The Lure Of Liquid Assets by Christopher C. Williams
Highlighted companies: Aqua America Inc. (WTR), Pentair Inc. (PNR), Watts Water Technologies Inc. (WTS), Veolia Environnement SA (VE), Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), General Electric Co. (GE), Suez (SZE), ITT Corp. (ITT), American States Water Co. (AWR), United Utilities plc (UU), PowerShares Water Resources ETF (PHO)
Summary: The water sector is on fire: The Stanford Washington Research Group Water Index of 20 U.S. and international stocks has returned 131% in the past five years (vs. 4% in the S&P 500). "Much of the easy money has been made, but investors willing to cast their nets a bit wider can find compelling bargains." Barron's profiles six such companies:
(1) Aqua America Inc. (WTR): They provide water and waste-water systems to 2.5M customers. They are the "leading acquirer" in the sector, having snatched-up over 100 smaller fish in the past five years. Current revenues are about $500M, and rate increases are between 3-5%. As the industry leader, WTR is well positioned to benefit from government infrastructure spending estimated at $280B over the next 20 years. Shares ($22.90) trade at 27x estimated earnings, but are cheaper than their March high of $29.79. Management targets 7% annual revenue growth and a 5% dividend yield; analysts say it should have no trouble reaching these. "If the company stays on course, its shares could appreciate more than 20% in the coming year -- continuing a decade-long trend of 25%-plus annual gains."
(2) Pentair Inc. (PNR): They make fluid-handling systems and industrial products; sales of water and waste-water pumps are 74% of its $3B in sales. It is the dominant player in the water-components market; analysts believe it could attract buyers, perhaps within a year. It is boosting its share-buyback program, streamlining management, and expanding in emerging markets such as China. At $29.51 it is 16% off its March highs, and trades for 14x estimated earnings of $2.12/share. "Earnings could rebound sharply and push the stock back to the mid-30s."
(3) Watts Water Technologies Inc. (WTS): Maker of valve and flow-control products. It has doubled its business in the past five years, mainly through acquisitions. It has been expanding overseas; over 30% of its business comes from Europe and China. They too stand to benefit from government infrastructure investment (see above). A housing-market slump and higher copper costs could pose problems. WTS has a history of beating analysts projections; it reported a 32% increase in Q2 sales, and a 12% increase in EPS ($1.67) last year. At $36.22 (down from a $40.03 high in May) it trades at about 16x earnings. "Earnings per share could jump to $2.16 this year, and grow by 15% in each of the next three years."
(4) Veolia Environnement SA (VE): Water revenues account for over 30% of the French company's €25B revenues; other industries include energy and transportation. It is the world's largest water utility, and stands to benefit from an estimated $600-$700B European water investment over the next 20 years. More than half of its business comes from outside France, and France itself is the world's second-largest water consumer per-capita (U.S. is #1). Its shares fell recently on news it may acquire Italian builder Vinci, but rebounded when the deal fell through. Its shares (€47; U.S. depositary receipts $59.29) are 16x 2007 earnings. "If Veolia focuses on cutting costs instead of striking potentially disruptive deals, its shares... should remain buoyant, and profits could grow by 18% a year."
(5) Companhia de Saneamento Basico do Estado de Sao Paulo (SBS): The Brazilian company is the Americas' largest water utility and #3 worldwide. Last year's $2B in sales came mainly from contracts with municipalities. It has been awarded rate increases that exceed the rate of inflation. Last year net profits jumped 69%, and it is expected to grow annual earnings at a rate of 10% (industry average is 8.5%). Its ADRs ($31.31) have gained 88% since last November, but its shares still trade at just 8x earnings. Investors worry about 50% state ownership, and the possibility the government could enact non-shareholder-friendly policies. "The water market in South America should grow 4% a year, and SBS is one of the best ways to play it."
