Carnival Corp. (CCL) and Royal Caribbean Cruises (RCL) present appealing valuations after unfortunate effects like influenza, storms and a shipwreck, and they have both seen double-digit growth in their stock price since then, CCL at 18% and Royal at about 40%, says Harry C. Curtis, Managing Director & Senior Analyst at Nomura Securities International, Inc.
Both CCL and RCL are “buy” rated for Curtis, and he says that he’s now “beginning to see some sequential improvement in pricing in Europe, which is a surprise given the economy. Some capacity is also moving out of Europe, so our sense is that pricing could be up low to midsingle digits next year. That would argue for additional upside, more so in Royal than in Carnival,” Curtis said.
There could also be a rebound if the European markets improve and the demand for cruises improves, which could result in strengthening of the pricing power for these cruise companies, Curtis said.
“Now, we have had, and still have, a preference for Royal, because it has more operating leverage than Carnival does and because it is going to be refinancing at least $1 billion, maybe upward of $2 billion, of its debt over the next couple of years. That should help their earnings growth,” he said.
Oracle Corp. (ORCL) is the largest enterprise software company and currently has about 50% of its revenues in a fully recurrent mode, selling updates on current software licenses it installs and selling a significant among of product-support services at highly profitable and recurring levels, making it part of the investment portfolio of said Jean-Baptiste Nadal, Managing Director & Lead Portfolio Manager-Global and International at Metropolitan West Capital Management, LLC.
“The company is the market leader in the database market with 50% share, a market with high barriers of entry and extremely high barriers of exit for the clients. Indeed, once Oracle’s products are installed on a client’s system, it’s very difficult to displace them and for the client to switch to another vendor,” Nadal said.
Nadal says enterprise software is among the fastest growing in the technology sector, and he expects ORCL to maintain its position of leadership in enterprise software for the foreseeable future, and the stock is currently near the top in terms of percentage of his portfolio holdings.
“From a catalyst standpoint, we think that the company will continue to broaden its product portfolio in part through bold acquisitions, so to become the vendor of choice for most corporations. Therefore, we believe that the competitive position of the company is actually strengthening and its ability to generate strong cash flow over a long period of time is pretty much intact,” Nadal said.
SAP AG (SAP), Adobe Systems (ADBE), Citrix Systems (CTXS) are rated “outperform” by Mark Moerdler, Senior Research Analyst at Sanford C. Bernstein & Co., LLC. These companies are seeing opportunities for recurring revenue, and Moerdler says aspects in mobile and database lift these companies in different ways.
“The opportunity for SAP is threefold because the core business is reasonably protected. It’s got a very large recurring revenue stream to it, and in addition, they’ve moved into the area and they developed organically a technology in memory database called HANA, which we believe will generate significant revenue in the business intelligence space. They have also moved into the cloud by acquisition and some of their own development to be able to offer what’s now becoming a suite of cloud-based ERP solutions,” Moerdler said.
For Adobe, Moerdler says the investment community has stopped watching, and during that time ADBE has increased the percentage of their business that is recurring revenue, moved into CRM/digital market by acquiring Omniture, and they have taken the Creative Suite product and are now offering it as a license and subscription version, with upside from its mobile device app-development capabilities.
Moerdler then says the “outperform” rating on Citrix is driven by “mobile and that we see there’s an opportunity here for Citrix to grow their desktop virtualization business. As consumers buy more and more mobile devices, they come to work with them, they want access to the corporate apps from it and one of the best ways to deliver it is desktop virtualization, application virtualization, which is core to Citrix’s business.”
Genpact Ltd. (G), Exlservice Holdings (EXLS) and WNS (Holdings) Ltd. (WNS) currently serve the end markets with the most demand in business services through their business process management services and business analytics, leading Manish Hemrajani, Executive Director and Senior Analyst at Oppenheimer & Co. Inc., to rate all three companies “outperform” in his business service coverage.
“Additionally,” Hemrajani says of these three companies, “they have very low exposure to discretionary projects; cater to strong demand for BPO services, especially in F&A and procurement; benefit from the continued secular trend of delivery mix shifting offshore; have high recurring revenue stream; and their contracts tend to be long-term, multiyear in nature.”
