The Daily Kill Sheet Picking Off Profits One Stock At A Time!

February 21, 2012

Daily Kill Sheet For February 21st. 2012

Filed under: Uncategorized — Administrator @ 8:05 am
Take a look at Willbros Group (WG, $4.50) for an intermediate term trade. Willbros is a global contractor specializing in energy infrastructure. The stock price was hit hard after the last recession when cap ex spending was cut due to lack of funding and the collapse in oil prices. In late 2010, the company did a large acquisition that nearly doubled the size of the company. When anticipated synergies were slow to be realized, and questions were raised about the company’s financial stability, the stock was cut in half again. 

At this point WG is showing signs of a turnaround. Third-quarter backlog was up 121% on a year over year basis (some of this is due to the acquisition) and the company is well positioned to benefit from two growth areas: The rapid growth of shale oil and gas drilling and a large increase in the amount of cap ex spending in the electrical transmission industry. To better position itself for the expected growth in shale oil and gas drilling, the company has opened a number of new offices to better position itself for the growth.

Source: Willbros Group 12/11 Presentation At the Capital 1 South Coast Energy Conference

 In regards to financial stability, the company has worked hard to pay down its debt. Indeed, through the first nine months of 2001, the company has repaid $113.4 million in debt and now has only $183.4 million left on its term loan. In the near term, earnings visibility remains cloudy. The company took a large goodwill impairment charge in the third quarter and the fourth quarter is typically seasonally weak. Absent the one-time charges in the third quarter, operating earnings showed both sequential and year over year improvement in the third quarter.

On a valuation basis, the stock is trading at 0.52x book value, well below its 9-year average rate of 1.75x (the stock averages a P/B of 2.61x while trading at a 52-week high over the past 9 years and averages a P/B of 0.90x while trading at a 52-week low over that same time period). On a price to sales basis, the stock is trading at 0.12x the forward revenue estimate. Given the company is early in its turnaround, the P/E at this point isn’t meaningful. Still, by most metrics WG shares are trading at a discount to its peer group. Granted, this discount is likely caused by the company’s recent liquidity scare, even so, the discount should narrow as the company’s earnings improve over the next 12 to 18 months driven by its rising backlog. Note that the stock saw some insider buying in December and is up significantly since then..

On a technical basis, the stock recently tested resistance at about $5 a share and has pulled back. Once the sdtock works through this level, is mild resistance around $6.65 and then major resistance near $9.25. My intermediate-term price target is $9, implying 100% upside over the next six to 12 months. The keys to the stock hitting my price target in the intermediate term is continued progress on working down debt, continued backlog growth and a return to consistent profitability. The company took a large risk in 2010, taking on debt to better position the company for electrical transmission work. The company to date has done a good job of working down its debt load, but still has a ways to go. Improved operating results will go a long way towards improving the balance sheet. At this point, keep a 20% trailing stop on the position.

Home Depot has reported fourth-quarter earnings of $0.50 a share, $0.07 better than the consensus estimate.

Earnings quality was solid. Although a lower-than-expected tax rate added $0.02 to results versus expectations, this was offset by higher-than-expected interest expense and a higher-than-expected share count, which each hurt results by a penny.
Operationally, revenues came in 2.7% higher than the tear-sheet average, while the gross margin beat expectations by 11 basis points. SG&A; expenses as a percentage of sales were 68 basis points less than the tear sheet average, leading to an operating margin 79 basis points better than Street expectations.
Revenues rose 5.9% year over year to $16.01 billion versus the $15.47 billion consensus revenue estimate. Comparable-store sales increased 5.7%  for the quarter, driven by both increased customer transactions (+3.6% yr/yr) and a higher average ticket (+2
.4%) versus a year ago.
Inventories were well controlled, dropping 2.8% year over year even though sales jumped 5.9%.
For the upcoming year, the company is guiding earnings to $2.79, $0.03 above the consensus estimate of $2.76. Management is also guiding revenues to be up 4% year over year to about $73.21 billion. The consensus revenue estimate stands at $72.39 billion. Note that a 53rd week in the upcoming year will likely add about $1 billion to total sales. All said, the company expects comparable-store sales to increase at a low single-digit rate and for the gross margin to expand moderately.

February 10, 2012

Daily Kill Sheet For February 10th 2012

Filed under: Uncategorized — Administrator @ 8:20 am

Take a look at Accuride Corp. (ACW, $8.60) for an intermediate-term trade. The company is the market share leader for steel wheels and brake drums for commercial trucks in North America and also holds the #2 position for aluminum wheels and metal bumpers, and disc wheel hubs. Fundamentally, the company emerged from bankruptcy in 2010 and a new management has been revamping the company to take advantage of the next up cycle in trailer and truck production. Management has divested a number of non-core operations such as a subsidiary that manufactured parts for farm equipment, a unit that produced truck seating as well as its Fabco unit, a manufacturer of steer drive axles and transfer cases. Meanwhile the company has increased its cap-ex spending on its aluminum wheels plants to gain share in this rapidly growing product category.

