Questcor Pharmaceuticals Inc (QCOR) has potential to make $5 per share in earnings over the next 12 months, with a 50% gain from its current market price due to numerous positive developments at the company, including steady growth of its one-of-a-kind Acthar drug, continued share buybacks, and increased research and development spending, says Brian Poma, Partner and Portfolio Manager at Neumeier Poma Investment Counsel, LLC.
“We like to find companies that have some sort of edge over their competition that is highly defensible. Well, Questcor’s lead drug, H.P. Acthar, fits this bill. Acthar is a biologic drug with orphan status that’s approved to treat 19 different indications. Although Acthar has patent exclusivity on just one of these indications, generic competition has never been able to develop a copied version of this drug. This has to do with the complex makeup of Acthar’s 39 aminoacid peptides with impurities that have never been disclosed. Matching these impurities, which is a task that would be required by the FDA in order for a generic company to get approval, has been basically impossible. Further barriers to generics are a proprietary manufacturing process and required FDA clinical trials, which make us feel comfortable that Acthar won’t have a generic competitor for at least the next seven to 10 years, if ever,” Poma said.
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While Questcor‘s price was rocked in September 2012 due to Acthar’s higher price and restricted reimbursement by some insurers, the stock eventually recovered because of the company’s numerous positive developments, Poma says. QCOR has continued on this positive trend as it buys back shares, has initiated its first dividend and increased its research and development spending, Poma says, and he predicts that the company will roughly double its market share price in the future.
“The stock has recovered almost to its price before that panic event, because of a number of positive developments. One, there was no significant restrictions forthcoming from Acthar’s other reimbursement insurers. Two, NS revenues continued their steady growth. Three, Questcor bought the rights to Synacthen, thus eliminating any threat of that future competition. And four, Questcor initiated the marketing of a new important indication, rheumatology. In addition, over the last six months, the company has continued to buy back shares, initiated its first dividend, strengthened the quality of its board of directors, tightened its reimbursement procedures, purchased its Acthar manufacturer,” Poma said. “We believe a fair valuation is around 15 times our 2014 estimate of $5. So that sets our price target around $75, roughly a 50% gain from its current market price.”
Ascena Retail Group (ASNA) has remodeled Dress Barn stores, rationalized store base and improved operation efficiency, quality and fashion to respond to consumer apathy to the brand, while maintaining impressive sales at its Justice division for tweens and its Maurices for female young adults, says Marshall Kaplan, Managing Director at Global Investment Solutions.
“ASNA has gone from five distribution centers down to two. Management moved Dress Barn’s distribution center into a state-of-the-art Justice distribution facility in Ohio and developed a new merchandise planning and allocation system as well. ASNA is also adopting a company-wide sourcing model that should improve efficiencies,” Kaplan said.
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Kaplan says ASNA recently acquired two newer divisions as a result of the Charming Shoppes transaction — Lane Bryant and Catherines, both of which target plus-size women. He says management is pursuing synergy opportunities, and also cost savings.
“From a valuation perspective, the stock trades at approximately 13 times forecast earnings for fiscal 2014 — July. Sentiment is not positive right now in the investment community. Of the 11 recommendations by analysts on Wall Street, currently, seven of them are ‘hold’ rated. We believe that the market has not fully taken note of management’s numerous initiatives to improve the company,” Kaplan said.
Teleflex Incorporated (TFX) recently finished a transition from its industrial roots to a focused global medical products company, emphasizing in single-use, disposable medical products to improve safety, efficiency and patient outcomes, says Steven Howard, Managing Director at Global Investment Solutions.
“We find their product suite to be particularly attractive, given hospitals’ increased focus on preventing hospital-borne infections. Further, these are not capital-intensive and expensive products, so orders are less apt to be impacted when administrators are slashing budgets,” Howard said.
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Howard says the new medical structure at TFX allows for better pricing, margin opportunities and new avenues for growth than its previous conglomerate structure. He adds that the company has an innovative pipeline and is on its way to synergize acquired businesses uch as LMA’s laryngeal masks.
“This type of dynamic can have a very positive impact on margins. Near term, investors have been concerned about the slowdown in European sales, which has crimped full-year pricing goals, somewhat. Still, we think there is significant ability to raise operating margins toward 20% over time, from the current 16% level, and believe this is a good entry point for investors,” Howard said.
Thermo Fisher Scientific Inc. (TMO) is looking toward a transformational acquisition of Life Technologies Corp. (LIFE) in early 2014, which will bring both cost and revenue synergies, making TMO a long-term value for investors, says Steven Howard, Managing Director at Global Investment Solutions.
