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).