Korean ADRs Likely To Benefit From Warmer Relations With The North

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Apr 232013
 

Korea’s economy will likely grow 3% this year, while Japan is expected to grow by about 1.5%, the U.S. by 2%, and the four largest economies in the European Union (Germany, France, Italy, and Spain) are expected to decline a combined 0.3% in 2013, according to the IMF. Among the developed countries, Korea offers some of the best opportunities for economic growth. Three Korean companies that will benefit from this continued economic strength and whose shares are traded on a U.S. exchange are the steel giant POSCO (PKX), KB Financial Group (KB), and Korea Electric Power Corp (KEP). These three companies are leaders in their areas and their shares seem undervalued compared with other global companies in their industries. Importantly, these companies will likely deliver even stronger results if relations between Korea and North Korea improve.

Benefits of developing business relations with the North

North and South Korea share the same culture, language, and history. However, following World War II, the country was artificially divided in two along the 38th parallel. More than 60 years later, the North has a population of 24.5 million, a land mass of 46,528 square miles (size of Pennsylvania), and a 2011 nominal GDP per person of $506. At the same time the South’s population is around 50 million living on 38,691 square miles (slightly larger than Indiana) with a 2012 nominal GDP per person of $23,100.

POSCO, KB and Korea Electric Power will benefit almost overnight in the case of stronger ties between the two countries due to the following major reasons:

  • Geographical proximity,
  • Sharing the same culture, ethnicity, language, and history, and
  • Lack of competition in the North in the areas of steel production, financial services and electricity generation and distribution. (continued)

Low potash prices not a big concern for PotashCorp

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Apr 152013
 

Introduction

Since my last article about PotashCorp (POT) on January 11, 2013, the price of muriate of potash has declined by about 10% and is currently under $400 per ton. Similarly, PotashCorp stock price is down by 7.9% during the same period. This price performance is significantly below that of the S&P 500 index but not as severe as that in the stock prices of major competitors CF Industries (CF), Agrium (AGU), and Intrepid Potash (IPI) and worse only than that of Mosaic (MOS) (see graph). (continue reading)

Lifetime Brands (LCUT) – a microcap opportunity

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Apr 112013
 

Lifetime Brands (NASDAQ: LCUT) is not a household name, but the company sells a variety of kitchen products under well-known brands. Its common stock has lagged behind those of larger competitors, including Williams-Sonoma (NYSE: WSM) and Jarden (NYSE: JAH), and is significantly undervalued. Because of its smaller size, attractive fundamentals, international exposure and well-known kitchen products, Lifetime Brands offers a unique investment opportunity.

In addition, the company could be acquired by a larger competitor or a private equity firm because of its smaller size and advanced age of its veteran Chairman, CEO and President, Jeffrey Siegel (70+). Coincidentally, Siegel’s current employment agreement with the company ends on Dec. 31, 2013 and has an option to be renewed for one additional year.

Fundamentals and valuation

Lifetime owns the Mikasa, Platzgraff, Kamenstein, Elements, Melannco, Wallace Silversmiths, and Fred brands and licenses certain kitchenware made under the Farberware (183 years free license to utilize the brand in kitchenware and tabletop products), KitchenAid, Cusinart, Misto, V&A, and Royal Botanic Gardens Kew brands. The company sells its products wholesale (95.5% of 2012 sales) and direct retail through its own web sites (4.5%). Lifetime’s product category is kitchenware (55.1% of 2012 sales) followed by tabletop (24.5%), home solutions (11.2%) and creative tops (9.7%). It should benefit from its exclusive focus on the kitchen and table top products, strong relationships with leading online (Amazon.com) and brick and mortar retailers (Target, Wal-Mart and Kohl’s), and a recovering U.S. economy led by housing and consumer confidence.

