Abaxis Inc (ABAX) is a strong player in the vet diagnostics space, as the company has built up its portfolio by adding rapid assay products, opening a reference lab and obtaining rights to i-STAT, resulting in solid revenue growth for the past two to three years, says Jonathan Block, Managing Director at Stifel, Nicolaus & Co., Inc.
“Abaxis over the years has built out their portfolio by adding stuff such as rapid assays, reference lab and i-STAT,” Block said. “I think their offering is stronger today than what it was a couple of years ago, and I also think that they are going to be a beneficiary, again a modest beneficiary, but a beneficiary nevertheless of the altered distributor landscape, if you would. That’s going to result in some modest share gains going forward.”
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Block believes that a robust bundle in the vet diagnostics space is important to gain share, and he points to ABAX‘s achievement in that are over the past 12 to 24 months as a reason behind the company’s solid revenue growth.
“They’ve cobbled together a bunch of technologies and expanded their offering, resulting in very solid revenue growth for the past two to three years. Now they have got to figure out a way to stabilize, if not increase, margins. So you see that revenue growth flow effectively down to the bottom line,” Block said.
Cheniere Energy, Inc. (LNG), the first company to receive a license build a gas liquefaction plant in the U.S. in 50 years, is now moving forward in renting out use of its facility with take-or-pay contracts, says Shaun Hong, Managing Director and Equity Portfolio Manager/Research Analyst at Jennison Associates LLC.
“[A] name that’s in our top 10 is Cheniere Energy (LNG). This company doesn’t pay any dividends today. It has a liquefied natural gas receiving terminal in Louisiana. What the company is doing, basically, is adding equipment to export natural gas in the form of liquefied natural gas out to the rest of the world. They were the first to receive a license from the U.S. government, the Department of Energy, as well as FERC, the Federal Energy Regulatory Commission,” Hong said.
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Cheniere Energy is now looking toward take-or-pay contracts, where customers are renting to use LNG‘s facility and must pay whether they take gas or not. These attractive new projects are reflected in the stock’s performance, Hong says.
“Its counter-parties are all companies with investment-grade credit, and these are 25- to 30-year contracts where, basically, the customers have to pay rent for the right to use Cheniere’s facility, whether they take the gas or not. That stock has done well over the last couple of years as Cheniere has moved forward with these projects. We got involved, even though the company doesn’t pay a dividend, because we saw it as an attractive opportunity,” Hong said.
Wal-Mart Stores, Inc. (WMT) and Target Corporation (TGT) are highlighting the pet retail area in stores by adding new SKUs and limited edition products, respectively, as both companies aim to serve the lower-to-moderate income demographic in the grocery end of pet food, says Daniel Binder, Managing Director and Senior Equity Research Analyst at Jefferies & Company, Inc.
“Wal-Mart‘s focus has been more about adding SKUs back, not just in pet, but also across the stores and at the same time achieving a better in-stock position. In fact, I remember Wal-Mart highlighting pet as a good area in one of its earnings calls over the last year,” Binder said.
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Both Wal-Mart and Target are serving a different type of customer than PetSmart, Inc. (PETM), Binder says, that being a lower-income demographic buying grocery-type dog and cat food. While the pet space is not a primary focus of either company, it is an area that WMT and TGT are taking interest.
“Target has done more in pet this past year, too, with the introduction of new treats and limited edition product. I don’t think it was necessarily a huge needle mover for the entire company’s business, but it was unique. By and large, they’re going to have a grocery selection on the food side, too,” Binder said.
Exxon Mobil Corporation (XOM) is one of the most stable energy companies, with a large diversification, trading at a reasonable valuation, and it offers downside protection through the sale of options, says Kirk Mentzer, Senior Vice President and Director of Research at Huntington Private Financial Group.
“I’m not going to move the market in Exxon. The idea here is that the valuations look reasonable, and they have a bias toward natural gas. Natural gas prices are just now starting to pick up a little bit. The play here is their diversification in the energy markets. They have been one of the most steady energy companies. When I’m looking at the process of going through the quantitative measures, the yield is about 2.8%, and it’s just a good, steady player and high quality,” Mentzer said.
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Mentzer says he can add value to his XOM ownership through the use of cover call options. He says he can add value this way, and he uses this strategy to gain some incremental return.
“The dividend’s only $0.63 a share; if I can gain a couple dollars on an option, wait that out for a couple of months, maybe I pick up another dividend, and if the stock just stays where it’s at, I still come out ahead. If it drops, then I keep the option income. It’s really capital, but I look at it as additional return for the shareholder,” Mentzer said.
VCA Antech Inc (WOOF), a provider of veterinary services and diagnostic testing, holds a significant amount of earnings leverage in its business model should the U.S. economy improve, says Nicholas Jansen, Analyst at Raymond James & Associates, Inc.
“[VCA Antech] had mid- to high single-digit comps prerecession, and today their comps are low to mid-single-digit…if you believe the economy is going to continue to improve, therefore their comps would continue to improve; there is a significant amount of earnings leverage as margins go from negative to neutral to positive, which should yield significant earnings growth over the next two years to three years if that transpires,” Jansen said.
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With WOOF also generating a decent amount of free cash flow, Jansen sees opportunities for the company to buy animal hospitals or employ other strategies attractive to shareholders.
“They do generate a fair amount of free cash flow that they can utilize to either buy animal hospitals or perhaps be more shareholder-friendly capital deployment strategy, such as a share repurchase program, which they announced alongside their 1Q earnings report. So I think that’s a name that’s interesting to monitor if you’re bullish on the economic recovery story of the consumer,” Jansen said.
