Ceragon jumps 2.1% in the Small & Micro Cap Screener $CRNT

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Ceragon Networks Ltd (NASDAQ:CRNT), the #1 wireless backhaul specialist, recently announced that a leading mobile operator in the Southern Cone of South America is continuing its multi-country, large scale 4G LTE expansion and modernization project using the IP-20 Platform. Following a successful rollout in 2015, this longstanding Ceragon customer placed follow-up orders totaling over $4.9 million, year to date, that began shipping in Q1 2016.

The South Cone operator utilizes Ceragon’s solutions for its wireless backhaul needs across the network. Its decision to select the IP-20 Platform is based on Ceragon’s proven ability to quickly deliver 4G backhaul capacity across multiple countries and maximize service availability.

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Delta raises dividend and plans to complete $5 billion share repurchase $DAL

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As Tobias recently tweeted about Delta Air Lines, Inc. (NYSE:DAL)

The best performing stock in The Acquirers Multiple Large Cap Screener midweek is DAL Delta Air Lines Inc. up 5.4 percent to 43.86

The reason for the jump is the company’s latest announcement to analysts that it’s set to increase its regular dividend to $625 million per year.

Delta stated that, “The dividend represents a long-term commitment to consistently return cash to our owners”.

The annual dividend per share will increase to $0.81, from $0.54, in the September quarter – representing a 2% yield at the current stock price.

Delta also says it is planning to complete its $5 billion share repurchase authorization by May 2017.

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Why do underperforming companies continue to outperform?

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I often get asked, “Why do under-performing companies continue to outperform?”.

To answer this, we need to start with a little history lesson.

In 1934 there was a book published called Security Analysis, written by professors Benjamin Graham and David Dodd of Columbia Business School, which laid the intellectual foundation for what would later be called value investing.

The book has become the  ‘Bible’ for value investors since 1934.

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Ralph Lauren Corp ($RL) Quick Analysis

Tobias CarlisleStocksLeave a Comment

Ralph Lauren Corp ($RL) just popped into the free Large Cap screener on the weakness in retail and apparel.

Here are Third Avenue Management March 29, 2016 comments on Ralph Lauren when the stock was at $96.50 via Gurufocus:

Ralph Lauren (NYSE:RL) is one of the crown jewels in retail. It is well capitalized with a net cash balance sheet and has historically earned a premium valuation. Given its compounding history, the premium valuation is justified. Due to short-term factors, the stock price has dropped over 40% from recent highs and now trades at absolute valuation levels last seen shortly after the financial crisis. It is a rare opportunity to buy a well-managed, well capitalized, owner-operator at an attractive price.

Although retail has historically been an area that Third Avenue Management (Trades, Portfolio) (TAM) shies away from, RL is an exception. It meets our three pillar criteria as it is a credit worthy compounder trading at a discount to NAV. Over the past five and ten year periods, RL has grown book value (including dividends) 11% and 13%, respectively. It is a blue-chip asset with a more stable operating history than most players in the space. For example, sales only declined marginally in 2009, following the financial crisis. Although it could be categorized as a retail company, considering that roughly half of RL’s sales are wholesale/licensing and its brand strength, it’s more comparable to Nike than a typical retailer.

Besides macro concerns about an economic slowdown, company specific issues have soured RL’s near-term outlook. We have assessed these risks and feel it is a classic case of investor short-termism. First, the strong USD has impacted sales. One-third of RL’s sales are from outside the US, so currency translation has pinched sales and margins. Also, 20% of RL’s sales come from foreign tourists shopping in the US. Those sales have been pinched as tourists are choosing to stay home as the costs of traveling to the US have risen with the stronger USD. RL continues to experience double digit same-store sales growth in flagship stores overseas, so it does not appear to be a brand problem.

Another major factor impacting RL is the implementation of its Global Reorganization Plan (GRP). Management is investing for growth by creating a brand based operating structure, implementing a global SAP system (US completed and Europe in-process) and expanding its global footprint and internet presence. All initiatives make sense in the long-run, but have been costly in the short-run. The slower than expected sales and additional costs have pressured margins, creating investor angst. Management projects cost savings of $100 million per year once the initiatives are completed later this year. Investors are struggling to see through the near-term noise which has created a worst-case scenario valuation.

A final catalyst is the hiring of CEO Stephan Larsson. Larsson is a young, ambitious retail executive who had highly successful stints at H&M and Old Navy. With Ralph Lauren now 75 years old, Larsson’s hiring makes strategic sense. Lauren will remain a creative force at the company, but Larsson’s expertise in understanding the fast fashion landscape (H&M) and turnarounds (Old Navy) might be the shot in the arm RL needs.

