Pension Plan in Valuation

[Palantir]

So I'm looking at a firm called Innophos (IPHS), they run both DB and DC plans. Since DC plans are not a liability, I focus on the DB plans. Their US DB plan is underfunded by 1.1B and the Canada DB plan is overfunded by 1.7B. So we get a net asset of 600M....

 

May I back that 600M out of the market cap to get EV the way you back out Cash? That's what I've been doing, but it's such a big number relative to market cap, makes me wonder.....

[Palantir]

bump

[Hielko]

In theory yes, but you would need to take a look at their return assumptions and discount rates to see if you agree with the size of the accounting liability.

[LC]

I think it depends on what the investment thesis is too. If you're saying the company is undervalued on an asset basis then I would consider it an asset. But if you're looking at a compounding machine or if the thesis hinges on the company's earnings, I'm not sure it plays a huge role. 

 

Also consider the company's competitors. Do they have pension liabilities? How does the funded status of each compare?

[Palantir]

Why would it be different for a compounder? Even with a compounder, you still back out Net Cash from the EV right? So...why can you not do that with the Pension Plan, as it is a debt of sorts...

[LC]

Well, assuming you agree with the pension assumptions and there truly is an overfunded situation, then yes you back it out if you want to do EBITDA/EV type analysis.

 

(When I look at compounding investments I try to look at FCF on it's own and then form a qualitative view of the economics of the business (i.e. the moat, if any). I only look at EV or BV to form an opinion on how much capital investments are necessary, how much capital was put into the business in the past and how those past investments have ended up in the current EV.)

[G2]

Would you mind sharing your current thesis on the name and how the net pension asset relates to it?

 

I'm not familiar with the co or its prospects and only looked quickly at its recent 10-K with a focus on note 14 on pp 57-64.

 

http://www.sec.gov/Archives/edgar/data/1364099/000136409913000005/iphs10k123112.htm#sDE3B1E125AE9F0082B9151FA9A9A4D38

 

The weighted discount rate seems to have ranged between 5.25% and 4% between 2010-12 and decreasing over time.

 

Their expected rate of return is stated at 6.35% for 2012 and the breakdown in investments is 60% fixed income and 40% equity.  The breakdown was 80% equity and 20% fixed income in 2011. (page 60)

 

On the same page, do you understand the difference in discount rates for the "weighted average assumptions for balance sheet liabilities" and the "weighted average net periodic benefit cost"?  The former seems to be decreasing will the latter increases over time but I don't fully understand what that might mean or implies.

 

Are you basing the valuation on the net pension being a hidden asset which creates an 11%+ FCF/EV yield where FCF equals CFO less maint capex (and excludes business acquisitions) and EV is adjusted for the pension.  The same FCF and EV not adjusted for the pension asset creates a 6% FCF yield by comparison.

 

Is that what you are looking to evaluate?

[Palantir]

Ha, I'm looking at this for an interview. No...I don't understand the diff between the two discount  rates either..