Outstanding Management Team, 32% Gains And Strong Real Estate Auction Foothold Make KWIC The Company To Watch In 2010, According To Industry Expert
January 29, 2010 - The Wall Street Transcript has just published TWST Investing Strategies Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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ARNOLD URSANER started CJS Securities, Inc., in 1997, named after his three children, and it has grown to 10 analysts. Clients of CJS include leading institutional mutual funds, banks and investment advisors. He has over 30 years of brokerage industry experience. Before starting CJS, he worked at Bear Stearns as a Managing Director in Equity Capital Markets, responsible for the marketing and distribution of IPOs and follow-on transactions. Earlier in his career, he was in institutional sales at Smith Barney and then First Boston. CJS Securities has enjoyed growing recognition. Mr. Ursaner received the 2002 Nasdaq-Starmine Analyst Award for Top Stock Picker in commercial services and supplies. In 2003, he received the "Best of Wall Street" award, given out by The Wall Street Journal, for general industrial services. Institutional Investor magazine, arguably the top publication for professionals in the industry, presents its Home Run Hitters Award for analysts who had some of the top performing ideas for the previous year. In 2003, it recognized CJS for having two of the top five small cap ideas of 2002.
TWST: What are some of the companies that you are looking at and doing research on.
Mr. Ursaner: One of our newest ideas indicative of the way we think about additions to coverage is Kennedy-Wilson (KWIC). The company is a way to invest in what we think will be a negative trend in commercial real estate over the next one to three years. They are a leading provider of real estate auction services and they also have a fee-based property asset management business. It also has an real estate investment portfolio and will be using the funds raised to expand its portfolio buying distressed properties during the expected downturn. My analyst, Jason Ursaner is the only current research coverage on the name. It was formed by a reverse merger of what had been a public company into a special-purpose acquisition company or SPAC completed in mid-November 2009.
We've taken a very conservative approach towards the earnings outlook for this new company, but believe KWIC could essentially double its EBITDA for each of the next three years, from 2010 through 2012. We are not factoring in asset sales or earning promotes on exceeding targeted returns on individual properties. Kennedy-Wilson can be thought of as a general partner in the real estate area as opposed to a limited partner. The management team has a tremendous historic record. Over the last few years they've shown 32% gains, net of fees on the transactions they have undertaken and because the historic financials do not capture any of the underlying current business of the company, it is not even yet on Wall Street's radar screen, a process we expect to occur early in 2010.They are a leading provider of real estate auction services.
TWST: What about another company?
Mr. Ursaner: Another name we recently initiated coverage on is Neenah Paper (NP). It was spun out of Kimberly-Clark in 2004. Frequently when you have a carve-out, the parent company will put substantial debt on the new company, especially if it generates good cash flow. Neenah is the #1 supplier of premium printing and writing papers. These are used when you get fancy invitations to weddings and things like that. It's a much higher quality of paper. Shares have been under pressure since mid-2006. They exited the commodity pulp business and sold some timberland assets while enhancing their specialty paper product offerings through a series of acquisitions. They have been severely impacted by their debt load and the recession.
One of the hidden values in Neenah is they have 500,000 acres of timberlands in Canada, which they have publicly indicated they intend to sell. We conservatively estimate that the sale proceeds could be as much as $70 million. The company has a free cash flow yield of almost 15%, which is being used to reduce some of the debt they took on for the acquisitions, so earnings will benefit from deleverage. While people remain concerned about the economy, the specialty premium type paper they make is used in much different applications. It's not tied to office type white paper, but much more specialty products.
TWST: I know you don't have a formal sell discipline, but what are the factors that would make you recommend a sale for your clients?
Mr. Ursaner: The primary factor that should cause an investor to sell shares in a portfolio company is if there is a change in the underlying reason that you bought the stock in the first place. If that changes, you must reassess the stock. If you thought they had an exciting new product with a competitive advantage but find out that has changed, if you thought management was going to sell a business and chose not to for reasons that were not clear, did management take on excessive financial risk, these are all valid reasons one should consider selling a stock. There are other factors that can affect one's view.
If we spoke over the last three years, one of the more exciting areas that we've been focused on for new investment is a build-out of transmission and distribution for electric utilities. We are seeing a fairly rapid change. Towards the end of 2009, a number of utilities chose to slow down or postpone build-outs of transmission and distribution projects. What we don't know is whether that's a three or six-month process or whether that will prove to be a two or three year process and it affects our views on companies in the space such as Valmont Industries (VMI), which manufactures highly engineered utility poles; AZZ Corp, which provides products used in the back end of transmission and distribution; Powell, which is a supplier of arc equipment used in power generation. These are names that we have been quite enthused about over the last few years, but the next six to 12 months could be quite uncertain. The other place we look for sale candidates is where there is a fairly dramatic negative secular trend change underway.
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