Wednesday, February 27, 2013

Special Situation Ideas for week of 27-Feb-2013

Those looking into some catalyst might want to ponder over these names for the week. I have not done extensive research on them, but this is a way for me to share names on my list that others can work with since I have too many ideas to work on.  These are def. is worth a serious look.

ADT Corp (ADT):  Read it in Barron's. Makes for a good read. ADT was  spun off from Tyco International in Sep-2012. The firm is trying to move beyond normal security business by using its access to 6.43M homes. The growth might come from ADT’s efforts to have its current customers use its equipment to monitor their children, lock doors, control thermometers, turn on lights, and start dinner prep. Moreover, these functions can us operation remotely via new ADT technology – something that will ease the adaptation. The technology is currenylu sold to only 4% of its customer base, leaving large leg room for growth. Management's revenue growth targets for 2013 are 5%-to-7%. Subscription-based, recurring revenue is 92% of total sales.  Firm has a 25% share of the home-alarm business and 14% of the small-business segment. Firm plans to buy back $2B of shares over next 3 years, with $600M in 2013.

Computer Task Group (CTGX): It’s an information technology (IT) solutions and staffing company with operations in North America and Europe. Tech and Healthcare constiture approx 64% of total revenues. Given the impending M&A cycle, it should be noted that IBM is CTG’s largest customer with 30% of revenue, making this mid-cap name a potential takeover target.; P/E: 21x, no debt, ROE 14%, Margins 5% with EPS growth 20%.

MasTec, Inc (MTZ): It is an infrastructure construction company operating mainly throughout North America across a range of industries. Its customers are primarily in the utility, communications and government industries. The Company’s core services are the engineering, building, installing, maintaining and upgrading of infrastructure for communications, utility and government customers.  I have spoken about the upgrade cycle long due in the US and this might be a name to look into for potentially playing that theme. I work about Xylem a while ago, as a play on water infrastructure. It can also be potentially taken out, if the upgrade cycle starts. MTZ does not trade cheap, with  forward P/E: 16x with  ROE of 12%. My concern is the debt on the firm, that should be looked into.

Tessera Technologies (TSRA): The battle is heating up between Starboard and the company. The most recent board feud in addition to the pressure from the activist may bring this company back into play, thereby making it an interesting trade. I wrote about Tessera (TSRA) a while ago and might be worth revisiting.

Sunday, February 10, 2013

Special Situation Ideas for week of 11-Feb-2013

Those looking into some catalyst might want to ponder over these name for the week. I had two of these names on my list (HCA and HSP), and Barron’s confirmed my thoughts. Here is a summary from Barron's. These def. is worth a serious look.

HCA (HCA): Potential Short: Catalyst - OverLeveraged with unknown obamacare benefits priced in
HCA (HCA), the country's biggest publicly traded hospital operator, have soared almost 70% since 2011, and 23% this year alone. One main factor has been the remarks that the Affordable Care Act, or Obamacare, will add substantially to its earnings in 2014.
However,  given the uncertainties of Obamacare reimbursement for hospitals, and HCA's fourth-quarter results, which were more checkered than they seem at first blush, this run might not last. Leverage is rising; profit margins are falling; and earnings before interest, depreciation, and amortization fell from year-earlier levels.
A negative for the shareholders I the funding of special dividends, a total of $4.50 per share last year, nearly $2B, mainly through debt, giving big gains to Bain Capital Partners and KKR (KKR), part of the private-equity group that brought HCA public in March 2011, after taking it private in 2006. That group sold about 32 million shares in December for around $1B, but Bain and KKR still own about 40% of HCA.
Management guidance for 2013 that was weaker than expected and expressed caution about what Obamacare will mean for profits – putting a question mark on the run up in HCA’s share price. Same-facility inpatient revenue per admission fell 1%. That probably reflects pricing weakness.Emergency visits rose 12.7%, but it’s a  lower-margin business. Apparantly provisions for doubtful accounts soared 67% in the fourth quarter, to $1.1 billion, from the year-earlier total. Debt, due to special dividends, increased by $2B, to $29B, higher than HCA’s $28B in total assets.  When interest rates jump, or Obamacare isn't as remunerative as HCA's stock price indicates it will be, times could get tougher.

