Ideas to think over for this Sunday 15-Jul-2012

Ideas to think over for this Sunday 15-Jul-2012

Those looking into some catalyst might want to ponder over this name for the week. After looking into the name which I originally got from Barron's this def. is worth the post:

Phillip 66 (PSX) : The firm is a recent spinoff from COP. Trades at 5x earnings and basically has 3 business, Chemicals, oil refining and midstream. The firm seem to have good prospects. Recently talked about by two smart investors -

What might be the catalysts:  SOTP by industry experts suggest a 30% upside.
 
Chemical: The firm has a JV with chevron. PSX apparently also has a proprietary process producing higher quality ethylene and polyethylene from ethane and naphtha at lower cost. In addition PSX licenses technology to competitors. 80% capaicty is within US where it uses low price ethane and sell into high price markets, earning good spread.  Valued at approx. $13 a share at 10x P/E

Midstream assets at 17x FCF are worth aporox. $20 a share. Two non-refining segments are worth $31 a share

Refining has 3 segments - specialty marketing, pipeline. With no capacity to move crude out of kushing and crude trading at a discount to brent, for few yrs refinary's will enjoy low cost advantage. Some estimates suggest that  refining alone worth is worth approx. $10 a share with pipeline assets within refining in addition to marketing business can be possibly valued at $20. The basic refining is worth approxc $10 a share. Refining is basically free and can earn potential EPS of approx. $4.00 share.

Taking $9 per share debt out of the price, the stock is still worth approx $50 s share.    

Two Ideas to think over for this Sunday

Those looking into some catalyst might want to ponder over these names for the week:


Rentech Nitrogen Partners - Manufactures nitrogern fertilizer and industrial products including ammonia, urea and stuff. Used natural gas as its primary feedstock. debt, 10M; Cash:72M; 6Q EPS is more than 15%; last Q EPS is more than 46%; last Q sales increase is 60%.

Cardtronics:: Potential Short: Over leveraged; they have contract with BoA which provides them with 56% of their cash needs. The contract is set to expire in October,2012.

Ideas I posted in early June, in case you missed

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

ARE - Potential Long - Investors worried about investment pipeline and efforts to delever balance sheet. Now they are investment grade. Its pipeline is very large, USD 1.1bn, 17% of gross asset value. Most of pipeline is in premier life science hubs, SF, Boston, ect. The development projects open late this year

MANH - Potential Long - Develop supply chain software for manufacturers, distributors, retailers & transportation. I just love the business they are in. Haven't looked at fundamentals.

QCOR - Potential Short - Stock had a 100% run in last 2 yrs, acthar - drug on which QCOR depends came off patent; dependency on single manufacturer, expansion of rebates under medicaid will adversly affect these guys - therefore the upholding of healthcare law is not good? Regulation about how insurers reimburse for Acthar will negatively impact QCOR (pg 16 10K), Negative impact from macro- moving payer mix more under medicaid and govt. programs will (-)vly affect the firm; anti takeover provisions in place

GIL - Potential Long - Went from 10% to 65% of Wholesale screenprint market which will grow to 70%. shareprice fell as cotton prices increased - the company seems to have absorbed some of it. Recently increased the capacity by 40% EPS expected to increase. They " might enter" and sell to Nike and Disney. mgt. owns $250m stock

RLD may provide substantial upside with lateral growth, good fundamentals and growing emerging markets

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at small cap beaten down stocks..

• RealD – Current price at $14.96
• Potential Upside by Industry Estimates: $8 per share
• Market Capitalization: $818M
• Cash: $24.89M; Total debt: $25M
• Shares Outstanding: 55M
• Operating Margins: 22%; ROE:22%
• Sector: Technology; Industry: Movie Production, Theaters

 What does RLD do?

RealD, a technology outfit that specializes in 3D movies, could finally be ready to give up its feast-or-famine existence as an occasional Hollywood novelty for a meatier long-term role. The Los Angeles company, which supplies theatres with systems that enable their projectors to play 3D movies, and sells the special glasses required, has enjoyed a good lead-in to the arrival of summer blockbusters.

WHY RLD:
Led since 2003 by co-founder Michael Lewis, RLD went public at $16 in 2010 after the enormous success of the movie Avatar, then rose to a high of $35 in May 2011. But then the stock slid all the way to $8 late last year, amid fears that 3D was a fad. A failed deal to use RealD's technology in TV sets heightened the worry. However, early reviews from Europe for The Amazing Spider -Man in 3D have been positive, and new licensing deals with a Chinese theater operator should help the company's expansion overseas. That comes on top of the spectacular success of another 3D pic, The Avengers, in early May. The recent news has helped push RealD shares to $13.52 and according to some industry estimates the stock has the potential to top $20 in the next year. Summer blockbuster candidates like Spider-Man and Madagascar 3 could add to 3D's momentum from big-budget movies such as Prometheus.

