Near monopolistic pricing power and Potential M&A to provide substantial upside to Verisk (VRSK) shareholders

  This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at potential takeover targets and trades due to firm's industry position & pricing power. The valuation, like those published exclusive on seeking Alpha, is not mine.

• Verisk Analytics, Inc (VRSK) - Currently trades at $45.39
• Potential Upside by Industry Estimates: Approx. $10-$15 per share
• Market Capitalization: $7.48bn
• Cash: $196M; Total debt: $1.11B
• Shares Outstanding: Approximately 164M
• Earnings growth: 22%; Leverage:1.19x
• Sector: Services ; Industry: Business Services
• Main Catalyst:  Upside from new ventures,; improving fundamentals; Pricing Power, Potential M&A
• Trading timeline:  12months – 15months

What does VRSK?

     Verisk Analytics, Inc. (Verisk) enables risk-bearing businesses to understand and manage their risks. The Company serves its customers by supplying data that, combined with its analytic methods, creates embedded decision support solutions. It provides actuarial and underwriting data pertaining to United States, property and casualty (P&C) and insurance risks. It offers solutions for detecting fraud in the United States P&C insurance, healthcare and mortgage industries. It operates in two segments: Risk Assessment and Decision Analytics. On December 16, 2010, it completed the acquisition of 3E Company (3E), a global source for a range of environmental health and safety compliance solutions. On December 14, 2010, it completed the acquisition of Crowe Paradis Services Corporation (CP). On February 26, 2010, the Company completed the acquisition of Strategic Analytics, Inc. (SA). In April 2011, the Company acquired Bloodhound Technologies, Inc.

WHY VRSK:
Hazards to property and people are effectively infinite and nearly unfathomable. This is a happy circumstance for Verisk Analytics, an indispensable company for property and health insurers. Verisk started operating in 1970s as a central repository for property-casualty insurance data, supplied with its proprietary pricing and property information by most of the largest U.S. insurers, which also owned Verisk. The company still is a near-monopoly in its core business, with an uncommonly stable revenue stream and the legal right to collect and report customer-insurance data to regulators in all 50 states. Verisk went public at $22 per share in late 2009, not long after the financial crisis climaxed. The stock was the subject of an approving item in Barron's Streetwise column soon after its debut, and since then has performed nicely; it's now close to $44. Last week, the shares got a boost from an overachieving earnings report released Tuesday. Earnings came in at 47 cents a share, versus the expected 44 cents, and revenue and cash flow were better than expected. For the year, earnings are projected to approach $2.00 a share, up from $1.75 in 2011. The shares remain attractive for long-term investors, given the enviable stability of Verisk's core business and the opportunities for it to build on its expertise in cataloging and pricing risk into such areas as medical insurance

Potential Catalysts:

Monopoly: Despite its crucial role at  the center of a huge industry, Verisk arguably remains one of the lesser known $8 billion stock-market-value companies out there. This is partly because it is the ultimate behind-the-scenes business, made up of actuaries and Ph.Ds designing analytics for other companies to use internally. In addition, even among data providers, Verisk has no precise peers. It's not really a financial company, and somehow gets lumped among industrials by index providers. Verisk  is to insurance what Mastercard (MA) and Visa (V) are to consumer banking, and the CME Group (CME) is to futures trading. In each case, the company was founded as a central information utility owned by industry participants, not run to maximize profit or expand into new realms. But once they became publicly traded independent firms, they were free to raise fees, expand profit margins, make acquisitions and enrich their new shareholders. In each case, too, the companies have hard-to-replicate networks, low capital-investment needs and impressive economies of scale.

