Sunday, December 16, 2012

A great way to play Post Bankrupt Spin-off

 This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small/Mid cap names. The valuation, unlike my other articles, is not mine.

  • Tronox (ticker: TROX)  - Currently trades at $15.77
  •  Potential Upside by Industry Estimates: Approx. $15 to $20 per share
  • Market Capitalization: $1B; Dividend Yield: 6.4%
  • Cash: $774M; Total debt: $1.6B
  • Revenue FY13: $2B; FY13 EPS: $3.25
  • Sector: Basic Materials ; Industry: Chemicals 
  • Main Catalyst: Legal Settlement, Housing Market, Accretive M&A, Strong Fundamentals


Tronox was spun off from Kerr-McGee in 2005, not long before the financial crises hit and demand for titanium dioxide plummeted. Tronox, which had been saddled with significant environmental liabilities from Kerr-McGee, filed for bankruptcy. Two years later, in 2011, it emerged, with a cleaner balance sheet, the liabilities remediated to a trust, and significant tax credits.

A weak global economy has quashed demand for titanium dioxide, a white pigment used in paints and coatings. The decline stems from the economic problems of a hard-hit Europe and a slowing China, where the pace of construction -- red-hot until last year -- has cooled. With demand weak, paint makers have slashed their orders of the pigment.

That has hurt results at Tronox, one of the pigment's largest producers. In the September quarter, its titanium-dioxide sales fell 30% from the level a year earlier. Tronox shares (TROX) have tumbled, too, by 50% since June. But the selloff seems overdone. At a recent price of $15.65, Tronox looks cheap, trading at a 37% discount to its stated book value of $25, and for 6.6 times next year's estimated earnings. There's reason to think that demand for titanium dioxide could rebound. As that happens, over the next year, Tronox stock could double.

Potential Catalysts:
Accretive M&A and Exchange Listing:
Last summer, Tronox bought the mineral-sands operations of Exxaro Resources (EXX.South Africa), a South African miner, in exchange for a 38.5% stake in itself. The mineral-sands operation includes feedstock used to make titanium dioxide. That makes Tronox the world's largest vertically integrated pigment producer. Once the deal closed in June, Tronox was listed on the New York Stock Exchange. At the end of July, the stock split, 5 for 1. With more than 1,000 customers in 90 countries, Tronox has 8% of the global titanium dioxide market, and is the only producer, aside from DuPont, that uses 100% chloride in its production process. This typically creates a higher-quality product than the rival sulfate process. The company gets 77% of its sales from the paint and coatings industry, and 20% from plastics. Its customers include blue-chip outfits like Benjamin Moore, Sherwin-Williams (SHW) and PPG Industries (PPG).  With the acquisition of Exxaro's mining unit, Tronox produces zircon, a co-product of titanium feedstock mining used to whiten tiles, and pig iron, which is used to produce steel.

Upside from Housing Market & China Stimulus:
The current weakness dates to 2011's fourth quarter. Since then, customers have been primarily living off their pigment stockpiles, and delaying new orders. But now, inventories have fallen, and customers who have been substituting cheaper materials for titanium dioxide have reached a point where adding more of these to their products would threaten quality. An improving U.S. housing market, and stimulus policies in China, could also stoke demand. In a Nov. 12 earnings release, CEO Tom Casey said: "While demand for our pigment products has been weak, we believe the fundamental conditions underlying demand for these products have begun to recover, and we believe sales will begin to increase next year." As demand ramps up, Tronox should benefit from its vertically integrated model. It will be consuming its own low-cost feedstock, rather than feedstock bought elsewhere, boosting operating leverage and margins.

Improving Fundamentals and upside from legal settlement:

As for its balance sheet, Tronox has $774 million in cash to $1.6 billion in debt, or net debt of 19% of total capitalization. The company is expected to generate $252 million in free cash flow this year. A shareholder-friendly management used some of its cash to buy back 10% of Tronox's stock in the September quarter, and to pay a hefty $1.00-a-share annual dividend, producing a 6.4% yield. In the September quarter, sales were split between pigments and minerals. For the full year, analysts estimate that Tronox could earn $249 million, or $3.25 a share, on $2 billion in revenue. FY13, EPS is expected to dip to $2.36 a share, before reviving in 2014, if pigment demand rises, as seems likely. According to investors, company's replacement cost totals roughly $35 a share. In addition, Tronox has $3.50 a share in net operating losses, and could reap a large settlement from its pending $14 billion lawsuit against Kerr-McGee, now a unit of Anadarko Petroleum (APC). Tronox claims that the environmental liabilities Kerr-McGee left it with in the spinoff drove it into bankruptcy.  As pigment demand normalizes, Tronox could hit $30 to $50, given how volatile its stock has been. 

Monday, December 10, 2012

A Great Way to play Oil & Gas Cash Flows

 This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small cap names. The valuation, unlike my other articles, is not mine.

  • Crosstex (ticker: XTXI)  - Currently trades at $13.06 
  •  Potential Upside by Industry Estimates: Approx. $5 to $10 per share 
  • Market Capitalization: $620m; Dividend Yield: 3.8% 
  • Cash: $6.00M; Total debt: $1B 
  • Shares Outstanding: Approximately 47.4M 
  • Revenue: $1.61B; EV/EBITDA: 7.8x 
  • Sector: Basic Materials ; Industry: Oil & Gas 
  • Main Catalyst: Distribution rights, new projects online in 2013, M&A,  Fundamentals,

 What does XTXI?
Founded in 2000, Crosstex Energy LP (XTEX), a master limited partnership that gathers, processes, and markets natural gas and natural-gas liquids, and transports crude oil. Crosstex (XTXI) owns a 2% general partner interest; 22% of the LP's units, and all of the incentive distribution rights. The LP operates approximately 3,300 miles of pipeline, 10 processing plants, and 4 fractionators, and makes money by charging fees for its services. It also buys natural gas and crude oil, and resells it at a profit.

Weak natural-gas prices have slowed growth in the past year for much of the oil and gas industry. Crosstex Energy is no exception. The partnership's distribution has been unchanged for the past three quarters, as Crosstex (XTEX) has been investing in fee-based projects that expand its natural-gas liquids and oil business, where prices have remained relatively steady compared to gas. Some of those projects are expected to come online in 2013, leading to higher cash flows.
The company's general partner, Crosstex Energy Inc. (XTXI), offers a good way for investors to benefit from the growth. As a general partner, it owns lucrative incentive distribution rights, which motivate it to manage the LP's assets effectively and grow the distribution. As the distribution increases, Crosstex receives a stepped-up percentage, up to 50%, making it levered to the LP's rising cash flows. In 2011, the company received 27% of all cash distributed.

