A Quality Exec Comp Plan Lowers The Risk Of Investing In BWX Technologies


Reflection of a stock trader viewing the performance of a company share price on screen


Recap from Septemberā€™s Picks

The Exec Comp Aligned with ROIC Model Portfolio (+3.3%) performed in-line with the S&P 500 (+3.3%) from September 16, 2020 through October 13, 2020. The best performing stock in the portfolio was up 9%. Overall, nine out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from September 16, 2020 through October 13, 2020.

Only my firmā€™s research utilizes the superior data and earnings adjustments featured by the HBS & MIT Sloan paper,Ā “Core Earnings: New Data and Evidence.ā€ The success of this Model Portfolio highlights the value of my firmā€™sĀ Robo-Analyst technology[1], which scales forensic accounting expertise (featured in Barronā€™s) across thousands of stocks.

This Model Portfolio only includes stocks that earn anĀ attractive or very attractiveĀ rating and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is theĀ primary driver of shareholder value creation.[2]

New Stock Feature for October: BWX Technologies Inc. (BWXT)

BWX Technologies Inc (BWXT) is the featured stock in Octoberā€™s Exec Comp Aligned with ROIC Model Portfolio.

BWX Technologies has grown revenue by 8% compounded annually and after-tax profit (NOPAT) by 15% compounded annually over the past four years. BWX Technologiesā€™ NOPAT margin increased from 10% in 2015 to 13% over the trailing-twelve-months (TTM), while itsĀ invested capital turnsĀ improved from 1.2 to 1.3 over the same time. Rising margins and invested capital turns drive BWX Technologiesā€™ ROIC from 12% in 2015 to 18% TTM.

Figure 1: Revenue & NOPAT Since 2015

BWXT Revenue And NOPAT

BWXT Revenue And NOPAT

New Constructs, LLC

Compensation Plan Properly Incentivizes Executives

BWX Technologiesā€™ executive compensation plan aligns executivesā€™ interests with shareholdersā€™ interests by tying compensation to return on invested capital (ROIC). Apart from base salary and short-term incentives, BWX Technologiesā€™ executives receive long-term equity compensation in the form of performance-based RSUs (60%) and time-based RSUs (40%). Half of executivesā€™ performance-based RSUs are tied to the firmā€™s average annual ROIC during the three-year performance period and the other half are tied to earnings per share targets.

Per Figure 2, BWX Technologiesā€™ inclusion of ROIC as an executive compensation metric has helped drive shareholder value creation. BWX Technologies improved its ROIC from 12% in 2015 to 18% TTM while itsĀ economic earningsĀ increased from $82 million to $208 million over the same time.

Figure 2: BWX Technologiesā€™ ROIC Since 2015

BWXT Improved ROIC

BWXT Improved ROIC

New Constructs, LLC

BWXT Is Undervalued

At its current price of $56/share, BWXT has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects BWX Technologiesā€™ NOPAT to permanently decline by 10%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 5% compounded annually over the past five years.

Even if BWX Technologiesā€™ NOPAT margin falls to 12% (vs. 13% TTM) and the firm grows NOPAT by just 3% compounded annually for the next decade, the stock is worth $70/share today ā€“ a 25% upside.Ā See the math behind this reverse DCF scenario.

Critical Details Found in Financial Filings by My Firmā€™sĀ Robo-Analyst Technology

As investorsĀ focus moreĀ on fundamental research, research automation technology is needed to analyze all the critical financialĀ details in financial filingsĀ as shown in the Harvard Business School and MIT Sloan paper,Ā “Core Earnings: New Data and Evidenceā€.

Below are specifics on the adjustments I make based on Robo-Analyst findings in BWX Technologiesā€™ 10-Qs and 10-K:

Income Statement: I made $75 million of adjustments, with a net effect of removing $3 million inĀ non-operating expensesĀ (less than 1% of revenue). You can see all the adjustments made toĀ BWX Technologiesā€™Ā income statementĀ here.

Balance Sheet: I made $277 million of adjustments to calculate invested capital with a net decrease of $54 million. One of the most notable adjustments was $80 million inĀ asset write-downs. This adjustment represented 5% of reported net assets. You can see all the adjustments made to BWX Technologiesā€™ balance sheetĀ here.

Valuation: I made $1.1 billion of adjustments with a net effect of decreasing shareholder value by $1.1 billion. There were no adjustments that increased shareholder value. Apart fromĀ total debt, one of the largest adjustments to shareholder value was $169 million inĀ underfunded pensions. This adjustment represents 3% of BWX Technologiesā€™ market cap. See all adjustments to BWX Technologiesā€™ valuationĀ here.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1]Ā Harvard Business School features the powerful impact of my firmā€™s research automation technology in the caseĀ New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

[2]Ā Compare my firmā€™s analytics on a mega cap company to Bloomberg and Capital IQā€™s (SPGI) analytics in theĀ detailed appendix of this paper.

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