Four Energy and Consumer Plays

Yesterday Rafael Resendes, our co-founder, was interviewed on CNBC to discuss a few investment ideas. Below is the list of stocks he discussed during the interview, along with additional key points on why we like them.

Kohl's Corp (KSS)

The Company operates family-oriented department stores that sell moderately priced apparel, footwear and accessories for women, men and children; soft home products such as sheets and pillows; and housewares.

Why We Like It

1. Sound and successfully executed strategy: Continuous expansion by building new stores; Continuous expansion of private or exclusive labels; Conservative inventory management; more efficient marketing.
2. Fared better than competition in 2008: Opened nearly 80 stores in 2008 or about 9% growth, comps down 7.7% ytd, EBITDA down 6%. Comps and earnings erosions are smaller than competition such as JCP and Macy’s (M), not to mention Mervyns which is filing for liquidation.
3. Financial Strength: Doesn’t own credit card operation, therefore, no worries of credit loss. Has financial book debt of just $2 billion, EBIT / Int ratio is more than 10 times.
4. Going forward: In 2009, Kohl’s is going to continue to utilize its strong financial position to continue to open new stores and remodel existing stores to grow market share in a very difficult environment. The company has a very attractive valuation and our tgt price is $46, suggesting about 22% upside.

Value Expectations Analysis on KSS

CVS Caremark Corp (CVS)

The Company is a provider of prescriptions and related healthcare services in the United States. It operates two business segments: Retail Pharmacy and Pharmacy Services.

Why We Like It

1. A juggernaut in providing healthcare services: CVS now has the largest retail pharmacy, and the 2nd largest PBM business in the US. Great potential to bring more convenient pharmaceutical benefits to consumers, at lower cost, by integrating mail delivery, internet, telephone, and walk in options.
2. Less volatile Demand: Drug retail is largely non discretionary, aging population, higher use of drugs for preventive measures, and the proliferation of new pharmaceutical products.
3. Good execution:
   
   • CVS always won the battles related to acquisition targets against other suitors and has always delivered promised synergies from those acquisitions. They are consistent enablers of acquired assets.
   • Ytd, front store comps growth has been positive and EBITDA margins have grown consistently from the year ago periods too.
4. Overall: Buying a sophisticated leader of an industry with stable demand at a great price.

Value Expectations Analysis on CVS

Valero Energy Corp (VLO)

An independent refining and marketing company that owns and operates 17 refineries in the United States, Canada, and Aruba. It produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants etc.

Why We Like It

1. Margins for diesel are more favorable than gasoline, since diesel (retail price) is currently selling about 33% higher than gasoline. VLO’s distillate production, which includes diesel, jet fuel and heating oil, rose to 35% of overall production in first nine months of 2008, up from 33% last year.
2. The market has priced in more than 40% sales decline long-term, but we believe that VLO can do better than that.
3. Gasoline demand is down 2.2% from a year ago at 9 million barrels per day. However, it is difficult to believe that a 2% dip in demand would translate into a P/E multiple of only 5.3 (ttm) or EV/EBITDA of 3.2 (ttm).

Value Expectations Analysis on VLO

Freeport-Mcmoran C & G (FCX)

The Company is engaged in the copper, gold and molybdenum mining through its majority-owned subsidiary, PT Freeport Indonesia.

Why We Like It

1. Market is pricing in about 40% long-term sales decline, so there’s been overselling in the stock because we think that FCX can do better than that.
2. One year following the prior recession in 2001, FCX outperformed the S&P 500 Index by 44%.
3. FCX is responding to reduced demand by cutting back production, suspending its $2 per share a year dividend, and delaying spending on expansion projects. The market has rewarded the company’s moves recently, pushing up shares about 20% over the past 5 trading days.

Value Expectations Analysis on FCX

Comments

[Gravity404:]

This article fails to mention CVS has $10 Billion in debt without the free cash flow to support it.

I do like FCX....a lot. They do have a new world monopoly on Indonesia natural resources. From $140 to under $20 provides a great opportunity to buy long term holdings here. This stock will create wealth. Put your kids in it.

With VLO you gotta watch the crack spreads. This could be picked up a lower prices later this year.

Jan 09 09:34 AM