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

April 26, 2012

Daily Kill Sheet For April 26th 2012

Filed under: Uncategorized — Administrator @ 10:10 am

Position Update: CRR

Carbo Ceramics has reported first-quarter earnings of $1.31 a share, $0.10 worse than the consensus estimate of $1.41.
Revenues rose 8.2% year over year to $163.2 million versus the $160.5 million consensus revenue estimate. Operationally, however, results showed the impact of higher costs and a shift in volumes from ceramic proppant to other types of proppant such as resin coated sand. Ceramic proppant volumes dropped 3.7% year over year, while volume for “other proppants” increased 82.6% year over year, albeit from a smaller base.
The gross margin dropped 770 basis points year over year, while the operating margin declined 300 basis points. While management stated that the margin pressure was largely due to increases in freight, logistics, and SG&A; and other operating expenses, the change in makeup of the proppant volume also likely had something to do with the margin pressure, given that ceramic proppant holds higher margins that resin coated sand.
 All said, management stated: “We believe 2012 will be a challenging year, primarily due to the continued transition underway by the industry to relocate equipment, services, and supplies into the liquids-rich basins in North America. As a result, pricing pressures will likely become more evident in the industry over the remainder of the year. At this point, management believes second-quarter proppant sales volumes are expected to be similar, or better than, the volumes sold in the first quarter of 2012, despite the lower activity in Canada as a result of spring break-up.” This implies a 4.3% volume increase over 2011’s second-quarter volume. 
Although management did not give earnings guidance in the release this morning, management did state that “The industry transition in North America from gas-directed activity to oil-directed activity continues.  For CARBO, this transition is largely complete as the vast majority of our U.S. ceramic proppant sales volume is now being sold into liquids-rich basins.” To me, this implies that the worst of the margin pressures is now behind the company. Looking ahead, pricing, volume and volume mix will be the driver of margin going forward. With that said, the company will be holding a conference call at 11:00. In the meantime, I expect to see some short covering given that while the company did miss sell-side estimates, the news that their higher transition costs are now behind them should come as welcome news given that the company had been saying that they expected the transition to take one or two quarters.
At this juncture, I am reiterating my “Buy” recommendation on CRR shares. The demand picture remains bright for their product and the stock’s valuation remains near the low end of its traditional range, even after factoring in that the consensus estimate is likely to drift a tad lower here due to this quarter’s miss versus sell-side expectations. 

April 23, 2012

Daily Kill Sheet For April 23rd 2012

Filed under: Uncategorized — Administrator @ 9:12 am

Take a look at Cheniere Energy (LNG $17.77) on the short side. The stock closed on Friday with a bearish belt hold pattern, which typically signals a near-term reversal. The stock had jumped 18.7% over the past two weeks after the company announced that FERC had approved their Sabine Pass liquefaction project.

On a technical basis, the belt hold was generated on declining volume six days after a gap in its chart that has yet to be tested. The gap appears between the 4/12 close and the 4/13 open when the company reported its good news. The 4/12 close was $15.70 while the 4/13 open was $16.40. My near-term target is $16, implying about a 9.9% return to my target. In addition to the belt hold, three of my favorite technical indicators are also signaling a near-term bearish underpinning. The TRIX indicator has just done a bearish crossover and is sitting near an unsustainable level. Meanwhile, the Williams %R ratio suggests that the stock is overbought here and has already started to rollover. Finally, the Elder Ray ratio is also suggesting that short trades can be safely entered near the current quote. 

On a fundamental basis, this stock is trading on dreams. The stock lost over $2 a share this year and the red ink is slated to continue through 2015. The company is in the process of setting up the funding for estimated capital costs before financing for the first two trains of the liquefaction project of $4.5 billion to $5.0 billion. The trains are expected to be funded from a combination of debt and equity financings. In my mind, the success of the project over the long term rests on the premise that liquefied natural gas will not become commoditized over time similar to oil and other petroleum products. Given the large number of LNG plants in their planning stages world wide (Canada, Australia, United States, and the Middle East), I have my doubts whether or not the large spread between Asian LNG prices and U.S./Canadian prices can hold over the long term.

Regardless of the long-term sustainability of the nat gas pricing spread between the U.S. and Asia/Europe, in the near term Cheniere remains an overbought stock of a company that is losing money that just had a major catalyst triggered. Given an absence of near-term catalysts, it makes sense that the stock could take a breather here and retest the gap in its chart from 4/12 – 4/13.

April 16, 2012

Daily Kill Sheet For April 16, 2012

Filed under: Uncategorized — Administrator @ 10:22 am

Take a look at Raytheon Company (RTN $52.83) on the short side. The stock closed Friday with a tweezer top formation, just below its 52-week high. Tweezer tops typically signal a loss of momentum and are usually only a short-term trading opportunity. With Raytheon, I believe fundamentals are more in line for a longer decline. I believe the recent strength in RTN was driven by the recent dividend hike that the company announced, which raised the stock’s yield to just shy of 4.0%.

