Special Situation Ideas for week of 7-Oct-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.  These are def. is worth a serious look.

Penn National Gaming (PENN): Penn will split on Nov. 1 into a real-estate investment trust called Gaming & Leisure Properties (GLPI), and an operating company that will lease properties from the REIT. By Jan-14, PENN holder will receive a total of 1.35 G&LP shares and a special $3.33 cash dividend, plus more from the REIT.  The operating company could be valued at 8x this year's estimated cash flow of $1.95 a share, or $15.60 a share, while G&LP could command as much as 13.8x estimated cash flow of $2.93, or $54. Add the special dividend, and the parts could be worth north of $70 a share, or 30% more than the current stock price. Another growth factor might be the consolidation of the regional gaming industry, whose markets have been suffering. PENN management has said it received many expressions of interest from potential sellers. The U.S. has more than 100 privately owned gaming operations, many run by aging owners who might want to cash out. PENN CEO Peter Carlino, owns a 14.5% stake. One thorny issue for Penn and G&LP is excess capacity in regional gaming. It the top of the market in 2007, Carlino arranged to sell Penn to a consortium led by Fortress Investment group. The deal fell apart, but Fortress kept some shares and Penn got some cash, which it used to buy a distressed M Resort in Henderson, Nev. When the split is completed, the Carlino family will own just under 10% of the operating company and a higher percentage of the REIT; and Fortress, 9.9% of each entity.

PICO Holdings (PICO): own a water-resources company, a West Coast home builder, and a canola-seed crushing company.  PICO seeks out undervalued assets. Over the years, it has evolved from an insurance business into a company with three core divisions. Vidler is PICO's largest division, accounting for 45% of book, as of June 30. UCP contributes 26%, and its 88% interest in Northstar, 13%.

Its assets, which are leveraged to the housing recovery and the growing demand for water in the Southwest, could be worth much more than the market is giving them credit for.  Industry estimates the stock could be worth about 50% to 75% more.

Of all the divisions, Vidler could hold the most potential. Much of the division's water rights are located in states where there are water shortages, like Nevada and Arizona. The Southwest is seeing its population grow faster than the national average. As housing recovers, home builders will need to secure water for their properties. Municipalities also buy water rights. In February PICO entered into an option agreement with Lincoln County water district in Nevada to sell 7,000 acre-feet of water rights for $12,000 per acre-foot, well above the company's cost. PICO acquired the developer in 2008, and throughout the downturn it bought up residential lots at bargain prices in hard-hit markets like Central Valley and Monterey Bay, Calif. Meanwhile, the Northstar canola refinery is poised for growth. The operation could benefit from rising consumption of canola in the U.S. Canola oil's lower fat content compared with other oils has made it attractive to health-conscious consumers. PICO can be valued at $30 -$35 a share. Additionally, CEO has 838,000 options with an exercise price of $33.76. The options expire in December 2015. 

NCR (ticker: NCR):  The stock has since surged more than 77%, however hedge fund Marcato Capital Management sees the potential for a 50% rise in the next year.

NCR is riding a number of growth waves that have taken annual revenue from $5.3 bn in 2011 to an expected $6.3bn in FY13. Its primary business is ATM’s which have benefited from the upgrades in technology by U.S. banks to permit ATMs to optically scan checks tendered by customers for deposit. NCR also has a major presence abroad and will benefit from major rollouts of ATM systems in emerging nations like China. It now gets 50% of its revenue from overseas. NCR is also at the forefront of the movement toward self-checkout equipment, having signed a large contract with Wal-Mart Stores (WMT). This has revived growth in its point-of-sale business. Airlines now operate kiosks that sell and issue tickets to passengers, and restaurants, bars, and movie theatres are all employing NCR equipment to help manage electronic sales via credit cards and other payment systems. NCR is expected to earn $3.10 a share in FY14 on revenue of $6.7bn. With a P/E 15x, that would justify a stock price of over $63.

