David Abrams Drills Into Energy Transfer in 3rd Quarter

Guru also reveals real-time reduction of Sculptor Capital Management stake

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Nov 24, 2020
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David Abrams (Trades, Portfolio), the leader of Abrams Capital Management, disclosed his third-quarter portfolio earlier this month.

The former Seth Klarman (Trades, Portfolio) protégé follows a fundamental, value-oriented approach to stock picking, investing in a fairly concentrated number of stocks. His Boston-based firm searches for long-term opportunities among a wide variety of asset types in both foreign and domestic markets. He also prefers companies in which the CEO has a significant stake, or where the CEO's salary is primarily stock-based.

Keeping these criteria in mind, the guru increased his Energy Transfer LP (ET, Financial) stake by 63.55%, sold out of Pacific Drilling SA (PACDQ, Financial) and curbed his holdings of Franklin Resources Inc. (BEN, Financial), Camping World Holdings Inc. (CWH, Financial) and Sculptor Capital Management Inc. (SCU, Financial).

Energy Transfer

With an impact of 1.47% on the equity portfolio, Abrams boosted his stake in Energy Transfer by 63.55%, buying 8.59 million shares. The stock traded for an average price of $6.36 per share during the quarter.

He now holds 22.12 million shares total, representing 3.79% of the equity portfolio. GuruFocus estimates Abrams has lost 27.12% on the investment so far.

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The Dallas-based midstream energy company has a $17.83 billion market cap; its shares were trading around $6.64 on Tuesday with a price-book ratio of 0.98 and a price-sales ratio of 0.41.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 8 out of 10 is also indicative of undervaluation.

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GuruFocus rated Energy Transfer's financial strength 3 out of 10. As a result of issuing approximately $1.8 billion in new long-term debt over the past three years, the company has weak interest coverage. The low Altman Z-Score of 0.72 also warns the company could be in danger of going bankrupt if it does not improve its liquidity. The weighted average cost of capital also surpasses the return on invested capital, indicating good value creation.

The company's profitability fared a bit better with a 6 out of 10 rating. While the operating margin is expanding, Energy Transfer's returns are negative but outperform over half of their competitors. The company also has a moderate Piotroski F-Score of 4, which suggests business conditions are stable, and a business predictability rank of one out of five stars that is on watch as a result of revenue per share declining over the past five years. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Energy Transfer, Abrams is the company's largest guru shareholder with 0.82% of outstanding shares. David Tepper (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), George Soros (Trades, Portfolio), Bruce Berkowitz (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Alan Fournier (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) also own the stock.

Pacific Drilling

Impacting the equity portfolio by -0.01%, the guru sold his 406,076 remaining shares of Pacific Drilling. During the quarter, shares traded for an average price of 35 cents each.

According to GuruFocus data, he lost an estimated 99.96% on the investment.

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The offshore drilling company, which is headquartered in Luxembourg, filed for Chapter 11 bankruptcy in early November. The company has a market cap of $2.46 million; its shares were trading around 3 cents on Tuesday with a price-sales ratio of 0.01, which GuruFocus noted are close to 10-year lows.

According to the median price-sales chart, the stock is trading on par with its historical value.

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In addition to a low cash-to-debt ratio of 0.19, Pacific Drilling is weighed down by a low Altman Z-Score of -1.6. The recent bankruptcy filing was issued in an effort to restructure $1.1 billion in bond debt. This marks the second time in three years the company has filed for Chapter 11.

The company also has negative margins and returns that are underperforming a majority of industry peers, a low Piotroski F-Score of 3 that indicates operating conditions are in poor shape and has recorded a decline in revenue per share over the past three years.

No gurus currently hold the stock.

Franklin Resources

The investor trimmed his Franklin Resources position by 15.58%, selling 1.5 million shares. The transaction had an impact of -1.03% on the equity portfolio. The stock traded for an average per-share price of $21 during the quarter.

Abrams now holds 8.2 million shares total, accounting for 5.28% of the equity portfolio and is his 10-largest holding. GuruFocus data shows he has lost an estimated 40.88% on the investment since the fourth quarter of 2015.