Operationally, earnings have stalled and have begun to turn down. Indeed, on their last conference call management guided full-year earnings to $4.90 – $5.05, well below 2011’s $5.28 a share. The consensus has since fallen $0.18 a share. While some of the earnings drop is likely due to the sale of the company’s aviation services segment, the company is also being hurt by the loss of a R&D; tax credit, which ended in 2011 (about a $0.07 impact) rising interest expense (about $35 million – $45 million higher year over year) and a higher tax rate  (250 basis points higher year over year). On top of these known issues, the company is also facing the potential of steep spending declines by the U.S. defense agencies, and uncertainties in Europe.

My final concern is with the impact on cash from the company’s pension plans. The necessary funding in  2011 was $1.096 billion. The company also made a discretionary contribution of $750 million. Over the next three years, the necessary funding is set to jump 7.9%, 19.6% and 9.6%, respectively. My guess is that these projections will likely be too conservative given that the company is using an assumed return on assets of 8.75%. Last year, the actual return on assets was -1.3%. To the company’s credit, returns for the plan have beaten their assumptions in two out of the past three years. Note that this has been during a period of falling interest rates. With rates so low now, it is unlikely that the company will be able to repeat the out performance going forward and thus its likely that the necessary funding could be higher going forward.

On a valuation basis, the stock is trading at 10.5x the 2012 consensus estimate. Over the past three years, the stock has averaged a P/E of 11.2x while trading at a 52-week high and 7.65x earnings while trading at a 52-week low. All said, my near-term target is $49 a share, or 9.7x the consensus implying a 7.8% return to my target.


April 11, 2012

Daily Kill Sheet For April 11, 2012

Filed under: Uncategorized — Administrator @ 9:35 am

Adding Williams Partners To Our Buy List & Updating Holdings Due To Exercised PUT Positions

Given the recent market weakness, the puts we sold on APA, EOG, PCAR and CBI have all been exercised. We now have full positions in each of the stocks. Given we had sold the puts, the prices where we entered the trade are all below the strike price. Below are our new positions for tracking purposes.

Apache Corp. – 1/2 a position putted to us for a price of $103.12on 3/21. The stock was $108.98 when we recommended the put sale.

EOG Resources – 1/2 a position putted to us for a price of $108.52 on 3/22. The stock was trading at $116.78 when we recommended the put sale.

Chicago Bridge & Iron – the stock was putted to us for a price of $42.45 on 3/28. The stock was trading at $47.40 when we recommended the put sale.

PACCAR Inc. – the stock was putted to us for a price of $43.50 on 4/10. The stock was trading at $47.34 when we recommended the put sale.

The market weakness has also dropped the share price of one of the stocks on our watch list into “Buy” territory. Thus I am initiating a position in Williams Partners (WPZ, $53.80) and adding it to our portfolio. Williams is an MLP and may not be right for all portfolios. The company recently did a public offering of 10 million units to help pay for an acquisition of pipeline infrastructure from Caiman Energy to boost its footprint in the gas-rich Marcellus Shale region in the Northeast. The investment cost the company $2.5 billion.

All said, Williams has one of the largest pipeline networks on the east coast and is well positioned to take advantage of the drilling in the Marcellus and Utica shales.

April 5, 2012

Daily Kill Sheet for April 5th, 2012

Filed under: Uncategorized — Administrator @ 2:06 pm

I am using today’s weak market to close out three of our positions.

1. I am closing out Kellogg Company (K, $52.96) with a 5.0% gain. We put this position on in the beginning of November and it has been slow to gain. I’d rather get out of it now and look for a faster climbing stock to take its place.

2. I am closing out my short position on AGCO Corp. (AGCO, $46.09) with a 8.1% gain. AGCO was half of my agricultural pairs trade with Potash Corp (which is the long position). While we’re closing the position with a good gain, I actually expected more from this short position. The stock has stubbornly held in there, though, so I will take our small gain here and look for bigger game. This position was initiated on January 11th.

3. Finally, I am closing out my short on Saks Inc. (SKS, $10.96) with an 8.4% gain. Saks reported a better-than-I-expected comp this month off of a hard comparison (+11.1%). The company faces a +5.8% comp in April, thus I hesitate to keep the short on in the face of the easier comp. Let’s take the gain here and look to re-enter the trade at a higher price later. Yes, I still believe the P/E is unrealistic for this stock. However, I like to have a catalyst for my trading shorts other than valuation. We had that catalyst last month with the hard comp it was facing. Time to take gains on the position and look for greener pastures.

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