In summary, we feel that the favorable long-term prospects heavily outweigh the near-term concerns embedded in RL’s current valuation. Higher sales, a weaker USD and lower GRP costs can all contribute to a brighter outlook for RL’s operations. With the additional benefit of a highly motivated new CEO, the pace of change has probably been accelerated.

From the Third Avenue Value Fund 1st quarter 2016 letter.

Source: Ralph Lauren Corp (RL) Stock Analysis – GuruFocus.com

Core Molding Technologies announces record sales and profit in 2015 $CMT

Johnny HopkinsStocksLeave a Comment

On Wednesday, Core Molding Technologies, Inc. (NYSEMKT:CMT) released its 2015 annual report for the year ending December 31, 2015. The company announced record sales totalling $199 million, a 14% increase from the $175 million reported for the previous corresponding period.

Highlights

  • Net sales were $199.1 million compared to $175.2 million
  • Product sales were $189.1 million compared to $169.7 million
  • Gross margin was 18.2% compared to 17.2%
  • Operating income was $18.5 million compared to $14.6 million
  • Net income was $12.1 million, or $1.58 per diluted share, compared with $9.6 million, or $1.28 per diluted share

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Why did Brocade Communications Systems, Inc. sink 11.5% $BRCD

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On Monday, Brocade Communications Systems, Inc (NASDAQ: BRCD) reported preliminary financial results for its second fiscal quarter ended April 30, 2016.

Brocade is a supplier of networking hardware, software and services, including storage area networking (SAN) solutions, and Internet protocol (IP) networking solutions for businesses and organizations of various types and sizes.

The company now expects second fiscal quarter total revenue to be within the range of $518 million to $528 million, compared with the range of $542 million to $562 million previously provided in the planning assumptions and outlook for the quarter on February 17, 2016.

As a result, non-GAAP diluted earnings per share for the second fiscal quarter is expected to be within the range of $0.21 to $0.23, compared with the range of $0.22 to $0.24 in the planning assumptions and outlook for the quarter previously provided on February 17, 2016.

Brodcade CEO, Lloyd Carney said, “Consistent with the general softness in IT spending reported by many of our partners and peers, we expect revenue for the quarter to fall short of our original expectations.

This is largely the result of weaker than anticipated SAN revenue. In addition, IP Networking headwinds, noted on our fiscal Q1 2016 earnings call in February, continue to negatively impact our sales, particularly in our service provider and U.S. federal business.

We are addressing these near-term challenges by continuing our focus on sales execution in this weaker demand environment, maintaining prudent expense controls and managing our investments in line with our stated priorities.

We continue to execute on our strategy to build a pure-play networking company for the digital transformation era that expands our market reach, diversifies our revenue mix, and creates exciting, incremental opportunities for growth.”

Its been a tough 12 months for Brocade with its share price dropping almost 27% in that time.

(Source: Google Finance)

Brocade has been the news lately with its proposed acquisition of Ruckus Wireless. to Build a Networking Company for the Digital Transformation Era.

Brocade will acquire Ruckus Wireless, Inc. (NYSE: RKUS) in a cash and stock transaction. The acquisition will complement Brocade’s enterprise networking portfolio, adding Ruckus’ higher-growth, wireless products to Brocade’s market-leading networking solutions. It will also significantly strengthen Brocade’s strategic presence in the broader service provider space, with Ruckus’ market-leading Wi-Fi position. Brocade expects the transaction to be accretive to its non-GAAP earnings by its first quarter of fiscal 2017. The Ruckus organization will be led by current Ruckus CEO, Selina Lo, and report directly to Brocade CEO, Lloyd Carney.

Under the terms of the agreement, Ruckus stockholders will receive $6.45 in cash and 0.75 shares of Brocade common stock for each share of Ruckus common stock. Based on the closing price of Brocade’s stock on April 1, 2016, the transaction values Ruckus at a price of $14.43 per common share, or approximately $1.5 billion, and may fluctuate until close. Net of estimated cash acquired, the transaction value is approximately $1.2 billion. The cash portion of the purchase price will be funded through a combination of cash on hand and new bank term loan financing.

Brocade is currently at #12 in the Large Cap 1000 Screener. The company has an Enterprise Value of $2.8 billion and operating earnings of $477 million. That gives the company an Acquirer’s Multiple of 5.94. It’s currently trading on a price-to-earnings ratio of 11.72, and a Free Cash Flow to EV Yield of 14%. So, still representing great value.

