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A Look At Atlantic Investment Management’s Potential Activist Targets

Alexander J. Roepers founded Atlantic Investment Management in 1988 as a long/short hedge fund. Atlantic Investment uses fundamental analysis with a bottom-up stock picking approach and is also known for its activist efforts. The fund’s management keeps a concentrated portfolio and tends to buy large stakes, up to 7%, in mid-cap stocks. Since Atlantic Investment is among the most prominent activist investors, we have analyzed their latest 13F filing in search for clues regarding potential activist plays. Let’s have a look.

Alexander Roepers, Atlantic Investment Management

One of the stocks that caught our attention is NCR Corporation (NYSE:NCR), a new addition to Atlantic’s equity portfolio. Over the course of the 2017 fourth quarter, Roepers and his team have bought 117,631 shares of the tech company, as reported in Atlantic’s latest 13F filing. Glenn W. Welling’s Engaged Capital, another activist hedge fund, has also been buying NCR shares. The fund’s latest regulatory filings show a 235% increase in its holding of NCR stock to 351,467 shares. According to Insider Monkey’s database, NCR Corporation registered a boost in popularity among hedge funds, with 27 of them having reported a stake in the company at the end of 2017, up from 23 registered in the previous quarter.

Industry & Stock Performance

The IT services industry has been one of the fastest growing industries in the United States in the past twelve months, having surged by approximately 28.6%, while the S&P500 index is up by just 15.9% during the same period of time. NCR Corporation (NYSE:NCR), on the other hand, has been losing value, with shares currently down by 32% trailing twelve months. By comparison, industry-leader International Business Machines Corp. (NYSE:IBM) fell by 12.7%, while another of NCR’s competitor, Unisys Corporation (NYSE:UIS) lost 19.3% of its value during the same period of time.


One of the reasons behind the poor performance of NCR Corporation (NYSE:NCR) stock is the lack of growth in revenue. Over the past five years, the company’s revenues have been stagnant, oscillating between $6.1 billion and $6.6 billion without any clear trend. In order to keep up with the constantly evolving world of payment services, NCR Corporation has been busy trying to keep up with the latest trends. The company is trying to reinvent itself as a provider of diversified payment services and a major player in the cloud business, shifting away from its legacy as a manufacturer of cash-register. While its cloud and services businesses have been driving sales higher, the hardware segment continues to cause headaches.

Roepers and Atlantic Investment Management have also added to their position in ARRIS International plc (NASDAQ:ARRS), a provider of communications equipment for media and entertainment companies. Atlantic had its stake increased by 14% to 4.49 million shares, making ARRIS its third-largest equity position. Ricky Sandler’s Eminence Capital, also an activist investor, dumped 56% of its stake during the fourth quarter, reducing its holding to 4.36 million shares. Hedge fund sentiment towards ARRIS International did not change significantly, with the number of funds invested in the company having inched up to 30 at the end of December 2017, from 29 at the end of September.

Industry & Stock Performance

Communication Equipment industry ended 2017 on a bullish note and has pushed on higher despite the recent market sell-off. According to data from Fidelity, the industry is up 29.5% for the past twelve months, almost double the S&P500’s 15.9% rise. It’s also interesting to note that the industry index has already surpassed the peak that preceded the sell-off. ARRIS International plc (NASDAQ:ARRS) stock is significantly behind the industry average, currently flat trailing twelve months. By comparison, direct competitors are doing somewhat better, but still lagging the broader industry index. NetGear Inc. (NASDAQ:NTGR) is currently up by 5.3%, while Echostar Corporation (NASDAQ:SATS) stock has appreciated by 10.4% since February 2017.


So, the next logical step is to find out why ARRIS International plc (NASDAQ:ARRS) stock has been going nowhere. The company’s financial reports offer us some clues. In the past five years, the company has managed to grow its revenue through both organic growth and acquisitions. ARRIS International’s most recent acquisitions include the Ruckus Wireless division acquired from Broadcom Ltd (NASDAQ:AVGO) in 2017 and the British Pace PLC, bought in 2016. On the other hand, the company’s management failed to keep costs under control, as margins deteriorated significantly. Operating margin fell from 6.41% in 2014 to 1.62% in 2016 and increased slightly in 2017 to 1.88%, while net margins plummeted from 6.15% in 2014 to 0.27% in 2016 and then rose to 1.4% in 2017.

Disclosure: none.