 Major shareholders might create M&A opportunity: Among the long-term holders is Warren Buffett's Berkshire Hathaway (BRKA), whose insurance subsidiaries were original owners of Verisk. While most other insurer shareholders sold out upon the IPO, due to their need for fresh capital after the crisis, Berkshire held tight, and it owns a 2.1% stake. Unlike other original owners of Verisk, Warren Buffett's Berkshire Hathaway has recently boosted its stake in the company, to 2.4%.  Like Mastercard or CME in their early years as publicly traded companies, Verisk doesn't have a cheap stock. Through Thursday, it was up more than 30% in the past year. It trades above 22 times forecast 2012 earnings, and its enterprise value (stock-market value plus net debt) is close to 13 times current-year cash flow (measured by earnings before interest, taxes, depreciation and amortization). Yet Value Investors, such as Artisan Funds, a shareholder since the initial offering, remain fans and cite high quality and capital efficiency of Verisk's core business making its reasonable Artisan calculates that Verisk's private-market value is most likely 20% above the current share price. Other analyses posit that, assuming Verisk can trade near today's cash-flow multiple on 2014 results, the stock could be worth $65 a share.

Stable to potentially increasing revenue stream: Verisk's risk-assessment division, serving property-casualty insurers, is over 40% of the business, mostly driven by recurring subscription revenue. Verisk raises prices as the P&C market gets firmer, as it is doing now. This makes Verisk a keen play on the improving property-casualty insurance cycle, without the capital-loss risk of actual insurers. This has set up Verisk for good performance in 2013 and 2014.

New Horizions creating more upside: The Jersey City, N.J., company has expanded into other areas of the "data decisioning" market—notably in health care, where, partly through acquisitions, it has expanded into analytical products that help insurers detect, predict and manage waste, fraud and abuse of medical services. This unit's contribution to revenue has doubled in recent years. The company also has designs on data products and acquisitions in manufacturing and logistics. Verisk also has a sluggish unit that vets mortgage applicants and serves banks in the foreclosure process. This operation probably has bottomed, setting up the prospect that most of Verisk's units will pick up in coming quarters.

Verisk shares have had a nice gain over the past 12 months, but for long-term investors they still look attractive. Bulls think they could move up from the 40s now into the 60s in a year. An already superior company kicking into a higher gear is a rare thing, and worth a premium price.

Verisk Analytics at a Glance
Recent Price	$43.20
Stk-Mkt Val	$7.7 bil
EPS 2011	$1.75
EPS 2012E	$1.93
P/E 2011	24.7
P/E 2012E	22.4
E=Estimate  Source: Thomson Reuters

Business restructing and Potential M&A to provide substantial upside to Kraton (KRA) shareholders

This article is a summary of what I read online on Barron's and my own research. I thought this was interesting to point to readers looking at potential takeover targets and restructuring trades. The valuation, like those published exclusive on seeking Alpha, is not mine.

• Kraton Performance Polymers Inc (KRA) - Currently trades at $28.00
• Potential Upside by Industry Estimates: Approx. $10-$15 per share
• Market Capitalization: $882M
• Cash: $45.5M; Total debt: $69M
• Shares Outstanding: Approximately 32M
• ROE: 24%; Leverage:0.3x
• Sector: Basic Materials ; Industry: Specialty Chemicals
• Main Catalyst:  Upside from inventory valuation methods; Business restructuring; Potential M&A
• Major Clients: Procter & Gamble (PG) and Kimberly-Clark (KMB).
• Trading timeline: 12 months – 18 months

What does KRA do?

      Kraton Performance Polymers, Inc. (Kraton) is a producer of styrenic block copolymers (SBCs). The Company markets its products under the KRATON brand. Kraton’s SBC products are found in a number of applications, including disposable baby diapers, rubberized grips of toothbrushes, razor blades, power tools and in asphalt formulations used to pave roads. The Company also develops, manufactures and markets non-SBC, such as isoprene rubber latex (IRL). Kraton’s IRL products are used in applications, such as surgical gloves and condoms. As of December 31, 2010, the Company offered approximately 800 products to more than 700 customers in over 60 countries worldwide. The Company manufactures its polymers at five manufacturing facilities on four continents (North America, Europe, South America and Asia), including its flagship plant in Belpre, Ohio. In July 2010, the Company announced the addition of Kraton D1183 BT to its line of polymers.

