Tuesday, September 17, 2013

Special Situation Ideas for week of 17-Sept-2013

Those looking into some catalyst might want to ponder over these names for the week. I have  done research on few of them, the other I have read online, on Barron’s and other publications.  

CST Brands: Valero Energy (VLO), spun off its retail business called CST Brands. The spinoff could be a winner for investors. CST is no lightweight, operating one of the largest fuel and convenience-store networks in North America. CST has 1,875 stores in the southwestern U.S. and eastern Canada. The company is asset-rich, as it owns 80% of its properties. It has a solid balance sheet, and generates roughly $100 mn a year in free cash flow. Management will use the company's ample free cash flow to reduce its $640 mn in net debt and pay dividends. It declared an initial quarterly payout  6.25 cents a share, for an 0.8% annual yield. CST's real estate could be worth nearly $1 billion and CST could choose to monetize the properties.
CST is on its own, management can expand the higher-margin merchandise business instead of focusing on the sale of more fuel. One of the largest opportunities for profit growth lies in boosting sales of private-label coffee, snacks, beverages, and other products. Private-label goods, currently underrepresented in U.S. stores, carry higher gross profit margins than branded products. The company's Canadian stores carry no private-label merchandise. CST also plans to expand the sale of fresh foods, another high-margin category, extending service from the morning to later in the day. CST carries a broad merchandise selection in its stores, including beverages, cigarettes, snacks, and fresh foods such as cheeseburgers, kolache pastries, and tacos. It also sells gas under the Valero, Diamond Shamrock, and Ultramar brands. Fuel accounts for 84% of sales, but only 49% of gross profit.
In the past three years, new stores in the U.S. have generated a nearly 90% increase in merchandise gross profit, compared with older outlets. Management plans to build 22 stores this year, and 37 in 2014.
CST's earnings are sensitive to fuel margins, which depend on wholesale gas prices. A drop in wholesale gas prices results in higher retail-gas profit margins. Conversely, rising wholesale prices crimp retail margins. Margins can be volatile on a quarterly basis, but tend to be more stable on an annual basis.
In the next 18 months, as CST benefits from its independence, the stock could climb 20%.

Timber: More of a long term plays. The product will get expensive given that its in high demand and the weather to say the least is not helping at all. There have been tones of forest fires, termite attacks, deforestation going on in the world. The space might also look into consolidation or mid tier companies might become potential takeover targets. Two companies that pique my interest are : Rayonier (RYN) yielding 3.5% and trading at 13x EV/EBITDA and Potlach (PCH), yielding 3% and trading at 13x EV/EBITDA.

Canadian Energy Services: Develops nonsulfur-based chemicals and fluid systems used in drilling. Firm is developing impressive new products, including a solution that neutralizes pipe-corroding brine. Could see its stock price, now around $16, on the Toronto Exchange, double or even triple. Meanwhile, shares yield 4.2%.             

Diebold Incorporated: Diebold got a new CEO Andy Mattes earlier this month. Firm can capitalize on an ATM-upgrade cycle in the U.S., driven by new features such as check-deposit automation, videoconferencing amd video functionality (BAC is testing and will use firm and NCR), and the expansion of ATM use abroad. Also helped by regulatory changes for ATM’s. Impending cost cutting of 100M -150M. yields 3.6%. Strong cash flow. 77% of its revenue from the sale and servicing of ATMs, and most of the remainder from security products and services - 50% of the NorthAm mkt and 25% of global. Business has been bad after financial crisis due to banks reducing costs. 47% revenue overseas – another positive. Another positive is sales of vaults as well as electronic-security products.

FutureFuel Corp: Good Balance Sheet, no debt, 2.7% yield. Firm is involved in Biofuels and Chemical manufacturing. Sale agreement with PG locked in until 2016.; Interesting to see, if the firm can be taken over or undergo secular growth?

Recent News: Philips : Philips raised most of its financial targets and announced plans to return 1.5 billion euros ($2 billion) to shareholders, saying it would reap the benefits of a two-year revamp to focus on healthcare, lighting and consumer appliances.

Also, there have been round of spin-offs in the last few months. Those looking at these situations should be paying closer attention!