Special Situation Ideas for week of 10-June-2013

The following are the name I have done research on read online, on Barron’s and other publications. 

NetScount Systems (NTCT): The firm designs, develops, manufactures, markets, licenses, sells and supports market application and network performance management and service assurance solutions for the Internet protocol (IP) based service delivery environments. The major plus is that NTCT is into analysis of data and trends. Every major mobile operator uses their technology and they provide analysis of network and real time analytics. No debt and USD 137m in cash. 20% operating margins and 12% profit margins. They can become a  potential takeover target.

Quanta Services (PWR): Services PWR provides include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries it serves, such as electric power transmission and distribution networks, substation facilities, renewable energy facilities, natural gas and oil transmission and distribution systems and telecommunications networks used for video, data and voice transmission. The major driver for the firm will be infrastructure spending. With the state of infrastructure in the US and the upgrades needed globally and in United States, this might be either a takeout target or a long term secular growth story. Firm has no debt, 366m in cash with 9% operating margin and 11% ROE. Worth  digging into.                     

Old National Bancorp (ONB) and Berkshire Hills Bancorp (BHLD): Both will ride the wave of consolidation that will happen in the US via consolidation in the financial sector and will benefit by acquiring small rivals or distressed assets. This will happen, because US is over branched for one (7100 banks in US with approx. 100k branches, with 90% banks in US with assets under USD 1bn) and two, banks especially medium size ones are overburdened with regulatory costs. ONB has been acquiring branches in Indiana and other regions. BHLD has good management, its CEO is a protégée of Larry Bossidy, a plus and it can acquire UBNK (UBNK’s CEO is 70+).  Plus, they are both under 1.5bn, so targets themselves!

Quality Distribution (QLTY) is the largest tank-truck operator in North America. QLTY operates a large network of 2,800 tractors, 5,200 trailers, servicing terminals, and other energy-related equipment. While it owns most of the trailers and some tractors, it relies on a network of independent trucking affiliates for most of the trucks, drivers, and terminals. Quality handles the sales and the back-office support, and gets a cut of shipping revenue. It also gets a fee for renting out its trailers.Quality's core chemical-logistics business accounts for 67% of revenue. The company also operates an intermodal tank-transportation business that ships liquids overseas. It chips in 16% of annual sales, and the energy business contributes the remainder.

Key Points:

Because of Quality's asset-light model, capital expenditures are low and it helps QLTY generate substantial free cash. FY13 estimated free-cash-flow yield is a hefty 18%. QLTY transports chemicals for the likes of Dow Chemical (DOW) and DuPont (DD), and could rally next year, partly aided by rising chemicals shipments.

Most of Quality's problems can be traced to an ill-timed acquisition spree in FY11-FY12 spending about USD 110mn to buy trucking-logistics companies, which service the hydraulic-fracturing energy market. This segment was negatively affected by the downturn in the gas drilling market. Management has already taken action to address weakness in the energy business. Part of its strategy involves shifting tractors and trailers from the gas-heavy Bakken and Marcellus shale deposits to more oily deposits like Eagle Ford. The equipment will be used to transport crude oil. Furthermore, QLTY announced in May-13 that it had struck an agreement with a trucking affiliate to take over management of three terminals in the Marcellus and Utica shales. The company will sell equipment to the affiliate, which will lower Quality's costs and boost its profitability.

Industry estimate QLTY to earn USD24 mn this year, down from USD 50 mn in FY12. EPS could total 79 cents, on revenue of USD 947 mn. FY14 EPS could rise to USD1.05 a share, on higher revenue. QLTY has a leveraged balance sheet, with net debt of USD 405mn stands at 4.5 times estimated Ebitda. But the debt is manageable given free cash flow, which could hit USD 42mn this year. FY12 interest expense was USD1.12 a share. Management appears committed to paying down debt, and a reduction in debt could be a meaningful driver of earnings.

Personal Note: I recently bought long position in HES CALLS expiring in Jan-14. There is also a wave of spin-off’s for those like me, who look at special sits. I told in my last post, that the coming time will be feast for special situation investors. Its my personal feeling that this market will trend up, atleast for a year after a slow correction in the summer.

On Break

Kedar has been on a break and will remain on a break until June 1st week. Thanks.

