Special Situation Ideas for week of 11-Feb-2013

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) andPfizer (PFE). 

Spectrum Brands (SPB) – Post Bankruptcy play with substantial upsisde

Those looking into some catalyst might want to ponder over this name for the week. I looked at this name and read it in Barron's. It was Meryl Witmer’s pick. This def. is worth a serious look.

Current Price: $55.60

Market Cap: $2.5bn

Shares outstanding: 53m

How high could the stock go? Two-year price target is $75 to $100.

History: Spectrum emerged from bankruptcy protection in 2009. It is 57.7%-owned by Harbinger Group [HRG], which is controlled by Harbinger Holdings, a private investment firm run by Phil Falcone. Spectrum represents the majority of the value of Harbinger Group. Falcone is controversial, and Harbinger's ownership stake could explain why Spectrum is a good value. Harbinger might have to sell its Spectrum shares at some point. If a forced sale were to occur, it might remove the taint from Spectrum, and bring it more attention.

Business: Spectrum is a diversified seller of branded consumer products. Its brands include Rayovac and Varta batteries; it is No. 3 in the business in North America, and No. 1 in Latin America. It also sells Remington electric razors and personal-care products, and is No. 2 in the category in North America, the U.K., and Australia. In small kitchen appliances, with brands such as Farberware, Black & Decker, George Foreman, and Russell Hobbs, it is No. 2 in the U.S. and No. 1 in the U.K. Spectrum also is active in pet supplies; its brands include Tetra, FURminator, Nature's Miracle, and Dingo. It is No. 1 in fish supplies, No. 2 in global pet supplies. In the home-and-garden segment, it sells insect repellants, and is No. 2 in the U.S.

Key points: A key consideration  is the quality of the management team, and its focus on allocating capital wisely. Spectrum recently completed an acquisition that may turn out to be brilliant. It bought a division of Stanley Black & Decker (SWK), whose brands include Kwikset, Weiser, and Baldwin doorknobs and locks. It is No. 1 in locks in the U.S. and Canada, and No. 1 in luxury hardware in the U.S. Other brands include Stanley hardware, No. 1 with residential builders in the U.S., and Pfister faucets, No. 4 in the U.S. The benefits from this acquisition are twofold. Spectrum has a fantastic global distribution system and, over time, can introduce the Stanley Black & Decker products worldwide. Also, it will gain increased scale with customers.

Financial impact From M&A: If the only benefit of the merger is the $10 million in cost savings that management outlined, and there is no growth, reported earnings per share would climb from an estimated $3.64 in 2013 to $4.20 in 2015, mainly from paying down debt. To square GAAP accounting , we add back incremental cash flow of 80 cents a share from NOLs [net operating-loss carry forwards, a deferred-tax asset]. That's $5 a share in after-tax free cash. The excess of depreciation and amortization over capital spending adds another $2 in cash. In all, after-tax free cash flow grows from an estimated $6.44 a share in 2013 to $7 in 2015. The stock is a real bargain at 7x after-tax free cash.

A few things could happen to boost earnings. Spectrum could continue to grow at a 4% annual rate, which would add another 80 cents to earnings over two years. In 2014, it could refinance some expensive debt on which it is paying 9.5% at, say, 6%, which would save another 65 cents a share. Add it up and you get $8.45 a share. Plus, the company has NOLs of more than $1 billion. And these numbers don't include the benefits of broader distribution of the Stanley Black & Decker brands, or a significant increase in homes built in the U.S., which we expect.

NetSuite - A Loved Long For The Shorts

I have posted an article on Seeking alpha which goes into details about how to profit from going short NetSuite (N). It’s for medium to long term investors. 

 
If anyone reading do invest in special situations, this might make a good read. Either you can click here or go to Seeking Alpha and check out "kedar special situations" Its under short ideas for NetSuite (N).

Thank you

2012 Returns on the Ideas

Every year, I look at returns on the ideas I put out. Even though I have been generating these ideas for 4 years, I only started putting them on my blog since 2011.

Annualized return on my synthetic portfolio of Long/Short ideas for 2012 is 54%. They are NOT inclusive of dividend payouts and potential trading costs.

Some of 2012 ideas:

Long - GNTX, NBR, NSR, GIL, PSX, VRSK, PRXL, STX and TSRA

Shorts - CSTR, QCOR, CATM and WM

A great way to play Post Bankrupt Spin-off

 This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small/Mid cap names. The valuation, unlike my other articles, is not mine.

• Tronox (ticker: TROX)  - Currently trades at $15.77
•  Potential Upside by Industry Estimates: Approx. $15 to $20 per share
• Market Capitalization: $1B; Dividend Yield: 6.4%
• Cash: $774M; Total debt: $1.6B
• Revenue FY13: $2B; FY13 EPS: $3.25
• Sector: Basic Materials ; Industry: Chemicals 
• Main Catalyst: Legal Settlement, Housing Market, Accretive M&A, Strong Fundamentals

WHY TROX:

Tronox was spun off from Kerr-McGee in 2005, not long before the financial crises hit and demand for titanium dioxide plummeted. Tronox, which had been saddled with significant environmental liabilities from Kerr-McGee, filed for bankruptcy. Two years later, in 2011, it emerged, with a cleaner balance sheet, the liabilities remediated to a trust, and significant tax credits.

