A longtime resident of Madrid, Spain, James Levy has been a wealth management advisor for twenty years - first, in the Madrid office of Merrill Lynch International Private Banking, and later as a Founding Partner at Private Wealth Advisors. In 2009, PWA was acquired by Madrid based Banco Inversis, where James is currently a Patrimonial Banker.
PWA's principle areas of interest are efficient portfolios of European registered international mutual funds, sector selection strategies and microcap opportunities.
Note: This Q&A represents James Levy's own personal opinions - he is not acting here in the capacity of representing Banco Inversis.
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Seeking Alpha: What is your highest conviction stock position, long or short?
Our highest conviction position is a new long holding in Telvent (Nasdaq:TLVT). We are buying aggressively this week to take advantage of the recent price correction and situate ourselves before quarterly earnings are released tomorrow, February 19th.
Telvent is a global Information Technology solutions and business information services provider. Its central focus is to help leading companies worldwide to improve efficiency, safety and security of their systems and networks. The company receives most of its revenues from the energy, transportation, agricultural and environmental sectors. While headquartered in Madrid, Spain (note: Telvent shares trade on the Nasdaq), Telvent receives only 40% of its revenue from Europe, with the rest coming from fast-growing markets in North and South America and Asia. With more than 6,000 employees and a market capitalization of just over $1 billion, Telvent is a small multinational company with a long history of impressive and consistent earnings growth.
Telvent is ideally positioned to take advantage of demand for its services to better manage and control power grids, transportation systems and oil and gas pipelines. Many of its contracts come from fast-growing emerging countries such as Brazil or China which are now building entirely new networks and are hiring this Spanish company with leading edge technology, as it is often more politically acceptable than hiring an American firm.
Millions of people worldwide benefit from Telvent's services each day without ever being aware of the fact. Just to mention a few examples, over 60% of all the gas and oil which moves through pipelines in the Western Hemisphere is controlled through Telvent pipeline efficiency solutions, while Telvent traffic control systems impact 56 million people daily, including users of the EZ Pass system in NY, which is a Telvent product.
To what extent is this an industry pick as opposed to a pure bottom-up selection?
This is both an industry pick and a bottom-up pick. Providing services for the optimization, control and security of networks is a terrific sector for the coming years as emerging countries build these networks for the first time, and developed countries seek to improve their energy efficiency and security through upgrading their existing network infrastructure. As a leader in this segment, Telvent provides a high value service with little capital requirements, its main asset being the brainpower of its employees.
At the same time, Telvent captures consistent recurrent revenues, as existing contracts tend to continue for many years even as the company is enjoying great success in signing new customers such as PetroChina (NYSE:PTR) for pipeline control, the control systems for the subway of Rio de Janeiro in Brazil, or the integration of the new light rail system into a traffic control network in Morocco, just to name a few recent contracts. The combination of recurrent revenue with new contracts gives us confidence that Telvent will be able to continue to deliver consistently high margins and steadily increasing revenues in coming quarters.
How would you describe Telvent's competitive environment?
Telvent is classified by Standard and Poor's as a mid-sized Information Technology Services company. While this industry has been adversely impacted by the global financial crisis and the recession in the developed world, it is widely thought that the worst is already past as companies are forced to upgrade their systems in order to remain competitive in the coming years. Telvent has carved out a particular niche in this industry as a leading ¨green¨ company, providing solutions to build a more sustainable and secure world through increased efficiency and control of networks, be they pipelines or traffic or energy transmission. (Jim Cramer has recommended Telvent as a ¨smart grid¨ play and a ¨one stop shop for everything that is the future.¨ In fact, the Telvent David is tied with the General Electric (NYSE:GE) Goliath for the number two ranking for systems that monitor and control power for efficiency gains.)
Another advantage for Telvent within this industry is its Spanish origins and headquarters. Spanish companies are very successful competitors in Latin America, where Spain is the leading foreign investor, even ahead of the United States. At the same time, Telvent is able to gain contracts in countries such as China which for geopolitical reasons might not want to grant an American company a contract for control of vital infrastructure such as the oil pipeline network.
