Notes on a couple of stocks
There are a couple of stocks I follow about which I would like to make a few comments. Tetra Technologies Inc. (TTI: 19.69 +0.31 +1.60%) released their first quarter earnings recently and City Bank (CTBK: 15.22 -0.12 -0.78%) 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.
Aegean Marine: stock price out-running earnings growth
Aegean Marine Petroleum Network (ANW: 42.71 +0.53 +1.26%) 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:
- 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.
- Earnings actually do start to increase and accelerate without a significant increase in stock price.
- 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.
Gigamedia keeps rocking
As one of my favorite growth stocks it is nice to see Gigamedia (GIGM: 18.83 -0.04 -0.21%) hitting on all cylinders. The company released 1st quarter of 2008 results yesterday and the growth continues at a great rate. GIGM is managing to rapidly grow its existing platforms and at the same time enter new markets with new products with even greater growth potential. I will break down some of the facts and financial highlights here.
You can think of Gigamedia’s business as two business units. The first is what they refer to as gaming software. This unit consist of the company’s flagship Everest Poker (internet poker) and online casino games. New initiatives by the company are working to cross sell between poker and casino games. Even bigger, GIGM is planning to offer sports betting to its gaming software line. They have also signed a multi-year sponsorship agreement with the World Series of Poker. As the unit stand now they are showing some excellent growth numbers:
- Q1 revenues for Everest Poker were up 56% year-over-year (YoY) and up 11% over Q4.
- Casino game revenues were up 17% over Q4, 2007.
- Operating margins for the company have risen to 23% in Q1 vs. 19% in Q4.
The second unit is referenced as Asian online gaming. This unit offers a combination of video games and Asian style real money games in Hong Kong, Taiwan, China and Japan. Gigamedia’s push into Asian online games is fairly new, so revenues are are small compared to gaming software but growing rapidly. Asian online game revenues grew greater than 100% YoY and 28% over Q4, 2007. This growth is without adding any new games in Q1. Q2, Q3 and Q4 will see the company add some new, high demand games from companies like Electronic Arts that should accelerate revenue growth. Finally, the commercial launch of the Japanese real money games will occur in June. Another potential huge revenue stream. For the first quarter the Asian gaming had an operating margin of 28%.
Not to forget earnings: GIGM earned 20¢ in the first quarter, up 43% from Q1, 2007. Analysts (4 of them) are projecting 80¢ earnings for 2008. My little calculator comes up with 93¢ if earnings grow at 10% per quarter. I think Gigamedia can grow revenues and earnings at 50%+++ for years and currently trades at 27 times the last 4 quarters combined earnings.
Some days I think I should sell everything else and just own GIGM. I think the $1 billion market cap company will be $5 billion then $10 billion in a very short period of time. The company has virtually an unlimited market for its products and very low additional cost to add customers, games and revenues. I will probably not put everything into GIGM but will keep a nice portion of my stock portfolio and this site’s Special Situations Portfolio.
Note: I have a long position in GIGM.
VeraSun Energy beats the odds
VeraSun Energy (VSE: 6.19 -0.01 -0.16%) has reported 1st quarter earnings and the results could be considered very good, given the current sentiment for ethanol producers. VSE increased quarterly revenue by 257%, primarily by increasing the volume of ethanol sold by 223%. VeraSun sold 191.7 million gallons of ethanol, including 49.5 million gallons they purchased from other producers to resell to their customers. VeraSun’s own production increased 138.6% from the 1st quarter of 2007.
The first thing I notice from this information is that there seems to be a very strong demand for ethanol! Who would have guessed that from recent news on ethanol.
Corn costs increased from $1.43 per manufactured gallon of ethanol to $1.68. This is pretty in line with the additional 20¢ per gallon the company realized on the average sale of product to $2.33. This reinforces my contention that corn and ethanol prices are now inelastically tied. Corn and ethanol prices will rise and fall together, keeping the crush spread fairly constant. For an efficiently run company like VeraSun you can see that margin is about 50¢ to 60¢ per gallon of ethanol. Less efficient producers will have much tighter spreads and will only be profitable by efficiency gains.
