Thursday, July 28, 2011

ACIW - Potential Takeover Target

For those of you, who want to benefit from cost cutting within the technology sector and the M&A going on, especially by IBM, a worthwhile company to look into it ACIW.

IBM holds warrants to purchase 9% of the firm. Additionally, it fits into IBM's strategy, because its a tech company, into software catering to financial sector and with a market cap around USD 1.2bn.

Since I wrote about it last, its already up from USD 30 to USD 37....but i believe there is still much more to go...

Saturday, July 23, 2011

Sara Lee (SLE) - Assured 20% Return and some more - Case of Special Dividend

* I hold a position in this company since the last 4 months.

Company: Sara Lee. Currently trading at: USD 19.59
Situation: Upcoming USD 3.00 a share special dividend in addition to the current 2.5% dividend yield.
Timeline: 6 months
Catalyst : This stock will see a huge uptick when this special dividend gets announced. Next earnings call is on 11-Aug-2011. Investors not only earn the dividend but will also make money from capital appreciations.

For those of us wanting some cash in hand, given the possible market downturn in the 2H-2011, SLE might be a good stock to invest in. There have been many reasons I invested in SLE, but one that might interest investors in the near future is the special USD 3 a share dividend that the company stated it will pay investors.

How do we earn 20%?  Here is how -

* SLE stated that it will pay USD 3.00 a share special dividend as part of its separation plan; a 15.4% return on the current share price of USD 19.59.This is expected in the next 6 months.

* Additionally, SLE has a current dividend yield of approx. 2.5%.

* Another few points can be earned from appreciation in the stock price as everyone rushes in to earn the dividend. Adding the capital appreciation will generate more than 20% return on the investment.

Friday, July 1, 2011

Manitowoc (MTW) - Short Idea

Buy if stock comes down to USD 11. Potential downside from current price is USD 7
Company: Manitowoc Company (MTW). Currently trading at: USD 16
Market Capitalization: USD 2.3bn; Shares Outstanding: Approximately 131m
Industry: Capital Goods, Machinery
Situation: Highly leveraged post M&A situation making MTW a high beta stock
Probable timeline: 6 to 12 months
Main Point of Contention: Everyone on Wall Street is modeling for uptick in the Crane business and remains bullish on the company. However, numbers tell a different story.
What are the catalysts for the down move?
  1. Expiration of accelerated depreciation Tax laws in Dec-2011 might lead to further decline in Crane Segment (55% of total revenue) backlog. The uptick in Crane backlog in 1Q-11 was partly due to this tax law giving temprory uptick to the shareprice. This law expires in 6 months.
  2. High Leverage (5x Debt/EBITDA; 1x Interest coverage Ratio), which puts pressure on MTW earnings due to high interest expense and high level of debt.
  3. Slowdown and increased competition in MTW's biggest Crane growth markets of China & Brazi that will lead to decline in crane segment operating margins ( Already declined from 8.2% in 1Q-09 to 2.7% in 1Q-11)
  4. New sales as opposed to renewed contracts generated 83% of Crane Revenue. Crane has 50% exposure to residential & commercial construction and road sectors. Government spend and consumer spend, main drivers for roads & construction to which Crane is 50% exposed expected to decline further.
  5. Volatile FCFE (negative in 4 of the last 9 quarters). FCFE excluding borrowing for 1Q-11 is negative USD 162m compared to negative USD77m for 1Q-10
  6.  Steady decline in Capex. Company generates cash flow just enough to cover debt expense and some more. In an event of a market downturn in addition to expiration of tax law by Dec-2011, MTW’s stock might see a significant decline. Markets that are expected to decline in 2H-2011, will have a huge negative impact on the share price.
  7. One of the historical growth strategies for MTW has been growth via acquisitions. Debt covenants due to high Leverage will discourage MTW to follow an acquisitive strategy and further hamper its growth prospects. As of 31-Mar-11, MTW’s Consolidated Senior Secured Leverage Ratio was 3.02x, while the maximum ratio dictated by its covenants under the credit facilities is 4.50x, and its Consolidated Interest Coverage Ratio was 1.94x, above the minimum ratio of 1.50x
  8. The closest competitors trade at 1.14x P/B and 0.66x P/S as opposed to MTW’s 4.3x P/B and 0.77x P/S.
Potential Positive Catalyst:
  1.  MTW’s Foodservice Equipment business which constitutes 45% of total revenue. It has reported steady increase in operating margins and revenues. 
  2. A potential spin-off of the Crane business or separation of two segments namely Crane & Foodservices, might unlock shareholder value. However, management might not be inclined to do so.

