. Management’s long term incentives are determined primarily by Net Debt reduction (33%) and relative total return vs the S&P 500 (50%). We don’t like that IFF’s current “long term” equity LTIP is actually settled 50% in cash upon vesting and that the plan allows participants to choose between 3 types of equity grant.

Equity Ownership: Management churn has resulted in IFF’s officers having low equity ownership in their company. CEO Fibig’s 79k beneficial shares, valued at $11.7 million, is low given his $7.7 million total compensation last year. He has also been a net seller that brought him $2.2 million in net proceeds since the start of 2020. This includes $1.3 million from sales in April of this year. CFO Richter’s initial $5 million RSU grant hasn’t vested its first tranche yet so his ownership is negligible.

Fiduciary & Other: Chairman & CEO Fibig has presided over an aging Board. We assume Sachem’s Scott Ferguson, will become a Director this month (but has not yet) bringing the Board to 14 Directors but there are many retirement candidates for a new Chairman to cull. We think Ferguson will be a constructive member of the Board. Currently, IFF has 13 Directors, with 7 coming from legacy IFF along with 6 legacy DuPont representatives. One of the new Directors is Edward Breen (65), DuPont’s Chairman & CEO, who has become IFF’s Lead Director replacing Dale Morrison (72, Director since 2011). Director Matthias Heinzel (54) was President of DuPont’s Nutrition & Biosciences for 2 years until the acquisition was completed and might be an internal candidate to become the next CEO.

ValuEngine’s Blank Says Take Profits In Energy, Buy Utilities

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Time to Flip the Switch from Energy to Utilities

November 4, 2021 by Herb Blank

This week’s blog focuses on a trade recommendation based upon many data elements found in ValuEngine reports combined with industry experience and knowledge. At the end-of-June blog, “Drill. Baby, Drill”, I focused on the 5 (Strong Buy) recommendation that the ValuEngine models had on the iShares US Oil & Gas Exploration & Production ETF (ticker IEO). The blog recommended that for trading purposes IEO would likely outperform the market in the next 3-to-6 months, but it was not a recommended buy for long-term investors. Four months have passed. That recommendation, fortunately, was on the mark.

IEO significantly outperformed the SPDR S&P 500 ETF (ticker SPY) by State Street Global Advisors (SSgA) during the past four-months: 12.5% as compared with 7.6%. Since ValuEngine models are dynamic and based on a multitude of factors, it can change significantly in a few months. IEO now has a rating of 1 (Strong Sell). The price run-up combined with fundamental, technical, economic and market-relative changes contributed to the decline. Beyond that, long-term investors should still stay away from fossil-fuel-related stocks, especially those in and servicing the drilling industry. Global climate change concerns have led many businesses and governments to institute plans to find alternatives to fossil fuels. These changes are anticipated to severely limit future earnings.

For those looking to utilize profits taken in Energy ETFs, I recommend taking a long look at the Utilities Sector ETFs. The largest of these in assets under management (AUM) is XLU and is currently rated 4 (Buy) by ValuEngine.

Let’s take a closer look at the data behind the numbers. The below data is as of October 31, 2021. The bold numbers denote the ETF with the most favorable score in the category.

IEO XLU SPY
ValuEngine Rating 1 4 3
VE Forecast 3-mo. Return -1.5% +1.1% +0.9%
VE Forecast 6-mo. Return -2.8% +3.0% +2.7%
VE Forecast 1-yr. Return -8.5% -1.7% -3.7%
Historical 3-Mo. Price Return 23.92% 0.57% 4.22%
Historical 1-Yr. Price Return 154.05% 6.28% 39.18%
Historical 5-Yr Annualized Price Return -1.14% 5.31% 13.70%
Volatility 44.1% 14.6% 15.4%
Sharpe Ratio (3-Year) -0.03 0.36 0.89
Beta 2.15 0.42 1.00
Alpha 0.26 -0.03 0.00
# of Stocks 49 29 500
% of Stocks Deemed Undervalued by VE 76% 52% 38%
P/E Ratio -27.5% 27.2% 28.6%
P/B Ratio 1.8x 2.3x 4.7x
Div. Yield 2.0% 3.0% 1.2%
Expense Ratio 0.42% 0.12% 0.09%
Index Provider S&P Dow Jones S&P Dow Jones S&P Dow Jones
Index

Scheme

 Mkt. Cap Weighting Mkt. Cap Weighting Mkt. Cap Weighting
ETF Sponsor iShares by Blackrock SPDRs by SSgA SPDRs by SSgA

The first four rows show the rating and forecasts produced by ValuEngine models. IEO uniformly had the worst predictions for all the upcoming periods. Since it was a tactical buy based on timing, now would be a good time to sell IEO. The best in each category is Utilities. The opportunity to get into a Utilities Sector ETF now might be even more attractive than the differences displayed in these rows, especially for income-hungry investors. Here are some reasons why I think XLU is so attractive now:

