eBay Inc (EBAY) is overcoming its struggles in the e-commerce market against companies like Amazon (AMZN) by implementing a new strategy using data to improve user experience, and as a result is seeing growth in earnings per share, says James H. England, Lead Manager at Aster Investment Management, Inc.
“The perception in the market was that there was no growth left in the auction model and that companies like Amazon (AMZN) were winning the competition in fixed-price sales, resulting in continued e-commerce market share losses for eBay,” England said.
Consequently, EBAY put new management in place and fundamentally changed the way they managed the marketplace business, says England. By fixing problems with customer service and using technology to identify what seller behavior is most appealing to buyers, EBAY has improved the customer experience, leading to user growth and and an increase in earnings per share.
“The result of all this is that annual earnings per share grew from $1.73 in 2010 to projected earnings per share of $2.72 this year. In addition, the price-to-earnings multiple has expanded from 13 times when we invested to 20 times currently,” England said.
Denny’s Corporation (DENN) is rebounding from several quarters of declining earnings, and is seeing gradual improvement as new management implements a turnaround strategy, says James H. England Jr., Lead Manager at Aster Investment Management, Inc.
“The company had experienced several quarters of declining earnings per share due to rising food costs and lower sales. Sales were hurt by declining traffic,” England said. “Despite these problems, the company did have some things going for it, such as scale advantages and high brand awareness.”
Positive changes in the company started occurring when a new management team was put into place, says England. DENN‘s new management is now focused on refranchising company stores and rebuilding the brand. This strategy and DENN‘s attractive cash flow yield are promoting earnings growth for the company.
“We see them continuing to grind out gradual improvement and believe the company could eventually earn over $0.50 a share in normalized earnings from less than $0.30 in 2012,” England said. “We believe that Denny’s can continue rebuild the brand and drive years of earnings growth.”
Valero Energy Corporation (VLO) refines North American crudes in its Gulf Coast and mid-Continent refineries, benefiting from the large discount of domestic crude prices relative to international crudes and having a competitive advantage over refiners paying international market prices for their raw materials, says Jonathan S. Vyorst, Senior Vice President at Paradigm Capital Management, Inc.
“Valero is interesting because there is currently a large supply of oil being produced in the United States and Canada that sells for a substantial discount to oil sold on international markets. To give you a sense of the discount, in the fourth quarter, the differential between West Texas Intermediate and Brent crude was over $20 per barrel,” Vyorst said.
Valero is the largest independent refiner in the United States, and Vyorst says the domestic focus shift is changing the nature of the petrochemical and refinery industries in the United States.
“U.S. refiners benefit from that because they can buy oil locally from domestic and Canadian producers and then sell it as refined products, such as diesel or jet fuel, to customers in Latin America and even Europe. In the fourth quarter, for the first time ever, Valero bought all of the light oil it uses on the Gulf Coast from domestic producers,” Vyorst said.
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Apple (AAPL) currently sells for about 11 times trailing 12-month earnings, changing its investor base from growth to a value investors despite being a well-run, innovative technology company. Jonathan S. Vyorst, Senior Vice President at Paradigm Capital Management, currently holds the company in his investment portfolio.
“We believe in finding good companies, high-quality businesses that can grow and increase their intrinsic value over time. We also recognize that the market often overpays for investments, and that that has caused a lot of grief over the past 10 years. And so we are very conscious of the price that we pay for a security,” Vyorst said.
Vyorst does not expect AAPL‘s competitive innovation edge to decrease to the extent many investors do. He also says his investment strategy focuses on buying high-quality businesses selling at steep discounts, a strategy he says provides better upside return and hopefully better downside protection in volatile markets.
“I recognize that the growth rate that Apple had in the past is unlikely to continue into the future just because of the law of large numbers. However, I think people are underestimating the innovation that exists in the company. There’s a certain intellectual asset that the company has from having hired the best people in Silicon Valley and that R&D capability is a tremendous competitive advantage,” Vyorst said.
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Noble Corp. (NE) temporarily trades at a discount to peers in the offshore drilling services sector because of challenges in bringing newbuild rigs to market and getting them to operate smoothly, says Edward C. Muztafago, Vice President of Investment Research at Societe Generale Group.
“Generally, it takes several quarters to work through these newbuild efficiency issues,” Muztafago said. “As Noble works through those issues, and the fact that the stock has been so heavily discounted due to the cost associated with newbuild downtime, some of the valuation discrepancy will go away.”
Muztafago says NE has been performing solidly since his coverage initiation on the stock about a month and a half ago. He also says temporary execution hurdles are common in the space, and many companies have overcome the initial issues in a few quarters.
“The stock has been a pretty solid performer since we initiated about a month and a half ago, but on a valuation basis it still trades at a pretty decent discount to its peer Ensco (ESV), and an even greater discount to its peer Rowan (RDC),” Muztafago said.
National-Oilwell Varco’s (NOV) reputation as a good operator and the stock’s positive track record in the last five years hasn’t been enough to quell investors’ doubt about the company’s ability to maintain its order flow going forward, but Nigel Browne, Equity Research Analyst at Macquarie Capital, says this hesitation in unwarranted.