(6) Sinomem Technology (SINO Singapore): A water treatment provider. It stands to benefit from China's pledged $125B for water treatment and infrastructure in the next five years; the Chinese market is expected to increase by 20% annually. It is still a small player: sales were $51M last year. It trades for S$0.91; Goldman has a S$1.09 target. "John Dickerson of Summit Global recommends that investors buy a basket of Singapore-listed water-related stocks, including Sinomem, Hyflux (HYF Singapore) and Bio-Treat Technology (BIOT Singapore)."
Quick comment: The article notes: "The year-old PowerShares Water Resources Portfolio (PHO), an exchange-traded fund, is a basket of global water stocks; it's up 15% on the year" • Faisal Laljee calls water "the new oil" and Roger Nusbaum includes it in his "long-term themes" • Utility analyst Sandy Cohen tracks the water utility industry • Debra Fiakas likes Basin Water Inc.'s (BWTR) proprietary ion exchange system for an emerging player in water treatment; John Bethel likes Mueller Water Products Inc. (MWA); Hillary Kramer calls Tetra Tech Inc. (TTEK) an overlooked stock in a strong market • Profiting from Water with The Water Resources ETF • The Water Industry's Pumping On All Lines • ETFs to Own • The Bull Case for Water • Investing in Global Water Stocks • Entering International Waters -- For Investment
INTERVIEW: Oil Prices: a Pause, Then Up by Sandra Ward
Highlighted companies: ExxonMobil Corp. (XOM), Marathon Oil Corp. (MRO), Royal Dutch Shell (RDS.A), Hess Corp. (HES), BP PLC (BP), Total S.A. (TOT), ConocoPhillips (COP), EnCana Corp. (ECA), Suncor Energy Inc. (SU), Nexen Inc. (NXY), Canadian Natural Resource Ltd. (CNQ), Chevron Corp. (CVX)
Summary:Barron's interviews Charley Maxwell, a 50-year veteran of the oil and gas industry, and presents his thoughts on the energy scene. Key points:
His energy-stock investment advice: "You want to buy companies that have long-life reserves and are developing them," such as Canadian tar sands producers Suncor, EnCana, and Nexen Inc. (NXY), and Canadian Natural Resource Ltd. (CNQ).
- Previous shortages (1973-74, 1979-86, Iraq wars) were man-made; present shortages are due to a true lack of oil. Hubbert's Peak, the theory that says global oil production will peak, will dominate our attitude by 2015-2020.
- National oil companies [NOCs] account for 3/4 of global production. They face structural challenges: (1) Poor political influence; their profits are going to support local issues such as the military. (2) NOCs failed to react to a reduction in global surplus (it fell from 20% in 86-87 to the current 2-3%) due to lack of money and a lack of skilled management. "I don't know how we get around the problem of the NOCs. They control so much of the world's production and they are bloody helpless. They don't have enough money and they don't have prestige and they don't have professionalism."
- Multinationals such as ExxonMobil Corp. (XOM) lack vision; they have failed to recognize/react to the production problem. They are underspending on exploration and development and under-leasing deep-water projects.
- Peak oil: About 3 months ago it was unexpectedly discovered the world's second largest oil-field (Burgan in Kuwait) had peaked. Number one (Ghawar) is very close. Non-OPEC oil will peak around 2010, making us dependent on OPEC for all future growth, which will accelerate rising oil prices. The natural gas peak looks like it will only occur in 2035-2040.
- Oil company peaks: Marathon Oil Corp. (MRO) will peak in 2009. Royal Dutch Shell (RDS.A) 2009. Hess Corp. (HES) 2010. Exxon 2011. BP PLC (BP) 2012. Total S.A. (TOT) 2012. ConocoPhillips (COP) 2013. EnCana Corp. (ECA) 2020. Suncor Energy Inc. (SU) 2045.
- Barrels found vs. barrels used: 1930 -- 10B found 1.5B used. 1964 -- 48B found 12B used. 1988 -- 23B found 23B used (crossover point). 2005 -- 5B found 30B used.
- Oil prices: Currently, the 'bottom' could be in the high 40s. Yearly averages will stay in the 60s. In 2008-09 prices will begin their rise, going to 130-150, then a pullback.
