Sunday, June 8, 2014

Special Situation Ideas for week of 8-June-14

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

Boise Cascade (BCC):
BCC, the country's second-largest manufacturer of plywood and engineered wood products, is another promising—and undervalued—housing play. While the U.S. housing recovery has been slower than many expected, the market is far from dormant. After a storm-battered winter, housing starts rose 13% month-over-month in April, meaning that there could be lots more improvement ahead. Madison Dearborn Partners bought the company in 2004, when Boise also owned timberland and a paper-packaging business. Madison sold off the timberland and paper-packaging operations before taking Boise public in February 2013 at $21 a share. BCC has more than 4,500 customers, including wholesalers, lumberyards, and big retailers such as Home Depot (HD). BCC could become a takeover target. Last year, Louisiana-Pacific (LPX), a big producer of oriented strand board, offered to buy its smaller rival, Ainsworth Lumber (ANS.Canada), but later dropped the bid after facing tough opposition from regulators. BCC's larger competitors include Georgia-Pacific and Weyerhaeuser (WY). Boise is in solid financial shape, with net debt of $216 million and expected free cash flow this year. At $26.50, BCC trades for an EV/EBITDA of 5.9x. Some in industry think that BCC’s share price can raise to $38. Management has said its priority for its cash is acquisitions, but according to analyst, management is open to the possibility of returning cash to shareholders. A buyback or a dividend would likely boost the stock.

Office Depot (ODP): ODP shares have fallen 89%, losing $10.1bn in valuation as strong competition from online retailers such as (AMZN). On 1-Nov-13 ODP merged with OfficeMax, for $1.2bn and few days later, hired a retail turnaround specialist, Roland Smith, as chairman and CEO. He's brought ODP back to profitability. The CEO seems like a perfect for the task ahead: basic blocking and tackling. ODP plans to close 400 stores, about 20% of total by FY16 and expects to realize $675m in annual savings. CEO wants to narrow focus, eliminating low-volume items. A detailed retailing plan should be ready by 3Q14. North America deliver 41% of revenue, but only 9% of profit. 
ODP can double its EBITDA to $800m by FY16. Additionally, 75% of ODP's store leases come up for renewal within five years, offering big savings. Some investors think stock could rise to $8 and some think it can double from where it is. And there's always the possibility of a sale to Staples. The FTC included online competition in its total market assessment when it blessed the merger of Office Depot and OfficeMax. With online rivals like Newegg keeping the competitive pressure on, the door's open to a merger of the superstores.


MeadWestvaco (MWV): MWV is a global packaging company with 5 different lines of business, which presents a great opportunity for an activist to restructure and create value. On 2-July-14, Starboard filed a 13D, in which it declared a 5.6% in MWV. In the letter, Starboard Value is urging the board to improve operating margins, explore a separation of certain noncore assets, and improve capital allocation. Management announced a $125m cost-cutting plan however Starboard thinks it needs $300m in cost cutting. The fund thinks MWV can attain $69 per share. MWV has five businesses: food/beverage; home, health and beauty; industrial; specialty chemicals; and community development and land management. There two main paths to value creation here are margin improvement and selling or spinning off the specialty chemicals business, which is not synergistic with the company's core business. Other ways to create value would be to sell land assets and use $500m of debt and increased free cash flow generated from cost cuts to buy back shares. The entire company could also be sold to one of several strategic investors that would realize great operational synergies and be able to monetize the company's $1.5bn overfunded pension by merging it with their underfunded pension. The fund is also keep a close eye on the recently announced CEO succession plan, which will be key in shaping the future of the company.

EOG Resources (EOG): EOG was spun out of Enron in 1999. Today, it is a leading E&P participant in several prolific shale plays, including the Barnett Shale, near Fort Worth, and the Eagle Ford Shale in southern Texas. EOG is one of the biggest and best-run companies in the oil patch, is having a great FY14. Its crude-oil production surged 42% in the 1Q, beating estimates and can see a 32% jump in earnings this year. This may result from EOG recently increased output of oil and equivalents at the expense of natural gas. Helping to drive the gains are four new plays in Colorado, as well as increased output from existing shale plays. The Rocky Mountain sites could increase the predicted longevity of drilling inventory by 10 years. It also has substantial acreage in the Marcellus and Haynesville shale plays, and is well positioned to take advantage of any rise in natural-gas prices. EOG's EV/EBITDA is 6.9x roughly in line Chesapeake Energy (CHK) and Devon Energy (DVN), however EOG deserves a loftier multiple than the group, given its significant drilling inventory, superior production growth, lower debt ratio, and hefty 15.6% return on equity, compared with an average of 9.5% among peers. EOG shares could climb another 20% to $126 as production rises, winning the company a richer valuation.  