The fact that the share price dropped by 11.5% on Monday presents contrarian investors, like me, with a great opportunity to add Brocade to their portfolio.

Seadrill Partners LLC (NYSE:SDLP) up 4.4% here’s why $SDLP

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Seadrill Partners LLC (NYSE:SDLP) jumped 4.4% following the release of its 2015 annual report, for the 12 months ending December 2015.

Seadrill reported  a 29% increase in revenue of $1.7 billion, up from $1.3 billion for the previous corresponding period (pcp). Net profit was up 79% to $257 million from $138 million for the pcp.

This may be the start of a positive turnaround in what’s been a tough 12 months for the share price of Seadrill, falling 54% in that time.

(Source: Google Finance)

About Seadrill

Seadrill Partners LLC owns, operates and acquires offshore drilling rigs.

The Company’s drilling units are under long-term contracts with oil companies, such as Chevron, BP, ExxonMobil and Tullow. The Company provides services to these customers with its fleet. The Company’s fleet consists of the semi-submersible West Aquarius, West Capricorn, West Leo, West Sirius; the semi-tender West Vencedor; the tender rig T-15 and T-16; the drillship West Auriga, West Vela, and West Capella. The Company provides drilling services on a dayrate contract basis.

The main reasons for the increase in 2015 revenues included:

Contract Revenues

Contract revenues increased by $300.9 million, or 23.1%, to $1,603.6 million, for the year ended December 31, 2015, from $1,302.7 million in the year ended December 31, 2014. The increase was primarily due to contract revenues from the West Auriga which was acquired on March 21, 2014, contract revenues from the West Vela, which was acquired on November 4, 2014, and contract revenues from the West Polaris, which was acquired on June 19, 2015.

The acquisitions of the West Auriga, West Vela and West Polaris contributed approximately $56.4 million, $183.4 million and $123.3 million respectively to the increase compared to the year ended December 31, 2014.

Lower Downtime

Lower downtime on the West Aquarius in the the year ended December 31, 2015 compared to the year ended December 31, 2014 also contributed to an increase of approximately $65.7 million.

Lower downtime on the West Capricorn contributed to the increase in revenues by approximately $33.5 million. The increase was partly offset by a decrease in contract revenues of approximately $122.2 million relating to the West Sirius which came off contract in April 2015, and is now receiving a termination fee rather than the full dayrate. The termination fee is included in “Other revenues”.

Also offsetting the increase was a decrease of approximately $38.5 million in initial contract revenues from the West Vencedor, which was stacked after its contract ended in June 2015, before commencing a short-term contract in Myanmar in late 2015. The remaining movements were due to variations in the operations of the drilling units.

Reimbursable Revenues

Reimbursable revenues increased by $10.0 million, or 25.1%, to $49.9 million for the year ended December 31, 2015, from $39.9 million for the year ended December 31, 2014. The increase is due to additional equipment purchased on behalf of customers, for which the company has been reimbursed.

Other Revenues

Other revenues were $88.1 million for the year ended December 31, 2015, compared to nil for the year ended December 31, 2014. During the year ended December 31, 2015, the company earned other revenues within its Nigerian service company billed to Seadrill for certain services, including the provision of onshore and offshore personnel, which is provided to Seadrill’s West Jupiter and West Saturn drilling rigs, amounting to approximately $13.4 million.

OK, so that’s the good news however, one of the biggest issues facing Seadrill is its high debt load. So it’s no surprise when we read the following from Bloomberg.

Offshore drillers are struggling to repay debt as competition and reduced spending by oil companies hurt income. Falling demand for rig services is forecast to reduce sales at the world’s largest offshore contractors by 25 percent this year and at least 10 percent in 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove.

So, it was good news on Friday when Seadrill announced, that it has reached agreement with its banking group to extend its three nearest maturing borrowing facilities and amend certain covenants across its secured credit facilities, as the first phase of a broader plan to refinance and recapitalize the business.

The facility extensions relate to:

  1. The US$450 million credit facility originally maturing in June 2016 is now extended until December 2016
  2. The US$400 million credit facility originally maturing in December 2016 extended until May 2017
  3. The US$2.0 billion NADL credit facility originally maturing in April 2017 extended until June 2017

The covenant amendments extend to 30 June 2017 and relate to the following:

  1. A reset of the leverage covenant
  2. A revised definition of the Equity Ratio to exclude the impact of any change to the market value of our rigs
  3. A suspension of the provision that allows lenders to receive a prepayment under their secured credit facilities if rig values decline below a minimum value relative to the loan balance outstanding

Mark Morris, Chief Financial Officer said: “This is an important first step in our funding plan.  By deferring our imminent borrowing maturities, resetting a number of covenants and removing the risk of facility prepayments related to declining rig values we have established a more stable platform to pursue and conclude negotiations with our stakeholders.  We are pleased with the support shown by our banking group and continue to make good progress on negotiating a broader package of measures intended to significantly improve liquidity and bridge us to a recovery in the sector.”

