Special Situation Ideas for week of 3-December-2012

Water:

In a thematic writeup which I usually don’t do, I stated that “Water” is one of my favorite sectors. US water infrastructure is aging. What’s further exacerbating the situation is the current extreme weather conditions. According to what I read online, the U.S. EPA has estimated that 250K watermain breaks occur each year in the nation, with up to 70K-75K sewer overflows annually, discharging up to 10bn -11bn gallons of untreated wastewater. Sewer cost, water cost and investment in infrastructure are slated to increase in the US alone by more than USD 1T, before 2035. Bloomberg article has other statistics. One of the main beneficiaries of this tread is a name I wrote about a while ago, Xylem (XYL). Other names worthy to look into are : Pentair (PNR), Flowserve (FLS) and Aegion (AEGN).

Activism:

I wrote a long on Tessera Technologies(TSRA). It might be worth another look. According to BArrons 13D monitor, Starboard declareda 5.7% stake in TSRA. The fund has had particular activist success in companies that have solid core businesses with significant cash flow, but management that reinvests the cash in noncore unsuccessful businesses. Starboard is likely to nominate directors for the next annual meeting and ask for a breakup.

Another three stocks I read about:
Celanese (CE) is a diversified company. Its biggest segment is acetic acid, which is suffering from weak global demand. The stock is around $40 and trades for 9x 203 earnings. Once the global economy recovers, CE can increase its EPS from $2.75 a share to over $5 a share. Catalyst: CE has developed a process that can make ethanol from natural gas and coal. The cost is substantially below the cost of making ethanol from corn. The first commercial plant will open in China in 3Q13 and will make both industrial and fuel ethanol. If the U.S. changes its policy which currently requires that ethanol be made from corn, then it can be a huge game changer. (Barrons)

AerCap (AER) buys planes from Boeing and Airbus and leases them to airlines. The leases typically run for well over a decade. The credit quality of leases is good. The stock trades around $12.50, which is 70% of its tangible book value of just over $18. Its also trading at just 6x forward earnings. The firm does not pay any dividend; however, they bought back 18.5% of its stock over the last 1.5years. t ultimately could get sold to a large financial-services company with low-cost funding. (Barrons)

NetScout Systems(NTCT): The firm develops and sells network performance management and service assurance solutions for high speed networks. End clients ma include commercial enterprises, governmental agencies and telecommunication service. Trades at P/E of 20x, reported YoY growth in EPS of 12%; 20% Operating Margin; $230M in cash and only $69M in debt. With the networks inundated with demand for data, and the ongoing digital revoltion, the firms product might see incremental demand going forward. This firm in addition to reporting increased demand for its products might also become a takeover target.

A Restructuring Story For Small Cap Investors

  This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small cap names. The valuation, unlike my other articles, is not mine.

• Sparton Corporation (SPA) - Currently trades at $12.05
• Potential Upside by Industry Estimates: Approx. $8 per share
• Market Capitalization: $123m
• Cash: $43M; Total debt: $1.64B
• Shares Outstanding: Approximately 7M
• Revenue: $21.7M; EPS 2013/2014 Est.: $1.30/ $ 1.70
• Sector: Technology; Industry: Divesrifised Electronics
• Main Catalyst:   Navy contract, Fundamentals, Accretive acquisition,

      What does SPA?

      Founded in 1900 and based in Schaumburg, Ill., Sparton has a rich history as a manufacturer. At one point it was an automotive supplier, and is credited with inventing the car horn. Today the company operates in three segments—medical devices, defense, and electronics manufacturing, which it dubs "complex systems." Medical manufacturing accounts for 50% of sales.

WHY SPA:
Sparton, a small manufacturer of electromechanical devices, is well on its way to reinventing itself after a period of operating losses and a near-death experience in 2008-09. The turnaround has been piloted from the start by a new management team, led by CEO Carey Wood, who slashed costs and terminated unprofitable contracts. Management also has shifted its focus since 2009 from low-margin contract manufacturing, such as circuit-board assembly, to specialized manufacturing in highly regulated markets such as military aerospace and medical devices, which carries higher profit margins.

The results have been impressive. In fiscal 2012, ended June 30, gross margins widened to 17.2% from 7.1% at the trough in fiscal 2009. Sales climbed 10% from fiscal 2011 to $224 million, with earnings up 27%, to $9.5 million, or 92 cents a share. Applying a multiple of 12 times earnings to 2014 estimate,  the stock could be worth $20.

