Dole Food Company (DOLE), the ubiquitous fruits company, presents investors with a value play in the small-cap sector, says Greg Roeder, Co-Portfolio Manager for the Adirondack Small Cap Fund (MUTF:ADKSX). Roeder says DOLE, along with Chiquita Brands International (CQB) and Fresh Del Monte Produce (FDP), control about 65% of the global sale of fresh produce.
“Dole runs essentially three businesses — one, a packaged food business, which is products, like fruit cups, canned pineapples, frozen strawberries; two, fresh fruit business, which is mostly bananas, but also strawberries, blueberries, pineapples and various other fruits; and, three, fresh vegetables business, lettuce, broccoli, carrots, cauliflower,” Roeder said.
The value aspect comes from DOLE‘s shedding of its Asian business division, and the potential sale of its Hawaii lands. Roeder says the company is not pressed to sell its real estate, but he likes the company’s steady cash flow with modest debt and some hidden assets.
“Currently, only about 15% of this land is used for actual farming. They grow pineapples and harvest coffee beans. Depending on who you talk to, the estimated value of this land ranges from $200 million to $400 million. That’s a hidden asset representing about 20% or more of current enterprise value,” Roeder said.
Cigna (CI) and Aetna (AET) are developing their health care IT capabilities by acquiring businesses, and also creating and integrating solutions across the board, while also changing delivery toward a more consumer-centric model that enhances results while lowering costs.
Aetna currently has an Accountable Care Solutions Group among its startups, a payer-neutral connectivity solution, says Charles E. Saunders, CEO of Emerging Businesses at Aetna Inc.
“I think it’s fair to say that Aetna is the market leader in ACO development in the United States. We have developed a very large book of business in a very short period of time that includes about 11 announced multiline and multipayer ACOs, including some very large health care systems, such as Banner, Carilion and Inova,” Saunders said.
Saunders also says AET is collaborating with states to create ACO-like structures for state employees with a pipeline of more than 200 health systems.
CI recently acquired HealthSpring, and Cigna Executive Vice President Mark Boxer says “it’s given us insights into how you build deeper physician partnerships in key markets. It’s given us additional capabilities relative to diversification into the Medicare advantage business. It’s allowed us to develop a glide path to owning the customer relationship across life stages, as when commercial customers reach retirement age.”
Boxer says CI‘s technology is key to meetings the company’s goals, and he says the company’s HealthEview is a central strategy. “This application takes an individual’s health and risk factors, and applies a powerful set of algorithms that allows us to better manage health and deliver the right care in the right setting. Then we have a set of care coordinators using this application to conduct proactive outreach,” he said.
A Democratic victory in the November presidential elections may result in a boost to Medicaid managed care companies, says Thomas Carroll, Managing Director at Stifel, Nicolaus & Co., Inc. He says a Barack Obama victory is expected to translate into an Affordable Care Act rollout with expansion of Medicaid.
“I don’t want to be too bullish in terms of about an election trade, if you will, but I would look to Medicaid managed care companies before the election,” Carroll said. “If Obama wins, and everyone expects the ACA to roll out, expectations will be for an expansion of Medicaid, and over the last two years or so, whenever there’s been chatter that, the Medicaid companies have done well.”
Carroll’s favorite way to play is WellCare Health Plans (WCG) ahead of the election and ahead of third-quarter earnings. “We [are] recommending WellCare, a large Medicaid- and Medicare-focused specialty managed company. Medicaid and Medicare are poised to grow over the next five years, and migrating those populations over to managed programs, where a single company like WellCare takes the risk, should help to lower expenditures and keep some of the spread.”
The expansion of health care attracts Carroll to UnitedHealth Group (UNH) and WellPoint (WLP). “We do know health care is only getting bigger in the next decade, and I think United is going to do very well in that environment. It’s trading at about nine times forward earnings,” he said, and he adds “I also like WellPoint. There is a lot more hair on the story, and it’s trading about seven times forward earnings. If Obama is re-elected, and we do have more visibility, investors may look for a little more risk in the space. Why not buy WellPoint at seven times with the potential for a little more upside movement than a United?”