Canadian Natural Resources (CNQ): Canadian tar sands developers have generally encountered a difficult environment over the last two to three years because of the large headwinds, such as difficulty in transporting the fuel, logistical problems, quality of fuel and technology needed to extract oil from the sands. However, with the increased focused on technology and interest from Asia, amongst others catalysts, could this be a signal that fortunes in the tar sands sector are about to improve? A good way to play this turnaround ight be CNQ that has tripled on a split-adjusted basis since FY05. However it has languished for most of the past two years between the high 20s and high 30s. CNQ broke-out to a new three-year high in the low-$40s, though it is still 23% below its all-time high. Although the tar sands are not environmentally-friendly, CNQ possesses a number of attributes which offset this risk. CNQ is not exclusively a tar-sands investment, as it has a well balanced portfolio across natural gas (29% of 2013 total production), North American light crude/NGLs (10%), international light crude/NGLs (5%), North American heavy oil (27%) and oil (tar) sands (29%). The company’s proved oil and natural gas reserves exceed 5 billion barrels of oil equivalent, and its Horizon oil sands project has a 40-year-plus reserve life. The company’s operating cash flow target this year exceeds its planned capital spending by C$2.3bn and its long-term debt-to capital ratio was 28% at the end of the first quarter (including the current portion of long-term debt). Not surprisingly, given its cash generation and strong balance sheet, the company repurchased 10.2m common shares in FY13 and 2.1m shares this year, out of 1.1bn shares outstanding.

Personal Note: As I stated a while ago, CalAmp (CAMP), is worth a serious look. The market for M2M hardware, software for fleet logistics and insurance telematics is poised to be in a secular uptrend for years to come and CAMP is well positioned to take advantage of it. Those looking to invest longer term, will do well, to take a serious look into this company.

Friday, June 6, 2014

Ideas For The Week of 6-Jun-14

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

Time Inc (TIME): Time Warner (ticker: TWX) decided to spin off Time Inc. which started trading trading on when issued basis. The shares will be distributed on June 6, with the ticker: TIME.  At USD 21, or about 10x FY14 EBIT before restructuring charges of $2.13 a share. That estimate is from Morgan Stanley analysts carry a fair-value range for the stock of $23 to $25 a share. Time's FCF yield is above 10%, reflecting modest capital expenditures of around $35 million annually. The company is targeting an annual dividend equal to 30% of FCF.  Considering the prominence of its publications and a venerable history dating back to its founding in 1922, Time has a modest market value of $2.4 billion, making it a possible takeover candidate down the road. Under its new CEO, Joseph Ripp, the company is moving to address these issues and cut costs, including workforce reductions and real-estate savings. Time incurred $63 million of restructuring charges in 2013 and it expects another $150 million in the first half of this year. The layoffs reflect increasing austerity at an organization once known for being a cushy place for journalists. Time is moving its headquarters from the Time-Life building in midtown Manhattan, in the hope to save $50m yearly from lower rental expense, although it expects to incur $120m to develop the new space.

Gannett (ticker: GCI) at recent $28, is trading under 11x earnings. GCI’s majority of profits come from local TV stations, thanks to a $2.2bn deal last year for Belo Corp. Meanwhile, all of Gannett's 80 local papers, from the Argus Leader, in Sioux Falls, S.D., to the Great Falls Tribune, in Montana, now have a pay wall in front of their Websites. The strategy has helped stabilize revenue at the publishing unit, just as an improving economy, political ads, and licensing fees are boosting broadcast operations. Total sales are likely to rise 15% this year to $6bn. Broadcast is an increasingly larger part of the company. GCI paid $215m for six Texas TV stations; the purchase comes five months after the company closed its much larger Belo deal, which brought 17 big-market stations into the fold. In all, the company will have 46 stations across the country. This year more than 50% of GCI’s $1.5bn in Ebitda will come from television.  Local station groups are increasingly insisting on big payments from pay-TV operators to carry their signals. The so-called retransmission fees were at the center of last year's dispute between Time Warner Cable (TWC) and CBS (CBS), which owns local stations in large markets. CBS ultimately forced the cable company to double its payments to $2 per subscriber. In 1Q, GCI's own retransmission fees jumped 66%. GCI still benefiting from its investment in On a sum-of-the-parts basis, Gannett's is probably worth $34 -- 20% and could reach $40.

