The stock market fell on Friday as the third quarter came to an end amid continuing concern over a slowdown in the global economy and the European sovereign debt crisis. These issues are not going away any time soon. Investors need to find quality companies, follow the stocks, and take positions only when there is a significant dislocation in the valuation from fundamental value.
Here are several ideas to put on your watch list.
Carmike Cinemas (CKEC) is a motion picture exhibitor with theater locations in small to mid-sized markets 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 6.1x LTM EBITDA. Over the past 12 months, Carmike has generated over $34 million in free cash flow -- a staggering 40% FCF yield. Carmike is making good use of the cash and is gearing up to grow. Recently Carmike announced both the acquisition of several theatres and the construction of another. The acquisition is likely not reflected in 2011 and 2012 expectations.
Further, the North American box office had a strong third quarter. Boxofficemojo.com data shows third-quarter revenue was up more than 6.5% versus the third quarter of 2010. Further, the movie slate for the fourth quarter of 2011 is very strong, suggesting further box office growth that should continue well into 2012.
FXCM, Inc. (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 quotes 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 $14.02 per share FXCM has a market capitalization of $1.088 billion and an enterprise value of $908 million. With a strong second quarter performance FXCM now trades at 10x LTM EBITDA and 8x consensus 2011 EBITDA. The company pays a $0.06 quarterly dividend. 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. The stock has run recently, but the fundamentals are very strong.
Titan International, Inc. (TWI) is a manufacturer of 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 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 and recreational/utility trailers.
At $15.00 per share Titan has a market cap of approximately $790 million and an enterprise value of $1.006 billion. With LTM EBITDA of $124 million, Titan trades at 9.9x trailing EBITDA. More importantly, the company increased 2011 guidance last week to EBITDA of $180-$200 million, implying an enterprise value to EBITDA multiple of 5-5.4x. This was not a surprise to Wall Street analysts who already had a 2011E EBITDA estimate of $195 million growing to $255 million in 2012. On the 2012 consensus number Titan is trading at a paltry 3.9x. Despite this, Titan fell 8% last week and was down 30% in September to it low of the year.
The largest risk is a decrease in farm income leading to less capital purchases by farmers. The decline in corn prices last week, after a report showed increased supplies, is an issue if downward price pressure persists and corn falls back to 2009 levels.
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, which buy equipment – and every tractor needs wheels and tires.
These are three interesting opportunities to put on your radar. Remember to build positions on weakness, expect continued market volatility, and never purchase your entire position at once, in case volatility provides an even cheaper entry point.
Disclosure: I am long TWI, CKEC, FXCM.