Potential Catalysts:

Increased distribution:
XTXI generates all of its cash flow from the distributions, and doesn't own hard assets. As growth projects come online, distributions and dividends could grow significantly. Industry analyst from RBC expects XTXI distribution growing 3.4% in 2013 and 11.7% in 2014, while the dividend could increase by 8.3% in FY13 and 33.7% the FY14. XTXI shares closed last week at $12.51. In the FY13, they could rise 25% or more, and yield 3.8%. CEO of the XTXI stated that he anticipates XTXI will continue to see annual distribution-growth rates of 8% to 10% per year, and dividend growth rates of 20% to 25% per year.

Promising Fundamentals:
While Crosstex could lose $12.8m, or 27 cents a share, this year on revenue of $1.6bn, it could pocket 26.6% of the LP's estimated $217 million in EBITDA. FY13, the LP's EBITDA could rise 14%, to $248m, due to new projects and acquisitions. One project, the Cajun-Sibon, is a 130-mile NGL pipeline extension of a 440-mile pipeline in central Louisiana. It could come online in mid-2013, and generate $170 million in annual operating income by the end of that year.  Last May, XTXI bought Clearfield Energy, an oil-services company, giving it a strong foothold in oil transportation.
Potential M&A:
XTXI could be attractive to an acquirer, given its leverage to the LP's cash flows and the scarcity of publicly traded general partners. Last year, several deals involving GP buyouts occurred at significant premiums. Shares can rise to $18, but as cash flows ramp up in coming years, that value could rise to $24.

Sunday, December 2, 2012

Special Situation Ideas for week of 3-December-2012

In a thematic writeup which I usually don’t do, I stated that “Water” is one of my favorite sectors. US water infrastructure is aging. What’s further exacerbating the situation is the current extreme weather conditions. According to what I read online, the U.S. EPA has estimated that 250K watermain breaks occur each year in the nation, with up to 70K-75K sewer overflows annually, discharging up to 10bn -11bn gallons of untreated wastewater. Sewer cost, water cost and investment in infrastructure are slated to increase in the US alone by more than USD 1T, before 2035. Bloomberg article has other statistics. One of the main beneficiaries of this tread is a name I wrote about a while ago, Xylem (XYL). Other names worthy to look into are : Pentair (PNR), Flowserve (FLS) and Aegion (AEGN).

I wrote a long on Tessera Technologies(TSRA). It might be worth another look. According to BArrons 13D monitor, Starboard declareda 5.7% stake in TSRA. The fund has had particular activist success in companies that have solid core businesses with significant cash flow, but management that reinvests the cash in noncore unsuccessful businesses. Starboard is likely to nominate directors for the next annual meeting and ask for a breakup.

Another three stocks I read about:
Celanese (CE)
is a diversified company. Its biggest segment is acetic acid, which is suffering from weak global demand. The stock is around $40 and trades for 9x 203 earnings. Once the global economy recovers, CE can increase its EPS from $2.75 a share to over $5 a share. Catalyst: CE has developed a process that can make ethanol from natural gas and coal. The cost is substantially below the cost of making ethanol from corn. The first commercial plant will open in China in 3Q13 and will make both industrial and fuel ethanol. If the U.S. changes its policy which currently requires that ethanol be made from corn, then it can be a huge game changer. (Barrons)

AerCap (AER) buys planes from Boeing and Airbus and leases them to airlines. The leases typically run for well over a decade. The credit quality of leases is good. The stock trades around $12.50, which is 70% of its tangible book value of just over $18. Its also trading at just 6x forward earnings. The firm does not pay any dividend; however, they bought back 18.5% of its stock over the last 1.5years. t ultimately could get sold to a large financial-services company with low-cost funding. (Barrons)

NetScout Systems(NTCT): The firm develops and sells network performance management and service assurance solutions for high speed networks. End clients ma include commercial enterprises, governmental agencies and telecommunication service. Trades at P/E of 20x, reported YoY growth in EPS of 12%; 20% Operating Margin; $230M in cash and only $69M in debt. With the networks inundated with demand for data, and the ongoing digital revoltion, the firms product might see incremental demand going forward. This firm in addition to reporting increased demand for its products might also become a takeover target.

Sunday, November 18, 2012

A Restructuring Story For Small Cap Investors

  This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small cap names. The valuation, unlike my other articles, is not mine.
  • Sparton Corporation (SPA) - Currently trades at $12.05
  • Potential Upside by Industry Estimates: Approx. $8 per share
  • Market Capitalization: $123m
  • Cash: $43M; Total debt: $1.64B
  • Shares Outstanding: Approximately 7M
  • Revenue: $21.7M; EPS 2013/2014 Est.: $1.30/ $ 1.70
  • Sector: Technology; Industry: Divesrifised Electronics
  • Main Catalyst:   Navy contract, Fundamentals, Accretive acquisition,

      What does SPA?
      Founded in 1900 and based in Schaumburg, Ill., Sparton has a rich history as a manufacturer. At one point it was an automotive supplier, and is credited with inventing the car horn. Today the company operates in three segments—medical devices, defense, and electronics manufacturing, which it dubs "complex systems." Medical manufacturing accounts for 50% of sales.

Sparton, a small manufacturer of electromechanical devices, is well on its way to reinventing itself after a period of operating losses and a near-death experience in 2008-09. The turnaround has been piloted from the start by a new management team, led by CEO Carey Wood, who slashed costs and terminated unprofitable contracts. Management also has shifted its focus since 2009 from low-margin contract manufacturing, such as circuit-board assembly, to specialized manufacturing in highly regulated markets such as military aerospace and medical devices, which carries higher profit margins.
The results have been impressive. In fiscal 2012, ended June 30, gross margins widened to 17.2% from 7.1% at the trough in fiscal 2009. Sales climbed 10% from fiscal 2011 to $224 million, with earnings up 27%, to $9.5 million, or 92 cents a share. Applying a multiple of 12 times earnings to 2014 estimate,  the stock could be worth $20.

Potential Catalysts:

US Navy:

The U.S. Navy is Sparton's biggest customer for underwater sonobuoys. Investors were quick to spot the improvement; Sparton's shares (SPA) have rallied more than 700%, to $12.05, from $1 and change in 2009. But the stock remains underappreciated at 13.5 times trailing 12-month earnings of 89 cents a share, and more gains are likely.Management is targeting $500 million in revenue by 2015, driven by acquisitions. The shares could rise 50% or more in the next 18 months. In the defense segment, Sparton builds sonobuoys, underwater listening and locating devices designed to detect the presence of submarines. They are positioned in the water ahead of every carrier fleet to alert them to the presence of enemy submarines. A sonobuoy survives for about eight hours before it self-destructs. Sparton is the only U.S. manufacturer of sonobuoys, and one of two worldwide. The U.S. Navy is its primary customer.

