Eagle Bancorp (EGBN) delivers strong loan growth while containing expenses, and the company has posted positive results in the last few quarters, leading Christopher Marinac, Managing Principal and Director of Research at FIG Partners, to estimate a possible above-average premium for the stock for price to tangible book as well as a price to earnings basis.
“From my standpoint, one of the best growing companies in the country has been Eagle Bancorp. The company has had a very nice consecutive string of positive earnings surprises, including fourth quarter announced last week. The company, I think, is still well-positioned to grow and produce a healthy return on tangible common equity over 13% in 2013,” Marinac said.
Marinac says revenues are outpacing expenses at EGBN, causing efficiency ratios to go down and earnings and returns to go up. He says the bank’s conscious decision not to engage in M&A and focusing on operations makes it capable of surprising Street estimates yet again.
“It’s a perfect example of a company who made a strategic decision not to do M&A, and by virtue of not doing M&A they’re keeping their overhead very low and they’re getting a fair amount of operating leverage, which in plain English means that your expenses are growing a lot slower than your revenues,” Marinac said.
Superior Energy Services (SPN) operates in the North American land side with a broadly diversified services portfolio, and the combination of financial metrics, historical performance and exposure to the U.S. GOM may provide investors with some relief as distress may come in 2013, says John Keller, Vice President in Equity Research at Stephens Inc.
“On the North American land side, we like Superior Energy Services,” Keller said. “It’s a broadly diversified service company in North America land, probably best known for their pressure pumping, coil tubing assets and a little bit of offshore. They’ve also got a small international footprint.”
Keller says that, although the North American land market is suffering from pricing pressures due to increase drilling efficiencies, companies like SPN are an option investors can partake in with some comfort.
“With the challenging environment that we see in North America, we think that the combination of valuation, leverage to the U.S. Gulf of Mexico, quality management team and a pretty good operational track record sets them up nicely as a company you can be comfortably invested for a somewhat uncertain and potentially tough environment through 2013,” Keller said.
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BB&T Corporation (BBT) has emerged from the financial crisis on the positive side with its increased M&A activity, says Tom Mitchell, Senior Analyst at Miller Tabak + Co., LLC.
“BBT (BBT) has made relatively few mistakes and has consistently built its portfolio largely by buying community banks, midsize banks or on occasion distressed banks,” said Mitchell.
What has worked for BBT, Mitchell says, is the acquisition of banks in their own territory or in a similar territory demographically,which saves on operating expenses while positioning greater efficiencies. He says BBT can keep up the M&A activity as opportunities abound for acquisitions in the Southeast.
“BBT, we think, is well worth buying for the additional 5% to 6% a year they can add to their earnings and book value through making smart deals, which they’ve done very consistently for decades,” said Mitchell.
Transocean Ltd. (RIG) is grabbing investors’ interest with the spin-off of assets and a new management team at the helm, says Longdley Zephirin, Chief Executive Officer, Director of Research and Senior Analyst at The Zephirin Group.
“After all the legal battles that they’ve had, now, with the settlement with the DoJ, they’ve spun off assets, and they have new management in place,” said Zephirin. “I think investors are looking into Transocean.”
With the current liquidity in the oil & gas sector, investors are looking at names that may have once been out of favor, such as RIG, Zephirin says. He believes that investors will be looking to sell out of companies like Ensco (ESV) and Diamond Offshore (DO) to add on their investment in RIG.
“Investors are looking at ways to hedge the sector, which they should, because there’s liquidity,” Zephirin said. “The sector has the best liquidity out there in the marketplace right now.”
Constellation Software (TSE:CSU) acquires smaller software companies in highly vertical markets to dominate the software needs in those very specific niches, becoming the go-to company in multiple areas and sharing efficiency practices across the company’s holdings, says Peter Hofstra, President and CIO at Manitou Investment Management Ltd.
“Think of a golf course scheduling software, that type of thing, and [Constellation Software will] come in and completely dominate that niche market. And they’ll do that across things like bus scheduling, but they will come in and dominate these various niches with these smaller software companies, and then look to aggregate these and share best practices and so on,” Hofstra said.
Hofstra says that, because TSE:CSU is a software company, they don’t have the need to deploy large amounts of capital, and they can often do an earn out with their acquisitions. Moreover, the software is licensed, and there generally are upfront payments from their clients, making the holding one of his favorite companies.
“[Constellation Software is] a company that we think has taken a while for the market to really recognize its capacity to grow, and one that we’ve done very well with at Manitou. It instituted a dividend over a year ago, and it’s now in the index, so it’s become a company that’s certainly gaining more attention,” Hofstra said.
Pacific Drilling SA (PACD) operates four ultradeepwater drill ships for a blue-chip customer base, and they have four more rigs scheduled to be delivered in the next two years, standing out as the purest play on ultradeepwater with the newest fleet in the industry, says John Keller, Vice President in Equity Research at Stephens Inc.
