Special Situation Ideas for week of 8-Dec-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. 

Ciena Corporation (CIEN): Growing demand for data, leading to growing demand for optical network equipment and infrastructure leaders will help the company grow and perform well in the future.Will likely benefit from its partnership with Verizon, AT&T as they start t accelerate the roll out of 100G technologies. VZ is currently field testing a new technology from CIEN that allows use of specialized software to increase spectral efficiency of the networks - doubling the capacity of its 100G network. Could also be a future takeout candidate.

Berry Plastics Group (BERY): Makes plastic containers and drinking cups, including a cup made of a biodegradable plastic it calls Versalite. Styrofoam cups aren't biodegradable, and paper cups aren't optimal for holding hot liquids; the company was taken private in a leveraged buyout by Apollo Global Mgt, and came public again in Oct-12. It generates $2 a share in fcf, and is paying down debt. Shares trade for $21. If nothing happens, you could make 11% just by deleveraging. But revenue are expected to grow.                      

Valero Energy (VLO): VLO operates as an independent petroleum refining and marketing company. VLO recently  spun off its its retail operations. Makes one of every 4 barrels of product exported from US. It’s a play on refining. With WTI-Brent spread bet. $5 -$8 it’s easier to make products here and export them. The company did well over the financial crises. Furthermore, future crack spreads are suppose to move higher, leading to higher operating margins. Stock traded in the 45, 10x earnings and a 2% dividend yield.

Northfield Bancorp (NFBK) – It’s a possible takeover target. The Avenel, N.J., outfit operates 30 branches in attractive markets in NY's Staten Island and Brooklyn, as well as Union and Middlesex counties in NJ. Given its high-quality customer base, it might pique the interest of a larger acquirer. NFBK has $ 2.7bn in assets, and primarily makes multifamily and commercial real-estate loans. Its credit quality is really good! Jan-12, bank raised $ 355m in a second-step conversion, which dissolved its mutual holding company's majority interest. Therefore, NFBK can't be sold for two years from this January.  At a recent $13, they trade for 108% of tangible book value. The bank could be sold for 125% of tangible book, or about $15 a share.

International Game Technology (IGT) – The story for this firm is interesting. IGT purchased an Internet gaming company, DoubleDown. DoubleDown since then has come to dominate the social-gaming vertical of the Internet. DoubleDown is highly profitable and growing very rapidly. DoubleDown is close to generating $ 100m of OCF; applying valuation standards this alone could be valued at excess of $ 1.5bn. IGT sells at around 7x CF with other parts of IGT valued between 4x to 5x OCF. IGT generates stable cash-flow growth, has 20%+ operating margins and ROE of 25%+,; ideally giving it a valuation of 10x to 11x instead of the current 7x. IGT just did another $ 200m buyback. The traditional slots business is a mature business, probably 2% to 3% growth in the U.S. The combination of everything is on the order of 8% growth and operating cash flow; extraordinarily high growth in free cash flow; the ability to buy shares at an attractive price; a decent dividend; and perhaps a transaction. William Hill (WIMHY)—a gaming company is large enough and has a high-enough stock-market value to buy IGT. It  has been expanding in the U.S. and is now licensed in almost all of the important gaming venues, and so that particular barrier that used to exist with IGT isn't as significant as it used to be. On SOTP the firm should be valued atleast 50% higher than it is right now.

 Take-Two (TTWO) - The intersection of consumer electronics and non-casino gaming is a major growth industry globally, and investors undervalue the power of growth of this immersive gaming. Immersive games is very difficult business to get into—you can make a very nice return, and right now, the company that does a good job of this and happens to be very undervalued is TTWO. In addition to creating games, TTWO has been very aggressive in acquiring its stock. The principal asset of Take-Two is Grand Theft Auto. GTA comes out every 5 yrs and each time a new version is released, the cash flow of this game is more significant than it was the previous time. It is very clear the cash flow from the latest edition of Grand Theft Auto—GTA 5—is going to be over $ 500m during its 5 yr lifetime, and that's $100m a year. At a CF multiple of 10x  puts GTA value around  $1bn; that's more or less the entire value of TTWO. Anything else is a bonus for shareholders. Stock should be worth $22 to $23.

Nestlé: The world's largest food outfit has one of its industry's best growth outlooks, thanks to a big presence in the developing world. The Swiss company aims for 5%-6% annual organic sales growth, and it should come close to hitting that target this year. Analysts believe that Nestlé is capable of high single-digit yearly gains in earnings per share. Nestlé's U.S.-listed shares, at around $72, fetch about 17 times estimated 2014 profits and yield 2%. Nestlé isn't cheap, but it rarely is a bargain, because of the strength of its global portfolio, which includes candy, coffee, bottled water, ice cream, infant formula, and pet food. It owns almost 30% of cosmetics maker L'Oréal, a stake worth $30 billion. Excluding that, Nestlé trades at only a small premium to slower-growing U.S. food outfits like General Mills (GIS) and Kellogg (K).

 Unit (UNT): The company is in the business of contract drilling, exploration and production, and midstream services in the oil and gas industry.  New Mountain Vantage which owns 5.2% of UNT has had discussions with management regarding its corporate structure, capital allocation, maximizing the value of the midstream division, board structure, and management compensation. The fund bought the shares at an average cost of $45.99. UNT’s midstream business grew 35% this year. New Mountain is an active shareholder that is very engaged with management, but most of the time privately. It believes that UNT is trading at a large discount to the sum of its parts. While UNT is primarily an exploration and production business, its midstream business has been growing and has a good management team that can continue growth by competing for larger jobs and entering into strategic transactions. Soon it will make a lot of sense to do something strategic with the midstream business. The company trades at less than 5x Ebitda, which is low even for pure E&P businesses. Midstream businesses trade at double-digit multiples. A separation of the two businesses could ultimately be beneficial to both. New Mountain has a constructive relationship with management and is likely to support them and work with them to enhance shareholder value. But, if need be, as it has shown in the past, it has the experience and conviction to follow through on a proxy fight