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%.                                                  

Special Situation Ideas for week of 7-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.

Penn National Gaming (PENN): Penn will split on Nov. 1 into a real-estate investment trust called Gaming & Leisure Properties (GLPI), and an operating company that will lease properties from the REIT. By Jan-14, PENN holder will receive a total of 1.35 G&LP shares and a special $3.33 cash dividend, plus more from the REIT.  The operating company could be valued at 8x this year's estimated cash flow of $1.95 a share, or $15.60 a share, while G&LP could command as much as 13.8x estimated cash flow of $2.93, or $54. Add the special dividend, and the parts could be worth north of $70 a share, or 30% more than the current stock price. Another growth factor might be the consolidation of the regional gaming industry, whose markets have been suffering. PENN management has said it received many expressions of interest from potential sellers. The U.S. has more than 100 privately owned gaming operations, many run by aging owners who might want to cash out. PENN CEO Peter Carlino, owns a 14.5% stake. One thorny issue for Penn and G&LP is excess capacity in regional gaming. It the top of the market in 2007, Carlino arranged to sell Penn to a consortium led by Fortress Investment group. The deal fell apart, but Fortress kept some shares and Penn got some cash, which it used to buy a distressed M Resort in Henderson, Nev. When the split is completed, the Carlino family will own just under 10% of the operating company and a higher percentage of the REIT; and Fortress, 9.9% of each entity.

PICO Holdings (PICO): own a water-resources company, a West Coast home builder, and a canola-seed crushing company.  PICO seeks out undervalued assets. Over the years, it has evolved from an insurance business into a company with three core divisions. Vidler is PICO's largest division, accounting for 45% of book, as of June 30. UCP contributes 26%, and its 88% interest in Northstar, 13%.

Its assets, which are leveraged to the housing recovery and the growing demand for water in the Southwest, could be worth much more than the market is giving them credit for.  Industry estimates the stock could be worth about 50% to 75% more.

Of all the divisions, Vidler could hold the most potential. Much of the division's water rights are located in states where there are water shortages, like Nevada and Arizona. The Southwest is seeing its population grow faster than the national average. As housing recovers, home builders will need to secure water for their properties. Municipalities also buy water rights. In February PICO entered into an option agreement with Lincoln County water district in Nevada to sell 7,000 acre-feet of water rights for $12,000 per acre-foot, well above the company's cost. PICO acquired the developer in 2008, and throughout the downturn it bought up residential lots at bargain prices in hard-hit markets like Central Valley and Monterey Bay, Calif. Meanwhile, the Northstar canola refinery is poised for growth. The operation could benefit from rising consumption of canola in the U.S. Canola oil's lower fat content compared with other oils has made it attractive to health-conscious consumers. PICO can be valued at $30 -$35 a share. Additionally, CEO has 838,000 options with an exercise price of $33.76. The options expire in December 2015. 

NCR (ticker: NCR):  The stock has since surged more than 77%, however hedge fund Marcato Capital Management sees the potential for a 50% rise in the next year.

NCR is riding a number of growth waves that have taken annual revenue from $5.3 bn in 2011 to an expected $6.3bn in FY13. Its primary business is ATM’s which have benefited from the upgrades in technology by U.S. banks to permit ATMs to optically scan checks tendered by customers for deposit. NCR also has a major presence abroad and will benefit from major rollouts of ATM systems in emerging nations like China. It now gets 50% of its revenue from overseas. NCR is also at the forefront of the movement toward self-checkout equipment, having signed a large contract with Wal-Mart Stores (WMT). This has revived growth in its point-of-sale business. Airlines now operate kiosks that sell and issue tickets to passengers, and restaurants, bars, and movie theatres are all employing NCR equipment to help manage electronic sales via credit cards and other payment systems. NCR is expected to earn $3.10 a share in FY14 on revenue of $6.7bn. With a P/E 15x, that would justify a stock price of over $63.