Shifting Strategy:
Sparton works on contract in the other two divisions, serving as the manufacturing arm for original-equipment makers. In the medical segment, it makes therapeutic and in vitro diagnostic devices for customers such as Siemens (SI), Fenwal, and NuVasive (NUVA). In complex systems, Sparton builds circuit-card assemblies as well as complete electronic systems for aerospace customers such as Goodrich and Raytheon (RTN).
Management is keen to shift the revenue mix to higher-margin activities. The defense business has the highest gross margins, at 23.6%; medical margins are 13.7%, and for complex systems, 10.7%.To boost margins, Sparton has explored new growth initiatives. For example, it is planning to bundle the directional and listening technologies used in sonobuoys and market them for use in other unmanned defense systems, a growing market. Sonobuoy sales also could see growth as the Navy moves in 2014 to deploy the devices via jets instead of prop aircraft. According to a fiscal 2011 budget estimate from the Navy, spending will increase 60% year over year in fiscal 2014, to $160 million, primarily due to the transition.
SPA’S other plans include gaining market share in niche medical devices via acquisitions, and continuing to migrate to higher-margin work in complex systems. In the September quarter, revenue fell 5% from the year-earlier period, and net income fell to $1 million from $1.5 million. The decline is temporary, and related to a delay in sonobuoy deliveries. Management is optimistic for the remainder of the fiscal year.

M&A and Fundamentals:
As of Sept. 30, Sparton had $43.1 million in cash to $1.6 million in debt. It generated $22 million in free cash in fiscal 2012. On 6-Nov-12, Sparton agreed to buy Onyx EMS, a medical-device manufacturer, for $43.3 million. The deal, expected to close at the end of the month, is a major one for Sparton, bringing in $50 million in annual revenue. While management currently is restricted from disclosing how accretive the purchase will be, it has said that Onyx has gross margins of 18%, higher than Sparton's own medical division. The deal will be financed with cash and borrowing under a credit facility.  Some in the industry estimate that the deal could add 50 cents a share in annual earnings, bringing his fiscal 2013 earnings estimate up to $1.30 a share, and his fiscal 2014 estimate to $1.70 a share. Applying a multiple of 12 times earnings to his 2014 estimate,  the stock could be worth $20.

Wednesday, November 14, 2012

Long Gentex Industries (GNTX): Positive Catalysts Outnumber Negative Ones

I have posted an article on Seeking alpha which goes into details about how to profit from going long Gentex Industries (GNTX). It’s for medium to long term investors. 
If anyone reading do invest in special situations, this might make a good read. Either you can click here or go to Seeking Alpha and  and check out "kedar special situations" Its under long ideas for Gentex (GNTX).

Thank you

Tuesday, October 9, 2012

Special Situation Ideas for week of 8-October-2012

I have come across these with some decent catalysts while reading various publications. Might be worthwhile for readers to look into:

PRXL - Potential Long – This s a mid-cap company which is into clinical research. Large number of firms have become budget conscious. Gets 75% revenue from clinical trials; is one of the two or three strategic partners to drugmakers such as Eli Lilly, Pfizer, Merck and Glaxo. Most of big drug makers face major patent expiration. Parexel earned lot of revenue from late stage clinical trial studies with phase 3 & 4 constituting the bulk of the revenue. Additionally, PRXL also offers consulting services and clinical trial technology. Firm also has global network, which is a huge asset with 70 locations in 51 countries. Also provide advance technology tools including medical imaging to facilititate clinical development process. The industry estimates that the firm will see growth in revenue and earnings of 25% + over the next 2 years. Also recently launched unit to work with mid-size bio pharma companies, which constitute most of the ongoing development programs.                                   

EXASPotential Long -  Has developed a sophisticated colon-cancer screening test based on DNA markers. EXAS hopes that its self-administered stool test can detect 85% of cancers and more than half of pre-cancerous growths, with a false-positive rate of only 10%, much better than existing test, which detects an estimated 65% of cancers and fewer than 25% of precancerous growths. Trial results, expected in early 2013, if favorable, FDA approval within a year - 2014. Revenue can $500M - $1B by the end of this decade. EXAS is trying to arrange for Medicare and private insurers to pay for it. Potential takeover takeover target by a larger health-care outfit. Centers for Medicare and Medicaid Services, agree to pay for the tests soon after a favorable FDA ruling. 80M Americans 50 or older. If 30% of them take the test every three years, thats 8M tests a year at perhaps $300 a test, translating to $1.2B in revenue or almost $4 a share, but unlikely before 2020.                                  

A note on playing China – Lot of people is still invested in Chinese real estate. For those who don’t know, there has been a decent slowdown in numbers and the returns might not be phenomenal to say the least. However, I believe, that over he longer and medium term, one of the better play to play china is the Chinese investment in infrastructure and one of the beneficiaries of this will be the firms that are in the transportation sector. And I believe one of the best was to play transportation is Chinese Railway sector. Those who can invest in China, I have come across few names – CSR Corp (Largest producer of locomotives. Also produces wagons, carriages, ect.  Another is China Railway Construction Corp (largest railway construction company). Zhuzhou CSR Times Electric (supplier of train borne electrical systems and components). Other names being, Daqin Railways and Guangshen Railways.

Sunday, September 30, 2012

Special Situation Thematic Ideas for week of 30-September-2012

These names are obviously not analyzed but i have come across them which might be a good way to play these themes. Might be worthwhile for readers to look into -

Playing Smart Grids: With what happened recently in India, and given the demand for energy in China, I believe there will be a huge demand for grid technology in the coming years. How to best play this sector? Well there are few names to look at:

Well, ABB is an obvious choice. Another firm that’s operation in this sector is Siemens AG. However come of the non-obvious names to look at are Echelon (ELON); Itron (ITRI) and EnerNOC (ENOC).

Playing Cyber Security: I guess everyone knows that there is a huge demand for cyber security with everything moving online. The recent news of Chinese intelligence hacking in major US Corporation, substantial increase in cyber security crimes on the corporate side, terrorists trying to hack into military networks, this is another area that’s poised to undergo substantial investment overt he next few years. What are some of the names to look into?

Well, obvious culprits are: Lockheed Martin (LMT) which has been making substantial investing in cyber security; Northrop Grumman (NOC), a cyber security and UAV play. But some less obvious names are NCI (NCIT), a play on traffic and data analysis for intelligence community; SourceFire (FIRE), a real time network defense solutions provider also speculated to be a take over target and Keyw Holdings Corp (KEYW), a leading cyber security consultant to the defense and intelligence and national security agency.

Sunday, September 23, 2012

Special Situation Ideas for week of 23-September-2012

These names are obviously not analyzed but i have come across them with some decent catalysts. Might be worthwhile for readers to look into --

CTGX - Potential Long – This s a small cap company. Technology and  Healthcare constitute  64% of total revenue. IBM is CTG’s largest customer (30% of Rev) and given the M&A trends in the industry, this firm might become a takeover target.  P/E: 20x, the firm has no debt, ROE is approx 14%, EPS growth has been approx. 20%

Ebix Inc - Potential Long – Midcap company which is a  leading supplier of Software solutions to the insurance industry. It was found in 1976 as Delphi Systems. ROE is 20%+, P/E 13x; Cash 26M and Debt is abt 80M. Maybe a potential takeover target.  