“They have four ultradeepwater drill ships that they are operating today: two with Chevron (CVX), one with Total (TOT) and one with Petrobras (PBR). PACD is a very young company with a blue-chip customer base,” Keller said. “When all is said and done, you’ve got a company that’s growing very appreciably over the next several years.”
Keller says deepwater is one the themes gaining traction in the coming years, and offshore drilling is occurring all over the world now, not only in what was previously considered the core markets. Keller highlights geographies like East Africa, Southeast Asia, Australia and the North Sea, as well as the U.S. Gulf of Mexico as regions seeing drilling for resources.
“As I said earlier, there is a global proliferation of deepwater, and I think the companies with new assets are going to be very well-positioned, for efficiency and safety reasons. There are few small-cap ways to gain exposure to the ultradeepwater sector, so Pacific is a good company that fits a niche in the marketplace and in investors’ portfolios,” Keller said.
McDermott International (MDR) will see an increase in order activity as the construction cycle turns in its favor, and demand is expected to grow for the platforms and subsea infrastructure this offshore construction company builds, says John Keller, Vice President in Equity Research with Stephens Inc.
“You’ve seen a couple of good years of drilling activity on a global basis, and the construction cycle tends to lag drilling 18 to 24 months as a general rule,” said Keller. “As a result, we should be coming into a period in 2013 where McDermott is going to get a large number of awards. There should be very strong bidding flow and order activity.”
Keller says offshore makes for a better long-term investment thesis due to the secular nature of the growth, and he says given the slow movement of the major oil and gas companies in years-long projects offshore, this segment is less shaky when compared to others in energy production.
“As you look at other parts of the globe, I think the fundamental outlook for the offshore sector in general is pretty stout. You’re underpinned by the deepwater, not only in the core markets — the Gulf of Mexico, Brazil, West Africa — that have been and look to remain strong, but also with the proliferation of deepwater development in other parts of the world,” Keller said.
Wells Fargo & Company (WFC) grows revenue and continues creating efficiencies in its super-regional banking services, serving customers in the Midwest and Southeast. Growth for this super-regional bank, according to Marty Mosby, Managing Director and Large-Cap Bank Analyst with Guggenheim Securities, is of high-quality, and the stock price is expected to see upside.
“They’re seeing some revenue growth and have continued efficiencies that they can gain with the scale of the company that they have, so in our opinion Wells is a high-quality super-regional bank that serves customers in these regions that we do think has a lot of upside as they go through this year,” Mosby said.
Mosby believes Wells Fargo will overcome the different pressures that are currently a part of the banking industry, and its size relative to some of its regional competitors will aid WFC in gaining efficiencies relative to peers and aiding in the upward movement of the equity price.
“If you look at the high-growth quality kind of names that we like, that would be Wells Fargo, which is not just particular to these regions but serves customers in these two regions. We think that the balance that they have in their business mix will overcome the different pressures that are going on out there,” Mosby said.
Hercules Offshore (HERO) is one of the primary beneficiaries of the long-term reduction in the supply of rigs in the U.S. Gulf of Mexico, coupled with an uptick in shallow-water activity after years of declining rig count, making the few companies that remain beneficiaries from the increased demand for their services, says John Keller, Vice President in Equity Research at Stephens Inc.
“Given the fact that the rig count has declined from roughly 140 10 or 12 years ago to roughly 40 rigs today, the supply is such that everyone who remains is in a pretty good position,” Keller said. “Hercules is the primary driller out there with about 50% market share, so they are the right player in the right market at the right time.”
Keller says the large exposure HERO has to the reinvigoration of the shallow-water U.S. Gulf of Mexico makes it a primary beneficiary, and he says the U.S. Gulf of Mexico, along with developments in Africa and Brazil, is one of the places that look to remain strong for companies like this.
“As you can see by the stock of late, HERO is a primary beneficiary of the shallow-water U.S. Gulf of Mexico reinvigoration,” Keller said. “You’ve seen some property transactions out there which have driven incremental interest and activity on the shelf.”
Comerica (CMA) is seeing improvements in its commercial loan growth after a controversial acquisition of Sterling Bancshares in Texas a couple of years ago at 2.3 times book, and the company also now recently raised its dividend, leading Mark Palmer, Managing Director & Equity Analyst at BTIG LLC, to rate this stock a “buy.”
“It’s hard to argue against the results that Comerica has shown as a consequence of its increased Texas penetration thanks to owning Sterling. So there you’re seeing commercial loan growth help Comerica — which has a portfolio which is 85% floating rate — to nevertheless deliver earnings beats and see its shares appreciate, because it’s able to offset the pressures on its net interest margin and net interest income,” Palmer said.
CMA currently is among the banks with the best capital ratios in the industry, and Palmer believes the bank will have little trouble getting its requests for capital return approved by the Federal Reserve in 2013. The bank is currently in the middle of the CCAR process, and he thinks CMA‘s plans will be approved.
“KEY and Comerica are in very good stead going into the process. They’re both already returning a very high percentage of their income to shareholders, and we believe that’s sustainable. Comerica actually just increased its quarterly dividend from $0.15 to $0.17 a few days ago,” Palmer said.
