Here are some U.S.companies we are actively tracking ahead of 2010 fourth quarter press releases. We believe they may have a good chance to eclipse analyst estimates or are about to experience an acceleration in EPS growth. Our previous mock portfolio built on 2010 third quarter earnings preview returned 42% applying the high price achieved during the coverage period (~two months) and 34.2% using December 23, 2010, closing prices.
Asbury Automotive (ABG) - Price: $18.51*; Coded as a GeoSpecial at $16.72.
Asbury Automotive is one of the largest automotive retailers in the U.S.
- Was mentioned in 2010 third quarter earnings watch article.
- In addition to earlier reasons there are a few more that drive our bullish outlook:
- GPR of 4**
- Stock buy back
- Sells non-core assets
- Makes accretive acquisition
- Seeking to reduce leverage
- Stock has had a nice run which could lead to a short-term pull back which we believe would create additional buying opportunities.
- Short-term price target based on a P/E on 15 on analyst 2011 EPS expectations of $1.81: $27.15.
Mercer Intl (MERC) - Price: $7.71*; Coded as a GeoSpecial at $6.93
Owns and operates a diverse pulp and paper business in the southern German states of Saxony and Thuringia, in the former East Germany.
- GPR of 3
- Currently a GeoSpecial
- Just restructured facilities, resulting in more efficient operation of mills.
- New stable source of revenue through the sale of surplus energy generated by mills.
- We are somewhat concerned that the fourth quarter may see a sequential drop in earnings from a very strong third quarter, but believe the company will make impressive strides in 2011. We also have to be aware that MERC’s revenues are dominated in Euros and could be affected by currency fluctuations.
- Short-term price target based on a P/E of 7.5 on our 2010 EPS expectations of $2.32: $17.40.
Handy & Harman Ltd. (HNH), formerly WXCO - Price: $12.50*
Handy & Harman is a diversified global industrial company "delivering value through the WHX Business System which drives innovation, operating excellence and superior customer service. Our companies are organized into six business segments: Precious Metals, Tubing, Engineered Materials, Arlon Electronic Materials, Arlon Coated Materials and Kasco. "
- Remains in mock portfolio.
- The company followed its 2010 second quarter performance with another blow out EPS outing for its 2010 third quarter: $0.49 vs $0.08.
- Lowered borrowing costs.
"We also refinanced in October substantially all of WHX's indebtedness principally with our existing lenders or their affiliates. This refinancing will lower our ongoing borrowing costs compared to our prior financing arrangements and extend the maturity date of almost all of our indebtedness," Mr. Kassan stated.
- The company serves markets that will directly benefit from a gradual economic recovery:
"Medical, semiconductor fabrication, aerospace and instrumentation industries refrigeration, automotive, and heating, ventilation and air conditioning, or “HVAC” industries building and roofing material wholesalers military/aerospace, wireless communications, transportation, energy generation, oil drilling, general industrial, and semiconductor markets."
The Stainless Steel Tubing Group’s capabilities in long continuous drawing of seamless stainless steel coils allow this group to serve the petrochemical infrastructure and shipbuilding markets.
“The increase in demand as compared to 2009 for WHX’s products and services that we reported in the first half of 2010 continued in the third quarter, resulting in 22.1% quarter-over-quarter sales growth, and 22.9% sales growth on a year-to-date basis versus 2009,” said Glen Kassan, Vice Chairman of the Board and Chief Executive Officer of WHX. “The increased sales volume across all operating business segments was driven by the improvement in the world-wide economy, with increased demand from the electrical, replacement roofing, petrochemical and commercial construction markets.”
We will consider adding HNH to the GeoSpecial list. Short-term price target TBA.
Allied Motion Tech (AMOT) - Price: $7.29*; Initiated a short-term trading position at $6.40
Allied Motion designs, manufactures and sells motion control products into applications that serve many industry sectors.
- GPR of at least 3.
- Sales have just returned to pre recession sales levels. However, margins are better then previous levels which should drive EPS growth for a few more quarters even with minimal revenue increases.
- Just made accretive acquisition which could help increase GPR.
- Stock breaking out to new highs.
- Short-term price target based on a P/E of 25 on our 2010 EPS expectations of $0.46: $11.50.
CPI Aerostructures (CVU) - Price: $14.02*; Coded as a GeoBargain at $5.00.
CPI is engaged in the contract production of structural aircraft parts for leading prime defense contractors, the U.S. Air Force, and other branches of the armed forces.
- May have a weak fourth quarter, but GPR becomes a solid 4 in 2011.
- EPS is expected to grow 85% to $1.35 in 2011.
- Very shareholder friendly management.
- Predictable backlog that could provide upside to EPS targets.