Corrections Corp - CWX - Potential Long – It’s a owner and operator of privatized correctional and detention facilities and prison operators in the United States. Major Catalyst might be population growth. Current downturn presents a better proposition to state prisons. Another major catalyst might be a potential REIT Conversion. CWX manages prisons more effectively (prisoner cost $67 VS federal $85 and California $140. 2011 AFFO is $235M. Stock came under pressure as CA announced to move 10K prisoners inside. It has 12K excess beds; Corvex capital and Marcato Cap filed 13D announcing 7.6% ownership recommending a shift to corp. structure. Firm pays $0.80 div, can go upto 2.25 a share if converts to REIT. Will also save $75M if converts to REIT. Firm did buybacks before. REIT with similar characters traded at 22x AFFO while CVX is at 12x.

Monday, September 17, 2012

A Cold winter will make Compass Minerals a hot stock to own!

This article is a summary of what I read in Barron's and little bit of my own fact checking. I thought this was interesting idea to point to readers to look into this further.

  • Compass Minerals International (CMP) – Current price at $72.29
  • Potential Upside by Industry Estimates: $ 15 – 20 per share
  • Market Capitalization: $2,390M
  • Cash: $147M; Total debt: $484M
  • Shares Outstanding: 33.11M
  • Operating Margins: 16.50%; ROE:29%
  • EPS 2012E: $3.43; EPS 2013E: $5.15; Div Yield: 2.7%
  • Sector: Basic Material; Industry: Industrial Metals & Minerals
Sources: Thomson Reuters & Yahoo

What does CMP do?
Compass Minerals International (CMP) is a producer of minerals, including salt, sulfate of potash specialty fertilizer (SOP) and magnesium chloride. As of December 31, 2011, the Company operated 12 production and packaging facilities, including the rock salt mine in Goderich, Ontario, Canada, and the rock salt mine in the United Kingdom in Winsford, Cheshire. Its solar evaporation facility located in Ogden, Utah, is a SOP production site and a solar salt production site in North America. Compass Minerals provides highway deicing salt to customers in North America and the United Kingdom and specialty fertilizer to growers and fertilizer distributors worldwide. It also produces and markets consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other mineral-based products for consumer, agricultural and industrial applications. In January 2011, the Company acquired Big Quill Resources, Inc. (Source: Google)

Based in Overland Park, Kan., the company derives about 80% of its annual revenue from the sale of salt, much of it used by municipalities to de-ice roads in winter. Following the warmest winter in two decades, however, many cities and towns are sitting on large inventories of rock salt. Adding to the pain, a tornado damaged a Compass salt mine and evaporation facility in Canada in August 2011, while a rainier-than-normal summer last year meant less evaporation at a plant that produces sulfate of potash. The fertilizer, which accounts for the other 20% of sales, is harvested by evaporating water from the Great Salt Lake. In Ontario, Compass operates the world's largest underground rock-salt mine. If weather patterns follow the historic trend with  a cold winter in 2012, CMP might be a stock worth owning.

Potential Catalysts:

Weather Patters:
Compass benefits whenever municipalities spread rock salt, usually after an inch of snow has fallen. Last winter, there were 89 snow events in Compass territories, which encompass the U.S. Midwest and Canada, down from 203 in the prior winter and almost half the average of the past 10 years. However, about 90% of the time, an exceedingly warm winter with well-below-normal snowfall is followed by a winter with 10% to 25% more snow than the average. Expectations are that the coming winter to last longer than usual, too, with snow more than usual.
Additionally, CMP produces fertilizer used on high-end crops, including fruits, vegetables, and nut trees. Its fertilizer customers, typically on the West Coast and in the Southeast, haven't been harmed by the drought in the Midwest. Sales and prices of sulfate of potash have been strong, pushing that segment's revenue up 14% in the second quarter, to $56.2 million. But because of last year's cloudy weather, the cost of producing SOP rose and profit margins were compressed. Second-quarter operating income in the segment fell 26%, to $13.9 million, from the prior year's total. However, evaporation has improved greatly this year, owing to ample sun and hot temperatures at the Great Salt Lake. The company hopes that population growth and rising demand for healthy foods will bolster demand for SOP.

Irreplacable Assets:
CMP has an asset base that’s very difficult to replicate. The company owns the world's largest rock-salt mine, in Goderich, Ontario, on Lake Huron, from which salt can be shipped inexpensively on barges. Keeping transportation costs low is key because they account for 30% of the selling price. CMP also benefits from having its largest salt mine located near the North American snow belt, in the North Central states. Compass is the largest provider of rock salt in North America, competing against Cargill and K&S Group, the owner of Morton salt. Sales are likely to stay soft through the end of the year, as customers work off inventories and prices fall. Likewise, costs could be higher than normal because the mines won't be operating at full capacity and the company has had to repair damage caused by the tornado. At least Compass has a flexible work force that can be dismissed when times are tough and recalled when business improves. In the second quarter, sales in the salt segment fell 6%, to $119.9 million, and operating income fell 5%, to $12.9 million.

This year, the company is expected to earn $109.9 million, or $3.43 a share, on revenue of $1 billion, down from last year's already depressed earnings of $160.4 million, or $4.79, on revenue of $1.1 billion.
Despite that, CMP has stayed profitable and maintained a healthy balance sheet, with only $336.5M of net debt. Moreover, it generates enough cash to pay an annual dividend of $1.98 a share, for a yield of 2.7%.  Industry estimates that CMP may earn $5.15 a share next year. That growth could command a price/earnings multiple of 17 times 2013 estimated earnings, up from 14 times earnings for 2012. CMP historically has produced relatively steady earnings gains, suggesting that it deserves an above-market P/E. It typically has enjoyed 1% to 2% annual growth in demand and 3% to 4% price increases. At 17.5 times earnings, the stock would be worth about $90 a share, or 25% more than its recent price.

Thursday, August 23, 2012

Longs should waste no time looking at Waste Management (WM)

Those looking into some catalyst might want to ponder over this name for the week. After looking into the name which I originally got from Barron's is definitely worth a look:

Waste Management (WM) -
Waste Management was a great growth stock in the late 1990s, rising 450% between 1994 and 1999, to a peak above $55, as it delivered rapid profit growth by rolling up the fragmented waste-services industry. The company was then beset by accounting inquiries, management turmoil, and shareholder lawsuits, before settling into a stagnant middle age in recent years. Garbage volume has been flat to down for years, thanks to conservation, recycling, and slow industrial growth, and is just now firming from its downturn during the recession. WM offers stability, little global risk, and a generous dividend policy that puts its yield at 4%. However, the math dictates that dividend growth will be slower and slighter, and buyback activity reduced, compared with recent years. That eventually could draw more attention to the company's unimpressive operating performance.

