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)
and
Pfizer (PFE).