Money and Investing Thoughts

May 2008 Lyon Press Release-Dist.pdf (application/pdf Object)

I have a personal interest in the Sacramento real estate market and check regularly for news of the market there. Today I found the press release linked above at the Sacramento Bee Real Estate Blog. Mike Lyon is the owner of the largest real estate brokerage in Northern California and I have found him to knowledgeable and interesting. I you have interest in more details of the Sacramento real estate market read the whole report, it is only 3 or 4 pages. This excerpt pretty much covers the tone of the report:

“The market is now being driven by three different factors affecting three separate price ranges,” said Michael Lyon, CEO of Lyon Real Estate. “Homes under $300,000 – especially foreclosure homes – are selling in a matter of hours with multiple bid and in under three months. Then we have homes above $300,000 and under $580,000 that are not in foreclosure but have low interest, low-down FHA programs to finance the sale and have inventory levels of under six months – this market segment is much better than it has been in the last two years. Finally we have those homes for sale in the non-conforming loan or Jumbo bracket, and inventory levels of around 20 months. With down payment requirements of between 20 to 30%, even if priced right, it can take two to three times longer to sell a home in this price-bracket than those homes priced under $580,000.”

“The good news in all of this lies in the rate of absorption for the foreclosure properties. If sustained, it will mitigate the effects of the 15,000 foreclosure homes still expected to come on the market this year. Many people who never dreamed of owning a home now have a chance, at least until the end of this year when these FHA programs sunset.

There are a couple of stocks I follow about which I would like to make a few comments. Tetra Technologies Inc. (TTI: 10.53 0.00 0.00%) released their first quarter earnings recently and City Bank (CTBK: 0.00 N/A N/A) has released nothing to tell me why the stock price is acting the way it is.

First, TTI: First quarter earnings were disappointing, off 68% from the previous year at a dime a share, actually worse than very low expectations. The stock price was hardly affected and has moved up nicely from about $15 at the end of March. On the conference call, management repeated their claim that recent restructuring will start to show in the 2nd and 3rd quarters with profits surpassing anything the company has done for several years. Management repeated their April earnings guidance of $1.30 to $1.55 for the year so the next few quarters need to show some serious gains. TTI earned 38¢ for all of 2007. If they start making their projected numbers, the stock has the opportunity to clear $25 later in 2008.

City Bank’s share price devaluation has me seriously perplexed. The stock started the year around $22 and has eroded ever since. CTBK is at the top of it’s peer group as far as banking ratios go and has 30+ years of profitable management. Only 37% of the float is institution owned, who, according to Reuters have been net adding to their positions. So it must be individual investors who are dumping their shares. Do they know something, or just running scared due to the share price? Earnings projections for 2008 remain stable at $2.20 to $2.40 per share and the 60¢ dividend will probably get a year end $1.00 boost if earnings are as predicted. These numbers give a current PE of 7 and a yield over 10%. I am tempted to add to my position, but worry that there is some unknown (to me) info out there that will seriously affect the bank’s earnings.

Final note: TTI is in oil services and CTBK is in banking, maybe that alone is causing one to go up and the other to falter.

Note: I have a long position in CTBK, none in TTI.

I always have to look up the spelling of the names in this company, from here forward it will be KHD (KHD: 0.00 N/A N/A). It has not been long since the company released year end results, and now 1st quarter numbers are out. They have one glitch (scientific term) in the number, which I will attempt to explain away, but the rest is all good.

KHD’s primary business is to manufacture cement plant equipment. They sell the majority of their cement plants where the infrastructure needs more cement: Russia, the Middle East and Asia. The main thrust is the manufacturing of the equipment of a cement plant, which they install and sell spare parts for. They are expanding their business model to set up partnerships to build, own and operate cement plants.

The important fact is that business is good and growing. A few numbers from the first quarter results compared to Q1, 2007:

• Revenues: $136.8 million, up 28%
• Order intake: $288.4 million, up 91%. 61% of new orders from Russia and Eastern Europe. 29% from emerging Asia.
• Order backlog: $1.1 billion, up 74%.
• Order backlog by region: 36% from Russia and Eastern Europe, 28% from the Middle East and 27% from Asia.
• Pro-forma earnings per share: 43¢, up 54%.