“TMO has been able to bolt on new business lines to its existing distribution infrastructure to achieve solid and sustainable EPS growth. More recently, TMO announced that it would acquire a company called Life Technologies, which we believe will be transformational. The deal is expected to close in early 2014. Excluding the positive impact of the Life deal, we believe the strong cost focus and the ability to leverage its distribution system allows the company to potentially turn organic topline growth rates of around 3%, into a consistent and greater EPS growth story,” Howard said.
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Howard sees the potential for cost and revenue synergies with the transaction, as LIFE brings about a strong installed base, significant revenues and strong cash flow. Thus, despite possible near-term headwinds in Chinese growth and the sequestration in Washington, Howard believes TMO can offer investors significant long-term value.
“Life Technologies is already a leader in life science tools and analytical tools, and benefits from a strong installed base, significant recurring revenues and strong cash flow. As part of the larger Thermo Fisher organization, we see the potential for both cost and revenue synergies. Further, we believe it fits well with the theme of increased lab spending over the long term. It complements Thermo’s focus on providing solutions to the people in ‘white coats’ who parse the human genome, test and measure pollution levels and ensure a safe food supply,” Howard said.
ConAgra Foods, Inc. (CAG) is poised to benefit from its $4.75 billion Ralcorp acquisition as well as continued agricultural price deflation, which will allow the company to price more opportunistically, and the stock is currently a value as it trades at 15 times forecast earnings while carrying a 3% dividend yield, says Marshall Kaplan, Managing Director at Global Investment Solutions.
“[ConAgra] was historically a branded foods company until it acquired Ralcorp, a private-label company, in January of 2013, for about $4.75 billion. There are a couple of exciting components to the story. First, we think there is a margin expansion opportunity here because of agricultural price deflation — 2011 and 2012 were difficult years for food manufacturers as we saw double-digit inflation rates on cost of goods sold. This drove larger price increases on the products, which, in our opinion, had a negative impact on volume growth and margins. Price inflation is now moderating significantly. We would expect the second half of 2013 to post low-single-digit input cost increases and could actually see further price declines in 2014. We believe the cost savings will allow the company to be able to price more opportunistically,” Kaplan said.
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Kaplan also sees product innovation in CAG‘s future, and believes that if the company steps up its marketing and advertising efforts, it could drive volume growth and increase margins. Because the stock is currently trading at 15 times 2014 forecast earnings and exhibiting a 3% dividend yield, Kaplan considers CAG a value.
“From a valuation perspective, the stock trades on forecast earnings for 2014 — it’s a May fiscal year — at about 15 times. We think the synergies resulting from the acquisition of Ralcorp could provide upside to that. Further, we see product innovation on the way, and CAG has some very strong brands, like Marie Callender’s, Reddi-wip, Hunt’s and PAM. We are convinced that the stock, which also carries a 3% dividend yield, is not fully appreciated by investors at current levels,” Kaplan said.
Liberty Property Trust (LRY) trades at a discount to other REITs due to its exposure to suburban offices and industrial properties, and the pickup in GDP and employment trends could drive growth for the REIT, along with increased dividends, says David Abella, Senior Portfolio Manager at Rochdale Investment Management.
“The price to FFO, which is the main metric in REITs, is 14 times. That’s a great value in our view. The stock pays a 5.1% yield, and that’s higher than REITs on average, but the main reason we like it is this is a company that we feel can do a lot better with economic improvement,” Abella said.
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Abella says the concerns that interest rates may affect REITs like LRY are concerns for the short term, and he says in the longer term what’s more important is the improving economy and the REITs’ ability to drive occupancy and rents thanks to it.
“The stock trades at a 7% discount to the group, and that group of suburban office and industrial REITs is a little cheaper than other REITs in general. So you are getting into a cheaper sector and at a discount to the group. And it’s a very well-run, very conservative company as well so that’s pretty important. Management makes acquisitions and divestitures of properties on a very careful basis, and so we feel there is solid value in the name and see upside with better economic growth,” Abella said.
Johnson & Johnson (JNJ) is expected to grow cash flow and dividend in the mid-to-high single digits, with analysts believing the company has a solid pharmaceutical pipeline with enough diversification to weather hits to its portfolio, says David Abella, Senior Portfolio Manager at Rochdale Investment Management.
