Chicago Bridge & Iron: Has The Market Overreacted To Its Troubles?
- Chicago Bridge and Iron is experiencing indigestion from an acquisition in 2013 which could cost it as much as $1.5B.
- As a result, CBI has gone from being the darling of hedge funds to being highly suspected. Its share price has crashed from $90 to $50 in 2014.
- A risk-based analysis shows its current price is close to fair value. It is not a compelling value play at this price.
Immersion's Partnership With SomaTone Adds Another Piece To Its Mobile Haptic Strategy
- Last week, Immersion Corporation announced a partnership with SomaTone Interactive, adding another piece to its strategy to “make implementing haptics easy” for content producers.
- SomaTone is a clear leader in the casual gaming niche. The company produces sound effects, music, voice work and other audio services for video game companies.
- The two companies have been cooperating for years. SomaTone founder, Nick Thomas, joined Immersion - a testament to the potential of the growing consumer demand for “immersification” of digital experiences.
BioCryst Pharmaceutical: Short-Term Pump-And-Dump On Ebola Fear, A Long-Term Hold On Pipeline
- Short term, this company is too volatile and should be played for short-term gains.
- Long term, this company has an attractive pipeline that could provide it with respectable yearly income.
- Its potential drugs against Ebola, Influenza, Hereditary Angioedema, and Gout make this company very lucrative.
The Elephant(s) In The Room In GoPro's Business
- With the action camera market now taking off, GoPro’s relationship with Ambarella, its exclusive image processor supplier, is poised to become thorny, shifting from value creation to value distribution.
- GoPro’s online business model is jeopardized by YouTube’s dominance in a winner-takes-all market that has squeezed all the content providers.
- In response to its strategic challenges, GoPro is racing to build market power by expanding its product line to target segments beyond its core customer base.
- Valuation outcome of the base case is stressed-tested against the most important value drivers in a fairly mature post-2018 action camera market (IDC forecast).
- Why Aswath Damodaran is wrong in his market sizing analysis of the action camera market.
EarthLink: How A Supposed Dial-Up Company Could Have 80-250% Upside
- We believe that EarthLink could be worth $6/share, potentially nearly double its current share price, based on fundamental cash flow analysis alone.
- In a value recognition scenario, which we view as potentially likely, we believe EarthLink might be worth $8/share.
- Downside case of $3 based on valuation in line with the assumption that growth rates on its key legacy businesses materially worsen with no valuation credit for its sizeable NOL.
- The risk/reward is uniquely asymmetric with potential downside of 10% relative to potential 80-250% upside.
- Upcoming catalysts over the next 6 months include quarterly earnings (potential guidance revisions upward) and potential value enhancement via a potential sale of all or parts of the company.
Zooplus: Fast Growing But Undervalued Online Retail Opportunity
- Company is growing fast: 27.2% sales growth during 2013.
- Valued at 0.66x current year’s sales vs. much higher multiples for peers.
- Market leader in online pet supplies category in Europe.
- Pet supplies category is very suitable for online retail.
- New distribution center opened in Poland leaves room for more growth.
Air Canada: Undervalued, Growing Airline With At Least 50% Upside
- Renewed focus reduced their once bloated cost structure to levels below that of their largest competitor and other NA comparable firms.
- Very high Operating Earnings Yield show they are returning significantly to shareholders and are undervalued.
- Maintaining their load factor while increasing capacity.
- Delivery of 34 more Dreamliners will further reduce costs in the mid to long term.
- They have learned from past mistakes and now hedge 40% of expected annual future jet fuel costs.
Rumors Of A Sale Validate Long Thesis For Lumos Networks
- The stock remains attractive (despite the ~30% gain since initiation) as the original investment thesis continues to play out.
- The FTTC business received a huge boost after Project Ark went live last month; the (realistic) long-term $70 million revenue run rate is 3.5x the 2014E.
- The value of the embedded takeover option increased after the company reportedly hired Wells Fargo to help with a potential sale last week.
