UBS Investment Research recently published a report entitled “U.S. Research” on December 30, 2011. It isn’t publicly available but we will summarize its main points. The report lists UBS' top stock ideas for 2012. In this article, we will discuss their most-preferred stock ideas for the Industrial sector. This is the first of two articles (read Part II).
Spirit AeroSystems Holdings (SPR) designs and manufactures commercial aero-structures on a global scale. UBS has given the company a buy rating. UBS expects Spirit AeroSystems to outgrow its peers on account of the greater leverage given to production rate increases. With an increase in production of the 737 and the 777, Spirit AeroSystems is expected to improve its cash flow significantly. UBS also expects cost reductions and lower advance payments on the 787 to have a positive impact on the company’s cash flows. Shares of Spirit AeroSystems are currently trading around $22 per share and are expected to reach a price target of $23.
CSX Corp. (CSX) provides rail-based transportation services. UBS has given the company a buy rating as it believes that CSX has the highest degree of pricing power in the North American railroad sector. Its core price grew by 7.1% in 2011. Despite the recession, the company’s management managed to limit any damage to margins and earnings. Shares of the company are currently trading at $22.7 per share and are expected to reach a price target of $31, hence, indicating a potential upside of 36.5% in share price. Its PEG ratio of 6.1x, versus the sector average of 7.4x, is also the cheapest. Jim Simons’ Renaissance Technologies had $23 million invested in CSX at the end of September.
Delta Air Lines Inc. (DAL) provides scheduled air transportation for passengers and cargo. UBS has given the company a buy rating. According to UBS, the merged Delta/Northwest is expected to generate strong earnings and cash. The company is also expected to de-lever its balance sheet aggressively, with debt for equity swaps driving shares higher. UBS expects the company to generate a free cash flow yield of 30% in 2012. Shares of Delta Air Lines are currently trading at $8.3 per share and are expected to reach a price target of $12 per share. The price target given by UBS is based on a 6x the enterprise value to EBITDA ratio. Billionaire David Tepper had $21 million invested in Delta at the end of September.
Ford Motor Co. (F) designs, manufactures and distributes vehicles and parts. UBS has given the company a buy rating because it expects the U.S. auto market to grow in 2012. UBS is forecasting an increase in sales of over 4.5% in the U.S. alone. Operating margin for the company will expand with incremental sales due to Ford’s high operating leverage. UBS is bullish on the ability of Ford to increase its market share and improve its pricing. Shares of the company are currently trading at $11.7 per share and are expected to reach a price target of $14 per share, indicating a potential upside of around 20% in share price. The price target is based on UBS’s 4x EBITDA estimate for 2012.
LyondellBasell Industries (LYB) manufactures and sells chemicals and polymers, refines crude oil, produces gasoline blending components, and develops and licenses technologies for the production of polymers. The company has been given a buy rating by UBS. After its exit from bankruptcy protection, the company has reduced its costs and increased productivity. The company is paying a special dividend of $4.50 per share due to strong operating results and significant cash generation. LyondellBasell is also looking for an investment-grade credit rating. UBS expects the company to improve its balance sheet and to book peak earnings from the ethylene cycle. By 2014, the company may generate $750 million in incremental EBITDA due to the expansion and retrofit projects. Shares of the company are currently trading at $34.4 and are expected to go north of $41.5. The company is trading at 3.8x its 2012 enterprise value to EBITDA, indicating a 25% discount to its peers.
Alpha Natural Resources (ANR) produces, processes and sells coal in the U.S. The company has been given a buy rating by UBS. The company’s merger with Massey Energy (MEE) is expected to prove beneficial for 2012 as synergies are realized and the outlook of the merger improves. Alpha Natural improved upon the employee turnover problems at Massey even before the merger was finalized and it began to aggressively repurchase shares right after. Alpha Natural is the largest exporter of coal, offering exposure to the met and thermal coal markets. Shares of the company are currently trading around $21 per share and are expected to go north of $58, indicating a potential upside of 176% in share price for 2012. Billionaire John Paulson cut his fund’s stake in ANR by 46% during the third quarter.