In terms of valuation, we currently have Seadrill at #20 in the All Investable Screener here at The Acquirer’s Multiple. The company has an Enterprise Value of $4.2 billion, and operating earnings of $844 million, giving it an Acquirer’s Multiple of 4.99. Incredibly, the company is trading on a price-to-earnings ratio of just 1.79, and a Free Cash Flow to EV Yield (FCF/EV) of 10%.

I think Seadrill has had a great 12 months, based on its latest annual report. I agree that the company does appear to have a high debt load however, I also believe that its long dated contracts and substantial contract backlog will mean that it is well positioned to “weather the  storm”.

For me, Seadrill is still a buy.

Can DryShips Inc. (NASDAQ:DRYS) survive as a going concern $DRYS

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DryShips Inc. (NASDAQ:DRYS) was one of the biggest movers in the Small and Micro Cap screen last week. The company’s share price rose 28.5% following the release of its 2015 annual report.

About Dryships Inc.

DryShips Inc. is an owner of drybulk carriers and offshore support vessels that operate worldwide. The Company owns approximately 40% of the outstanding shares of Ocean Rig UDW Inc. (NASDAQ:ORIG), an international drilling contractor. The Company owns a fleet of 23 drybulk carriers, comprising three Capesize and twenty Panamax with a combined deadweight tonnage of approximately 2.1 million tons, and six offshore supply vessels, comprising two platform supply and four oil spill recovery vessels.

Its been a tough 12 months for Dryships, with its share price dropping almost 80% from April 29, 2015.

(Source: Google Finance)

According to its latest annual report, Dryships revenue dropped by 55% for the 12 months ending December 2015, from $2.18 billion to $969 million. In the same period, its net profit dropped significantly from a loss of ($47 million) in 2014 to a loss of ($2.8 billion) in 2015.

The main business segments all performed poorly, with voyage revenues in the Drybulk Carrier segment decreasing by $90.0 million, or 43.8%, to $115.6 million for the year ended December 31, 2015, as compared to $205.6 million for the year ended December 31, 2014.

Voyage revenues in the Tanker Segment decreased by $42.5 million, or 26.1%, to $120.3 million for the year ended December 31, 2015, as compared to $162.8 million for year ended December 31, 2014.

And, revenues from off-shore drilling contracts decreased by $1.09 billion, or 60.1%, to $725.8 million for the year ended December 31, 2015, as compared to $1.81 billion for the year ended December 31, 2014.

In addition to it poor performing revenues, from October 21, 2015, Dryships entered into the offshore support business segment through the acquisition of Nautilus Offshore Services Inc. which owns six Offshore Supply Vessels of which four are oil spill recovery vessels (OSRVs) and two are platform supply vessels (PSVs). As a result, revenues from the Offshore support business segment amounted to $8.1 million for the year ended December 31, 2015.

The biggest news however, to come out of the annual report is on Page 98, where the company states the following:

We are currently in negotiations with our lenders to obtain debt maturity extension or restructuring of our debt facilities.

We cannot guarantee that we will be able to obtain our lenders consent with respect to the aforementioned noncompliance under our credit facilities or any non-compliance with specified financial ratios or financial covenants under future financial obligations we may enter into, or that we will be able to refinance or restructure any such indebtedness.

If we fail to remedy, or obtain a waiver of, the breaches of the covenants discussed above, our lenders may accelerate our indebtedness under the relevant credit facilities, which could trigger the cross-acceleration or cross-default provisions contained in our other credit facilities, under which a total of $341.9 million, including $103.7 million classified as “Liabilities held for sale” in the consolidated balance sheet as of December 31, 2015 included in this annual report, due to the sale of the respective vessels, was outstanding as of December 31, 2015.

If our indebtedness is accelerated, it will be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose their liens…

The company goes on to add:

We plan to pay loan interest with cash expected to be generated from operations. We do not expect that cash on hand and cash expected to be generated from operations will be sufficient to repay our loans…

And finally, the company states:

Further, as discussed below, our independent registered public accounting firm has issued its opinion with an explanatory paragraph in connection with our audited financial statements included in this report that expresses substantial doubt about our ability to continue as a going concern…

So, we’ll have to wait and see.

