Blount International (BLT) and Titan International (TWI) are benefiting from the global mechanization of farming in emerging markets, leading Lawrence T. De Maria, Co-Group Head of Global Industrial Infrastructure at William Blair & Company, L.L.C., to give these companies an “outperform” rating.
“The global mechanization in emerging markets to increase production on farms has become a significant change. Farms in emerging markets have had to become more efficient, more productive, as the world consumes more food and uses more biofuels. That is the major global theme that is happening over time,” De Maria said.
De Maria says Blount has a recurring and stable revenue stream and BLT‘s saw chains are an interesting and underfollowed story. “It has a very recurring and stable revenue stream,” he added. “Because the business is very stable, the company can reallocate resources into adjacent markets to accelerate its growth, and thus we think that in a moderate organic growth environment, the company can achieve solid double-digits earnings growth over the next few years.”
He also expects Titan International to outperform with its manufacturing of wheels and tires for farm, construction and mining equipment. “[TWI] is currently consolidating the global farm tire business for agriculture and is expanding further into mining. So in agriculture, Titan has gone from a U.S. business to a U.S. and South American business, and is now entering Europe through consolidation,” he said.
Yara (STO:YARO) benefits from the current high crop prices, as higher prices translate into good volume growth for their nitrogen fertilizers, despite an overall tightness, muted growth and difficulty in pricing power for the broader chemicals sector, says Jeremy Redenius, Research Analyst at Sanford C. Bernstein & Co., LLC.
“Yara is one of the most interesting stories in my coverage right now. They are a nitrogen fertilizer company. High crop prices translate into good volume growth for their fertilizers. Meanwhile, we find there is some supply/demand tightness in their value chain. There is just not quite enough supply to go around, and therefore, the company has been able to maintain higher margins,” Redenius said.
Redenius says petrochemicals have seen a decline in margins, and specialty chemicals with pricing power have been able to maintain some of the margin growth. Redenius also says agricultural chemical companies like Yara enjoy more pricing power due to the current high crop prices.
“We continue to see a slight month-over-month declines in chemicals volumes. Volumes have been slightly stronger in agricultural chemicals due to higher crop prices. Anything chemicals related to economic development in southern Europe and construction in southern Europe continue to do quite poorly,” Redenius said.
Cyclacel Pharmaceuticals (CYCC) produced sapacitabine, an oral-drug currently in Phase III which shows encouraging life-extension results for acute myeloid leukemia (AML) and meylodysplastic syndrome (MDS) patients who are aged 70 or older, with Phase II results which already suggest patients may increase their life expectancy from three to 12 months, says Spiro Rombotis, President & CEO of Cyclacel Pharmaceuticals.
“Sapacitabine is currently in a Phase III trial called ‘SEAMLESS’ in elderly patients with AML under a SPA, or special protocol assessment, agreement we reached with the U.S. FDA. A SPA essentially guarantees that if SEAMLESS meets the criteria for success of the trial specified by the FDA, then the data would be eligible for submission in a marketing authorization,” Rombotis said.
Rombotis places special emphasis on the oral delivery of CYCC‘s drug sapacitabine, a feature unique among drugs of its kind. He says drugs for the same conditions are administered intravenously, significantly increasing the ease at which elderly patients can consume the drug without the need of medical staff, and simplifying the logistics that can result in a better life quality.
“The complexity of having a family member drive them to the doctor’s office or the hospital to receive an hour-long intravenous infusion disappears,” Rombotis said of Cyclacel‘s product. “Taking time off from work for several hours to drive grandpa or grandma to their infusion appointment for five days during a treatment week is obviously a major inconvenience, which may even preclude older patients from receiving intravenous chemotherapy.”
Citigroup (C) is expected to approach a tangible book value of $55 per share over the next two years, making Citi an important holding at the Large Cap Value Strategy, a longer-term strategy benchmarked against the Russell 1000 Value, says David F. Hone, Portfolio Manager of the strategy at William Blair & Company, L.L.C.
