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«Applied Investment Management (AIM) Program AIM Class of 2015 Equity Fund Reports Spring 2015 Date: January 30, 2015 | Time: 3:00 - 5:30 p.m. | ...»

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Applied Investment Management (AIM) Program

AIM Class of 2015 Equity Fund Reports

Spring 2015

Date: January 30, 2015 | Time: 3:00 - 5:30 p.m. | Location: AIM Research Room (488)

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Student Presenter Company Name Ticker Price Page No.

Austin Wilson GAMCO Investors, Inc. GBL $83.56 2 Mariano Sanz Marine Harvest ASA MHG $12.94 5 Jiajun Zhou Avolon Holdings Ltd. AVOL $19.10 8 Mitchell Swirth The Greenbrier Companies, Inc. GBX $54.40 11 Anne Wiesman Ashford Hospitality Trust, Inc. AHT $10.77 14 15 Minute Break Mark Messier Federated National Holding Co. FNHC $28.06 17 James Stark Cerus Corporartion (CERS) CERS $5.52 20 Zhe Wang Ping An Insurance Company of China, Ltd. PNGAY $22.43 23 Joe Simonelli Atlas Financial Holdings, Inc. AFH $16.68 26 These student presentations are an important element of the applied learning experience in the AIM program. The students conduct fundamental equity research and present their recommendations in written and oral format – with the goal of adding their stock to the AIM Equity Fund. Your comments and advice add considerably to their educational experience and is greatly appreciated. Each student will spend about 5-7 minutes presenting their formal recommendation, which is then followed by about 8-10 minutes of Q & A.

David S. Krause, PhD Director, Applied Investment Management Program Marquette University College of Business Administration, Department of Finance 436 Straz Hall, PO Box 1881 Milwaukee, WI 53201-1881 mailto: AIM@marquette.edu Website: MarquetteBuz/AIM AIM Blog: AIM Program Blog Twitter: Marquette AIM Facebook: Marquette AIM Marquette University AIM Class 2015 Equity Reports Spring 2015 Page 1 GAMCO Investors, Inc. (GBL) January 30, 2015 Austin Wilson Financial Services GAMCO Investors, Inc. (NYSE: GBL) is an asset management and financial services company based in the U.S. The company offers a range of mutual funds including open-ended funds, closed-ended funds and undertakings for collective investments funds. In addition, it offers annuities, investment advisory services, asset management services, brokerage services and private wealth management services. GBL’s revenues are based primarily on the firm’s levels of assets under management (“AuM”) and to a lesser extent, incentive fees associated with its various investment products, as well as revenues from institutional services. GAMCO serves under brand names such as TETON Westwood, Gabelli, GAMCO and Comstock. GAMCO operates through its subsidiaries and branch offices in North America, Europe and Asia. GAMCO is headquartered in Rye, New York, U.S.

Recommendation In 2014, GBL reported revenue of $431.6 million (a 12.8% YoY increase), a rise in serviceable AuM by 29.1%, and an operating margin of 46.9%, which represented a decrease of 109 bps from the previous year. Despite projected weakening operating margins in the future due to competition from ETF’s and other passive management strategies, GBL seeks to expand its AuM as the market supply of serviceable AuM is expected to increase in forward years (a projected increase of 5.7% YoY to $30 trillion by 2020).

While GBL classifies its business operations into one reportable division, Advisory and Asset Management Business, it categorizes its AuM into four categories: Investment Partnerships (1.7% of AuM), Institutional and Private Wealth Management (43.3% of AuM), Open and Closed-End Funds (54.8% of AuM), and SICAV (0.28% of AuM). Because GBL derives the majority of its revenues (98.1%) from fee-based commissions, GBL faces the opportunity to substantially increase its profits as its AuM grows. Low-fee, scale-driven products have fueled advisory consolidation over the past several years and as GBL continues to grow in AuM (29.1% YoY to 47.0B 2014), GBL will experience cost and distribution leverage which will effectively combat investor inflows to ETF’s and passive management strategies. As a result of GBL’s expanding scalable AuM, a strong balance sheet poised for acquisitions, in combination with a favorable valuation, it is recommended that GBL be added to the AIM Equity Fund with a target price of $100.53, representing over a 20% upside. The firm pays a small dividend.

