Pillpoppinpuppy

Five Stocks Currently Raising Dividends

For many years, Kaydon has impressed me as an efficient operator with high margins and strong free cash flow. Gross margin consistently exceeds 40%. Growth has been reasonable over the past five years with revenue increasing 12% per year and cash flow 11%. Productivity has been strong, with EBITDA per employee increasing 9% per year over the past three years. The company is currently sitting on a cash hoard of more than $6 a share, net of debt that could enable it to make a significant accretive acquisition; it could also make the company an interesting acquisition target by a leveraged entity (97% of the shares are institutionally owned). Despite the accumulating net cash balance reaching $207 million at the end of March, Kaydon was made just one acquisition in 3.5 years, a $55 million purchase of Avon Bearings in late 2007, although it has repurchased $78 million of stock during the period.

The conditions underlying recent economic weakness, namely, tight credit, coupled with low energy prices, have slowed the growth in wind energy projects in 2009. Recent large additions to the nation’s natural gas reserves as a result of the advent of shale gas, threatens to reduce growth in wind energy demand, affecting investor sentiment near term. However, significant wind energy projects continue to be announced globally. (A sample list of projects is presented at the bottom of this analysis.) China could also present an opportunity. However, China appears to be largely a closed market to nondomestic manufacturers: When the Chinese government took bids in early 2009 for 25 large contracts to supply wind turbines, every contract was won by one of seven domestic companies. This is unfortunate for component manufacturers like Kaydon, because in 2009, China passed the U.S. as the world’s largest market for wind energy (nytimes.com/2009/07/1...

Expectations for Kaydon’s 2009 and 2010 earnings have declined materially. Management has taken several steps to adjust to the weak market, freezing executive salaries, eliminating salary increases across the board, closing or eliminating a number of benefit programs, significantly curtailing both temporary labor and overtime, and implementing targeted staff cuts at most locations.

KDN’s stock price is down from $59 last July to $30. At the current price, the shares trade at 9 times estimated 2009 EBITDA, which is expected to drop nearly 30% from 2008 on an expected 11% revenue decline. A multiple of nine on depressed earnings is attractive. Based on what I believe are conservative estimates in the five years following 2009, Kaydon will generate $10 a share in free cash flow. At the current stage of the economic cycle, I believe that the potential upside outweighs the downside risk.

My view is that KDN is a core position that may not appreciate in value for two or three quarters. I am reluctant to trade in and out because Kaydon could be an appealing acquisition target; even based on depressed 2009 expectations, an acquirer, assuming half of Kaydon’s SG&A expense could be eliminated in a takeover, could purchase KDN for six times EBITDA and pay off nearly 20% of the acquisition price with the cash on Kaydon’s balance sheet. In a different era, portfolio managers actually invested in stocks based on such company-specific analysis as opposed to speculating in entire industry segments using ETFs. Although that era may never return, private equity and strategic acquirers are unlikely to remain dormant forever.

