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A Little Optimization To Maximize The Value

publication date: Mar 8, 2018
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author/source: Valuentum Analysts

We continue to help readers find some of our best ideas for consideration, and some of the companies in this article didn’t make the cut for our long-term perspective. We’re allocating resources elsewhere.

Clean Diesel Tech (CDTI)

Clean Diesel Tech is a leading global manufacturer and distributor of emissions control systems and products to the automotive and heavy duty diesel markets.

Clean Diesel Tech is a leading global manufacturer and distributor of emissions control systems and products to the automotive and heavy duty diesel markets. It uses patented technology to reduce emissions and lower the carbon intensity of engine applications. The company was founded in 1996 and is based in California.

Clean Diesel Tech expects to realize a shit in revenue mix in the coming months as partner revenues increase. Margin expansion is projected as technology and material revenues advance, and operating expenses are anticipated to continue trending downward.

The company operates in two primary divisions: a Heavy Duty Diesel Systems division, which specializes in the design and manufacture of verified exhaust emission control solutions, and a Catalyst division, which produces catalyst formulations to reduce emissions from gasoline, diesel and natural gas combustion engines.

Clean Diesel Tech believes it has significant opportunities in China and India. The firm expects China to become the world's leading new car producer by 2021, when it will account for 30% of all new vehicles manufactured. India boasts an auto market based on diesel engines growing at a strong 9% CAGR.

Clean Diesel recently signed a partnership with automotive supplier DENSO to provide its emission control technology to the heavy-duty market in North America. PowerEdge diesel after-treatment will be manufactured by Clean Diesel and distributed by DENSO.

Our published fair value estimate range for Clean Diesel Tech is $1-$3 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.

Seacor (CKH)

Seacor's offshore marine segment often generates double-digit returns, but most of its vessels do not have long-term contracts.

Seacor has four segments: offshore marine services, which operates equipment supporting offshore oil and gas exploration/production; inland river services, which operates tank barges in the US waterway systems; shipping services, which transports petroleum products in the US; and Illinois Corn Processing (ICP), which operates an ethanol processing plant in Pekin, Illinois.

Dividend investors are well aware that Seacor is known for its special dividends. The board declared a special dividend of $5 per share in December 2012 and declared a $15 per share special dividend in December 2010. Its payout can fluctuate wildly.

The firm's offshore marine segment often generates double-digit returns, but most of its vessels do not have long-term contracts. Its inland river services segment generates low-single digit returns, but the resilience of its dry cargo fleet has been promising.The firm's shipping services segment benefits from the Jones Act, but mid-single-digit segment returns aren't anything to write home about.

Seacor defines the outlook for offshore marine services as 'cold, damp, and wet,' and the pressure on the price of oil has hurt performance in the segment as of late.The executive team believes its outlook for its inland river services business is 'cloudy,' and rates and margins are under pressure. On an optimistic note, management believes the outlook for its shipping business is 'bright,' noting a balanced order book." &" ICP is its 'favorite child' thanks to higher sales volumes of alcohol and ethanol, however. The company's economic performance will remain 'lumpy.

Our published fair value estimate range for Seacor is $36-$60 per share, with a Valuentum Buying Index rating of 5 and an Economic Castle rating of Unattractive.

EV Energy (EVEP)

EV Energy's financial leverage is significantly elevated, a recipe for disaster for an upstream MLP.

EV Energy is a limited partnership engaged in the acquisition, development and production of oil and natural gas properties. Its properties are located in the Barnett Shale (40%+ of its SEC proved reserves), the Appalachian Basin (Utica Shale), the Mid–Continent, among others. EV Energy's primary business objective is to manage its oil/natural gas assets for the purpose of generating cash flows and providing growth of distributions per unit. The MLP's distributions were once an attractive attribute, but it was forced to suspend distribution payments in April 2016 in an attempt to shore up its balance sheet. Debt levels remain elevated, however.

For MLPs, our valuation considers only maintenance capex (as opposed to total capex) in the derivation of enterprise free cash flow, consistent with the definition of 'distributable cash flow'. This peculiarity results in MLPs' fair value estimates receiving a boost for future operating cash flow growth without organically subtracting the " &"growth capital associated with driving such expansion. This is a valuation imbalance that exists as a result of the inherent structure of an MLP (for MLPs, growth is typically funded via new capital as opposed to organically). Investors should be aware that, under a scenario in which all capex is deducted, our fair value estimate would be considerably lower.

