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.