Genworth Financial (GNW): GNW’s mortgage unit could benefit, as the Federal Housing Administration ceded market share to private entities in providing mortgage insurance. The FHA has significantly raised prices in the interim, giving Genworth and rivals like Radian Group (RDN) a chance to firm their pricing and possibly gain share. FHA once had a 74% share of this market, which has since dropped to 64% and is projected to fall toward 60% by year end. GNW, the No. 4 insurer, has maintained a 13% share. GNW EPS is projected to rise to $1.12 this year from 81 cents a year ago. Revenue is down to $9.5bn this year from $10bn last year. Shares can be priced at $20

HD Supply Holdings: Former Unit of Home Depot. Carlyle, Bain and Clayton own 19% each. HD owns another 9%. Post IPO, none of PE have sold their shares, which are at purchase price that is approx. $20 a share. NEED TO LOOK AT HOW DEBT IS BEING PAID DOWN. maturieis are for 2017, 2019 and 2020. Also benefitting from tax losses. Stock can go to approx. 42% in 2/3 years.                 

Infinera (INFN): Growing demand for data, leading to growing demand for optical network equipment and infrastrcuture leaders. The company is betting on its new Photonic integrated circuit (PIC), used inside optical transport platforms. it has the worlds only commercially deployed large scale PIC, which it believes is a game changer for its cost scalability and speed. Worhtwhile company to look into for medium term investors.

Personal Note: I have sold my HES CALLS expiring in Jan-14 at 40% profit. I still hold BWLD puts expiring March 2014.

Leidos - A New Spin-Off To Play The CyberIntel And Healthcare Sectors

I have posted an article on Seeking Alpha which goes into details about how to profit from going long Leidos International (LDOS). 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 long ideas for Leidos International (LDOS).  

If you are unable to access it tonight (since the article was exclusively published early morning for Seeking Alpha – Rich subscriber base), you should be able to access it tomorrow after 11am.

Personal Note: I sold my HES calls expiring in Jan-14 at a 40% gain and I am long BWLD puts, expiring March-14.

Thank you

Special Situation Ideas for week of 17-Sept-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.  

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! 

ManTech International - A Contrarian Play On Sequestration And Afghanistan Drawdown

I have posted an article on Seeking Alpha which goes into details about how to profit from going long ManTech International (MANT). 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 long ideas for ManTech International (MANT). 

If you are unable to access it tonight (since the article was exclusively published early morning for Seeking Alpha – Rich subscriber base), you should be able to access it tomorrow after 11am.

Personal Note: I am long HES calls expiring in Jan-14 (up 15% to date) and I went long BWLD puts, expiring March-14 (up 15% to date). 

Thank you

Great way to play the Healthcare Market

Those looking into some catalyst might want to ponder over this name I read online on Barron’s.

Trinity Biotech (TRIB)

Price:  USD 19.36

Market Value: USD 392m

Est 2013 Revenue: USD 89m

Est 2013 Net Income: USD 18m

Est 2013 EPS: USD 0.80

Est 2014 EPS: USD 0.97

Est 2014 PE*: 15 (Stripped of cash)

Dividend Yield: 1.20%

Business: Trinity Biotech (TRIB), an Irish maker of medical-testing equipment.

Catalyst:

• Diabetes has reached epidemic proportions around the world. There are 250 mn diabetics living today, and by 2025 the number could soar to 380 mn.That has created a large opportunity for companies that make testing equipment to diagnose the disease. TRIB has seen strong demand for the Premier Hb9210, its diabetes-testing instrument, since it was launched in 2011. The Premier boasts noted advantages over existing devices, including speed, accuracy, and easy-to-use touch-screen technology.
• In 2012, its first full year of sales, Trinity shipped 202 of the Premier devices, which sell to hospitals and labs for about USD25,000. This year, Trinity estimates it will ship 320 or more devices, aided by its recent entry into China, a potentially large market for the device, with an estimated 54 mn undiagnosed diabetics.
• Trinity makes tests and clinical instruments that detect for Lyme disease, syphilis, legionella, diabetes and autoimmune disorders like lupus. The company is perhaps best known for its point-of-care tests for AIDS used in Africa and the U.S.Last year, clinical instrumentation accounted for 77% of revenue, with point-of-care testing chipping in the remainder.In addition to growth from Premier, Trinity could also benefit from its lineup of new rapid point-of-care tests. They include tests for syphilis, herpes, strep pneumonia and cryptosporidium, and are expected to come to the market this year. Sales could ramp up in 2014.
• Trinity is also making progress with its point-of-care cardiac test to determine if a patient has had a heart attack. With an estimated world-wide market of USD1 billion a year, the potential is large. Trinity acquired the test in March 2012 when it bought Fiomi Diagnostics, and reported in April, that the test has begun clinical trials in Europe for regulatory approval. Approval, if it occurs, could come as soon as the end of this year.
• Trinity has a solid balance sheet, with USD73 mn in net cash. Free cash flow for 2012 is USD17 mn. Management is committed to returning some of its cash to shareholders in the form of dividends and stock buybacks. According to industry, TRIB can be worth USD25 by the end of 2014.

