Copa Holdings has profitable 1st quarter

Friday May 9, 2008 • Leave a Comment

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.

City Bank has flat 1st quarter

Tuesday April 15, 2008 • Leave a Comment

My favorite City Bank (CTBK: 15.22 -0.12 -0.78%) is the regional bank located in Washington state. Yesterday they released their results for the 1st quarter of 2008 and results were mixed. The major financial media laser-focused on the fact that net earnings fell about 6% but I hope to give a little more in-depth analysis here. First an outline of some of the results compared to Q1, 2007.

Net income: $9.69 million, -6.7%
Net interest income: $18.26 million, -8.4%
Total loan: $1.213 billion, +16.7%
Non-performing assets: $56.6 million, 4.6% of total loans, up from $2.7 million
Net interest margin: 6.09% down from 7.52%

The press release from City Bank noted the financial slow down is having an effect on the bank in the form of a higher amount of non-performing assets and tighter net interest margin. They also noted that assets continued to grow in the 1st quarter, up 5.65% from 12/31/2007.

I believe small, well run regional banks can be tremendous cash and profit generators. City Bank management has proven itself to do a fine job in the past and I think they will weather this current economic slowdown in fine shape. They are continuing to grow assets during these tough times and profits will follow as the economy improves. the 3% dividend is covered 4x by projected earnings. Here are a couple of banking related ratio that show how City Bank stacks up against the average of comparable banks. Source

Return on Average Assets (ROA): 3.11% vs. 1.06% (higher is better)
Return on Average Equity (ROE): 18.09% vs. 10.8%
Efficiency Ratio: 22% vs. 59% (lower is better, below 50% considered excellent)

At this point the stock trades at 7.5 times 2007 and projected 2008 earnings. Over the last few years the company has paid at least a $1.00 special dividend at the end of the year, pushing the possible yield to 8%. With the start of an economic recovery this could be a $30 stock again. I am not expecting higher stock values soon for CTBK so I am going to switch it from my Growth Portfolio to the Income Portfolio.

Note: I currently have a long position in CTBK.

Changes coming here

Friday April 4, 2008 • Leave a Comment

I am planning to make some changes to the organization and type of posting I am doing here. First, the stock tracking will be changed. Six months ago I started a 20 Stock Portfolio here to track stocks that I was interested in or invested in or thought would be good investments. I picked 20 because I believed that is a number of companies/stock a part time investor could get a good handle on. As I built up the 20 stocks I found my interests fall into two distinct camps of stocks. Going forward I am going to divide my stock tracking on this site into 2 portfolios.

One area of interest is income stocks. To me, these are companies and stocks that pay well above average dividend payouts. I am talking about stocks that pay 8%, 12% or even higher. The challenge with these companies is that by allowing the dividend rate to be so high, the market is assuming there is a high degree of risk that the payout rate will not continue. My challenge is to attempt to determine/guess if the dividends will continue or even better increase.

The second type of stocks are those I will call growth stocks. I look at several factors that I think will give a stock market beating performance. First, I love unfollowed stocks. If they have 1-3 analysts predicting their future, the odds of them accurately predicting the future are slim. I like a classic growth stock, whose earnings and revenues are growing significantly faster than there PE would indicate. In this case the market does not believe the growth is sustainable. Gigamedia (GIGM: 18.83 -0.04 -0.21%) is a good example of this type of company. I am also interested in turn around plays where a company’s earnings have fallen on hard times and the company is taking steps to get back on track. Headwaters (HW: 11.44 +0.29 +2.60%) and Tetra Technologies (TTI: 19.69 +0.31 +1.60%) fall into this group. I also have a strong interest in smaller cap international companies, especially those based in South America as I have additional interest and knowledge about that region.

Sometime over the next few days I will start dismantling the 20 Stock Portfolio and setting up an Income Portfolio and a Growth Portfolio. Right now I will continue tracking the portfolio stocks on an equal dollar weighted basis and updating quarterly. The current components will be the ones from the old 20 Stock group minus the ill fated Thornburg Mortgage (TMA: 0.73 +0.02 +2.82%).

Last note: I am going to try to generate more commentary on topics of general investing interest. I will still try to give good analysis of the stocks that interest me, but I want to broaden what I am writing about. So if you are not a regular reader, I hope these new changes tempt you to become one.

Still lots of growth for Gigamedia

Wednesday March 12, 2008 • 2 Comments

Yesterday the market took off, Gigamedia, Ltd. (GIGM: 18.83 -0.04 -0.21%) released earnings slightly above estimates and the stock was hammered down over 6%. It is always interesting to see the short term reactions to a single number. The bad number was that year over year quarterly earnings were up only 8%, even though the 19¢ per share earnings beat the estimate by 2¢.

The main reason Q4 earnings were only sightly up on Q4,2006 was that the company spent 45% of revenue on advertising vs. the usual 30%. The extra ads should pump up Q1, 2008 revenues. On an annual basis the company grew revenues and profits at a 60% rate. I expect even stronger growth in the next few years for the following reasons:

The company’s core business, Everest Poker, remained strong and the company has several initiatives in the works to boost revenues. Gigamedia has signed a multi-year marketing agreement with the World Series of Poker and is planning to add more gambling options to the Everest Poker experience.
Asian games and gaming is still in the ramp up stage. Beta downloads of Pachinko and other games are taking off. GIGM has 60 million registered users in Asia and expects that to quadruple. Recent agreements and investments with game companies such as Electronic Arts will give Gigamedia the latest games to offer in the Asian market.
GIGM will offer sports betting with in the year. They are looking for a partner to bring sport’s wagering to their customers. This is a huge market and should bring significant revenues to the company.
Finally, and this is a long shot, the company is preparing for the return of legal online poker in the U.S. Online gambling was outlawed in 2006, but the huge popularity of Poker in the U.S. plus broad TV coverage of poker tournaments could lead to legalization again. If/when this happens, GIGM plans to be an early applicant. As the only U.S. listed, public company they think they have an inside track on obtaining a license.