As seen from the table below, Lifetime common stock has a number of valuation and fundamental measures that are more attractive than those of major competitors, Williams-Sonoma and Jarden. Importantly, Lifetime has no physical stores and can operate more efficiently than Williams-Sonoma. Also it focuses on fewer product categories than both Williams-Sonoma and Jarden. For example, Jarden sells over 100 consumer products brands ranging from products in outdoor recreation to animal solutions and consumer staples. On the negative side, Lifetime has the lowest margin as measured by EBITDA. On the upside, a margin expansion is likelier from Lifetime’s current low level.

LCUT WSM JAH S&P 500
Market capitalization $154M $5B $5.1B $13,839B
Enterprise value [EV] $248M $4.6B $7.9B n/a
EBITDA margin 7.3% 13.5% 10.9% 21.3%
EV/EBITDA 6.5 8.4 10.2 n/a
Price-to-earnings (2013) 8.6 18.3 13.3 14.3
PEG 1.2 1.3 1 1.8
Price-to-CFO 6.8 13.7 10.6 n/a
Price-to-sales 0.3 1.3 0.8 1.4
Price-to-book value 0.9 4.1 2.9 6.6
International sales % 11.5% ~5% est. 39.0% n/a
1-year total return (a/o April 5, 2013) 12.0% 34.7% 59.9% 14.0%
Insider equity ownership (2012 proxy) 20.4% 2.3% 6.6% n/a
Dividend yield 1.0% 2.4% nil 2.2%
Debt to equity 0.6 0 2.2 0.7
Beta 2 1.7 1.5 1
Employees (full-time) 1,247 7,200 25,000 n/a

Source: Capital IQ, Thomson Reuters, SEC filings and author’s calculations; EBITDA – earnings before interest, tax, depreciation and amortization; CFO – cash flow from operations; PEG – price-to-earnings-to-growth

International exposure

Lifetime’s international sales are more than 10% of its total sales. This is more than Williams-Sonoma’s but less than Jarden’s international sales. Importantly, Lifetime owns 30% and 40% of the equity of Grupo Vasconia (Mexico) and GS Internacional (Brazil), respectively. In addition, Lifetime has a 50% and 40% interest in China and Hong-Kong based partnerships, respectively. Lifetime accounts for these four investments under the equity method of accounting and in 2012 it generated $6.1 million of net income from these international partnerships. This represents 29% of Lifetime’s net income in 2012 of $20.95 million. Since three out of the four international investments were made in the past two years, it is likely that international exposure will rise from current levels.

Conclusion

Lifetime is a company that has solid growth prospects. In the U.S., the company should benefit from its focus on a relatively narrow market, increased consumer confidence, and a housing market stabilization and recovery. Internationally, it is well positioned to improve its participation in the kitchenware and table top markets in the emerging economies of Latin America and Asia.

At current valuation levels, the common stock appears to be trading more like a value stock. Instead it should have higher multiples as Lifetime is likely to continue growing in the next several years. An additional catalyst could be the sale of the company to a strategic or financial buyer. Lifetime’s executives and directors hold over 20% of the shares and it will not be a surprise if a shareholder-friendly transaction occurs in the near future. This is an especially popular exit for long-term CEOs who are also the major shareholder in smaller companies such as Lifetime.

Power up your portfolio with Tyson Foods

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Apr 092013
 

Tyson Foods (TSN) is the largest protein processor in the United States and its common stock offers a good investment opportunity. Many of the company’s fundamentals and valuation measures are attractive compared to similar publicly traded companies. Tyson is well positioned to meet changes in tastes for meat as the company is diversified across the major meat types (poultry, pork and beef), its profit margins are normalizing, and it is continuing to innovate and invest in value-added businesses, which could bring even more shareholder value in the future. Overall, Tyson could see improvements in its business due to these major trends:

  • Population growth;
  • Swings in consumption – Tyson is the largest provider of meats to the quick service restaurants, which are constantly reinventing their menus – also, despite a sluggish economy consumers are not reducing meat consumption but moving to poultry from red meats;
  • Growth in higher margin value-added poultry and prepared foods; and
  • Growth in international poultry – the company is investing in China, Mexico is strong and Brazil is exporting into Europe.

