Wednesday, March 28, 2012

Coinstar: Medium-Term Catalysts Present Shorting Opportunity

I have posted an article on Seeking alpha which goes into details about how to profit from going short Coinstar (CSTR). Its for medium term investors. The potential upside is between USD 15 to USD 20 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 short ideas for Coinstar (CSTR).

Thank you

Tuesday, March 13, 2012

Near monopolistic pricing power and Potential M&A to provide substantial upside to Verisk (VRSK) 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 trades due to firm's industry position & pricing power. The valuation, like those published exclusive on seeking Alpha, is not mine.
  • Verisk Analytics, Inc (VRSK) - Currently trades at $45.39
  • Potential Upside by Industry Estimates: Approx. $10-$15 per share
  • Market Capitalization: $7.48bn
  • Cash: $196M; Total debt: $1.11B
  • Shares Outstanding: Approximately 164M
  • Earnings growth: 22%; Leverage:1.19x
  • Sector: Services ; Industry: Business Services
  • Main Catalyst:  Upside from new ventures,; improving fundamentals; Pricing Power, Potential M&A
  • Trading timeline:  12months – 15months

What does VRSK?
     Verisk Analytics, Inc. (Verisk) enables risk-bearing businesses to understand and manage their risks. The Company serves its customers by supplying data that, combined with its analytic methods, creates embedded decision support solutions. It provides actuarial and underwriting data pertaining to United States, property and casualty (P&C) and insurance risks. It offers solutions for detecting fraud in the United States P&C insurance, healthcare and mortgage industries. It operates in two segments: Risk Assessment and Decision Analytics. On December 16, 2010, it completed the acquisition of 3E Company (3E), a global source for a range of environmental health and safety compliance solutions. On December 14, 2010, it completed the acquisition of Crowe Paradis Services Corporation (CP). On February 26, 2010, the Company completed the acquisition of Strategic Analytics, Inc. (SA). In April 2011, the Company acquired Bloodhound Technologies, Inc.

Hazards to property and people are effectively infinite and nearly unfathomable. This is a happy circumstance for Verisk Analytics, an indispensable company for property and health insurers. Verisk started operating in 1970s as a central repository for property-casualty insurance data, supplied with its proprietary pricing and property information by most of the largest U.S. insurers, which also owned Verisk. The company still is a near-monopoly in its core business, with an uncommonly stable revenue stream and the legal right to collect and report customer-insurance data to regulators in all 50 states. Verisk went public at $22 per share in late 2009, not long after the financial crisis climaxed. The stock was the subject of an approving item in Barron's Streetwise column soon after its debut, and since then has performed nicely; it's now close to $44. Last week, the shares got a boost from an overachieving earnings report released Tuesday. Earnings came in at 47 cents a share, versus the expected 44 cents, and revenue and cash flow were better than expected. For the year, earnings are projected to approach $2.00 a share, up from $1.75 in 2011. The shares remain attractive for long-term investors, given the enviable stability of Verisk's core business and the opportunities for it to build on its expertise in cataloging and pricing risk into such areas as medical insurance

Potential Catalysts:

Despite its crucial role at  the center of a huge industry, Verisk arguably remains one of the lesser known $8 billion stock-market-value companies out there. This is partly because it is the ultimate behind-the-scenes business, made up of actuaries and Ph.Ds designing analytics for other companies to use internally. In addition, even among data providers, Verisk has no precise peers. It's not really a financial company, and somehow gets lumped among industrials by index providers. Verisk  is to insurance what Mastercard (MA) and Visa (V) are to consumer banking, and the CME Group (CME) is to futures trading. In each case, the company was founded as a central information utility owned by industry participants, not run to maximize profit or expand into new realms. But once they became publicly traded independent firms, they were free to raise fees, expand profit margins, make acquisitions and enrich their new shareholders. In each case, too, the companies have hard-to-replicate networks, low capital-investment needs and impressive economies of scale.

 Major shareholders might create M&A opportunity: Among the long-term holders is Warren Buffett's Berkshire Hathaway (BRKA), whose insurance subsidiaries were original owners of Verisk. While most other insurer shareholders sold out upon the IPO, due to their need for fresh capital after the crisis, Berkshire held tight, and it owns a 2.1% stake. Unlike other original owners of Verisk, Warren Buffett's Berkshire Hathaway has recently boosted its stake in the company, to 2.4%.  Like Mastercard or CME in their early years as publicly traded companies, Verisk doesn't have a cheap stock. Through Thursday, it was up more than 30% in the past year. It trades above 22 times forecast 2012 earnings, and its enterprise value (stock-market value plus net debt) is close to 13 times current-year cash flow (measured by earnings before interest, taxes, depreciation and amortization). Yet Value Investors, such as Artisan Funds, a shareholder since the initial offering, remain fans and cite high quality and capital efficiency of Verisk's core business making its reasonable Artisan calculates that Verisk's private-market value is most likely 20% above the current share price. Other analyses posit that, assuming Verisk can trade near today's cash-flow multiple on 2014 results, the stock could be worth $65 a share.

Stable to potentially increasing revenue stream: Verisk's risk-assessment division, serving property-casualty insurers, is over 40% of the business, mostly driven by recurring subscription revenue. Verisk raises prices as the P&C market gets firmer, as it is doing now. This makes Verisk a keen play on the improving property-casualty insurance cycle, without the capital-loss risk of actual insurers. This has set up Verisk for good performance in 2013 and 2014.

New Horizions creating more upside: The Jersey City, N.J., company has expanded into other areas of the "data decisioning" market—notably in health care, where, partly through acquisitions, it has expanded into analytical products that help insurers detect, predict and manage waste, fraud and abuse of medical services. This unit's contribution to revenue has doubled in recent years. The company also has designs on data products and acquisitions in manufacturing and logistics. Verisk also has a sluggish unit that vets mortgage applicants and serves banks in the foreclosure process. This operation probably has bottomed, setting up the prospect that most of Verisk's units will pick up in coming quarters.

Verisk shares have had a nice gain over the past 12 months, but for long-term investors they still look attractive. Bulls think they could move up from the 40s now into the 60s in a year. An already superior company kicking into a higher gear is a rare thing, and worth a premium price.

Verisk Analytics at a Glance
Recent Price
Stk-Mkt Val
$7.7 bil
EPS 2011
EPS 2012E
P/E 2011
P/E 2012E
Source: Thomson Reuters