Sunday, April 27, 2014

Special Situation Ideas for week of 27-Apr-2014

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

CalAmp Corp. (CAMP): CAMP develops and markets wireless communications products and solutions for various applications worldwide. It operates in two segments, Wireless DataCom and Satellite. The Wireless DataCom segment offers solutions for mobile resource management applications, machine-to-machine communications space, and other emerging markets that require connectivity anytime and anywhere. The company has been unduly punished due to certain short term factors coming into play and has fallen almost 45% in the last 2 months. CAMP has been growing revenues at a pace of 30% YoY. The firm has consistently increased its gross and operating margins. A move into software, in addition to hardware sales should help CAMP improve margins on an ongoing basis. CAMP currently trades at 15x forward earnings. It has almost no debt and $30 mn in cash, almost 10% ROE and 30% ROIC. The shares have been discarded by short term oriented investors, however should rally in 2H14. The company is up for generating revenue from 3 insurance telematics contracts coming into play in 2H14. Additionally, legislation is Brazil on stolen vehicle recovery, where CAMP is a major player, should be enacted in 1H15. This will start generating revenue for CAMP in 2H14, as auto companies start complying. Additionally, its contract will Caterpillar will actually start generating profits in 2H14. This might turn out to be a huge opportunity. Short team weakness in 1Q1 due to lower than expected revenue from solar contract is supposed to be more than made up for, in the later part of the year. Additionally, its business to provide hardware to trains reported weakness in FY11 and FY12 and bottomed out in Fy13. It’s also due for a rebound in FY14. With the recent acquisition of RSI, CAMP is also becoming a player in the municipal and state government markets, giving its sticky customer base. CAMP has a history of generating incremental revenue and EPS. With certain major catalysts coming into play in 2H14, CAMP shares can almost double from here.

Meridian Bioscience (VIVO) is a stock that defensive-minded investors might consider, he says. It's 20% below its high reached just last Jan. 10, for what appear to be timing issues more than anything else. The main cause of this quick shellacking was a disappointing quarterly result. On Jan. 22, the company reported that in its fiscal first quarter ended Dec. 31, sales fell 1%, to $44.8 million, and net income to $7.4 million, or 18 cents per share, from $8.5 million, or 20 cents. On the revenue side, the company was hurt by delays in shipments and ordering patterns, a seasonal shift in influenza, fewer hospital admissions and higher spending. Meridian indicated that these were timing issues and that most of the shortfall would be made up in the second quarter, which it will soon report. The company stuck to its fiscal 2014 EPS guidance of 98 cents to $1.03. Despite its relatively small size, Meridian has a pretty good history of competing with much bigger testing firms. It's a leader in some commonly used tests, such as for C.difficile, an infection commonly acquired at hospitals and health-care facilities by patients given certain antibiotics. Meridian is also switching its products to its "illumigene," or molecular technology process, that looks at the DNA of the pathogen and is faster, cheaper, and easier to use than the traditional immunoassay methods, which measure the immune response to a pathogen.
Meridian has four molecular tests approved by regulators and is awaiting a decision on three more. The illumigene kits are a kind of "razor and blade" system. The new system is simpler and more economical, with no major capital requirements for hospitals, labs, clinics, and doctors. That provides a "sustainable competitive advantage. VIVO has good balance sheet, a nearly 4% dividend yield, a history of 25% returns on equity, and strong market positions in diagnosing gastrointestinal, serological, parasitological, and fungal diseases.

Symantec (SYMC), which produces data security software, has fallen by about 10.81% from for $23.34 a share last November. Despite the selloff that followed the firing of its CEO in March, the company can grow its earnings at about 15% a year over the next five years as it implements the former CEO's plan to reorganize the company and cut costs. Based on the calculation of five-year forward normalized earnings of $3.30 a share, it will reach a fair value of $33 eventually.

