Dave Schaeffer, CEO of Cogent Communications Group, Inc. (CCOI) says the there are two major trends occurring simultaneously in terms of data usage. The first is the “product substitution” of Internet over every other telecommunication service and product.
“Everything is moving to the Internet. Voice is going over the top in VoIP, video is going over the top, and people are turning off linear video channels to replace them with on-demand using the Internet,” Schaeffer says. “That is driving unit volume growth, but because of technological advancement, price per bit continues to fall.”
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The other key trend, Schaeffer says, is that Internet is becoming the primary mechanism to deliver video. Schaeffer believes both trends are positive for Cogent in part because the company doesn’t have a legacy business that is being eroded.
“Anything that causes growth in the Internet is a positive for us. In fact, our corporate business has grown organically sequentially for 36 consecutive quarters as a public company at an average growth rate of 3.3%. Our service-provider business has grown at an average of 2.7% sequentially quarter over quarter.”
Additionally, Schaeffer says Cogent has a cost structure that enables the company to sell at low prices while generating high cash flow.
“We have been fortunate in that we have been producing free cash from operations for eight years,” he says. “We pay a dividend, and we have grown that dividend every quarter sequentially since issuing it.”
Analyst Ben Isaacson of Scotiabank Global Banking and Markets says Agrium Inc. (USA) (AGU) is a misunderstood story, because unlike most publicly traded fertilizer producers, 50% of Agrium’s EBITDA comes from its retail business.
“Retail is known for providing investors with stable and more predictable free cash flow. Over time, as they continue to build up their retail business and dilute their wholesale commodity business, we expect that the stock will get a re-rating as investors reward Agrium with a higher multiple for that more stable free cash flow,” Isaacson said.
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Isaacson believes Agrium’s free cash flow can grow from zero today to nearly $1 billion in 2015 and potentially up to $1.5 billion in 2016. The second part of the story, he says, is what Agrium does with that cash.
“We think cash generated should be returned to shareholders, in the form of dividend hikes and share buybacks, rather than continuing to empire build. In summary, we think Agrium can increase its dividend to $4 per share from $3 per share over the next 18 to 24 months,” Isaacson said.
Portfolio Manager Roger Vogel of Silvercrest Asset Management Group says US Ecology Inc (ECOL) has significant franchise value, and its recent acquisition of EQ – The Environmental Quality Co. should prove to be quite accretive in the next couple of years.
“US Ecology, one of the largest hazardous waste landfill companies in the United States, is a very interesting company. As you might expect, this is a business that has significant barriers to entry. It’s hard to get landfill capacity permits, so there is a lot of franchise value,” Vogel said.
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Vogel says what’s most intriguing about US Ecology is its recent acquisition of competitor EQ – The Environmental Quality Co.
“This [acquisition] greatly enhances US Ecology’s geographic footprint and expands the company’s service offerings,” Vogel said.
“The company has already been a solid performer for us…This is a hard asset to replicate, and we think US Ecology is certainly quite valuable from that standpoint, as well as being a solid company on an operating basis,” Vogel added.
Timothy Taylor, Globalstar, Inc.’s (GSAT) Vice President of Finance, Operations and Strategy, says the company’s research and development efforts are currently twofold. He says one area of focus is the product front and leveraging in-house engineering teams.
“We focus on designing and producing satellite components that are small and inexpensive enough to fit into the smaller devices preferred by our customer base,” Taylor says. “Our teams work on advanced plastics technology, user-interface upgrades and — very important to satellite communications — battery technology.”
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Additionally, Taylor says the R&D team is focused on upgrading the company’s ground infrastructure. He says the current system is about 15 years old, and updates will meaningfully improve the user experience.
“That means that data speeds will be increased by 25 times, and the network protocol will be upgraded to modern technology,” Taylor says. “At the end of the day, this results in much faster transmission speeds, which will significantly improve our competitive position.”
Ted Deinard is the CEO of ARC Group WorldWide Inc’s (ARCW) ARC Wireless, LLC. He says his segment of the business has been acquisitive in the past, and plans to grow in that manner.
“We have made acquisitions and announced several of them,” Deinard says. “And where they make sense, we are certainly going to continue to look at that.”
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In addition, Deinard says ARC Wireless will also grow organically through new product launches. He says the company’s small size makes growth attainable.