PetSmart, Inc. (PETM) is distinguishing itself in the pet retail marketplace with new product introductions and partnerships with Martha Stewart, Bret Michaels and Disney, and is expected to continue partnership activity in the future, says Daniel Binder, Managing Director and Senior Equity Research Analyst at Jefferies & Company, Inc.
“PetSmart has done a lot in recent years to differentiate itself in the marketplace, and that has included a lot of reset activity and new product introductions. There have been new product introductions in vitamins, and hardlines with Martha Stewart, and pet toys under the Bret Michaels name and so forth,” Binder said.
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PETM has also recently announced a new Disney relationship, offering Disney pet apparel and toys. Binder believes the company will continue to form new partnerships in the future, further distinguishing itself in the market with a focus on the more affluent customer.
“They did announce this Disney (DIS) relationship, which is new, and I suspect there will be more to come on the partnership front. In summary, they’ve done a great job of distinguishing themselves in the marketplace with great products and partnerships,” Binder said.
Cracker Barrel Old Country Store (CBRL) has reduced its shares outstanding by 50% to 23.5 million since 2000, increasing earnings per share while maintaining a consistent strategy of providing nondiscounted country food and retail merchandise, says Gary Bradshaw, Senior Vice President & Portfolio Manager at Hodges Capital Management.
“They stuck to their knitting of providing great-tasting country cooking at inexpensive prices, and they didn’t get into the discounts like Chili’s, T.G.I. Friday’s or Applebee’s — I call it the “T.G.I. Chilibee’s” — where you go in and get two for $20 or two for $25. Cracker Barrel never engaged in discounting, and their customers have come back week after week for the same good food. Their same-store sales have been over 3%, which is much better than the industry average,” Bradshaw said.
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Bradshaw says the restaurant chain has about 625 locations along interstate highways, and it yields a dividend of about 3.26%. The store also monetizes the waiting room at the restaurants by including a retail store for T-shirts, toys and novelties.
“In addition, Cracker Barrel has a little retail store in the front of each restaurant where you can buy T-shirts, novelties and toys while you wait to be seated. They will do about $1 million of business in these retail stores. Of late, Cracker Barrel has rewarded shareholders by raising their dividend. Just this past quarter they raised it 50%, from $0.50 a share quarterly to $0.75 a share quarterly,” Bradshaw said.
The Boeing Company (BA) continues growing earnings as the world hungers for more fuel-efficient airplanes, making the aerospace company’s stock still a buy candidate as the company has overcome hiccups in performance, says Gary Bradshaw, Senior Vice President and Portfolio Manager at Hodges Capital Management.
“This is a company that has a long history of producing fuel-efficient airplanes, whether it’s the 737, the 777 or the new 787, and we can see Boeing’s business being good for the next 20 years. Even though the stock has done very well recently, it was only three or four months ago when Boeing was having the battery issues, when the stock was around $74 and we were adding to our Boeing holdings. It closed today around $98.67, and yet we still think it’s a great buy, because earnings, which were $5.11 in 2012, we think will go to $6.47 this year and $7.22 in 2014. The stock trades at 13.7 times next year’s earnings,” Bradshaw said.
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Bradshaw says BA is engaging in strategies to return capital to shareholders, and the management has overcome issues with plane batteries, which are generally not out of the norm when it comes to large-scale projects.
“Airlines want to replace the older airplanes that they have and Boeing is the premier company to do that. Boeing recently raised their dividend 10%, and they started a $3.6 billion share buyback, so we see earnings continuing to grow. Additionally, Jim McNerney has done a great job in managing Boeing. They’ve obviously had glitches with the batteries, and any time you start up a new project of this magnitude there are going to be hiccups. Yet they’ve overcome them in good fashion and the stock has done well,” Bradshaw said.
Ethan Bellamy is Robert W. Baird & Co.’s Senior Analyst covering master limited partnerships and U.S. royalty trusts. In an interview last May, this top-ranked oil and gas industry analyst was positive on BreitBurn Energy Partner’s (BBEP) royalty trusts and MLP management: “…and then longer term, we think that there’s potential production upside from their exposure to the Orcutt diatomite. We have a $21 target on ROYT, which implies 30% potential to our target and 9% in total rate of return. We think that’s attractive and really well-run. It’s actually one of the few that’s actively marketed by the folks that run it. The management team is the same folks who run BreitBurn Energy Partners, and that’s interesting because they are in the market every day and, incidentally while we are not talking about MLPs, today we do like the BreitBurn management team and BBEP as well.”
Daniel Katzenberg is Executive Director and Senior Analyst for Oppenheimer & Co., and he seconds this recommendation in his interview from last March: “On the upstream side, there are two names that I think are attractive. BreitBurn (BBEP) had a very active year last year in the acquisition market, and they currently have about $900 million available to make acquisitions this year. We expect that they’ll most likely use the majority of that and make accretive acquisitions. They had a secondary offering just a few weeks back, so I think they’re pretty well-positioned from this point going forward. I expect to get some acquisition announcements soon, and possibly of a large size, that will really improve their outlook.”
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Halbert S. Washburn, the CEO and a Director at BreitBurn Energy Partners, confirms that they are an acquisition-driven organization and explains their methodology in this interview from earlier this year: “We look at a lot of deals, and we get a very small amount of them. In 2011, we looked at roughly 200 transactions and closed two. In 2012 we screened about 480 deals and closed six. So we look at a lot of transactions. Our team is used to having deals fall through. Ninety-nine times out of 100, we don’t get the deal. But the deals that we do get, we get because we have worked them very hard, we understand them as well and better than as anyone. And then, we are able to make a strong and aggressive bid.”