AerCap Holdings (AER), an aircraft-leasing company has nearly doubled from $21.31 on Dec. 10, 2013, to $40.16 following an announcement that it would acquire a larger private competitor, International Lease Finance Corp. The latest rise is just a small part of the value realized. AerCap's return on invested capital is about 15%. At $7.50 a share in five-year normalized earnings, fair value can be $65 a share.

Zoetis (ZTS) - Is down about 15% from highs, on mostly one-time issues. Management guided analyst estimates for 2014 down, forecasting 2014 "adjusted" EPS at $1.48 to $1.54 and revenue of $4.65 bn to $4.75 bn, below previous analyst expectations of about $1.62 and $4.77 bn, respectively. ZTS's non-GAAP adjusted results exclude traditional nonrecurring items such as acquisition costs, restructuring charges, and initial public offering expenses, but not stock compensation. The roughly 10 cents per-share guidance shortfall has hurt the stock and was due to both operational and nonoperational issues.

About 5 cents derives from foreign exchange, and the rest from pork and cattle life-cycle issues, among other things. For example, the U.S. pig population has been hit hard by the porcine epidemic diarrhea virus, which killed more than 4 million piglets over the past year. These are generally short-term industry issues and aren't nearly as important as the beneficial long-term trends for animal health and medicines. There is an emerging global middle class with a diet moving more toward protein and the consumption of meat. Getting medicine to market in animal health is much more straightforward than the human-drug approval process, and there are no intermediaries like pharmacy-benefit managers to worry about. ZTS's steady and stable 5% to 6% long-term secular sales growth and 10% EPS gains seems like a good story in this market. As ZTS gets its legs it should be able to expand operating margins to about 30% from 25% over the next five years. ZTS trades at about 20x FY14 EPS. Also Eli Lilly agreed to acquire Novartis ' (NVS) animal-health division for about $5.4 bn, which is 4.3x sales or a 25-to-30 P/E. The same ratios applied to Zoetis result in a $35 to $40 price, 15% to 30% higher than Friday's close of $30.16.Zoetis offers a solid business with pricing power and good financial characteristics, and one that's not an Internet business.
Personal Note: I am long CAMP. I bought it around $24 and bought more stock when it fell to $18.

Monday, March 10, 2014

Special Situation Ideas for week of 10-MAR-2014

URS (NYSE: URS): This is an interesting time to take a look at a company, that’s a play on US and internal infrastructure. The company operates in 4 major sectors – Government (roads, bridges, water infrastructure, nuclear, among others); Oil & Gas, Power and Industrial. The firm has underperformed its peeps for a while, however, the firm does not look like it’s badly managed.
The company trades at 11x earnings, with a 1.9% yield. I believe that this and next year should see capital spending, especially on infrastructure and capital spending, especially on Industrial, and Oil & Gas sectors should pick up in the next two years.
Another interesting thing that has happened in the last month, is the involvement of some very well-known hedge funds in this business, among them Jana Partners, which has declared a 9.9% stake in the company at an average cost of $47.46 per share. Jana Partners is having discussions with the company regarding capital and corporate structure. March 14 is the new deadline for submitting director nominations. This deal is a little different from the usual activist situation for Jana; it started out as a passive 13G investment that was converted to a 13D after the company announced poor financial results. For now, it's an amicable engagement, with the company agreeing to extend the deadline for stockholders to nominate directors so it can continue negotiations with Jana. Despite generating $1.5bn of FCF and completing $5.3bn of acquisitions since 2006, the company has grown its EV by only $2.5bn. These acquisitions left the company with many separate businesses that haven't been integrated, and with strong cash flow significantly in excess of earnings. So, the activist opportunities here are to use free cash flow to buy back stock, divest some of the businesses that haven't been working out, and/or take advantage of the FCF to sell the entire company or do a leveraged buyout. Because URS' long-time chairman/CEO is expected to retire this year, and his logical successor recently resigned, now is likely a good time to proceed, since activist agendas are much easier to implement when the management team is in transition.