Hemrajani says G, EXLS and WNS have traditionally served the BFSI verticals, but they are now moving increasing their exposure to health care, one vertical where he expects meaningful growth. He says the transition from ICD-9 to ICD-10 is expected to translate into a meaningful amount of business.
“The differences between ICD-9 and ICD-10 are significant, and none of the payers or providers in the health care industry are ready for it with a deadline set for October 1, 2014, and that’s where the BPO vendors come in. So you’re going to see a meaningful growth coming from health care in this space. Some are touting it as the Y2K of health care,” Hemrajani said.
Enersis SA (ENI) produces electricity relatively cheaply and presents ample room for growth in the growing markets of Latin America while enjoying stability with its headquarters located in Chile, of of the most stable markets in the region, says Jean-Baptiste Nadal, Managing Director and Lead Portfolio Manager-Global and International at Metropolitan West Capital Management, LLC.
“Because it is operating in emerging markets — including Colombia, Peru and Brazil — that present still low levels of per capita electricity consumption compared to the U.S., Enersis has strong, long-term growth prospects, which are unusual for a utility company,” Nadal said.
Nadal says ENI benefits from low-cost hydroelectric generation assets when rainfalls are abundant, and Chile’s government currently provides a stable regulatory environment that has improved significantly over the last decade, and it has a government that is relatively probusiness.
“Its Chile location was not the first thing on our mind when we decided to invest in Enersis, but rather the positioning of its assets across the entire South America, its low-cost status for generation and distribution and the room in various markets for the company to build additional capacity with good returns,” Nadal said.
Niche airlines are developing as a very profitable growth sector, according to Ray Neidl, Senior Equity Analyst at Calyon Securities (USA) Inc. He says airlines like Alaska Air Group (ALK), Hawaiian Holdings (HA), JetBlue Airways Corp. (JBLU), Allegiant Travel Company (ALGT), Spirit Airlines (SAVE) and Southwest Airlines Co. (LUV) are all growing fairly rapidly in their particular niches, and are now large enough to be considered carriers.
“You have Alaska Airlines, which is really growing and dominating the western coastal area of the North American continent. You’ve got Allegiant, which has a very unique model, which in combination of a charter schedule service going into very small communities that have lost your scheduled service because of the fallback of the regional airlines. You have got JetBlue, which is restructuring themselves,” Neidl said. “And you’ve got Spirit Airlines, which is growing at around 20% a year with a very unique product, where they charge you for just about everything beyond the ticket, to keep ticket prices low, which appeals to be a very certain segment of the economic market toward the bottom end of the small business — the infrequent traveler seems to like that product.”
Neidl says these air carriers have different niches they attack, and they have been very successful attacking them. He says the margins are better than those normally seen in airlines, and expects significant growth in these airlines.
Neidl also says Hawaiian has room for growth beyond its interisland routes into East Asia, expanding beyond its close-to-monopoly situation in the Hawaiian islands. “The big area for growth for them is to Asian points — Japan, where they just recently started services; in particular, Korea; and eventually, China — and that represents big growth and profitable opportunity for them,” he said.
And lastly, he highlights the discount-fare airline Southwest Airlines. “You’ve got Southwest out there as not the only low-cost, low-fare carrier any longer. They are quite large, but wisely they have curtailed growth as they restructure themselves and try and absorb their recent acquisition of AirTran. So Southwest has to define their model in a new industry environment and to achieve a targeted ROIC before they begin growth again,” Neidl said.
Philip Cusick, Managing Director at J.P. Morgan, recently shared his top stock picks for the entertainment sector. Cusick has won the prestigious Institutional Investor All-America accolade for his wireless coverage, and in this recent interview he delves in some of the central themes in the intersection between telecommunications and entertainment, including mergers and acquisitions, dividends yields and the growth of data usage.
Cusick’s favorite pick is Comcast Corp. (CMCSA). “Our three favorite stocks today over the next 12 to 18 months — number one is Comcast. I think it’s the best large-cap company that we cover. I think it’s a company you can buy and put away,” Cusick said. He also says that CMCSA is expected to grow dividends by 20% to 30% next year from its current 1.5% to 2% range.