Potential Catalysts:

Lateral Growth:
The popularity of the recent 3D movies and the technology's new expansion beyond the action-adventure genre to drama are positive signs of maturity. As production costs fall, more directors are likely to embrace 3D. RLD's systems have been installed on about 20,600 screens, 12,000 in the U.S., and 8,600 overseas. The company invests $10,000 to put in each unit. In turn, the theater pays the company a fee of 50 cents for each 3D movie ticket it sells. It's a nice swap: Theaters charge as much as $5 more for a 3D ticket. To recoup its investment, RealD needs a theater to sell roughly 20,000 tickets per screen. According to some analyst conservative estimates, a theatre will sell an average of 17,000 tickets per screen in the first year, with a modest decline per screen each year as more 3D screens go into service. That suggests the system pays for itself in about 16 months. According to industry estimates each theater screen might bring RLD $37,000 over eight years. Yet he says the stock trades as if the take might be only $21,000, offering a significant discount for investors.

Emerging Markets:
Biggest opportunity, however, lies abroad where big-budget action pictures require little translation. Already, the 3D splits—the proportion of a movie's box office sales generated in 3D—is about 49% domestic and 51% international. For the five years ending 2015, RealD's international growth rate might average 19.7%, versus 8.8% for domestic. RLD's international expansion has "a lot of legroom, a lot of runway" for growth. RLD has less than 10% of the Chinese market In the past 18 months, it's signed up 2,000 screens in China, including a big deal this month, and has installed 650 of them. China is adding 3,000 screens per year and had 10,500 screens at the end of 2011. By contrast, the U.S. has 40,000 screens. But RealD is also taking share from rivals, including Dolby Laboratories (DBL); other competitors include IMAX (IMAX) and MasterImage.

Patents:
RLD might enjoy a bright spot is the consumer-electronics business. In 2011, Samsung decided not to make flat-screen panels using 3D technology. Yet 3D is surely coming back. RealD has 300 patents, which it could license to companies making 3D TVs.


Fundamentals:
Earnings might fall in 2012 to $26.1m, or 47cents a share, from $36.9m, or 65cents a share, as RealD invests abroad, puts more money into R&D and fixes bumps at its 3D eyewear unit. Cash flow from theatrical licensing could rise to $141mn in 2015, nearly double what it was in 2010, as capital spending on U.S. theaters wanes and licensing fees roll in. RealD trades at about 12x cash flow, compared to 25 times for IMAX . RealD could fetch $21 a share from any acquirer—about 50% above current levels.

Nabors might make a great investment due to impending divestiture, deleveraging, and management changes

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at firms with a restructuring trades.

• Nabors Industries Ltd – Current price at $13.19
• Potential Upside by Industry Estimates: $10 per share
• Market Capitalization: $3.83B
• Cash: $494M; Total debt: $4.7B
• Shares Outstanding: 290M
• Operating Margins:
• Sector: Basic Materials; Industry: Oil & Gas Drilling & Exploration

 What does NBR do?

Nabors Industries Ltd. (Nabors) is a land drilling contractor. It is also a land well-servicing and workover contractor in the United States and Canada. It markets approximately 499 land drilling rigs for oil and gas land drilling operations in the United States Lower 48 states, Alaska, Canada, South America, Mexico, the Middle East, the Far East, the South Pacific, Russia and Africa. The Company markets approximately 581 rigs for land well-servicing and workover work in the United States and approximately 174 rigs for land well-servicing and workover work in Canada. It is also a provider of offshore platform workover and drilling rigs, and markets 39 platform, 12 jackup and four barge rigs in the United States, including the Gulf of Mexico, and international markets. In April 2012, TransForce Inc. acquired through its subsidiary, I.E. Miller Services, Inc, certain assets of Peak USA Energy Services, Ltd., subsidiary of Nabors.      (Source: Google Finance)

WHY NBR:

Nabors Industries, the world's largest driller of onshore oil and gas, reported first-quarter results in late April that soundly beat expectations. Yet, to judge from its share price, it would seem all the oil and gas wells were running dry. At $13.07 a share, the stock (NBR) is down more than 50% from its 52-week high of $27.63 reached in August 2011. The shares have been hurt by falling prices for natural gas, and investor anger over executive perks and severance packages. But shareholders look to be getting a stronger say in corporate governance, and there are lots of reasons to be optimistic. The shares, hurt by falling natural gas and a controversy over severance packages, could hit $30 as asset sales and big debt reductions pay off.