“Given Citigroup’s attractive global footprint and diversified model, we believe the company can generate attractive growth, particularly in book value per share. Key to our thesis is management’s continued execution on winding down the noncore component of the business, Citi Holdings, which should unleash excess capital for the shareholders’ benefit and a higher valuation,” Hone said.
Hone says many investors left holdings like Citigroup four years ago during the financial crisis, and now they are suffering from a “poor sentiment hangover” despite favorable fundamental trends in portfolio optimization, growing dividend payouts and excess capital return.
“This steady improvement in book value supported by a growing return of capital stream to shareholders could expand the valuation of Citigroup toward one times tangible book value over time,” Hone said.
PDL BioPharma (PDL) has provided AxoGen (OTC:AXGN) with a total of $20.8 million since August in exchange for royalties on some of AxoGen‘s revenues, reported PR Newswire this week. The deal closed on Tuesday, and John P. McLaughlin, the President and CEO of PDLI, joined the board of directors at AxoGen immediately after the closing.
“We are looking at how we can get attractive revenue-generating assets with an appropriate risk profile for our shareholders,” McLaughlin said recently in an interview with The Wall Street Transcript. “It could be through licensing deals; it could be through loans; it could be buying royalty streams from companies or universities or possibly through buying companies that have royalty streams that are attractive and are unencumbered by other R&D operations. We’re not really interested in getting into substantial R&D operations. Our shareholders like the fact that we focus on commercial-stage assets, and I think that’s how we prefer to stay.”
The transaction closing between PDLI and AxoGen comes at a time when PDLI is in search for revenue-generating assets. In the interview, McLaughlin said despite some of PDLI’s Queen et al. patents expiring by 2014, the company is interested in finding more revenue-generating assets and continue paying a dividend, which currently is at around 8%.
When asked about PDLI as a investment, McLaughlin cites three reasons why investors may want to buy into the company: One, the assets are predominantly commercial stage; two, regular dividend payments; and three, a trading volume of about 1.9 million shares a day.
High-quality large-cap companies have a favorable relative rate of return compared to Treasury bonds, a favorite investment tool of long-term investors which has become somewhat overvalued, says Donald Yacktman, President and Co-Chief Investment Officer of Yacktman Asset Management LP.
“When you look at the rate of interest you get on long-term Treasuries, there is virtually no real return. When you look at a lot of these high-quality businesses, there’s an enormous spread to fixed income, so on a relative basis they are quite cheap. In fact, you get several of these large companies that are in our top 10 holdings where the dividend exceeds the 30-year Treasuries,” Yacktman said.
Yacktman’s favorite ideas are Procter & Gamble (PG), News Corp. (NWS) and Pepsi (PEP). He also likes Microsoft Corporation (MSFT), Cisco Systems (CSCO), Sysco Corp. (SYY), C.R. Bard (BCR) and Clorox Company (CLX).
Arthur W. Hatfield, Managing Director at Raymond James Financial, is “slightly bullish” on the transportation space. He says there has been capacity tightening, which has given companies pricing power, but the macroeconomy has to improve for the sector to rally.
In the current environment, he says stock picking is important, and he shares some of his top names:
Celadon Group (CGI): “Celadon, within the truckload space, was able to show a little bit of growth because of some acquisitions they had made, and also a good job on the cost and pricing front gave a good number.”
Saia (SAIA): “Saia in LTL had a very good second-quarter result, and that was driven by a very strong pricing discipline and good cost control.”
American Railcar (ARII): “Within the equipment side, American Railcar put up a very strong number, and that was really a result of discipline on the orders that they took into their backlog and producing on those orders with good cost controls.”
Greenbrier Companies (GBX): “We like the fundamentals of the railcar supply space, but one of the things is that Greenbrier has lagged the group. There are some concerns about their ability to produce numbers to the level of some of their peers, and I think to a little bit of a degree that’s justified, but I think, as a whole, the industry has performed well, and I think that they should be able to continue to perform well. As such, and the fact that it’s lagged, I think it will play a little bit of a catchup going forward. So that’s our current favorite idea.”