“Number two would be SBA Communications (SBAC), sort of a small tower company,” Cusick said. “Among the tower companies, it’s the most aggressive sort of user of leverage that is international. It’s growing the U.S. business a little bit faster than its competitors, and it’s the most aggressive in terms of using the balance sheet to juice up returns.”
“And number three would be a company called Charter (CHTR), which is a small cable company. We think Charter is a little bit more of a great longer-term story, not necessarily that things are going to go great in the near term, because they’re really turning the business around. But I think longer term, Charter has a huge opportunity to grow the video subscriber base, grow its subscriber base and grow their cash flow generation in a tremendous way,” Cusick said.
Boeing (BA) and Embraer SA (ERJ) continue their growth trajectory despite fears of a fiscal cliff and cuts in defense spending, as Boeing remains to a large extent levered to its commercial aerospace business, and Embraer‘s defense business is levered almost exclusively internationally, says Ray Neidl, Senior Equity Analyst at Calyon Securities (USA) Inc.
“Embraer, on the other hand, their defense business is almost exclusively for Third World countries, so it should have minimal effect on what they are doing there. In the case of Boeing, of course, any disruption would be difficult for their defense business, but the thing is the main driver in my opinion of the Boeing stock price does remain in the commercial sector, which is very, very strong at this point as airlines try to modernize their fleet for efficiency and to cut cost,” Neidl said.
Neidl says half of Boeing‘s commercial aircraft orders is for growth and the other half is for replacement, and that it is a good ratio to have, as airlines are engaging in cost reductions worldwide, and their order book is so thick that cancellations can be replaced. He adds that “the new products that Boeing has are, one, going to be much more fuel efficient with digital technology, and number two, are going to be more efficient in operating and maintenance. And for that reason, even in a weak economic environment, many airlines would want to purchase that product.”
Neidl has a “buy” rating on Embraer despite the current slow spending by regional airlines in North America. He expects regional North American regional airlines and international startup airlines to increase their spending in the coming couple of years. He adds that, although the business jet business is flat, their defense products are in the developing world and increasing as a proportion of the total defense business.
Matrix Service Company (MTRX) provides infrastructure services to the oil and gas industry, and the stock currently trades at about half of its precrisis price while having the highest backlog in the company’s history and just as much revenue, providing an opportunity to investors, says Greg Roeder, Co-Portfolio Manager at Adirondack Research & Management, Inc.
“[MTRX] is a company with a debt-free balance sheet and $1.50 per share in cash. They are in a space, which we believe has good long-term growth potential. We like this space because there has been a huge amount of spending recently to find oil and gas in North America. When they find these fossil fuels, they’re going to need to move and store them,” Roeder said.
Roeder says MRTX builds and repairs fuel-storage tanks, does refinery work and works on the electrical grid, providing essential services to the oil and gas industry. Roeder also says trends in the integrated oil companies may benefit MTRX as they shed assets and the new buyers look to acquire Matrix Service Company‘s services.
“The trend we find really interesting is that the integrated oil companies have been selling assets. They either are selling their refineries to pure-play refinery companies or they’re selling their gathering and storage assets to master limited partnerships. The companies buying these assets are more focused on improving the performance and quality of the assets, which we believe will bode well for companies like Matrix Service,” Roeder said.
Lions Gate Entertainment Corp. (LGF) and The Madison Square Garden Company (MSG) offer opportunities and a bullish outlook for investors due to their ownership of strong content and its underlying I.P., says Ben Mogil, Analyst at Stifel, Nicolaus & Co., Inc.
“We’d actually put Madison Square Garden, because they’ve got a bunch of very strong cable networks. These are the two MSG channels in New York that own the sports teams,” he said. “They’ve got the broadcast rights and they certainly are very strong on the content side — that they own the underlying I.P. effectively around the games.”
Mogil also favors LGF because it owns a couple of projects for next year, that if they succeed also will be major producers of franchises. The company already has a core base to its business with its ownership of the “Twilight” and “Hunger Games” movies.
“You’ve got a company that, for three years or four years, I had a ‘hold’ on the stock, and then, we upgraded around $9.50. The stock now is $16,” he said. “And it’s interesting, while like obviously upgrading $9.50 to $16 has been a good call, the other part of the good call, to be honest, was having a ‘hold’ on the stock for three years.”