Chemtura (CHMT):
This is a FY10 post-bankruptcy play. The firm filed for bankruptcy pressured by rising raw material costs and declining sales. It eventually emerged in FY10 with a liquidation value of $750M. It had 4 segments, Consumer division, and Industrial Performance Product (IPP), Industrial Engineering Product (IEP), and Agricultural division.  Recently, the firm got out of consumer unit, by selling it for USD 315M.  The company is in the process of selling its agricultural unit, which is expected to be sold around $800M - $1bn.
The company has discussed using the cash from divestitures, to return it to shareholders and deleverage the balance sheet. The company is expect to generate FCF of $72M In in FY14, and currently has net debt of approx. $350M, with $550M in cash.
The firm has been going through some major restructuring and cost reductions since FY10, that are expected to bear fruit in FY14.  In addition, IEP unit, which has been the most problematic is expected to have hit a bottom is should begin to improve going forward. The IEP+IPP division generated $310M in EBITDA and I expect them to generate $282M this year and improve going forward. Agro solutions generates about $75M in EBITDA.  At 8x EBITDA, I believe that investors get agriculture division for free, if they can buy this company at $25 range. The stock can easily be valued at more than $35, in a year. The kicker is the management. The CEO of CHMT was appointed by the Debtors committee, and is the former CEO of Hercules. He was instrumental in the sale of the company to Ashland in FY08.  

BroadRidge Financial (BR):
Given the current market environment, everything thinks about investing in such a firm that would largely remain unaffected by the daily gyrations that markets go through. I recommend to look at BR. BR is a service company that provides trade processing and Investor communications business to the financial service industry. It services 4 major clients, mutual funds, Corporates, Banks and broker dealers. The firm controls 90% of the proxy market, approx. 33% of equity processing and 55% fixed income processing market in the US. There are huge regulatory hurdles to enter and compete with BR, putting it in a good position. Additionally, the company is technologically savvy and disruptor in the space. It also is helping its clients save cost (eg: it does fixed income processing for its clients at 25% cheaper cost than institutions can do internally).  Since it’s the leading firm in the US, its innovation should only produce modest growth. Its also going into buy side, a new area for BR.
The kicker comes from its recently announced JV with Accenture, to scale its capabilities and products into Europe and Asia. With its credibility already working for Major US institutions, it should not have trouble cracking those markets and providing the next leg up in terms of revenue generation and profits. It already counts SocGen as its client and is growing in Europe. BR comes with a solid balance sheet. It has $300m of net debt and approx. $300M of FCF. The firm sports a 2.2% dividend yield and trades at 17x earnings. It stands to benefit, as major banks and broker dealers cut costs and look for a credible partner to provide them with the same quality services and BR might just prove to be that. If it continues to execute, BR stock can easily be $50+ in 1 to 1.5yrs.

GameStop (GME):  After reporting weak sales of videogames during the holiday season, GME fell 18% to $37.50. The market reaction creates an opportunity for investors. The shares now trade for 10x FY14 earnings. Plus, the company has $5 a share in cash on its balance sheet and no debt. The stock yields 3%, and last year the company bought back 7% of its shares. GME has no debt on the balance sheet, healthy cash flow and sports a 3% dividend yield. GME remains the dominant seller of videogames, with a roughly 50% market share, and sits at the center of a lucrative ecosystem involving new and used games. GME's sales of new-game hardware nearly doubled during the holiday period as Sony introduced its new PS4 and Microsoft rolled out its Xbox One. Software sales, however, fell 22.5%, which GME attributed to reduced sales of games for the older Sony and Microsoft consoles, but the Street worried that the report signaled a slide in the disc portion of the business. One reason that software sales might have been weak is that consumers bought millions of new PS4s and Xbox Ones—which cost $399 and $499, respectively—leaving little money to spare for new games, which usually cost about $60 apiece. Given the high upfront investment, new-game sales may follow. However, there seems to be a strong pipeline of games in FY14 and FY15. According to some industry estimates, this stock can be valued at $55 to $60 a share on modest new and used software sales growth and flat hardware sales.  