ASML Holding NV (ASML) is emerging as the winner of the Silicon Wars between Intel Corp. (INTC), Samsung Electronics (KRX:005930) and Taiwan Semiconductor Manufacturing Company (TSM), says Mark Li, Senior Research Analyst at Sanford C. Bernstein & Co., LLC. While the semi giants battle for market share in PCs and smartphones, ASML will be selling equipment to all of them as they continually try to outdo each other in capacity buildout.
“The Silicon Wars basically has these two factors — rising cost and intensifying competition,” Li said. “What we are seeing is that competition pressure among Intel and TSMC literally are forcing them to accelerate instead of decelerate. They all want to gain more share to offset the cost increase. So they are actually spending more in capex. Because of this, the profitability of these players likely would be compressed in the next few years.”
Li adds that the lines between PCs and smartphones have blurred, pitting Intel, Samsung and TSMC against each other in an increasing fashion. “Intel mainly did chips for PCs, and TSMC made chips for handsets, and Samsung concentrated on memory chips,” Li said, but now the niches have mixed.
“Regardless the outcome of this war, the undisputable winner is the arms dealer,” Li said. “So the companies that sell equipment to these companies to build capacity will benefit. The company we have in mind is ASML. They are the biggest tool vendor in semiconductor space, and has very high share. So they will be the winner on this Silicon War.”
Lam Research (LRCX) and Teradyne (TER) have been chosen as “buy”-rated stocks by Vishal Shah, Managing Director & Senior Analyst at Deutsche Bank Securities Inc. He says these two names offer investors a great valuation for investors with a longer-term horizon, and also good longer-term fundamental support.
Shah says Lam Research has been historically considered a play on memory spending, and although spending is currently weaker than expected, Shay says the “key areas of growth for NAND will be penetration on all the other — the growth of SSD, solid state drives, in both PCs and enterprise. And as that happens in 2014 and beyond, we expect NAND spending to come back sharply from sometime in 2013.”
“The other thing that’s helping actually to some extent from the memory companies is capex discipline by some of the key chipmakers, like Samsung (KRX:005930) and SanDisk (SNDK). We think that as the supply/demand comes to somewhat of a balance in 2013, some of these spenders are going to start adding more capacity as far as the growth of smartphones and tablets continues because these are some of the other drivers for NAND,” Shah said.
Regarding Teradyne, he says that although TER‘s business has been considered to be commoditized and with low returns, the company’s performance, business model change and valuation in light of the current fundamentals make the stock look attractive.
“[TER] also has recently bought this other — is buying this test company called LitePoint. That business itself is worth at least $7 in our view, and the combined business has potential to be in the low 20s even on a normalized basis. So we like these opportunities now, and those are the two names that I will recommend,” Shah said.
The entire transportation and logistics space is more influenced by macroeconomic performance than in the past, says John L. Barnes III, Managing Director at RBC Capital Markets. He thinks, however, the U.S. economy has reached a bottom and won’t double dip, and rail, airfreight or truck volumes are not expected to fall further, leading the award-winning analyst to place a risk-on trade in the sector.
“Given that we like the risk-on trade, we basically like anything that’s got a little hair on it. The dirtier the story, the better, the more operating leverage to a rebound in the economy, the better. I want that sharp explosive earnings growth when the volumes begin to turn,” Barnes said.
“Our favorite names in the space right now? We like Ryder (R) on the equipment leasing and logistics side; Swift Transportation (SWFT) on the truckload side; Con-way (CNW) in LTL; Atlas Air (AAWW) in airfreight; and Kirby Corporation (KEX) on the barging side. I think those are the names where you’re going to get that explosive growth as the economy begins to recover and as volumes begin to move to the upside.,” Barnes said.
Barnes says he wouldn’t be surprised if transportation companies outperformed expectations in the third quarter, especially after analysts have reduced expectations in the space. “They are not going to be great results, but will likely be better than the sharply lowered expectations,” he said.
