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.