WHY KRA:
Launched in the mid-1960s as part of Shell Chemicals, Kraton was spun off from its parent in 2001. More recently, it was owned by two private-equity firms, TPG Capital and JPMorgan Partners. The company went public in late 2009. Until recently, shares of KRA had been on a lot of Sell lists. At around $27 , Kraton (KRA) was above its 52-week low of $14.37, set in October amid concern about a sluggish economy in the U.S. and Europe. But it was still well below its 52-week high of nearly $48, hit last April. The Houston company makes styrenic block copolymers, or SBCs, which are used in everything from disposable diapers and rubberized razor grips to surgical gloves and intravenous-drip bags. SBCs give diapers and other products more strength, flexibility, durability and resilience. When the economy rebounds, some analyst feel that stock might be worth as much as $43.00

Potential Catalysts:

Business Restructuring: Recently CEO Kevin Fogarty has dumped unprofitable product lines and changed pricing policies. When he took over in 2008, roughly a third of Kraton's products were unprofitable, and the company repriced its wares only annually, preventing it from adapting quickly to spikes in raw-material costs. Fogarty discontinued 5% to 7% of the unprofitable lines and raised prices on the rest. According to the current policy, KRA now gives customers a 30-day notice on price changes. Kraton also deemphasized footwear, a low-margin line. One promising area for KRA has been isoprene rubber latex, a "non-allergenic" substitute for natural-rubber latex that is used to make condoms and surgical gloves. It's by far the company's fastest-growing segment, albeit off a modest base; sales rose 35% in the third quarter, to $26 million. 

 Future Upside from using FIFO inventory Method: Kraton is expected to report a loss for the fourth quarter, owing to its use of FIFO (first in, first out) inventory accounting. After surging through the summer of 2011, prices of butadiene, a crucial raw material on which no hedges are available, began to fall. The North American butadiene contract price for January is settling at $1.06 a pound, down from $1.77 last August, according to reports. Butadiene, styrene and isoprene account for about 55% of Kraton's cost of goods sold. Under FIFO, the higher costs didn't show up until late last year and will pummel fourth-quarter results. Analysts expect a 27-cents-a-share loss, with sluggish volume also hurting the numbers. The good news: Kraton has been able to pass along a lot of the raw-material increases to customers. And the higher-cost inventory from last year won't last indefinitely. "You have to look through the noise of that inventory accounting in the near term," says David Goldsmith, an analyst at Baron Capital Management, which holds Kraton shares.

Potential M&A:With recent buy of Solutia by Eastman Chemicals at 40% premium, there is a renewed interest in the chemical’s sector. One of the most important KRAcustomers namely P&G spoke about potential M&A and divestitures.  According to industry reports,  the market is treating Kraton like a commodity chemical company, even though it has rolled out innovative value-added products, including allergy-resistant surgical gloves and a substitute for PVC plastic that is more environmentally friendly than that material. Furthermore, bulls note that the company has a strong global footprint, market-leading positions in many of its products and good overseas growth prospects, particularly in China. Kraton divides its SBCs into two categories: USBCs, used in products for paving, roofing, footwear, adhesives and sealants, and higher-margin HSBCs, which are more complex and whose uses include soft-touch rubber razor and toothbrush handles, along with IV bags in hospitals. HSBCs account for about one-third of sales, and the company is gradually tilting its sales mix toward them. With an enterprise value of $1.17 billion and strong growth prospects, Kraton would be an attractive acquisition target.