Valuation and fundamentals

Tyson has 354.5 million shares outstanding of which 284.5 million are A shares and publicly traded, with the remaining 70 million B shares held in a trust formed by descendants of Tyson’s founder, John Tyson. Tyson is the largest publicly traded meat processor and marketer in the United States and the second largest in the world (behind only Brazilian JBS SA). A significant number of its outstanding shares are controlled by insiders and the company is shareholder friendly.

It returns cash in the form of dividends and share repurchases. In its first 2013 fiscal quarter that ended on December 31, 2012, it repurchased 5.1 million shares for $100 million and paid a special dividend of $0.10 per share in November of 2012. The 2012 dividend yield based on recent share prices is 1.1%. The company is likely to continue its share repurchasing and dividend payment as it has nearly $2 billion in liquidity, significantly above its targeted range of liquidity of $1.2 to $1.5 billion. Below is a table that compares valuation and fundamental measures of Tyson and its major publicly traded competitors Smithfield Foods (SFD), Hormel Foods (HRL) and Pilgrim’s Pride (PPC). (full article)

The Race For Clearwire’s Assets Is Entering The Homestretch

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Mar 312013
 

Introduction

Clearwire’s (CLWR) common stock is down about 85% since it went public in March of 2008. The company was a spin-off from Sprint (S) and now Sprint is in talks to buy back Clearwire at a fraction of the price it initially divested it at. And since my first article about Clearwire, in June of 2012, Clearwire’s price is up over 100% (see graph). However, the drama with this public and massive loss incurring company is not likely to be over in a predictable way. Currently, Sprint and DISH (DISH) are vying for Clearwire’s hand, the former offering $2.97 per share and the latter $3.30, but with more conditions. And finally, a number of prominent hedge funds have placed their bets on the race for Clearwire’s assets. Let’s take a closer look at Clearwire’s recent developments. (continue reading)

Introduction to the maker of Silk and Horizon beverages

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Mar 242013
 

People that are intolerant to lactose or fearful of the effects of hormones in milk products often turn to Silk soy milk and the single serve Horizon organic milk drinks. These products are made by WhiteWave Foods (WWAV), a recent spin-off from Dean Foods (DF). The company has products in a few niche drink categories such as soy milk, organic milk, and coffee creamers. Importantly, demand for its products is increasing, which bodes well for the company and its shareholders. Let’s take a look at the company’s valuation and its prospects going forward.

Fundamentals and valuations

WhiteWave has 173 million shares outstanding and only 23 million shares floated on the market for a market capitalization of about $3 billion and an enterprise value of $3.8 billion. The 150 million shares that are not traded on the market are held by Dean Foods. Following a recent favorable tax ruling from the IRS, Dean Foods will make a tax-free distribution of most of these shares on April 23, 2013. (continue reading)

Nike is losing its appeal

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Mar 212013
 

Increased competition in the sports industry is putting pressure on Nike (NKE) common stock which will probably continue to underperform the market. This comes at a time when Europe, a major market for Nike’s products, is in an unpleasant recession. Even compared with its peers that are focused primarily in the U.S., such as VF Corp (VFC), Lululemon Athletica (LULU), and Under Armour (UA), Nike’s shares are not cheap when accounting for expected growth. Based on past results, expectations from Nike are high. Importantly, there is only a small margin of safety if this sporting goods company stumbles on its path to dressing and equipping athletes across the globe.

Fundamentals and valuation

Nike, VF, Lululemon and Under Armour have 901, 110, 144 and 105 million shares outstanding, respectively, for a market capitalization of about $49, $18, $9 and $5 billion, respectively. As seen from the table below, all four companies have low to no leverage. There are more similarities between the smaller Lululemon and Under Armour and the larger Nike and VF, that can be explained by their similar sizes and stages of development.