In short, Telvent can have it both ways, succeeding in the U.S. as an "American" company with a Nasdaq listing and Washington D.C., U.S. headquarters, but playing the Spanish card when useful in Latin America and other countries worldwide where a U.S. company carries considerable political baggage.
Can you talk about valuation? How does valuation compare to competitors?
Following its recent decline from all time highs, Telvent shares are very attractively priced. We have here a company which has demonstrated sales growth of over 30% per year and income growth of over 40% per year for the past five years. An investor can purchase this company now for just over 12 times 2010 fiscal year estimated earnings. S&P gives Telvent a mean estimated annual growth rate of 16% over the next five years, but keep in mind the fact that this company has a history of exceeding estimates through both organic growth and well executed acquisitions of small players in its industry focus areas.
Additionally, Telvent pays an annual dividend with a yield of approximately 1.5%. The recurrent nature of its revenue from well diversified sources and its consistent success in winning new contracts in the fastest growing areas of the world give Telvent a very attractive risk/return profile at the current prices, superior to any of its competitors at this time.
What is the current sentiment on Telvent? How does your view differ from consensus?
Current sentiment on the stock has been adversely impacted by a recent Piper Jaffray downgrade from Overweight to Neutral based on concerns about the Spanish economy and how this might impact Telvent´s business. Piper lowered their target price to $37 from $46, while Zacks has maintained a $41.90 target price. The company is scheduled to release 4th quarter and fiscal year 2009 earnings before the opening of the market on February 19th.
Given Telvent´s history of upside surprises and resilient and well diversified revenue base, we believe that the results may be better than expected. We believe the current price more than discounts justifiable concerns for how the Spanish economic situation could impact Telvent in the future.
Does the company's management play a role in your position? If so, how?
The quality of Telvent´s management plays a crucial role in our positive position on Telvent. The management team is stable, well qualified and highly dedicated to executing Telvent´s ambitious business plan and realizing Telvent´s objective of becoming widely known as ¨The Information Company for a Sustainable World.¨ I have had the opportunity to speak with many Telvent executives, customers and suppliers over the years here in Madrid, and have received consistently good input concerning this firm.
Additionally, Telvent is in origin a family owned firmed, and continues to be managed with the prudence and long term vision which is a characteristic advantage of these kinds of firms. Insiders currently own over 66% of shares.
What catalysts do you see that could move the stock?
Given its modest capitalization of just over $1 billion, and very attractive valuation and growth rates, Telvent could be a very enticing acquisition candidate for a larger firm seeking to enter the fast growing market segments where Telvent has built a name for itself. Similarly, an improvement in the economic situation in Spain could well serve as a catalyst to price gains in the future.
What could go wrong with Telvent as a stock holding?
The recent decline in the share in response to publicity about the worrisome state of the Spanish economy demonstrates that Telvent's share price is not immune to the evolution of the ongoing European sovereign debt financing crisis. For example, if the Spanish government is forced to put in place severe spending reductions, this could impact Telvent's Spanish sourced revenue. Additionally, if the crisis in Spain reaches Icelandic proportions, each and every Spanish company, including Telvent, will find its valuation adversely affected.
However, we believe that these risks are worth taking and are already discounted in the current stock price. Telvent's contracts in Spain as in other countries tend to be multiyear contracts in critical infrastructure, and are not prone to sudden cutbacks in response to government budget restraints. For example, one of Telvent's important projects in Spain is the information technology for data control and border security of over 50 million people who enter Spain each year. Even if faced with severe budget cuts, it is very unlikely that the Spanish government would cancel this contract. In short, we believe that at the actual price just before the quarterly earnings release, Telvent's shares offer investors an excellent entry point to a very promising small cap growth stock for the long term.
Thank you so much for sharing your thesis, James.
Disclosure: Funds managed by James Levy are long TLVT