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Far from ordinary, our roots lie on the investment side, but we have been around the startup block a few times. This helps us bring a unique perspective to markets and stocks. We look for under-covered ideas in markets outside the U.S., while also focusing on bringing to light the short case for... More
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  • 1 Of Retail's Biggest Turnarounds Further Along In Its Turnaround

    J.C. Penney (NYSE:JCP) is one of most talked about turnaround stories in the investment space today. The big news is that Penney is closing 33 of its underperforming stores, meaning some two thousand jobs will be lost. On the plus side, the move will save the company some $65 million per year. Even still, the retailer is back down near decade lows.

    Just as the airline industry has gone through rationalization over the last half decade, the retail industry could use a similar breakthrough. This includes closing a number of underperforming stores. J.C. Penney has already gotten out in front of the store closings, announcing, last week, that it plans to close 33 stores, that's 3% of Penney's store base. The move is expected to be the first of many to help bring more rationalization to the industry, by decreasing the number of underperforming stores.

    Other major retailers looking to close stores include Aeropostale (NYSE:ARO), which plans on closing 175 stores over the next couple years, and Wal-Mart has over 100 U.S. stores that have negative same-store sales declines of more than 3 percent.

    More specially, for Aeropostale, it is looking to close upwards of 50 stores in fiscal 2014, and remodel another 25. The company is looking to invest upwards of $35 million in 2014 to make certain infrastructure investments and remodel stores. Compare that to the $82 million the company spent on capital expenditures in 2013. The other thing is that Aeropostale is trying to do includes targeting more fashionable products, other than just jeans and t-shirts.

    However, it still doesn't appear to be a worthwhile investment when looking at its future growth prospects. Aeropostale's price-to-earnings-to-growth ratio is a 3.9; anything above a 2 is considered high.

    Wal-Mart is the other major retailer needed close some stores. One of the big issues facing Wal-Mart is that its store size is daunting. Its Supercenter stores sit on nearly 30 acres of land. However, Wal-Mart does have a bright spot with its grocery offerings, helping the retailer better compete with the likes of Kroger and Target. However Wal-Mart is trading in line with major peer Target from a valuation perspective, yet, it's return on equity is 15%, 8 percentage points below target.

    Store closings just the latest in Penney's line of initiatives

    As part of the plan to revamp its stores, Penney has been opening Sephora stores within its stores. What Sephora does is draws in the larger millennial shopper base. It now has over 440 Sephora store within a stores.

    Penney has already brought back promotions, helping comparable store sales grow 10.1% year over year for the November month. Helping to further drive Penney's sales growth should be the company's realigning of its .com and ecommerce business. During the third quarter, online sales via were up 25% year over year. And in conjunction with its store closings, Penney is also bringing back sales commissions.

    Last week, Penney also changed its poison pill policy, lowering the threshold for the plan from 10% to 4.9%. This now requires investors looking to buy more than 4.9% of the company to receive board approval.

    Bottom line

    Investing in this turnaround doesn't come without risks. The retailer still operates in the "red," posting another loss, of $1.81 per share, for the third quarter. Quarterly sales were down over 5% year over year for the quarter. However, Penney is trading at 75% of its book value, which is well below the major department chains. Macy's trades at 3.7 times book value and Kohl's at 1.8 times book value. Investors with a steel stomach might be able to make money over the long-term with Penney.

    Disclosure: I am long JCP.

    Tags: JCP
    Feb 07 12:42 PM | Link | Comment!
  • Playing Mexico's Natural Gas Deficit

    It's a relatively safe bet that 95% of investors have never heard of Infraestuctura Energetica Nova S.A.B. de C.V. (IENOVA.MX), and why would they? It has minimal analyst coverage and operates in a very "unsexy" market in the unloved Mexican market.

    We are big fans, and owners, of Chesapeake Energy. This stock reminds us a lot of that company. Not so much the management issues, but more so the company's portfolio and exposure to the natural gas market.

    You see, IENOVA is a play on the Mexican energy market, but a bigger play on the Mexico natural gas market.

    IENOVA now the largest natural gas pipeline company in Mexico, behind only Pemex. The company owns 29% of the market share. Meanwhile, IENOVA owns over 50% of the market share for LNG terminals in Mexico.

    Quite simply, it's the largest private operator of natural gas pipelines in Mexico. IENOVA won over 50% of the projects offered up in for 2012 and the first quarter of 2013. The company just completed its IPO earlier this year and it hasn't been too disappointing so far; up nearly 25% over the last seven months. Compare that to the 15% or so the S&P 500 is up over the same time period.

    It's relatively new to the markets, having completed its IPO earlier this year, offering 98 million shares for MXN 34 per share.

    One of the real beauties is that the company is not just a growth story, but also a cash flow story. The company has long-term contracts. IENOVA should start churning out recurring FCF of around $270mm/year by 2015. It also has some $700mm in "firepower" for new projects. Given its ability to turn out a 10% plus IRR on its projects, $700mm investable capital has the ability to add $10/share of value for the company.

    The company has the management to get it done. At the helm as CEO is Carlos Sacristán. Carlos took over as CEO in June 2012, when the company was still Sempra Mexico. He whipped the company into shape for its IPO. Carlos also serves founded Proyectos Estrategicos Integrales in November 2001, and has situated himself as one of the most prominent businessmen in Mexico. Before Proyectos, Carlos served as a Secretary of Communication and Transportation of Mexico. He also received his MBA from Northwestern University of Chicago.

    One of the biggest drivers for IENOVA is that Mexico's energy infrastructure build out is only just getting started. This comes as the country has a very large, untapped, hydrocarbon resources.

    Mexico's energy generated by fuel type - notice that natural gas dominates

    Mexico's supply-demand dichotomy - notice that demand outpaces supply by about 25% currently, but by 2025, the difference will grow by 40%

    The company should manage to hit $270mm in recurring FCF by 2015, putting its recurring FCF yield at

    Ultimately, the stock should be trading closer to $60 to $65, and what's more is that the stock has a 4% dividend yield. This is based on a combination of a DCF and multiple valuation.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: long-ideas
    Nov 03 10:59 AM | Link | Comment!
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