Humana Inc.’s (HUM) Medicare Advantage Plans are sustainable because they provide cost savings as compared to government-provided Medicare plans, according to Willem Schilpzand, a money manager for Alpine Capital Research.
“Humana’s Medicare Advantage plans are relatively more attractive to potential new Medicare members than original Medicare plans, Medicare has secular demographic tailwinds, Humana is under leveraged, and finally HUM’s capital allocation policies should reward investors while we wait for the Medicare Advantage headwinds to pass,” Schilpzand said.
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The number of people enrolling in Medicare Advantage Plans is growing. Schilpzand said approximately 29% of Medicare eligible individuals currently choose a Medicare Advantage. That figure is compared to only 18% of Medicare eligible six years ago, and Schilpzand said he expects that trend to continue.
“Regarding the secular tailwind, each year 2%-3% more individuals turn 65 years of age and therefore age into Medicare,” Schilpzand said. “The demographic situation of the U.S. assures that this growth will continue well into the future.”
As that trend plays out, Schilpzand said Humana is poised to benefit.
“Humana has an internal debt to capital goal and currently has the capability to issue approximately 10% of their market cap in debt to reach that internal target,” Schilpzand said.
As a result, Humana is likely to use that for what Schilpzand called “investor friendly purposes” – increased dividends, share repurchases or M&A activity. “Humana is investor friendly and they have appropriately returned their excess free cash flow to investors in the form of dividends and share repurchases,” Schilpzand said. “Humana’s business model is not very capital intensive, so we anticipate this to continue. We believe this return to shareholders can approximate mid-single digit levels annually of Humana’s market cap.”
As shale gas and shale oil discoveries in the U.S. are impacting the energy infrastructure sector, Charles Goldblum, President and Founder of Hurley Capital, LLC, has identified a unique investment opportunity in SunCoke Energy, Inc. (SXC).
“What’s interesting about SunCoke Energy is that they’re not really in the oil and gas business. They have a technology where they turn metallurgical coal into metallurgical coke. They do this for steel producers typically on or near their facility where they load this coke directly into their blast furnaces,” Goldblum said. “So that’s a pretty boring business, but they have created an MLP which they will start selling their plants into over time starting next year.”
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Goldblum said SunCoke, which trades on its own for six to seven times EBITDA, will likely sell assets to an MLP that they’ve created at nine to 10 times EBITDA.
“SXC will receive a bunch of cash back, which they will redeploy into creating more assets to sell to the MLP while at the same time garnering an increasing portion of the MLP’s cash flow through a preferential sponsor treatment,” Goldblum said. “So we think the stock which is at $20.70 today has probably another 30% to 50% upside from here as they actually do what we think they will do by selling their assets.”
In spite of recent growth trends, Charles Goldblum, President and Founder of Hurley Capital, LLC, doesn’t like the home improvement retail sector.
“Home Depot (HD) and Lowe’s (LOW) stocks have done very well this year, up 25% and 43%, respectively. They’ve reported great sales growth and have benefitted from the resurgence in the homebuilders,” Goldblum said. “And I think that will dissipate.”
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But, he said he hasn’t yet shorted Lowes or Home Depot because expectations for the stocks aren’t that high going forward.
“Where they had very high same-store sales in the first half, they guided to much lower in the second half,” Goldblum says. “So without high expectations, we can’t short them.”
In June 2012, James Nelson, associate portfolio manager at Herndon Capital Management, started selling shares of Coach, Inc. (COH) to purchase Michael Kors Holdings Limited (KORS) stock.
“At that time, Kors, which had opened up its first flagship store in New York City in 2000, was starting to use the money that they had gotten from their IPO to aggressively expand its presence and gain critical mass,” Nelson said. “Kors at that time was about a quarter of the size of Coach, but was very attractive.”
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Nelson said Kors stock in 2012 was more expensive than Coach stock from a forward p/e basis, but he said investors at that time were not giving the company credit for the potential opportunities ahead. Nelson decided to take a bet on Kors, and a year and a half later, he said it has paid off.