Wild Buffalo Don't Fly On Wings: The Short Case For Buffalo Wild Wings

I have posted an article on Seeking alpha which goes into details about how to profit from going short Buffalo Wild Wings (BWLD). 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 short ideas for NetSuite (N).

Thank you

Special Situation Ideas for week of 8-Apr-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.

Hess Corporation(HES) – This firm might present a good opportunity for investors looking to benefit from two definite catalysts – ongoing divestitures and shareholder activism by Elliott Associates.

On 4-Mar-13, in a press release, HES outlined several initiatives; to transformation HES into a pure play exploration and production (E&P) company after divesting upstream and downstream assets . Part of this initiative is also to increase the dividend to USD 1.00 per share, an increase of 120% and to buyback USD 4bn of stock (16% of HES market cap), dependent on asset sales. HES has already divested certain assets to date, which includes ones in Eagle Ford for USD 265m, its ACG fields USD 1.0bn and its  Russian subsidiary, Samara-Nafta, to OAO Lukoil for USD 2.05bn.

However, this announcement comes after Elliott filed with the SEC on 29-Jan-13, asking for nomination of its own 5 directors and for the breakup for the company after divesting HES’s downstream and midstream assets. A detailed plan with the SEC on 13-Mar-13,  in which Elliott values downstream and midstream assets at USD 3bn-3.5bn and USD 2bn-2.5bn respectively.  It also calculates that value of HES shares to be between USD 97 to USD 128 per share, a substantial premium to where they trade today, at USD 71.00. The value realization is possible, if HES executes on Elliott’s plan to breakup of HES into two entities, divest assets and gain operational efficieny.

However, HES has refused to breakup the company and instead has decided to follow its own course of action. HES’s future will be decided at the AGM which will be held on 16-May-13.  Shareholders can chose to either vote for Elliott’s directors, paving the way for a breakup of the firm, or they can vote for HES’s nominees and stay with the current plan leading to a pure play transformation, an increased dividend and USD 4.0bn share buyback plan.  No matter what the outcome, this seems like a good trade with a definite catalyst for investors looking to trade energy names.

Valero Energy (VLO) - Continuing with the energy theme, this is another name worth a serious look. Valero Energy (VLO) that said it will spin off its retail operations.

Nabors Industries (NBR): I wrote about  Nabors Energy on my Seeking Alpha blog a while ago. Here is the link to the writeup - Nabors(NBR) . Recently it was reported that NBR’s biggest shareholder convinced the management and thereby got the right to up its stake just below 15% in the company. NBR has also agreed to additional board appointments and what’s more important is that the firm has agreed to undertake a strategic review of the company. The poison pill NBR had expires in July 2013. Firm was rumored to be a takeout candidate. Its actively looking into and is divesting assets and restructured its operation in 2012. Recent DB research note suggests the firm’s fair value at USD 25 per share – which was my best case scenario. My base case was $18.00 a share, still 14% above where it trades today.

Brookfield Property Partners(BPY) – BPY is suppose to be spun-off from from Brookfield Asset Management (BAM) on 15-Apr-13, and will contain BAM’s commercial real estate holdings, to become one of the world’s largest property companies. What makes this opportunity interesting is BAM’s history of successful spin-off in the past. For example, shares of Brookfield Infrastructure Partners (BIP), in which BAM owns 28%, have doubled since they began trading in 2008. Additionally, BAM owns 68% of Brookfield Renewable Energy Partners (BRPFF), whose stock is up 260% since early 2001. On 15-Apr-13, BAM plans to distribute 7.5% of BPY to BAM shareholders of record March 26 in the form of a tax-free special dividend of one BPY unit for each 17.42 BAM shares held. BPY is targeting a distribution growth-rate target of 3% to 5% annually and expects to pay USD 1 per unit annually which will yield 4.7%. BPY is suppose to benefit from a recovering U.S. economy, and further expansion into Brazil and Europe will drive growth. The firm according to some in the industry should be valued at USD 30 a share.

On a Personal Note: I think its always good news, when you make money and help people make some too! My SLE spin-off, DE Master Blender got an offer at a 33% premium to its trading price. My HSH is up 30% and I am long DELL LEAPS, which have made money for me so far. Last long I wrote about was Gentex (GNTX) – I believe it’s worth another look for those looking at investing in decent firms. Also, a recent short I wrote is something I believe people should keep on their radar. It was on NetSuite (N)

I personally expected volatility in this month and going forward and believe there will be better opportunities to buy. However, its hard to fight so much liquidity getting pumped into the market, helping the market move higher without strong underlying fundamental. I think the coming times will be a feast for special situation investors! Stay tuned!

