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!
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