Hexcel Corporation (HXL) benefits from its exposure to the growing commercial aerospace industry, a story which is expected to see sustained growth for years to come, says Chris Kapsch, Analyst at Topeka Capital Markets. He adds that, although the stock is currently trading at rich multiples, any event that pulls the price down can be considered as an opportunity to buy more shares.
“Hexcel is essentially a pure play on the sustainable strength in the commercial aerospace cycle, as well as a prime beneficiary of the increased content of carbon fiber in those commercial aerospace applications,” Kapsch said. “Any pullback in that particular stock, for example on the latest 787 fire — which appears unlikely to derail the 787 program — we would be viewing as a buying opportunity.”
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Kapsch says that, although HXL stock is trading at high multiples, he keeps his sight on the longer-term growth of the aerospace industry and the increasing content of carbon fiber in commercial aircraft.
“That story is sustainable for the balance of this decade, and while currently enjoying a rich multiple, it’s an earnings growth story that should clearly grow into and justify that multiple over the next several years,” Kapsch said.
ADA-ES, Inc. (ADES) is looking to generate up to $6 million per year for each refined coal facility, and the company expects three facilities to be finalized by the end of summer with one more completed by the end of 2013, says Michael Durham, President and CEO of ADA-ES, Inc.
“The main goal is to get the remaining refined coal facilities up and running under long-term agreements. So to give you some metrics, we’re averaging about 3 million — each facility being about 3 million tons, and so each facility that we get up and running this year and next, our share nets out at a segment margin of about $1.70 per ton, so that each facility will start generating for us $5 million to $6 million a year of this segment income,” Durham said.
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Durham expects each facility to be a significant financial contributors to the company’s earnings. With three facilities projected to finalize by the end of summer and one more completed by the end of 2013, Durham is confident in how each will be a steady source of income in the future.
“We only have 10 million shares, so that becomes $0.50 to $0.60 per share for each one of these, and again, that ends up being a continuous source of margin income over the next eight years. So each one of these is very significant, and we recently announced that we are very close to having three of these finalized before the end of the summer and then at least one additional facility completed before the end of the year, and all of them will produce very significant and ongoing contributions to our earnings,” Durham said.
Chemtura Corp. (CHMT) focuses on higher-margin businesses, having shed divisions that were not performing to the desired level, and benefiting from exposure to sectors of the economy that are improving and which may translate into upside, says Daniel Rizzo, Analyst at Sidoti & Company, LLC.
“I like Chemtura, too. I think that stock is well-positioned. They are really changing the way they do business. They focus on much more high-margin and profitable businesses. They sold off the antioxidants business, which is a little bit lower margin. They also should benefit from housing in the consumer segment. They have exposure to agriculture. Their electronics end market has been weak, but it’s showing strong signs of life,” Rizzo said.
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Chemtura also may take part in the M&A wave in the specialty chemicals space that is expected for 2013. Chris Kapsch, Analyst at Topeka Capital Markets, says investors expect the company to maintain a growing core while managing their portfolio.
“I think people in 2013 are still looking for M&A to be a catalyst for one way or another for a majority of the stocks. One company in my space, Chemtura, investors have fairly high expectations that they will continue to manage their portfolio, meaning maybe carve off another business or two while also looking to grow their core industrial businesses,” Kapsch said.
Polypore International (PPO) was recently downgraded by Chris Kapsch, Analyst at Topeka Capital Markets, based on estimates that the chemicals company’s stock is fairly valued and expectations of forced divestiture of its Microporous division.
“We think the forced divestiture, which now has to happen within roughly six months, will result in a transaction dilutive to EPS by as much as $0.15 to $0.20. This dilutive transaction, which we think of now as imminent, is not factored into the consensus earnings expectations, so we view that as a negative catalyst,” Kapsch said.
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Kapsch says there are positive catalysts on the horizon for PPO, but the timing of the divestiture and the longer-term prospects for its electric-drive vehicle exposure lead him to sit and watch the stock from the sidelines.
