Hospira (HSP), the leader in generic injectable drugs, recently encountered a setback with the FDA that lead to a closure of one of its primary manufacturing facilities, but the company should be able to recover with its strong leadership, says J. Jeffrey Auxier, President and CEO of Auxier Asset Management, LLC.
“They’ve got a strong, experienced operator in CEO Michael Ball who came from Allergan (AGN) in 2011. We think the odds are high that the problems will be solved and the recovery highs will be well worth the wait,” Auxier said.
Auxier uses HSP as an example of the type of stock he likes to get in early on for the double or triple play, because though the stock was crushed into the high $20s, Hospira‘s problem is fixable.
“In today’s world, a somewhat invisible but lethal risk is the loss of purchasing power. Again, it is imperative to work harder to aim for the double or triple play on all our investments, and we need to get adequately compensated for the risk,” Auxier said.
Sunoco Logistics Partners L.P. (SXL) seems undervalued when adding all of its component parts, including assets unrecognized by the market such as refinery plants, cash and a spun-out component part, qualifying it as a special-situation investment in the eyes of Jonathan S. Vyorst, Senior Vice President of Paradigm Capital Management, Inc.
“We had bought Sunoco back in January 2012, and at that time, people were selling off shares because the company had a refinery on the East Coast that was losing money. Sunoco had a plan to close down the refinery, and thereby stem its losses,” Vyorst said. “It also had other assets that made it much more valuable than the market recognized.”
Vyorst added up all of SXL‘s characteristics: the 5,000 Northeast gas stations, a publicly traded master limited partnership, the spinoff of its metallurgical coking business, its IPO execution and SXL‘s net cash of $700 million, and decided Sunoco was worth at least $50 a share while selling at $35.
“All one had to do to recognize its value was to take out a calculator and add up the different pieces,” Vyorst said. “When Sunoco spun off SunCoke Energy, its share price increased by 10% or 15%. Then it put in place a plan to repurchase about 20% of its shares with the excess cash it had on its balance sheet. That increased the value as well. Then in April, Energy Transfer Partners offered to buy Sunoco for $50 a share.”
Coach (COH) trades in the lower range of its historical valuation range and has a dividend yield. Marian Kessler, Portfolio Manager and Equity Research Analyst Becker Capital Management, expects this fine-accessories marketer to overcome seemingly short-term mishaps and includes COH in her high-quality, value investment portfolio.
“Coach, which has traditionally been a beloved growth name selling at a premium valuation multiple to the market and often to the retailers in general is one. Coach had a series of missteps, which we think are short-term in nature. Following a difficult fourth quarter, the stock is now trading at about 13 times earnings and an enterprise value of EBITDA of 8.5 times, which is in the lower quartile of its valuation range over the last 10 years. It has a decent dividend yield at 2.5%,” Kessler said.
Kessler says stock performance in the market has recently been heavily macro-driven, and she says much of the volatility can be attributed to the global crisis, fears about the European Union and the euro, and other headline risks. Kessler takes advantage of volatility, she says, and uses four primary criteria to dispassionately select stocks like COH.
“We buy stocks that meet four primary criteria. The stocks must be out of favor, as measured by sentiment or trading range, and they must be good-quality companies. We do not buy turnarounds and are not contrarian investors. We don’t buy distressed or speculative issues. We buy stocks that are trading at attractive valuations either to their historic norms — relative value — or stocks trading at a valuation discount to the market as a whole, otherwise coined an absolute value. The fourth criteria for inclusion in a Becker portfolio is that a company has to have a stable-to-improving roadmap in the future. For us, it’s not enough to buy a cheap stock. We want to buy good-quality companies with good growth prospects, but at valuation discounts,” Kessler said.
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Pacific Continental Corporation (PCBK) saw net income in 2012 rise 136.9% over 2011, reflecting the solid growth of their primary niche segments such as health care and nonprofit, said Roger S. Busse, President and Chief Operating Officer of Pacific Continental Corporation.