On the larger-cap side, Carroll favors Humana (HUM). “One of the challenges on Humana is going to be 2014, when the Medicare companies are subject to an 85% minimum medical loss ratio. Humana has a little work to do there — not a lot, but still somewhat of a risk going forward. The demographics of the world certainly favor more and quicker adoption of private-sector solutions in order to gain your Medicare entitlement benefits,” he said.
Companies like Catamaran Corp. (CTRX), Cerner Corp. (CERN) and athenahealth (ATHN) are enabling the adoption of meaningful use health care technologies for compliance with the HITECH Act, driving companies to adopt and use electronic health records, evolving the practice of health care toward a more data-analysis based model, says Michael Cherny, Managing Director and Analyst at ISI Group LLC.
“It’s been an interesting divergence within the industry, both from a growth perspective and a performance perspective, for the stocks of companies that sell electronic health records. The major divergence has been between the companies that have been taking share in certain solutions and the companies that have either had product issues and/or have hit some sort of growth wall in their space,” Cherny said.
Cherny is positive on Catamaran, the pharmacy benefits manager. “We have an ‘overweight’ rating driven by the ability for them to move up market and compete more effectively in the large employer market to win incremental deals there, while still keeping their strong focus within the middle markets and health plan areas,” he said.
Cherny is also positive on Cerner and athenahealth. “Cerner has obviously been a major beneficiary of their broad product solutions and product architecture. They’ve been able to win new customers and continue to see strong revenue and bookings growth,” he said, and adds, “athenahealth’s growth has also remained at elevated levels from the rest of the group, driven in large part by the focus on driving cash flow enhancements for physicians while also selling electronic health record solutions.”
Apartment REIT stocks like UDR (UDR), Home Properties (HME) and Aimco (AIV) stand in the intersection of a shift toward renting by tenants looking not to be tied down to mortgages or who can’t afford them, and the slowing down of new housing, says Tom Mitchell, Senior Analyst at Miller Tabak + Co., LLC.
“The whole apartment sector has seen 95%-plus occupancies now for several years, and 95% is close enough to full occupancy in the apartment market that there has been considerable pricing power, really starting from the first quarter of 2010, depending, of course, on location and the specific geographic market,” Mitchell said.
Mitchell says UDR has upgraded its portfolio aggressively and managed it conservatively, leading him to rate the stock a “buy.” “UDR, we think, is interesting from another point of view, which is that they took a somewhat unusual approach to moving into the New York City market about a year ago, and they have done, we think, a very good job of maximizing the opportunity while minimizing the cost,” he said.
Mitchell’s top pick is Home Properties, which he says is in a relatively narrow footprint. “We think that they are an excellent operator and that they have done a very good job of being aggressive about adding to their property base at the right time and at the right cost, so we have a strong ‘buy’ on them,” Mitchell said.
Aimco is a bit of a mixed story, he says, but still a “buy”-rated stock. “[AIV has] been aggressively rebalancing their balance sheet, and they’ve essentially been removing some very expensive preferred stock from in front of where the common shareholder stands, and as a result of that, they’ve been getting some nice positive traction in addition to what’s already going on in the apartment space,” Mitchell said.
CF Industries Holdings (CF) currently rides its nitrogen fertilizer business on high corn prices and low prices for natural gas, reaping rewards for the conflation of these two separate trends in North America and making it a favorite fertilizer stock for Edlain Rodriguez, Senior Vice President and Senior Analyst of Lazard Capital Markets.
“Right now, I like CF Industries,” Rodriguez said. “Approximately 90% of its earnings come from nitrogen. The reason we like nitrogen fertilizer better than the other ones, and the reason we like companies exposed to the nitrogen fertilizer, is because as farmers plant a record amount of corn, they need to use nitrogen.”
Rodriguez adds that, unlike potash and phosphate, nitrogen needs to be added to the corn crops more often because nitrogen does not stay in the soil.