Points to Consider -

**Revenue, earnings, margins, and cash flow have been stagnant for years. It is undergoing the latest in a succession of cost-cutting programs to rationalize an organization built by buying garbage-collection and landfill operations over decades. Pricing power is scant, capital spending to maintain its vehicles and facilities is a ceaseless treadmill, and rates fetched on the recycled cardboard and aluminum it sells have ebbed.

**Spending on items like maintenance of Waste Management's truck fleet has to continue even if revenue and cash flow have been stagnant for years.

**The company's dividend has grown dramatically in recent years and now consumes a majority of its net income and free cash flow. While the payout at current levels appears secure, the company won't be able to raise distribution levels very much from here. And with its shares already valued at a premium to the broad market, based on current and expected earnings, it's hard to see the yield falling significantly below today's 4% level through further stock appreciation. The spokeswoman notes the company already has started to slow its rate of dividend increases. After two years of 10-cent hikes, the payout went up 6 cents a share in 2012, from 2011.

** About 74 million net shares have been retired through buybacks since 2006, helping per-share earnings to rise modestly. Yet it is the sizable dividend increases that have held investors' attention and kept the shares afloat. At the current rate of $1.42 a share, or $658 million in total, dividends this year will consume more than 57% of projected free cash flow, and about two-thirds of expected earnings of $2.14 a share. Waste Management still trades at 16.6 times expected 2012 earnings, a 20% premium to the broad market–only, it seems, because of the dividend.

Waste Management/WM
Market Value (bil)
Recent Price
52-Week High
52-Week Low
2011 EPS
EPS 2012E
P/E 2012E
Source: Thomson Reuters

** Waste Management in 2006, revenue was $13.4 billion, cash generated from operations was $2.5 billion and, after capital spending of $1.3 billion, free cash flow amounted to $1.2 billion. In 2011, it was as if time had stood still: Revenue totaled $13.4 billion, cash from operations slightly below $2.5 billion and, after $1.3 billion in capital spending, free cash flow was just over $1.1 billion. So, there was no growth and, indeed, very little variation in yearly results within that span, even though the U.S. economy was about 15% larger in 2011 and the company, on a net basis, had spent nearly $800 million on acquisitions. For 2012, forecasts are for more of the same: revenue of $13.8 billion and, according to company guidance, $1.1 billion to $1.2 billion in free cash flow.

**Waste Management has missed adjusted per-share earnings forecasts in five of the past eight quarters. Price increases, crucial given flat waste volumes, have been hard to come by, and will likely fall short of 2% again this year. Municipalities, a major customer, face abiding financial pressures. Prices for the recycled material the company sells have been soft and will remain a headwind this year.

Sunday, August 12, 2012

NeuStar (NSR) – Market Leader with great prospects -

Those looking into some catalyst might want to ponder over this name for the week. After looking into the name which I originally got from Barron's this def. is worth a serious look:

Important time period – 1H2013

Potential Long -
NSR - NeuStar was created in 1996 to provide clearinghouse services to the telecommunications industry. NeuStar, Inc. provides real-time information and analytics to the Internet, communications, entertainment, advertising and marketing industries. It offers a range of services, which include registry services, managed domain name system, services, Internet Protocol, services, fixed IP geolocation services, Internet security services, and Web performance monitoring services. It operates in three segments: Carrier Services, Enterprise Services and Information Services

Notes or points to keep in mind –
NeuStar was created in 1996 to provide clearinghouse services to the telecommunications industry.

Manage number portability for both landline and mobile meaning when a customer wants to change providers and want to have the same phone number - NSR does it. NSR provides addressing and routing for every single phone call and text message in U.S. Operates under long-term contracts with all telecom firms with annual escalators of 6.5%,until 2015. NSR has been flawless under contract for the past 15 years. There are 4700 telecom. Virtual monopoly in the US so NSR is very valuable to whole network and not easily replacable. That business is 50% of NSR of revenue.

2nd business is enterprise which services the Internet infrastructure space. NSR addresses and routes about 20% of all Internet traffic globally. Emerging growth opportunities include network security services; majority enterprise revenue is subscription-based, so easy to predict. How does that work - If I make a phone call, either on a land line or a cellphone, and I'm trying to find your cellphone, the phone call essentially goes up into the cloud and through NSR databases. NSR also acquired Targus because of which NSR is able to provide real-time use in marketing, advertising, and customer support.

NSR trades at less than 10x 2013 cash earnings, and the stock could double in the next year or two. NSR has good management and made smart acquisitions. Bought back 12% of the shares in the past year.

RISK: The NSR contract with all telecommunication firms runs through the middle of 2015 but NSR is the single vendor in the space. NSR renewal process for the contract starts in 1H 2013. The risk of losing their contract is almost nil, because  the complexity they are dealing with and the investments made by those 4,700 telecom entities in connecting with NSR. Additionally NSR’s performance has been flawless.                                                                                           

Wednesday, August 1, 2012

Nabors : Positive Catalysts Will Create Upside For Medium To Long Term Investors

I have posted an article on Seeking alpha which goes into details about how to profit from going long Nabors Industries (NBR). It’s for medium to long term investors. The potential upside is between USD 8 to USD 10 a share.
If anyone reading do invest in special situations, this might make a good read. Either you can click here or go to Seeking Alpha and  and check out "kedar special situations" Its under long ideas for Coinstar (CSTR).

Thank you

Sunday, July 15, 2012

Ideas to think over for this Sunday 15-Jul-2012

Those looking into some catalyst might want to ponder over this name for the week. After looking into the name which I originally got from Barron's this def. is worth the post:

Phillip 66 (PSX) : The firm is a recent spinoff from COP. Trades at 5x earnings and basically has 3 business, Chemicals, oil refining and midstream. The firm seem to have good prospects. Recently talked about by two smart investors -

What might be the catalysts:  SOTP by industry experts suggest a 30% upside.
Chemical: The firm has a JV with chevron. PSX apparently also has a proprietary process producing higher quality ethylene and polyethylene from ethane and naphtha at lower cost. In addition PSX licenses technology to competitors. 80% capaicty is within US where it uses low price ethane and sell into high price markets, earning good spread.  Valued at approx. $13 a share at 10x P/E

Midstream assets at 17x FCF are worth aporox. $20 a share. Two non-refining segments are worth $31 a share

Refining has 3 segments - specialty marketing, pipeline. With no capacity to move crude out of kushing and crude trading at a discount to brent, for few yrs refinary's will enjoy low cost advantage. Some estimates suggest that  refining alone worth is worth approx. $10 a share with pipeline assets within refining in addition to marketing business can be possibly valued at $20. The basic refining is worth approxc $10 a share. Refining is basically free and can earn potential EPS of approx. $4.00 share.

Taking $9 per share debt out of the price, the stock is still worth approx $50 s share.    

Sunday, July 8, 2012

Two Ideas to think over for this Sunday

Those looking into some catalyst might want to ponder over these names for the week:

Rentech Nitrogen Partners - Manufactures nitrogern fertilizer and industrial products including ammonia, urea and stuff. Used natural gas as its primary feedstock. debt, 10M; Cash:72M; 6Q EPS is more than 15%; last Q EPS is more than 46%; last Q sales increase is 60%.

