Today - Tuesday, March 11, 2014
- Alcoa (AA +1.7%) has enjoyed a 15% run YTD, and Morgan Stanley’s Paretosh Misra thinks shares look expensive at 34x 2014 earnings forecasts vs. the historical one-year forward P/E of 14x, but the firm sees three reasons Alcoa shares could hold up nicely.
- Stanley thinks Q1 consensus looks too low; based on quarter-to-date average FX, alumina and aluminum prices, the firm sees Q1 EPS at ~$0.10 vs. current consensus of $0.04.
- The auto body sheet story has gained traction, the firm says, sensing investors may overlook weakness in near-term earnings given the focus on 2015-20.
- Alumina prices are $15/ton below the YTD peak level, but the firm cites some expectation that Indonesia may not restart bauxite export this year, which could tighten the market.
- Still, Morgan’s base case for AA stock is $11, 11% lower than today’s price.
- Fears of a China slowdown have sent iron ore prices tumbling, and BHP Billiton (BHP) and Rio Tinto (RIO) are warning of lower prices through this year, but J.P. Morgan analysts maintain a Buy rating on Brazilian iron ore producer Vale (VALE -1.5%).
- The firm thinks iron ore prices and could test Sept. 2012 lows of ~$87/ton, but prices below $110-$120 should be temporary as weaker prices should make high cost producers uneconomical and, together with a potential resumption in restocking at lower levels, should act as a buoyant force on prices.
- Also, JPM says Vale shares already have priced in a very pessimistic scenario, and valuations are attractive even with iron ore prices at $100/ton.
- The meteoric rise in Plug Power (PLUG +2%) is weakened after Citron Research says the fair value of the stock is a mere $0.50, which is a blended average of all of the company's recent capital raises.
- PLUG will issue earnings and guidance on Thursday and warns investors they "cannot trust management guidance... not even a little bit," saying the company has "a history of broken promises and failure to deliver."
- Citron claims Wal-Mart and Fedex are PLUG customers only to take advantage of the 1063 Treasury Program that gives tax credits for renewable energy.
- The summary from Citron's report: "No profits. No unique technology. No scalability. No demand. No brand equity. No media hype. No analyst support."
- Pac Crest's Brent Bracelin (Outperform, $14 PT) reports Fusion-io's (FIO +5.6%) channel partners are seeing improved demand for the company's new storage appliances and software.
- He also thinks Fusion-io could benefit from the launch of a 3rd-gen server flash module platform, and from diminishing competition. The PCIe flash module space has seen some consolidation, and Violin Memory recently suggested it's abandoning the market. But competition is still provided by Western Digital, Intel, LSI, and others.
- Fusion-io's sales were hit hard last year by declining orders from Apple and Facebook. The company is counting on a stronger enterprise push (led by new CEO/ex-H-P exec Shane Robison) and growing sales to other Web/cloud clients (e.g. Salesforce, Pandora, Yelp, Alibaba) to spark a turnaround.
- Roth Capital raises its price target on high-flying Hydrogenics (HYGS -2.7%) to $40 from $14 and keeps its Buy rating following recent Q4 results.
- The firm notes Q4 gross margin was light at 24.6% and profit missed on higher than expected operating expenses; the company affirmed guidance, which calls for a 30% gain in profits in 2014 and achieving profitability in H2 2014.
- Roth expects power-to-gas to serve as a source of long-term revenue growth, while in the short term HYGS is seeing increased customer interest for larger projects; although it is difficult to predict timing, it believes HYGS may secure large-scale orders in 2014.
- Despite today's losses, shares have gained 68% YTD.
- Knightsbridge Tankers (VLCCF +11.1%) is upgraded to Buy from Neutral with a $16 target price at Global Hunter following yesterday's news of an agreement to purchase six Capesize bulk carriers.