“Since that period of time, Kors have grown nearly 80% and Coach has been down about 10%,” Nelson said. “While our purchase and sell decisions are not perfect all the time, our dynamic and cohesive process consistently identifies opportunities when a change may be timely.”
Generic drug sales could be a boon for both CVS Caremark Corporation (CVS) and Walgreen Co. (WAG), according to John Schnieders, a principal at Schnieders Capital Management. Schnieders said America’s aging population will usher in an era of increased prescription drug sales.
“The National Association of Pharmacists has done a study that the average 55-year-old American gets about five prescriptions filled a year and by the time you reach 75, that number goes up to 29 prescriptions filled a year,” Schnieders said. “So we have the largest demographic in American history retiring. We know they are going to need to get their drugs filled and most likely they’re going to do it at CVS or Walgreen.”
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What’s more, Schnieders said generic drugs, which are increasingly popular, are actually more profitable for pharmacies like Walgreen’s and CVS.
“If you fill a vial of drugs for $100, CVS and Walgreen might make $1 just to fill that order for you. But if you buy a generic drug that is chemically equivalent and it only cost $25, they might charge $5 to fill that vial,” Schnieders said. “So their profit margins are much higher, but the customer is still saving 70% on the overall cost. So there’s tremendous earnings expansion that can take place in both of these companies.”
Additionally, Schnieders expects CVS and Walgreen’s to profit from Obamacare. He said an estimated 30 million people will now have health insurance, but there is no expected increase in doctors or hospitals to treat those patients, creating an opportunity for CVS and Walgreen’s.
“To meet this need, CVS has come out with their MinuteClinic and Walgreen has come out with their Healthcare Clinic. Both of these clinics are going to take insurance. They’re both open on evenings and on weekends and we see that a lot of easy-to-treat symptoms are going to be treated at these locations,” Schnieders said. “So we think what’s going to happen here is that those two companies are going to become much more integral and a much larger part of the health care system with a very long-term demographic trend at their back.”
James Schnieders, co-founder of Schnieders Capital Management, said Google, Inc.’s (GOOG) stock could increase 13% next year. He said he likes the Internet giant because the company has continuously grown earnings, even during the economic downturn.
“The reason we like Google is that even during the worse of the downturn of 2008, 2009, during the financial crisis, they still grew their earnings year-over-year by 19%. We think Google is the best way to invest in the growth of the Internet. The company dominates searches.”
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Schnieders said he expects Google’s search and Internet services to continue to post strong gains. He said the Android operating system could be a key factor in Google’s growth.
“Last quarter, the paid clicks were up 23%. And we think that the next one billion Internet users will be from emerging markets and they will use a smartphone to access the Internet,” Schnieders said. “As of last quarter, IDC reported that Android had 81% of the smartphone market. So at the end of the day, even though Google is still up strong, we think that the consensus estimates of 2014 at $52.15 are reasonable and we think at 22 times forward earnings, the stock comes in about $1,147 a share, at the current quote that’s about a 13% increase.”
Less burdened by credit problems that plague other major banks, Wells Fargo & Co (WFC) could see strong earnings and dividend growth in 2014, according to William Schnieders, founder of Schnieders Capital Management, LLC.
“We think that they are, first of all, on track to earn that $4 a share because they have improving credit quality and we see an expansion in housing as benefitting Wells Fargo,” Schnieders said. “They accounted for close to 40% of all mortgage originations last year and have picked up their share of that market. We also see them as less exposed to credit problems overseas as the other major banks.”
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Schnieders said Wells Fargo has historically paid 40% to 50% of earnings in dividends, and he said dividend levels could again begin to approach those levels in 2014.
“The earnings projected for 2014 are right around the $4 area and we know that their dividend has increased from $0.20 level in 2010, down from the financial debacle that we had back to $0.88 last year, and it’s projected now at a current rate of $1.20,” Schnieders said. “Given their historic dividend policy, we think that their dividend could rise up to the level of $1.75 to $2.00 over the next two or three years. And at the current value, this trumps anything you can get in the bond market.”