Improving Fundamentals: Another wrinkle with raw materials is that when their prices start to decline, customers sometimes hesitate to buy, hoping for better deals down the line. That hurt Kraton toward the end of last year, as customers ran down their inventories. But butadiene prices have started to tick back up. "They are starting to get emergency orders, and now that butadiene prices are rising again, you will likely see customers get off the sidelines and restock," says Analysts and recommend buying the stock on any dips. Its stock valuation hardly reflects any of that. Late last week, the company was trading at about 8.5 times the $2.98 a share that analysts expect it to earn this year, down from $3.50 in 2011. The problem: raw materials, a big part of Kraton's costs, are volatile and hard to predict. In the third quarter, it earned $1.33 a diluted share, up from 88 cents a year earlier, on $402 million, thanks largely to price increases that the company passed along. Volume, as measured by tonnage, fell 4%.

Tessera: Implementation Of Strategic Initiatives And Starboard's Involvement May Create Substantial Upside

I have posted an article on Seeking alpha which goes into details about how to profit from and why Tessera Technologies (TSRA), will create upside for medium term investors. The upside is approximately USD 6 a share.

If anyone reading do invest in special situations, this might make a good read. Either you can click on the title or go to Seeking Alpha and  and check out "kedar special situations" Its under Long Ideas ideas for Tessera Technologies (TSRA)

Thank you

2011 Returns on the Ideas

Every year, I look at returns on my "well researched ideas" I put out. Even though I have been generating these ideas for 3 years, I only started putting them on my blog this year.


Return on my synthetic portfolio of Long/Short ideas in 2010 was 52% and for 2011 is 62%. They are NOT inclusive of dividend payouts and potential trading costs.

Some of my 2011 ideas:
Long - XYL, FDML, MAR, SLE, ACIW, DELL, MDP, AMAG and BSCI

Shorts - AMSC, MTW, CVC and RAH




I hope everyone reading this  have a wonderful 2012! 

ABB Ltd (ADR) – 3.7% Dividend yield and turn around in global energy infrastructure cycle to provide 40% potential upside

This article is a summary of what I read online. I thought this was interesting to point to readers looking at dividend play and trying to play the upturn in energy infrastructure cycle. The valuation, like those published exclusive on seeking Alpha, is not mine.

ABB Ltd (ADR) - Currently trades at $17.79
Potential Upside by Industry Estimates: $7 - $9
Market Cap: $41B

Cash: $5B; Total debt: $4.6B

Dividend Yield: 3.7%

Shares Outstanding: Approximately 2.29B

Sector: Industrial Goods; Industry: Industrial Electrical Equipment

Trading timeline: 12 - 15 months

What does ABB do?

ABB, the electrical-engineering giant, is enjoying a power surge. The company, which specializes in power and automation technologies, occupies the sweet spot in energy efficiency, and is ringing up increased orders and revenue as corporations and governments around the world seek to modernize buildings, manufacturing practices and the power grid.

Whats the Story:

Despite flirting with bankruptcy less than ten years ago, and its ADR’s down 19%, to $18.26, since the start of the year, and off 34% from a late-April high of $27.58, I would consider this firm an investment candidate and a name to seriously analyze. Why? For starters, ABB is in one of the few firms best positioned to capture the piece of the growing energy infrastructure pie. The International Energy Agency expects global investment in energy infrastructure is going to average $1.5 trillion a year for decades, for a total of $38 trillion by 2035

Possible Catalyst:

·         ABB has spent heavily on research and development and acquisitions. Both types of investments are paying off so far. ABB earned $3.8 billion, or $1.12 a share, in 2010, on revenue of $31.6 billion, and is expected to generate per-share profits of $1.47 this year and $1.61 in 2012. Additionally, ABB returns some of its cash to shareholders via a 67-cent annual dividend per ADR, which equates, at the current stock price, to a sweet yield of 3.7%. The company is expected to shell out $1.48 billion in dividend payments this year, up from $1.26 billion in 2010.

·         ABB trades for 11.5x next year's estimated earnings, a valuation that discounts concerns about global economic growth. The stock can trade at a P/E multiple of 15 to 18 times earnings, which implies a target price of $26.50.

