American Water Works Company Inc (AWK) is expected to see growth as it improves earned returns through cost-containment efforts, a benefit of asset swapping with other water companies, and is showing a 7% to 10% EPS CAGR, says Heike Doerr, Senior Research Associate at Robert W. Baird & Co.
“We currently have an ‘outperform’ on American Water, which we believe will close its trading discount to the group as it improves earned returns through cost-containment efforts, the benefit of recent portfolio swaps, and growth of its nonregulated business. At 7% to 10% EPS CAGR, we believe AWK has the most attractive growth outlook of the group,” Doerr said.
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AWK‘s engagement in portfolio optimization, or asset swapping, with other water companies is how the company is finding additional opportunities and stimulating growth, Doerr says.
“We saw Aqua (WTR) and America (AWK) engage in portfolio optimization — asset swapping — as means of improving margins and stimulating earnings growth. Each company exited states where they had not been as impactful, and increased their customer count in states where they had better regulatory relationships and additional growth opportunities,” Doerr said.
Tesla Motors Inc (TSLA) is looking to hit its 25% gross margin target as the company continues to extend its competitive advantage by solving the driving range and battery cost issues with electric vehicles, as well as by introducing a smaller, more affordable Generation 3 vehicle, says Dan Galves, Vice President at Deutsche Bank Securities Inc.
“There are a lot of inherent advantages in electric vehicles. I’ll give you a couple of examples: lower fueling cost per mile, lower maintenance cost, better acceleration, better handling,” Galves said. “We see those inherent advantages in EVs, but clearly you need to solve the driving range and the battery cost issues, and we think Tesla‘s current vehicle has already largely solved the range problem, providing 200-plus miles in an essentially no-compromises car, and if you need to drive farther than that, Tesla is quickly building out a network of exclusive fast-charging stations that we think will extend their competitive advantage.”
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Galves expects Tesla‘s next EV, the Generation 3 vehicle, to fully close the gap to internal combustion cars. Based on his positive outlook of the more affordable Gen 3, Galves is expecting Tesla to hit its target gross margin this year.
“I think getting comfortable that these vehicles are very high-quality, and that we expect the margins to continue to improve throughout the course of this year; we think Tesla will hit their 25% gross margin target, or at least very close to that. That plus our belief that they can offer a smaller vehicle — Gen 3 — at a much lower price to drive a more affordable electric vehicle is what made us feel comfortable enough to upgrade the stock,” Galves said.
A recent interview in the Wall Street Transcript with Sanjay Srestha, Managing Director and Senior Analyst covering alternative energy at Lazard Capital Markets (LAZ), indicates that the solar power sector could become supercharged through lower-cost capital in the pipeline:
“One of the bottlenecks for the growth in the renewables and solar industry has been the availability and, more importantly, the cost of capital…We expect these barriers to be gradually overcome as projects continue to perform in the field, and we expect to see a private rooftop securitization in the market over the next 12 months,” Shrestha said.
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Pavel Molchanov, an experienced analyst with Raymond James & Associates (RJF) sees the clear beneficiaries of this new trend to be the alternative energy installation companies like SolarCity, and possibly smaller solar power installation companies such as Real Goods Solar (RSOL), which he labels “a pure play on the demand side of the equation rather than the supply side.”
A solar rooftop securitization market would not only lower the cost of solar power and create additional demand for electric vehicles, it would also boost the profits of Wall Street firms underwriting this new asset class. This positive feedback loop could finally drive solar energy into the mainstream of United States energy policy.
Greencore Group plc (LON:GNC) makes processed foods for large retail groceries stores in the United Kingdom, with its dominance across the Atlantic expected to remain firm while the company seeks to expand and grow its business in the United States, says Bernard R. Horn Jr., President & Portfolio Manager at Polaris Capital Management, LLC.