OSI Systems, Inc. (OSIS) is already seeing the majority of its growth from X-ray inspection equipment in U.S. airports; however, the company is also eyeing the international market for large cargo inspection equipment and has secured a $ 1 billion contract in Mexico for the screening of cargo containers and tractor trailers, says Brian W. Ruttenbur, Managing Director at CRT Capital Group LLC.
“OSI Systems is a company that about half their business and the majority of their growth comes from security equipment. That’s X-ray inspection equipment; that division is under the name Rapiscan, and you’ll recognize them from U.S. airports. They have about 50% market share in U.S. airports,” Ruttenbur said.
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Though OSIS is seeing success domestically, the company is also seeing major growth in the international markets with its cargo inspection equipment, Ruttenbur says. He points to the company’s contract in Mexico, where OSIS is on track to take over and screen all large cargo coming into the country.
“They make large cargo inspection equipment for tractor trailers and for cargo containers, and they are in the process of taking over and screening all the cargo containers and tractor trailers entering Mexico. That’s a $1 billion contract; that’s large, and it’s going to produce very large margins for them. They have already taken over the screening in Puerto Rico. There’s going to be growth in that as countries look to secure their own ports and borders from drugs, currency and weapons trafficking,” Ruttenbur said.
Coeur Mining Inc (CDE) is looking to benefit from its April acquisition of Orko Silver, which included the La Preciosa project in Mexico, as the project has the opportunity to be a cash-flow generator as well as a significant counterweight to the company’s Palmarejo mine, also located in the mining-friendly country of Mexico, says Mitchell J. Krebs, President and CEO of Coeur Mining Inc.
“La Preciosa…is a very unique project in that it is one of the world’s largest undeveloped silver resources and is located in a very favorable jurisdiction in Mexico. It also is well-located in terms of access to infrastructure and the workforce, making it a great place to build a mine,” Krebs said. “For us, it will do three main things once in production. First, it has the opportunity of being a cash-flow generator with average annual silver production of approximately 9 million ounces compared to our company total right now of approximately 18 million. It will clearly move the needle quite significantly for us in terms of production and cash flow.”
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Krebs also points to La Preciosa as being a significant enough asset where it will be a solid counterweight to the company’s largest mine, Palmarejo, which is also in Mexico. Additionally, the La Preciosa project will increase Coeur‘s exposure to Mexico, where Krebs believes is a good area for the company to grow.
“Palmarejo is an extremely large operation. It’s Mexico’s second-largest primary silver mine, and it generates more than 50% of our cash flow currently, which is great, but it’s also a concentration risk on one asset. With La Preciosa, what we want to have is another chunky asset that can help diversify us across a greater number of operating assets,” Krebs said. “Finally, it increases our Mexican exposure. Mexico is one of the most mining-friendly countries. It’s the world’s second-largest silver producing country…over a third of all global silver production ever mined has come out of Mexico. It’s a big part of the culture and economy of Mexico, and it’s a good place for us to grow the business. Because of this, we feel good about having a significant development project in La Preciosa.”
Wyndam Worldwide Corporation (WYN) has recalibrated its timeshare business and turned around its free cash flow by approximately $1 billion, and is now generating up to $900 million free cash flow with a current yield close to 10%, which is the highest in the sector, says Simon Yarmak, CFA, Vice President at Stifel, Nicolaus & Co., Inc.
“Wyndham has a diversified business model. Almost half of their EBITDA comes from the timeshare business, about 23% comes from their hotel platform, and the remaining approximately 29% is derived coming from vacation rental and timeshare exchange platform. The big issue with Wyndham last cycle was that the company had too much timeshare inventory on their balance sheet, and they were spending too much money on developing timeshare,” Yarmak said.
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This cycle Wyndham has been able to transition its timeshare business to a more asset-like model, which has enabled the company to turn around free cash flow and deliver a significant amount back to investors, Yarmak says.
“[Wyndham is] now generating $800 million to $900 million of free cash flow this year, which is over $6 a share or at today’s prices. That’s a 9% to 10% free cash flow yield, and I’m unaware of any other real estate company that has a free cash flow yield in that range. Free cash flow will continue for the foreseeable future. Like Starwood (HOT), most of that would be returned to shareholders in the form of dividends and share buybacks,” Yarmak said.