Investment Thesis  Growth in a Scalable Industry. GBL registered a strong growth (29.1% CAGR) in total AuM ($47.0B) in FY2014, showcasing the confidence of new clients investing in GBL’s business model. Growing AuM demonstrates an opportunity for GBL to maintain its current cost structure while charging additional fees for new AuM, thus increasing margins. With GBL exhibiting consistent uptrends in AuM over the past five years (15.6% CAGR 2009-2013 and 29.1% in 2014), and consensus estimating that by 2020, pension fund assets in North America will rise by 5.7% a year to $30 trillion (from $19.3 trillion in 2012), GBL is firmly positioned to attract new serviceable AuM.

Marquette University AIM Class 2015 Equity Reports Spring 2015 Page 2  Attractive Industry Valuations. The blended forward P/E ratio of the Bloomberg Intelligence small cap asset manager group was 22.33x at the end of 2014, 18% below the 26.34x it was at the end of 2013. Coupled with competition from ETF’s, industry valuations declined in 2014 even as blended forward-EPS forecasts rose 10% (GBL: 13.4%). With equity fund inflows exceeding those of fixed income in 2014, following their first year of inflows (2013) since the 2008-09 financial crisis, these valuation declines represent a mispricing in the markets that more than offset 2014 weakening, as multiples are well below the long-term 26x average which present an optimal buying opportunity in an expanding market.

 Balance in Accelerating Consolidation. As U.S.-based investment advice continues to move toward a fee-based model, fund mergers have reduced the number of funds, with 49% fewer in the markets since 1999. As consolidation and M&A activity increases (62% growth in M&A volume in 2014), Mario Gabelli, the CEO of GBL, has stated that it is GBL’s top priority to fund acquisitions that can increase the firm’s AuM. In 2014, GBL increased liquid cash equivalents to $253.9 million in 2014 (14.1% YoY), while simultaneously reducing a substantial amount of its debt (repaid $99 million of notes reducing total debt to $115.9 million) thus enabling GBL to be competitive in the M&A market moving forward.

Valuation To find the intrinsic value of GBL, a discounted cash flow model was used, as well as a price-to-book multiple. The discounted cash flow model used a cost of equity of 10.25% and a long-term growth rate of 1.5%, which resulted in an intrinsic value of $91.42. The 5-year average historic price-to-book for GBL was 3.10x with the market cap weighted average being 3.80x. Weighting the historic average by 30% and the market cap average at 70%, the P/B yielded an intrinsic value of $106.60. Weighting these valuations 40/60 respectively, the final estimated intrinsic value of GBL is $100.53, which provides an upside of 20.3%. GBL paid a $.28 dividend/share in 2014.

Risks  Highly Regulated Asset Management Industry. Changes in laws or regulations or in governmental policies and compliance with existing laws or regulations could limit the sources and amounts of GBL’s revenues, increase the costs of doing business, decrease profitability and materially and adversely affect the business.

 Deterioration in Fee Income. The investment management business is highly competitive and has relatively low barriers to entry. To the extent GBL is forced to compete on the basis of price, it may not be able to maintain its current fee structure. Although GBL’s investment management fees vary from product to product, historically, it has competed primarily on the performance of its products and not on the level of its investment management fees relative to those of its competitors. In recent years, however, there has been a sustained trend toward lower fees in the investment management industry.

Management Mario J. Gabelli is the Chairman and Chief Executive Officer of GAMCO Investors, Inc., the firm he founded in 1977. A 1965 summa cum laude graduate of Fordham University's College of Business Administration, he also holds an M.B.A. from Columbia University Graduate School of Business, and honorary doctorates from Fordham University and Roger Williams University. He was Morningstar's Portfolio Manager of the Year in 1997 and was named Money Manager of the Year by Institutional Investor for 2011 and is a member of Barron's All Star Century Team. Additionally, Mr. Gabelli serves on the Boards of Boston College, Roger Williams University, Columbia University Graduate School of Business, the American-Italian Cancer Foundation, the Foundation for Italian Art & Culture and is a Trustee of the Winston Churchill Foundation of the United States and of the E.L. Wiegand Foundation.

–  –  –

Marine Harvest ASA, (NYSE: MHG) is a seafood company that produces and sells farmed salmon products worldwide. The company provides farm raised salmon and processed seafood to more than 50 markets. The company conducts its core fish farming operations in Norway, Scotland, Canada, Chile and Ireland. Furthermore, the firm engages in the secondary processing of salmon to prepare products such as fillets and smoked salmon. The company employs 10,200 people and is represented in 22 countries.

The company was founded in 1965 and is headquartered in Bergen, Norway.