Potential Catalysts:

US Navy:
The U.S. Navy is Sparton's biggest customer for underwater sonobuoys. Investors were quick to spot the improvement; Sparton's shares (SPA) have rallied more than 700%, to $12.05, from $1 and change in 2009. But the stock remains underappreciated at 13.5 times trailing 12-month earnings of 89 cents a share, and more gains are likely.Management is targeting $500 million in revenue by 2015, driven by acquisitions. The shares could rise 50% or more in the next 18 months. In the defense segment, Sparton builds sonobuoys, underwater listening and locating devices designed to detect the presence of submarines. They are positioned in the water ahead of every carrier fleet to alert them to the presence of enemy submarines. A sonobuoy survives for about eight hours before it self-destructs. Sparton is the only U.S. manufacturer of sonobuoys, and one of two worldwide. The U.S. Navy is its primary customer.

Shifting Strategy:

Sparton works on contract in the other two divisions, serving as the manufacturing arm for original-equipment makers. In the medical segment, it makes therapeutic and in vitro diagnostic devices for customers such as Siemens (SI), Fenwal, and NuVasive (NUVA). In complex systems, Sparton builds circuit-card assemblies as well as complete electronic systems for aerospace customers such as Goodrich and Raytheon (RTN).

Management is keen to shift the revenue mix to higher-margin activities. The defense business has the highest gross margins, at 23.6%; medical margins are 13.7%, and for complex systems, 10.7%.To boost margins, Sparton has explored new growth initiatives. For example, it is planning to bundle the directional and listening technologies used in sonobuoys and market them for use in other unmanned defense systems, a growing market. Sonobuoy sales also could see growth as the Navy moves in 2014 to deploy the devices via jets instead of prop aircraft. According to a fiscal 2011 budget estimate from the Navy, spending will increase 60% year over year in fiscal 2014, to $160 million, primarily due to the transition.

SPA’S other plans include gaining market share in niche medical devices via acquisitions, and continuing to migrate to higher-margin work in complex systems. In the September quarter, revenue fell 5% from the year-earlier period, and net income fell to $1 million from $1.5 million. The decline is temporary, and related to a delay in sonobuoy deliveries. Management is optimistic for the remainder of the fiscal year.

M&A and Fundamentals:

As of Sept. 30, Sparton had $43.1 million in cash to $1.6 million in debt. It generated $22 million in free cash in fiscal 2012. On 6-Nov-12, Sparton agreed to buy Onyx EMS, a medical-device manufacturer, for $43.3 million. The deal, expected to close at the end of the month, is a major one for Sparton, bringing in $50 million in annual revenue. While management currently is restricted from disclosing how accretive the purchase will be, it has said that Onyx has gross margins of 18%, higher than Sparton's own medical division. The deal will be financed with cash and borrowing under a credit facility.  Some in the industry estimate that the deal could add 50 cents a share in annual earnings, bringing his fiscal 2013 earnings estimate up to $1.30 a share, and his fiscal 2014 estimate to $1.70 a share. Applying a multiple of 12 times earnings to his 2014 estimate,  the stock could be worth $20.

Long Gentex Industries (GNTX): Positive Catalysts Outnumber Negative Ones

I have posted an article on Seeking alpha which goes into details about how to profit from going long Gentex Industries (GNTX). 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  and check out "kedar special situations" Its under long ideas for Gentex (GNTX).

Thank you

Special Situation Ideas for week of 8-October-2012

I have come across these with some decent catalysts while reading various publications. Might be worthwhile for readers to look into:

PRXL - Potential Long – This s a mid-cap company which is into clinical research. Large number of firms have become budget conscious. Gets 75% revenue from clinical trials; is one of the two or three strategic partners to drugmakers such as Eli Lilly, Pfizer, Merck and Glaxo. Most of big drug makers face major patent expiration. Parexel earned lot of revenue from late stage clinical trial studies with phase 3 & 4 constituting the bulk of the revenue. Additionally, PRXL also offers consulting services and clinical trial technology. Firm also has global network, which is a huge asset with 70 locations in 51 countries. Also provide advance technology tools including medical imaging to facilititate clinical development process. The industry estimates that the firm will see growth in revenue and earnings of 25% + over the next 2 years. Also recently launched unit to work with mid-size bio pharma companies, which constitute most of the ongoing development programs.                                   