Potential Catalysts:

Divestiture to pay down debt: In March 2012, it was reported that progress has been made in jettisoning noncore businesses in which NBR might raise $800  million. These asset sales will help reduce a hefty $4.8 billion in debt. Strong free cash flow will also be used to pay down debt. The company is targeting a net debt-to-capitalization ratio of 25% in two years from the current 45%.

Management Changes: Nabor’s fall from grace is directly related to the company's history of bestowing lavish pay and perks on its executives. An uproar ensued last fall when its former CEO, Eugene Isenberg, was set to receive a $100 million cash payout due to a "change-of-control" clause in his contract triggered by the board removing him from the CEO position. The 81-year-old Isenberg eventually relinquished his right to collect the payment. Isenberg, who remains chairman, is credited with leading Nabors, formerly known as Anglo Energy, out of bankruptcy in 1987 and has been amply rewarded ever since. From 1992 until he stepped down last fall, Nabors paid him $750 million, including exercised stock options. He regularly jetted between headquarters in Houston and his homes in Palm Beach, Fla., Martha's Vineyard, Mass., and New York. However, a cultural and strategic transformation appears to be taking hold at Nabors under the new CEO, Anthony Petrello, and some new blood on the board—lead director John Yearwood, the former chief executive of Smith International, a respected oil- and gas- equipment maker that was sold to Schlumberger in 2010. The changes are showing up in the customer-satisfaction rankings conducted by independent oilfield tracker Doug Sheridan and his Houston-based EnergyPoint Research. Nabors ratings, though still low or average, are trending higher, reflecting improvements in pricing and contract terms, service, technology, and other factors.

Improving Business:  NBR’s domestic drilling business in the lower 48 states has performed well despite industry challenges. Nabors' Alaska and offshore operations have rebounded, and its overseas operations appear to be recovering. Should natural-gas prices stage a comeback, as is inevitable at some point, Nabors will be a major beneficiary. Nabors also has very limited direct exposure—two rigs—to troubled Chesapeake Energy (CHK), which many expect to cut back on its shale exploration to conserve cash. Margins at Nabors' international operations are set to improve in the second half of this year and into next year as contracts are repriced. Last year, business in Saudi Arabia and North Africa, two areas that account for about half the overseas fleet, were disrupted by the Arab Spring uprisings, resulting in higher labor costs in Saudi Arabia and lower rig utilization in North Africa. Company officials believe the first quarter marked the bottom of the cycle in the international business.

Strong Fundamentals: Nabors' domestic drilling business has performed well still it is trading at a paltry six times estimated earnings of $2.19 a share for this year and about five times projected earnings of $2.51 a share for 2013, despite Wall Street expectations for earnings to increase by 15%. Any way you look at it, the stock appears undervalued. Nabors trades at less than four times EV/Ebitda, despite historically fetching a multiple of more than five. At five times EV/Ebitda, or cash flow, the stock might be worth closer to $23 a share, according to some industry estimates. A price/earnings ratio of 12 would result in a stock price closer to $22, representing gains of 65% to 70%.

Recent Price	$13.07
52 Week Hi-Lo	$27.63-$11.05
Market Value	$3.8 bil
Rev 2012E	$7.5 bil
EPS 2012E	$2.19
P/E 2012E	6.0
Source: Thomson Reuters

Macro Economic Thoughts in 2012

Quick thoughts for the next 12 months:

Both EU and emerging markets have undergone turmoil within the last 12 months and these events might be correlated. The recession within EU might be trickling down to emerging markets leaving US as the next best option for investors around the globe. EU is currently in recession as we know of. Greece underwent a pseudo referendum this weekend on the question of whether or not to stay in the EU. The Greek people voted for the party that supports Greece staying in the EU, however the elections this weekend have resulted in a fragile political dynamic and still lot of uncertainties remain. With Spain and Italian yields at 7%, banks undergoing major restructuring and governments reporting significant deficits, the countries seem to be in trouble. EU turmoil resulting in restricted lending, stagnant corporate growth and high unemployment has resulted in a decline in consumption and corporate spend alike.

Similarly, with two major emerging markets exposed to EU; China with 17% of its exports to EU and Indian with 16% of exports to EU are negatively impacted by European recession. Others in the Asian club are economies such as Malaysia with more than 14% exposure to EU. Furthermore, manufacturing jobs that are returning to the US only exacerbate the problem for the emerging economies. In addition to these problems, China and India have problems of their own; China with its real estate market and India with its high rate of inflation. Both are expected to face volatility over the next year or two. Easing of monetary policy in china might alleviate some short term concerns; however, fundamental problems with bank leverage and real estate still remain.