- One of our favorite stocks for 2011.
- Short-term price target based on a P/E of 15 on analyst 2011 EPS expectations of $1.35: $20.25.
Brown Shoe Co (BWS) - Price: $13.66*; Coded as a GeoBargain at $14.15.
Brown Shoe is a $2.5 billion global footwear company.
- GPR of 5
- Strong visibility as indicated by management's willingness to provide 2011 EPS guidance in the range of $1.31 to $1.43.
- Company recently crushed earning estimates.
- Issued 2011 guidance well above estimates.
- 2010 third quarter conference call was very bullish.
- Stock is still well off of its high despite recent good news.
- Short-term price target based on a P/E of 15 on analyst 2011 EPS expectations of $1.31: $19.65.
Kemet (KEM) - Price: $15.22*; Coded as a GeoSpecial at $10.50
Kemet "applies world-class service and quality to deliver industry-leading, high-performance capacitance solutions to its customers around the world."
- GPR of 4.
- Restructuring process still in early stages.
- Upside to growth goals, since does not take into account a meaningful increase in volumes.
- Gross margins improving, but striving for further gains.
- Fiscal 2011 third quarter revenues are expected to be on par with fiscal 2011 second quarter, but has some upside.
- Break even point is lower than ever, giving the company the ability to withstand market downturns.
- Very interested in increasing investor awareness.
- Successfully completed a secondary offering of stock from investment group K Equity LLC that has removed overhang.
- Stock has had a nice run which could lead to a short-term pull back which we believe would create additional buying opportunities.
- Short-term price target based on a P/E of 15 on analyst 2011 EPS expectations of $1.77: $26.55.
IEC Electronics Corp (IEC) - Price: $7.80*; Coded as a GeoBargain at $4.98.
Provides contract electronic manufacturing services to advanced companies primarily in the military and aerospace, medical, industrial and computing sectors.
- We believe a GPR of 4 is in the cards
- One of our favorite for 2011
- Successful integration of recent acquisition
- In December announces another acquisition which will boost revenues about 21% from current base.
- Expects to be many times bigger then they are today.
- Recent acquisitions strategy enforces our belief IEC can achieve 30% EPS growth. Company had expected to grow earnings at about 17% which is below GeoBargin requirements, but we believe acquisition goals make this guidance conservative. Furthermore, per a recent power point presentation, growth objectives have been raised. Now expects revenue to grow 35% in fiscal 2011.
- Short-term price target based on a P/E of 25 on Fiscal 2010 September EPS results of $0.48: $12.00. Fiscal 2011 December first quarter results will give us more insight into 2011 near-term EPS growth expectations at which time we will adjust our price target.
US Home Systems (USHS) - Price: $4.88*; Coded as a GeoBargain at $4.29.
US Home Systems Manufactures or procures, designs, sells and installs custom quality specialty home improvement products.
- GPR of 5
- Fiscal 2011 analyst EPS estimates of $0.50 indicate growth of 100%, assuming the company meets 2010 estimates of $0.25.
- Strong EPS performance for each of the last four quarters.
- Operates in a sector that often benefits from consumers’ choice to upgrade current dwelling as opposed to purchasing a new home during recession periods.
- Major risk is it’s heavy reliance on relationship with Home Depot.
- Short-term price target based on a P/E of 15 on analyst 2011 EPS expectations of $0.50: $7.50.
Versar (VSR) - Price: $3.35*; Coded as a GeoSpecial at $3.01
Versar is an international professional services firm supporting government and industry in national defense.
- GPR OF 5
- A turnaround story. Company has rectified problems that plagued it during fiscal 2010.
- Company has quickly returned to profitability after dismal 2010.
- Stock has sold at much higher levels in the past, when the story line was not as strong as it is now.
- Insider buying
- Strong backlog
- Short-term price target based on a P/E of 15 on our 2011 EPS expectations of $0.35: $5.25.
Navistar Intl Corp (NAV) - Price: $56.49*; Initiated a short-term trading position at $58.06
Navistar is a holding company whose subsidiaries and affiliates produce international brand commercial and military trucks
- GPR would be at least 8 if not for fiscal third quarter ending July 2011, when EPS growth temporarily slows.
- EPS expected to grow 50% in each of next two years to $4.63 and $7.07, respectively.
- Stock has yet to react to positive fiscal 2010 fourth quarter results. Missed estimate on GAAP basis, but astute investors will realize that the company beat on non-GAAP basis.
- Direct economic recovery play.
- Short-term price target based on a P/E of 15 on analyst 2011 EPS expectations of $4.63: $69.45.