- An acquirer could easily pay 10x EBITDA, which is above the current 7.8x multiple, but below the 12.8x Level 3 paid for TW Telecom four months ago.
- A potential spin-off of legacy assets into a REIT is a higher-probability event than implied.
Oil & Gas Stocks: Is This Correction Over?
- Is the oil market indeed oversupplied?
- Do North American shale oil producers have to curtail production?
- Where will oil production curtailments come from?
- How does the Oil & Gas sector’s risk/reward balance look like currently?
Through Herbalife's Venezuela Looking Glass... And Back Again
- Herbalife created the illusion of a strong and sustainable business in Venezuela by overvaluing its bolivar sales, profits and assets.
- The economics of Herbalife’s Venezuela business became massively distorted because Venezuelans could convert bolivars to dollars and transfer capital out of the country just by purchasing Herbalife products.
- The scheme, which allowed Herbalife Venezuela to artificially inflate the company’s earnings in recent years, is now unraveling, and the ripple effects on Herbalife’s business will be felt far beyond Venezuela.
- Rather than the estimated $110 million operating profit Herbalife Venezuela has contributed over the last four quarters, we calculate that a revaluation to SICAD-II would have produced a $65 million loss (all things being equal), a $1.20 decline in earnings per share, and a 22% reduction to adjusted operating income.
Marriott Vacations Worldwide: Ride The Buyback Gondola?
- Large buyback authorization - 10% of shares outstanding.
- Large cash flows compared to net income.
- Non-bank financial intermediary - asset-backed security issuer.
Ophir Energy Has A Potential 67% Upside
- Ophir Energy is trading at a discount of 40% based on individual asset valuation, implying an upside of 67%. The valuation gap is likely to be closed within 12-24 months.
- Ophir Energy has strong partners, rich assets and is fully funded through 2015 for high level of exploration and development activity.
- Ophir Energy has multiple triggers in the form of divestment, government approval and new discoveries that will take the stock higher.
MV Oil Trust And VOC Energy Trust: A Tale Of Two Trusts
- MVO has outperformed VOC massively YTD.
- This should reverse based on expected dividend paths.
- Both trusts appear rich versus their expected yield, MVO egregiously so.
Black Diamond: A Very Attractive And Timely Short With A +50% Near-Term Return Potential
- Sold off its most attractive, highest margin and only profitable brand.
- Ongoing business with much lower margins and sharply negative earnings.
- Now expanding into highly competitive and mature categories where it has zero prior experience.
- Large recent discounts and unfavorable channel checks indicate these ongoing new product roll-outs are a disaster.
- Diamond Foods has had a tough time with litigation in the past few years. Thanks to good management decisions, it appears to be fully back on track.
- The joint problems of debt and positive speculation have left Diamond Foods as neither a potential buyer nor seller on the M&A scene.
- Don't be fooled by this seeming value play. There's a lot more to the story, but it's worth your attention.
Arotech's Growth Is Massively Decelerating, Leading To Reduced Profits And A Likely Default On Its Credit Agreement
- Q3 growth should decelerate massively, catching investors by surprise. Consensus expects 30% growth but we think growth will be negative. Based on this, growth investors should run for the exit.
- Profitability for the year should be 25% below Wall Street estimates. This too will likely become apparent in the Q3 report and drive the stock towards $1.15.
- ARTX will likely be in default of its credit agreement based on the expected EBITDA shortfall. Management will then be beholden to creditors.
- Another massive equity dilution will be needed to satisfy creditors. We expect shareholders to be diluted by another 55%, after already being diluted 50% year to date.
- As the company has been issuing stock, management has been selling theirs. Since highlighting this in our initial report the selling continues. So far management has sold $600,000 of stock.
Statoil's New Gas Discovery Strengthens Company's Position To Be A Major Supplier To Growing Asian Markets
- Statoil recently made its seventh major discovery in the gas-rich block 2 region offshore Tanzania.
- Tanzania is ideally positioned to ship natural gas to Southeast Asia.
- Several countries in Southeast Asia are likely to greatly increase their imports of natural gas over the next two to three decades.