Insulet Corporation (PODD):
Insulet (PODD), an insulin-device maker that has risen 130% over 2yrs. But there is a problem – PODD is a one-trick pony, selling OmniPod and has yet to make a profit since 2005, the time it had the tubeless-pump market pretty much to itself. There are other big companies with deeper pockets, such as Medtronic (MDT) and Roche Holding (ROG). There are about 1.5 million to 1.7m Americans with Type 1 diabetes, of which 25%-30% use some kind of pump, rather than manual injections. Medtronic has been talking about a "patch pump" for a while, but investors should pay attention to the September settlement that terminated its patent-infringement lawsuit against Insulet. PODD can use some patents of Medtronic but in return, Medtronic is licensed to use some of PODD’s, including the one for automatic needle insertion, an important OmniPod feature. The settlement precludes Medtronic from making a replica of the OmniPod, but doesn't stop it from producing a similar product—that is, a wearable, disposable tubeless pump with automatic needle insertion. Profit expected by 2014 and 2015. This company might make a good short.

Personal Note: I am long, CHMT, URS, GME and BR.

Saturday, February 8, 2014

Special Situation Ideas for week of 10-Feb-2014

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.

Constellium (CSTM): CSTM is  a producer of specialized aluminum products. The company went public in 2013 at $15 a share, and is not well known. The firm is 9% owned by Rio Tinto, 20%+ by Apollo, 10%+ by FSI (arm of the French Govt.), about 5% some by the management and the rest is public.  For a more detailed view, you can read CSTM’s F-1 (Click here).
CSTM converts aluminum into specialty products. It earns a conversion spread [the difference between aluminum and finished-product prices] and has minimal exposure to the underlying aluminum prices. It produces aluminum plate for aerospace customers, can stock for beverage manufacturers in Europe, and sheet and crash-management parts for automotive manufacturers. CSTM is a play on structural changes in both the aerospace and automotive markets. The demand for lighter, stronger materials that are environmentally friendly will significantly increase aluminum usage in the years ahead. CSTM enjoys long-term relationships with key customers including Airbus, Boeing, Audi, and Mercedes. These companies require suppliers' plants to be certified, which provides barriers to competitors.
In aerospace, CCTM is the global leader in plate and one of only two producers with certified production plants in both North America and Europe. CSTM signed a 10-year contract with Airbus to use Airware on the A350, and deliveries should start in 2015. Overall, this market is expected to grow by about 10% a year.
CSTM is also the largest producer of aluminum sheet for a vehicle's core body structure, known as Body-in-White, for the premium European auto makers. Next year could mark a significant step-change in demand in North America, with the rollout of the new Ford [F] F-150. Demand in NorthAm could grow to 450K tons by FY15 and a 1 mn tons by 2020 from less than 100K in FY12. The firm announced on 23-Jan-14 that it had formed a joint venture with UACJ to supply Body-in-White to North. America.] This is being driven by federal fuel-economy regulations mandating an average of 55 miles per gallon for corporate fleets by 2025.
CSTM has 105mn shares outstanding. Net debt is USD 225mn. The company is headquartered in the Netherlands and reports financials in euros. Yet, the shares are listed in New York. CSTM is expected to earn about $2 in 2013 with potential to earn more than $2.50 a share in t2 to 3 years. It could start to pay a dividend this year. Firm can go upto USD 35 in 2 years The company estimated that the replacement value of its assets is north of USD 8.2bn, which compares to an enterprise value of USD 3bn today.

 GAP Inc. (GPS): Most of the street is bullish on the stock with people expecting 17% gain in addition to a 2.1% dividend yield. At 12.6x earnings, GAP sells at discount to all of its domestic peers, despite having the best margins; competitors being ANF, ARO, ANN, H&M, Inditex. GAP stores, baby gap and gap kids: 40% of sales, old navy: 38%; Banana republic: 18%; rest by intermix, athleta (competes with lulu lemon) and Piper lime. Operating margins have climbed to 13% from 10%, 3 years ago. Growth will come from stores of Athleta (1st store in FS in FY11), Piper- lime with first store in in Soho, NY in Fy12. GAP’s Athleta is benefitting from Lulu lemon’s mishaps. International expansion should also help the company and justify multiple expansion. Additionally, company has history of buybacks. Fisher family, which controls 40%, is not selling, so slowly the firm is going private because of buybacks. Once the firms is seen as a global player, then at 15x earnings, which is S&P 500 multiple, share should be valued at $49 based on FY15 earnings of $3.27. The company has a ROE of 40%+; 13x P/E; holds USD 1bn cash on the balance sheet with USD 1.25bn debt.