RPC Inc. (RES) - Price: $18.11*; Coded as a GeoSpecial at $18.55
Provides a broad range of specialized oilfield services and equipment primarily to independent and major oilfield companies engaged in the exploration, production and development of oil and gas properties throughout the United States.
- Improving economy will lead to increase in demand for oil exploration.
- Was one of our recent successful short term trades.
- Stock has pulled off highs likely because investors have lightened up on post split shares. We see this as a buying opportunity to reestablish a position.
- Increased dividend.
- 2011 EPS expected to grow 62%, but stock sports only a PE of 11.6 on $1.56 split adjusted EPS estimate.
- Short-term price target based on a P/E of 15 on analyst 2011 EPS expectations of $1.56: $23.40 (conservative).
Global Defense (GTEC) - Price: $16.46*; Coded as a GeoSpecial at $15.33
Global Defense is a full-service IT and government solutions firm with a strong track record of past performance supporting mission-critical U.S. intelligence, defense and law enforcement programs in highly secure environments.
- Operates in industry that will see increased demand as company addresses homeland security solution.
- Company claims to have several advantages such as having an intimate relationship with customers and an ability to quickly respond/resolve customer emergencies/operational breakdowns. Focus is on predictable work and superior customer service. Also targets higher margin and highly technical areas of its served markets.
- This is a sensitive industry which results in customer loyalty to competent firms.
- Large predictable backlog.
- Short-term price target based on a P/E of 25 on analyst 2011 EPS expectations of $0.89: $22.25. We have not yet valued GTEC on 2011 estimates of $1.15, as we believe they are conservative.
American Biltrite - Price: $6.75*; Short-term trading position at $5.85; coded as a GeoSpecial at $6.88.
American Bitrate operates domestically through two businesses, the Tape Division and K&M Associates L.P. In addition, the company owns a controlling interest in Congoleum Corporation, a manufacturer and producer of resilient floor tile and sheet vinyl flooring.
- GeoSpecial (Special situation play)
- Stock price has been depressed due to legal issues related with one of its past flooring subsidiaries (Congoleum). Issue revolves around asbestos lawsuits against this subsidiary.
- Per recent successful chapter 11 proceedings of Congoleum, the company no longer has an ownership interest in Congoleum.
- Claims to have more then adequate insurance coverage for future claims tied to its past involvement with old subsidiary.
- Stock is thinly traded and will move quickly if company can put together a string of strong profitable quarters similar to its 2010 third quarter when it reported 2010 third quarter EPS of $0.59 vs $0.11 in the 2009 comparable period.
- Although we expect to see some PE expansion, we do not see maximum expansion due to lingering affect of legal issue that will last for many years and a risk that claims could exceed insurance coverage. Company will still be exposed to past litigation due to involvement with old subsidiary.
- Challenge going forward will be to achieve reasonable revenue growth in a mundane industry.
- We are banking that the a repricing of risk premium (via P/E multiple expansion) will occur now that Congoleum is not part of ABL business.
- Short-term price target TBA.
LSB Industries manufactures and sells commercial and residential climate control products, such as geothermal and water source heat pumps, as well as chemical products for the mining, agricultural and industrial markets.
- Recent EPS history has been lumpy, but GPR is a solid 5.
- Seeing strength in markets that will continue to improve with economic recovery.
Jack Golsen, LSB’s Board Chairman and CEO stated,
“We are seeing positive signs in our Climate Control Business in sales, new orders and backlog. Our Climate Control backlog also continues to move in the right direction, with sequential quarterly improvement since year-end 2009. We are encouraged by the improvement in our commercial products order level and we believe our aggressive advertising and marketing campaign and the enactment of federal tax credits for geothermal heat pumps have had a positive impact on sales of those highly energy efficient and green products.”
Turning to LSB’s Chemical Business Mr. Golsen continued,
“The current outlook points to positive supply and demand fundamentals for the types of nitrogen fertilizer products we produce and sell, although, during the third quarter, our agricultural product sales were impacted by weather conditions in certain of our markets. We are, of course, pleased that the prior Facility is producing ammonia and look forward to the contribution it will make in the years to come. We are also optimistic about improvement in the industrial and mining markets we serve as the economy continues to recover.”
- Backlog is significantly up from prior year.
- Appears pricey at a P/E of 31.2 on 2010 EPS analyst estimates of $0.77 and a P/E of 14.1 on 2011 EPS estimates of $1.70. However, the company has been beating analyst estimates and given 2011 estimate EPS growth rate of 121%, we are willing to value shares at a P/E of 20 on 2011 EPS estimates.
- Short-term price target based on a P/E of 20 on analyst 2011 EPS expectations of $1.70: $34.00.
*Price as of business close on Monday, January 4, 2011
**For more on GPR, please see this.