Production costs for CF are also relatively low relative to European counterparts. Rodriguez says the low natural gas prices bring cost for nitrogen to nearly a third for CF relative to its peers across the Atlantic, further benefiting the agricultural chemicals company.
“As 75% of the cost of production of nitrogen is natural gas, the U.S. has a significant advantage because natural gas prices in the U.S. have become extremely competitive compared to the rest of the world,” Rodriguez said. “Essentially, you have the European producers of nitrogen paying $8, $9 for natural gas, while in the U.S., the cost is only $3. That is a significant difference that benefits CF and the other North American names.”
Kohl’s Corp. (KSS) is structurally advantaged relative to peers in the retail industry, locating their off-mall retail stores conveniently and with a business model which allows stores to be serviced efficiencly from a distribution and merchandising standpoint, translating into attractive return in capital, says Michael M. Meyer, Partner & Analyst/Portfolio Manager at Cooke & Bieler.
“Kohl’s, by virtue of their structural advantages and also a management team that has been unusually stable and consistently good on the execution side, has an enviable track record of generating strong earnings growth relatively consistently,” Meyer said. “We think the stock right now is beaten down, and really, we don’t see a fundamental reason for that.”
Meyer says KSS outperformed relative to peers during the challenging environment of 2008 and 2009. And now that consumer spending is on the rise and stores like Macy’s (M) are recovering, Meyer says there there is an underappreciation for the dependability of a company like Kohl’s.
“Right now, with the stock trading at roughly 10 times earnings and 10 times free cash, or 10% free cash flow yield, it’s very attractive from a valuation standpoint. So we look at it and see that return on capital, and we think it is going to continue to offer attractive returns to shareholders, and there’s the potential upside kicker to valuation expansion at this point as well,” Meyer said.
LinkedIn Corp. (LNKD) is expected to benefit from the shift of approximately $20 billion in advertisement spending from traditional sources like television into digital platforms, making LNKD one of the top picks in the Internet services sector for Mark Zgutowicz, Vice President & Senior Research Analyst at Piper Jaffray & Co.
“The two most prominent are on both the smartphone and tablet advertising front,” Zgutowicz said. “LinkedIn stands to benefit from increasing penetration and usage of smartphones and tablets — specifically, the shift of eyeballs to viewing devices away from historically primary mediums such as TV.”
Zgutowicz says most of the revenue gathered today for LNKD comes from its Website, LinkedIn.com, and once the company releases its ad monetization platform in the mobile device areas, the global user base can be more effectively targeted.
“We expect a mobile ad platform to be released prior to year end, enabling companies — and particularly, B2B advertisers — to better engage LinkedIn’s 170 million or so global user base who are increasingly using LinkedIn’s smartphone and tablet apps to access content,” Zgutowicz said.
“It’s also important to mention the fact that their solution, or that the software that they provide to access their database, is really a cost save for most enterprise recruiters relative to what they’re paying on some of those other areas that I mentioned,” he said.
JD Alexander, President and Chief Executive Officer of Alico, Inc. (ALCO), talked to The Wall Street Transcript about his company.Click here to read the complete interview.
TWST: When did Alico start operations and what are your activities?
Mr. Alexander: Alico, or the Atlantic Land & Improvement Company, was founded in 1960. The company was spun off from the Atlantic Coast Line Railroad Company. We own approximately 130,300 acres in southwest Florida, which is located in Collier, Glades, Hendry, Lee and Polk counties. We produce citrus and sugarcane, as well as raise beef cattle. We also lease land, have rock and sand mines, and one producing oil well.
TWST: One of the accomplishments of Alico is the company has increased yield and decreased production costs in its citrus production. How do you do that?
Mr. Alexander: We farm the groves by using best management practices. I was a Production Manager for Alico from 1987 to 1997. During that time, we made a lot of progress in improving the production of our groves. It’s not really just one thing. It’s a lot of things which you do right routinely that creates a better situation all around. Most crops are annual crops. You plant them and have a crop in months.
