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.