Wendy's (WEN) : Potential Long: Catalyst - Takeover target, Business restructuring
In the past 18 months, Wendy's (WEN) has gone back to its roots as a high-quality burger maker, introducing new menu items and more focused marketing, and rolling out a dramatic remodeling of its stores. The results are notable, with same-store sales rising for six of the past seven quarters. They were up 4.9% in the past two years. Wendy's EV/EBITDA is 8.4x. while its competitors trade at 10x. The discount is likely to narrow as Wendy's transformation unfolds. At 10x 2014 est.EBITDA, Wendy's would be worth $7.20. The stock yields 3.2%.
WEN has 6,560 stores, with 78% franchised and the rest company-owned. Almost 90% of the stores are in the U.S., with the greatest concentrations in Florida, Ohio, Texas, and Georgia. In 2008, Wendy's was acquired for $2.4B by Triarc, a holding company controlled by activist investor Nelson Peltz. The current CEO, Emil Brolick, joined Wendy's in September 2011 and knows it well, having worked closely at Wendy’s  before leaving for Yum! Brands. Brolick turned around Yum's Taco Bell unit, and most recently served as chief operating officer of Yum. Last April he hired Craig Bahner, a Procter & Gamble (PG) veteran, as chief marketing officer.
Wendy's has made significant changes to its menu and marketing plan. The new products have met with success, and Wendy's has gained share in large hamburgers and large chicken sandwiches. But some price-conscious customers have taken their business elsewhere. Management recently launched a value-based menu, called "Right Price Right Size," and will ramp up marketing of it this year. Remodeling Wendy's aging stores is another part of its strategy. The remodels include such features as lounge seating, fireplaces, flat-screen TVs, Wi-Fi, and digital menu boards.
Sales in the newer-looking stores are up 25% since remodeling. The company plans to remodel 200 stores this year, and open 120 new units. In 2015 it is targeting 1,300 new and remodeled outposts. The changes are showing up in profitability and sales with December quarter, company-run restaurants enjoyed profit margins of 15.9%, compared with 15% a year ago. Cash stands at $454M to debt of $1.46B. FCF is  expected at $15M in 2013. Peltz and associates control 27% of Wendy's stock. Given his involvement, a sale of the business is a strong possibility. One logical buyer: Yum! Brands, which doesn't own a burger business.

Hospira (HSP): Potential Long: Catalyst - FDA inspection, takeover target, biosimilars
Nearly three years after the FDA mandated that it improve quality control at one of its top drug-manufacturing plants, Hospira (HSP) is getting ready for an inspection of the Rocky Mount, N.C., facility, possibly in 1H13. A clean bill of health from the FDA could clear a path to boost the plant's production, which has been scaled back amid the remediation efforts. It also would enable Hospira to focus more resources on promising markets, including generic substitutes for biotech treatments whose patents are expiring. Overseeing the plant's cleanup and the company's revamped strategy is CEO Michael Ball, who joined the firm in March 2011 from Allergan (AGN).Hospira makes generic injectable drugs including morphine and antibiotics. CEO wants to increase HSP’s presence in France, Germany, and Japan as well as the emerging markets of China and Brazil.
After the FDA inspection, North Carolina is expected to come online and that will give the firm good lift. Gross profit margins, at 30%, will probably rise as the costs of upgrading its facilities decline, plant efficiencies improve, drug shipments increase, and prices rise. The facility is important as it accounts for 25% of the company's $4B in sales.  Due to uncertainty surrounding Hospira's inspection, stock has been negatively impacted. Shares are down about 43% since November 2010 high. That has created an opportunity. HSP enjoys world's No. 1 market share—37%—in the generic injectable-drug market, a highly specialized class of drugs that require advanced handling techniques. The complexity of making these drugs creates a high barrier to entry. Hospira enjoys limited competition and higher margins as a result. About 63% revenue comes from these drugs. HSP also ranks No. 2 in the market for intravenous-delivery systems and pumps with a 17% share. The systems and pumps kick in about 24% of revenue; other products like IV solutions comprise the rest.
Whats not priced in the stock is the growth potential from a new drug group known as biosimilars. HSP is the leading U.S.-based producer of these drugs and among the world's top three, along with Teva Pharmaceutical (TEVA) and Sandoz, a division of Novartis (NVS). Estimated $40B of the biologics are scheduled to lose their patent protection through 2020, providing lots of new opportunity for HSP and its rivals. Its estimated that the biosimilar market will reach nearly $4B by 2015 from $243M in 2010. HSP's biosimilar for Amgen's Epogen, is in Phase III clinical trials with the U.S. FDA. The last patent on Epogen is scheduled to expire in 2015, which is when the U.S. market for a biosimilar version is set to begin. HSP is also selling Nivestim, a version of Amgen's Neupogen, which boosts infection-fighting white-blood cells in cancer patients, in Europe and Australia. Biosimilars enjoy support of pharmacy-benefit managers because of the tremendous cost savings they represent for their customers. Hospira's  market value is about $6B makes it a potential acquisition target for big-pharma companies such as Merck (MRK) andPfizer (PFE). 