Cardtronics:: Potential Short: Over leveraged; they have contract with BoA which provides them with 56% of their cash needs. The contract is set to expire in October,2012.

Sunday, July 1, 2012

Ideas I posted in early June, in case you missed

These names are obviously not analyzed but i have come across them with some decent catalysts. Might be worthwhile for readers to look into --

ARE - Potential Long - Investors worried about investment pipeline and efforts to delever balance sheet. Now they are investment grade. Its pipeline is very large, USD 1.1bn, 17% of gross asset value. Most of pipeline is in premier life science hubs, SF, Boston, ect. The development projects open late this year

MANH - Potential Long - Develop supply chain software for manufacturers, distributors, retailers & transportation. I just love the business they are in. Haven't looked at fundamentals.

QCOR - Potential Short - Stock had a 100% run in last 2 yrs, acthar - drug on which QCOR depends came off patent; dependency on single manufacturer, expansion of rebates under medicaid will adversly affect these guys - therefore the upholding of healthcare law is not good? Regulation about how insurers reimburse for Acthar will negatively impact QCOR (pg 16 10K), Negative impact from macro- moving payer mix more under medicaid and govt. programs will (-)vly affect the firm; anti takeover provisions in place

GIL - Potential Long - Went from 10% to 65% of Wholesale screenprint market which will grow to 70%. shareprice fell as cotton prices increased - the company seems to have absorbed some of it. Recently increased the capacity by 40% EPS expected to increase. They " might enter" and sell to Nike and Disney. mgt. owns $250m stock

RLD may provide substantial upside with lateral growth, good fundamentals and growing emerging markets

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at small cap beaten down stocks..
  • RealD – Current price at $14.96
  • Potential Upside by Industry Estimates: $8 per share
  • Market Capitalization: $818M
  • Cash: $24.89M; Total debt: $25M
  • Shares Outstanding: 55M
  • Operating Margins: 22%; ROE:22%
  • Sector: Technology; Industry: Movie Production, Theaters

 What does RLD do?
RealD, a technology outfit that specializes in 3D movies, could finally be ready to give up its feast-or-famine existence as an occasional Hollywood novelty for a meatier long-term role. The Los Angeles company, which supplies theatres with systems that enable their projectors to play 3D movies, and sells the special glasses required, has enjoyed a good lead-in to the arrival of summer blockbusters.

Led since 2003 by co-founder Michael Lewis, RLD went public at $16 in 2010 after the enormous success of the movie Avatar, then rose to a high of $35 in May 2011. But then the stock slid all the way to $8 late last year, amid fears that 3D was a fad. A failed deal to use RealD's technology in TV sets heightened the worry. However, early reviews from Europe for The Amazing Spider -Man in 3D have been positive, and new licensing deals with a Chinese theater operator should help the company's expansion overseas. That comes on top of the spectacular success of another 3D pic, The Avengers, in early May. The recent news has helped push RealD shares to $13.52 and according to some industry estimates the stock has the potential to top $20 in the next year. Summer blockbuster candidates like Spider-Man and Madagascar 3 could add to 3D's momentum from big-budget movies such as Prometheus.

Potential Catalysts:

Lateral Growth:
The popularity of the recent 3D movies and the technology's new expansion beyond the action-adventure genre to drama are positive signs of maturity. As production costs fall, more directors are likely to embrace 3D. RLD's systems have been installed on about 20,600 screens, 12,000 in the U.S., and 8,600 overseas. The company invests $10,000 to put in each unit. In turn, the theater pays the company a fee of 50 cents for each 3D movie ticket it sells. It's a nice swap: Theaters charge as much as $5 more for a 3D ticket. To recoup its investment, RealD needs a theater to sell roughly 20,000 tickets per screen. According to some analyst conservative estimates, a theatre will sell an average of 17,000 tickets per screen in the first year, with a modest decline per screen each year as more 3D screens go into service. That suggests the system pays for itself in about 16 months. According to industry estimates each theater screen might bring RLD $37,000 over eight years. Yet he says the stock trades as if the take might be only $21,000, offering a significant discount for investors.

Emerging Markets:
Biggest opportunity, however, lies abroad where big-budget action pictures require little translation. Already, the 3D splits—the proportion of a movie's box office sales generated in 3D—is about 49% domestic and 51% international. For the five years ending 2015, RealD's international growth rate might average 19.7%, versus 8.8% for domestic. RLD's international expansion has "a lot of legroom, a lot of runway" for growth. RLD has less than 10% of the Chinese market In the past 18 months, it's signed up 2,000 screens in China, including a big deal this month, and has installed 650 of them. China is adding 3,000 screens per year and had 10,500 screens at the end of 2011. By contrast, the U.S. has 40,000 screens. But RealD is also taking share from rivals, including Dolby Laboratories (DBL); other competitors include IMAX (IMAX) and MasterImage.

RLD might enjoy a bright spot is the consumer-electronics business. In 2011, Samsung decided not to make flat-screen panels using 3D technology. Yet 3D is surely coming back. RealD has 300 patents, which it could license to companies making 3D TVs.

Earnings might fall in 2012 to $26.1m, or 47cents a share, from $36.9m, or 65cents a share, as RealD invests abroad, puts more money into R&D and fixes bumps at its 3D eyewear unit. Cash flow from theatrical licensing could rise to $141mn in 2015, nearly double what it was in 2010, as capital spending on U.S. theaters wanes and licensing fees roll in. RealD trades at about 12x cash flow, compared to 25 times for IMAX . RealD could fetch $21 a share from any acquirer—about 50% above current levels.

Sunday, June 24, 2012

Nabors might make a great investment due to impending divestiture, deleveraging, and management changes

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at firms with a restructuring trades.

  • Nabors Industries Ltd – Current price at $13.19
  • Potential Upside by Industry Estimates: $10 per share
  • Market Capitalization: $3.83B
  • Cash: $494M; Total debt: $4.7B
  • Shares Outstanding: 290M
  • Operating Margins:
  • Sector: Basic Materials; Industry: Oil & Gas Drilling & Exploration

 What does NBR do?
Nabors Industries Ltd. (Nabors) is a land drilling contractor. It is also a land well-servicing and workover contractor in the United States and Canada. It markets approximately 499 land drilling rigs for oil and gas land drilling operations in the United States Lower 48 states, Alaska, Canada, South America, Mexico, the Middle East, the Far East, the South Pacific, Russia and Africa. The Company markets approximately 581 rigs for land well-servicing and workover work in the United States and approximately 174 rigs for land well-servicing and workover work in Canada. It is also a provider of offshore platform workover and drilling rigs, and markets 39 platform, 12 jackup and four barge rigs in the United States, including the Gulf of Mexico, and international markets. In April 2012, TransForce Inc. acquired through its subsidiary, I.E. Miller Services, Inc, certain assets of Peak USA Energy Services, Ltd., subsidiary of Nabors.      (Source: Google Finance)

Nabors Industries, the world's largest driller of onshore oil and gas, reported first-quarter results in late April that soundly beat expectations. Yet, to judge from its share price, it would seem all the oil and gas wells were running dry. At $13.07 a share, the stock (NBR) is down more than 50% from its 52-week high of $27.63 reached in August 2011. The shares have been hurt by falling prices for natural gas, and investor anger over executive perks and severance packages. But shareholders look to be getting a stronger say in corporate governance, and there are lots of reasons to be optimistic. The shares, hurt by falling natural gas and a controversy over severance packages, could hit $30 as asset sales and big debt reductions pay off.

