Among the top institutional owners of engineering and construction firm URS Corp (NYSE:URS) are several hedge fund managers with an activist bent, such as Barry Rosenstein of JANA Partners, Larry Robbins of Glenview Capital Management, David Einhorn of Greenlight Capital, Clifton Robbins of Blue Harbour and Steven B. Klinsky of New Mountain Capital, most of whose stakes have increased during 4Q13.
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Last September, URS Corp (NYSE:URS) laid out plans to return $500M to shareholders by the end of 2015 through stock buybacks and dividends, funded internally from its free cash flow. More importantly, the company does not plan any major acquisitions over the next two years, which had been the largest use of its cash flow in the past (it has completed approximately $2B of acquisitions since the beginning of 2010). Coincidentally, this announcement came during a quarter in which several hedge funds purchased large amounts of the stock during the quarter. Assuming roughly $60M of annual dividend payments, its capital plan would imply share repurchases of $380M (or 11% of its market cap). Since the vast majority of the buybacks ($350M) will be completed in 2014, the impact to 2015 EPS should be maximized (at least $0.50 accretive, based on our estimate). URS does have $690M of debt maturing in Oct. 2016, which could decrease the amount of capital return to shareholders in that year but, as this debt is related to a credit facility (which tends to be maintained / refinanced for liquidity purposes rather than completely paid off), assuming URS’s business does not fall off a cliff, its cash flow generation and share repurchases should not deviate too much after 2015.
Following the company’s mid-February pre-announcement of disappointing 4Q13 results and lower-than-consensus 2014 guidance, due to execution issues in its Oil & Gas Division and project delays stemming from lower natural gas prices / pipeline capacity, the stock dropped 14% the next day and is down 12% YTD. With market expectations reset lower, URS has been setup for a rebound if it can demonstrate improved EPS through higher share repurchases. Its free cash flow yield of 8.5% is double the level of peers but, as its capital allocation changes to one focused on returning cash to shareholders rather than growing through acquisitions, this disparity should narrow (a peer-like yield would imply a stock price more than double its current level). Any developments on increased ownership by activist investors, either new or existing, would also act as a positive catalyst.
After the market close on February 27, 2014, JANA Partners disclosed in a 13D filing that it increased its position by roughly 100,000 shares (for a 9.7% stake in the company) and will be taking on an activist role, with plans to increase shareholder value by discussing with management possible changes to its board, management, capital / corporate structure and other matters.
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