Remarkably, Nike and VF have over 20% of sales coming from Europe, which is undergoing financial and economic crises with no solution on the horizon. Lululemon derives its sales mostly from the U.S. and outside the U.S. from Canada, Australia, and New Zealand, markets that are showing economic growth. And Under Armor is primarily focused on the U.S. market. Overexposure to Europe does not bode well for Nike. (continue reading)

A look at the paint and coatings industry

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Mar 182013
 

With recent gains in economic activity in the U.S. as well in other developed and emerging economies around the world and the housing rebound in the U.S., the demand for paint and coatings products should rise. Also, it will not be a surprise if a strategic buyer or a private equity firm acquires one or more of the major painting and coatings companies. For example, Blackstone (BX) acquired home security and automation company Vivint in the second half of 2012 and later it announced that the company is buying wholesale foreclosed single family homes. Clearly, a paint manufacturing company makes sense when you buy thousands of homes and plan to renovate and rent them.

Three companies that investors could consider and that offer exposure to the painting and coatings industry include PPG Industries (PPG), RPM International (RPM) and Sherwin-Williams (SHW). These three companies appear fully valued and risks from higher inflation, recent acquisition and a still uncertain economic climate could drive their shares down. However, a strategic or financial buyer will have to pay a significant premium to their current stock prices. Let’s take a closer look at some important valuation and fundamental metrics and which company offers the best prospects.

Basic fundamentals and valuation metrics

PPG, RPM and Sherwin-Williams have 142.9 million, 132.4 million and 103.3 million shares outstanding for a market capitalization of $20.2 billion, $4.2 billion and $17.5 billion, respectively. Below is a table comparing some of their valuation and fundamental metrics to that of the S&P 500. (continue reading)

The Private Equity Food Pyramid

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Mar 142013
 

Introduction

The food pyramid of private equity firms is very simple. At the top are the owners who are usually well known public figures and often make the Forbes 100 list. Then come the employees. Six figure annual paychecks for entry-level employees is often the norm. In bad or in good markets, these companies have to make sure that they have the brightest professionals. Then come the limited partners or the institutions and private investors who commit capital directly to the pool. The limited partners provide the funds that private equity firms invest on their behalf. A private equity firm’s goal is to preserve capital so in bad years, a private equity fund would likely be able to achieve a small positive or negative return. Over the long-term, returns from the leading private equity funds handily beat the S&P 500, but there could be years where performance is in the single digits.

At the bottom of this food pyramid are the equity investors in the publicly traded shares of private equity firms. Whatever investment income and/or revenue is left after the top of the pyramid needs are satisfied, the leftover goes to the equity investors. Thus, in bad periods, shares of private equity firms usually under-perform the market by a lot and in a climate which is beneficial for investing they outperform. The current investment environment leaves enough food for the bottom of the private equity pyramid due to low interest rates, risk-aversion, and the flexibility of private equity firms to venture where other capital providers cannot go.

Stock performance and fundamentals

Since my last article about three of the major private equity firms in Jan. 2013, Blackstone (BX), KKR (KKR), and Fortress Investment Group (FIG) share prices have appreciated by about 13%, 13%, and 33%, respectively, compared to a rise of 4.7% for the S&P 500 (see graph). Despite this stellar performance, the shares of Fortress and Blackstone are down by about 80% and 40% since the companies went public in Feb. and June of 2007, respectively. Only KKR, which went public in July 2010 and following the great recession, has achieved a positive return of nearly 100% since its IPO (almost twice the return of the S&P 500). Private equity firms should continue to perform well in the next few months as the tailwinds that have been present in the past several months are still in place. (continue reading)

MasterCard and Visa are winners in the wars on cash

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Mar 112013
 

Since my last analysis in Dec. 2012, the major credit companies have performed in-line with the rise in the S&P 500 with American Express’ (AXP) price slightly outperforming and Discover Financial (DFS), MasterCard (MA), and Visa (V) stock prices slightly underperforming the index. The latest quarterly results of MasterCard and Visa exceeded Wall Street expectations and due to a lack of meaningful competition, a secular move to electronic transactions, and shareholder friendly policies, I expect the common stock of MasterCard and Visa to continue to perform well. Despite recent legislation to reduce credit card companies’ pricing power and lawsuits against these companies, it seems like the music will continue to play for the major credit card companies for years…(continue reading)

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