Halliburton Company is in a position to report earnings growth and margin growth, even though revenue is expected to increase at a more modest pace, according to J.P. Morgan Analyst David Anderson. He credits the company’s efforts to improve operational efficiency.
“In Halliburton’s case, the company is getting more efficient with equipment and supply chain, seeking to increase margins in North America by 500 basis points over the next three years without any help from pricing – a lot of internal work to increase efficiency and improve margins,” Anderson says.
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Anderson says that in the current environment, expected margin improvement is a reason to own larger oilfield services and equipment stocks rather than smaller pure plays.
“On the contrary, we see many momentum investors trying to own some of the pure North American names, but we think that’s a mistake,” Anderson says. “I think a lot of these smaller companies in particular are going to be very much at a disadvantage to the Halliburtons, to the larger integrated players out there. So we’re shying away from those small discrete players, preferring the bigger companies that have more opportunities to grow margin without help from the top line.”
BankUnited (BKU) is a special situation stock positioned to grow approximately $1 billion per quarter, with benefits coming from recovery in the South Florida market as well as the company’s entry into the New York market, says David W. Darst, Managing Director at Guggenheim Securities, LLC.
“In 2009, [CEO John] Kanas and some private equity partners took over BankUnited from the FDIC, after the South Florida-based bank was sinking under the weight of subprime mortgages. They have since converted that franchise into more of a broad-based commercial bank with opportunities to grow, and they are hiring a lot of commercial banking lenders from larger banks,” Darst said. “There’s a very good recovery in the South Florida market now. On top of that, most of Mr. Kanas’ experience was in the New York market, which BankUnited re-entered this year with a couple more branches in Midtown Manhattan.”
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With these drivers in place, BKU is positioned to grow nearly $1 billion per quarter, Darst says, and if that rate is sustained the company is expected to double in size in three-plus years. Darst also is expecting to see earnings per share growth accelerate significantly in 2015, after the acquired bank earnings combine with new bank earnings in mid-2014.
“In the near term, the purchased assets from the FDIC are amortizing. Given the discount at which they made this purchase, they have a very high yield, so the net interest margin is going to be compressing. The growth is going to offset that margin compression, and you should begin to see the acquired bank earnings mix with the new bank earnings as you move into mid-2014. Earnings per share growth should really accelerate in 2015,” Darst said.
CIT Group Inc. (CIT) may not be getting full credit for its long-term potential, says Matthew C. Schultheis, Analyst at Boenning & Scattergood, Inc., as the company is set for growth due to its unique lending niches, such as airplane financing, and its ability to generate loans and the deposits to fund them.
“I do still like CIT Group. It’s international, and they have some interesting lending niches that they do very well, such as airplane and rail car financing,” Mr. Schultheis said. “One of the things I like about airplane finance is that if you take a long view of passenger and freight airline travel around the world, it’s very clear that there is a lot more demand out there to be built into the system. Passenger traffic is just going to keep growing for the next 20 years. There may be some blips in there, but CIT Group is involved with that long-term growth trend, and it bodes well for them.”
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Mr. Schultheis also says that CIT Group has done a solid job of improving its financing and generating loans, and at the stock’s current price of around $50, he sees a discount relative to the company’s growth potential.
“Right now we have a $53 target price, and the stock is around $50. I would argue it should easily be trading at $53, just to be in line with the multiples of its peers. There is a discount there. You also have the upside of an asset generator and a good growing company in some spaces that have long demographic benefits to them,” Mr. Schultheis said.
Randall White, President and CEO of Educational Development Corporation (NASDAQ: EDUC) reports that since severing ties with Amazon (NASDAQ: AMZN) in February of 2012 they have totally replaced the 20% of their business — $2 million — that used to come from Amazon, because of the support they received from their retail accounts. In October, he notes, the publishing division recorded its largest sales month.
“We think the Home Business Division, now that we’re more supportive of them and they’re not being undercut in price, can have growth, and actually we have just recorded five consecutive months of growth over the same period last year in that division,” says White.
But is this growth sustainable given consumer demand for e-books and purchasing online? “Time will tell,” notes White, adding that they have their own Internet presence with 7,000 sales consultants who have their own websites that EDC provides for them.
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The company’s home sales consultants are also getting into creating virtual home shows on Facebook (NASDAQ: FB). They call them Facebook Parties, where participants are all on social media sharing the books instead of meeting in someone’s home. In the past couple of months this has started to be a significant business for the book publishing company.
They are also in the e-book marketplace through the e-books that are available on their website and their 2011 investment in Demibooks, a company that has created apps of several of EDC’s books for the iPad. So far this business hasn’t been very profitable for EDC, the apps particularly; the e-books are very profitable, notes White, because it’s very inexpensive to make an e-book.
White believes that growth can come from the home business division if they can make the playing field level and prices are not being undercut. “We are not going to undercut our business, either the retail customers or the home business division,” he says, “so we don’t sell to high-volume, low-margin operations like Costco and Amazon.”