Now, let’s have a look at Dryships in the Small and Micro Screen. The company currently has an Enterprise Value of $225 million. Its operating earnings, which we take from the top of the income statement, are $201 million. That gives us an Acquirer’s Multiple of 1.12 plus, the company provides a nice Dividend Yield of 47.1%.

Takeaway

While I agree that the above doesn’t look great for Dryships, if like me you believe that we’ll start to see a boost in iron ore exports by heavyweights Australia and Brazil, who are gaining market share in top buyer China, and you agree that the Chinese government will continue to expand investment into its infrastructure projects, then Dryships will clearly benefit from both.

Therefore, based on its current valuation and growth possibilites, Dryships seems like an obvious pick, if it can refinance its debt!

Apple Inc ‘pops up’ in our Large Cap Screener $AAPL

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Unless you’ve been on another planet, you’ll know that this week Apple Inc (NASDAQ:AAPL) reported a a quarterly profit of ‘just’ $10.5 billion.

As if that’s not enough, the company also reported a 13% drop in revenue of $50.5 billion, down from $58 billion for the previous corresponding period, with China being the main culprit, contributed a significant drop of 26%.

Apparently that’s wasn’t great news for a bunch of investors with the share price dropping 6.26% for the day, closing at $97.82.

Basically, the reason for the drop was the decline in iPhone shipments (51.2 million ) during the quarter compared to the same period 12 months ago.

As a contrarian investor, this is music to my ears!

So, quarterly revenue and profits may have fallen but its important to remember that these revenues and profits are being compared to Apple’s 2015 iPhone 6 cycle. Hardly fair!

For me, Apple still remains a well run company that generates heaps of cash for its shareholders and let’s not forget the $55 billion in cash and short term investments that the company holds on its balance sheet.

While I agree that Apple may never develop another product as successful as the iPhone, you can’t ignore its loyal customer base. Customers who upgrade their Apple device every couple of years for another Apple device. In fact Tim Cook said during his call, “Those 1 billion-plus active devices are a source of recurring revenue that is growing independent of the unit shipments we report every three months”.

It’s also important to remember that services like its payment apps, iTunes and the App store generated a 20% increase in revenues over the quarter to $6 billion.

If we look at the company’s valuation in the Large Cap Screener here at The Acquirer’s Multiple. Apple has an Enterprise Value of $567 billion. It has operating earnings of $70 billion, giving it an Acquirer’s Multiple of 8.03. The company currently trades on a price-to-earnings ratio of 11.22 and a FCF/EV ratio of 9%. So it’s cheap!

For me, now is the right time for contrarian investors to buy Apple.

Why did Network-1 Technologies Inc soar 11%? $NTIP

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Network-1 Technologies, Inc. (NYSE MKT: NTIP), a company specializing in the development, licensing and protection of its intellectual property assets, today announced that Mirror Worlds Technologies, LLC (“MWT”), its wholly-owned subsidiary, has entered into an agreement pursuant to which it will receive $17.5 million in connection with a settlement of a professional liability claim relating to services rendered in 2008 – 2010.  Network-1, through its subsidiary MWT, acquired the claim in May 2013 as part of its acquisition of the patent portfolio of Mirror Worlds, LLC.

Shares in Network-1 rose 11% on the news to close at $2.31.

Who is Network-1 Technologies?

Network-1 Technologies, Inc. develops, licenses, and protects intellectual property assets.

It owns 27 patents that relate to various technologies, including patents covering the delivery of power over Ethernet cables for the purpose of remotely powering network devices, such as wireless access ports, IP phones, and network based cameras; foundational technologies that enable unified search and indexing, displaying, and archiving of documents in a computer system; enabling technology for identifying media content on the Internet; and systems and methods for the transmission of audio, video, and data over computer and telephony networks.

Network-1 has had a fantastic run since December 2015, with its share price soaring over 97%.

(Source: Google Finance)

We currently have Network-1 as the 9th most undervalued share in The Small and Micro Cap Screener here at The Acquirer’s Multiple.

This settlement further enhances my feeling that Network-1 is a great buy today. The company currently has a market capitalisation of $53 million, but with cash exceeding debt by $22 million, this gives it an Enterprise Value of $31 million. With operating earnings of $7 million that gives it an Acquirer’s Multiple of 4.85.

It’s currently trading on a price-to-earnings ratio of 11.68 and a Free Cash Flow/Enterprise Value of 10%. So, it certainly looks cheap.

If you’re looking for a great little micro cap to add to your portfolio, then I’d be certainly be considering Network-1.