- Statoil has sufficient gas reserves in the country to become a major supplier to these countries.
- The company is currently constructing the needed infrastructure to take advantage of this trend.
GameStop: A Cash Cow Offering Asymmetric Return
- GameStop is a leading video game retailer threatened by the adoption of digital content.
- Digital is not expected to surpass physical delivery for the next four to five years giving GameStop ample time to execute transformation.
- Console cycle will boost the sales of the company in the short term while the company re-positions.
- Valuation reveals minimal risk for investors, over 1-2 years, as the company doesn’t lose its value even with bear-case growth assumptions. Bull-case valuation projects an upside of more than 50%.
IBM: Taking A Hard Look At R&D
- If IBM is anything more than a cash cow/buyback machine, R&D is where the value lies.
- With a $6 billion budget, there is a lot of money being spent.
- IBM's Director of Research has written a book on the New Era of Cognitive Computing, worth reading for perspective on IBM's long-term strategy.
- The sale of the microelectronics business was a justifiable business decision, and doesn't detract from the potential value inherent in the company's focus on innovation.
- The R&D spend is being targeted at relevant areas, with a good mix of short-term and long-term priorities. Growth may follow in due course.
QLogic: A Logical Buy For 2015
- Despite clear signs of progress in its turnaround, shares of QLogic remain undervalued on both an absolute and relative basis.
- Signs of stabilization in the Fibre Channel market and continued growth in Ethernet sales have allowed the company to expand its market share.
- Despite gross margin pressures, tight cost controls have helped minimize the impact to operating margins.
- Pristine, debt-free balance sheet, with almost 30% of market capitalization in cash.
Playmates Holdings: Deep NAV Discount Gives 70% Upside From Rental Properties And Ninja Turtles Toys
- Playmates Holdings is an undercovered investment holding company in Hong Kong that's selling at a deep discount to NAV with positive catalysts ahead.
- 2 main growing businesses to drive narrowing discount and stock re-rating, being (1) property investments and (2) TMNT toys.
- (1) Property investments: Upside in rental income and valuation from prime-located commercial building with improving tenant mix including a global retail brand.
- (2) TMNT toys: Sales upside driven by product range expansion and new markets penetration, leveraging strong entertainment pipeline in TV and movies.
- Recent selloff offers attractive valuation now for an entry point. The selloff was driven by subsiding hype after airing of TMNT movie, but TMNT pipeline is far from over.
HealthEquity IPO Implies 50%+ Upside For Webster Financial
- The market is assigning virtually zero value to Webster's HSA Bank, the largest HSA custodian in the country.
- Meanwhile, smaller HSA custodian, HealthEquity, has recently been awarded a $1B+ market value via a successful IPO.
- With superior size and scale, HSA Bank should be awarded a valuation at least as high as HealthEquity's.
- In addition, the company's core banking operations are outperforming peers yet valued less expensively.
- Considering the low volatility associated with a regional bank stock and Webster's massive upside potential, its risk/reward profile is among the best we've seen recently.
Japan Tobacco And Imperial Tobacco: Reading The Smoke Signals (Part 3)
- Japan Tobacco is the third-largest international tobacco company.
- Imperial Tobacco is the fourth-largest international tobacco company.
- Both companies are competing with Philip Morris in the international markets.
- We believe one of these companies to be trading at a discount to fair value.
Yahoo: Figuring Out Alibaba And Then Focusing On Original Content Creates Upside Catalyst
- Yahoo needs to figure out what to do with its Alibaba holdings and divest them responsibly.
- It needs to stop trying to play corporate VC with its deals with start-ups, and focus on its internal growth.
- Yahoo should look to acquire AOL for cost-saving benefits, but also because of AOL's programmatic ads and its video ad technology.
- Rolling out Tumblr as the next YouTube will require more investment from Yahoo.
- Yahoo should look to acquire a small, but tremendously successful content creator.
Red Eagle Mining: Could This Small, Potentially Very Profitable LatAm Gold Developer Fly Into Permitted Territory?