“Johnson & Johnson is a bread-and-butter stock for any large value portfolio. At 16 times earnings, it’s a bit of premium to pharmaceutical stocks, but it’s cheaper than, say, a consumer staple name like Procter & Gamble (PG) at 19 times earnings. It has a great medical device business. The dividend is very, very solid, 3% but growing 7% over the past five years,” Abella said.
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Abella says JNJ represent a stable company within his investment portfolio thanks to its growth prospects and involvement in different industries, and he adds the company is a leader in the medical device space, which trades at a higher multiple than pharmaceuticals.
“When you sum up the pharmaceutical business, the medical device business and then the consumer product business, which is a solid business in and of itself, you end up with a true blue-chip, steady company, and one that we feel can be a stable performer, with defensive characteristics, or in baseball terms, hopefully a solid base hit — and in this market, trying to get to a solid base hit is pretty important,” Abella said.
Dr Pepper Snapple Group Inc. (DPS) is at a good entry point for investors, as the company is cheaper than its competitors The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) and is showing 3.3% dividend yield and cash flow growth while making efforts to drive growth through the launch of the TEN format and the strengthening of certain brands, says David Abella, Senior Portfolio Manager at Rochdale Investment Management.
“[DPS] is a smaller beverage company and at 15 times earnings, it’s a lot cheaper than rivals Coca-Cola and Pepsi, great companies but a little pricier at 19 times earnings. So it has a dividend yield of 3.3%. They grew their dividend 12% last year. I think high-single-digit dividend growth is very reasonable going forward given the cash flow growth. It’s been a steady stock performer over the last couple of years, but at 7% to 8% off of its high in mid-May, I think that makes it a good entry point for investors who haven’t been in the stock,” Abella said.
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DPS is also making efforts to increase productivity and strengthen its brands, including introducing a 10-calorie soft drink, and the company should continue to benefit from the improvement of the commodity environment, Abella says.
“They have something called the TEN format, which would be 10 calories in the soft drink, and that has improved flavor and it’s had some really solid test results in the rollouts. The diet versions of soft drinks just don’t have the same market share as the nondiet versions, and yet there are worries about calories and sugar. So I think if the TEN format works out for Dr. Pepper Snapple, that could be pretty interesting. And meanwhile they are trying to reinvigorate certain brands, such as Snapple, which was a big brand once upon a time, still a great product, but trying to get that old magic back…But bottom line, I think that they can do better in terms of cash flow and dividend growth with a stronger economy,” Abella said.
Mattel, Inc. (MAT) represents a good value at 16 times earnings with an attractive 3.1% dividend yield and up to 12% earnings growth, and the company is likely to continue that growth as the economy improves, says David Abella, Senior Portfolio Manager at Rochdale Investment Management.
“This is a name that, at 16 times earnings, I think is a good value. It is near the high end of its range, but compared to other consumer companies that have reasonable growth, I think Mattel still represents good value. From a dividend point of view, the yield at 3.1% is attractive. It’s been growing in the low teens, and I think going forward a high-single-digit growth rate is very reasonable. The earnings growth has been in the 10% to 12% range, and topline revenue has been growing in the high-single-digit range. So it’s been a steady performer, a good value name with solid earnings and dividend growth as well,” Abella said.
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Abella also believes that investing in Mattel is a smart way to play the continued growth in economic improvement, as the stock held up well during the financial crisis, and consumers are likely to buy more toys as the economy continues to recover.
“This company was pretty stress tested in 2008 through 2010, and it did hold its sales pretty well. Generally in retail, toys are cut last in the cycle. People will give up other items in retail and try to maintain the toy spending. And the bottom line is, I think that if the economy does continue to improve, people will buy more toys and Mattel will be a beneficiary of that. They are very well poised from a franchise point of view to capture that,” Abella said.
Cracker Barrel Old Country Store (CBRL) has continuously increased its dividend while maintaining significant amounts of cash on its balance sheet, making the restaurant company an attractive holding for Morley Campbell, Portfolio Manager, Analyst and Managing Director at NFJ Investment Group, LLC.
“On a forward-earnings basis, it was 13.8 times earnings, and the dividend growth was particularly impressive, doubling year over year at the time we made our purchase. Despite the dividend growth, Cracker Barrel had over $120 million of cash on the balance sheet, an unprecedented level,” Campbell said.
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Campbell adds that the $120 million Cracker Barrel has on its balance sheet is particularly significant given the restaurant currently has a market cap in the single-digit billions.
“[Cracker Barrel Old Country Store is] an operator of over 600 restaurant and gift shops in the U.S., and they had increased their dividend and were yielding 3%,” Campbell said, adding that he “liked the valuation” of the company.
