What to Expect Now From These 4 Mid-Cap Gainers

Includes: ALEX, DDD, SCI, SRX
by: Rash Menaria

The following is a list of four major mid-cap gainers from Friday:



% Gain

Alexander & Baldwin



3D Systems Corp



Service Corporation International



SRA International



Here are some specifics about these stocks and what to expect from them going forward:

Alexander & Baldwin (NYSE:ALEX), a company with operations in transportation, real estate, and agribusiness industries, gained close to 20% in trade after disclosure of 8.6% holding by Pershing Square Capital and 1.3% holding by Mercato Capital Management boosted investor sentiment. Bill Ackman of Pershing Square is known for his value investing and has a successful track record of value unlocking in JC Penney (NYSE:JCP), Citi Group (NYSE:C), Howard Hughes (NYSE:HHC), etc.

The stock has been underperforming since company provided lower than expected Q1 guidance in mid march, due to higher fuel prices and an anticipated fall in tourism after Japan's quake. The company is undervalued if we look at its sum of the part valuation. Its real estate portfolio alone is worth ~ $60/share and the transportation business is worth ~ $20/share, taking the overall business value well above current $54 /share price. The stock can be bought at current levels as there is a good chance of value unlocking going forward.

3D Systems Corporation (TDSC), a designer, developer and manufacture of 3-D printing, rapid manufacturing, and prototyping systems, gained over 13% in trading due to continued buying interest after recent announcements of expansion and fresh capital raising for potential acquisitions. The company has successfully made 13 acquisitions over last 18 months. The company has a strong business strategy wherein the company generates ~65% of revenues from material and service sales and targets 70-75% of revenues through recurring sales for every printer sold.

TDSC operates at gross margins of over 45% and is expected to improve operating margins to close to 20% from 13% in 2010, backed by improved op-ex in coming quarters. The stock has soared over 50% YTD on better than expected Q4FY10. It currently trades at 23x FY12e EPS (ex-cash), which is lower when compared to peers like Stratasys (NASDAQ:SSYS), trading at 34x FY12e EPS (ex-cash). The stock can be bought on dips for a decent upside from current levels.

Service Corporation International (NYSE:SCI), a provider of death care products and services in the United States, Canada, and Germany, rose close to 5% in Friday’s trade. The company is seeing positive momentum after it recently announced an increase of $100 mn in revolving credit line facility ( $500 mn available now), interest rate improvement of ~ 100bps, and revision of certain negative covenants related to permitted acquisitions. These recent amendments will help the company’s M&A activities which can be the likely catalysts on the upside for the stock. The company may also take up a share buy back and open market debt re-purchase incase M&A opportunities are not lucrative enough. The stock is trading at 11x FY11e EPS and can be bought at dips for decent returns in medium term.

SRA International (NYSE:SRX), a provider of technology and strategic consulting services and solutions to the national security, civil government, health care and public health, and intelligence and space markets, rallied over 9% in trading. The rally occurred after Providence Equity partners announced a purchase of the company at $31.25/share at a total value of ~$1.9 billion. The deal is expected to close by Q3CY11. The 30-day counter bid period might see a rival bid [likely by BAE Systems (BA.LO)] but nothing can be said with certainty. The stock is trading at ~10x of EV/EBIDTA for CY12 (nearly 50% premium to peers) and a P/E of 20x for CY12e (~30% premium to peers). The stock might stick around these levels till the deal closes (Q3CY11), unless there is any trigger in the form of a rival bid.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.