Special Situation Ideas for week of 27-Feb-2013

Those looking into some catalyst might want to ponder over these names for the week. I have not done extensive research on them, but this is a way for me to share names on my list that others can work with since I have too many ideas to work on.  These are def. is worth a serious look.

ADT Corp (ADT):  Read it in Barron's. Makes for a good read. ADT was  spun off from Tyco International in Sep-2012. The firm is trying to move beyond normal security business by using its access to 6.43M homes. The growth might come from ADT’s efforts to have its current customers use its equipment to monitor their children, lock doors, control thermometers, turn on lights, and start dinner prep. Moreover, these functions can us operation remotely via new ADT technology – something that will ease the adaptation. The technology is currenylu sold to only 4% of its customer base, leaving large leg room for growth. Management's revenue growth targets for 2013 are 5%-to-7%. Subscription-based, recurring revenue is 92% of total sales.  Firm has a 25% share of the home-alarm business and 14% of the small-business segment. Firm plans to buy back $2B of shares over next 3 years, with $600M in 2013.

Computer Task Group (CTGX): It’s an information technology (IT) solutions and staffing company with operations in North America and Europe. Tech and Healthcare constiture approx 64% of total revenues. Given the impending M&A cycle, it should be noted that IBM is CTG’s largest customer with 30% of revenue, making this mid-cap name a potential takeover target.; P/E: 21x, no debt, ROE 14%, Margins 5% with EPS growth 20%.

MasTec, Inc (MTZ): It is an infrastructure construction company operating mainly throughout North America across a range of industries. Its customers are primarily in the utility, communications and government industries. The Company’s core services are the engineering, building, installing, maintaining and upgrading of infrastructure for communications, utility and government customers.  I have spoken about the upgrade cycle long due in the US and this might be a name to look into for potentially playing that theme. I work about Xylem a while ago, as a play on water infrastructure. It can also be potentially taken out, if the upgrade cycle starts. MTZ does not trade cheap, with  forward P/E: 16x with  ROE of 12%. My concern is the debt on the firm, that should be looked into.

Tessera Technologies (TSRA): The battle is heating up between Starboard and the company. The most recent board feud in addition to the pressure from the activist may bring this company back into play, thereby making it an interesting trade. I wrote about Tessera (TSRA) a while ago and might be worth revisiting.

Special Situation Ideas for week of 11-Feb-2013

Those looking into some catalyst might want to ponder over these name for the week. I had two of these names on my list (HCA and HSP), and Barron’s confirmed my thoughts. Here is a summary from Barron's. These def. is worth a serious look.

HCA (HCA): Potential Short: Catalyst - OverLeveraged with unknown obamacare benefits priced in

HCA (HCA), the country's biggest publicly traded hospital operator, have soared almost 70% since 2011, and 23% this year alone. One main factor has been the remarks that the Affordable Care Act, or Obamacare, will add substantially to its earnings in 2014.

However,  given the uncertainties of Obamacare reimbursement for hospitals, and HCA's fourth-quarter results, which were more checkered than they seem at first blush, this run might not last. Leverage is rising; profit margins are falling; and earnings before interest, depreciation, and amortization fell from year-earlier levels.

A negative for the shareholders I the funding of special dividends, a total of $4.50 per share last year, nearly $2B, mainly through debt, giving big gains to Bain Capital Partners and KKR (KKR), part of the private-equity group that brought HCA public in March 2011, after taking it private in 2006. That group sold about 32 million shares in December for around $1B, but Bain and KKR still own about 40% of HCA.

Management guidance for 2013 that was weaker than expected and expressed caution about what Obamacare will mean for profits – putting a question mark on the run up in HCA’s share price. Same-facility inpatient revenue per admission fell 1%. That probably reflects pricing weakness.Emergency visits rose 12.7%, but it’s a  lower-margin business. Apparantly provisions for doubtful accounts soared 67% in the fourth quarter, to $1.1 billion, from the year-earlier total. Debt, due to special dividends, increased by $2B, to $29B, higher than HCA’s $28B in total assets.  When interest rates jump, or Obamacare isn't as remunerative as HCA's stock price indicates it will be, times could get tougher.