Now is the time to buy Ocean Rig UDW Inc. (NASDAQ:ORIG) $ORIG

Johnny HopkinsStocks2 Comments

All Investable stock, Ocean Rig UDW Inc. (NASDAQ:ORIG) announced yesterday that one of its subsidiaries has acquired the 6th generation ultra deepwater drillship Cerrado, being sold through an auction, for a purchase price of $65 million, which will be funded with available cash on hand.

The drillship was built at Samsung Heavy Industries in 2011 to similar design specifications as the Company’s existing 6th generation drillships built at Samsung, and will be renamed the Ocean Rig Paros upon its delivery to Ocean Rig.

Another subsidiary of the Company has been acting as the manager of the drillship for its previous owners. The transaction is expected to close upon completion of the judicial auction procedure.

Investors reacted positively to the news, with the share price jumped 3.4% or $0.05, to close at $1.52.

About Ocean Rig UDW Inc.

Ocean Rig is an international offshore drilling contractor providing oilfield services for offshore oil and gas exploration, development and production drilling, and specializing in the ultra deepwater and harsh-environment segment of the offshore drilling industry.

There’s no doubt its been a tough 12 months for Ocean Rig, with its share price falling over 77%.

(Source: Google Finance)

With that in mind, lots of investors will be asking the question, “is now the right time for Ocean Rig to be buying an Ultra Deep Water drill-ship”.

While I agree that at current oil prices, the timing may appear to be poor, I would argue that now is precisely the right time make these purchases, when the price is unquestionably cheap. Ocean Rig is paying $65 million for drillship Cerrado compared to the sale of Deepsea Metro II, which was recently auctioned and sold for $210 million on March 15, 2016.

According to Dutch law firm, ekvandoorne.com:

The drilling rig Deepsea Metro II was auctioned and sold for USD 210mln on 15 March. The vessel was anchored in Curacao waters. The Court of First Instance of Curacao granted the order for the auction at the request of the executing party, DVB Bank America NV. DVB was assisted by partner and maritime law expert Mayesi Hammoud.

If like me you believe that we’ll see a recovery in oil prices and the Ultra Deep Water market, then now is clearly a good time to buy undervalued Ocean Rig.

In terms of its valuation, according to the All Investable Stock screen here at The Acquirer’s Multiple, the company has an Enterprise Value of $4,135 million and operating earnings of $703 million, giving it an Acquirer’s Multiple of 5.88. The company is also trading on a price-to earnings ratio of just 2.77.

 

Johnny’s Real-Life Acquirers Multiple Portfolio – Month 4 – Part 2

Johnny HopkinsStocks1 Comment

This is part 2 of month 4, for Part 1 click here.

Stock purchase #8, March 2016.

OK, now let’s take a look at this month’s (March 2016) second pick that I’m adding to my portfolio.

Next in The All Investable Stock Screener this month is Brasilagro Cia Brasileira De Propriedades Agricolas (NYSE: LND). As you can see from the chart below, Brasilagro’s share price has done ok in the past 12 months, up nearly 13% in that time:

(Source: Google Finance)

How does it look in the Screener?

Let’s take a closer look at Brasilagro in the “All Investable Stock Screener”.

The company currently has a market cap of $181 million, while its Enterprise Value (EV) is $151 million.

The reason for this EV is because the company has an excess of $30 million of cash and cash equivalents once you subtract its total debt. As an acquirer, we subtract this $30 million from the current market capitalisation of $181 million, which leaves us with a total EV of $151 million.

The company’s operating earnings, which are taken from the top of the income statement, are $55 million.

In other words, we’re paying $181 million for a company with an EV of $151 million, that is returning operating earnings of $55 million on that $151 Million.

This gives us an Acquirer’s Multiple of 2.78, when we divide the EV ($151 million) by the operating earnings ($55 million).

Who is Brasilagro?

Brasilagro is a company based in São Paulo, Brazil.

The company focuses on acquisition, development and exploitation of agricultural land that it believes possesses significant potential for cash flow generation and value appreciation. The company seeks to transform this land through cultivation of high value-added crops and periodically sell the newly developed land in order to generate profits.

What’s the problem for Brasilagro?

At face value, there doesn’t appear to be much wrong with Brasilagro. In the company’s latest 2015 annual report, which ended June 2015,  it stated revenue of US$45 million, a 32% increase from the previous corresponding period (pcp).

The company also reported net profit of US$46 million, which was also up significantly on the pcp, due largely to a ‘Gain on Sale of Farms’ of US$50 million.

Brasilagro has done an awesome job of converting land into profits.

Here’s a typical example from the latest annual report.