“We had a five-year decline in the home business division and to have five months up is very encouraging,” adds White. “So we think it’s all based on the strategy of trying to be supportive of the sales force and not being undercut, and we think that’s going to grow, and I’m excited about that. And by the way, I’m the largest shareholder and I haven’t sold my stock. So buyers can make their own choices about that, but I think this upcoming year is going to be better for us.”
John Wiley & Sons, Inc. (NYSE: JW.A) has been hard at work digitizing their business since the end of the 1990s, but the focus today is on using technology to grow their service-based and solutions-based businesses. Currently those businesses represent 10% of revenue, but the company expects it to grow to 25% of revenue by 2017.
The areas that the publisher is focused on for future growth, according to Stephen Smith, President and CEO, are online learning — both in the formal four-year and two-year educational segment — and also corporate online learning. “There are big opportunities for us,” Smith says, “and we’ve made some acquisitions in that space and expect that we will continue to do more of that.”
A year ago, when Wiley acquired Deltak, an online program management provider, Deltak was doing about $54 million in revenue. “It’s on a trajectory now to grow 20% plus for the coming years,” says Smith. “We see the growth of Deltak as a major contributor to us moving from 10% to 25% of revenue from our solutions-based businesses.”
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With Wiley’s base businesses somewhat growth-constrained, the company has identified technology-enabled training and talent assessment as a high-growth sector. “The continuum between online learning and talent management that we call the career arc of the professional is where we identify a number of places where we can play and add value; these are all areas of growth for the company,” says Smith.
The other principal growth area is around their research content. As a journal publisher, they have long-term publishing relationships with 800 learned societies. They see opportunities to build on those publishing relationships to provide societies with more of what they need, which is usually around how to interact and retain more members and to provide additional services to those members, such as continuing professional education and online learning.
This focus on technology-enabled learning will enter Wiley into a new competitive arena. The talent management space, says Smith, is a very fragmented industry, with a very large number of small players and very few big ones; “a company like Skillsoft would be a direct competitor,” says Smith. “When you think about an SAP (NYSE: SAP) or an IBM (NYSE: IBM), there is some overlap there but not really head-on competition in terms of strategy,” he adds.
The company is also using technology to make better internal customer decisions. They recently launched an internal center of excellence around digital analytics using tools from vendors like Salesforce.com (NYSE: CRM) to be able to make better use of customer data to inform decisions around sales and marketing and product development. They are also launching an internal certification program for marketers and digital product managers around digital analytics to upgrade those skills across the organization, because they think those will be vital to their success in the years ahead.
After years of burning through cash and a restructuring effort begun a year and a half ago that is now complete, TheStreet, Inc. (NASDAQ:TST) is now headed into a growth phase. “We have set the stage for margin expansion,” says Elisabeth DeMarse, Chairman, President and CEO of the financial media company.
“As the country recovers from the financial crisis,” says DeMarse, “we are seeing an uptick in interest in all of our products. Also, as weaker competitors drop out and decline, we’ve been gaining market share. There’s a ‘winner-take-all’ effect when the industry consolidates during a period of secular weakness. We are well positioned to compete and gain in market share.”
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Pleased with the year-old acquisition of The Deal that increased TheStreet’s institutional presence, the company has an active M&A program in place with the cash to fund it. Future acquisitions must be accretive, according to DeMarse, and will focus on the finance sector, both B2B and B2C. With their dual-monetization model — 80% of revenue comes from subscriptions and 20% from advertising — DeMarse believes they are “the only natural buyer for about 200 companies.” TheStreet’s advantage, she explains, is its ability to “monetize Internet uniques through advertising and through subscriptions.”
The company is also developing a robust publishing platform, which they will launch in Q1 of 2014. The platform will allow them to host contributor blogs, provide social sharing, videos in articles and support SEO. The platform will allow them to promote contributors who write especially compelling, insightful analysis across their four different websites or 14 different subscription products or via their Twitter and Facebook pages. Furthermore, they plan to spend 2014 upgrading the utilities on their sites.
“Our goal is to tie our readers’ portfolios, watch lists and alerts to our website and provide our readers with all the pricing and fundamental data that they need,” says DeMarse. “We will then overlay our advice on top of that platform. It will be a very powerful and unique combination.”
After a decade or more of gold miners damaging shareholder value by issuing excessive equity, the industry is turning a new page, and Randgold Resources Ltd. (NASDAQ: GOLD) is a prime example of the new trend, says Greg Orrell.
“One of our larger holdings, Randgold Resources, has shown the ability to hold equity dear,” says Mr. Orrell, President of Orrell Capital Management, Inc. and the Portfolio Manager, OCM Gold Fund (OCMGX). “It has had very strong management through Mark Bristow since its inception. It’s allocated its capital prudently by building a couple of new mines over the last couple of years that will work at lower gold prices, so it will be more in a harvesting mode than needing to spend capital.”
“When we look at Randgold over the next couple of years, we think it’s going to be in a position to have increased dividend payouts, and also take advantage of the depressed market in exploration assets — it will pick up some of those,” Mr. Orrell cointues. “So we like Randgold, though it does come with some geopolitical risk because of the operating jurisdictions it operates in West Africa and the DRC.”