Special Situation Ideas for week of 15-Jul-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.  These are def. is worth a serious look.

Utility sector: As usual, people think this is a boring sector to dwell into. However, as power plants switch from coal into a more renewable energy mix, there might be an potential M&A opportunities in this sector, specifically with those firms that are into renewable space. This is not the time for huge LBO’s of buyouts especially In the sector that’s regulated on the revenue side. However, some small and mid cap names are worth a look, at they not only bring a client base but help the acquirer reduce cost and increase margins. Some names do come to mind : Hawaiian Electric (HE) - Approx 5% yield and capturing and generating solar energy in addition to non-renewable. Portland Electric (POR): approx. 3.6% yield and huge in renewable sector; Avista Corp (AVA); approx. 4.6% yield and into wid, landfill Gas and Hydro.

Intuit (INTU): This technology company might be poised for a huge dividend increase. The firm just sold its financial services unit to Thomas Bravo for USD 1bn and plans to sell its healthcare business. With USD 2bn in cash and USD 500m in debt, the completion of second divestiture, might either propel the firm o return cash to shareholders of make accretive acquisition. Its worth a look!

Maple Leaf Foods (MFI): IN light of the recent Canadian M&A, this firm might be worth taking a look at. The company has not only been cited repeatedly as a takeover target, there were rumors it was  looking to divest. If not for takeover, the fundamentals of the firm support organic growth in food sector, given the demand and consumption. Also, 33% owned by M. McCain, the CEO and 11.4% owned by canadian activist - west face capital. There is a chance, the firm might get sold in the future.

Citigroup (C): There was a good article this week on Citigroup (C) , which I believe is worth a read . Some in industry believe the stock is worth USD 70s to low-USD 80s: Some of the key points it made were as follows:

·       Management change : 17-April-12, Chairman Michael O'Neill, a former Marine known for turn around in banks and  a new CEO, Michael Corbat, a former banker.

·         Truly global franchise, which is almost impossible to replicate: Citi is in 160 countries. All told, about 58% of Citigroup's revenue comes from outside North America. In contrast JPMorgan Chase (JPM) gets just 19% , while Bank of America (BAC), a mere 13%.

·          Bank is sitting on USD55 bn in deferred tax assets, or future tax write-offs, which will be increasingly valuable in using its capital more effectively. Helps improve earnings and create leeway for future stock buybacks and dividend increases.

·         Citi has received permission to buy back USD1.2 bn of its shares through the first quarter of next year, a relatively modest amount but an important symbolic victory.

·         Corbat plans to lift return on assets to 90 to 110 basis points from the 62 basis points recorded in 2012 (a basis point is one-hundredth of a percent). He's aiming to boost ROE to more than 10% from 5% in 2012, and to attain an efficiency ratio at Citi  in the mid-50% range, compared with 60% in 2012. Keeping with his promise, CEO has cut 11,000 jobs worldwide, sold or scaled back consumer-lending operations in Turkey, Romania, Paraguay, Uruguay, and Pakistan, and sold a consumer-finance unit in Brazil to focus on faster-growing business lines.  Also paid USD1bn to move past the financial crisis claims from Freddie and Fannie.

·         Many believe the bank is overcapitalized. Additionally,  Latin America contributes 13% to overall revenue -- Citigroup's corporate and retail banking revenues are increasing at double-digit clips compared with domestic growth that's been flat, excluding Citi Holdings.

·         The level of problem assets in Citi Holdings , a.k.a. the bad bank stands at USD149 bn, well off its peak of about USD800 bn in 2008. Just unlocking the capital connected to Citi Holdings could add as much as USD10 a share to his price target of USD60.

Personal Note: I am still long HES CALLS expiring in Jan-14. In addition, I have still held on to my DELL LEAPS.

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.