Tuesday, January 31, 2012

Business restructing and Potential M&A to provide substantial upside to Kraton (KRA) 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 potential takeover targets and restructuring trades. The valuation, like those published exclusive on seeking Alpha, is not mine.
  • Kraton Performance Polymers Inc (KRA) - Currently trades at $28.00
  • Potential Upside by Industry Estimates: Approx. $10-$15 per share
  • Market Capitalization: $882M
  • Cash: $45.5M; Total debt: $69M
  • Shares Outstanding: Approximately 32M
  • ROE: 24%; Leverage:0.3x
  • Sector: Basic Materials ; Industry: Specialty Chemicals
  • Main Catalyst:  Upside from inventory valuation methods; Business restructuring; Potential M&A
  • Major Clients: Procter & Gamble (PG) and Kimberly-Clark (KMB).
  • Trading timeline: 12 months – 18 months

What does KRA do?
      Kraton Performance Polymers, Inc. (Kraton) is a producer of styrenic block copolymers (SBCs). The Company markets its products under the KRATON brand. Kraton’s SBC products are found in a number of applications, including disposable baby diapers, rubberized grips of toothbrushes, razor blades, power tools and in asphalt formulations used to pave roads. The Company also develops, manufactures and markets non-SBC, such as isoprene rubber latex (IRL). Kraton’s IRL products are used in applications, such as surgical gloves and condoms. As of December 31, 2010, the Company offered approximately 800 products to more than 700 customers in over 60 countries worldwide. The Company manufactures its polymers at five manufacturing facilities on four continents (North America, Europe, South America and Asia), including its flagship plant in Belpre, Ohio. In July 2010, the Company announced the addition of Kraton D1183 BT to its line of polymers.

Launched in the mid-1960s as part of Shell Chemicals, Kraton was spun off from its parent in 2001. More recently, it was owned by two private-equity firms, TPG Capital and JPMorgan Partners. The company went public in late 2009. Until recently, shares of KRA had been on a lot of Sell lists. At around $27 , Kraton (KRA) was above its 52-week low of $14.37, set in October amid concern about a sluggish economy in the U.S. and Europe. But it was still well below its 52-week high of nearly $48, hit last April. The Houston company makes styrenic block copolymers, or SBCs, which are used in everything from disposable diapers and rubberized razor grips to surgical gloves and intravenous-drip bags. SBCs give diapers and other products more strength, flexibility, durability and resilience. When the economy rebounds, some analyst feel that stock might be worth as much as $43.00

Potential Catalysts:

Business Restructuring:
Recently CEO Kevin Fogarty has dumped unprofitable product lines and changed pricing policies. When he took over in 2008, roughly a third of Kraton's products were unprofitable, and the company repriced its wares only annually, preventing it from adapting quickly to spikes in raw-material costs. Fogarty discontinued 5% to 7% of the unprofitable lines and raised prices on the rest. According to the current policy, KRA now gives customers a 30-day notice on price changes. Kraton also deemphasized footwear, a low-margin line. One promising area for KRA has been isoprene rubber latex, a "non-allergenic" substitute for natural-rubber latex that is used to make condoms and surgical gloves. It's by far the company's fastest-growing segment, albeit off a modest base; sales rose 35% in the third quarter, to $26 million. 

 Future Upside from using FIFO inventory Method: Kraton is expected to report a loss for the fourth quarter, owing to its use of FIFO (first in, first out) inventory accounting. After surging through the summer of 2011, prices of butadiene, a crucial raw material on which no hedges are available, began to fall. The North American butadiene contract price for January is settling at $1.06 a pound, down from $1.77 last August, according to reports. Butadiene, styrene and isoprene account for about 55% of Kraton's cost of goods sold. Under FIFO, the higher costs didn't show up until late last year and will pummel fourth-quarter results. Analysts expect a 27-cents-a-share loss, with sluggish volume also hurting the numbers. The good news: Kraton has been able to pass along a lot of the raw-material increases to customers. And the higher-cost inventory from last year won't last indefinitely. "You have to look through the noise of that inventory accounting in the near term," says David Goldsmith, an analyst at Baron Capital Management, which holds Kraton shares.

Potential M&A:With recent buy of Solutia by Eastman Chemicals at 40% premium, there is a renewed interest in the chemical’s sector. One of the most important KRAcustomers namely P&G spoke about potential M&A and divestitures.  According to industry reports,  the market is treating Kraton like a commodity chemical company, even though it has rolled out innovative value-added products, including allergy-resistant surgical gloves and a substitute for PVC plastic that is more environmentally friendly than that material. Furthermore, bulls note that the company has a strong global footprint, market-leading positions in many of its products and good overseas growth prospects, particularly in China. Kraton divides its SBCs into two categories: USBCs, used in products for paving, roofing, footwear, adhesives and sealants, and higher-margin HSBCs, which are more complex and whose uses include soft-touch rubber razor and toothbrush handles, along with IV bags in hospitals. HSBCs account for about one-third of sales, and the company is gradually tilting its sales mix toward them. With an enterprise value of $1.17 billion and strong growth prospects, Kraton would be an attractive acquisition target.

Improving Fundamentals: Another wrinkle with raw materials is that when their prices start to decline, customers sometimes hesitate to buy, hoping for better deals down the line. That hurt Kraton toward the end of last year, as customers ran down their inventories. But butadiene prices have started to tick back up. "They are starting to get emergency orders, and now that butadiene prices are rising again, you will likely see customers get off the sidelines and restock," says Analysts and recommend buying the stock on any dips. Its stock valuation hardly reflects any of that. Late last week, the company was trading at about 8.5 times the $2.98 a share that analysts expect it to earn this year, down from $3.50 in 2011. The problem: raw materials, a big part of Kraton's costs, are volatile and hard to predict. In the third quarter, it earned $1.33 a diluted share, up from 88 cents a year earlier, on $402 million, thanks largely to price increases that the company passed along. Volume, as measured by tonnage, fell 4%.

Wednesday, January 11, 2012

Tessera: Implementation Of Strategic Initiatives And Starboard's Involvement May Create Substantial Upside

I have posted an article on Seeking alpha which goes into details about how to profit from and why Tessera Technologies (TSRA), will create upside for medium term investors. The upside is approximately USD 6 a share.

If anyone reading do invest in special situations, this might make a good read. Either you can click on the title or go to Seeking Alpha and  and check out "kedar special situations" Its under Long Ideas ideas for Tessera Technologies (TSRA)

Thank you

2011 Returns on the Ideas

Every year, I look at returns on my "well researched ideas" I put out. Even though I have been generating these ideas for 3 years, I only started putting them on my blog this year.

Return on my synthetic portfolio of Long/Short ideas in 2010 was 52% and for 2011 is 62%. They are NOT inclusive of dividend payouts and potential trading costs.

Some of my 2011 ideas:


I hope everyone reading this  have a wonderful 2012!