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Digging Deeper into what Really Matters at Onex Corporation

Late last week Onex Corporation (TSX: OCX) announced that its third quarter earnings jumped over 300% to US$399 million compared to US$98 million during the third quarter of 2012.  Revenues also saw a solid 16% increase to US$7.13 billion compared to US$6.14 billion in the prior year.

However, with any earnings report investors must dive into the details to fully understand the company and the numbers so let’s take a closer look.

Who is Onex Corporation?

Onex is a publicly traded private equity firm carrying investments in both private and public companies.  The firm manages its own capital as well as earns fees for managing the capital of others such as pension funds, banks and insurance companies.

The majority of the company’s investments are through its flagship private equity platform Onex Partners which currently operates three funds focused on large-scale businesses in North America that present a compelling value.  Some of Onex Partners investments include belt and hose manufacturer Tomkins Limited, window and door manufacturer JELD-WEN, and automatic transmission manufacturer Allison Transmission.

Like Onex Partners, the firm’s two active ONCAP funds are also value oriented, but focus on medium-sized North American businesses with an enterprise value up to $500 million.  Some notable investments include pizza restaurant CiCi’s Pizza, casino operator Pure Canadian Gaming, and car wash operator Mister Car Wash.

Onex also carries a couple of legacy direct investments in Celestica Inc. (TSX: CLS) and Sitel Worldwide.  In addition, the firm has real estate investments primarily made up of multi-family communities as well as the Sky View Parc mixed-use development in Flushing, New York.  Lastly, Onex has been growing its credit investing partnership, Onex Credit Partners, which is focused on various debt strategies in senior secured loans, high yield bonds and distressed corporate debt.

Do revenue and earnings really matter at Onex?

The simple answer is – not really.  Financial results for the company can vary widely from quarter to quarter and year to year as a result of ongoing acquisitions and dispositions of various businesses and investments.

In the most recent quarter, earnings were positively impacted by an income tax recovery of US$551 million compared to US$89 million in 2012.  This is a non-cash entry that reduces the firm’s deferred income tax liability on the balance sheet.  The jump in revenues was primarily the result of the consolidation of three business acquired in the last three months of 2012 and one business acquired in June 2013.  Therefore, revenues and earnings for the period are not comparable and help illustrate why investors should not rely only on the quarterly financial results to analyze Onex.

What is important?

The focus of Onex is to grow capital to create value for shareholders.  The company has a stated goal to grow its capital by at least 15% per annum and have that reflected in the price of the shares.  For the last 20 years, the firm is right on target as shares have generated a 15% annual compound return.  Over the last twelve months ended September 30, 2013, the proprietary capital of Onex has increased 20% to $48.62 per share.

The firm has had many recent developments that have it poised to continue delivering on its promise to shareholders.  In October, Onex sold its remaining stake in TMS International reaping $172 million for the firm and achieving a factor of 2 times on invested capital when prior realizations are included.  Even more recently, one of the firms ONCAP funds agreed to sell, Caliber Collision, will result in net cash proceeds of $170 million for Onex and a return of 7.4 times on invested capital.

Final thoughts

An investment in Onex is based on confidence in management’s ability to deliver returns on invested capital.  If past results are any indication, Onex could be a good long-term bet for your portfolio.  The company recently began fund raising for a fourth Onex Partners fund targeting a size of $4.5 billion with Onex being the largest limited partner with a commitment of $1.2 billion.  This new fund will give Onex a new stream of annual management fees and the potential to earn carried interest on invested capital.

Management also stated in its recent conference call that the current environment is presenting a good opportunity for the firm to sell businesses so more announcements like those mentioned earlier may be in the offing.  However, that is not to say it will be all selling and no buying.  Management also stated that interesting opportunities still exist and in the past few months the firm has seen its pipeline growing.

Shares of Onex have performed very well so far in 2013 rising nearly 40% at their recent peak and nearly 7% just in the last month.  Even though Onex is one for the long haul, waiting for the market to cool before committing capital may be wise.

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Fool contributor Alex Gray does not own any of the stocks mentioned in this post at this time.  The Motley Fool does not own any of the stocks mentioned in this post at this time.

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