"Small-Cap Opportunities", a report published by Goldman Sachs (GS) Equity Research, highlights single stock opportunities within their small-cap universe. Defined as companies with a market-cap under $3.5 billion, these companies show promising growth prospects and offer an average upside of 20% to their share price. The stocks analyzed in the report are all small-cap stocks with potential profit opportunities. The report is published on January 13th, but it isn't publicly available. We summarized Goldman Sachs' thesis, followed by our take on these stocks:
Aeroflex Holding Corp. (ARX) provides a broad range of advanced technology solutions to the defense, cellular, aerospace and broadband communications markets. Currently trading at $12.69, Aeroflex is at a 10% discount to its 12-month target price of $14.00, and has been assigned a "CL-Buy" rating. Although GS considers Aeroflex Holding's exposure to defense spending (30%-40% of revenues) a key risk, the analysts believe that some positives may surface from the C4Q11 guidance update. GS foresees a possible acquisition of Aeroflex Holding in 2012, mainly on account of its 4G LTE test, along with its high reliability microelectronics franchises. The company is in a position to do a tax-free spin of either of these two segments.
Aeroflex is trading at a forward P/E ratio of 16x as compared to the 14x for the sector. Though the company may present a short term opportunity if this acquisition deal materializes, recurring losses (FQ12012 net profit margin at -3.2%) may erode value. We are neutral on Aeroflex.
Knight Capital Group, Inc. (KCG), with a $1.13 billion market-cap in the 'Market Structure' sector, has been assigned a "CL-Buy" rating by GS. The stock's 12-month target price of $13.00 presents an upside of 7% from the current price of $12.10 per share. Knight Capital Group's stock repurchase authorization of approximately 15% of the market-cap may not only provide an impetus to the stock price, in turn benefiting the investor, but it will also support bottom-line growth. Though GS identifies lower volumes and higher expenses as key risks, a series of cost cutting measures by the company may provide additional operating leverage to the business.
Knight Capital Group is undervalued on its Price to Book multiple, trading at a P/B ratio of 0.89x compared to the sector's ratio of 1.12x. Net profit margin has improved over the last quarter, i.e. 11.7% in the quarter ending Dec' 2011 compared to 6.7% in the quarter ending Sep'2011. We are bullish about Knight Capital.
NeuStar, Inc. (NSR), founded in 1996, provides communication services via its three defined business segments (Carrier, Enterprise and Information services) catering to a vast customer base. Originally founded to meet the government's Local Number Portability requirement, Neustar will stand to benefit if the contract is renewed, as the segment accounts for more than 50% of its revenue. GS identifies the sound nature of Neustar's business, its recurring revenue base, its low exposure to the distressed financial sector and European markets, and its EPS growth as its key drivers in the short term. GS estimates the company's FY12 earnings per share at $2.55, which is 10% above the consensus estimates. GS believes that the true potential of Neustar is yet to be recognized.
Estimates are expected to increase once the earnings addition from share repurchase, and the TARGUSinfo acquisition is realized. The stock has been rated a "CL-Buy", as it carries a potential upside of 22% in its target price of $43.00. We are bullish about NeuStar as well.
Onyx Pharmaceuticals, Inc. (ONXX) is the producer of Nexavar, the only systemic therapy approved for liver cancer. As current revenues are primarily driven by Nexavar, Onyx Pharmaceuticals is expected to witness a 24% increase in topline after the launch of its new cancer drugs, Rego and CFZ expected in 2013 and 2014 respectively. Valued at $47.00 per share, the target price indicates a potential upside of 11%, and is rated as a "CL-Buy" by GS.
In the short-term, trial data from tests may be a catalyst to the stock price, offering investors an opportunity to book gains. We are bullish about Onyx.
Sanderson Farms, Inc. (SAFM) is expected to witness an improved bottom line as the gap between the chicken supply and demand narrows. An oversupply of chicken has resulted in price declines, thus hurting profitability. GS estimates the company's earnings per share to increase by 450% in FY13 over FY12, as the prices pick up momentum. The stock is currently trading at $47.41, which is at a 27% discount to its 12-month price target of $60.00. GS maintains Sanderson Farms in its conviction list, and has assigned it a "CL-Buy" rating. Sanderson Farms has a dividend yield of 1.3%.
Sanderson Farms' profitability, after hitting as low as -10%, has started to improve as the demand-supply gap narrows (latest net profit margin was at -3.8%). The company's stock is slightly undervalued on its price to earnings multiple at 14x, compared to the sector's 16x. We believe that some improvement in price and a reduction in supply will improve profitability and remove pressures on the stock price. However, we are long-term neutral on Sanderson Farms.
Synchronoss Technologies, Inc. (SNCR) is a provider of automation software and cloud technology solutions. The company, directly linked to connected device adoption, is expected to witness a growth over 25% in its earnings per share by 2013. GS has assigned a "CL-Buy" to Synchronoss Technologies and estimates the 12-month price target at $37 which depicts a 25% potential upside to its current price of $29.70. Strong wireless trends in the industry, and a possible surge in the transaction fee from $7-$10 to $14-$20 are both expected to drive earnings even higher. We are bullish about Synchronoss Technologies as well.
Western Refining, Inc. (WNR) stands to benefit from the ongoing "WTI discount", a robust free cash flow outlook, and sustainable crude oil sourcing advantages over the non-Mid Continent refiners. Deleveraging Western Refining's capital structure and the recently announced dividend of $0.04 per share are both positive signs that the company is working towards efficient capital allocation. GS has assigned a "CL-Buy" rating to the stock, with a potential upside of 42% indicated in the price target of $21.00 (current price $14.78).
Western Refining trades at a forward P/E multiple of 5x compared to the sector's P/E at 9.7x. The WTI price discount has bode favorably for the company as it has been able to maintain a net profit margin of 4%. Billionaire investor David Tepper is among the WNR investors. We are also extremely bullish about Western Refining.