- Red Eagle Mining has one of the most profitable gold projects in Latin America, with FS economics at a gold price of $1300/oz of an after-tax IRR of 53%.
- Its Colombian flagship project, Santa Rosa, is subject to permitting and project financing.
- As the project has an average 50k oz Au production per annum, capex is limited at $74.2M for a 1000 tpd operation, so financing by LMM could be realistic.
- There seems to be a lot of exploration potential, possibly attributing to a longer mine life, but there are also permitting and jurisdictional risks.
- A sum-of-parts valuation still generates an estimated current fair value of $0.34 per share, for a profit of 42%.
Gilead Sciences: Clear The Dockets And Settle With Merck Already
- The patent disputes of Gilead with Merck and AbbVie are not frivolous.
- Merck/Idenix have valid patents with claims on the structure of the Sovaldi active metabolite.
- AbbVie has 2 patents that claim Harvoni.
- The stakes in the HCV franchise are enormous, which argues for a conservative approach to IP protection.
- Settling the patent cases with Merck would help secure Sovaldi/Harvoni worldwide for the long term and remove a nagging uncertainty.
New Ulm Telecom: This Obscure Regional Telecom Offers Cheapness, Yield And An Embedded Catalyst
- New Ulm Telecom, an obscure regional telecommunications company, furnishes investors with a favorable risk/reward profile and attractive dividend yield.
- Investors enjoy downside protection through the cheapness of shares, which are priced significantly below book and the essential nature of the company's business.
- A wave of consolidation is sweeping through small-cap telecom in recent years, raising the possibility of New Ulm being taken out in the near-to-medium term.
- A similar situation currently unfolding with another regional telecom, the LICT Corporation, indicates significant upside potential should a bid emerge from an acquiring party.
- Should New Ulm Telecom be acquired at book value, investors at current prices will enjoy over 50% upside in addition to dividends.
Orocobre's Recent Retreat Might Be The Final Opportunity To Get In
- Orocobre's Olaroz project should be in production within weeks.
- The recent contraction on the commodity markets has sent Orocobre's shares tumbling.
- I see an easy 45% upside potential to the company's fair value.
Quiksilver: Restructuring The Quicksand Capital Structure
- Quiksilver's primary business segments have faced significant brand equity erosion and market share losses over the past twelve months, particularly across Roxy and Quiksilver brands.
- Weak wholesale revenue led to an EMEA goodwill impairment charge of $182 million in FQ3'2014, including a $38 million non-cash charge for the impairment of DC Shoes goodwill.
- Quiksilver's common stock is a terminal short; 17% of outstanding common shares are sold short and the common stock has realized a Y'o'Y price per share decline of -76%.
- Quiksilver's USD-denominated senior secured and senior unsecured notes may appear to offer attractive relative value but expected recovery rates do not support current trade levels.
Five Takeaways From Capital One's Earnings
- Analysts are concerned about the potential for higher credit losses, but this is not unexpected and must be viewed in context.
- The company is receiving no credit for its pedigree in utilizing technology and analytics to establish leadership positions in new market segments.
- Capital One's valuation is still undemanding; the TARP warrants offer a leveraged play.
How Important Is Facebook Challenging YouTube For In-House Video Post Supremacy?
- Facebook's rise in video posts and views and its threat to YouTube.
- Why more surveys need to be made before we know the depth of the impact of falling YouTube video posts on Facebook.
- YouTube and Facebook will probably both benefit from the growing online video craze, which has increased the market for everyone.
Contributor Call: Short Monsanto, Says BluePac's Chris Sommers
EOG Resources: A Best-Of-Breed Selling Below Fair Value
- The market has been most unkind to EOG Resources stock; shares are off 23% from a recent high.
- At these price levels, do EOG shares present investors with an asymmetric risk-reward profile?
- How closely is the price of EOG stock aligned with the movement in WTI spot crude?
The Toll Booth Businesses Of Visa And MasterCard
- Visa and MasterCard both play a vital role in the payments ecosystem and get paid handsomely to do so while bearing little risk.