  1. It is highly unusual for utilities sector stocks or ETFs to be rated anything but 2 (below market performer) or 3 (market performer). One reason is that they are highly regulated, and their profitability is controlled by set upper boundaries. During periods of market expansion, this is very limiting.
  2. Our ratings models are based upon projected price appreciation, they do not project total return or account for dividends.
  3. On the other hand, utilities investors take dividend yield heavily into account. Although a 3% yield is close to the low end of XLU’s historic range starting in Autumn of 1998, it is very attractive relative to the 1.2% yield offered by SPY – a difference of 250%.
  4. From traditional valuation and risk tolerance perspectives, XLU also looks more attractive than SPY. Its volatility is lower; its market Beta is below 0.5; its Price/Book ratio and Price/Earnings ratio are also lower. Collectively, this indicates that utilities are valued more in line with their intrinsic value than the S&P 500 currently is. One utility stock we find particularly attractive now is Vivendi (VIVHY), the American Depository Receipt (ADR) of the French telecommunications company. It gets our highest rating of 5 to accompany a yield of 4.4%.
  5. The next 12-months for the S&P 500 are projected to be very choppy according to the latest round table of market strategists. Our one-year projection for SPY of -3.7% is in line with that. Taken the 1.2% yield into account, a rough approximation of total return would be -2.5%. Conversely, a projected -1.7% return on price combined with a 3.0% yield results in a rough approximated total return projection of +1.3%. Investors with low risk tolerances might be less upset by a turbulent market if between one-quarter and one-half of their core US large cap allocation were shifted to XLU for the upcoming 12 months.

The utilities sector is generally considered boring but in a volatile market, boring can be a very reassuring place to be. My conclusion is that it is time to flip the switch and sell IEO if you bought it in June and shift some of your core US equity into a Utilities ETF such as XLU.

Axiomatic Data Releases New ESG Social Metrics

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Axiomatic Data, the Form 5500 Information Company, announced today the release of new ESG metrics to its database covering over 700,000 US public and private companies. Using information extracted from Form 5500 filings, Axiomatic Data has developed three new attributes that measure the Social or “S” component of Environmental, Social, and Governance criteria.

“There are many sources of information that measure the Environmental and Governance aspects of ESG,” said Steve Goldstein, a partner with Axiomatic Data. “Working with ESG-sensitive investment managers, we created three metrics that facilitate comparisons between companies based on how they treat their employees, which is a critical part of the “Social” component in ESG.”

Salary Boost measures the level and growth of company contributions to a retirement benefit plan. Salary Deferral measures the level and growth of participant contributions to a retirement benefit plan. Pension Plan Participation Rate measures the level of participation among employees in a company-sponsored retirement plan. These metrics will vary widely between industry groups, but within industry groups they can identify the strongest and weakest “S” performers.

“There’s been a flood of new ESG data sources, but few have focused on the Social component,” said Rob Passarella, founder of Advisory Insights, an alternative data consulting firm. “Axiomatic’s offering is unique and makes it easy to rank companies and include Social metrics in ESG models.”

The Form 5500 series is a compliance, research, and disclosure tool for US employee benefit plans mandated by the US Department of Labor. Axiomatic aggregates, harmonizes, and normalizes millions of filings annually to create an accurate, robust database for investing, deal sourcing, due diligence, and now ESG use cases. To access Axiomatic Data’s white paper on their ESG indicators, click here.

About Axiomatic Data

Axiomatic Data, the Form 5500 Information Company, provides a database and analytic tools for US public and private companies based on Form 5500 filings. The database has history back to 2013 and for the Russell 3000 is point-in-time and mapped to tickers. In addition to using Axiomatic Data as part of financial models for US public company investing, Axiomatic Data is used for ESG analysis, private equity deal sourcing and due diligence, and for comprehensive firmographic information for US companies.

Management CV Analysis of UPS: Better Framework, Better Returns

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Carol Tomé is UPS’ 12th CEO in the company’s nearly 114-year history and we like her focus on making the firm’s capital allocation more efficient and leaving pure volume strategies behind. The CEO’s solid execution in her first 18 months, despite pandemic related turmoil, is partly because of her familiarity with UPS as a long-time Director (since 2003).

Tomé’s ascension to the CEO role was fortuitously timed in March of 2020 and her predecessor David Abney (65), retired after 46 years with UPS. CEO Tomé has refocused UPS on sensible operating efficiency and ROIC while emphasizing both customer and employee satisfaction.

She and CFO Brian Newman (52) have systematically reduced debt, boosted margins, and improved customer-focused key performance indicators. We also like the Board’s revamping of the executive pay plan and substantial Director refreshment in the last year.

