Qualcomm (QCOM) provides chips to all of the major smartphone manufacturers, benefiting from the massive global adoption of smartphones regardless of which company emerges victorious from the battle for mobile device dominance, says Christopher C. Grisanti, Owner, Co-Founder and Co-Portfolio Manager at Grisanti Capital Management.
“We basically view Qualcomm as the arms dealer to the whole smartphone industry today. They don’t care who wins in the marketplace — if Apple (AAPL) wins, they sell Apple chips. If Samsung (005930.KS) wins, they sell Samsung; they sell Motorola (MSI). When I own Qualcomm, all I care about is that the pie is growing as quickly as possible, and we think that that’s true,” Grisanti said.
Grisanti says QCOM doesn’t have to worry too much about whether smartphones are affordable in emerging markets, because different clients sell at different price points, making the stock a real play on smartphones. He also says smartphones is a trend that has had its profitability underestimated by some of the investor world.
“Qualcomm reported [recently], and it was up 5%. So even though it is not a particularly cheap stock, it’s one that: A, the market likes, but B, is not that expensive compared to the growth of the pie. It’s one of the few areas of technology these days that continues to grow by leaps and bounds,” Grisanti said.
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Joy Global (JOY) maintains value through its domestic aftermarket recurring-revenue strategy, and it has begun shifting its coal-mining equipment strategy to sell more to China, which currently consumes 50% of global coal and is expected to increase its energy needs going forward, says Michael McCloskey, President and Founder at GreensKeeper Asset Management Inc.
“[China’s] coal market is about four times the size of the U.S. market, so even if the U.S. market declines by 10% a year, Joy Global is going to make that up through exports, because the U.S. is a lower-cost producer than the Chinese,” McCloskey said. “Long-term, coal is still a decent story.”
McCloskey says that despite’s JOY‘s recent drop in stock price due to low natural gas prices, the stock maintains a baseline of value and is expected to grow in the next few years. He says the company recently engaged in acquisitions in China, and he says the company can prove a good value investment.
“Joy Global earned $7.22 last year, and this fiscal year it is going to be lower. But they’ll still earn $6.24, and we think paying 10 times earnings for a company whose earnings are likely to be materially higher five years from now is wise. They’re starting to make acquisitions, too. They bought a company in China last year for about $1.1 billion,” McCloskey said.
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SolarCity Corp (SCTY) pays low prices to solar manufacturers and is expected to benefit from decades-long energy savings, and it stands out as the only player with the liquidity and the market cap offering exposure to the part of the solar energy value chain that is expected to see the most value, says Aaron Chew, Vice President of Equity Research and Senior Alternative Energy/Solar Analyst at Maxim Group LLC.
“My thesis on SolarCity is that it is an amazing company, with impressive growth prospects, solid cash flow generation and returns on invested capital. It’s such a unique business model that I don’t think investors are going to have an easy time getting their hands around this,” Chew said.
Chew says the difficulty in understanding SCTY’s business model can be traced to GAAP-accounting, which requires immediately reporting of expenses of assets which are expected to long-term gains. He expects the company to report EPS losses for the next few years, and gains to be realized in 20 to 30 years.
“The challenge with investing and valuing SolarCity is that what they do is they sign a 20-year lease, so there is going to be a tendency every time they report earnings for everyone to say the revenue is only ‘X;’ but really, if you sign $1 billion in 20-year contracts right now, it’s going to show up as $50 million in revenue,” Chew said.
EnerNOC (ENOC) increases efficiency in energy consumption, aggregating negawatts through demand-response technology by managing the distribution of electric resources depending on very specific demand over different geographies at different times of the day, says Ben Kallo, Senior Analyst at Robert W. Baird & Co.
“In peak period electricity demand will actually turn down an eight-stack cooling system or turn down every other light in the aggregate over that territory. Rather than building new a power plant to meet that very specific demand, we can manage the demand with technology and reduce supply in areas where there is less demand and increase it in areas where demand is increasing,” Kallo said.
ENOC is the leader in this area, and the company is poised for a positive next two years as they emerge from regulatory overhangs due to the novelty of its energy solutions, Kallo says. ENOC may also appeal to larger energy services companies for future acquisitions given its good balance sheet and large footprint in the market, he adds.
“A small-cap company, they are basically forging the road on the regulatory side because it is somewhat of a new market. The stock gets rocked around a little bit when they have regulatory issues, and we’ve seen that over the past few years they’ve gone through too big regulatory battles, just emerging from that and really set up for a great 2013 and 2014 — good visibility in their business model,” Kallo said.
First Solar (FSLR) builds projects for large-scale customers in a more cost-efficient manner than in the past, benefiting from the low prices caused by an oversupply of solar modules and moving away from subsidized plays and into markets that make sense from a cost perspective, says Ben Kallo, Senior Analyst at Robert W. Baird & Co.
“First Solar plays predominantly, almost exclusively, in the utility-scale business. They are building multihundred megawatt projects at this point, or at least 50 megawatts or above, for utilities out in the desert. They sell the power through long-term power-purchase agreements,” Kallo said.