Timken (TKR):
TKR manufactures, markets and sells products for friction management and mechanical power transmission, alloy steels and steel components. The big story here is the imminent spin-off of the company in Summer of FY14. TKR will spin-off its more cyclical steel business from its bearings business which should yield much better return for the long term shareholders.  The company yield about 1.6%. There are two activist investors involved who have pushed for the spin-off. There was a huge pension overhang on the company, which is not a factor anymore. IN the most recent conference call, the company stated that its pension are now fully funded, which in addition to other cost restricting efforts, should free up the cash flow, to be reinvested or returned to shareholders. On the SOTP basis, TKR post spin should trade at USD 69 a share, which is a hefty return from the current $55.  Activist Presentation (click here)

Few Other Names: As i wrote earlier, FY14 will be a volatile year for stocks, and unless something unforeseen happens, i think market this year will trade sideways to modestly up. However, in this stock picker market, we are better off investing in defensive value plays with good dividends that are playing into a growth theme and has some support. Here are few names worth revisiting:  Hess (HES): I wrote about this a while ago, and its coming back into the price range, where this might again be a good buy.  Another two names that are worthy of a look for long term shareholders is ManTech (MANT) and Leidos (LDOS) which spun off SAIC in FY13. Another name for those, looking to play the energy efficient space, might do themselves a favor by reading a really good article on Cree (CREE) which was written in IBD.

 Personal Note: I am invested in GAP, LDOS, MANT, CSTM and TKR.

Sunday, February 2, 2014

Thoughts on the 2014 markets

US markets have done pretty well over the last two years, and by that reason, to some, the emerging and EU markets look much more promising for this year.  That might be so, however, for an investor sitting in the United States, it’s sometimes very difficult to calculate the risks that come with investing in the emerging markets.

EU has done very well, over the last year. If you heard Mark Lasrey, someone I greatly respect, then there have been many turnaround opportunities in Europe which could have generated double digit returns. However, Europe has faced its own crisis, with unemployment still very high in some of the so called richer countries. Spain, France, Italy in particular are worth mentioning. Germany has performed relatively well over the last year or two – however it’s still tied to Europe in many ways. UK is doing well, but its more due to the easy monetary policies of the central bank. Global companies such as Nestle, however, are always a sure and safe bet.

The emerging markets have presented us with lot of opportunities as well, however, it’s very hard to gauge the political risks that comes with investing there. Recent slowdown in China, political opposition in Bangkok, sudden changes in rules ( for example gold) regarding imports in India, problems in Pakistan and Afghanistan, volatility in the Philippines should provide us with a note of caution – especially those sitting in US trying to play the emerging markets. Vietnam and Singapore might be good cases of investments, however, you better be visiting those places before putting your money to work.
Middle-east is a story that speaks for itself.  The markets in Brazil, Argentina, and Venezuela are not doing that great.

So this brings me back to the US and this year seems to be an interesting market – interesting because the Federal Reserve has started to taper and there is a change in guard. Stan Fisher is coming back as the vice-chair of the Federal Reserve and he has been a proponent of intervention in the past and so is Janet Yellen. I believe that those focused on the US markets investing for the medium term should focus on special situation equities.  I believe FY14 will present good opportunities for turnarounds, spin-off’s, and restructurings. Additionally, I also expect that FY14, given the political climate around the globe, will be a year in which stock markets as well as commodity markets will undergo a lot of volatility. Therefore, those who are looking to do well this year, are better off investing in companies that are light on debt (especially those firms whose debt is coming due in FY15, given the cost of debt will rise), have some yield with good margins and solid business model. Furthermore, the same companies, if they have a catalyst attached to them such as major divestitures, restructuring/turnarounds will perform better than the markets in general. This year might not be the year to bet on risky stocks that have done well in the past just because there was ample liquidity created by the federal reserve. I would say, in general, it will be a good year to play names and focus more on solid balance sheets rather than income statement!

Wednesday, January 15, 2014

Agilent's November Spin-Off To Create Upside For Investors

I have posted an article on Seeking Alpha which goes into details about how to profit from going long Agilent (A). It’s for medium to long term investors.

If anyone reading do invest in special situations, this might make a good read. Either you can click here or go to Seeking Alpha and check out "Kedar special situations" Its under long ideas. 

If you are unable to access it tonight (since the article was exclusively published early morning for Seeking Alpha – Rich subscriber base), you should be able to access it tomorrow after 11am.

Thank you