E&Ps are increasing capex for higher-quality equipment to drill in ultradeepwater, shales and other hard-to-reach oil reservoirs, directly benefiting oil services companies providing services for oil producers, says Andrea Sharkey, Research Analyst at Gabelli & Company, Inc.
“The exploration and production companies have been increasing their capex budgets, which should directly benefit service companies,” Sharkey said. “I expect E&Ps spending to grow 15% this year, led by growth in the North American shale regions, and then I think in 2012 we’ll start to see stronger E&P spending in the international arena.”
Sharkey points to Cameron International Corporation (CAM) as a services company expected to benefit from the capex increase over the next 12 to 18 months. CAM has a 50% share of the blowout-preventer market and is increasing its frac offerings for shale development.
“[Cameron has] high-quality wellheads, frac trees and frac manifolds that have been seeing a lot more demand, and so I think they’ll benefit from that,” Sharkey said. “And then they’ll also benefit in their valve and measurement products from increased demand as pipeline and midstream infrastructure is built out to support the development of shale regions as well.”
Physician offices are increasingly adopting electronic health records (EHR), creating demand for health care IT solutions as they become HITECH Act meaningful users of EHR and apply for federal stimulus money through Centers of Medicare & Medicaid Services, says Michael Cherny, Vice President of Healthcare Services & Technology at Deutsche Bank Securities Inc.
“What we have also started to see is customers in the larger end of the physician market making their purchasing decisions, either in terms of upgrading their systems, replacing one system with another, or for user groups that had nothing previously, going out and buying their first EHR,” Cherny said.
Cherny has a “buy” rating on Allscripts Healthcare Solutions (MDRX), a health care IT company expected to benefit from the growing physician office demand. He says MDRX has seen 20% bookings growth over the last two quarters, and it has integrated the Eclipsys legacy products from last year’s merger into a coherent strategy.
“We view Allscripts as in the best position to gain incremental market share because of their broad product suite, which allows them to sell into all different areas in the market,” Cherny said. “The company has already done a very strong job of cross-selling into the legacy customer bases, particularly selling Allscripts ambulatory products into the legacy Eclipsys hospital base. And we would expect the reverse to happen going forward as well.”
Companies offering integrated health care IT product suites are the most likely to benefit from the near-term rush of IT purchase decisions by hospitals and physician practices. Health care providers are rushing to fulfill HITECH Act‘s stage one meaningful use requirements, says Steven P. Halper, Managing Director, Stifel, Nicolaus & Co., Inc.
“Hospitals and physician practices are accelerating purchase decisions for IT so that they can qualify for what we call stage one meaningful use incentive payments,” Halper said. “That program started a couple of months ago. So we see that hospitals and physicians are responding accordingly.”
Halper has a “buy” rating on athenahealth (ATHN), a health care solutions company offering an integrated cloud-based product suite. The company offers its athenaCollector product to create efficiencies in billing and its athenaCommunicator as a virtual liaison between health care providers and patients.
“We’re looking at 30% revenue growth with 30% or 40% operating margins,” Halper said. “athena is capable of significant earnings growth as it increases its market share. And I think the long-term future cash flow streams are not well reflected in the stock’s valuation at current prices.”
Health care IT companies offer hospitals and physician offices IT solutions to comply with meaningful use requirements to obtain $30 billion in federal stimulus money from the HITECH Act, creating investment opportunities in companies in the sector, says Stephen Shankman, an Analyst with UBS Investment Bank.
“The large majority of the incentive payments related to HITECH are expected to be paid out over the next five years,” Shankman said. “EHR or clinical applications are more of the focus over the near term, as both hospitals and physicians try to align themselves to receive these incentive payments.”
Shankman has a “buy” rating on Allscripts Healthcare Solutions (MDRX). He expects 25% upside from current levels and he says the stock is trading at a discount of 19 times 2012 EPS estimates, compared to the group’s 24 times.
“We think the market is underappreciating Allscripts‘ market-leading, hospital-to-physician product offering. And that’s really only matched by a few other players, one of which is private,” Shankman said. “So that gives them high-quality exposure to the EHR adoption story on both the hospital and physician side.”
Large oil equipment and services companies are reaping the benefits of a North American drilling renaissance — in shales and other hard-to-reach oil reservoirs — brought forth by a coupling of high oil prices and drilling technology developments, says Scott Gruber, Senior Research Analyst at Sanford C. Bernstein & Co., LLC.
“These were assets that historically the industry has known about, but we haven’t had the combination of elevated commodity prices and the technology and technical expertise available to extract these at economically viable rates of return. And now they’re attractive,” Gruber said.
Gruber points to Baker Hughes (BHI) as one of the dominant providers of directional drilling in North America, one key technology used to drill in hard-to-reach oil reservoirs. BHI also recently acquired BJ Services, which adds synergistic capabilities to its product suite.
“They moved away from a product-line structure and toward a geo market structure, so they now have geo market heads that are selling the full product suite and acting as liaisons with customers to execute more complex multiservice packages,” Gruber said. “This should yield market share gains, both domestically and abroad.”
