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| IN THIS ISSUE – June 11, 2010 | www.bullmarket.com |
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Feature Article By BullMarket.com: Recent Weakness Makes Philip Morris International's Stock a Bargain By NextInning.com: Member Q&A - A Look at ATMI By BullMarket.com: Member Q&A: Windstream By BullMarket.com: Member Q&A: Michael Baker
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Recent Weakness Makes Philip Morris International's Stock a Bargain Barron's noted how the strong dollar and a roiled European economy have combined to drop the company's shares into the bargain basement. After reaching a one-year high of $53.91 on April 20th, it has been mostly downhill for PMI's shares. The wobbly recovery in Europe and a slumping euro combined to push the company's stock price to a close of $43.74 on Friday, a drop of nearly -19%. We agree that the selling is overdone and PMI is a bargain, especially for income-oriented investors. At current levels, the company's $2.32 annual dividend is yielding 5.3%. It remains a huge cash generator and it plans to spend $12 billion over the next three years to buy back its stock. The company generally returns 65% of its profits to shareholders via its dividend payments. The last quarter from the company was just OK in our view as Western Europe was a bit of a drag, but the stock is relatively cheap given its long-term growth potential and attractive dividend. CFO Hermann Waldemer's view was that the company's 90 cents per share of profit in Q1 on net sales of $6.5 billion were "pretty solid numbers." Profits were up by 13.5% excluding currencies. Waldemer appeared at an investor conference in New York last month to provide an update on the company's growth prospects. "Now, looking forward -- really already today, if you go into Asia, into Latin America, and I would say that we see very strong signs of economic recovery. I will just make one example for each region, Waldemer said last month. "Indonesia in the Asian region, the total cigarette market is growing by 5%. That’s a very, very strong performance, also financially very attractive market. Let me move over to Latin America, to Mexico where consumer confidence is consistently increasing month-over-month. The situation there is going well and we are almost approaching now the 70% market share in that market." Mexico isn't the only Latin American country that PMI dominates. It also claims a nearly 74% share of the market in Argentina. Despite those big share numbers, Waldemer said "there is no market share too high that you can’t still grow it." Russia, he said, is showing signs of recovery though the company is still seeing consumers trade down from its premium brands to cheaper smokes, "however, less so than what we have seen before. It’s calming down and I would see a much improved situation actually towards the end of the year and the beginning of recovery in the year 2011." Russia is the largest, most important market in the company's Eastern Europe, Middle East, Africa segment. Annual cigarette consumption tops 390 billion, which Waldemer noted "is way bigger than the United States." With the trade-down effect calming, he expects the company's brands like Marlboro, which has already gained share in the premium markets, will grow that share even more as a recovering economy promotes a trade-up effect. "I'm sure that this will start again because that's the name of the game in this market," Waldemer noted. The European Union, he said, "is a mixed bag. Not everything is bad. I think it’s overdone in the press in recent days. There are pretty strong economies there." He called Germany and France "the locomotives, they are doing pretty well," but he conceded Greece and Spain were both economies in trouble and the company is seeing down trading in those markets. Waldemer said PMI's business was "very resilient" during recessions but not immune to downturns, as evidenced by the trade-down effect in weak economies. But he argued that the company's brand portfolio is the reason it can still pump out cash even during tough times. "We have a portfolio that spans across all price ranges, with strong brands in each one of them and then we, of course, will be ready with Marlboro and Parliament for the up-trading as soon as it restarts," he said. Excise taxes are a constant headwind for the industry. Cigarette makers have to add those taxes to a pack of cigarettes and remit them to local governments, which drives up the price per pack. While cigarette makers always draw the attention of governments struggling to find revenue -- Waldemer said so-called sin taxes are "part of our life, that will never change" -- he noted that most governments have been implementing "reasonable" increases. Not every government is being reasonable, however. The industry is facing what he said were "disruptive increases" this year in Romania, Turkey, Greece, Australia, and Japan. A new EU excise tax directive, however, calls for more measured increases and gives the company visibility on the tax policy through 2018. Waldemer also said the company's 50-50 joint venture with China National Tobacco is going well. The Chinese company is the world's largest cigarette maker and dominates the domestic market. Waldemer estimated the total cigarette volume is in the range of 2.3 trillion cigarettes annually. Under the JV, PMI is selling Chinese-branded smokes outside of China while its partner is making Marlboro under license at two of its factories. BMR Take: Though the first three months of 2010 weren't as good as expected, our basic view of Phillip Morris International is unchanged. The company continues to offer investors a unique opportunity to own a stock with an attractive yield and strong growth prospects. A strong dollar is a headwind, but as Waldemer noted, the biggest factor that influences its business isn't currency fluctuations but employment levels. To the extent the world's economy is improving, so will premium cigarette sales. In the meantime, the company remains an enormous cash generator and is very shareholder friendly, as evidenced by the generous dividend and buyback policies. Income-oriented investors should use the current weakness to accumulate positions in this "Buy" rated stock. The company continues to face near-term headwinds, particularly from Europe, but it remains a fundamentally strong long-term play. Our current price Target is $57.