The cautiousness in bank lending, slowdown in exports and that in Chinese real estate directly impact consumption and corporate spend in the mainland. With slowdown in these economies, which are major consumer of natural resources, economies such as Australia and Brazil will get impacted. The markets are pricing in a slowdown in these countries as well.

That leaves US. Within US, equities are priced at 12x – 13x times’ earnings, corporate balance sheets very strong and corporate are sitting on loads of cash (almost $2T).  A lot of investors are looking for safer havens and have parked their money in treasuries which might be currently overbought – so much so that they are yielding negative yields in real terms. The only reason why investors would do that is because US Govt. assures return of principal if nothing else! With interest rates nowhere to go, treasury market might be overbought and will undergo correction at the first sign of interest rate moves.

That leaves us with US Equity markets. Does that mean the equity markets will rally in short term? Probably not! With almost 20% of S&P 500 companies exposed to EU and almost 35% to 40% firms exposed internationally ( EU & Emerging markets), the markets might undergo short term volatility. Earning comps might not come out that strong YoY, however, US firms are well positioned to take advantage of a turnaround and are one of the best bets for investors, looking both for yields and long term capital appreciation.

2011 and 2012 have seen lot of special situation such as spin-off’s M&A, actual/potential divestitures or potential JV’s in the large and mid cap space. Furthermore, the markets have also seen lot of new regulation & budget cuts post 2008 crisis that will affect the firms going forward. There have also been companies that have emerged from bankruptcies and have started trading post reorganization; these events present ample opportunities for long term investors looking for value plays with significant catalysts attached.

For example - defense sector will see cuts and therefore might lead to consolidation. Healthcare technology providers might benefit from the healthcare regulation. Within homebuilding where I do not see a significant recovery in short term, those who are into home repair & maintenance might come out as winners. Natural gas provides ample opportunities for people to invest in - not in the natural gas producers per se, but in companies that are well placed to take advantage of LNG exports from US to countries in EU & countries like China. There is also need for or demand for natural gas technology which will benefit companies who will export or share it with emerging economies looking to explore natural gas reserves. Furthermore, firms that help build Natural gas infrastructure will benefit too. Water, which has been big on my list, will be a money maker in the next three years, especially firms who are providing water testing systems, analytics, providing water for fracking, transportation and dewatering.  

There are more firms I can talk about within the technology space or shorts for companies that are leveraged with exposure to cyclical industries/consumers. I can talk about Gold given easy monetary policy, but am not expert in gold and it’s an obvious choice! Therefore, I will end it here for now.

These are macro views and should not be construed as my views on specific companies trading internationally. Current markets are clearly for investors who are looking to trade medium to long term.

Material share buybacks, pricing power due to industry consolidation and strong fundamental provide substantial upside to Seagate (STX) shareholders

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at firms with material buybacks and fundamental trades. The valuation, like those published exclusive on seeking Alpha, is not mine.

• Seagate Technology PLC (STX) - Currently trades at $29.00
• Potential Upside by Industry Estimates: Approx. $10-$15 per share
• Market Capitalization: $13.11B
• Cash: $2.05M; Total debt: $2.86M
• Shares Outstanding: Approximately 448M
• Dividend Yield: 3.5%; Operating Margins: 16.89%
• Sector: Technology; Industry: Data Storage Space
• Main Catalyst:  Pricing power, share buybacks, Upside from industry consolidation, long term contracts, strong fundamentals

What does STX do?

     Seagate Technology plc (Seagate) designs, manufactures, markets and sells hard disk drives. Seagate produces a range of disk drive products addressing enterprise applications, where its products are designed for enterprise servers, mainframes and workstations; client compute applications, where its products are designed for desktop and notebook computers, and client non-compute applications, where its products are designed for a range of end user devices, such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems. In addition to manufacturing and selling disk drives, the Company provides data storage services for small- to medium-sized businesses, including online backup, data protection and recovery solutions. The Company sells its disk drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. (Source: Google Finance)

WHY STX:
Disk drives are data-storage devices widely used in desktop computers, notebooks and servers. While annual industry unit sales top 600M, generating over $30B, STX a rare find in an improving industry trades for just three times earnings. Seagate dominates the disk-drive industry, along with Western Digital (WDC). Sales of Seagate disk drives are benefiting from tightness in the market after extensive flooding in Thailand last year hurt competitor Western Digital. Seagate shares, at $29, trade for approx. four times a projected profit of $6.28 a share in its current fiscal year, which ends in June, and three times the $8.52 expected in fiscal 2013.Seagate looks appealing because of its super-low valuation, strong market position, and shareholder-friendly management, led by CEO Steve Luczo.