A sample of recently announced projects; in the third quarter, the following wind energy projects have been announced:
Australia: (1) Roaring 40s is proceeding with the development of a 111MW wind project at Waterloo in South Australia. Vestas received an order for 37 units of the V90-3.0 MW wind turbine for a wind farm project in South Australia. The order comprises supply, installation, commissioning as well as a 10-year service agreement. Shipment of the turbines is scheduled for the 4Q09, with site delivery and installation in 2010
Canary Islands (1) Gas Natural SDG, Spain’s largest gas company, wins contracts to build 11 wind energy parks in the Canary Islands that will add 116.6 MW of capacity.
China: (1) Vestas received orders for 75 MW of turbines from a large Chinese independent power producer.
(2) China WindPower Group announced plans to develop 1,500 MW of wind turbines in Baicheng in province of Jilin; Baicheng plans to have wind capacity of 10 GW.
(3) China is now building six wind farms with a capacity of 10,000 to 20,000 megawatts apiece.
(4) Huaneng commissioned a 300MW wind farm in Fuxin in China’s Liaoning Province. The project, the second phase of a 500MW wind farm in Fuxin, will have 200 turbines installed, and will cost $454 MM.
(5) China Huadian Group announced plans to build a 100MW wind farm in Xiji County in the Ningxia Antonomous region. Intends to construct the $146 MM wind farm in two phases.
Cyprus: (1) Vestas wins order for 41 wind turbines with total capacity of 82 MW for Cyprus’ first wind park; turbine deliveries expected to begin in Q409 and commissioning to be completed in summer of 2010
Germany (1) German utility Enbw and project developer Altus have set up a joint venture to develop 150MW of German onshore wind projects. The 50-50 vehicle has the rights to develop six wind projects
(2) Vattenfall is planning to construct a 400MW offshore wind farm 70km off the North Sea island of Sylt, Germany. The project will cost around $1.5 bil. and will benefit from a feed-in-tariff of around EUR $0.22/kWh. Construction of the project is planned from 2011 onwards.
Hong Kong: (1) CLP and UK project developer Wind Prospect have secured approval for the environmental impact assessment report from the Hong Kong government for a 200MW offshore wind project in the territory. The next phase of the project is the installation of a wind mast at the proposed site for a feasibility study
Norway: (1) Enova allocated $170 MM for four wind projects across Norway, located in Fakken, Nygårdsfjellet, Hundhammerfjellet and Høg-Jæren, that will generate around 460GWh of power annually
Poland: (1) Five large offshore wind farms with output totaling almost 2000MW are being planned in the Polish waters of the Baltic Sea to come on stream in five years' time, report the country's media. The most ambitious projects are being prepared by Polska Grupa Energetyczna, with some 1000MW in the pipeline, at an estimated cost of some $4.6bil.
Scotland: (1) Statkraft AS, Europe's largest renewable energy generator, plans to invest more than $650 million building wind farms in Scotland; Statkraft is involved in seven onshore wind farm projects in the UK, including five in Scotland
(2) The Government of Scotland has granted approval to the 78MW Berry Burn wind farm. The Berry Burn plant, located near Forres, is developed by Catamount Energy and will comprise 29 turbines.
(3) The Government of Scotland has granted approvals to the 15MW extension of the Millennium project. The Millennium farm, developed by Millenium Wind Energy, currently has the capacity of 65MW, and 15MW will be added shortly.
(4) Npower Renewables, the UK subsidiary of German utility RWE, has been given the go ahead to develop a wind farm of up to 16MW in Aberdeenshire, Scotland.
Spain: (1) Suzlon agreed with EUFER to supply and install in 2010-2011 224.5 MW of 2.1 MW turbines in Spain and Portugal
Taiwan: (1) KfW IPEX Bank is providing a $85 MM loan for German wind farm developers VWind AG and WPD AG to develop the 43.7MW Guanyin project in Taiwan
U.K. (1) The U.K. government published its Low Carbon Industrial Strategy, which would invest up to $170 million to support the development of a U.K.-based offshore wind industry. The money is coming from the $573 million set aside in the 2009 budget. The U.K. is counting on offshore wind to meet a binding European Union target to source 15% of its energy needs from renewable sources by 2020. The British Wind Energy Assn. and the Confederation of British Industry said the government needs to take stronger measures to overcome local planning issues, which have stalled projects and vital grid infrastructure.
U.S.: (1) Finnish turbine manufacturer Winwind agreed to supply US-based Wild Brush Energy with $200 million of turbines towards a 120 MW project
(2) BP Plc started expanding its Fowler Ridge wind farm in Benton County,Indiana; project's second phase to have a capacity of 200 MW and is expected to be completed in 1Q10; BP will use 133 GE turbines
(3) Regulators in Texas have awarded start-up Baryonyx two offshore wind leases in the Gulf of Mexico for projects that could eventually each be as large as 1.3GW
(4) EnXco & Indianapolis Power & Light entered 20-year power purchase agreement for 201 MW wind facility to be built in Minnesota; enXco to develop, build and own the project which will feature 134 GW 1.5 MW turbines; project is expected to be operational by the end of 2010
(5) BP & Clipper to build first phase of Titan wind farm in South Dakota on expectation that an economic recovery will ease financing constraints; first installation of 25 MW stage planned for this year. Total project capacity targeted to be 5,050 MW to be built in stages over 10 years at total cost of $12-15B

Amedisys' Blowout Quarter: More to Come

Take a look at LHCG as well...relative to AMED, it has a lower EBITDA multiple, a higher pretax margin, a better balance sheet and a higher return on invested capital.

Amedisys: Rally Ahead of Earnings

I think that if you like AMED, you should like LHCG even more, both on valuation and fundamentals.

LHC Group (LHCG-$23) provides post-acute healthcare services primarily to Medicare beneficiaries in rural markets in the southern U.S. It provides home-based services through home nursing agencies and hospices and facility-based services through long-term acute care hospitals and outpatient rehabilitation clinics. About 38 million persons in the U.S. are over the age of 65, and about 3.7 million are in need of intermittent care in their homes. In two decades, over 70 million will be over 65, according to the U.S. Census Bureau.

LHC’s operating performance history is impressive: over the past four years, revenue has grown by 33% per year, cash flow by 38% per year, and EPS by 22% per year, while net debt increased by less than one dollar per share. However, since its IPO in June 2005, the shares have appreciated just 11% per year. Concern about government-mandated changes to the country’s established healthcare system has sent investors fleeing from healthcare stocks as aggressively as they dumped data processing stocks prior to Y2K. Meanwhile, LHC continues to deliver: in the March quarter, EPS grew 116% on revenue growth of 49%.