Member Q&A - A Look at ATMI A) With roughly 40% of its current price (about $6.25) covered by its adjusted (adjusted for $6.3M in long-term deferred revenue) net current asset value and a core focus on markets that are seeing strong demand, I'm not surprised that ATMI has caught your attention. However, since I don't have good company-specific insight or even great visibility into ATMI's markets, I can't add much beyond some valuation comments and how I would play it based on this limited vision. What we know is ATMI has topped the Wall Street earnings consensus for at least the last four quarters. Its last report for the March quarter (+$0.25) beat the consensus by $0.05. While this led Wall Street to up the views for both 2010 (now $0.98 from $0.81) and 2011 ($1.24 from $1.15), the consensus for the June quarter remained at $0.22. Taking all of this in context leads me to believe ATMI is pretty good at guiding conservatively, but there is also a chance the company expects a pause in demand. If we take my estimated balance sheet value of about $6.25 away from the current price of $15.65 we're left with $9.40 to offset with forward earnings. If we use the $0.98 consensus for 2010, the resulting forward adjusted PE ratio is 9.6 to 1 and if we use the $1.24 2011 consensus it drops to 7.6 to 1. I think even given the highly cyclical nature of ATMI's business, these are both too low. Of course, Wall Street might be viewing the balance sheet value based only on net cash and not adjusted for deferred revenue. If so, that would drop the balance sheet value to about $4.10 and boost the implied 2010 adjusted PE ratio to by 2.2 and the 2011 ratio by 1.7. This would reasonably well align the value based on 2010 earnings with the low end of what I would call a reasonable fair value range, but still leave room for some upside if ATMI remains on course to deliver $1.24 next year. In my view, that upside would be to somewhere around the 52-week high of $22.05. However, if I were to speculate here I would probably plan to complete an exit somewhere before $21. Disclosure: At the time of this publication, out of the companies discussed herein, Paul McWilliams had nor positions.
Member Q&A: Windstream A) Like Frontier Communications (FTR, $7.82, 0.04) , which we profiled last month, Windstream is a rural local exchange carrier. It provides its customers local and long-distance telephone service, Internet access, digital phone, and DISH satellite TV. The company currently operates in 23 states, serving primarily rural and suburban areas. It has approximately 3.0 million access lines and 1.2 billion high-speed Internet subscribers. The company has been an aggressive acquirer, most recently completing a $1.2 billion acquisition of Iowa Telecom at the start of this month. The deal added 249,000 access lines, 96,000 high-speed Internet customers, and 27,500 digital TV customers in Iowa and Minnesota. Windstream reported Q1 earnings last month, posting a profit of $74.1 million, or 17 cents per share, down -17% from $88.2 million, or 20 cents per share, a year ago. Adjusted EPS came in at 20 cents. Revenue rose 12% to $847.9 million, while pro forma revenue, which adjusts for acquisitions and excludes out-of-territory product distribution operations, fell -3% to $905.2 million. Adjusted free cash flow was $216 million, and the company had a dividend payout ratio of 51%. CapEx fell -4% to $61 million, while adjusted CapEx fell -33% to $64 million. Number of access lines fell -4% to 3.11 million. High-speed Internet subscribers rose 10% to 1.17 billion, while video subscribers increased 14% to 381.8 million. BMR Take: As a landline focused telecom, Windstream isn't exactly in a great business. However, it's done a good job of keeping its landline losses to a minimum and it isn't spending a lot on CapEx to grow. The company is a cash cow, and its approximately 3.5x debt to EBITDA ratio and 51% dividend payout are solid metrics. The stock probably doesn't have a ton of capital appreciation potential, but the 9.3% yield looks solid and it may have a little more juice to move higher. A target of $12.50 seems reasonable.
Member Q&A: Michael Baker A) Michael Baker is a engineering and construction firm that focuses on the Aviation, Defense, Environmental, Facilities, Geospatial Information Technologies, Homeland Security, Municipal & Civil, Pipelines & Utilities, Rail & Transit, Transportation, and Water markets. Its services span the complete life cycle of infrastructure and managed asset projects, including planning, design, construction services, asset management, and asset renewal. It sold its energy business in October 2009 for $37.9 million. Then in May this year, it turned around and purchased LPA Group, an engineering firm specializing in the transportation sector with a solid presence in the Southern U.S., for $51.4 million in cash and $8.0 million in stock ($59.4 million total). LPA Group has 475 employees, and had $93 million in revenue for 2009. The company reported Q1 results last month, posting net income from continuing operations of $4.6 million, or 52 cents per share, down from $6.3 million, or 70 cents per share, last year. Revenue fell -3% to $111.7 million. Looking at segments, the Federal segment saw operating income slip 21% to $8.1 million. The company attributed the decline to less work for FEMA and in Iraq, as well as a decrease in utilization and decreased margin related to project mix. The transportation segment, meanwhile, saw its operating income fall -8% to $4.3 million. The company said the decline was due to a decrease in margins related to project mix and higher corporate overhead costs due to acquisition-related costs. Total backlog for continuing operations at the end of the quarter was $1.53 billion compared to $1.43 billion at year-end 2009. The company ended the quarter with $120.2 million, or $13.50 per share, in cash and short-term investments and zero debt. After the LPA acquisition, that number would be down to $68.8 million, or over $7.50 in cash. "We might talk about the first quarter of 2010 as a tail of two quarters," CEO Bradley Mallory said. "January and February, it might be a stretch to call them the winter of our discontent but January and February were a challenge for us with several of our key offices being out of commission for several days and it shows up in these results." "On the other hand, with warmer sunnier skies in March the business rebounded very, very strongly and candidly ended up resulting in a quarter that was just a click ahead of where we thought it might be and accordingly a click ahead of most of the estimates accordingly." BMR Take: Michael Baker looks like a solid U.S.-focused E&C firm that should benefit from the flow of federal stimulus dollars to improve infrastructure. The sale of the energy business, meanwhile, and purchase of LPA look like good moves, as the energy infrastructure business has been volatile the past few years while transportation spending in the U.S. should be picking up. Trading at only around 8x forward estimates after stripping out its cash, we think the stock can be accumulated at current levels and on weakness.
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