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“The gold mining industry really lost its way in a lot of ways, especially over the past decade,” Mr. Orrell explains. “Historically, the argument for owning gold mining shares was that they offered gold price leverage through operating earnings, increased value in reserves, especially as the gold prices rose but also through exploration success, and then the prospect for participation in cash flow through dividends. That was all the way through the 1970s and up to 1980, and then it became a growth story, and companies were punished for not having any growth.”
“Especially over the last decade, management destroyed shareholder value by issuing equity for unprofitable production or projects time and again, it appears all in an effort to institutionalize the company. We say that we are a value-oriented investment firm, and that’s been tough the last few years, as the mining companies have been more adept at value destruction rather than value creation. Fortunately, we see that theme changing,” Mr. Orrell concludes.
Contrarian investors seeking to gain some exposure to low-cost iron ore producers can look to companies like Rio Tinto PLC (NYSE:RIO) and Fortescue Metals Group Ltd. (OTC:FSUGY) (ASE:FGM), BlackRock Managing Director Catherine Raw tells The Wall Street Transcript. Both companies, she says, are expected to offer good volume growth as well as good cash flow growth over the next several years.
Ms. Raw, a Portfolio Manager of the BlackRock Commodity Strategies Fund, notes that in terms of the fund’s mining and gold investments, the portfolio is currently overweight iron ore. “That is quite a contrarian view, because many people are worried about the iron ore market over the next three years,” she says. “Our view is very much that we believe the iron ore price is going to outperform people’s expectations, rather than necessarily that the iron price is going to rise.”
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“The nature of the cost structure in the industry, where you have some very high-cost iron ore producers keeping the price at this level, will last longer than possibly the market expects means that if you’re exposed to very low-cost producers like Rio Tinto, for example, or Fortescue in Australia, then they will be able to sustain good margins,” Ms. Raw explains.
“Particularly if they have growth in production over the next three years, and even if prices do come down, that could be more than compensated for by the rise in volumes,” Ms. Raw adds. “And so you actually can see quite good revenue, earnings and cash flow growth on a three-year view for companies like Rio and Fortescue, both of which are also just coming off very high capital expenditure plans, so that we can translate that spending into volume growth and cash flow growth.”
Changes to its senior management team and a new direction for the company have positioned VeriFone Systems Inc. (NYSE:PAY) to regain market share and ultimately resume growth, says Steve Wilson, Founder & Chief Investment Officer of Greenwich, Connecticut-based Lapides Asset Management LLC.
“This was, just a couple of years ago, a very well loved stock that traded at a very large valuation,” Mr. Wilson notes in a recent interview with The Wall Street Transcript. “They run the payment systems that you and I deal with on a daily basis when we’re using a credit or debit card. Whether you are at the gas pump, Wal-Mart or at the supermarket, this would be the terminal that you slide the credit card through and, if need be, punch in your zip code and then sign on a screen. They are the worldwide leader with a very strong market share.”
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Despite the ubiquity of the company’s product, VeriFone began struggling several years ago, and their stock ultimately suffered as a result. “They had a CEO who had run the company for a number of years and really sort of lost his way. He was trying to keep them growing at an unsustainable rate, and started to do numerous acquisitions that were certainly viewed from the investors’ standpoint as being inappropriate, overpriced, and unnecessary,” Wilson recounts. “Two years ago the stock traded in the $50s, and the valuation of the company was around $6 billion. When we got involved the stock had already lost some 70% of its value; he was ultimately removed from the company, and that’s when we stepped in. We felt that it was a company that needed new direction. They had just brought in a new CFO, who we had met with and felt pretty strongly that he was going to be a positive force for meaningful improvement. Also, they just recently named the new CEO after a long search.”
“So, the company has begun – reiterate begun – a process of regaining lost market share and improving their product offering and returning the company to a level of reasonable growth and improving returns and cash flow generation, which will ultimately bring them a much higher valuation,” Wilson concludes.
Willem Schilpzand, a money manager for Alpine Capital Research, said negative sentiment around Intel Corporation’s (INTC) core PC market could present an opportunity for savvy investors.
“Intel has been one of the poster children for the death of the PC negative sentiment and the belief that as the world goes increasingly mobile that Intel’s core PC market would bleed a slow death,” Schilpzand said. “In addition, the belief was, or perhaps still is, that Intel can only make performance heavy chips while mobile products require power efficient chips and that therefore Intel’s mobile ventures would fail.”
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Schilpzand said his firm’s research revealed that Intel had other growth opportunities that weren’t priced into the company’s stock price.
“Currently, only the PC Client and Data Center segments make money and their combined earnings per share is greater than $2,” Schilpzand said. “We see these two segments as Intel’s core businesses.”
At Intel’s current share price, Schilpzand said you can back into a p/e multiple of nine to 10 times by taking out the excess cash on Intel’s balance sheet.
“We believe the core business is worth more than that,” Schilpzand said. “We acknowledge the headwinds to the PC segment, but growing corporate PC profits, innovation in the laptop space and a server business that is growing double digits should lead to longer-term profitable growth in the core business.”