It’s to do with the Cremaq Farm transaction:

On October 2006, the Cremaq farm was acquired by its subsidiary Imobiliária Cremaq with a total area of 32,702 hectares for R$42.3 million.

At the time of acquisition, 3,000 hectares were cultivated with grain production. Since the acquisition the company had invested R$26.0 million (net of accumulated depreciation) in infrastructure to support the production process, including the construction of a silo at a total cost of R$8.4 million with capacity to store 72,000 tons of grains (such silos are capitalized under property, plant and equipment).

During the planting season for the 2014/2015 crop year, Brasilagro planted 14,965 hectares of soybean and 3,750 hectares of corn at the Cremaq farm.

On May 10, 2013, the company sold 4,895 hectares of the Cremaq farm, 3,201 of which are arable, for a total sale price of R$37.4 million, equivalent to 901,481 soybean bags.

On June 10, 2015, the company sold the remaining 27,745 hectares of the Cremaq farm and related assets, 18,578 of which are arable, for a total price of R$270.0 million.

So, where’s the problem?

This is a typical example of a good company affected by its geographical location.

The Brazilian economy has been experiencing a slowdown – GDP growth rates were 7.5%, 3.9%, 1.8%, 2.7%, and 0.1% in 2010, 2011, 2012, 2013 and 2014, respectively and GDP decreased 1.9% in the first six months of 2015.

Inflation, unemployment and interest rates have increased more recently and the Brazilian Real has weakened significantly in comparison to the U.S. dollar.

In addition to the recent economic crisis, protests, strikes and corruption scandals, including the “Lava Jato” investigation, has led to a fall in confidence and a political crisis.

There is strong popular pressure and several legal and administrative proceedings for the impeachment of the Brazilian President and/or revocation of the mandates or resignation of the Brazilian President and/or the Head of the House of Representatives, which have led to uncertainties.

The economic and political crisis have resulted in the downgrading of the country’s long-term credit rating from Standard & Poor’s rating agency from BBB + to BBB-, placing Brazil back to speculative investment grade level (“junk”). Moody’s downgraded Brazil from “Baa2” to “Baa3” and changed the negative perspective to stable, while Fitch Ratings downgraded Brazil from BBB to BBB- and changed the perspective from stable to negative. Both Moody’s and Fitch still consider Brazil investment grade.

Low Volume

Another important issue surrounding the company is simply that it has such low trading volumes. For the entire month of February 2016, the company only traded 34,300 stocks. While this is great for individual investors, it makes it difficult for institutional investors to get involved.

So, with all that said, now let’s take a look at their numbers:

Acquirer’s Multiple – 2.78

P/E – 2.54

P/B – 0.82

P/S – 1.66

Based on all of these numbers, the company certainly does look cheap.

How safe is the business?

To figure out the stability of the company, we use a number of key metrics.

Its Altman Z-Score is 4.61 – indicating it’s in the Safe Zone.

Its Piotroski F-Score is 8 – indicating the company’s financial situation is stable.

Its Beneish M-Score is -1.67, indicating that it may be an accounting manipulator.

Details of the trade:

I have $300 Australian Dollars to allocate to each stock in my portfolio.

The AUD/USD Exchange Rate this month is USD$0.75.

Therefore, I have around USD$226 to allocate to the company.

I purchased 72 shares on March 24, 2016 @ Market for $3.10.

Johnny’s Real-Life Acquirers Multiple Portfolio – Month 4 – Part 1

Johnny HopkinsStocks2 Comments

Back in December 2015, thanks to Tobias, I starting my own Real-Life Acquirer’s Multiple Portfolio, using my own savings, here at the The Acquirer’s Multiple.

I simply buy the top two stocks equally weighted each month, that I don’t already hold, from “The All Investable Stock Screener”, until I hold 24 stocks over 12 months, then I re-balance.

Stocks must be selected without fear or favour. All stocks suffer from the ‘broken leg’ problem (significant issues that make them unfavourable). I don’t try to cherry pick the best stocks, I simply take the top two stocks in the screen that I don’t own and then track their performance right here.

Here’s the latest performance update for the portfolio:

As you can see, the portfolio’s up 12.62% since inception, and outperforming the Russell 3000 index by almost 13.34%. (Data excludes fees).

Great performances from Bridgepoint Education, up 53% since inception and Nevsun Resources, up 28% since inception.

You can read all about my Acquirer’s Multiple Portfolio investing strategy and monthly picks here:

Month 1 stock picks

Month 2 stock picks

Month 3 stock picks

Stock purchase #7, March 2016.

OK, now let’s take a look at this month’s (March 2016) first pick that I’m adding to my portfolio.