- Global Hunter views the deal as especially well timed considering the recent strength of the dry bulk market, particularly the Capesize segment; the firm says the $360M cost is in line with its assessments of such vessels.
- The firm believes VLCCF is now positioned to generate substantial cash flow and pay a growing dividend.
Monday, March 10, 2014
- Seth Klarman is warning of an impending asset price bubble, calling out "nosebleed valuations” in high-flying stocks such as Netflix (NFLX) and Tesla (TSLA) and warning of the potential for a brutal correction across financial markets.
- “Any year in which the S&P 500 jumps 32% and the Nasdaq 40% while corporate earnings barely increase should be a cause for concern, not for further exuberance," the Baupost Group head wrote in a letter to clients.
- "There is a growing gap between the financial markets and the real economy... and the overall picture is one of growing risk and inadequate potential return almost everywhere one looks."
- In a semi-rebuttal, Vanguard's Jack Bogle agrees stocks are in "risky territory" but says investors shouldn't be trying to time the market in any case, and the problem with selling stocks based on such a prediction is you won't know when to re-enter: "Will [Klarman] call you and tell you when it's time to get back in?"
- Shares of Cliffs Natural Resources (CLF -4.2%) can't withstand today's news of plunging spot iron ore prices prompted by weak Chinese export data; adding insult to injury, Axiom Capital initiates coverage of CLF with a Sell rating, saying the iron ore and coal miner is "living on a prayer."
- The firm thinks CLF likely will blow through its debt covenants in 2014, further cut its dividend, and likely need to do a very large dilutive equity deal - with "acute liquidity risk" if the company is not able to execute these options; $114 iron ore suggests bankruptcy is a growing reality.
- It didn’t have to be this way, the analysts lament; CLF once had a steady business selling iron to non-coastal companies, but it wanted to get in on the China play, so it purchased other mines - now it’s paying for it.
- Barron's touted high-yield energy plays CVR Refining (CVRR +4.6%) and Northern Tier Energy (NTI +0.9%) over the weekend as looking attractive on a long-term perspective after both currently go for just 6x this year's projected earnings.
- Wall Street analysts estimate NTI will pay out 44% of its unit price in total over three years through 2016; for CVRR, estimated payments over three years work out to 37% of its recent price.
- Average analyst price targets suggest 13% upside for NTI over the next year and 19% for CVRR; add that to projected yields this year of 15% for each, and the result is potential for returns of more than 30%.
- Cimatron (CIMT -14%) "seems to be one of those cases where non-professional investors that don't really know the 3D [printing] industry are jumping on the stock," says SA contributor 3D Insider in a very bearish piece.
- The author states Cimatron admitted on its Q4 CC (transcript) it expects minimal revenue from 3D printing in the near-term, and that printer makers such as 3D Systems and Stratasys offer their own software suites.
- 3D Insider also notes insiders unloaded millions of shares last year via two public offerings. "Within a quarter, the owners managed to get rid of their 40% stake, which dropped almost to 0% by September 2013."
- Earlier: 3D printer makers fall on Barron's piece
- Kirby Corp. (KEX -1.1%) is added to the Top Picks list at FBR Capital, which notes KEX's core marine transportation unit continues to exhibit solid growth, driven by the transport of petrochemicals, black oil and refined products, and the firm expects demand for these volumes to only accelerate over the next three years.
- FBR thinks fundamentals driving KEX's diesel engine services unit bottomed in 2013, and it expects the segment to be a major contributor to earnings growth in 2014 and beyond.
- While expecting steady, consistent growth in the marine business, the firm says it "would not be surprised" to see growth juiced by M&A activity in the near term, particularly in the coastal barge market.
- Archer Daniels Midland (ADM +1.9%) is upgraded to Outperform from Market Perform with a $50 price target at BMO, which believes ADM is in the early stages of a strategic "transformation" that should create earnings upside in H2 2014 and into 2015.