Wednesday, February 6, 2013

Spectrum Brands (SPB) – Post Bankruptcy play with substantial upsisde

Those looking into some catalyst might want to ponder over this name for the week. I looked at this name and read it in Barron's. It was Meryl Witmer’s pick. This def. is worth a serious look.

Current Price: $55.60

Market Cap:

Shares outstanding: 53m

How high could the stock go? Two-year price target is $75 to $100.

Spectrum emerged from bankruptcy protection in 2009. It is 57.7%-owned by Harbinger Group [HRG], which is controlled by Harbinger Holdings, a private investment firm run by Phil Falcone. Spectrum represents the majority of the value of Harbinger Group. Falcone is controversial, and Harbinger's ownership stake could explain why Spectrum is a good value. Harbinger might have to sell its Spectrum shares at some point. If a forced sale were to occur, it might remove the taint from Spectrum, and bring it more attention.

Business: Spectrum is a diversified seller of branded consumer products. Its brands include Rayovac and Varta batteries; it is No. 3 in the business in North America, and No. 1 in Latin America. It also sells Remington electric razors and personal-care products, and is No. 2 in the category in North America, the U.K., and Australia. In small kitchen appliances, with brands such as Farberware, Black & Decker, George Foreman, and Russell Hobbs, it is No. 2 in the U.S. and No. 1 in the U.K. Spectrum also is active in pet supplies; its brands include Tetra, FURminator, Nature's Miracle, and Dingo. It is No. 1 in fish supplies, No. 2 in global pet supplies. In the home-and-garden segment, it sells insect repellants, and is No. 2 in the U.S.

Key points:
A key consideration  is the quality of the management team, and its focus on allocating capital wisely. Spectrum recently completed an acquisition that may turn out to be brilliant. It bought a division of Stanley Black & Decker (SWK), whose brands include Kwikset, Weiser, and Baldwin doorknobs and locks. It is No. 1 in locks in the U.S. and Canada, and No. 1 in luxury hardware in the U.S. Other brands include Stanley hardware, No. 1 with residential builders in the U.S., and Pfister faucets, No. 4 in the U.S. The benefits from this acquisition are twofold. Spectrum has a fantastic global distribution system and, over time, can introduce the Stanley Black & Decker products worldwide. Also, it will gain increased scale with customers.

Financial impact From M&A
: If the only benefit of the merger is the $10 million in cost savings that management outlined, and there is no growth, reported earnings per share would climb from an estimated $3.64 in 2013 to $4.20 in 2015, mainly from paying down debt. To square GAAP accounting , we add back incremental cash flow of 80 cents a share from NOLs [net operating-loss carry forwards, a deferred-tax asset]. That's $5 a share in after-tax free cash. The excess of depreciation and amortization over capital spending adds another $2 in cash. In all, after-tax free cash flow grows from an estimated $6.44 a share in 2013 to $7 in 2015. The stock is a real bargain at 7x after-tax free cash.

A few things could happen to boost earnings. Spectrum could continue to grow at a 4% annual rate, which would add another 80 cents to earnings over two years. In 2014, it could refinance some expensive debt on which it is paying 9.5% at, say, 6%, which would save another 65 cents a share. Add it up and you get $8.45 a share. Plus, the company has NOLs of more than $1 billion. And these numbers don't include the benefits of broader distribution of the Stanley Black & Decker brands, or a significant increase in homes built in the U.S., which we expect.