I believe revenues and earnings will accelerate for GIGM over the coming quarters and years. With the PE now below 25, the stock value is attractive. I am very tempted to add to my position as the price falls.

Note: I have a long position in GIGM.

Mini Fuel Cell Companies

Thursday December 20, 2007 • 1 Comment

With over 1 billion portable electronic devices being sold world wide annually, freedom from the recharging cable will make some company’s investors rich. The idea of a refuelable or disposable fuel cell that will power cell phones, PDAs, ipods and laptop computers for extended periods of time without recharging is the goal of several companies. The development of tiny fuel cells that are safe, reliable and cost effective is on the horizon. Here is a list of publicly traded companies hard a work to develop the product that is battery of the future for small electronic devices.

Neah Power Systems: This company has taken the direct methane fuel cell (DMFC) in a different direction by replacing the typical polymer membrane with a porous silicon wafer that is claimed to be generate a higher level of power in a smaller format. Neah Power trades on the OTC symbol: NPWS.

Medis Technology: Here they have developed what they call Direct Liquid Fuel Cell (DLFC) technology using liquid borohydride. The DLFC is claimed to be passive technology without the internal fluid transfer mechanics required in the methane powered fuel cells. The stock is listed on the NASDAQ: MDTL.

VIASPACE Inc.: The VIASPACE Energy subsidiary is working on disposable DMFC technology. VIASPACE uses technology licensed from NASA’s Jet Propulsion Laboratory. The stock trades on the OTC bulletin board: VSPC.

MTI Micro: This subsidiary of Mechanical Technology Inc. (MTI) has their version of DMFC’s called Mobion. With 80 patents that improve the technology, MTI has licensing agreements with Samsung and Duracell to help get their technology into the market. MTI stock is NASDAQ traded: MKTY.

Power Air Corporation: Power Air has developed a technology called the Zinc-Air Fuel Cell (ZAFC). Obviously, they use zinc vs. methane as fuel for their products. The company was covered by this site here, and are aiming to have products commercially available by next fall. Stock is OTC BB: PWAC.

Of these companies only Medis is not currently a penny stock. The others are micro-cap issues trying to make their technology the next big thing. Medis has a market cap of $450 million. After reading some of the on-line literature I like what Power Air Corp is trying to do. These are not companies I would invest in at this time, but definitely need to check in on them occasionally to see if a breakout is ready to happen.

Note: I do not have a position in any company discussed here.

VeraSun Energy - Q3 Update

Saturday November 17, 2007 • Leave a Comment

VeraSun Energy (VSE: 6.19 -0.01 -0.16%) is the largest pure play ethanol producer. Ethanol producers have taken a hit due to the double whammy of lower ethanol prices and higher corn prices. VeraSun did manage to stay in the green with a 7 cent per share profit, but things are definitely tough in the corn belt.

Here are the positive notes:

Production continues to grow up 77% YoY to 100 million gallons for the quarter.
Revenue was up 49%
Cash on hand is $320 million
4th quarter production will be 40 million gallons higher than Q3.

The negative factors:

Average corn cost $3.32 a bushel, up 62%
Average ethanol price: $1.96, down 17%
4th quarter corn and ethanol prices are on track to slightly worse than Q3.

Next some trends and projections concerning the future for VSE:

Production and revenues for VSE will continue to grow strongly towards the 1 billion gallon annual production goal. VeraSun is selling all it produces.
4th quarter earnings will obviously be flat. The higher production and revenue will give some economies of scale, but the commodity prices are still unfavorable.
Gas stations offering VeraSun’s proprietary VE85 fuel grew 85% to 150. I believe more widespread availability of E85 is very important to the long term viability of ethanol as a fuel.
More states have, and additional ones will, mandate a 10% ethanol blend for regular gas to reduce carbon emissions and petroleum dependence. This could change the supply demand balance for ethanol towards higher prices.
$3.00 gas with $2.00 ethanol + tax credits makes blending economically attractive to fuel sellers.

An additional item from the quarterly report, VeraSun is developing the technology to extract corn oil as part of their process. Corn oil is forecast to add 15 cent profit to each gallon of ethanol. Two plants are gearing up for this technology to be operational in 2009. 15 cents times 200 million gallons of ethanol equals the $7.5 million additional profit per quarter or another 8-9 cents a share.

Bottom line ethanol is a commodity business and VeraSun needs prices to swing its way. Record corn prices will not stay that way indefinitely and ethanol is the only current way to significantly reduce our dependence on carbon fuels. I think in a few quarters the ratio of ethanol and corn prices will correct and VeraSun with growing production will show profitability to go with the revenues.

VeraSun Energy (VSE: 6.19 -0.01 -0.16%) is a component of this blog’s 20 Stock Portfolio. I do not currently own any VSE.