Quick comment: Seeking Alpha commentary: Phil Davis has a series of articles on oil prices and producers including Crude Reality: Supply > Demand • Discussions on Oil • Still Cautious on Gulf of Mexico Driller Stocks • China's Oil Demand in Perspective • Debunking the Bear Case for Energy • OPEC commentary: OPEC Waffles on Production Cut • Oil Traders Testing the OPEC Cartel • OPEC Production Cut Looks Inevitable • OPEC's Dilemma: When and How to Cut Production • Richard Kang looks at Oil Versus Natural Gas • ETFs: Oil Service HOLDRs ETF (OIH) invests in oil-service companies, United States Oil Fund ETF (USO) invests in crude oil futures, gasoline, and other petroleum-based fuels. Roger Nusbaum looks at New Oil Sands ETF from Claymore • Future world oil supplies: There is a finite limit [Diedoff.org] • 10-Year Petroleum Trends (1994-2003) Highlights [IHS]
Is This Steel Stock a Steal? by Andrew Bary
Highlighted companies:United States Steel Corp. (X), Cleveland-Cliffs Inc. (CLF), Nucor Corp. (NUE), Mittal Steel Company NV (MT)
Summary: United States Steel Corp. (X), the world's sixth-largest steel producer, has been the subject of recent takeover rumors: Its selling points: Large, integrated U.S. operations; low-cost steel mills in central/eastern Europe; vast iron-ore (steel's raw material) mines in Minnesota; debt-free; $8B market cap. The steel industry is in "its best shape in decades," and prices have risen since 2003. Domestic consolidation and higher raw-material costs have eroded China's pricing advantage. Despite a recent run-up of 18% since Oct. 3 (current price $65), U.S. Steel shares still look inexpensive at just 6x 2006 profits (about half of its main rival Nucor Corp. (NUE)), which led a J.P. Morgan analyst to remark that its stock isn't "reflecting the dramatic improvement in their earnings capability over future cycles." Its enterprise value (equity value plus net debt) is about $400 a ton of annual production; the industry leader is valued at over $600/ton. Q2 earnings were $3.22/share up from $2.04 y/y. The company has repurchased 7.7M shares since July 2005 (123M outstanding). Any buyout is likely to be foreign; Nucor, the only U.S. steelmaker with the potential, would face antitrust obstacles. Barron's bottom line: "Deal or no deal, U.S. Steel could be a winner. A buyer might pay $100 a share, and an independent U.S. Steel could top $80 in the next year if it defies the bears and produces ample profits in 2007."
Quick comment: Metals and Mining: Blast Off! • Steel Suppliers Facing Rising Inventories, Lower Demand • Metal Management CEO Talks About His Company • Deutsche Bank Analyst's Poor Calls on U.S. Steel • U.S. Steelmakers Report Strong Profits for Q3 • Cramer's Take on X • ETFs: SPDR Metals and Mining ETF (XME)
Inside J&J's Medicine Chest: New Products, Renewed Growth by Robin Goldwyn Blumenthal
Highlighted companies: Johnson & Johnson (JNJ), Pfizer Inc. (PFE), Boston Scientific Corp. (BSX), Bristol-Myers Squibb Co. (BMY), GlaxoSmithKline plc (GSK)
Summary: Health-care stocks have been on the move lately, and Johnson & Johnson (JNJ), at $64.50, is up 14% from February lows. Its business stems from three sectors: prescription drugs (44%), devices and diagnostics (38%), and consumer health care (18%). Its issues: patent-expiration, competition in medical devices, and safety/regulatory concerns. But J&J's ace-in-the-hole is its, "powerhouse over-the-counter health and beauty business (Tylenol, Band-Aids, etc.), buttressed mightily by its recent agreement to buy Pfizer's consumer health-care unit for $16.6 billion." The Pfizer purchase will boost consumer health to 25% of total sales. Earnings in the OTC business have doubled in the past seven years, while profit growth in pharmaceuticals and medical devices has slowed. In pharmaceuticals, its #1 seller (anti-psychotic Risperdal) had 2005 sales of $3.6B billion (one of eight J&J drugs with annual sales over $1B). In this year's H1 sales grew 20%. Sales of Remicade, an anti-inflammatory, also increased 20% in the H106. JNJ has some "potential blockbusters" in development including blood-thinner Rivaroxaban, two Remicade follow-on drugs, and a hepatitis C drug. Operations will generate $11B of free cash flow this year, rising by 5% to 7% a year in the next few years. In medical devices, J&J is best known for its development of artery-opening stents, which are under FDA scrutiny over questions about the possible increased risk of blood clots. Shares currently trade at 16x 2007 estimates; historically they have traded for 19.4x. Its price-to-cash-flow multiple is 15; historically 18. "Johnson & Johnson's dominance over the counter, not to mention its prominence behind it, will serve the company well as it seeks to grow even larger. That, and the defensive nature of its shares, should comfort investors when times get tough."