Price ($): (01/26/2015) $ 12.94 Beta: 0.85 FY: August 2013A 2014E 2015E Price Target ($): $ 16.51 WACC 7.85% Revenue (Mil) $3,268.80 $4,226.97 $4,627.22 52WK H-L ($): 15.53-10.37 L-Term Rev. Gr Rate Est: 5.4% % Growth 22.92% 29.31% 9.47% Market Cap: 5.48B L-Term EPS Gr Rate Est: 7.8% Gross Margin 47.92% 48.37% 49.12% Float (mil): 284.4 Debt/Equity: 56.08% Operating Margin 16.57% 20.20% 21.50% Short Interest (%): N/A ROA: 8.82% EPS (Cal) $ 1.13 $ 1.46 $ 1.70 Avg. Daily Vol: 105,203 ROE: 15.50% FCF/Share $ 0.79 $ 1.14 $ 1.33 Dividend ($): $ 0.67 P/E (Cal) 21.44 14.71 10.32 Yield (%): 4.70% EV/EBITDA 9.71 9.36 7.04 Recommendation Marine Harvest ASA is one of the largest seafood companies in the world - and is the world’s top producer of Atlantic salmon. During the last decade, the company has become the leader in the salmon industry with an estimated market share of 30% of the global market for salmon.

Marine Harvest has a key competitive advantage over its competitors by operating farming facilities in all of the world’s major salmon abounded areas. MHG accounts for the largest total production of salmon, holding about 25% of the quantity in Norway and about one-third of the market in North America and the United Kingdom. Since 2012, management has transformed the company from a product-driven fish farming company into an integrated marine protein producer by expanding into fish feed and expanding its secondary processing operations. To increase the company’s secondary production capacity, Marine Harvest acquired Morpol in 2013, which was the world’s leading value-added producer of salmon. In addition, in 4Q2014, the company also expanded its operations in Chile by acquiring the assets of the Chilean farming company, Acuinova Chile S.A. The acquired assets have a capacity to produce about 40,000 tonnes per annum, which represents an opportunity to increase their Chilean harvest production by 66%.

Furthermore, in June 2014, the company started its first fish production facility. Because of these reasons and a favorable valuation, it is recommended that Marine Harvest be added to the AIM International Fund with a target price of $16.51, representing a potential upside of over 28%. The company offers a dividend of $0.67, which represents a yield of 4.70%.

Investment Thesis  Organic Growth in Salmon Consumption. Although 70% of the world’s surface is covered by water, only 6.5% of the protein sources for human consumption is derived from sea animals. According to the World Bank, it is projected that global fish consumption will increase from 15.50 kg per capita in 2000 to 18.20 kg per capita in

2020. Atlantic salmon production has increased at a CAGR of 11% from 2004 to 2014, yet it currently accounts for only 4.2% of the global seafood supply. A trend that has helped increase salmon consumption and will continue doing so in the future is that Atlantic salmon has the highest level of industrialization and the lowest level of risk amongst other aquaculture products. Due to the company’s ample excess capacity in their Marquette University AIM Class 2015 Equity Reports Spring 2015 Page 5 production facilities, management estimates that the company will be able to grow revenue at a CAGR of over 6% for the next five years.

 Upstream and Downstream Integration. Marine Harvest opened its first salmon feed production facility in Norway in 2014. This facility has the potential to produce 220,000 metric tons of feed plant by 2015. This represents 40% of the company’s global feed fish needs, which the company previously bought from other suppliers. Salmon feed is the main operating cost for the company and management’s goal is to become the leader in salmon feed production over the next 10 years. In addition, the acquisition of Morpol has been successfully integrated into Marine Harvest’s operations. As a result of the recent expansion opportunities taken by management, the company has succeeded in vertically integrating its operations. Synergies from these actions will allow the company to improve operating margin by 280 bps in the next five years.

 Emerging Market Expansion. Per capita consumption of fish is expected to grow faster in regions with highest projected income growth, such as China and India. Salmon consumption in Asia has grown at a CAGR of 11% from 2004 to 2014. The company has five secondary production plants operating in Asia and currently MHG has 50% of the market share in salmon fillets in Asia. Further penetration in this market would allow the company to grow volume sales around 13% in this region.

Valuation In order to reach an intrinsic value for MHG a 5 year discounted cash flow model was conducted using a terminal growth rate of 2% and a WACC of 7.85%. This resulted in a valuation of $17.09. Sensitivity analysis of both the terminal growth rate and WACC provided for a range between $11.30 and $19.22.

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