- They are both wonderful businesses that benefit from a durable competitive advantage in the form of embedded ecosystem integration and universal acceptance coupled with strong consumer brand recognition.
- They both also benefit from a secular shift to card-based/digital/mobile payments, strong economics, high operating leverage and a natural index to inflation.
- There are risks/considerations to both businesses that include pricing power degradation, customer concentration, competition from China UnionPay, new digital payment technologies, potential disintermediation and also lawsuits.
- MasterCard trades at a ~23% discount to fair value at current prices near ~$71 and thus provides a bit more upside than Visa.
Walter Energy: A Look At Its Runway If It Wants To Avoid DIP Financing
- Walter Energy's interest payments are mostly due in Q2 and Q4 (and mainly April and October).
- Under current market conditions, it should have around $297 million in cash at the end of Q3 2015.
- Q4 2015 becomes a key decision point if it wants to avoid DIP financing, otherwise early 2016 is the decision point if there is minimal improvement in met coal prices.
- Likely a limited risk of bankruptcy filing before then.
Syntel Earnings: Undervalued
- Syntel's operating results for the third quarter showed moderately slowing revenue growth but otherwise were consistent with historical trends.
- Growth was affected both by declines in its manufacturing segment and slower-than-expected growth in its healthcare segment. Net margins were less affected.
- Cognizant's Trizetto acquisition played a role, but much of the healthcare segment revenue decline should be made up in future quarters, and the company's long-term prospects remain intact.
- There is no significant change to my fair value estimate, and I view the stock weakness as an overreaction, leaving shares materially undervalued and offering an attractive entry point.
CDK Global: A Spin-Off Worth Avoiding
- Fundamentals of the recent spin-off look weak when compared to peers in the industry.
- Relatively weak revenue growth and expected rise in expenses may put further pressure on the operating profitability.
- Stock may correct as more Street coverage on the new name highlight the lack of earnings power and comparatively expensive valuation.
Chef Medley Management Is Cooking Up Credit-Lending Capital Gains
- MDLY is an extremely unique company that is definitively outperforming its few non-directly comparable peers.
- MDLY has clear, operating results driving competitive advantages that not only will continue to grow results at incredible paces but should make it an acquisition target.
- MDLY's asset performance since inception, across the widest range of economic backdrops maybe ever, has been nothing short of near perfection - this creates a clear value-prop to clients.
SandRidge Permian Trust: Distribution Is Safe; Could Return +55% Within 1 Year
- PER’s share price has been hammered by a drop in oil prices.
- The market correction is undervaluing PER’s near-term distribution hedges.
- Even with the drop in oil prices, PER’s near-term distribution is on target for a near 30% forward yield.
- An additional return in share price appreciation of more than 25% is possible in the next year.
- PER’s fair value today is $12.72, resulting in a significant margin of safety; however, the trust is exposed to further oil price declines.
Check Point Software Technologies: Calling Activists As Cash Balances Continue To Increase
- Check Point's balance sheet is bloated with cash, with net cash & investments amounting to almost a third of the company's market capitalization.
- The company's operating margins and cash flow generation are higher than any of its competitors, including Microsoft.
- Combination of steady, but uninspiring revenue and EPS growth and continued growth in cash balances has created an attractive entry point for activist investors.
- Check Point has a long track record of share buybacks; since 2006 the company has bought back over 20% of its shares.
Monster Worldwide: Deeply Undervalued With 'Monster' Potential
- MWW trades at 50% of book value even though the company is profitable, FCF positive, and repurchasing stock hand over fist.
- Monster is poised for bookings growth in the upcoming 3Q followed by a return to sales growth in 4Q, suggesting a reversal from years of shrinking revenues.
- Software business is a hidden, unknown asset which should result in positive mix shift favoring high-margin recurring software revenue.
- Management has laid out 30%+ EBITDA margin targets to be achieved within 24 months. This breaches MWW’s prior peaks when the stock was $50+.
- MWW is the most hated/disliked in its industry and risk-reward is compelling even in the absence of revenue growth.