“On valuation, we think Polypore‘s stock is roughly fairly valued here. I tend to believe in the longer-term adoption story associated with electric-drive vehicles, a key piece of any positive thesis on Polypore. Currently, the adoption trajectory is more muted than what we would like to see; with a dilutive transaction imminent, we would prefer being on the sidelines with that particular stock at this juncture,” Kapsch said.
W.R. Grace & Co. (GRA) is generating Street enthusiasm with attractive returns on capital, solid free cash flow and the potential to benefit from a cyclical construction recovery, yet the stock may be overestimated when it comes to possible liabilities associated with bankruptcy emergence, says Chris Kapsch, Analyst at Topeka Capital Markets.
“There’s been a tremendous amount of enthusiasm for W.R. Grace stock in anticipation of its impending emergence from bankruptcy. The company is well-managed, it’s well-run, boasts attractive returns on capital and generates good free cash flow. However, our more cautious view, versus the rest of the Street, is based a couple of considerations. One is valuation; we think the stock is currently richly valued when you factor in the pro forma, postemergence liabilities associated with the emergence process,” Kapsch said.
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GRA‘s construction chemicals business is set to benefit from recovery in the residential and nonresidential markets, however Kapsch believes expectation for the company’s catalyst business will need to reach normalization before he becomes more positive on the stock.
“We believe expectations will have to be reduced, primarily a function of the company’s catalyst business having effectively overearned in the 2011, 2012 time frame, during which they benefited from the pass-through mechanism associated with rare earth mineral surcharges. So we think that there has to be somewhat of a normalization in the profitability expectations for that business before I become more enthusiastic on W.R. Grace shares,” Kapsch said.
Monsanto Company (MON) is poised to see increased profitability, enhanced margins and strong double-digit earnings per share growth with China’s recent approval to import the company’s next-generation Intacta soybeans, says Chris Kapsch, Analyst at Topeka Capital Markets.
“The real opportunity for Monsanto over that horizon is driven by the prospects for the company to enjoy a step change in its profitability in its Latin American business, which is largely a function of the recent Chinese approval of its next-generation Intacta soybeans…over the next two to five years as growers both in Brazil and Argentina adopt the next-generation Intacta beans, there’s an opportunity for Monsanto to see a step change in its profitability,” Kapsch said.
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In the next two to five years, growers in Brazil and Argentina are expected to adopt Monsanto‘s Intacta bean, which has the first insect-protected trait in soybeans. As more growers adopt the technology, Kapsch believes the company will see ample opportunity for profitability, as well as enhanced margins and sustainable double-digit earnings per share growth.
“In those two countries combined, there’s roughly 95 million to 100 million acres of soy planted each year, so that opportunity plus the continued mix upgrade of its both corn and soy products in North America — from additional traits being stacked on its germplasm, and the germplasm being continually upgraded — will continue to help drive enhanced margins, which should allow Monsanto to sustain strong double-digit earnings per share growth, which in turn should help the stock do well and maintain its fairly rich multiple over that time, and probably regardless of where corn prices tend to settle,” Kapsch said.
OMNOVA Solutions (OMN) trades at one of the lowest valuations in the specialty chemicals space, not having participated in the recent rally many companies saw but still showing exposure to domestic housing, says Daniel Rizzo, Analyst at Sidoti & Company, LLC.
“[A] company I like a lot is OMNOVA Solutions. This is more of a valuation; it’s probably the cheapest name in my sector, trading at less than 10 times estimate — didn’t really enjoy the run-up that a lot of other chemical companies did. They have heavy exposure, or just a decent exposure, to housing, to their laminate and their cabinet end markets,” Rizzo said.
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Rizzo says OMNOVA has seen stable input costs for its chemicals for the last couple quarters, and he expects the company to see increased revenue in the second half of 2013.