“I think that this discussion is unwarranted in the long term,” Browne said. “Every success, new oilfield or deepwater discovery that we find is going to lead to more orders for our capital equipment names like Cameron (CAM) and NOV, so despite the underperformance of NOV year to date, that’s the name that I continue to hold a ‘buy’ rating on.”
Browne looks at crude oil price and spending in seismic technology and data acquiring. He says NOV is poised to benefit from the increase in spending by E&P companies, as the more they look for oil, the more they need to spend on increasingly better equipment and services.
“Brent crude oil is currently sitting at around $115 per barrel, and WTI is sitting at $98 or so — as of this interview. That’s a really positive signal for a number of E&P companies to accelerate spending, which in turn will consume a lot more services,” Browne said. “This is a secular, thematic tailwind. You’re going to have approximately 78 new offshore rigs being deployed into the fleet in 2013 alone.”
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Halliburton Company (HAL) has seen its stock rally more than 35% and has benefited from sustained fracking activity, despite price degredation, and the pricing decreases caused by the oversupply of pressure pumping capacity in North America, says Nigel Browne, an Equity Research Analyst at Macquarie Capital.
“We started to see pricing degradation in fracking services in North America, driven by the crude oil prices that fell off on global macroeconomic fears. But we did not see a huge downturn in activity; instead, we saw a number of operators pushing some of their noncritical projects to the right,” said Browne. “Second, there was an oversupply of pressure pumping capacity in North America to the tune of approximately 20% to 25%. As a result, we saw pricing decreases, and Halliburton was most levered to that headwind.”
Browne upgraded HAL from “neutral” to “outperform,” and he says the company will see advantages in sustained spending in exploring and drilling for new reserves while the industry and financial markets grow more comfortable with the global macroeconomic picture.
“Brent crude oil is currently sitting at around $115 per barrel, and WTI is sitting at $98 or so…That’s a really positive signal for a number of E&P companies to accelerate spending, which in turn will consume a lot more services,” Browne said.
Schlumberger Limited (SLB) is expected to gain international pricing power for its international oil services as the gap between the large services contracts and the large equipment awards comes to a close, performing better than large peers with more of a North American exposure, says Edward C. Muztafago, Vice President of Investment Research at Societe Generale Group.
“You have the potential to see an international recovery kick in as you get into the back half of the year, and I think that gives Schlumberger a lot of tailwind on a relative basis. They generate about 70% of their revenue from international, where Baker (BHI) and Halliburton (HAL) are a little closer to 45% or 50%,” Muztafago said.
Muztafago rates Schlumberger a “buy,” and he says the company’s technology leads the group with a heavy focus reservoir optimization with data and technology suites oriented towards fracture mapping, and also through Framo Engineering, its subsea boosting pump division. The company’s technology is expected to prove helpful as international offshore demand grows.
“There is somewhat of that shift offshore internationally as well, because as you start to go into some of these ultradeepwater projects, there’s really only handful of service companies that can ultimately provide the services to drill these high-end exploration wells. So we’ve been somewhat positive on the multiservice names overall for quite some time, regardless of our opinions on what may happen relative in North America right now,” Muztafago said.
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Atwood Oceanics, Inc. (ATW) has bypassed investor concerns of drilling companies reporting operating-cost guidance, as the company reported its guidance for 2013 a quarter ago and thus is outperforming some competitors, says Matt Beeby, Senior Equity Research Analyst of Oilfield Services at Williams Financial Group.
“They’re a fiscal quarter ahead, and they had already, a quarter ago, reported their guidance for the fiscal year 2013. This quarter, they came back and they basically just reiterated their guidance for operating costs. I think that’s why they have of outperformed year to date, particularly against someone like Diamond (DO),” said Beeby.
Beeby also says Atwood has been his firm’s top pick for a long time because of its other value characteristics, including its growth profile.
“Across the space, I like Atwood. That’s been the top pick for some time. They’ve got that growth profile, the year-over-year continuation of earnings growth, and they’re at a reasonably attractive value today,” Beeby said.
Ensco plc (ESV) has positioned itself favorably in the offshore drilling market with a steady backlog and a build program that was started ahead of peers, and the company’s large asset base and capex foresight allows it to reap the rewards of previous investments, says Matt Beeby, Senior Equity Research Analyst of Oilfield Services at Williams Financial Group.
“[Ensco] started their new build program a couple of years in advance of a lot of drillers, so they’ve gotten most of their large cash flow outlays largely taken care of. They still are taking delivery of assets, but given their larger asset base, they have the ability to, I think, do a more meaningful return of cash to shareholders, which is something that a lot of people are looking for today.”
Beeby says earnings for offshore drillers continue growing even as companies across the board are building rigs, and smaller companies in the space have the potential to double their earnings in the next four years.
“The demand is out there, and we’re seeing longer-term programs that work at a reasonable commodity price; it doesn’t even have to be $95 a barrel oil. If you have confidence that oil will be above $80, generally everything across the globe is going to be profitable to the companies that continue to drill,” Beeby said.