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EXAS – Potential Long -  Has developed a sophisticated colon-cancer screening test based on DNA markers. EXAS hopes that its self-administered stool test can detect 85% of cancers and more than half of pre-cancerous growths, with a false-positive rate of only 10%, much better than existing test, which detects an estimated 65% of cancers and fewer than 25% of precancerous growths. Trial results, expected in early 2013, if favorable, FDA approval within a year - 2014. Revenue can $500M - $1B by the end of this decade. EXAS is trying to arrange for Medicare and private insurers to pay for it. Potential takeover takeover target by a larger health-care outfit. Centers for Medicare and Medicaid Services, agree to pay for the tests soon after a favorable FDA ruling. 80M Americans 50 or older. If 30% of them take the test every three years, thats 8M tests a year at perhaps $300 a test, translating to $1.2B in revenue or almost $4 a share, but unlikely before 2020.                                  

A note on playing China – Lot of people is still invested in Chinese real estate. For those who don’t know, there has been a decent slowdown in numbers and the returns might not be phenomenal to say the least. However, I believe, that over he longer and medium term, one of the better play to play china is the Chinese investment in infrastructure and one of the beneficiaries of this will be the firms that are in the transportation sector. And I believe one of the best was to play transportation is Chinese Railway sector. Those who can invest in China, I have come across few names – CSR Corp (Largest producer of locomotives. Also produces wagons, carriages, ect.  Another is China Railway Construction Corp (largest railway construction company). Zhuzhou CSR Times Electric (supplier of train borne electrical systems and components). Other names being, Daqin Railways and Guangshen Railways.

Special Situation Thematic Ideas for week of 30-September-2012

These names are obviously not analyzed but i have come across them which might be a good way to play these themes. Might be worthwhile for readers to look into -

Playing Smart Grids: With what happened recently in India, and given the demand for energy in China, I believe there will be a huge demand for grid technology in the coming years. How to best play this sector? Well there are few names to look at:

Well, ABB is an obvious choice. Another firm that’s operation in this sector is Siemens AG. However come of the non-obvious names to look at are Echelon (ELON); Itron (ITRI) and EnerNOC (ENOC).

Playing Cyber Security: I guess everyone knows that there is a huge demand for cyber security with everything moving online. The recent news of Chinese intelligence hacking in major US Corporation, substantial increase in cyber security crimes on the corporate side, terrorists trying to hack into military networks, this is another area that’s poised to undergo substantial investment overt he next few years. What are some of the names to look into?

Well, obvious culprits are: Lockheed Martin (LMT) which has been making substantial investing in cyber security; Northrop Grumman (NOC), a cyber security and UAV play. But some less obvious names are NCI (NCIT), a play on traffic and data analysis for intelligence community; SourceFire (FIRE), a real time network defense solutions provider also speculated to be a take over target and Keyw Holdings Corp (KEYW), a leading cyber security consultant to the defense and intelligence and national security agency.

Special Situation Ideas for week of 23-September-2012

These names are obviously not analyzed but i have come across them with some decent catalysts. Might be worthwhile for readers to look into --

CTGX - Potential Long – This s a small cap company. Technology and  Healthcare constitute  64% of total revenue. IBM is CTG’s largest customer (30% of Rev) and given the M&A trends in the industry, this firm might become a takeover target.  P/E: 20x, the firm has no debt, ROE is approx 14%, EPS growth has been approx. 20%

Ebix Inc - Potential Long – Midcap company which is a  leading supplier of Software solutions to the insurance industry. It was found in 1976 as Delphi Systems. ROE is 20%+, P/E 13x; Cash 26M and Debt is abt 80M. Maybe a potential takeover target.  

Corrections Corp - CWX - Potential Long – It’s a owner and operator of privatized correctional and detention facilities and prison operators in the United States. Major Catalyst might be population growth. Current downturn presents a better proposition to state prisons. Another major catalyst might be a potential REIT Conversion. CWX manages prisons more effectively (prisoner cost $67 VS federal $85 and California $140. 2011 AFFO is $235M. Stock came under pressure as CA announced to move 10K prisoners inside. It has 12K excess beds; Corvex capital and Marcato Cap filed 13D announcing 7.6% ownership recommending a shift to corp. structure. Firm pays $0.80 div, can go upto 2.25 a share if converts to REIT. Will also save $75M if converts to REIT. Firm did buybacks before. REIT with similar characters traded at 22x AFFO while CVX is at 12x.

A Cold winter will make Compass Minerals a hot stock to own!

This article is a summary of what I read in Barron's and little bit of my own fact checking. I thought this was interesting idea to point to readers to look into this further.

• Compass Minerals International (CMP) – Current price at $72.29
• Potential Upside by Industry Estimates: $ 15 – 20 per share
• Market Capitalization: $2,390M
• Cash: $147M; Total debt: $484M
• Shares Outstanding: 33.11M
• Operating Margins: 16.50%; ROE:29%
• EPS 2012E: $3.43; EPS 2013E: $5.15; Div Yield: 2.7%
• Sector: Basic Material; Industry: Industrial Metals & Minerals

Sources: Thomson Reuters & Yahoo

What does CMP do?