Genworth Financial (GNW): GNW’s mortgage unit could benefit, as the Federal Housing Administration ceded market share to private entities in providing mortgage insurance. The FHA has significantly raised prices in the interim, giving Genworth and rivals like Radian Group (RDN) a chance to firm their pricing and possibly gain share. FHA once had a 74% share of this market, which has since dropped to 64% and is projected to fall toward 60% by year end. GNW, the No. 4 insurer, has maintained a 13% share. GNW EPS is projected to rise to $1.12 this year from 81 cents a year ago. Revenue is down to $9.5bn this year from $10bn last year. Shares can be priced at $20

HD Supply Holdings: Former Unit of Home Depot. Carlyle, Bain and Clayton own 19% each. HD owns another 9%. Post IPO, none of PE have sold their shares, which are at purchase price that is approx. $20 a share. NEED TO LOOK AT HOW DEBT IS BEING PAID DOWN. maturieis are for 2017, 2019 and 2020. Also benefitting from tax losses. Stock can go to approx. 42% in 2/3 years.                 

Infinera (INFN): Growing demand for data, leading to growing demand for optical network equipment and infrastrcuture leaders. The company is betting on its new Photonic integrated circuit (PIC), used inside optical transport platforms. it has the worlds only commercially deployed large scale PIC, which it believes is a game changer for its cost scalability and speed. Worhtwhile company to look into for medium term investors.

Personal Note: I have sold my HES CALLS expiring in Jan-14 at 40% profit. I still hold BWLD puts expiring March 2014.

Leidos - A New Spin-Off To Play The CyberIntel And Healthcare Sectors

I have posted an article on Seeking Alpha which goes into details about how to profit from going long Leidos International (LDOS). 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 for Leidos International (LDOS).  

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.

Personal Note: I sold my HES calls expiring in Jan-14 at a 40% gain and I am long BWLD puts, expiring March-14.

Thank you

Special Situation Ideas for week of 17-Sept-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.  

CST Brands: Valero Energy (VLO), spun off its retail business called CST Brands. The spinoff could be a winner for investors. CST is no lightweight, operating one of the largest fuel and convenience-store networks in North America. CST has 1,875 stores in the southwestern U.S. and eastern Canada. The company is asset-rich, as it owns 80% of its properties. It has a solid balance sheet, and generates roughly $100 mn a year in free cash flow. Management will use the company's ample free cash flow to reduce its $640 mn in net debt and pay dividends. It declared an initial quarterly payout  6.25 cents a share, for an 0.8% annual yield. CST's real estate could be worth nearly $1 billion and CST could choose to monetize the properties.

CST is on its own, management can expand the higher-margin merchandise business instead of focusing on the sale of more fuel. One of the largest opportunities for profit growth lies in boosting sales of private-label coffee, snacks, beverages, and other products. Private-label goods, currently underrepresented in U.S. stores, carry higher gross profit margins than branded products. The company's Canadian stores carry no private-label merchandise. CST also plans to expand the sale of fresh foods, another high-margin category, extending service from the morning to later in the day. CST carries a broad merchandise selection in its stores, including beverages, cigarettes, snacks, and fresh foods such as cheeseburgers, kolache pastries, and tacos. It also sells gas under the Valero, Diamond Shamrock, and Ultramar brands. Fuel accounts for 84% of sales, but only 49% of gross profit.

In the past three years, new stores in the U.S. have generated a nearly 90% increase in merchandise gross profit, compared with older outlets. Management plans to build 22 stores this year, and 37 in 2014.

CST's earnings are sensitive to fuel margins, which depend on wholesale gas prices. A drop in wholesale gas prices results in higher retail-gas profit margins. Conversely, rising wholesale prices crimp retail margins. Margins can be volatile on a quarterly basis, but tend to be more stable on an annual basis.

In the next 18 months, as CST benefits from its independence, the stock could climb 20%.

Timber: More of a long term plays. The product will get expensive given that its in high demand and the weather to say the least is not helping at all. There have been tones of forest fires, termite attacks, deforestation going on in the world. The space might also look into consolidation or mid tier companies might become potential takeover targets. Two companies that pique my interest are : Rayonier (RYN) yielding 3.5% and trading at 13x EV/EBITDA and Potlach (PCH), yielding 3% and trading at 13x EV/EBITDA.