EV Energy's financial leverage is significantly elevated, a recipe for disaster for an upstream MLP. The worst may still be ahead for units as hedges eventually roll off. We wouldn't touch EV Energy with a 10-foot pole.

Our published fair value estimate range for EV Energy is $0-$4 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Unattractive.

Fuel Tech (FTEK)

Cash on the books represents a material portion of our estimate of Fuel Tech's intrinsic value.

E Fuel Tech is a leader in air pollution control systems. Products include customized NOx control systems and proprietary urea-to-ammonia conversion technology. Its FUEL CHEM programs help utilities meet environmental regulations. The firm was founded in 1987 and is headquartered in Illinois.

For Fuel Tech tends to announce awards frequently but it is important to keep deal size in perspective. The company's revenue has faced material pressure, and profit levels aren't much to speak of. Cash on the books represents a material portion of our estimate of its intrinsic value.

Coal-fired utilities continue to seek solutions that enable them to compete cost-effectively while maintaining compliance with increasingly stringent emissions requirements. Low natural gas prices and relatively weak electricity demand, however, have created a challenging environment. Fuel Tech's backlog has been quite volatile since 2014 and is worth keeping an eye on.

Despite continued revenue pressure, Fuel Tech remains confident that it is well-positioned for the changing regulatory environments around the world.The firm is focused on the US, Europe, Latin America, and China. As of 2015, the firm had solutions installed in 26 countries on four continents.

China remains a market of significant interest and opportunity for Fuel Tech. The firm's portfolio of NOx reduction solutions is well-positioned to address the country's needs to enhance pollution standards.

Our published fair value estimate range for Fuel Tech is $0-$4 per share, with a Valuentum Buying Index rating of 5 and an Economic Castle rating of Unattractive.

Layne Christensen (LAYN)

Backlog trends haven't been very encouraging as of late for Layne Christensen.

Layne is a global water management, construction and drilling company. The firm operates throughout North America, as well as Africa, Australia, Europe, Brazil, and through affiliates in other South American countries. The company recently sold its Geoconstruction business. Layne was founded in 1981 and is headquartered in Texas.

Backlog trends haven't been very encouraging as of late. Total backlog fell to ~$183 million at the end of the second quarter of fiscal 2018 compared to ~$194 million a year prior. Orders will continue to be lumpy, however.

All of Layne's businesses are leaders in their respective spaces. The firm is #1 in US water well drilling, #2 in US trenchless pipeline rehabilitation, the #3 mineral services driller in the Americas, and the #5 US water pipeline repair and construction contractor.

Layne Christensen registered the worst rating of a 1 on the Valuentum Buying Index in March 2013 at a price north of $20, and shares have fallen significantly since that time. We're not particularly enthused by its investment prospects.

The company continues to lose money, and while a return to profitability may be a catalyst for shares, we're just not that excited. Layne lost ~$52 million from continuing operations in fiscal 2017.

Our published fair value estimate range for Layne Christensen is $7-$14 per share, with a Valuentum Buying Index rating of 5 and an Economic Castle rating of Unattractive.

Liquidity Services Inc (LQDT)

Liquidity Services operates several leading online auction marketplaces for surplus and salvage assets.

Liquidity Services operates several leading online auction marketplaces for surplus and salvage assets. Its marketplaces are www.liquidation.com, www.govliquidation.com, www.govdeals.com, www.networkintl.com, among others. The company was founded in 1999 and is headquartered in Washington, DC.

Liquidity Services benefits from a network effect. Sellers benefit from a liquid, transparent market and the participation of a large base of buyers, while buyers benefit from the firm's relationships with high-volume, corporate and government sellers.

The online services market for auctioning or liquidating surplus and salvage assets is competitive. Excess returns will continue to face pressure, and the company recently lost a large contract with both the DoD and Walmart that has weighed on performance. Management has had difficulty predicting near-term results.

Investors should monitor the firm's top-line closely for potential upside during what we would describe to be a very difficult environment in the near term. Even modest revenue growth ahead of depressed expectations could drive upside to the company's equity value.

Our published fair value estimate range for Liquidity Services Inc is $5-$11 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.

Matson (MATX)

We've lowered our fair value estimate for Matson as a result of new competition entering its west coast-to-Hawaii shipping business.