Quick comment: As noted in the article, J&J was among the Street's most respected companies for its seemingly endless sales increases • Clark & Ritchie picked it as a stock of the week • Johnson & Johnson -- The Stock Sells Itself • Best Name in a Weak Sector • Pfizer story: Pfizer Hopes It Can Sell Its Consumer Health Care Unit to J&J • Everyone's a Winner in J&J's Purchase of Pfizer Unit
Enterra's Woes Mount by Vito J. Racanelli
Highlighted companies: Enterra Energy Trust (ENT), JED Oil Inc. (JDO), JMG Exploration (JMG)
Summary: Enterra Energy Trust (ENT) shares trade at $8.80, down from $24 last October. A number of reasons: (1) A 'sympathy move' following the meltdown in JED Oil Inc. (JDO) after it announced wells on its most important property weren't producing nearly as much as expected, and suspended production. (2) The collapse of natural gas prices, $5/million BTU down from $15 last winter, caused it to lower monthly dividends to $0.12/unit from $0.18; dividends, which are exempt from corporate taxation, are one of energy trusts' main selling points. (3) Low prices also forced it to terminate otherwise profitable revenue-sharing deals with drillers JED and JMG Exploration (JMG). (4) Of its $300M in debt, $200M is at Libor+4.5%, and matured on Sept. 20, meaning the rate escalates +1% for each of the next three months it goes unpaid; analysts are pessimistic they can refinance this debt without significant dilution. Marathon Resource Investments is short ENT, while Glickenhaus & Co. is adamant they're not selling, and calls it a "screaming buy" if it can solve the debt problem and gas prices rise. Barron's: "Those are big ifs. A reasonable scenario would be for Enterra to refinance via $150 million in new debt and $150 million in equity. At the current price of 8.80, that could mean as much as a 40% increase in shares outstanding. This would painfully dilute current unit holders, and would make another dividend cut likely."
Quick comment: Finding the Best Dividend Paying Equities: The Case of Enterra Energy Trust • Background: Enterra Energy Lowers Target Payout Ratio Range; Slashes Monthly Distribution To US$0.12/unit
Highlighted companies: China GrenTech Corp. Ltd. (GRRF)
Summary: After at least two-years of delay, it now appears the Chinese government may be getting ready to license third-generation (3G) mobile-phone services, whose high speeds facilitate video and internet via cell-phone. This should result in a rush of orders for gear makers, boosting earnings and share prices. Three obvious plays: (1) State-backed ZTE (ticker: 0763.Hong Kong) has core networks, while privately owned Comba Telecom Systems Holding (2342.Hong Kong), and China GrenTech (GRRF) sell equipment to boost mobile signals. Analysts expect the government to grant mobile licenses to at least one of China's two major fixed-line operators (China Telecom (0728.Hong Kong) and China Netcom (0906.Hong Kong)) to compete with its current two cellular providers, dominant China Mobile (0941.Hong Kong) and weaker rival China Unicom (0762.Hong Kong). Adding players and upping the standard should increase capital expenditures to build new networks and upgrade existing ones by as much as $76B in the next five years. ZTE stands to beat foreigners in contracting network support due to its active role in developing the TD-SCDMA 3G standard that the Chinese government is anxious to adopt; Daiwa Institute's Joseph Ho expects ZTE sales to soar 92% in 2007. The stock currently trades at 27 P/E, but if it can grab 20% of an estimated ¥80B increase in capex, it would make the stock look cheap at only 8.3x P/E. Comba and China GrenTech are smaller, but they will still be big beneficiaries. Some analysts caution that while revenues will surge with the acceptance of the new standard, operators will bargain aggressively with equipment suppliers, taking away some of their profit margins.
