As PNIN appeared in the US Momentum list generated by Ed Croft yesterday, I have pasted in a commentary/justification by Silver Ring Value Partners, who appear to have added this stock to their portfolio in early May/late April:
Phinia (PHIN US)
Phinia was a spin-off from BorgWarner (BWA) and consists of that company’s fuel systems and
after-market businesses. What attracted me to do further work was the language that management
used on their calls. For example, here is what the CEO said on a recent call about executive
compensation:
“... we are managing the business with a laser focus on generating economic value, or EV, and free
cash flow. The 2024 annual cash incentive will be based on the company's achievement of two
equally weighted performance metrics; EV and free cash flow. This program sends a clear message
throughout our organization that investment decisions are made through the lens of earning an
adequate return on capital. Our 2024 long-term equity incentive will be solely based on the
company's relative total shareholder returns compared to that of a peer group company.”
Early in my career I used to think that incentives at public companies primarily serve to drive
behavior. While that might still be true to a degree, my experience has led me to believe that they
primarily reflect management’s values and integrity. In theory the Board is independent and sets
incentives. In practice, often-times it’s the CEO who chooses how he or she will get compensated
with a rubber stamp from the usual compensation consultants and the Board.
To have a CEO choose to be compensated on Economic Value Added and free cash flow reflects
that this person is thinking about capital allocation in a way that aligns with my views. Since EVA is
reduced by the cost of capital used, someone choosing to get paid this way is putting his wallet on
the line that he thinks he will deploy shareholders’ capital wisely rather than throw it away on
exciting but uneconomical acquisitions.
Further work led me to realize that half of the company’s profits come from the aftermarket
business which is much less impacted by the transition from internal combustion engine (ICE)
vehicles to EVs. Of the other half, a minority of profits is from commercial vehicles which are much
less impacted by the EV transition for the time being. While the fuel systems business is under
secular…
