Special Situation Ideas for week of 20-Oct-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.  These are def. is worth a serious look.

Kulicke & Soffa Industries (KLIC) Shares of the 57-year-old company that  dominates its niche, bonding machinery that's used to provide electrical connections between semiconductors and circuit boards using superfine gold and copper wires. KLIC has 70% of the market for equipment used to bond electrical circuits to circuit boards.It trades around $12, giving it a market value of about $900 mn. It finished the June quarter with $508mn in cash, or about $6.65 a share. This is a company that looks ripe for an activist investor. The profitable and low-profile maker of semiconductor capital equipment is sitting on cash equal to more than half its market value, but refuses to pay a dividend or repurchase stock. The core reason that management hasn't initiated a buyback or a dividend is to maintain optionality on diversification. Nearly all of its customers are in Asia, where the bulk of the world's chips are produced. The knock on KLIC is that it's in a mediocre, economically sensitive business threatened by technology changes. But at  around $12, Kulicke & Soffa looks cheap. Subtract $6.65 in cash per share, and the forward P/E is 3x, according to industry estimates. Pennsylvania law makes it difficult for a hostile takeover, but activists generally seek to influence rather than buy companies. With most stock indexes at or near record levels, it's hard to find a company with the combination of Kulicke's cash holdings and earnings power. It should be said that about 80% of KLIC's cash is overseas. If repatriated under current rules, the cash would be subject to taxes that could reduce Kulicke's net cash position to about $5 a share from $6.65 a share—still a large amount.

Athlon Energy (ATHL) is Forth Worth, Texas-based independent oil and gas explorer has only been operating since 2011 and went public in August, 2013. It currently holds nearly 100,000 net acres with an average working interest of 93% in the area the Permian Basin. It lies in western Texas and stretches across into southeast New Mexico, is having an oil exploration and production rebirth. The basin has one of the world's thickest deposits of rocks from the Permian geologic period. ATHL's horizontal drilling technology offers incremental opportunities on the same acreage. ATHL dipped its toes into horizontal drilling in August. It plans to drill four horizontal wells by the end of the year in addition to seven vertical rigs that it will be running this year. Industry analysts say that by adding horizontal drilling, a company can recover 10 times as much oil as it does with vertical wells. But while a vertical well can cost approximately $2mn, the cost of a horizontal well can range closer to $6mn to $8 mn.

Management stated that the $554mn in liquidity raised at its IPO will be used for future drilling activity. From each vertical well, a company can produce about 140,000 barrels of oil equivalent (BOE) over the life of the well , in comparison, a horizontal well's lifetime production can be as high as 600,000 to 700,000 BOE. A third of ATHL's 2014 production growth to come from horizontal drilling. About 65% of Athlon stock is owned by the private equity firm Apollo Global Management (APO). Management is considered strong with a solid financial background.

Prior to Athlon's formation, CEO Reeves, a certified public accountant, served as CFO at Encore Energy Partners (ENP). Before joining ATHL in 2013, CFO William Butler was a managing director at the investment banking firm Stephens, and before that he was treasurer at XTO Energy, which later became a subsidiary of Exxon Mobil (XOM). Athlon also has solid hedges in place for the price of oil, at more than $92 per barrel of oil for 2013 and 2014. For the second half of 2013, oil hedging represents 92% of 2013 and 84% of 2014 estimated production. ATHL has the right real estate at the right place in the Permian where companies are moving from vertical drilling to horizontal drilling

Targa Resources: This is a midstream energy company and process oil and gas. Targa is growing EBITDA 20% to 25% a year for the next several years, and the overall U.S. energy industry is growing roughly 10% to 12% a year. Growth is disproportionately faster near shale regions. Targa has near on of the basins- assets in the Permian Basin, the Eagle Ford Shale, or the Marcellus Shale. This company can organically delever its balance sheet through FCF. Net debt/ Ebitda  under 5x which is expected to be 3.7x in 2 yrs. Become an investment grade firm in 2yrs and market not pricing that upgrade. Currently yielding 5%. Growth profile of this company is phenomenal. Investors can also own Targa bond that matures in November 2023, with a coupon as 4.25%.