“Every new product we come out with brings significant growth. When you start from a smaller base than some of our competitors, like we have at the moment, every new product gives us many new opportunities and many more connections and many opportunities for growth,” Deinard says. “New products, new customers, potentially new partners are all feeding into our growth strategy.”
Managing Director Roger Vogel of Silvercrest Asset Management Group says BancorpSouth, Inc. (BXS), a Mississippi-based regional bank, should continue to see improvements on its expense structure as the CEO emulates his previous successes.
“We purchased BancorpSouth about a year ago, initially on the promise that a new CEO, Dan Rollins, brought to the situation. We knew Dan very well from his previous employer, Prosperity Bank (PB), which is one of the highest-performing banks in the country,” Vogel said.
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Rollins had significant opportunity at BancorpSouth to rationalize the expense base and rejuvenate loan growth, Vogel says, which so far has played out.
“We still believe Dan will continue to work on the expense structure of the bank and probably pursue some acquisitions as well. As a result, we think there is still at least 20% upside,” Vogel said.
Portfolio Manager Roger Vogel of Silvercrest Asset Management Group continues to hold Ross Stores, Inc. (ROST), as he believes the stock is deeply undervalued and expects ROST to grow both its store base and same-store sales.
“When we look at Ross, we think it should be able to continue to grow the store base perhaps in the mid-high single digits over time. Hopefully, Ross will also have some same-store sales growth to enable an earnings CAGR in the low-mid double digits over our forecasted time period, four years from now,” Vogel said.
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With an approximate 12% earnings CAGR and targeting a valuation at the current market multiple, Vogel believes Ross’ stock is deeply undervalued, and as a value investor he is used to the ebbs and flows that may come with investing in retail.
“There will be times, like now, when the retailing environment is not particularly robust, so Ross’ last couple of recently reported quarters have been somewhat mediocre,” Vogel said. “As long as we think the basic model is intact, we believe there will be periods where Ross will show stronger same-store sales growth, and investors will become more excited with the name.”
Richard Vanden Boogard, Associate at Jacobson & Schmitt Advisors, says Enterprise Products Partners L.P. (EPD) is focused on generating returns on its investments and is a strong play on the U.S. energy theme.
“What we like about Enterprise is that they’re pretty laser-focused on generating returns when they invest, number one. Number two, they seem, from our vantage point, that they are very focused on the people they have inside the company and their employees, and they recognize that their employees are very important to the success of the firm,” Vanden Boogard said.
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Vanden Boogard says Enterprise Products has grown significantly over the years, and as the U.S. position in energy solidifies, EPD is in a strong position to keep generating returns.
“Because they have long-term contracts and tend to have a — it’s hard to say a guaranteed rate of return, but a much more known rate of return when they invest, that markets will reward them for investing heavily. We think there’s a long runway for Enterprise as this infrastructure, this energy infrastructure in the United States is built out,” Vanden Boogard said.
Associate Richard Vanden Boogard of Jacobson & Schmitt Advisors says Amphenol Corporation (APH) plays to the proliferation of electronics theme that his firm is eyeing, and also has other characteristics he looks for in an investment.
“Amphenol is a connector company that delivers electrical connectors and interconnects. So that plays to one of the things that we like, and they have a very entrepreneurial culture,” Vanden Boogard said. “They have shown that over time they do a wonderful job of buying companies, and you can’t say integrating them, that would be the wrong word, but letting their people manage those businesses well.”
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Mr. Vanden Boogard adds that not only is Amphenol Corporation shareholder friendly, it is a low-risk company.
“They are also in a good spot where we think is a great place to participate in the proliferation of electronics seemingly everywhere, in a way that doesn’t really require we make a big bet on some sort of technology. The obsolescence risk for something like Amphenol is quite low, because it’s simply connectors,” Vanden Boogard said.
Portfolio Manager Sonu Kalra of Fidelity Investments characterizes Comcast Corporation (CMCSA) as a blue-chip company. Comcast holds a dominant position in core cable markets, he says, and is the leading provider of high-speed Internet.
“The key here is their broadband business. If I were to take a survey of consumers and ask them what’s the one utility you can’t live without, most people would end up saying ‘Internet’ these days,” Kalra said.
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Comcast Corporation’s recent acquisition activity should also position the company well for the future, Kalra says.
“They’re in the process of acquiring Time Warner Cable (TWC), which would consolidate the market even further. So I think there is a lot of room for them to grow out,” Kalra said.