Kallo rates FSLR “outperform” among the solar energy companies, and he says this downstream company has positive earnings despite investor confusion due to negative headlines about the upstream solar industry. He also says there are huge markets globally for companies like these, among them sparsely populated countries with lots of sunlight like South Africa, Australia and India.
“Interestingly enough, a place that won’t really think about it — the Middle East — is also a market that’s developing just because generating electricity from solar is actually cheaper from the opportunity cost perspective than burning oil could generate electricity,” Kallo said.
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Tesla Motors (TSLA) will hit a run rate of 20,000 electric cars produced annually, production expected to meet a dramatically increased number of reservations now that Tesla’s Model S won the Motor Trend Car of the Year a few months ago, says Ben Kallo, Senior Analyst at Robert W. Baird & Co.
“[Tesla] is the first successful new car company in decades, and they continue to succeed. There are about 30 stores out there, but probably 99% of the population has never even seen a Tesla. They project they will sell 20,000 cars in 2013, and that success will accelerate demand for the car,” Kallo said.
Kallo says the production ramp-up will drive costs down, and Tesla is currently working on producing a moderately priced car in the $35,000 range, which would also help sales, creating a species of snowball effect where sales drive more sales. He also says TSLA currently has the best electric car technology out there, the primary reason of which is the battery.
“The Tesla Model S goes 300 miles on a charge versus a Nissan Leaf, which goes 70 miles to 100 miles on one charge. I think that battery range makes a big difference when people are deciding which electric vehicle to purchase. They want enough range to take away the anxiety of running out of power while they are driving somewhere,” Kallo said.
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Fusion-io (FIO) pioneered the flash storage architecture for increased input/output, staying ahead of the pack and tying all the growth drivers of data storage by speeding up performance in a cloud computing environment where Big Data continues growing unabatedly, says Andrew Nowinski, Assistant Vice President and Research Analyst at Piper Jaffray & Co.
“The larger data sets also create the need for better performance. That is where nonvolatile memory technologies such as SSDs, PCIe, NAND flash cards, and all-flash storage arrays come into play. Fusion-io is the pioneer of the space, but nearly every storage vendor, both public and private, is developing products for this market,” Nowinski said.
Nowinski says that 63% of CIOs are planning on increasing their data storage spending in 2013. He also says, however, that data storage stocks are volatile, with FIO drastically moving from the $30s to the midteens, then up and now down again, and some of FIO‘s largest customers delaying spending until the second half of the year.
“Fusion-io delivered relatively in-line December quarter results, but they drastically reduced their FY13 outlook. This was a function of an unexpected slowdown at Apple(AAPL) and Facebook (FB), in which these two strategic customers deferred or delayed spending for about six months. Management does not expect this spending to resume until the September quarter,” Nowinski said.
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CoreSite Realty Corporation (COR) catches investor attention among REITs due to its capacity to engage in multiple verticals in data storage and its capacity to expand multiples, especially as valuations are mixed in the REIT space in general, says Jonathan Atkin, Managing Director at RBC Capital Markets.
“CoreSite is the name that stands out among the listed REIT data center operators that saw the most notable multiple expansion, reflecting that company’s ability to tap into both retail and wholesale demand,” Atkin said. “In the wholesale space, going back to second quarter and third quarter, there was some softness in the operating results, but I think that’s gradually improving. The retail space performed better overall, reflecting stronger supply/demand and pricing dynamics.”
CoreSite, a fairly recent REIT convert among data centers, and its competition are currently looking to expand geographically through small M&A activity, although Atkin says larger deals may occur.
“I think you will continue to see tuck-in acquisitions. Recent examples of companies doing that are CoreSite, Equinix, Telecity, Digital, and then larger deals have been done by Digital and Equinix. I think that this should continue, driven principally by geographic expansion, maybe a little less so in footprint consolidation,” Atkin said.
InterXion Holding NV (INXN) experienced solid growth in Europe despite tough macroeconomic conditions in the region. Todd C. Weller, Managing Director at Stifel, Nicolaus & Co., Inc., says the secular growth in carrier-neutral colocation outweighed European declines, and he says INXN is his top pick in the sector.
“They’re in 11 countries in Europe. Again, they provide space and power, but the value proposition is that if you put your IT infrastructure in one of their data centers, you’re going to get access to lots and lots of networks over there. That’s important for latency-sensitive applications. A back-office financial application doesn’t need access to hundreds of networks, but if you’re an online gaming site you do, because the performance is important,” Weller said.
Weller says InterXion is trading at a discount to competitor TeleCity Group Plc (LON:TCY), even as the stock saw more multiple expansion in 2012 relative to some of the data center REITs. He says that the move toward a REIT-like structure is a possibility for the company, but he says that is long-term and the upside may be expected to come from other strategies.
“We think InterXion is well-positioned to get its fair share. From a fundamental perspective, 2012 was a big year of capacity growth for them — they were capacity-constrained in 2011 — about 18% capacity growth is expected in 2012, so we think that gives them a good ability to accelerate growth in 2013,” Weller said.
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