Large semiconductor manufacturers are expected to remain in the lead, as the capital requirements for new entrants are in the billions and no revolutionary innovation in manufacturing processes is expected for the next three years, says Mehdi Hosseini, an Analyst at Susquehanna Financial Group LLLP.
“These companies that make the equipment or provide the processes have been around for 30 years,” Hosseini said. “They have spent billions of dollars in innovation. They are now dominant in the sector, and it prohibits any competition in the manufacturing of the chips because all the initial developmental investment has already been done.”
Hosseini points to Taiwan Semiconductor Manufacturing Company Limited (TSM) as semiconductor manufacturer. He says Taiwan Semi has been recruiting the best minds away from the competition and investing heavily in R&D, putting it at par with semi manufacturers like Intel Corporation (INTC).
“Taiwan Semi, over the past 10 years, has been investing so much and innovating so much in the manufacturing process that they have become a leading high-tech manufacturer,” Hosseini said. “They’ve spent billions of dollars in R&D and purchasing the most leading-edge equipment for their factories.”
Newell Rubbermaid NWL (NYSE), the consumer products manufacturer, yesterday announced the selection of Michael Polk as its new CEO. Polk, currently the president of global foods, home and personal care at Unilever is also a member of Newell’s board of 
directors. Polk will succeed Mark Ketchum who was selected as Newell’s CEO back in 2005. Ketchum back in January of this year announced his intention to retire. The firm hired a search firm to find a new CEO. Wisely, the firm selected a seasoned executive familiar with their business but with experience outside the firm. Polk, who is fifty years old comes in as CEO as Newell has failed to live up to expectations. While he has a difficult task ahead of him, he has both the skills and the drive to help find ways to make the firm perform better going forward.
Earlier today, thestreet.com’s Miriam Remer
wrote a piece expressing concern about expectations the new CEO will create about the firm. Remer wrote,
Jefferies analyst Douglas Lane cautioned that Polk will have his work cut out for him in managing expectations after Newell Rubbermaid recently trimmed its full-year outlook. The guidance revision came, in part, because of soft demand in some of Newell Rubbermaid’s consumer product categories such as baby and parenting.
I am not nearly as sanguine as the Jefferies’ analyst quoted. Polk has a real opportunity to shine in his new position. Stay tuned.
Consolidation in the clinical labs space is boosting top and bottom lines of large companies in the space, with large companies such as Laboratory Corporation of America Holdings (LH) acquiring small and midcap labs, says Thomas Gallucci, Managing Director and Senior Analyst with Lazard Capital Markets.
LabCorp has outperformed the market year to date, Gallucci says. “Those acquisitions have helped the company to overcome some of the more sluggish underlying organic trends.”
That makes LabCorp “well positioned going forward,” Gallucci says, who points to the earnings benefits of the company’s recent acquisitions of Genzyme Genetics and Westcliff Medical Labs.
“The Genzyme deal is being integrated this year and is dilutive, but should be accretive next year. And they should have an inflection point in the earnings growth between 2011 and 2012 versus 2010 and 2011. Westcliff should be more additive in 2012 than it is in 2011,” Gallucci said.
Smartphone growth in emerging markets remains strong, and the trend continues informing investment decisions in the communications semiconductor sector, says Aalok Shah, Senior Vice President and Senior Research Analyst at D.A. Davidson & Co.
“In [emerging markets], you still have 3G adoptions increasing, particularly in India, China and Latin America. Those are the real growth areas right now,” Shah said. “China has now completed, for the most part, the infrastructure buildout for 3G, and so now we’re just waiting for the subscribers to come.”
Shah likes Broadcom (BRCM), a semiconductor company providing connectivity solutions within phones. The company’s combo chipset solutions provides phones with capabilities such as WiFi, Bluetooth, GPs and FM radio.
“[Broadcom] can do it all in what they call their combo chipset solutions, and they have almost 90% market share in that space,” Shah said. “I think that in anything mobile related you’re going to need these types of chipsets. Whether that mobile device is a tablet or a smartphone or even a regular phone, you’re going to see more and more connectivity devices.”
The demand for irrigation equipment is increasing along with food prices, with farmers reaping a faster return on their investments in such technology as center-pivot irrigation and remote monitoring, says C. Schon Williams, Vice President and Senior Equity Research Analyst at BB&T Capital Markets.
“High commodity prices have increased the return on investment for machinery and dramatically shortened the breakeven period,” Williams said. “Farmers see where corn, wheat and soybean prices are and are rushing out to buy agricultural machinery so that they can reap the benefit of the higher commodity prices.”
Williams points to Valmont Industries (VMI) as one of his favorite irrigation equipment companies. He says Valmont is trading at reasonable multiples, its irrigation equipment is one of the favorites among end users and the Energy Policy Act of 2005 benefits its utility-transmission business.
“We have a $130 price target on [Valmont], which would yield 20%, 25% upside from today,” Williams said. “They are doing very well in that irrigation market, and then you’ve got a couple of other catalysts including electrical transmission and a recent acquisition that are due to kick in here over the six to 12 months that should provide some additional upside.”