Canadian Energy Services: Develops nonsulfur-based chemicals and fluid systems used in drilling. Firm is developing impressive new products, including a solution that neutralizes pipe-corroding brine. Could see its stock price, now around $16, on the Toronto Exchange, double or even triple. Meanwhile, shares yield 4.2%.             

Diebold Incorporated: Diebold got a new CEO Andy Mattes earlier this month. Firm can capitalize on an ATM-upgrade cycle in the U.S., driven by new features such as check-deposit automation, videoconferencing amd video functionality (BAC is testing and will use firm and NCR), and the expansion of ATM use abroad. Also helped by regulatory changes for ATM’s. Impending cost cutting of 100M -150M. yields 3.6%. Strong cash flow. 77% of its revenue from the sale and servicing of ATMs, and most of the remainder from security products and services - 50% of the NorthAm mkt and 25% of global. Business has been bad after financial crisis due to banks reducing costs. 47% revenue overseas – another positive. Another positive is sales of vaults as well as electronic-security products.

FutureFuel Corp: Good Balance Sheet, no debt, 2.7% yield. Firm is involved in Biofuels and Chemical manufacturing. Sale agreement with PG locked in until 2016.; Interesting to see, if the firm can be taken over or undergo secular growth?

Recent News: Philips : Philips raised most of its financial targets and announced plans to return 1.5 billion euros ($2 billion) to shareholders, saying it would reap the benefits of a two-year revamp to focus on healthcare, lighting and consumer appliances.

Also, there have been round of spin-offs in the last few months. Those looking at these situations should be paying closer attention! 

ManTech International - A Contrarian Play On Sequestration And Afghanistan Drawdown

I have posted an article on Seeking Alpha which goes into details about how to profit from going long ManTech International (MANT). 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 for ManTech International (MANT). 

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.

Personal Note: I am long HES calls expiring in Jan-14 (up 15% to date) and I went long BWLD puts, expiring March-14 (up 15% to date). 

Thank you

Great way to play the Healthcare Market

Those looking into some catalyst might want to ponder over this name I read online on Barron’s.

Trinity Biotech (TRIB)

Price:  USD 19.36

Market Value: USD 392m

Est 2013 Revenue: USD 89m

Est 2013 Net Income: USD 18m

Est 2013 EPS: USD 0.80

Est 2014 EPS: USD 0.97

Est 2014 PE*: 15 (Stripped of cash)

Dividend Yield: 1.20%

Business: Trinity Biotech (TRIB), an Irish maker of medical-testing equipment.

Catalyst:

• Diabetes has reached epidemic proportions around the world. There are 250 mn diabetics living today, and by 2025 the number could soar to 380 mn.That has created a large opportunity for companies that make testing equipment to diagnose the disease. TRIB has seen strong demand for the Premier Hb9210, its diabetes-testing instrument, since it was launched in 2011. The Premier boasts noted advantages over existing devices, including speed, accuracy, and easy-to-use touch-screen technology.
• In 2012, its first full year of sales, Trinity shipped 202 of the Premier devices, which sell to hospitals and labs for about USD25,000. This year, Trinity estimates it will ship 320 or more devices, aided by its recent entry into China, a potentially large market for the device, with an estimated 54 mn undiagnosed diabetics.
• Trinity makes tests and clinical instruments that detect for Lyme disease, syphilis, legionella, diabetes and autoimmune disorders like lupus. The company is perhaps best known for its point-of-care tests for AIDS used in Africa and the U.S.Last year, clinical instrumentation accounted for 77% of revenue, with point-of-care testing chipping in the remainder.In addition to growth from Premier, Trinity could also benefit from its lineup of new rapid point-of-care tests. They include tests for syphilis, herpes, strep pneumonia and cryptosporidium, and are expected to come to the market this year. Sales could ramp up in 2014.
• Trinity is also making progress with its point-of-care cardiac test to determine if a patient has had a heart attack. With an estimated world-wide market of USD1 billion a year, the potential is large. Trinity acquired the test in March 2012 when it bought Fiomi Diagnostics, and reported in April, that the test has begun clinical trials in Europe for regulatory approval. Approval, if it occurs, could come as soon as the end of this year.
• Trinity has a solid balance sheet, with USD73 mn in net cash. Free cash flow for 2012 is USD17 mn. Management is committed to returning some of its cash to shareholders in the form of dividends and stock buybacks. According to industry, TRIB can be worth USD25 by the end of 2014.