“Greencore is an example of a portfolio company that has relatively lower volatility. At Polaris, we aim to hedge against downside risks and to improve the risk/return profile of the Fund. Greencore makes chilled foods, ready-to-eat meals and sandwich products that are primarily sold to large retail grocery stores in the U.K., like Tesco (LON:TSCO), Marks & Spencer’s (LON:MKS) and Asda,” Horn said.
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Horn says store brand goods comprise a high percentage of grocery stores in the U.K., and the expansion into the U.S. after many retailers convinced LON:GNC to cross the Atlantic show promise for the future of the company.
“Greencore made a couple of acquisitions over the last year or two that gave them an entry into Starbucks (SBUX) and 7-Eleven accounts. This is a company that may expect to continue its dominance on the U.K., while growing its business in the U.S.,” Horn said.
Methanex Corporation (MEOH) is the largest producer of methanol in the world, a cleaner fuel than natural gas that trades closely to oil prices and which is also used in adhesives and other chemical products, as well as a fuel substitute and additive, says Bernard R. Horn Jr., President and Portfolio Manager at Polaris Capital Management, LLC.
“Methanex builds methanol facilities where the low-cost natural gas is in some way stranded or cannot be used in the local economy,” Horn said. “At these plants, methanol is converted to a liquid form that then can be shipped to regions that want cleaner sources of fuel. They arbitrage the difference between low-cost natural gas as a feedstock, and ultimately something that trades a lot closer to oil prices.”
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Horn says MEOH has already done that in Canada, Chile and New Zealand, and they have plants in Egypt and Trinidad and Tobago. He adds that China is also one of the fastest growing users of methanol as a fuel substitute, as the country seeks to enhance environmental conditions.
“Any company that can conduct physical arbitrage between a very low price product and a very high price product is likely to make money. The Fund has had a position in Methanex for years, aware of its business model, customer base, strong management team and healthy assets,” Horn said.
Intel Corporation (INTC) stock is now hovering at just over $22 and has a dividend of 4%. Although challenged by a rapid switch from its mainstay Wintel PC franchise to mobile devices, many astute asset managers see the company as a long-term winner. John Pitzer is a Managing Director, Global Technology Strategist and Technology Sector Head for the Credit Suisse Group. This Institutional Investor number-one-ranked semiconductor capital equipment analyst sees it this way:
“Moore’s Law has been the cornerstone of not just semiconductor economics, but technology economics for over 40 years […] It is our view that Moore’s Law is getting much more challenging to implement. The capital burden to build leading-edge facilities is growing up nonlinearly, and fewer and fewer players could actually scale in the Moore’s law curve. It’s our view that Intel will be the last man standing on Moore’s Law,” Pitzer said.
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William Stein is a Managing Director at SunTrust Robinson Humphrey, covering technology stocks with a particular focus on semiconductor companies. He sees great potential in the wide spectrum of semiconductor sector stocks:
“Interest in the semiconductor stocks remains robust because there are so many ways to invest in this space. There are over 100 public companies, some that are growing quickly, some that are more cyclical, there are large caps and small caps, there are a lot of dividend-paying stocks, and some product cycle stories and restructuring stories,” Stein said.
Pairing Intel Corporation with one of his top recommendations from a recent interview in The Wall Street Transcript would be a good way to gain growth and yield in a single package.
Amtrust Financial Services, Inc. (AFSI) is currently a value selling at 11 or 12 times earnings, and the company has been able to earn an ROE in the high teens, uncommon in the insurance industry, and is also likely to grow EPS over the next couple of years, says Peter Neumeier, Founding Partner and Portfolio Manager at Neumeier Poma Investment Counsel, LLC.
“[Amtrust] is a specialty insurance company that in our view is unique in the small-cap market….They specialize in smaller policies where they are able to use their own proprietary technology to assess the risk and deliver the service efficiently,” Neumeier said. “This is a company that also has been superb at acquiring companies in their specialty and integrating them smoothly. We expect that to continue. Add it all up and you have a company that is able to earn a return on equity in the midteens or even the high-teens, a ROE which is unheard of in the insurance business.”