·         ABB's largest shareholder, Sweden's Investor (INVE-B.Sweden), purchased 1.5 million shares in the third quarter, lifting its stake to 7.3%. This marked the company's first ABB purchase in eight years.

·         ABB laid out a five-year plan projecting compound annual growth in organic revenue of 7% to 10%, with mergers and acquisitions potentially adding another 3 to 4 percentage points of growth. The company also modeled five-year Ebitda margins of 13% to 19%, up from a prior range of 11% to 16%.

·         ABB has been helped this year by a pick-up in its power-products division after two years lackluster performance - the division that accounts for 30% of revenue. ABB's profitability owes in part to cost cuts and is working to strip out about $1 billion in costs both this year and next, following $3 billion of cost reductions in the past two years.

·         ABB OPERATES IN ABOUT 100 COUNTRIES, and is benefiting from surging energy use, particularly in emerging markets. The International Energy Agency forecasts total global energy demand increasing by a third from 2010 to 2035, with 90% of the growth coming from developing countries. China, already the world's largest energy consumer, will account for 30% of that. ABB generated 50% of its revenue in 2010 from emerging markets, up from 42% in 2006

·         ABB'S DIMINISHING DEPENDENCE on mature markets however these markets are expected to account for about $4 trillion of the $9 trillion likely to be spent on infrastructure supply between 2010 and 2015. The U.S. and Europe urgently need to modernize aging infrastructure to accommodate more renewable-energy sources and meet anticipated demand for electric vehicles. In connection to this, R&D spending is expected to total $1.3 billion in 2011, or 3.5% of estimated sales, rising to 4% by 2015. ABB has high hopes for direct current, or DC, applications, and is putting the technology, which is more energy-efficient than alternating current, or AC, into data centers and fast chargers for electric vehicles.

·         Revenue from services grew at a compound annual growth rate of about 9% during much of the past 10 years, but ABB is targeting annual growth of between 15% and 20% through 2015. The company expects services to account for 20% to 25% of sales by the middle of the decade, compared with 15% to 16% now.

·         On the M&A front - ABB has shelled out $5 billion in the past 18 months on acquisitions. Its U.S. presence was strengthened with the January purchase of Baldor Electric, a maker of high-efficiency industrial electric motors, for $3.1 billion plus debt; it was ABB's biggest acquisition to date. With regulators demanding greater energy efficiency, Baldor so far has proved an excellent buy: The company's revenue rose 20% in the first nine months of this year, and Ebitda margins exceeded 20%.

·         ABB has also purchased software makers Ventyx and Mincom, which turned ABB into a leader in enterprise asset management, or the monitoring of mission-critical assets. Others seemed natural fits, including the near-$1 billion spent to raise ABB's stake in its Indian subsidiary. Those deals have added 7% points to sales and 9% points to profitability.

·         Management also has tidied up ABB's balance sheet, which boasted $5 billion of cash as of the end of September, against $4.6 billion of debt. Fitch Ratings raised its credit outlook on the company last month to Positive from Stable, putting further distance between ABB's promising present and its darker past.

Capital-goods companies still require caution, but ABB is among the best in class. Who You Gonna Call? The Big Three global engineering outfits all could attract investors.

	ABB / ABB	General Electric / GE	Siemens / SI*
Recent Price	$18.26	16.31	97.12
52-Wk Change	-11.6%	-4.2	-19.5
Market Val ( bil)	$43	173	90
EPS 2012 E	$1.61	1.54	9.51
P/E 2012 E	11.3	10.6	9.5
Dividend Yield	3.7%	3.7	4.0
*Fiscal year ending Sept. 30.		Source: FactSet

Xylem-ITT Spin-Off Will Create Substantial Upside For Shareholders In The Medium To Long Term

I have posted an article on Seeking alpha which goes into details about how to profit from and why Xylem (XYL), which was spun off from ITT in Nov-2011 will create upside for medium term to Long term investors. The upside is between USD 6 to USD 8 a share in addition to a potential 1.1% dividend yield.