“Dental banking currently represents about 31% of our total portfolio, or $270.8 million. We have made more than 1,000 dental loans in the past 10 years. It’s a high-performing portfolio. During 2012, and similarly for the last three years, we have had less than 0.20% in losses. The growth in the dental portfolio was about 31% over the previous year,” Busse said.
Busse notes that the growth in all segments was funded by a solid expansion in core deposits. Additionally, PCBK has more than 1,000 nonprofit banking relationships, and expects growth in that area as well.
“Down the road our nonprofit relationships will provide us with superior core funding. I say that because even though donations to nonprofit organizations dropped fairly substantially during the recession, the core deposits related to our nonprofit clients remained fairly steady,” said Busse.
Hilltop Holdings (HTH) and Texas Capital Bancshares (TCBI) obtain a large part of their revenue through their sizable mortgage operations in commercial warehouses, and these Texas banks are expected to grow and remain profitable, says Brett Rabatin, Managing Director of Equity Research at Sterne, Agee & Leach.
“Mortgage is a high percentage of [Hilltop Holdings‘] pretax income currently. I think people are a little overly concerned about where mortgage might normalize, but I think as they become more well-known and it becomes obvious that their profitability is going to continue to be pretty strong, that that’s a name that should benefit from both valuation improvement as well as a better knowledge by investors and the Street,” Rabatin said.
Texas Capital also has a sizable mortgage operation through its commercial warehouse exposure, which has seen meaningful growth in the past two years. Rabatin says TCBI has the potential for increased profitability and should continue to grow their commercial operations in the Lone Star State, and he says the pullback the stock recently suffered was overdone.
“I think people are concerned that their mortgage earnings will create some sort of a shortfall over the next year, but I’m actually pretty bullish on that name, given the potential for profitability to stay pretty elevated and for them to continue to grow their commercial operation in Texas. So I think the pullback in the stock, given some mortgage-related fears, is overdone. That name should do well, especially from the low $40s,” Rabatin said.
Superior Energy Services (SPN) provides investors with exposure to North American land oilfield equipment and services, a segment expected to trend upward beginning in 2013. and which may provide a good opportunity after the earnings call for investors in the longer term, says Matt Beeby, Senior Equity Research Analyst of Oilfield Services at Williams Financial Group.
“I think investors need some exposure to North American land. I don’t believe it’s a great market for 2013, but I think it will be headed in the right direction. The trajectory is going to be upward in the year, I believe. Superior has about 70% of their business in North America onshore. They also have nice diversification from U.S. Gulf activity offshore, and then their international presence. Those two pieces are about 15% of their business each,” Beeby said.
Although Beeby doesn’t expect North America to fully recover this year, he says Superior Energy Services provides a longer-term portfolio-diversification opportunity for investors. He says that natural gas production in the U.S. is currently affected by low commodity prices, but he says that nevertheless a baseline of production is expected to be maintained in the continent.
“Part of that is low natural gas commodity prices, between $3 and $3.50. It got as low as $2 in midyear 2012, and without a better picture on industrial demand and economic-driven demand, it’s hard to see gas prices improve meaningfully from here. The result is a great migration of both E&P companies and service companies trying to get more exposure to oil, and I think that’s the right move. At some point it starts to make sense that the capabilities to keep up with the natural gas production that we need, the baseline production, will be part of the picture,” Beeby said.
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Cameron International Corporation (CAM) remains underappreciated in the offshore drilling equipment and services space as the company trades at a discount to companies like FMC Technologies (FTI) and is expected to reverse some of its share loss in the subsea production equipment from a geographic and consumer standpoint, says Scott Gruber, Senior Research Analyst at Sanford C. Bernstein & Co., LLC.
“Within the equipment space, I think the Cameron story is interesting because you gain exposure to growth and production equipment at a much cheaper price than FMC. Within offshore drillers, rig rates started moving early in the cycle. I think they’ve reached their peak within the deepwater in the low $600,000 a day range, and I just don’t see much upside from there because they’re generating very good returns on incremental investment,” Gruber said.
