Justin Kuepper from SECInvestor.com
Hexcel Corporation (NYSE:HXL) shares jumped $0.77, or 3.61%, to $22.11 today after O.S.S. Capital Management disclosed a 5.1% stake in the company and expressed their concern over the company's recent under-performance in a Schedule 13D filing with the SEC. The hedge fund first contacted the company on March 9, 2007 when it sent a letter expressing concern regarding the company's operating performance relative to its peers and management's lack of concern regarding the gap in performance. O.S.S. also noted that one member of the company's board of directors was stepping down and suggested a candidate for his replacement.
The letter cited the company's operating margins - which stand near 10% now - as being the primary issue. While the company has increased this number from 7% in 2002 to 10% now, Cytec Industries' Engineered materials segment is now generating operating margins of 18% while Toray Industries' is even higher. Had the company achieved 17% operating margins on its 2006 revenues, the company would have earned an additional $78 million in operating income. And by applying the current 17x multiple of EV to operating income, this difference would result in a value increase of more than one billion dollars. This equates to more than $14 per share above the current share price! The hedge fund blames this inability to achieve proper valuation on poor management, which it believes needs to be replaced.
The next move came on April 9th when Hexcel Corporation's CEO visited O.S.S.'s offices to discuss these matters more deeply. But these talks seemed to have gone no where after the hedge fund reiterated its concerns shortly later and requested that a committee of independent directors be formed and that the committee retain an independent investment bank to advise as to how shareholder value could be best maximized. The hedge fund simply stated that the company is under-earning, management is not addressing the shortfall in earnings, and the shareholders are suffering. Therefore, an evaluation of strategic alternatives may be the only way for changes to take place. Whether or not this process happens smoothly depends largely on the company's board of directors. If they oppose, we could be in for a battle. However, if they agree, it could mean significant upside for the company's shareholders. This makes HXL a stock worth watching!
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