On to profitability: For the first time in quite a while, VSE showed a increase in profits for YoY quarters and consecutive quarters. The company earned 8¢ per share for Q1,2008 vs. a small loss of less than 1¢ for the same quarter of 2007 and a 4¢ profit in Q4 of 2007. Not great profitability but a turn in the right direction.
Going forward from here, the shorter term (2-3 quarters), looks like tight profitability, but definitely in the plus column. Further out, VSE will increase capacity a further 50% by the end of 2008 and overall capacity growth will level off at about the same time. Ethanol blending in gasoline will continue to grow for both economic and environmental reasons. One thing many pundits do not realize is that ethanol companies are able to sell everything they produce and that trend will not change. VeraSun Energy as the largest, leanest producer of ethanol will see profitability increase over the next couple of years.
Note: I currently have a long position in VSE.
Copa Holdings has profitable 1st quarter
With oil prices going through the roof, it is nice to see an airline generate some decent profits. Copa Holdings (CPA: 35.80 -0.03 -0.08%) is the parent of Panama based Copa Airlines and Columbia based Aero Republica. Earnings for Q1, 2008 were 91¢ per share compared to $1.12 for the same quarter a year ago. As one could easily guess, higher fuel prices put a dent in the earnings, with average fuel costs 35% higher for the quarter. Other revenue numbers showed some nice growth (all of the numbers are YoY quarter growth):
- Total revenue increased 21.9%.
- Revenue passenger miles increased 13.5%
- Yield per passenger mile increased 7.2%
- Load factor increased 1.6% to 78%
- Operating cost per seat mile increased 20.7% (see fuel cost increase above)
- Liquitidy (available cash & investments) equaled 33% of last 12 months revenues
- An annual dividend of 37¢ was declared
As a rule, airline stocks scare me, double scare me when fuel prices are rapidly rising. However, Copa is maintaining decent profitability in spite of increasing costs. The airline appears to be very well run (I have flown on Copa Airlines several times). The have a young (less than 4 years average age) fleet and serve the growing Latin America market.
CPA shares trade at around 10 time projected 2008 earnings. If they get any relief on fuel prices, owning this stock could be a nice place to be. I have CPA as a component of my Special Situations Portfolio and would be looking for buying opportunities if the stock pulled back into the low $30’s.
Note: I currently do not have a position in CPA.
Portfolio name change
I keep thinking and this blog keeps evolving, I hope for the better! Last fall, when I decided to start tracking a portfolio of stocks I was interested in, I set up a 20 Stock Portfolio of companies I believed would be good investment prospects. After about 7 months of building up and tracking the 20 Stock Portfolio, I felt my interests were naturally divided into two areas, and thus I split my portfolio into two: an Income Portfolio and a Growth Portfolio. I started tracking the separate portfolios for the 2nd quarter of 2007.
I have come to think the Growth Portfolio was severely misnamed. Although there are some pure growth stocks in the portfolio, it is far from a 100% strict “growth” orientation. In my research I am trying to find stocks that I believe have a good chance to double or better over the next few years. Also, I have some particular interests such as South American stocks and markets. This means the stocks in the portfolio could fit in a wide range of categories: growth, value, turn around, international, cyclical. I have my own criteria and methods to evaluate whether I think a company and it’s stock are a good investment, and I do not stock to any particluar discipline.
One general criteria I have is market cap. For U.S. companies (and most foreign) I try to stick to those in the $2 billion or less market cap range. I believe an individual investor and researcher like myself can find an edge in smaller companies vs. the well researched and over-analyzed large cap companies.
The result of all of this deep thinking is a decision to change the name of my Growth Portfolio to Special Situations Portfolio. For now the portfolio itself is the same and the old links to the Growth Portfolio still work. As of now, the stocks are still tracked on a equal dollar, quarterly basis with no buying and selling. Hopefully, more advanced portfolio tracking is the next step for my evolution here.
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