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The San Mateo, California-based investment management company has a $10.81 billion market cap; its shares were trading around $21.80 on Tuesday with a price-earnings ratio of 13.73, a price-book ratio of 1.07 and a price-sales ratio of 1.89.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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Franklin Resources' financial strength and profitability were both rated 7 out of 10 by GuruFocus. In addition to a comfortable level of interest coverage, the company is supported by a high Altman Z-Score of 3.44, which indicates it is in good standing. The ROIC also eclipses the WACC, indicating good value creation.

Although the operating and gross margins are in decline, Franklin Resources is supported by strong returns that outperform a majority of competitors. It also has a moderate Piotroski F-Score of 4, but the one-star predictability rank is on watch as a result of declining revenue per share over the past five years.

With a 1.66% stake, Abrams is the company's largest guru shareholder. Other guru investors are the T Rowe Price Equity Income Fund (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Pioneer, Jim Simons (Trades, Portfolio)' Renaissance Technologies, Michael Price (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Bernard Horn (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio).

Camping World

After several quarters of inactivity, Abrams curbed his Camping World stake by 16.37%, selling 1 million shares. The transaction had an impact of -0.88% on the equity portfolio. The stock traded for an average price of $32.53 per share during the quarter.

He now holds 5.1 million shares, which make up 4.80% of the equity portfolio. GuruFocus data shows Abrams has gained approximately 83.37% on the investment.

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Headquartered in Lincolnshire, Illinois, the company, which manufactures and sells recreational vehicles, has a market cap of $2.79 billion; its shares were trading around $31.33 on Tuesday with a price-earnings ratio of 16.8, a price-book ratio of 44.8 and a price-sales ratio of 0.28.

The Peter Lynch chart suggests the stock is overvalued.

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GuruFocus rated Camping World's financial strength 4 out of 10. As a result of issuing approximately $62.5 million in new long-term debt over the past three years, the company has inadequate interest coverage. The Altman Z-Score of 2.66 also indicates it is under some pressure currently due to losses in operating income over the past three years. The WACC also surpasses the ROIC, meaning value is being destroyed.

The company's profitability fared a bit better with a 7 out of 10 rating, driven by an expanding operating margin, returns that outperform over half of its industry peers and a high Piotroski F-Score of 7, which implies business conditions are healthy.

Camping World's largest guru shareholder is Abrams, who holds a 5.76% stake. Simons' firm, Chuck Royce (Trades, Portfolio) and Greenblatt also own the stock.

Sculptor Capital Management

After slimming the Sculptor Capital Management holding by 22.72% during the second quarter, GuruFocus Real-Time Picks, a Premium feature, reported the guru reduced the investment by an additional 29.62% on Nov. 18.

With an impact of -0.21% on the equity portfolio, Abrams sold 471,333 shares. Shares traded for an average price of $14.10 each on the day of the transaction.

He now holds 1.11 million shares total, which represent 0.50% of the equity portfolio. GuruFocus data shows he has gained an estimated 232.32% on the investment so far.

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The alternative asset management company based in New York has an $825.48 million market cap; its shares were trading around $14.97 on Tuesday with a price-sales ratio of 1.22.

According to the median price-sales chart, the stock is undervalued. The GuruFocus valuation rank of 7 out of 10 also leans toward undervaluation.

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Weighed down by poor interest coverage and an extremely low Altman Z-Score of 0.32, GuruFocus rated Sculptor's financial strength 4 out of 10. The ROIC is above the WACC, however, suggesting good value creation.

The company's profitability scored a 6 out of 10 rating. Although the operating and gross margins are in decline, the former still outperforms over half of its competitors. Sculptor also has a strong return on assets, a high Piotroski F-Score of 8 and a one-star predictability rank that is on watch as a result of revenue per share declining over the past five years.

Abrams is the only guru invested in the stock with a 2.02% stake.

Portfolio composition

Abrams did not make any other changes to his portfolio during the quarter.

Nearly 30% of the guru's $3.16 billion equity portfolio, which is composed of 19 stocks, is invested in the consumer cyclical sector, followed by smaller representations in the communication services (16.87%) and industrials (14.42%) spaces.

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Disclosure: No positions.

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