- The firm sees "uncanny" potential parallels between ADM and Tyson Foods: ADM has just exited a trough earnings period with EPS of $2.50-plus despite unprecedented challenges; has relatively new management that appears in a position to offer financial growth targets; should benefit from improving fundamentals; should begin to realize benefits from recent capex projects and cost savings efforts; and should deploy cash toward shareholder friendly options.
- A weekend column titled "Beware 3-D Printing!" questions industry valuations, and suggests 3D Systems (DDD -4.2% premarket) could drop 80%.
- The column highlights Whitney Tilson's critique of 3D Systems and the company's recent warning, argues 3D printing/additive manufacturing "remains slow and cumbersome," and notes the presence of rivals such as printing services firm Shapeways and leading metal printer maker EOS.
- Barron's suggests software vendors Autodesk (ADSK) and Dassault (DASTY) are a better way to play the trend (ed: 3D printing use cases account for only a fraction of each company's sales), and notes the former's efforts to automate design work by leveraging real-life info. "The goal is for a designer to input a function, letting the computer dictate the most efficient design."
- SSYS -3.1%. XONE -3.3%. VJET -1.7%.
- US Steel (X) is upgraded to Buy from Neutral with a $32 price target, up from $27, at Nomura on free cash flow potential.
- Nomura says it sees many reasons to own X after the stock's 18% correction since January; after meeting with the CEO and CFO last week, the firm has increased conviction in the company’s direction as well as the opportunity sets in the commercial, financial and operating functions of the business, and sees cash flow significantly increasing in the coming years.
- Shares -0.5% premarket.
Friday, March 7, 2014
- Barclays raised its target price for Joy Global (JOY -0.6%) to $60 from $56, seeing JOY's mixed FQ1 results as reflective of mining end markets that are still bottoming, but better than expected bookings in the quarter could be a sign of gradually improving aftermarket demand (Briefing.com).
- The firm is encouraged that JOY raised the bottom end of its FY 2014 EPS guidance by $0.10, which could indicate better visibility towards aftermarket demand and improving cost structure later this year.
- Although mining markets could remain muted, JOY's aftermarket business could pick up as miners who have prolonged their rebuild cycle in recent years will need to service aging equipment.
- Two energy investors presenting at Capital Link's MLP stress the desirability of crude oil and natural gas liquids over natural gas, and the importance of geographic diversity in suggesting six MLPs to buy now.
- Kyri Loupis, head of energy and infrastructure at Goldman Sachs, likes Oiltanking Partners (OILT), Lehigh Gas Partners (LGP) and EQT Midstream Partners (EQM) - smaller MLPs with strong growth prospects, healthy balance sheets and small distribution obligations to general partners.
- Dan Spears, a portfolio manager at Swank Capital, prefers larger pipeline players Access Midstream Partners (ACMP), Energy Transfer Equity (ETE) and NGL Energy Partners (NGL).
- Cabot Oil & Gas (COG +0.8%) is upgraded to Buy from Accumulate at KLR Group, which notes that COG's largest catalyst for growth is the Appalachian Basin Marcellus Shale, projecting ~41% production growth in 2014 as it plans to start a six-rig program to begin drilling this year.
- The firm's new $48 target price is based on the NPV of free cash flow over the life of a company using a reasonable discount rate; COG's valuation applies a 12.5% discount rate to determine the NPV of its free cash flow.
Thursday, March 6, 2014
- Alpha Natural Resources (ANR) -2.4% AH after Goldman Sachs downgrades shares to Sell from Neutral with a $4 price target, down from $6.
- Goldman cites a challenging met coal price outlook which drives its EBITDA estimates sharply below consensus; valuations near historical peak levels on an EV/EBITDA basis; competitively disadvantaged assets, including higher-cost met coal assets and lower-quality PRB mines; and high leverage levels and an incrementally negative free cash flow forecast.
- The firm says estimates need to be recalibrated lower before it could become more constructive on the stock.