A Closer Look Inside Solus

 | Nov 08, 2012 | 3:30 PM EST  | Comments
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Solus Alternative Asset Management filed its 13F with the Securities and Exchange Commission last month, publicly disclosing some of the long positions it had in its portfolio at the end of September. These filings provide investors with the most comprehensive look at what hedge funds and other notable investors own at a certain time, even if we must wait several weeks before seeing their positions. We track a number of funds, and so were able to review what Solus, managed by Christopher Pucillo, disclosed in its filing. Two of its positions had considerably larger market values than the rest of the stocks in its portfolio (you can research Solus' filings here).

The fund's largest 13F position by market value is 1.6 million shares of Loral Space & Communications (LORL), a $2.4 billion market cap company that designs satellites and space systems and, obviously, has a substantial communications business. The stock trades at 20x trailing earnings (based on historical results, Loral's earnings seem to be volatile). Revenue in the third quarter of 2012 was down 17% from the same period in 2011. Loral Space & Communications is also one of Mark Rachesky's favorite stocks; Rachesky, an activist investor, used to work for Carl Icahn but founded MHR Fund Management in 1996. At the end of June, MHR owned 8.1 million shares of Loral Space & Communications, making the company its second-largest holding by market value (see more of MHR's favorite stocks). Loral has recently announced plans to return $27 per share in cash to its shareholders following its sale of a business unit.

Visteon Corp. (VC) was the other of Solus' large positions, with the fund reporting a position of 2.2 million shares. Visteon is an auto parts company, and therefore is exposed to the struggling -- though, in the eyes of some investors, undervalued -- auto industry. It focuses on climate and electronics systems, and is one of activist JANA Partners' picks, with that fund increasing its stake by 67% during the second quarter (find more stock picks from Barry Rosenstein's JANA Partners). As an auto-related company, it's no surprise that statistically it tends to be highly exposed to the broader market (with a beta of 2.4), or that the stock is down 10% in the last year. It is a surprise, however, to see how highly valued Visteon is relative to its earnings: the trailing price-to-earnings multiple is quite high, and even with an optimistic outlook from the sell-side, it trades at 13x consensus earnings estimates for 2013. Automakers such as Ford (F) and GM (GM), as well as other auto parts companies such as Goodyear (GT), carry considerably lower multiples.

We'd understand this premium if Visteon's business was performing well, but it doesn't seem to be. In the third quarter, revenue declined 15% from a year earlier and this pushed its net income down 63%. While the forward PE looks good, we think the company only hits those numbers in the event of an auto recovery, which would also benefit many companies selling at better pricing.

We believe it's important to present these picks to investors, but we wouldn't recommend either for a value portfolio. There are a number of better values in the auto theme than Visteon. Though Loral may be worth revisiting after the special situation at the business related to its distribution of cash to shareholders has settled, it trades at a high multiple.

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