Matson has been around since the late 19th century. The company owns a fleet of ~25 vessels including containerships and custom-designed barges and is a leading US shipper in the Pacific, offering service to several island economies, including Hawaii and Guam. It also offers service from China to Southern California.

Though economic returns in prior years could be better, we assign the company an attractive Economic Castle rating. Matson has a strong and defensible position, and its unique expedited service between China-California offers premium pricing dynamics.

Matson's recent growth efforts have focused on Alaska, as it is acquiring strategic assets to serve key Alaskan hubs, Dutch Harbor and Kodiak. The company's operations serve as a critical lifeline to these communities, which speaks to the sustainability of demand and a stable revenue profile, and the integration of such operations will remain a focus.

Matson has several other things going for it as well. Construction activity in Hawaii continues to fuel demand for its shipping services, and its China operations may be the most attractive proposition of all. The company has the fastest transit time from China to Long Beach, offering customers a 3-6 day competitive advantage. The freight rate premium Matson can charge relative to the spot market falls straight to the bottom line. However, we've lowered our fair value estimate as a result of new competition entering its west coast-to-Hawaii shipping business. Top-line expectations have been ratcheted lower.

Our published fair value estimate range for Matson is $23-$39 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Attractive.

McClatchy Co (MNI)

We've lowered our fair value estimate for McClatchy as the slowdown in traditional print advertising spending continues. Its debt load is massive.

McClatchy Co is the third-largest newspaper firm in the US based on daily circulation and a digital publisher. The firm owns and operates 30 media companies in ~30 US markets, which are growing faster than the US average. It has stakes in CareerBuilder.com and Classified Ventures (Cars.com, Apartments.com).

McClatchy's debt load is just too much for any reasonable equity investor to bear. The firm has been trying to pay it down, but even after such efforts, in December 2016, it stood at ~$840 million on a net-of-cash basis. It continues to post net losses.

Advertising comprises a large majority of the firm's revenue (about two thirds), making the quality of its sales force of utmost importance. The firm has a local sales force in each of the markets it serves and believes that these sales forces are generally larger than those of other local media outlets and websites in those markets.

The firm competes with television, radio, other websites, direct mail companies, suburban and national newspapers and other publications. As with any newspaper publisher, its earnings are sensitive to changes in newsprint prices. Newsprint expense accounts for roughly 5%-7% of annual operating expenses.

McClatchy Co owns some reputable newspapers: Miami Herald, Sacramento Bee, Fort Worth Star-Telegram, Kansas City Star, Charlotte Observer and News & Observer in Raleigh, NC. Still, revenue growth continues to suffer.

Our published fair value estimate range for McClatchy Co is $5-$15 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Neutral.

PetroChina (PTR)

PetroChina is expecting the Chinese economy to continue growing at a moderate and stable rate, with consumer demand for oil and gas in the country to remain on its uptrend.

PetroChina is China's largest producer of crude oil and natural gas. It is also one of the largest companies in China in terms of revenue. The Chinese oil and gas industry is subject to extensive regulation by the Chinese government, which adds additional risk to the firm’s investment profile.

We expect PetroChina to pay out dividends in the range of 40%-50% of net earnings each year. Exchange rates can cause volatility, and volatile energy prices only complicate matters. Net profit dropped by two-thirds in 2015 and another 78% in 2016 before jumping exponentially in 2017's first half.

The controlling shareholder of the company is CNPC, a petroleum and petrochemical conglomerate. CNPC is also a state-authorized investment firm and state-owned enterprise. CNPC controls ~86% of the firm, revealing potentially significant corporate governance issues. Minority shareholders have little influence on PetroChina's business.

PetroChina is expecting the Chinese economy to continue growing at a moderate and stable rate, with consumer demand for oil and gas in the country to remain on its uptrend. It believes opportunities outweigh challenges at this juncture as reforms to energy pricing system and the national oil and gas system are accelerating growth.

Global energy use is expected to grow about 35% by 2040. PetroChina is well positioned. As of the end of 2016, the company had 5.2 million barrels of proved developed crude oil reserves and 40.7 billion cubic feet of proved developed natural gas reserves.

Our published fair value estimate range for PetroChina is $60-$111 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Unattractive.

E.W. Scripps (SSP)

Pet E.W. Scripps has agreed to acquire four fast-growing broadcast TV networks for just over $300 million.