Compass Minerals International (CMP) is a producer of minerals, including salt, sulfate of potash specialty fertilizer (SOP) and magnesium chloride. As of December 31, 2011, the Company operated 12 production and packaging facilities, including the rock salt mine in Goderich, Ontario, Canada, and the rock salt mine in the United Kingdom in Winsford, Cheshire. Its solar evaporation facility located in Ogden, Utah, is a SOP production site and a solar salt production site in North America. Compass Minerals provides highway deicing salt to customers in North America and the United Kingdom and specialty fertilizer to growers and fertilizer distributors worldwide. It also produces and markets consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other mineral-based products for consumer, agricultural and industrial applications. In January 2011, the Company acquired Big Quill Resources, Inc. (Source: Google)

WHY CMP:
Based in Overland Park, Kan., the company derives about 80% of its annual revenue from the sale of salt, much of it used by municipalities to de-ice roads in winter. Following the warmest winter in two decades, however, many cities and towns are sitting on large inventories of rock salt. Adding to the pain, a tornado damaged a Compass salt mine and evaporation facility in Canada in August 2011, while a rainier-than-normal summer last year meant less evaporation at a plant that produces sulfate of potash. The fertilizer, which accounts for the other 20% of sales, is harvested by evaporating water from the Great Salt Lake. In Ontario, Compass operates the world's largest underground rock-salt mine. If weather patterns follow the historic trend with  a cold winter in 2012, CMP might be a stock worth owning.

   

Potential Catalysts:

Weather Patters:
Compass benefits whenever municipalities spread rock salt, usually after an inch of snow has fallen. Last winter, there were 89 snow events in Compass territories, which encompass the U.S. Midwest and Canada, down from 203 in the prior winter and almost half the average of the past 10 years. However, about 90% of the time, an exceedingly warm winter with well-below-normal snowfall is followed by a winter with 10% to 25% more snow than the average. Expectations are that the coming winter to last longer than usual, too, with snow more than usual.
Additionally, CMP produces fertilizer used on high-end crops, including fruits, vegetables, and nut trees. Its fertilizer customers, typically on the West Coast and in the Southeast, haven't been harmed by the drought in the Midwest. Sales and prices of sulfate of potash have been strong, pushing that segment's revenue up 14% in the second quarter, to $56.2 million. But because of last year's cloudy weather, the cost of producing SOP rose and profit margins were compressed. Second-quarter operating income in the segment fell 26%, to $13.9 million, from the prior year's total. However, evaporation has improved greatly this year, owing to ample sun and hot temperatures at the Great Salt Lake. The company hopes that population growth and rising demand for healthy foods will bolster demand for SOP.

Irreplacable Assets:
CMP has an asset base that’s very difficult to replicate. The company owns the world's largest rock-salt mine, in Goderich, Ontario, on Lake Huron, from which salt can be shipped inexpensively on barges. Keeping transportation costs low is key because they account for 30% of the selling price. CMP also benefits from having its largest salt mine located near the North American snow belt, in the North Central states. Compass is the largest provider of rock salt in North America, competing against Cargill and K&S Group, the owner of Morton salt. Sales are likely to stay soft through the end of the year, as customers work off inventories and prices fall. Likewise, costs could be higher than normal because the mines won't be operating at full capacity and the company has had to repair damage caused by the tornado. At least Compass has a flexible work force that can be dismissed when times are tough and recalled when business improves. In the second quarter, sales in the salt segment fell 6%, to $119.9 million, and operating income fell 5%, to $12.9 million.

Fundamentals:
This year, the company is expected to earn $109.9 million, or $3.43 a share, on revenue of $1 billion, down from last year's already depressed earnings of $160.4 million, or $4.79, on revenue of $1.1 billion.

Despite that, CMP has stayed profitable and maintained a healthy balance sheet, with only $336.5M of net debt. Moreover, it generates enough cash to pay an annual dividend of $1.98 a share, for a yield of 2.7%.  Industry estimates that CMP may earn $5.15 a share next year. That growth could command a price/earnings multiple of 17 times 2013 estimated earnings, up from 14 times earnings for 2012. CMP historically has produced relatively steady earnings gains, suggesting that it deserves an above-market P/E. It typically has enjoyed 1% to 2% annual growth in demand and 3% to 4% price increases. At 17.5 times earnings, the stock would be worth about $90 a share, or 25% more than its recent price.