At four times estimated 2009 EBITDA, LHC is trading at less than half the average EBITDA multiple that it traded at over the four prior years (Figure 15). Expressed another way, the stock price is discounting an assumption that the final reconciliation bill sent to Mr. Obama’s desk will reduce LHC’s pro forma 2009 earnings from $2.20 per share to $1.00. Ceteris paribus, that seems extreme, and there are two compelling reasons why all else won’t be equal. First, the Senate, unlike the House, is not likely to ignore the established fact that home health providers save Medicare billions of dollars per year by reducing hospital stays; therefore, home health should not be penalized disproportionately relative to other health care providers, which is what the House is attempting to inflict. Second, any legislation that would cut LHC’s earnings by 50-60% would drive a significant percentage of small competing home health providers out of business, creating material consolidation opportunities of LHC.

Home health services significantly reduce the odds that a patient will need to return to the hospital – one of the largest avoidable costs in healthcare. Home health is a lower cost substitute for high-cost hospital care and should be expanded to meet the needs of an increasing senior population. In 2007, the average Medicare payment for a home health day was $137 versus $1,447 for a hospital day. One in five Medicare patients returns to the hospital within 30 days, resulting in a readmissions cost of about $17 billion (nytimes.com/2009/05/0... Home health providers have demonstrated success in reducing the readmission rate. Yet, home health providers would be forced, under the House bill, to accept cuts that are disproportionately high relative to those being asked of other providers. This is a needlessly self-destructive action by the House and is unlikely to withstand scrutiny in the Senate, as historical precedent suggests that 20% of the home health industry would go bankrupt under the House bill (files.shareholder.com/...).

LHC’s margins have been on an upward slope for the past several years (Figure 18). Also, the company’s sustainable growth rate (free cash flow to average gross assets) has been consistently in the high teens. Note that forecast margins and sustainable growth rate are projected to decline, reflecting an effort to be conservative. Despite these assumptions, which imply an EPS growth rate of about 8% in future years, the shares are trading at two times estimated 2012 EBITDA. Also despite these assumptions, cash flow per share over the four years beginning in 2010 would be $17 and free cash flow per share would be $15.

My view is that LHC is a core position that should be sold only at an EBITDA multiple of 8 or higher. LHC does not pay a dividend, and focuses on acquisitions as opposed to repurchasing shares. Officers and directors own 18% of outstanding shares. LHC could be an attractive acquisition target. For example, the shares currently trade at an extraordinary 65% discount to estimated leveraged acquisition value (assuming a 12.2% weighted average cost of capital, fixed charge coverage of two times, and an equity component of 40%.; Figure 16). Or, assuming an acquirer could eliminate 50% of SG&A expenses, LHC could currently be acquired for less than 3 times estimated 2009 EBITDA.

Figure 15. LHC’s Historical and Forecast EBITDA Multiples

Figure 16. LHC’s Historical and Forecast Price-to-Leveraged Acquisition Value

Figure 17. LHC’s Historical and Forecast Margins

Figure 18. LHC’s Historical and Forecast Sustainable Growth Rates

Canadian Income Trusts, Small Cap Producers: Volume Decline Boosts Price

The problem I have with Cimarex is that they seem to have zero concern about their finding costs, justifying over $30 a boe for the past 3 years with their cash return doubletalk. Maybe they should read "The First Tycoon: The Epic Life of Cornelius Vanderbilt" to get an understanding of how cost control is critical in generating wealth.... These guys control costs the way the Knicks play defense. I'm sick of it.

Stock to Watch: Automatic Data Processing, Inc. (ADP)

I think you gave ASF short shrift on the dividend front. Not only has it paid a dividend since 2005, but has increased it each year by 28%, 23%, and 11%, and currently yields 2.4%. In addition to that, though, it has repurchased shares every year since 1999, to the tune of $227 million or $9 per share. And after all that, it is sitting on $5 a share in cash net of debt. I just talked myself into buying more stock....

3 Stock Valuation Bubbles Ready to Burst

Corrections I would make to the Rollins comment: (1) contrary to a risk of ROL issuing stock, the company has actually been repurchasing shares every single quarter for the past five years. (2) At 11 times consensus EBITDA for 2009, the stock is trading below both the 5 and 10-year average EBITDA multiples, so it is relatively cheap even on depressed expectations. (3) According to Bloomberg, three firms actually cover ROL, and all rate the stock "buy" (I don't include Matrix as a firm covering ROL because they are quirky.) (4) Businesses do not view pest control as a discretionary expense, but of course companies are going out of business, (5) Weather has actually worked in ROL's favor this year. I would also point out that (1) ROL has generated $4 a share in free cash flow over the past five years, which isn't bad relative to a $17 stock. (2) EBITDA per employee has increased at 4.5% per year on average for the past three years, illustrating strong productivity gains. (3) DSO's are near an all time low, indicating strong working capital management. (4) ROL pays a nice dividend. So, while the multiple at which the stock trades may seem high to you, for a high quality company like this the multiple always seems relatively high, but it is actually materially lower than where it has traded in recent years.

Why Lampert Invested in Acxiom

Note that ACXM has four analysts and not one of them has a buy on the stock. If that isn't a screaming buy signal, I don't know what is. Another company with similar cash flow and investor sentiment characteristics is CSG Systems (CSGS)