Quick comment: China Techfaith Wireless Communication Technology Ltd. (CNTF) is the #1 mobile design company in China; it recently shifted its focus from GSM to 3G smart phones • Seeking Alpha's weekly Chinese Tech Stock Update has been covering the ongoing 3G adoption saga • ETFs: PowerShares Gldn Dragon Halter USX China (PGJ) has a 23% telecom exposure in the Chinese market
Lumber Lift May Not Last by Lester Aldrich
Summary: After years of negotiations, the U.S. and Canada finally inked a lumber deal on Oct. 12, sending CME lumber futures skyrocketing. The deal suggests Canadian production may soon be curtailed, which could allowed depressed U.S. lumber prices to make an extended run, beginning with a "ferocious" short-covering rally and sustained by supply shortages. But cutbacks in homebuilding mean U.S. demand is also slack, even taking into account the yet-unproven Canadian production cutbacks. And there is already excess lumber in the market: Canadian producers have been shipping almost all their unsold products to the U.S. to pre-empt the tax. Many mills are already losing money, normally an impetus for cutbacks. But a refund of $4.4B in duty charges will give many Canadian firms an operating cushion to continue running at full steam, further saturating the market.
Quick comment: Rick Konrad considers the implications of the recent deal in Trees and Paper: The Rodney Dangerfield of Commodity Stocks • Timber Stocks Should Outperform in an Inflationary Market • Roger Nusbaum likes Plum Creek Timber Co. Inc. (PCL) to capture lumber's upside • A weak housing sector and weak lumber demand puts pressure on the railroad sector • Timber stocks: Abitibi-Consolidated Inc. (ABY), Bowater Inc. (BOW), Potlatch Corp. (PCH), Plum Creek Timber Co. Inc. (PCL), Rayonier Inc. (RYN), Weyerhaeuser Company (WY), Louisiana-Pacific Corp. (LPX), International Paper Co. (IP), Meadwestvaco Corp. (MWV). Railroad stocks: Burlington Northern Santa Fe Corp. (BNI), CSX Corp. (CSX), Florida East Coast Industries Inc. (FLA), Kansas City Southern (KSU), Norfolk Southern Corp. (NSC), Union Pacific Corp. (UNP).
THE TRADER: NetRatings by Michael Santoli
Highlighted companies: NetRatings Inc. (NTRT)
Summary: NetRatings Inc. (NTRT) tracks website traffic and measures ad effectiveness. It is the leader of the field, and recently turned profitable. Dutch publisher VNU owns 62%, and last week offered to buy the remaining 32% for $16/share, a 10% premium. NTRT investors, including hedge funds, appear ready to fight for more; Pirate Capital, an activist hedge fund that owns more than 500,000 shares, filed suit Thursday to protest the offered terms. Shares traded Friday at $16.76. Advocates of a higher price cite $2/share in tax-loss assets, and that the company has recently begun enforcing its patents with success. NetRatings IPOed at $17, when it had $20M in sales and 38% gross margin; today it has $80M in sales, 72% gross margin, and 1,750 clients. One money manager who has owned the stock for years says share acquisition is accretive to VNU up to $25. "Expect pressure from shareholders and negotiations to make up some of the gap between $16 and $25 before this story concludes."
Quick comment: NTRT provides the opportunity for a "non-partisan" play on the internet advertising scene • NetRatings Gets the Low Bid [Motley Fool] • NetRatings closest publicly-traded competitor is Websidestory Inc. (WSSI)
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