Potential Catalysts:

Divestiture to pay down debt: In March 2012, it was reported that progress has been made in jettisoning noncore businesses in which NBR might raise $800  million. These asset sales will help reduce a hefty $4.8 billion in debt. Strong free cash flow will also be used to pay down debt. The company is targeting a net debt-to-capitalization ratio of 25% in two years from the current 45%.

Management Changes: Nabor’s fall from grace is directly related to the company's history of bestowing lavish pay and perks on its executives. An uproar ensued last fall when its former CEO, Eugene Isenberg, was set to receive a $100 million cash payout due to a "change-of-control" clause in his contract triggered by the board removing him from the CEO position. The 81-year-old Isenberg eventually relinquished his right to collect the payment. Isenberg, who remains chairman, is credited with leading Nabors, formerly known as Anglo Energy, out of bankruptcy in 1987 and has been amply rewarded ever since. From 1992 until he stepped down last fall, Nabors paid him $750 million, including exercised stock options. He regularly jetted between headquarters in Houston and his homes in Palm BeachFla.Martha's VineyardMass., and New York. However, a cultural and strategic transformation appears to be taking hold at Nabors under the new CEO, Anthony Petrello, and some new blood on the board—lead director John Yearwood, the former chief executive of Smith International, a respected oil- and gas- equipment maker that was sold to Schlumberger in 2010. The changes are showing up in the customer-satisfaction rankings conducted by independent oilfield tracker Doug Sheridan and his Houston-based EnergyPoint Research. Nabors ratings, though still low or average, are trending higher, reflecting improvements in pricing and contract terms, service, technology, and other factors.

Improving Business:  NBR’s domestic drilling business in the lower 48 states has performed well despite industry challenges. Nabors' Alaska and offshore operations have rebounded, and its overseas operations appear to be recovering. Should natural-gas prices stage a comeback, as is inevitable at some point, Nabors will be a major beneficiary. Nabors also has very limited direct exposure—two rigs—to troubled Chesapeake Energy (CHK), which many expect to cut back on its shale exploration to conserve cash. Margins at Nabors' international operations are set to improve in the second half of this year and into next year as contracts are repriced. Last year, business in Saudi Arabia and North Africa, two areas that account for about half the overseas fleet, were disrupted by the Arab Spring uprisings, resulting in higher labor costs in Saudi Arabia and lower rig utilization in North Africa. Company officials believe the first quarter marked the bottom of the cycle in the international business.

Strong Fundamentals: Nabors' domestic drilling business has performed well still it is trading at a paltry six times estimated earnings of $2.19 a share for this year and about five times projected earnings of $2.51 a share for 2013, despite Wall Street expectations for earnings to increase by 15%. Any way you look at it, the stock appears undervalued. Nabors trades at less than four times EV/Ebitda, despite historically fetching a multiple of more than five. At five times EV/Ebitda, or cash flow, the stock might be worth closer to $23 a share, according to some industry estimates. A price/earnings ratio of 12 would result in a stock price closer to $22, representing gains of 65% to 70%.

Recent Price
52 Week Hi-Lo
Market Value
$3.8 bil
Rev 2012E
$7.5 bil
EPS 2012E
P/E 2012E
Source: Thomson Reuters

Monday, June 18, 2012

Macro Economic Thoughts in 2012

Quick thoughts for the next 12 months:

Both EU and emerging markets have undergone turmoil within the last 12 months and these events might be correlated. The recession within EU might be trickling down to emerging markets leaving US as the next best option for investors around the globe. EU is currently in recession as we know of. Greece underwent a pseudo referendum this weekend on the question of whether or not to stay in the EU. The Greek people voted for the party that supports Greece staying in the EU, however the elections this weekend have resulted in a fragile political dynamic and still lot of uncertainties remain. With Spain and Italian yields at 7%, banks undergoing major restructuring and governments reporting significant deficits, the countries seem to be in trouble. EU turmoil resulting in restricted lending, stagnant corporate growth and high unemployment has resulted in a decline in consumption and corporate spend alike.

Similarly, with two major emerging markets exposed to EU; China with 17% of its exports to EU and Indian with 16% of exports to EU are negatively impacted by European recession. Others in the Asian club are economies such as Malaysia with more than 14% exposure to EU. Furthermore, manufacturing jobs that are returning to the US only exacerbate the problem for the emerging economies. In addition to these problems, China and India have problems of their own; China with its real estate market and India with its high rate of inflation. Both are expected to face volatility over the next year or two. Easing of monetary policy in china might alleviate some short term concerns; however, fundamental problems with bank leverage and real estate still remain.

The cautiousness in bank lending, slowdown in exports and that in Chinese real estate directly impact consumption and corporate spend in the mainland. With slowdown in these economies, which are major consumer of natural resources, economies such as Australia and Brazil will get impacted. The markets are pricing in a slowdown in these countries as well.

That leaves US. Within US, equities are priced at 12x – 13x times’ earnings, corporate balance sheets very strong and corporate are sitting on loads of cash (almost $2T).  A lot of investors are looking for safer havens and have parked their money in treasuries which might be currently overbought – so much so that they are yielding negative yields in real terms. The only reason why investors would do that is because US Govt. assures return of principal if nothing else! With interest rates nowhere to go, treasury market might be overbought and will undergo correction at the first sign of interest rate moves.

That leaves us with US Equity markets. Does that mean the equity markets will rally in short term? Probably not! With almost 20% of S&P 500 companies exposed to EU and almost 35% to 40% firms exposed internationally ( EU & Emerging markets), the markets might undergo short term volatility. Earning comps might not come out that strong YoY, however, US firms are well positioned to take advantage of a turnaround and are one of the best bets for investors, looking both for yields and long term capital appreciation.

2011 and 2012 have seen lot of special situation such as spin-off’s M&A, actual/potential divestitures or potential JV’s in the large and mid cap space. Furthermore, the markets have also seen lot of new regulation & budget cuts post 2008 crisis that will affect the firms going forward. There have also been companies that have emerged from bankruptcies and have started trading post reorganization; these events present ample opportunities for long term investors looking for value plays with significant catalysts attached.

