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.
Stock Review: Aircastle Ltd.
Aircastle Ltd. (AYR: 16.00 -0.30 -1.84%) caught my eye in March when the company slashed it’s quarterly dividend from 70¢ per share to 25¢. This was after 6 straight dividend increases from 16¢ to the earlier mentioned 70¢. The stock had peaked at about $40 last summer and had been declining steadily, with the downward slope steepening just before the dividend slash announcement.
I think the early stock price errosion was tied the the overall credit crisis and it’s effect on a company that requires a lot of debt. The dividend cut was accompanied by the announcement the company wanted to preserve cash in difficult times. Internet scuttlebutt hinted at difficulty with funding sources.
At this point, Aircastle has shored up it’s financing needs and the recently released Q1, 2008 earnings show a company in pretty good shape. Percentages shown are changes from Q1, 2007 and Q4, 2007.
- Revenues: $135 million, +92.8%, +11.8%
- EBITA: $119.9 million, +101.7%, NA
- Net Income: $31.6 million, +46.9%, -10.5%
- Net income before depreciation: $83 million, +49%, +5.5%
The net income before depreciation is the important one for a leasing company like Aircastle. The $83 million translates to $1.07 per share, giving excellent coverage to the 25¢ dividend.
Since I failed to mention it earlier: Aircastle is in the aircraft leasing business. They currently own 136 aircraft, leased to 59 customers in 39 countries. 92% of the aircraft are to customers outside the U.S. and 25% are air freighters. The company went public in 2006 and acquired approximately 50% of its fleet in 2007. Going forward, growth should be more incremental with several economic trends in their favor.
- AYR finances their aircraft at approximately 60% LTV. This allows them to borrow at attractive rates (last round at LIBOR +1.75%) on aircraft that have a current net lease rate return of almost 14%.
- Global air traffic is growing at a projected 6% rate per year.
- Of the approximate 25,000 global airliners, 4,000 are older, economically obsolete, fuel pigs. Higher oil prices prompt airlines to quickly replace these aircraft.
From listening to the last conference call and reading some of the press releases, I believe Aircastle is in a strong economic position to both grow their business and start increasing the dividend again. On the conference call, management made no commitment about the dividend, but the previous policy was 70% of free cash flow (net income before depreciation). For this last quarter, that number was $1.07 per share. Even if the 70% was too big a slice, 40% to 50% equals to a doubling of the dividend.
AYR currently yields 6.3% on the $1.00 per year dividend. I am adding this stock to my site’s Income Portfolio with the expectation of both dividend and share price increases over the next year.
Note: I currently have a long position in AYR.
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.
Income Portfolio Additions
I have been looking for a couple of securities to round out my Income Portfolio. Currently the portfolio consists of only 7 stocks: 3 energy LPs (or Canadian royalty trust), 2 oil tanker stocks, a REIT and a bank. To give some balance and hopefully a little stability to the portfolio I am now adding a CEF and an ETF. Both pay monthly distribution, always a nice factor, and give some opportunity for future capital appreciation.
First up is the ETF: PowerShares Preferred Financial Portfolio (PGF: 21.42 -0.01 -0.05%). This fund tracks an index of preferred shares of financial institutions. PGF is about 40% each in the preferred stock of insurance and banking. The balance of about 20% is diversified financial services. The current distribution yield is right at 7%. Financial companies have had a terrible last year (self inflicted!) but many good companies have been driven downward at the same time. I think PGF is a good place to invest for income and the possibility of price appreciation if/when the financial sector recovers.
The closed end fund (CEF) that has caught my attention is the Alpine Global Dynamic Dividend Fund (AGD: 18.98 +0.09 +0.48%). This fund employs several strategies to maximize tax advantaged dividend income. Here is an outline of their stated strategies (paraphrased):
- High dividend value stocks: High yielding companies that management feel are undervalued. Global approach to find opportunities.
- Dividend “capture” strategy: Rotation in and out of high yield stocks to capture extra dividends paid in different months and special one-time payouts.
- Growth potential: Attractive yielding companies with potential for earnings and dividend payout growth. Again, a global approach to selection.
Some positives for the fund are that they do not use leverage or sell covered calls to enhance the yield. All payouts have been earned income, not returns of capital. Also, AGD definitely has a global approach; only 22% of assets were U.S. based companies. Current yield for AGD is 10.2%. If someone is planning on investing with a tax advantaged account, they may want to look at the similar, Alpine Total Dynamic Dividend Fund (AOD: 17.15 +0.08 +0.47%), which cares not about finding tax advantaged dividends and yields and attractive 12.4%.
I do have a couple of concerns about the fund. First, it currently trades at a 13% premium to NAV. Historically, the fund has traded at a premium, but this is at the high end of the range. The other concern is the NAV errosion: Is it due to market conditions or the result of faulty trading activity in the dividend capture strategy? Adding AGD to this site’s Income Portfolio give me the opportunity to watch for buying opportunities if the price/NAV premium narrows.
Note: I currently do not have a position in PGF, AOD or AGD.
Copa Airlines - future growth?
I am not a big fan of airline stocks. As long as I have been watching stocks (30 years), outside of Southwest Airlines (LUV: 13.39 -0.06 -0.45%), they seem to spend more time losing money than making it. These are business with huge overhead costs that think nothing of slashing fares to win a bidding war or pick up a few points of market share.
When I took a closer look at Copa Holdings, Inc. (CPA: 35.80 -0.03 -0.08%), I found an airline company that actually seems to make good profits and the valuation looks pretty nice at these levels.
Copa Holdings consists of two airlines: Copa Airlines, which hubs out of Panama and serves all of the Americas and the Carribean, and Aero Republica, which puddle jumps around Columbia. The airline has a very young fleet of Boeing 737-700 and 737-800 and Embraer 190 aircraft. The multilingual website is easy to use and I find the company’s straight forward pricing to be refreshing. The prices for for flights stay consistent with different levels for different changeability/refund-ability. Business class is also offered on all flights. Copa code shares with Continental and the two airlines use the same frequent flyer program. Miles on Copa are the same as Continental and vice-versa. In the U.S., Copa has flights from NYC, Los Angeles, Washington DC, Miami and Orlando to Panama City for connections to the rest of Latin America.
Over the last year I have flown Copa several times between Los Angeles and Miami to South America. I found the service to be timely and efficient. Their Hub of the Americas in Panama could use another restaurant or two, but I do not think that is the airline’s issue. The connections worked will and I will definitely use Copa as my primary airline between South and North America.
Copa stocks trades on the NYSE. The market cap is $1.2 billion. All of the voting shares (about 30% of equity) are held by a single family. The stock is followed by half a dozen analysts. There are several reasons why I like this stock:
- The stock currently trades at only 1o.5 times 2008 estimated earnings. The estimates for this year are only slightly higher than 2007 results, but this is a highly profitable airline and positive surprises are a possibility.
- Copa serves a growth area with excellent service and few competitors. The company’s fuel efficient fleet gives them a competitive advantage.
- The stock traded for $70 not long ago. A return to profit growth could easily put it there again.
As I said above, airlines scare me as investments, just look at the news today about Continental and Southwest. I think Copa’s Latin America market and proven profitability set it apart and I am adding it to this site’s Growth Portfolio.
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