“They make a chemical that uses corporate backing and they make laminates for cabinets, and I think that’s going to help fuel revenues, and as I said, one of the things that’s killed them in the past is raw material costs, particularly butadiene. Those costs have been benign for about six months now; don’t see that really going up, so I think they could really do well when things start to tick up at the second half of the year,” Rizzo said.
American Vanguard Corp. (AVD) recently suffered a large hit to its stock price, losing close to a third of its dollar value. The specialty chemicals company, however, is poised to recover in the third quarter, presenting investors with an opportunity in this undervalued company, says Daniel Rizzo, Analyst at Sidoti & Company, LLC.
“My favorite stock right now is a company called American Vanguard. The stock is cheap now; it obviously took a hit last week. I think the stock was down roughly 30%, 30-odd percent. Because they preannounced a bad quarter, in my opinion, that was a lot of what — the problems they have there are weather-related and are just a timing issue. They will probably recoup most of that in the third quarter, and I think the stock is currently undervalued,” Rizzo said.
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Rizzo thinks AVD will benefit from an uptick in the demand for corn. He says corn prices are currently low because of an increased acreage right now, but that the increased acreage will results in increased demand for herbicides and pesticides.
“For American Vanguard in particular, they don’t have a lot of competition for one of their main products that corn is grown, insecticide, and demand is high because of rootworm problem and just because of traditional corn, and corn planting has led to some other methods of killing pests to be less effective. So I think they are in a unique position,” Rizzo said.
IDEXX Laboratories, Inc. (IDXX) is gaining market share from VCA Antech Inc (WOOF) in the veterinary reference lab space due to IDXX‘s strong bundled offerings and software services for veterinary practices, says Jonathan Block, Managing Director at Stifel, Nicolaus & Co., Inc.
“We’ve done a lot of diligence — big surveys — that show that some share has shifted from VCA to IDEXX. I think to be fair, VCA was sort of the incumbent here, and IDEXX came along years ago, so VCA had to lose some share. However, I think the share losses are still occurring. I think the two lab offerings are very, very similar in terms of price and turnaround time, and we’ve done work that shows those are the two most important variables when someone’s going to choose their reference lab provider,” Block said.
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Where the companies do differ is in their product offerings, with IDXX providing a stronger bundle with its in-clinic business, as well as offering software services through Cornerstone, Block says.
“While IDEXX is the number-two reference lab provider, they are the number one in-clinic/point-of-care company. They are the number-two software provider through Cornerstone. They have a lot of specialty tests at their reference lab that they run that arguably VCA doesn’t. So once you get beyond price and turnaround time, I just think IDEXX’s offering is more robust and superior, notably through their bundled offering and also through other stuff like software, specialty tests, etc.,” Block said.
Sprint Nextel Corporation (S) and T-Mobile USA (TMUS) are creating partnerships with other telecommunications companies to help make them stronger competitors against industry leaders Verizon (VZ) and AT&T (T), says Shaun Hong, Managing Director and Equity Portfolio Manager/Research Analyst at Jennison Associates LLC.
“The area of telecom in the U.S. may be more challenging. Sprint shareholders recently approved a deal with SoftBank (TYO:9984). SoftBank, now the majority owner of Sprint, is injecting more cash into Sprint to help make Sprint a stronger competitor, allowing Sprint to invest in its infrastructure,” Hong said.
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T-Mobile has also executed on a deal with MetroPCS (PCS), and despite PCS being a smaller player, the consolidation of the two may bring about more competition for Verizon and AT&T, Hong says, as demand continues within the sector.
“It could be a little tougher for the leaders, Verizon and AT&T. The challengers could have some success, but it’s going to cost them some money to get there. So we think there’s going to be more volatility around the telecom sector. The world is changing at a faster pace. There are some positive things, such as the consumption of data by everybody — whether it’s wireless or over cable modems or DSL, or what the telephone companies offer as broadband products. At the end of the day, that consumption of data, so far, doesn’t seem like it’s stopping. The growth of that demand just continues.”