A weak global economy has quashed demand for titanium dioxide, a white pigment used in paints and coatings. The decline stems from the economic problems of a hard-hit Europe and a slowing China, where the pace of construction -- red-hot until last year -- has cooled. With demand weak, paint makers have slashed their orders of the pigment.

That has hurt results at Tronox, one of the pigment's largest producers. In the September quarter, its titanium-dioxide sales fell 30% from the level a year earlier. Tronox shares (TROX) have tumbled, too, by 50% since June. But the selloff seems overdone. At a recent price of $15.65, Tronox looks cheap, trading at a 37% discount to its stated book value of $25, and for 6.6 times next year's estimated earnings. There's reason to think that demand for titanium dioxide could rebound. As that happens, over the next year, Tronox stock could double.

Potential Catalysts:

Accretive M&A and Exchange Listing:
Last summer, Tronox bought the mineral-sands operations of Exxaro Resources (EXX.South Africa), a South African miner, in exchange for a 38.5% stake in itself. The mineral-sands operation includes feedstock used to make titanium dioxide. That makes Tronox the world's largest vertically integrated pigment producer. Once the deal closed in June, Tronox was listed on the New York Stock Exchange. At the end of July, the stock split, 5 for 1. With more than 1,000 customers in 90 countries, Tronox has 8% of the global titanium dioxide market, and is the only producer, aside from DuPont, that uses 100% chloride in its production process. This typically creates a higher-quality product than the rival sulfate process. The company gets 77% of its sales from the paint and coatings industry, and 20% from plastics. Its customers include blue-chip outfits like Benjamin Moore, Sherwin-Williams (SHW) and PPG Industries (PPG).  With the acquisition of Exxaro's mining unit, Tronox produces zircon, a co-product of titanium feedstock mining used to whiten tiles, and pig iron, which is used to produce steel.

Upside from Housing Market & China Stimulus:
The current weakness dates to 2011's fourth quarter. Since then, customers have been primarily living off their pigment stockpiles, and delaying new orders. But now, inventories have fallen, and customers who have been substituting cheaper materials for titanium dioxide have reached a point where adding more of these to their products would threaten quality. An improving U.S. housing market, and stimulus policies in China, could also stoke demand. In a Nov. 12 earnings release, CEO Tom Casey said: "While demand for our pigment products has been weak, we believe the fundamental conditions underlying demand for these products have begun to recover, and we believe sales will begin to increase next year." As demand ramps up, Tronox should benefit from its vertically integrated model. It will be consuming its own low-cost feedstock, rather than feedstock bought elsewhere, boosting operating leverage and margins.

Improving Fundamentals and upside from legal settlement:
As for its balance sheet, Tronox has $774 million in cash to $1.6 billion in debt, or net debt of 19% of total capitalization. The company is expected to generate $252 million in free cash flow this year. A shareholder-friendly management used some of its cash to buy back 10% of Tronox's stock in the September quarter, and to pay a hefty $1.00-a-share annual dividend, producing a 6.4% yield. In the September quarter, sales were split between pigments and minerals. For the full year, analysts estimate that Tronox could earn $249 million, or $3.25 a share, on $2 billion in revenue. FY13, EPS is expected to dip to $2.36 a share, before reviving in 2014, if pigment demand rises, as seems likely. According to investors, company's replacement cost totals roughly $35 a share. In addition, Tronox has $3.50 a share in net operating losses, and could reap a large settlement from its pending $14 billion lawsuit against Kerr-McGee, now a unit of Anadarko Petroleum (APC). Tronox claims that the environmental liabilities Kerr-McGee left it with in the spinoff drove it into bankruptcy.  As pigment demand normalizes, Tronox could hit $30 to $50, given how volatile its stock has been. 

A Great Way to play Oil & Gas Cash Flows

 This article is a summary of what I read in Barron's . I thought this idea was interesting to point to readers looking at small cap names. The valuation, unlike my other articles, is not mine.

• Crosstex (ticker: XTXI)  - Currently trades at $13.06 
•  Potential Upside by Industry Estimates: Approx. $5 to $10 per share 
• Market Capitalization: $620m; Dividend Yield: 3.8% 
• Cash: $6.00M; Total debt: $1B 
• Shares Outstanding: Approximately 47.4M 
• Revenue: $1.61B; EV/EBITDA: 7.8x 
• Sector: Basic Materials ; Industry: Oil & Gas 
• Main Catalyst: Distribution rights, new projects online in 2013, M&A,  Fundamentals,

 What does XTXI?

Founded in 2000, Crosstex Energy LP (XTEX), a master limited partnership that gathers, processes, and markets natural gas and natural-gas liquids, and transports crude oil. Crosstex (XTXI) owns a 2% general partner interest; 22% of the LP's units, and all of the incentive distribution rights. The LP operates approximately 3,300 miles of pipeline, 10 processing plants, and 4 fractionators, and makes money by charging fees for its services. It also buys natural gas and crude oil, and resells it at a profit.