Gruber says even the most bullish sellside analysts underappreciate Cameron‘s benefits from the major themes within oil and gas. He says the oil and gas equipment and services company would recapture offshore drilling customers this year, and the geographic and customer standpoint look positive for the company.
“I believe [Cameron‘s] growth prospects are underappreciated even by a group of sellside analysts who tend to err on the side of being overly bullish. I believe that their revenue growth can exceed consensus expectations through 2015, and I think the market will gain insight into that trend via very healthy order intake for their capital equipments in the quarters ahead,” Gruber said.
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DeVry (DV) navigates through headwinds in the for-profit higher-education sector by generating incremental cost savings in a hope to regain some its share price after a massive loss in 2011, says Daniel G. Lysik, Founder and Managing Director of Pratt Capital, LLC.
“The stock price fell to $20 from a high near $70 back in the beginning of 2011,” Lysik said. “Like everyone in the industry, recent enrollment trends have been hurt by becoming less dependent on third-party channels and cyclically weak demand due to the economy and weakening consumer sentiment toward higher education. To help offset enrollment challenges, DeVry has focused on generating incremental cost-savings, which could add close to $1 per share in earnings over the next two years.”
Lysik believes that as enrollment improves over the next couple of years, DV could generate $4 per share of normalized earnings, and with the company’s pristine balance sheet, DeVry is geared up to be a solid long-term value opportunity.
“At time of purchase, DeVry’s market price, ex-cash, was approximately four times normalized earnings and a normalized earnings free cash flow yield of 25%. Even if it took three to five years for DeVry’s share price to reach its intrinsic value of more than $40, in our opinion, purchasing shares at $20 provided a very attractive holding period return,” Lysik said.
Hewlett-Packard Company (HPQ)‘s new management team is putting the company on course to return more cash to shareholders, and HPQ‘s low stock price and tremendous amount of operating cash flow are setting the company up to be a solid value opportunity in the technology sector, says Daniel G. Lysik, Founder and Managing Director of Pratt Capital, LLC.
“At current prices, Hewlett has a price to cash flow multiple below three, a forward price to earnings multiple below five and a free cash flow yield over 20%. Current valuation levels are at 30-year lows, and significantly below where they should be for a company with the franchise and market-leading positions as Hewlett-Packard,” Lysik said.
New management changes have led to better decisions for the company regarding asset integration, right-sizing the cost structure and new product innovation, and the amount of operating cash flow HPQ is generating should yield more share repurchases and increased dividends, says Lisik.
“With more than $20 billion in cash and long-term investments, as the company continues to reduce debt, there will be a significant opportunity over the next couple of years to return more cash to shareholders through share repurchases and increased dividends,” Lisik said. “I believe Hewlett-Packard has normalized earnings power closer to $5 per share as the company sees resumption of revenue growth and steady operating margin improvement. We believe Hewlett-Packard’s intrinsic value is north of $40.”
Marvell Technology Group Ltd. (MRVL) provides investors with a long-term investment opportunity as the stock has declined 60% in price over the past three years and the company continues investing heavily in research and development, with a potential to overcome investor concerns about patents and margins, says Daniel G. Lysik, Founder and Managing Director at Pratt Capital, LLC.
“Rarely do you see an innovation leader with annual research and development spending be more than 40% of their current market price, in essence providing investors with a free call option on the company’s future innovation. Marvell’s current market price, ex cash and investments, is less than three times its normalized earnings power, providing, in our opinion, a wonderful long-term opportunity,” Lysik said.
The stock’s precipitous fall can be attributed partly to investor concerns about MRVL‘s wireless segment, patent challenges and pressure on operating margins from margin compression and its incremental R&D spending, Lysik says. This wireless, storage and networking semiconductor company, however, continues managing to keep its clean balance sheet clean.
“Marvell is an industry-leading innovator, spending nearly 30% of its revenue on research and development. The company has a pristine balance sheet, no debt, and cash and long-term investments in excess of $2 billion or nearly $4 per share. More than 40% of the current market price is the cash and investments on the balance sheet,” Lysik said.
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