Potential Catalysts:

Share buybacks and strong dividend yield:The company has a 3.8% dividend yield, having boosted its payout 39% in January. Another dividend boost could come in the next year. Seagate also is aggressively repurchasing stock. The CEO has said the company aims to cut its share count by about 25% in the current calendar year to 350 million shares. Investors can follow Seagate's buyback progress in almost real time on its Website because the company, which is domiciled in Ireland (although run out of Cupertino, Calif.), complies with Irish rules that require prompt repurchase disclosure. Seagate has stepped up its buyback lately, repurchasing 3.85 million shares in the first three days of last week.

Market Demand and Industry consolidation creating pricing power: Seagate is benefiting from tightness in the disk-drive market, caused by the massive flooding in Thailand last summer, which caused an estimated $45 billion in damage and knocked out a big part of Western Digital's production. Seagate's factories were unscathed, although it was affected by component disruptions from suppliers. Why does Seagate trade so cheaply? Wall Street is skeptical that the good times will last beyond this year and believes that the disk-drive industry, which has a history of low margins and fierce price competition, will return to its bad old ways. However, one key positive that they ignore is the industry consolidation. A decade ago, there were eight major manufacturers. Now there are three, down from five last year. In December, Seagate paid $1.4 billion in stock and cash for the disk-drive operations of the No. 5 player, Samsung (005930.Korea). And this year, Western Digital bought the business of the No. 3 maker, Hitachi (6501.Japan). The only other independent producer is Toshiba (6502.Japan). Seagate and Western Digital both have a roughly 43% market share, which bodes well for firm pricing. In addition, the Thai floods created a temporary shortage of disk drives that may persist until the end of this year.

Benefits from long term supply contracts and incremental demand for storage: Rather than push up tabs quickly, Seagate has opted to ink long-term supply agreements with key customers like Dell which means better prices for a longer period. Some investors worry about the increasing competition that disk drives face from solid-state memory, like that used in Apple's iPad and other devices, including ultrabooks. Add to that doubts about the future of personal computers. But industry analysts argue that storage demand is growing sharply, thanks to an explosion in mobile and PC-generated content, and that disk drives will supply part of that need. The CEO has even talked about a scarcity of storage capacity. This could support double-digit annual growth in production. PC disk drives, which cost under $100, are a cheap source of data storage, costing a fraction as much as solid-state memory.

Strong Fundamentals: Some industry analysts see plenty of upside in Seagate, with some carrying a $40-$45 price target and a Strong Buy rating. They say that the STX valuation is "absurd" and that the disk-drive stocks represent one of the "best plays" in technology outside of Apple (AAPL). There is also a belief that firm will generate strong cash flows in the next quarters, with few tech companies returning so much cash to shareholders in the coming year, relative to their market value. Seagate sees $20B of revenue this calendar year, up from $11.5 billion in 2011. CEO's bullish guidance for the March and June quarters bolstered the stock at the time of his February conference call. While he didn't provide earnings projections, his guidance on revenue and margins enabled analysts to come up with profit estimates. The Street sees $2.09 a share for the March quarter and $2.58 for the June quarter. Investors are eagerly awaiting third-quarter results, to see if Seagate is delivering. Industry estimates that Seagate trades for just 2.4 times forward EBITDA, which is one of the lowest valuations among major tech outfits. It should also be noted that Industries in transition can be profitable because the markets value them very cheaply. Seagate shares seem to be reflecting fear of a profit collapse; that seems too dire a scenario, given the disk-drive business's consolidation, which should lead to better long-term pricing and margins. Even if Seagate's annualized profits drop to $5 to $7 a share, the stock looks inexpensive.And with no need for acquisitions, given its dominant position, Seagate is apt to continue repurchasing stock and may further boost its dividend—a great combination for investors.

The disk-drive industry's two giants trade at tiny multiples of their expected earnings.

Company/Ticker	Recent Price	12-Mo Chg	EPS 2012E	EPS 2013E	P/E 2012 E	P/E 2013E	Div Yld	Mkt Val (bil)
Seagate Tech/ STX	$26.99	64.3%	$6.28	$8.52	4.3	3.2	3.8%	$12
Western Digital /WDC	39.19	4.1	6.48	8.63	6.1	4.5	None	10