An important point on the earnings per share: The net earnings per share were 28¢ due to a non-cash charge of $5.4 million. The charge was the result of the company having U.S. $100 million in banks where the primary currency is not dollars. The company was forced to take the (non-cash) charge because the dollar fell in value against the local currency (euros) in the 1st quarter. The $100 million is still fully intact and being held for investment opportunities. The money will most likely be invested as dollars (the reason for being held as dollars) so no real charge will ever be taken. Thus, the pro-forma earnings are, IMHO, a better indication of the 1st quarter results.

Analysts (both of them!) estimates for the 1st quarter were 31¢ per share, so of course the market is knocking down the stock price today on the “miss”. KHD management has given earnings guidance for the year of $2.05 to $2.15 and the analysts “concur”. I see a company growing it’s order backlog at 40-50% per year trading at 15 times projected 2008 earnings.

In my last post on KHD I covered of the KHD’s initiatives to focus and grow their revenues. This quarter they announced the formation of an environmental group. This unit will offer equipment and services to their customers to recover and recycle energy, water and waste in their facilities. Definitely a money-maker in their markets and today’s environmentally conscious world.

KHD is a component of this site’s Special Opportunities Portfolio. I believe the stock is an emerging market infrastructure play that is not well known and has a tremendous future. Think $3 in earnings trading at a 30 multiple in 2009! Just a SWAG! ($10 in the PayPal of the 1st commenter to define SWAG correctly)

Notes: I have a long position in KHD. I have sole discretion on definition payout, no quibbling.

Aegean Marine Petroleum Network (ANW: 5.40 0.00 0.00%) has released earnings for the 1st quarter of 2008. My impression is the company is expanding their operations rapidly, but earnings growth are not yet following the increasing sales. The report shows sales increased 46% from Q1, 2007. Earnings per share came in at 18¢ per share, 2¢ more than the 1st quarter of 2007 and the same as Q4, 2007.

The business of Aegean Marine is to provide ship fueling services at their own service centers worldwide. The company currently has 8 centers, working towards 10 at the end of 2010. Ship fuel is delivered by bunkering tankers, of which ANW currently has 22 with orders in to bring their fleet to the 40 range. The bunkering market is very fragmented worldwide with many single hull bunkering tankers that will have to be removed from service in the next few years. Aegean’s plan to build a global network of double hulled bunkering tankers should allow them to be the dominant player in ship fueling.

I like the company’s growth, but do not currently like the stock valuation ($40+). As noted above, earnings are not yet keeping pace with revenue growth. The stock trades at better than 60 times 2007 earnings and 32 times “projected” 2008 earnings. However, per share earnings have been basically flat for 6 straight quarters, so the stock price is anticipating some serious earnings growth. I think the stock will be more attractive if one of three things happens:

1. The stock price falls: below $30 would be good, $25 much better. The company will continue to grow, we just need the market to get tired of waiting.
2. Earnings actually do start to increase and accelerate without a significant increase in stock price.
3. The company finishes most of it’s fleet build out and starts paying out free cash flow as a significant dividend. This would be probably in 2010 or 2011.

I will continue monitoring ANW in my Special Situations Portfolio. This is a company with tremendous prospects.

Note: I currently do not have a position in ANW.

Forbes.com: Digital Rules By Rich Karlgaard

Rich Karlgaard’s latest post at Forbes.com on his conversation with Peter Theil, co-founder of PayPal and now president of the hedge fund Clariam. I think this quote from the post pretty much sums up the process of finding market beating stock investments:

Much of what Peter told me yesterday was off the record. But he did share his deceptively simple investment map. Draw two circles that overlap a little bit. Call once circle “great businesses.” Call the other circle “businesses nobody likes.” The overlap is where you’ll find great investment opportunities.

The post is quite short and linked above. Go over and read it for further background. I am also going to follow the link to some of Clarium’s holdings to see if there are any nuggets that fit my investing style, such as it is.