Truck and trailer production seems to have bottomed in 2010 and industry forecasts point to the next peak in the 2013 – 2014 time frame. Indeed, in early January ACT Research reported that December trailer orders were up 23% year over year and that backlog had jumped 44% year over year and increased 10% sequentially. Moreover, while Class 8 truck orders declined 8% in January on a year over year basis, the results were still strong considering that orders had been up 322% in the year ago period. To that end, new orders remained above the 20,000 mark driven by replacement orders due to the overall fleet age in North America.

Looking ahead, the company will be reporting earnings in two weeks and the Street is looking for earnings of $0.04 a share. At this point, I think flattish results are more likely as the company is still early in its turn around and has been investing to expand capacity at its aluminum wheel plants. For the full year, the company will likely generate a $0.25 – $0.30 loss. For 2012, the Street is estimating earnings of about $0.48 a share for the stock. This could prove conservative if class 5 to 7 truck orders continue to ramp up as well as trailer production.  All said, cyclical stocks have a tendency to trade at higher P/Es early in their cycles as investors begin to anticipate higher earnings as the cycle turns up. At this point, ACW should easily be able to sport a 20x P/E implying about a $10 stock price, 16.2% higher than the current quote. My six-month price target for the stock is $13 as I expect EPS expectations to move higher over the next couple of quarters.

On a technical basis, the stock closed yesterday with a bearish deliberation pattern after a 23% run since January 17th. With that said, I expect the stock to take a short breather here and pull back towards the $7.50 – $8.15 level. The stock broke through and closed above a key resistance level yesterday and it is likely the stock will have to retest the $8.50 area. Above this point, their is minor resistance at $9.40 and then nothing until the $13 area, in line with my $13 price target. Given I am expecting this trade to play out over the next couple of quarters, I am placing a 25% trailing stop on the trade. Upside to my $13 price target is 51% from the current quote, and between 60% – 73% from a pullback into the $7.50 – $8.15 area. To track the trade, I will use today’s opening price.


February 7, 2012

Daily Kill Sheet For February 7th 2012

Filed under: Uncategorized — Administrator @ 9:51 am
AGCO Corp has reported fourth-quarter earnings of $1.44 a share, excluding non-recurring items, $0.11 better than the consensus estimate.
Earnings quality was low. While the company beat estimates by $0.11, $0.09 of the beat came from a lower-than-expected tax rate. Lower-than-expected interest expense also added a penny versus expectations, but this was offset by a higher-than-expected share count, which hurt results by a penny.
Operationally, sales were strong in North America and the Rest Of World segments, but had slowed from the annual pace in both Europe and South America.
4th Quarter Sales Growth
Full-Year Sales Growth
North America
South America
Rest Of World
The gross margin beat expectations by 89 basis points, yet the operating margin came in 4 basis points below the tear-sheet average. SG&A; expenses ran 63 basis points higher than the tear-sheet average, while engineering expenses were 43 basis points higher than Street expectations.
Revenues rose 16.1% year over year to $2.52 billion versus the $2.53 billion consensus revenue estimate.
It is interesting to note that the release spoke about full-year results for the segments and not about fourth-quarter results. One question I have is how did the company’s South American operations see a $13.4 million increase in operating profits from an $8.4 million increase in sales? On a full-year basis, operating profits were down year over year, while sales were up. What happened in the fourth quarter to reverse this trend so strongly?
For the full year, the company is guiding earnings to $5.00 a share. The consensus stands at $4.95.

All said, I recommend to continue to hold the short here. Europe/Africa/Middle East is the company’s biggest segment and the political situations in these areas are unstable at best. The currency and banking crisis besieging Europe right now makes visibility for sales in this area low. Also, with such a large percentage of sales coming from Europe, currency translation has a large impact on results. In fact, every $0.05 move in the euro/dollar value has about a $0.10 impact on EPS. With that said, I’ll stay short here until visibility in Europe becomes better.

February 3, 2012

Daily Kill Sheet For February 3rd 2012

Filed under: Uncategorized — Administrator @ 9:29 am

I am going to start with some house cleaning today. I am closing out my 11/14/11 short position on Advance Auto Parts (AAP, $76.27) and my 9/30/11 short on United Technologies (UTX, $80.02), with 10% losses respectively. For AAP, the unseasonably warm weather has worked against out short thesis and today’s upgrade by JP Morgan is the straw that broke the camel’s back. I’ll take my loss here and look for a better use for the cash. For UTX, the company beat Street expectations by a penny last week and recently broke above its 200-day moving average. The troubles in Europe did not lead to the earnings miss I was anticipating, and with this key catalyst to my short now behind us it is time to move on.

On a positive note our open position in Huntsman Chemicals should be bolstered today after being started with a buy recommendation at Lazard. Another of our positions, Potash (POT) should also push higher today as one of its competitors, Mosaic, has announced a 20% cut in their potash production for February through May. Management stated that “cautious dealer sentiment continues to delay purchases and lower near-term demand for potash…Farmer economics remain strong, and they continue to expect an above average application season in North America and record-setting global potash shipments in 2012. While they are confident fundamentals will ultimately prevail, they’ve taken steps that reflect the near-term supply and demand balance for potash.” All said, the cut in production should help to get industry inventories back into balance quicker and thus I expect to see a pop in POT shares in early trading today. I am reiterating my buy recommendation on the stock.

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