If anyone reading do invest in special situations, this might make a good read. Either you can click on the title or go to Seeking Alpha and  and check out "kedar special situations" Its under Long Ideas for Xylem (XYL)

Thank you

Meredith Corporation – 5.7% Dividend yield and 2012 election cycle to provide potential upside of 25%

This article is a summary of what I read online on Barron's. I thought this was interesting to point to readers looking at Dividend play and the 2012 election cycle. The valuation, like those published exclusive on seeking Alpha, is not mine.

• Meredith Corporation (MDP) - Currently trades at $30
• Potential Upside by Industry Estimates: Approx. $5-$6 per shar
• Dividend Yield: 5.7%
• Market Capitalization: $1.36B
• Cash: $18.95M; Total debt: $250M
• Shares Outstanding: Approximately 45M
• LT Debt/ Equity:20%; Leverage:2.7x
• Sector: Services; Industry:Printing and Publishing
• Main Catalyst: 50% increase in dividend yield; 2012 Election cycle
• Trading timeline: 12 -18 months

What does MDP do?
Meredith Corporation (Meredith) is a media and marketing company. The Company is engaged in magazine publishing and related brand licensing, television broadcasting, integrated marketing, interactive media, and video production related operations. The Company operates two business segments: national media and local media. The national media segment includes magazine publishing, brand licensing, integrated marketing, interactive media, database-related activities and other related operations. The local media segment consists primarily of the operations of network-affiliated television stations, related interactive media operations and video production related operations. In July 2010, the Company completed its acquisition of The Hyperfactory. In December 2010, the Company acquired Real Girls Media Network. During the fiscal year ended June 30, 2011 (fiscal 2011), Meredith relaunched Websites, including BHG.com and Recipe.com.

WHY MDP:
The shares MDP have fallen 21% in the past year, and 51% in the past four years. Then why is MDP an interesting candidate to look into? Here is why -

Potential Catalysts:

·         MDP disclosed last month that it will use a chunk of its cash to boost its dividend by 50%, to $1.53 a share, resulting in a yield of 5.7%. Those looking for cash flow in addition to capital appreciation potential of MDP might find this interesting.

·         Fundamentally -MDP trades at 10.2x for 2012 and under 0.9x sales—a valuation that discounts bad news and ignores some powerful drivers of future growth, including a coming tidal wave of political advertising and a recovery in food-industry ad spending. Buoyed by these trends, shares could rally to the mid-$30s in the next year, for a total return of more than 30%.

·         MDP's reliance on political advertising carried by its local TV stations makes its earnings fluctuate with the election cycle. EPS is expected to fall 6% in fiscal 2012, to USD2.62, only to rise 16% in fiscal '13, to USD3.05, as spending on the 2012 elections concludes

·         In a typical election year, candidates spend about $3.5 billion on TV ads, but some forecasters think the amount could double in this election cycle, given a 2010 Supreme Court ruling that loosens restrictions on corporate campaign spending. Meredith management doesn't anticipate such a surge, but the political climate suggests spending could be higher than usual. There are open U.S. Senate seats in Connecticut, Arizona and Nevada, three states where Meredith operates TV stations.

·         Another potential driver for the broadcast business is the fiscal 2013 renegotiation of five-year contracts for retransmission fees, which Meredith charges cable companies to carry their signals. Citigroup expects a double-digit fee increase.

·         Food advertising, which accounts for 25% of magazine-division revenue, was a weak spot in fiscal '11, as food companies faced rising commodity costs. While input prices aren't expected to drop, they are likely to level off, allowing the companies to pass through price increases to consumers. That should free up more funds for advertising.

·         In addition to funding a higher dividend, Meredith will use its cash to reinvest in the business, buy back stock and focus on small, accretive acquisitions.