Top of the All Investable Stock Screener this month is FreightCar America, Inc. (NASDAQ: RAIL). As you can see from the chart below, FreightCar’s share price has tanked in the past 12 months, falling over 47%:

(Source: Google Finance)

How does it look in the Screener?

Let’s take a closer look at FreightCar in the “All Investable Stock Screener”.

The company currently has a market cap of $188 million, while its Enterprise Value (EV) is just $71 million.

The reason its EV is so low is because the company has an excess of $117 million of cash and cash equivalents once you subtract its total debt. As an acquirer, we subtract this $117 million from the current market capitalisation of $188 million, which leaves us with a total EV of $71 million.

The company’s operating earnings, which are taken from the top of the income statement, are $41 million.

In other words, we’re paying $188 million for a company with an EV of just $71 million, that is returning operating earnings of $41 million on that $71 Million.

This gives us an Acquirer’s Multiple of 1.74, when we divide the EV ($71 million) by the operating earnings ($41 million).

Who is FreightCar?

FreightCar America Inc. is engaged in manufacturing of aluminum-bodied railcars in North America. The Company is also a manufacturer of coal cars. The Company also refurbishes and rebuilds railcars and sells forged cast and fabricated parts for all of the rail-cars it produces as well as those manufactured by others.

It offers railcar leasing and refurbishment alternatives to its customers. Through its newly formed subsidiary FreightCar Rail Services LLC (FCRS) it provides railcar repair and maintenance inspections and railcar fleet management services for all types of freight railcars. Its railcar manufacturing facilities are located in Danville Illinois and Roanoke Virginia.

What’s the problem for FreightCar?

Put simply, FreightCar belongs to an industry that’s suffering from a weakness in oil and commodity prices. As a result the company has seen a slowdown in orders.

FreightCar’s main customers include railroads, shippers and financial institutions, which represented 69%, 17% and 15%.

Its total backlog of firm orders for railcars has dropped from 14,791 as of December 31, 2014 to 9,840 railcars as of December 31, 2015.

The company is moving away from coal and rebuild cars to non-coal railcars.

Its backlog at the end of 2015 includes a variety of railcar types almost all of which were orders for non-coal cars. While at the end of 2014, 77% of its backlog consisted of orders for non-coal cars.

The backlog at the end of 2015 included no rebuilt railcars compared to 2,600 rebuilt railcars in our backlog as of December 31, 2014.  

The estimated sales value of its backlog is $926 million as of December 31, 2015.

This is a company that adapts quickly to change.

The company’s recently released its 2015 annual report, ending December 2015, FreightCar stated annual revenue of $772 million, an increase of 29% on the pcp, and net profit of $31.8 million, an increase of 438% on the $5.9 million reported in 2014.

FreightCar sells its railcar repair and maintenance services business

In October last year the company announced it had completed the sale of its railcar repair and maintenance services business to Appalachian Railcar Services, Inc. for an aggregate purchase price of $20.0 million in cash and the assumption of certain liabilities by the purchaser.

FreightCar’s President and Chief Executive Officer, Joe McNeely, said, “The consummation of this transaction will allow us to increase our focus on our railcar manufacturing, parts and leasing businesses”.

USW Reaches Settlement with FreightCar America

In August last year the company settled its litigation with the USW. USW is the largest industrial union in North America. USW reached a settlement of retiree insurance litigation with FreightCar over the company’s unlawful termination of retiree medical and life insurance benefits.

The company had promised to provide lifetime benefits to its retirees. On the eve of trial scheduled for late August, the company agreed to contribute more than $31 million to a fund to provide ongoing contributions toward insurance benefits.

So a tumultuous year for FreightCar, now let’s take a look at their numbers:

Acquirer’s Multiple – 1.74

P/E – 5.94

P/B – 0.78

P/S – 0.24

Based on all of these numbers, the company certainly does look cheap.

How safe is the business?

To figure out the stability of the company, we use a number of key metrics.

Its Altman Z-Score is a measure of the likelihood that a company will end up in bankruptcy within 2 years. The company scored 4.17 – indicating it’s in the Safe Zone.

Its Piotroski F-Score is 6 – indicating the company’s financial situation is stable.

Its Beneish M-Score is 4.9, indicating that it may be an accounting manipulator.

Details of the trade:

I have $300 Australian Dollars to allocate to each stock in my portfolio.

The AUD/USD Exchange Rate this month is USD$0.75.

Therefore, I have around USD$226 to allocate to the company.

I purchased 15 shares on March 24, 2016 @ Market for $15.09.

Total principal invested USD$226.35, excluding commissions/fees.