E.W. Scripps is a diverse, 130-year-old+ media enterprise. In 2015, the company completed a merger agreement with Journal Communications, which combined their broadcast operations. Both of the entities also spun off and merged their newspaper properties into a new entity, Journal Media (JMG). The company is headquartered in Cincinnati, Ohio.

As the company wraps up its integration of Journal Communications, television revenue comprises the vast majority of the firm's revenue (~85% as of the fourth quarter of 2016), but it also reports operations in three other divisions: radio, digital, and syndication.

Scripps has operated broadcast television stations since 1947. Today, its television station group reaches ~20% of US households and includes 10 ABC affiliates and 3 NBC affiliates. The company faces competitive threats in this area from direct-to-consumer content delivery vehicles such as Amazon, Hulu, and Netflix.

Scripps continues to reinvent itself. The company runs a mobile video news service Newsy and a weather app developer Weathersphere. However, it hasn't given up its longest-running educational program, the Scripps National Spelling Bee, nor has its motto changed: 'Give light and the people will find their way.

Scripps has agreed to acquire four Katz broadcasting networks for $302 million in a deal that will be treated as a purchase of assets for tax purposes. The networks are expected to add ~$180 million in revenue and ~$30 million in segment profit in 2018.

Our published fair value estimate range for E.W. Scripps is $12-$22 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.

tronc (TRNC)

Though secular trends are against it, Tribune has a strong market position in diverse regions.

tronc, formerly, Tribune Publishing, is a media and marketing-solutions company with daily titles and digital properties in major markets, including Los Angeles, San Diego, Chicago, South Florida, and Baltimore, among others. The company prides itself on great journalism and holds niche publications such as Red Eye (Chicago) and The Envelope (Los Angeles). It is headquartered in Chicago.

It's hard not to like the storied history of the company that originated from the creation of the Chicago Tribune in 1847. This history does include a bankruptcy filing in 2008, however, and rumors keep flying it may split or sell itself. Gannett has offered $18.75 per share in cash to acquire the company.

One of the strongest assets of Tribune is the talent of its journalists. Newspapers owned by Tribune including the Los Angeles Times, Sun Sentinel, Chicago Tribune, Baltimore Sun, Orlando Sentinel, and Hartford Courant have won over 90 Pulitzer Prizes. About 25% of revenue comes from the sale of newspapers and digital subscriptions.

Advertising remains the lifeblood of Tribune Publishing, accounting for roughly half of the company's revenue. Web-based media sources and social-media giants remain key forms of competition, however, not only for advertising dollars but also for consumer attention.

Though secular trends are against it, Tribune has a strong market position in diverse regions, and its leading brands have deep local reach and national scale. The acceleration of the company's digital strategy will be paramount to business sustainability.

Our published fair value estimate range for tronc is $12-$26 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Attractive.

Olympic Steel (ZEUS)

We applaud Olympic's shift from expanding capacity to generating better bottom-line performance.

Olympic Steel is a metals service center focused on the direct sale and distribution of large volumes of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel and aluminum products. Its services range from storage and distribution of unprocessed metals to value-added metals processing. Flat products account for ~65% of sales.

We applaud Olympic's shift from expanding capacity to generating better bottom-line performance. The firm continues to invest in its higher-margin Specialty Metals Flat Products and Tubular & Pipe Products segments. It continues to expect strong volume growth in the near term.

Sales of specialty metals continue to grow as a percentage of total net sales at Olympic and accounted for 18% of sales in 2016, up from 10% in 2012. Higher stainless steel volume in the transportation and food service industries continue to drive gains in this area, but poor pricing dynamics have hurt revenue. Market share in stainless steel has grown to ~6% from practically nil five years ago.

The US government continues to evaluate ways to mitigate the detriments of low-cost foreign producers flooding the US market and could take measures in addition to the duties currently in place. The penalties for selling steel in the US at unfairly low prices may not fully satisfy US producers, and the implications of Trump's infrastructure plans remain uncertain.

Olympic launched its profit improvement plan in 2015 that includes the lowering of inventory and debt, controlling transportation costs, consolidating administrative functions, optimizing mill sourcing, and improving productivity via automation. We’re fans of the initiative on a high level.

Our published fair value estimate range for Olympic Steel is $13-$29 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Unattractive.

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