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 Amazon.com (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.


16 comments:

  1. Your analysis is straightforward and concise yet insightful. Just stumbled across this blog - looking forward to reading more of your analysis. Thanks for sharing!

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  2. Yeah, keep it coming.

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    1. Do you actively invest? I use to post a lot, but now i also run money for some folks - so I post when i can.

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    2. I usually invest between 2 - 5 times a month with a 6 - 18 month timeline.

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    3. Hello, i wrote the original post. Yes, I'm a portfolio manager for HNW individuals and actively peruse the blogosphere for ideas.

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    4. Ahh great. I run a small hedge fund on the side too in nyc. Are you from NYC? Thanks for reading.

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  3. What do you think about the recent spin-off from SPG, Washington Prime Group?

    Looking at RTL (the U.S. Retail REIT Index ETF), retail real estate seems to be in a strong uptrend. WPG also seems undervalued with respect to its FFOx (8.33x) & NAV/Share ($26.65).

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    1. You never answered my question - anyways, i will take a look.

      If you are into spin's, then i just got out of TKR and keep an eye out of Agilent.

      Besides retail real estate seems to be in strong uptrend - question is, how long will it remain this way?

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    2. thats a pretty interesting response! but keep it coming. I will look at the firm you suggested when I have some more free time. Thanks a lot for writing to me - i really appreciate it.

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  4. Thank you for the writeup. I am trying to get comfortable with CAMP's moat and cyclicality. Do you think it is comparable to SWIR? They don't control the standards; they compete based the quality of products and services; and their revenues are not recurrent and largely fluctuates based on their product release cycles. I could be wrong in my understanding.

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  5. Difference between SWIR and CAMP is in their numbers among other things. You should look at that..also, i am a special sits guy, so i will usually never invest in something if there are no catalysts. CAMP has upcoming catalysts that will meaningfully impact the company, as oppose to SWIR. So you should focus on that. Also, there is a secular uptrend in telematics, logistics and whole M2M stuff in which firms like CAMP will hugely benefit

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  6. What do you think about EBIX? They are a software and e-commerce solutions company that primarily operates in the insurance industry. They currently have a P/E (& EBIT/EV) below 10 and a ROC over 20%. They have beaten analyst earnings estimates for the last five quarters, and they are projected to have an annual earnings growth of 20%.

    They made a recent acquisition of HealthConnect and are looking to restructure their terms with their current credit facility. This resulted in a massive sell-off, which had little to do with the fundamental value of the company (I believe it was just public fear that was magnified because this company had criminal probes on their accounting practices last year).

    Anyways, seemed like a good undervalued contrarian play to me. There was a recent article published on Seeking Alpha in case you're interested. http://seekingalpha.com/article/2258833-hysterical-selling-makes-buying-ebix-compelling

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  7. Hi Kedar,
    Love your ideas and insightful analysis. I've been following your blog for a while, but haven't seen recent posts. Hope you will get back to Posting soon!
    Ravi

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  8. This comment has been removed by a blog administrator.

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  9. Hello Kedar,
    Your analysis is good and waiting for your recent posts.Thanking you...
    Small Investment Plans

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