Current hot investment themes in the market are the cloud, tech M&A and dividends. What better way to capture potential upside than finding a company that has a footprint in all three camps. Step forward DuPont Fabros Technology (DFT).
All that information that magically disappears from our computers and is stored in the cloud has to go somewhere and DuPont Fabros Technology is an operator of data centers satisfies this need.
As per the company website, it primarily services New York, New Jersey, Chicago, Virginia and Silicon Valley. Although one of the smallest players in the data center world, the company has additional centers either under development or plans to add future capacity. This development all comes at a cost but the company has $30MM+ cash on hand and a large unused credit facility. Estimates vary on how much additional cost the company will incur in completing their developments but a reasonable estimate would be in the region of $40 - $65MM. While there is always risk in these types of development that the additional capacity may not be leased, the upside from a revenue perspective is substantial.
The company has a stable book of business with robust leasing booked in the 3Q 2011, showing that despite its size it is able to compete with larger competitors in this space. Its storage facilities appeal to financial firms, social media and other internet companies.
As an M&A candidate, DFT's size is a plus. It is not too large to present significant acquisition risk should it be acquired, has a geographical footprint that is attractive to potential acquirers and a stable pipeline of growing assets.
As an investor, the cream on the pie is that DFT is structured as a REIT with a 2% yield. As the build in assets comes on line, it is likely that the dividend will be increased, so whilst you wait for the potential take out you will be picking up a decent yield.
The share price is $3 below its 52 week high of $26.86 and has shown a nice bounce from hitting a 52 week low of $18.62 on October 4, 2011. There is a short interest of 16% of the float, which equates to about 9 days to cover. The stock is trading above the 200-day moving average of $23.21 and the 50-day moving average of $21.48.
All in all, having found support around the 50-day moving average and continuing to move higher, the stock could continue to tick up without the dividend being increased or any M&A news. If the latter were to come into play then a price of around $30 would not be unexpected.
Disclosure: I am long DFT.