Federal Mogul (FDML) - Long Idea

Buy: Between USD 20 and USD 22. Potential Value can go up to USD 32
Company: Federal Mogul (FDML) Trade: USD 21
Market Capitalization: USD 2.5bn; Shares Outstanding: Approximatly 100m
Industry: Industrial – Auto
Situation: Post bankruptcy play
Main Catalyst: Hiring of Lazard in Mar-2011, CEO Compensation structure, Cost basis of the largest shareholder, large cash position, unique business model & upside from Improving fundamentals, turnaround in auto industry business cycle
Probable timeline: 6 to 24 months
Main Shareholder: Carl Icahn. Acquired 75% equity through bankruptcy process

What can happen?

  1. Carl Icahn can potentially sell the entire company to entities wanting to participate in emerging market growth in addition to capitalize on the upturn in the upturn in the auto industry cycle in the US and EU.
  2. Carl Icahn can give up his controlling shares, thereby creating higher liquidity for FDML stock. This helps other potential bidders/ shareholders to participate in FDML upside due to the improving fundamentals. Furthermore, more liquidity makes it easier for a potential buyer to build up a stake in the company keeping M&A rumors alive and providing a floor for the stock.
  3. Third option is a possible deleveraging of the balance sheet and small acquisition accretive to earnings. A potential sale to 2012

     What are the catalysts for the Owners to sell:

    *       Carl Icahn who has approx. USD 1bn invested in FDML since 2008 has earned no dividend on his investments due to debt covenants. The only returns have been in the form of capital appreciation of stock. With his cost basis as USD 14 to USD 17 a share, this may be a good time to take some cash off the table. The point is further verified by FDML’s hiring of Lazard. Icahn is chairman of the board.
    *       Mr. Alapont, the CEO, agreed to an amendment to the CEO compensation structure in 2010. In the new compensation structure, the CEO gave up the put options he held on the original call options. He holds options on “4%” or “4m shares” of FDML. As of 2010, he holds only call options on 4m or 4% of FDML at strike price of USD 19.50. In addition to giving up the put, he extended his employment agreement until 2013.Mr. Alapont, the CEO, has been at the helm since 2005 and has led the company through bankruptcy. His options expire in 2014 and remain unexercised. In an event of sale or liquidation of stock, the CEO has an incentive to maximize the sale price.
    *       Turnaround in the auto cycle in the west and continued growth in Emerging markets might lure some buyers to pay hefty premiums.

    What are the catalysts for the potential buyers:

    *       Fundamentally, the company is doing really well. Good margins, 20% to 30% growth in emerging markets, substantial increase in net and operating income in addition to growth in YoY EBITDA margins. Company has USD 1bn in Cash and USD 2.8bn in debt. High cash is an added bonus for PE bidders.
    *       FDML’s business model gives any buyer unique access to both side of the markets, namely the auto parts after markets and the OEM markets. This dual access creates a hedge during potential market downturns.
    *       The board structure has been simplified since emerging from bankruptcy, meaning, annual meetings and no poison pills. Moreover, the structure now allows for a sale of the company
    *       A upside in auto cycle with added global growth for FDML serves as an added incentive
    *       2 Board members are former executives at Dana and Lear Corp, FDML’s direct competitors. They may help generate interest on the strategic side.

    Potential Value if the sale occurs:

    *       FDML’s 2011 fundamental value from competitive analysis and industry estimates can be approximated to be around USD 26 a share.
    *       An approximate 40% transaction premium for M&A deals within the Industrial sector in 2011 remain undiscounted.
    *       Additional value beyond the 2011 fundamentals and potential M&A come from FDML’s unique business model, furthering restructuring of the business, emerging market growth and improving business fundamentals that may still not be discounted in the share price.

    Downside hedge if the sale does not occur:

    *       Assuming that FDML is in active discussions, what might derail the process is a much higher ask price for the firm from Icahn. If that happens, fundamentals in addition to CEO compensation structure may provide floor to the equity price. Stock may see volatility in the short term