Special Situation Ideas for week of 15-Jul-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.

Utility sector: As usual, people think this is a boring sector to dwell into. However, as power plants switch from coal into a more renewable energy mix, there might be an potential M&A opportunities in this sector, specifically with those firms that are into renewable space. This is not the time for huge LBO’s of buyouts especially In the sector that’s regulated on the revenue side. However, some small and mid cap names are worth a look, at they not only bring a client base but help the acquirer reduce cost and increase margins. Some names do come to mind : Hawaiian Electric (HE) - Approx 5% yield and capturing and generating solar energy in addition to non-renewable. Portland Electric (POR): approx. 3.6% yield and huge in renewable sector; Avista Corp (AVA); approx. 4.6% yield and into wid, landfill Gas and Hydro.

Intuit (INTU): This technology company might be poised for a huge dividend increase. The firm just sold its financial services unit to Thomas Bravo for USD 1bn and plans to sell its healthcare business. With USD 2bn in cash and USD 500m in debt, the completion of second divestiture, might either propel the firm o return cash to shareholders of make accretive acquisition. Its worth a look!

Maple Leaf Foods (MFI): IN light of the recent Canadian M&A, this firm might be worth taking a look at. The company has not only been cited repeatedly as a takeover target, there were rumors it was  looking to divest. If not for takeover, the fundamentals of the firm support organic growth in food sector, given the demand and consumption. Also, 33% owned by M. McCain, the CEO and 11.4% owned by canadian activist - west face capital. There is a chance, the firm might get sold in the future.

Citigroup (C): There was a good article this week on Citigroup (C) , which I believe is worth a read . Some in industry believe the stock is worth USD 70s to low-USD 80s: Some of the key points it made were as follows:

·       Management change : 17-April-12, Chairman Michael O'Neill, a former Marine known for turn around in banks and  a new CEO, Michael Corbat, a former banker.

·         Truly global franchise, which is almost impossible to replicate: Citi is in 160 countries. All told, about 58% of Citigroup's revenue comes from outside North America. In contrast JPMorgan Chase (JPM) gets just 19% , while Bank of America (BAC), a mere 13%.

·          Bank is sitting on USD55 bn in deferred tax assets, or future tax write-offs, which will be increasingly valuable in using its capital more effectively. Helps improve earnings and create leeway for future stock buybacks and dividend increases.

·         Citi has received permission to buy back USD1.2 bn of its shares through the first quarter of next year, a relatively modest amount but an important symbolic victory.

·         Corbat plans to lift return on assets to 90 to 110 basis points from the 62 basis points recorded in 2012 (a basis point is one-hundredth of a percent). He's aiming to boost ROE to more than 10% from 5% in 2012, and to attain an efficiency ratio at Citi  in the mid-50% range, compared with 60% in 2012. Keeping with his promise, CEO has cut 11,000 jobs worldwide, sold or scaled back consumer-lending operations in Turkey, Romania, Paraguay, Uruguay, and Pakistan, and sold a consumer-finance unit in Brazil to focus on faster-growing business lines.  Also paid USD1bn to move past the financial crisis claims from Freddie and Fannie.

·         Many believe the bank is overcapitalized. Additionally,  Latin America contributes 13% to overall revenue -- Citigroup's corporate and retail banking revenues are increasing at double-digit clips compared with domestic growth that's been flat, excluding Citi Holdings.

·         The level of problem assets in Citi Holdings , a.k.a. the bad bank stands at USD149 bn, well off its peak of about USD800 bn in 2008. Just unlocking the capital connected to Citi Holdings could add as much as USD10 a share to his price target of USD60.

Personal Note: I am still long HES CALLS expiring in Jan-14. In addition, I have still held on to my DELL LEAPS.