Governance at UPS has improved in the last year. The Board split the Chief Executive Officer and Chairman roles following Carol Tomé becoming CEO in June 2020. Bill Johnson (72), who was Lead Independent Director since 2016, became Chairman. He is the former Chairman, President, and CEO of H.J. Heinz, we note that he has been on UPS’ Board since 2009. Refreshment has been a major theme across the 13 Directors in the last two years with 5 new Directors since 2020

CEO and Executive Team Rankings & Studies

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Axiomatic Data aggregates plan level Form 5500 filings to create a consistent, high quality, point-in time database of company level benefits information. Form 5500 Filings are a disclosure tool used to satisfy annual reporting requirements by public and private companies in the U.S. for employee benefit plans under ERISA and the Internal Revenue Code. These employee benefit filings cover both pension and welfare plan benefits.

ThriveScores leverage data from Form 5500 filings to create a new metric that measures recent corporate growth and provides insight into the future growth, given the stage of their corporate lifecycle. Axiomatic ThriveScore: The primary data attributes that go into building ThriveScores are 1, 2 and 3 year growth rates of employees, active pension participants, employer and employee contributions, per-participant employer and employee contribution to pension plans. The ThriveScores are created for 2015-2020 given that 4 years of data is needed to get 3 years of growth rates. Table1 below shows the specific components of the ThriveScore:

Stock & ETF Research, Valuations, Recommendations

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Axiomatic Data aggregates plan level Form 5500 filings to create a consistent, high quality, point-in time database of company level benefits information. Form 5500 Filings are a disclosure tool used to satisfy annual reporting requirements by public and private companies in the U.S. for employee benefit plans under ERISA and the Internal Revenue Code. These employee benefit filings cover both pension and welfare plan benefits.

ThriveScores leverage data from Form 5500 filings to create a new metric that measures recent corporate growth and provides insight into the future growth, given the stage of their corporate lifecycle. Axiomatic ThriveScore: The primary data attributes that go into building ThriveScores are 1, 2 and 3 year growth rates of employees, active pension participants, employer and employee contributions, per-participant employer and employee contribution to pension plans. The ThriveScores are created for 2015-2020 given that 4 years of data is needed to get 3 years of growth rates. Table1 below shows the specific components of the ThriveScore:

Employee Benefits Data for 100,000 Companies

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Axiomatic Data aggregates plan level Form 5500 filings to create a consistent, high quality, point-in time database of company level benefits information. Form 5500 Filings are a disclosure tool used to satisfy annual reporting requirements by public and private companies in the U.S. for employee benefit plans under ERISA and the Internal Revenue Code. These employee benefit filings cover both pension and welfare plan benefits.

ThriveScores leverage data from Form 5500 filings to create a new metric that measures recent corporate growth and provides insight into the future growth, given the stage of their corporate lifecycle. Axiomatic ThriveScore: The primary data attributes that go into building ThriveScores are 1, 2 and 3 year growth rates of employees, active pension participants, employer and employee contributions, per-participant employer and employee contribution to pension plans. The ThriveScores are created for 2015-2020 given that 4 years of data is needed to get 3 years of growth rates. Table1 below shows the specific components of the ThriveScore:

Axiomatic Data Creates and Releases ThriveScores™

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New York, NY February 11, 2021 – Axiomatic Data, the Form 5500 Information Company, announced today the creation and release of ThriveScores™ to its database covering over 650,000 US public and private companies. Using information extracted from Form

5500 filings, Axiomatic Data has developed a scoring methodology that predicts corporate growth, or likelihood to thrive, across the vast majority of US companies.

ThriveScores can be used as a measure of financial health for all US companies and as an investment signal for US public companies.

The Form 5500 series is a compliance, research, and disclosure tool for US employee benefit plans. The Department of Labor has mandated that a Form 5500 must be filed for welfare benefit plans by companies with over 100 employees and for all retirement plans such as 401Ks. Axiomatic Data aggregates, harmonizes, and normalizes several million Form 5500 filings annually to create an accurate, robust database serving multiple use cases.

“Customers asked if we could make stock price performance and financial health predictions based upon changes in employment and corporate benefits reported in Form 5500 filings. ThriveScores do just that,” said Steve Goldstein, a partner at Axiomatic Data. “We’ve developed algorithms that capsulize these changes and deliver this information in ThriveScores.”

“We analyzed the last 4 years of Axiomatic Data’s ThriveScores and found that Russell 3000 companies with higher ThriveScores outperform companies with lower ThriveScores,” said Larry Green, President of SmartMarketData, LLC, an alternative data analytics firm. “The data was compelling, and we’ve published a white paper that summarizes our findings.”

The ThriveScores algorithms incorporate changes in employment and employer contributions to employee benefit plans, among other attributes, from Form 5500. The SmartMarketData white paper can be downloaded here.