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AFSI is currently selling at a value of 11 or 12 times earnings, and Neumeier expects the company to continue to grow its EPS rate over the next couple of years, increasing the stock’s worth to over $50 as opposed to around $40 today.
“About 30% of their revenue is recurring fee income, which suggests to us that the company is worth a forward p/e of more like 14 times or 15 times. And again, we do like specialty companies. Amtrust Financial definitely fits that bill, and we think they’ll continue growing over the next couple of years in a low-teens EPS rate and that therefore, about a year from now, the company could earn about $3.75 in EPS, and the stock should be worth over $50. Today, it sells for about $40,” Neumeier said.
NxStage Medical (NXTM) helps reduce overall health care costs by allowing patients to take the dialysis from the health care center to their home, increasing their quality and length of life while reducing their dependence on medications, says Chris Cooley, Managing Director at Stephens Inc.
“What NxStage does is they have a proprietary, and they are really one of only two that have what we call a home hemodialysis system. So patients can actually have a fuller, healthier life, have control of their day and do dialysis in the home setting as opposed to having a go in-center three days a week. It’s important in the sense these patients are healthier,” Cooley said.
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Cooley says studies show patients using NXTM‘s technology live longer and use less medications, saving the health care system over time, combining better medicine with lower cost in the same solution — a service increasingly important given the disproportionate costs for treating the patient population that requires dialysis.
“This is a company which is focused on the dialysis marketplace, and it’s an important market in the sense that it’s only about 2% of the patients — I am sorry, 2% of the Medicare population — when we think about the patients in the U.S. each year. But they account for 8% of the annual Medicare outlay, so a disproportionate amount of costs associated with this patient population,” Cooley said.
STAAR Surgical Company (STAA) has two new products available on the market today both domestically and internationally for the cataract marketplace — the largest surgical market in ophthalmology — and the refractive market with a premium lens option, says Chris Cooley, Managing Director at Stephens Inc.
“What’s unique about STAAR is that you are seeing its core product, the Visian ICL, deliver unit growth in excess of 20% right now as the market starts to increasingly adopt lens-based options as opposed to laser or LASIK type choices for refractive surgery,” Cooley said. “The lens generates about an 80% margin to the company.”
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Cooley says STAA‘s COLLAMER product for cataracts has more benefits on the surgical side, leading to revenue growth acceleration.
“They have no debt, generating significant amount of cash, and on the cataract side, they have a premium lens material called COLLAMER, which is exclusive to STAAR, which gives you the benefits of both silicone and acrylic from the surgical side. So you get a premium lens outcome at quite frankly a base market price, and with that, this company is really starting to realize an acceleration in its top line, and its margin structure is improving,” Cooley said.
Endologix (ELGX) has innovated in the medical device space with its Ventana product expanding the market and the
Nellix products presenting significant growth prospects after receiving regulatory approval in Europe, says Chris Cooley, Managing Director at Stephens Inc.
“In Europe, they are here today. Specifically Nellix began commercialization during the June calendar quarter. We think Ventana will enter the European market in the second half of next year, 2014. For us here in the States, they are further out. These products, realistically assuming standard FDA timeline, will not be available until the end of 2015, early 2016,” Cooley said.
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Cooley says the Ventana and Nellix commercialization in Europe presents significant opportunities for growth, with topline growth in the double digits over the next three years.
“Their pipeline, though, is the real excitement here, and when we think about it, there is one device, Ventana, which basically has the opportunity to expand the market by upwards of $400 million; it’s about a $2.0 billion to $2.2 billion market today. And then Nellix, which just received a CE mark in Europe, really has the chance to change the game in the way that we think about endovascular approaches versus open surgical repair, and we see a very significant growth trajectory there; core top line growing in excess of 25% over the next three years,” Cooley said.