Wendy's (WEN) : Potential Long: Catalyst - Takeover target, Business restructuring

In the past 18 months, Wendy's (WEN) has gone back to its roots as a high-quality burger maker, introducing new menu items and more focused marketing, and rolling out a dramatic remodeling of its stores. The results are notable, with same-store sales rising for six of the past seven quarters. They were up 4.9% in the past two years. Wendy's EV/EBITDA is 8.4x. while its competitors trade at 10x. The discount is likely to narrow as Wendy's transformation unfolds. At 10x 2014 est.EBITDA, Wendy's would be worth $7.20. The stock yields 3.2%.

WEN has 6,560 stores, with 78% franchised and the rest company-owned. Almost 90% of the stores are in the U.S., with the greatest concentrations in Florida, Ohio, Texas, and Georgia. In 2008, Wendy's was acquired for $2.4B by Triarc, a holding company controlled by activist investor Nelson Peltz. The current CEO, Emil Brolick, joined Wendy's in September 2011 and knows it well, having worked closely at Wendy’s  before leaving for Yum! Brands. Brolick turned around Yum's Taco Bell unit, and most recently served as chief operating officer of Yum. Last April he hired Craig Bahner, a Procter & Gamble (PG) veteran, as chief marketing officer.

Wendy's has made significant changes to its menu and marketing plan. The new products have met with success, and Wendy's has gained share in large hamburgers and large chicken sandwiches. But some price-conscious customers have taken their business elsewhere. Management recently launched a value-based menu, called "Right Price Right Size," and will ramp up marketing of it this year. Remodeling Wendy's aging stores is another part of its strategy. The remodels include such features as lounge seating, fireplaces, flat-screen TVs, Wi-Fi, and digital menu boards.

Sales in the newer-looking stores are up 25% since remodeling. The company plans to remodel 200 stores this year, and open 120 new units. In 2015 it is targeting 1,300 new and remodeled outposts. The changes are showing up in profitability and sales with December quarter, company-run restaurants enjoyed profit margins of 15.9%, compared with 15% a year ago. Cash stands at $454M to debt of $1.46B. FCF is  expected at $15M in 2013. Peltz and associates control 27% of Wendy's stock. Given his involvement, a sale of the business is a strong possibility. One logical buyer: Yum! Brands, which doesn't own a burger business.

Hospira (HSP): Potential Long: Catalyst - FDA inspection, takeover target, biosimilars

Nearly three years after the FDA mandated that it improve quality control at one of its top drug-manufacturing plants, Hospira (HSP) is getting ready for an inspection of the Rocky Mount, N.C., facility, possibly in 1H13. A clean bill of health from the FDA could clear a path to boost the plant's production, which has been scaled back amid the remediation efforts. It also would enable Hospira to focus more resources on promising markets, including generic substitutes for biotech treatments whose patents are expiring. Overseeing the plant's cleanup and the company's revamped strategy is CEO Michael Ball, who joined the firm in March 2011 from Allergan (AGN).Hospira makes generic injectable drugs including morphine and antibiotics. CEO wants to increase HSP’s presence in France, Germany, and Japan as well as the emerging markets of China and Brazil.

After the FDA inspection, North Carolina is expected to come online and that will give the firm good lift. Gross profit margins, at 30%, will probably rise as the costs of upgrading its facilities decline, plant efficiencies improve, drug shipments increase, and prices rise. The facility is important as it accounts for 25% of the company's $4B in sales.  Due to uncertainty surrounding Hospira's inspection, stock has been negatively impacted. Shares are down about 43% since November 2010 high. That has created an opportunity. HSP enjoys world's No. 1 market share—37%—in the generic injectable-drug market, a highly specialized class of drugs that require advanced handling techniques. The complexity of making these drugs creates a high barrier to entry. Hospira enjoys limited competition and higher margins as a result. About 63% revenue comes from these drugs. HSP also ranks No. 2 in the market for intravenous-delivery systems and pumps with a 17% share. The systems and pumps kick in about 24% of revenue; other products like IV solutions comprise the rest.