For example - defense sector will see cuts and therefore might lead to consolidation. Healthcare technology providers might benefit from the healthcare regulation. Within homebuilding where I do not see a significant recovery in short term, those who are into home repair & maintenance might come out as winners. Natural gas provides ample opportunities for people to invest in - not in the natural gas producers per se, but in companies that are well placed to take advantage of LNG exports from US to countries in EU & countries like China. There is also need for or demand for natural gas technology which will benefit companies who will export or share it with emerging economies looking to explore natural gas reserves. Furthermore, firms that help build Natural gas infrastructure will benefit too. Water, which has been big on my list, will be a money maker in the next three years, especially firms who are providing water testing systems, analytics, providing water for fracking, transportation and dewatering.  

There are more firms I can talk about within the technology space or shorts for companies that are leveraged with exposure to cyclical industries/consumers. I can talk about Gold given easy monetary policy, but am not expert in gold and it’s an obvious choice! Therefore, I will end it here for now.

These are macro views and should not be construed as my views on specific companies trading internationally. Current markets are clearly for investors who are looking to trade medium to long term.

Sunday, April 22, 2012

Material share buybacks, pricing power due to industry consolidation and strong fundamental provide substantial upside to Seagate (STX) shareholders

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at firms with material buybacks and fundamental trades. The valuation, like those published exclusive on seeking Alpha, is not mine.
  • Seagate Technology PLC (STX) - Currently trades at $29.00
  • Potential Upside by Industry Estimates: Approx. $10-$15 per share
  • Market Capitalization: $13.11B
  • Cash: $2.05M; Total debt: $2.86M
  • Shares Outstanding: Approximately 448M
  • Dividend Yield: 3.5%; Operating Margins: 16.89%
  • Sector: Technology; Industry: Data Storage Space
  • Main Catalyst:  Pricing power, share buybacks, Upside from industry consolidation, long term contracts, strong fundamentals

What does STX do?
     Seagate Technology plc (Seagate) designs, manufactures, markets and sells hard disk drives. Seagate produces a range of disk drive products addressing enterprise applications, where its products are designed for enterprise servers, mainframes and workstations; client compute applications, where its products are designed for desktop and notebook computers, and client non-compute applications, where its products are designed for a range of end user devices, such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems. In addition to manufacturing and selling disk drives, the Company provides data storage services for small- to medium-sized businesses, including online backup, data protection and recovery solutions. The Company sells its disk drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. (Source: Google Finance)

Disk drives are data-storage devices widely used in desktop computers, notebooks and servers. While annual industry unit sales top 600M, generating over $30B, STX a rare find in an improving industry trades for just three times earnings. Seagate dominates the disk-drive industry, along with Western Digital (WDC). Sales of Seagate disk drives are benefiting from tightness in the market after extensive flooding in Thailand last year hurt competitor Western Digital. Seagate shares, at $29, trade for approx. four times a projected profit of $6.28 a share in its current fiscal year, which ends in June, and three times the $8.52 expected in fiscal 2013.Seagate looks appealing because of its super-low valuation, strong market position, and shareholder-friendly management, led by CEO Steve Luczo.

Potential Catalysts:

Share buybacks and strong dividend yield:
The company has a 3.8% dividend yield, having boosted its payout 39% in January. Another dividend boost could come in the next year. Seagate also is aggressively repurchasing stock. The CEO has said the company aims to cut its share count by about 25% in the current calendar year to 350 million shares. Investors can follow Seagate's buyback progress in almost real time on its Website because the company, which is domiciled in Ireland (although run out of Cupertino, Calif.), complies with Irish rules that require prompt repurchase disclosure. Seagate has stepped up its buyback lately, repurchasing 3.85 million shares in the first three days of last week.

Market Demand and Industry consolidation creating pricing power: Seagate is benefiting from tightness in the disk-drive market, caused by the massive flooding in Thailand last summer, which caused an estimated $45 billion in damage and knocked out a big part of Western Digital's production. Seagate's factories were unscathed, although it was affected by component disruptions from suppliers. Why does Seagate trade so cheaply? Wall Street is skeptical that the good times will last beyond this year and believes that the disk-drive industry, which has a history of low margins and fierce price competition, will return to its bad old ways. However, one key positive that they ignore is the industry consolidation. A decade ago, there were eight major manufacturers. Now there are three, down from five last year. In December, Seagate paid $1.4 billion in stock and cash for the disk-drive operations of the No. 5 player, Samsung (005930.Korea). And this year, Western Digital bought the business of the No. 3 maker, Hitachi (6501.Japan). The only other independent producer is Toshiba (6502.Japan). Seagate and Western Digital both have a roughly 43% market share, which bodes well for firm pricing. In addition, the Thai floods created a temporary shortage of disk drives that may persist until the end of this year.

Benefits from long term supply contracts and incremental demand for storage: Rather than push up tabs quickly, Seagate has opted to ink long-term supply agreements with key customers like Dell which means better prices for a longer period. Some investors worry about the increasing competition that disk drives face from solid-state memory, like that used in Apple's iPad and other devices, including ultrabooks. Add to that doubts about the future of personal computers. But industry analysts argue that storage demand is growing sharply, thanks to an explosion in mobile and PC-generated content, and that disk drives will supply part of that need. The CEO has even talked about a scarcity of storage capacity. This could support double-digit annual growth in production. PC disk drives, which cost under $100, are a cheap source of data storage, costing a fraction as much as solid-state memory.

Strong Fundamentals:
Some industry analysts see plenty of upside in Seagate, with some carrying a $40-$45 price target and a Strong Buy rating. They say that the STX valuation is "absurd" and that the disk-drive stocks represent one of the "best plays" in technology outside of Apple (AAPL). There is also a belief that firm will generate strong cash flows in the next quarters, with few tech companies returning so much cash to shareholders in the coming year, relative to their market value. Seagate sees $20B of revenue this calendar year, up from $11.5 billion in 2011. CEO's bullish guidance for the March and June quarters bolstered the stock at the time of his February conference call. While he didn't provide earnings projections, his guidance on revenue and margins enabled analysts to come up with profit estimates. The Street sees $2.09 a share for the March quarter and $2.58 for the June quarter. Investors are eagerly awaiting third-quarter results, to see if Seagate is delivering. Industry estimates that Seagate trades for just 2.4 times forward EBITDA, which is one of the lowest valuations among major tech outfits. It should also be noted that Industries in transition can be profitable because the markets value them very cheaply. Seagate shares seem to be reflecting fear of a profit collapse; that seems too dire a scenario, given the disk-drive business's consolidation, which should lead to better long-term pricing and margins. Even if Seagate's annualized profits drop to $5 to $7 a share, the stock looks inexpensive.And with no need for acquisitions, given its dominant position, Seagate is apt to continue repurchasing stock and may further boost its dividend—a great combination for investors.

The disk-drive industry's two giants trade at tiny multiples of their expected earnings.

Mkt Val (bil)
Seagate Tech/ STX
Western Digital /WDC