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.