SL Industries' Sell-Off Will Likely Reverse Soon - 50% Upside
- A 30% sell-off has likely been triggered by very few sellers and has apparently happened without major news.
- The sell-off could present an excellent entry opportunity for a short-term speculation on a rapid reversal.
- Besides that, SLI is a good business trading for only 9 times TTM FCF and would be interesting even for long-term investors.
Wayfair's Expansion Plans Will Have Me Waiting For Signs Of Momentum
- Wayfair is asking investors to buy in on the front-end of a growth strategy driven by capex explosion.
- Despite its full-year results, Wayfair is actually very FCF-generative, and I can evidence this via a quarterly breakdown of cash flows.
- Wayfair is a great long-term option and an eventual niche leader, but I will wait for evidence of strategy momentum before buying.
GrafTech: Cost Optimization, Hidden Asset, And Panic Selling Offer Outstanding Upside For Contrarian Investors After 60% Sell-Off
- Following this year's 63% selloff the valuation of GrafTech offers a highly compelling value proposition with solid margin of safety.
- Departure of previous CEO and board reshuffle after proxy contest led to major shareholder controlling the company and significantly improved management.
- Optimization of production and corporate structure improvements will produce significant cost savings with the effect being realized from the second half of 2014.
- GrafTech has a highly valuable hidden asset in the form of Engineered Solutions segment, where value is hidden by temporary headwinds and non-recurring expenses.
- Move to leaner corporate structure should lead to improved margins and free up additional $100mil of cash via lower inventory holding.
News Corp: Australian Assets Create Upside Catalyst
- News Corp is largely believed to be a newsprint company with little upside potential given the exposure to a dying industry. Of the total NAV, newsprint accounts for 1/5.
- The Move acquisition adds significant digital real estate assets to their fold with a substantial market opportunity.
- The disparate set of often hidden assets obscures a solid set of franchises with significant upside potential.
- The news business is the pinnacle in the space with a growing underlying WSJ business along with strong other assets like Dow Jones and Barron's.
- Over time, we think the FOX Sports 1 franchise expanding to the US (just last year) could be a significant growth driver for the cable networks division.
Mitcham Industries: The Discount To Book May Grow
- Mitcham is a lessor to the geophysical industry.
- The geophysical industry is notoriously cyclical due to variability in capex spend by E&P companies and fluctuating crude prices. Crude prices have fallen in recent weeks.
- Mitcham Industries is at a discount to tangible book which is likely deserved as we expect near term earnings to be weak or negative.
Chesapeake Energy: Marcellus South Sale Highlights Sum-Of-The-Parts Value
- The $5.4 billion divestiture of the Marcellus South addresses leverage concerns and delivers an adequate value for a major asset in the portfolio.
- The transaction is logical in the context of Chesapeake’s asset-rich but capital-poor situation.
- The divestiture may not be the last strategic step that the company may decide to pursue.
Contributor Call: Short John Deere, Says BluePac's Chris Sommers
Loyalist Group Ltd.: Globalism, Language, And Value Investing Presents An Under-Appreciated Education Roll-Up Story
- Under-appreciated story with little following that’s yet to be fully understood by the market with excellent growth potential.
- Large and extremely fragmented market filled with “Mom & Pop” operators with no exit strategy; M&A has historically been accretive; and there is no direct competition.
- Meaningful organic growth: strong government support for the industry; market share gains as Loyalist’s relative strength, size and brand recognition increase; and new initiatives, such as student housing and franchising.
- Targeting a 16.3% EBITDA margin and FCF of $0.05/share by 2016E with net cash on the balance sheet as Loyalist realizes the full impact of synergies from acquisitions.
- Target price of $0.99, or ~133% upside. Understanding the implications of recent M&A, the seasonality of the industry, and upcoming catalysts is critical to timing this compelling trade opportunity.
AbbVie-Shire Deal Not Quite Dead Yet
- AbbVie reconsiders its bid for Shire, after examining the Treasury's new tax rules.
- There are still many tax benefits from going ahead with the deal.
- Renegotiation of the terms of the transaction is unlikely.