Whats not priced in the stock is the growth potential from a new drug group known as biosimilars. HSP is the leading U.S.-based producer of these drugs and among the world's top three, along with Teva Pharmaceutical (TEVA) and Sandoz, a division of Novartis (NVS). Estimated $40B of the biologics are scheduled to lose their patent protection through 2020, providing lots of new opportunity for HSP and its rivals. Its estimated that the biosimilar market will reach nearly $4B by 2015 from $243M in 2010. HSP's biosimilar for Amgen's Epogen, is in Phase III clinical trials with the U.S. FDA. The last patent on Epogen is scheduled to expire in 2015, which is when the U.S. market for a biosimilar version is set to begin. HSP is also selling Nivestim, a version of Amgen's Neupogen, which boosts infection-fighting white-blood cells in cancer patients, in Europe and Australia. Biosimilars enjoy support of pharmacy-benefit managers because of the tremendous cost savings they represent for their customers. Hospira's  market value is about $6B makes it a potential acquisition target for big-pharma companies such as Merck (MRK) andPfizer (PFE). 

Spectrum Brands (SPB) – Post Bankruptcy play with substantial upsisde

Those looking into some catalyst might want to ponder over this name for the week. I looked at this name and read it in Barron's. It was Meryl Witmer’s pick. This def. is worth a serious look.

Current Price: $55.60

Market Cap: $2.5bn

Shares outstanding: 53m

How high could the stock go? Two-year price target is $75 to $100.

History: Spectrum emerged from bankruptcy protection in 2009. It is 57.7%-owned by Harbinger Group [HRG], which is controlled by Harbinger Holdings, a private investment firm run by Phil Falcone. Spectrum represents the majority of the value of Harbinger Group. Falcone is controversial, and Harbinger's ownership stake could explain why Spectrum is a good value. Harbinger might have to sell its Spectrum shares at some point. If a forced sale were to occur, it might remove the taint from Spectrum, and bring it more attention.

Business: Spectrum is a diversified seller of branded consumer products. Its brands include Rayovac and Varta batteries; it is No. 3 in the business in North America, and No. 1 in Latin America. It also sells Remington electric razors and personal-care products, and is No. 2 in the category in North America, the U.K., and Australia. In small kitchen appliances, with brands such as Farberware, Black & Decker, George Foreman, and Russell Hobbs, it is No. 2 in the U.S. and No. 1 in the U.K. Spectrum also is active in pet supplies; its brands include Tetra, FURminator, Nature's Miracle, and Dingo. It is No. 1 in fish supplies, No. 2 in global pet supplies. In the home-and-garden segment, it sells insect repellants, and is No. 2 in the U.S.

Key points: A key consideration  is the quality of the management team, and its focus on allocating capital wisely. Spectrum recently completed an acquisition that may turn out to be brilliant. It bought a division of Stanley Black & Decker (SWK), whose brands include Kwikset, Weiser, and Baldwin doorknobs and locks. It is No. 1 in locks in the U.S. and Canada, and No. 1 in luxury hardware in the U.S. Other brands include Stanley hardware, No. 1 with residential builders in the U.S., and Pfister faucets, No. 4 in the U.S. The benefits from this acquisition are twofold. Spectrum has a fantastic global distribution system and, over time, can introduce the Stanley Black & Decker products worldwide. Also, it will gain increased scale with customers.

Financial impact From M&A: If the only benefit of the merger is the $10 million in cost savings that management outlined, and there is no growth, reported earnings per share would climb from an estimated $3.64 in 2013 to $4.20 in 2015, mainly from paying down debt. To square GAAP accounting , we add back incremental cash flow of 80 cents a share from NOLs [net operating-loss carry forwards, a deferred-tax asset]. That's $5 a share in after-tax free cash. The excess of depreciation and amortization over capital spending adds another $2 in cash. In all, after-tax free cash flow grows from an estimated $6.44 a share in 2013 to $7 in 2015. The stock is a real bargain at 7x after-tax free cash.

A few things could happen to boost earnings. Spectrum could continue to grow at a 4% annual rate, which would add another 80 cents to earnings over two years. In 2014, it could refinance some expensive debt on which it is paying 9.5% at, say, 6%, which would save another 65 cents a share. Add it up and you get $8.45 a share. Plus, the company has NOLs of more than $1 billion. And these numbers don't include the benefits of broader distribution of the Stanley Black & Decker brands, or a significant increase in homes built in the U.S., which we expect.