WHY XTXI:

Weak natural-gas prices have slowed growth in the past year for much of the oil and gas industry. Crosstex Energy is no exception. The partnership's distribution has been unchanged for the past three quarters, as Crosstex (XTEX) has been investing in fee-based projects that expand its natural-gas liquids and oil business, where prices have remained relatively steady compared to gas. Some of those projects are expected to come online in 2013, leading to higher cash flows.

The company's general partner, Crosstex Energy Inc. (XTXI), offers a good way for investors to benefit from the growth. As a general partner, it owns lucrative incentive distribution rights, which motivate it to manage the LP's assets effectively and grow the distribution. As the distribution increases, Crosstex receives a stepped-up percentage, up to 50%, making it levered to the LP's rising cash flows. In 2011, the company received 27% of all cash distributed.

Potential Catalysts:

Increased distribution:
XTXI generates all of its cash flow from the distributions, and doesn't own hard assets. As growth projects come online, distributions and dividends could grow significantly. Industry analyst from RBC expects XTXI distribution growing 3.4% in 2013 and 11.7% in 2014, while the dividend could increase by 8.3% in FY13 and 33.7% the FY14. XTXI shares closed last week at $12.51. In the FY13, they could rise 25% or more, and yield 3.8%. CEO of the XTXI stated that he anticipates XTXI will continue to see annual distribution-growth rates of 8% to 10% per year, and dividend growth rates of 20% to 25% per year.

Promising Fundamentals:
While Crosstex could lose $12.8m, or 27 cents a share, this year on revenue of $1.6bn, it could pocket 26.6% of the LP's estimated $217 million in EBITDA. FY13, the LP's EBITDA could rise 14%, to $248m, due to new projects and acquisitions. One project, the Cajun-Sibon, is a 130-mile NGL pipeline extension of a 440-mile pipeline in central Louisiana. It could come online in mid-2013, and generate $170 million in annual operating income by the end of that year.  Last May, XTXI bought Clearfield Energy, an oil-services company, giving it a strong foothold in oil transportation.

 

Potential M&A:
XTXI could be attractive to an acquirer, given its leverage to the LP's cash flows and the scarcity of publicly traded general partners. Last year, several deals involving GP buyouts occurred at significant premiums. Shares can rise to $18, but as cash flows ramp up in coming years, that value could rise to $24.

Special Situation Ideas for week of 3-December-2012

Water:

In a thematic writeup which I usually don’t do, I stated that “Water” is one of my favorite sectors. US water infrastructure is aging. What’s further exacerbating the situation is the current extreme weather conditions. According to what I read online, the U.S. EPA has estimated that 250K watermain breaks occur each year in the nation, with up to 70K-75K sewer overflows annually, discharging up to 10bn -11bn gallons of untreated wastewater. Sewer cost, water cost and investment in infrastructure are slated to increase in the US alone by more than USD 1T, before 2035. Bloomberg article has other statistics. One of the main beneficiaries of this tread is a name I wrote about a while ago, Xylem (XYL). Other names worthy to look into are : Pentair (PNR), Flowserve (FLS) and Aegion (AEGN).

Activism:

I wrote a long on Tessera Technologies(TSRA). It might be worth another look. According to BArrons 13D monitor, Starboard declareda 5.7% stake in TSRA. The fund has had particular activist success in companies that have solid core businesses with significant cash flow, but management that reinvests the cash in noncore unsuccessful businesses. Starboard is likely to nominate directors for the next annual meeting and ask for a breakup.

Another three stocks I read about:
Celanese (CE) is a diversified company. Its biggest segment is acetic acid, which is suffering from weak global demand. The stock is around $40 and trades for 9x 203 earnings. Once the global economy recovers, CE can increase its EPS from $2.75 a share to over $5 a share. Catalyst: CE has developed a process that can make ethanol from natural gas and coal. The cost is substantially below the cost of making ethanol from corn. The first commercial plant will open in China in 3Q13 and will make both industrial and fuel ethanol. If the U.S. changes its policy which currently requires that ethanol be made from corn, then it can be a huge game changer. (Barrons)

AerCap (AER) buys planes from Boeing and Airbus and leases them to airlines. The leases typically run for well over a decade. The credit quality of leases is good. The stock trades around $12.50, which is 70% of its tangible book value of just over $18. Its also trading at just 6x forward earnings. The firm does not pay any dividend; however, they bought back 18.5% of its stock over the last 1.5years. t ultimately could get sold to a large financial-services company with low-cost funding. (Barrons)

NetScout Systems(NTCT): The firm develops and sells network performance management and service assurance solutions for high speed networks. End clients ma include commercial enterprises, governmental agencies and telecommunication service. Trades at P/E of 20x, reported YoY growth in EPS of 12%; 20% Operating Margin; $230M in cash and only $69M in debt. With the networks inundated with demand for data, and the ongoing digital revoltion, the firms product might see incremental demand going forward. This firm in addition to reporting increased demand for its products might also become a takeover target.