3 Small Cap Ideas That Do Not Depend On The Fed

Includes: CKEC, FXCM, TWI
by: Adam Muller

The investment community is waiting to hear from the Federal Reserve Chairman this coming Friday. Will he discuss further quantitative easing? Will he reiterate the options the Fed has but not commit to any particular action? How will his speech impact the markets? In the short term the Chairman’s speech could cause the market to move, up or down. However, there are some investment opportunities that should perform irrespective of what is said by the Fed Chairman on Friday. The following three companies fall into this category:

Carmike Cinemas

Carmike Cinemas (NASDAQ:CKEC) is a motion picture exhibitor with theater locations in small to mid-sized communities with populations of fewer than 100,000. As of December 31, 2010, Carmike had 220 theaters and 2,103 screens on a digital-based platform including 596 screens with 3-D capability.

Carmike had strong second quarter earnings and at $6.19 per share is trading at 6.7x LTM EBITDA and only 5.3x consensus 2011 EBITDA. Further, over the past 12 months Carmike has generated over $34mm in free cash flow (a staggering 42% FCF yield). Carmike is making good use of the cash and is gearing up to grow. In the last week Carmike announced both the acquisition of several theatres and the construction of another. The acquisition is likely not reflected in 2011 and 2012 expectations.

FXCM, Inc.

FXCM, Inc. (NYSE:FXCM) is an online provider of foreign exchange trading and related services. The company offers access to over-the-counter FX markets through a proprietary technology platform. The platform offers price quotations on up to 56 f/x currency pairs from up to 25 global banks, financial institutions and market makers, or FX market makers, allowing customers to trade f/x.

At $11.35 per share FXCM has a market capitalization of $880mm and an enterprise value of $700mm. With a strong second quarter performance FXCM now trades at 8x LTM EBITDA and only 5.9x consensus 2011 EBITDA. The company pays a $0.06/quarterly dividend and has a high single digit free cash flow yield.

FXCM has strong second quarter earnings beating the consensus EPS estimate by 10.5%.

Importantly, FXCM does well when there is volatility in currency markets and in global rising rate environments. Economic and political events around the world have created increased currency volatility, which is likely to continue for some time.

Titan International

Titan International, Inc. (NYSE:TWI) is a manufacturer of both wheels and tires for the off-highway industry. Titan is one of the few companies dedicated to off-highway wheel and tire products and produces a broad range of specialty products to meet the specifications of original equipment manufacturers (OEMs) and aftermarket customers in the agricultural, earthmoving/construction and consumer markets. Titan’s earthmoving/construction market includes wheels and tires supplied to the mining industry, while the consumer market includes products for all-terrain vehicles (ATVs) and recreational/utility trailers.

At $18.97 per share Titan has a market cap of approximately $1,000mm and an enterprise value of $1,219mm. With LTM EBITDA of $124mm Titan trades at 9.9x. Titan plays on a larger global theme recently articulated by Jim Cramer. Food prices are increasing as corn and soybean prices increase. This is being driven by an evolution in developing countries to more protein heavy diets. These diets utilize more chicken and beef, which in turn requires feedstock (corn, soybeans, etc.). These increased prices provide capital to farms who buy equipment – and every tractor needs wheels and tires. Not surprisingly Titan’s consensus EBITDA for 2011 is $195mm growing to $255mm in 2012. This implies TWI is trading below 5x 2012 EBITDA.

Disclosure: I am long CKEC, FXCM.