Hardinge, Inc. not getting it’s act together
Back in February I added Hardinge, Inc. (HDNG: 14.38 -0.09 -0.62%) to this site’s stock tracking as a turnaround candidate. In the 3rd quarter of 2007, the stock price was hammered by 50% when the company showed a zero earnings quarter. Previously, the company had been a steady generator of growth and profits. My thought was when the company was able to start generating profits at historical levels, the stock price would make a nice recovery.
In February, the 4th quarter earnings came in with a small net loss (-1¢), with the company claiming a decrease in net margins due to the unloading of some old inventory. Now, today, 1st quarter results are out with another quarterly loss! They reported a loss of 6¢ per share for the quarter on decreased sales and gross margin. Hardinge management blames a significant portion of their woes on currency exchange issues with their customers in Europe and Asia.
At this point in time, I see a company with 3 quarters in a row of negative earnings results. It appears management does not yet have a handle on how to return the company to its former profitability. For this reason I am removing HDNG from this site’s Special Situations Stock Portfolio. The share price after the news today is down a few bucks from where I added the stock to the portfolio. For me, there are better more interesting opportunities for stock investing at this time.
Note: I currently do not have a position in HDNG.
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.
End of the month with new portfolio system
On this blog I have been tracking a portfolio of selected stocks since September of 2007. I started with a 20 stock portfolio of those companies I had researched and believed had great potential for profit. As my portfolio evolved, I discovered I was interested in stocks of two distinct varieties so Starting in April 2008 I have divided the stocks I track into two separate portfolios, an Income Portfolio and a Growth Portfolio.
I have been tracking my portfolios on a quarterly basis, starting with an equal dollar amount of each stock at the beginning of each quarter. If I add a stock in the middle of a quarter, it starts with the same dollar amount. I have not tried to time any buying or selling in the portfolios.
After one month with the dual portfolios, the results have been interesting. The Income Portfolio significantly out performed the Growth Portfolio for the month. The outperformance does not include any dividends, most of which have record dates in May.
The Income Portfolio had a total stock price gain of 7.57% for the month of April. This was primarily driven by an almost 30% gain in Terra Nitrogen (TNH: 149.53 +1.49 +1.01%) and Nordic American Tanker (NAT: 39.46 +0.56 +1.44%) up over 20%. NAT was boosted by the company announcing at least a doubling of the dividend for this quarter. TNH has been riding the agricultural products boom. As of yesterday, I have dropped TNH from the Income Portfolio for reasons I have written on here and here.
The Growth Portfolio was up 1.8%, significantly under performing the major stock market averages. Hardinge Inc. (HDNG: 14.38 -0.09 -0.62%) and KHD Humboldt Wedag International Ltd. (KHD: 31.1699 +0.2799 +0.91%) were the stars, both up around 20%. The portfolio was pulled down by Silver Wheaton (SLW: 14.44 +0.20 +1.40%), Headwaters (HW: 11.44 +0.29 +2.60%) and VeraSun Energy (VSE: 6.19 -0.01 -0.16%), all down about 15%. SLW and HW were hit by negative earnings news and VSE is stuck in the negative ethanol news and commodity trend.
The results for April were very interesting, and I look forward to what happens from here. Someone with the Income Portfolio would be tempted to take the 8% gain and go money market for the rest of the year!
Note: of the stocks listed I have positions in KHD, HW and VSE
Conflicting ethanol news side-by-side at Yahoo Finance
Sector Snap: Analyst says end of ethanol oversupply in sight
In Alternative Energy Hunt, Ethanol Under the Gun
These two news items were right next too each other on the summary page for VeraSun Energy (VSE: 6.19 -0.01 -0.16%), the largest pure play ethanol producer.
The first article reported an analyst from Oppenheimer & Co. had announced he believes the current oversupply of ethanol will disappear in the next 5-12 months. I am not sure there is really an oversupply because as far as I can tell, all ethanol producers are selling every gallon they are producing and I have not heard of any idle production. There has been a worry of an overbuilding of ethanol plants, but many have been cancelled or put on hold, and it appears production capacity will really level off the middle of 2009.
The second article focuses on the twin problems of corn ethanol’s bad public image and high corn costs that really cut into margins. There are some interesting comments on the politics of ethanol and the belief that the next administration would not be a supporter of corn ethanol as a renewable fuel. The article also discusses the hard times ethanol companies have fallen on, stock price wise, and getting financing for new plants. Again the cry for cellulosic ethanol is raised, but the article does point out that there are currently 134 producing grain ethanol plants and 61 under construction and exactly zero cellulose ethanol plants producing ethanol.
My own belief is that the U.S. will continue towards about 10% ethanol blend in all gasoline, for both clean air and reduced oil dependence reasons. This give an annual requirement of 18 million gallons and current production is about 7.5 million gallons with capacity peaking in 2010 at about 14 million gallons. The current Renewable Fuel Standard calls for 36 billion gallons by 2012 and the Democratic presidential candidates are calling for 60 million gallons by 2030. But of course they do not want it to be corn ethanol. I do not see any way to meet the RFS without significant corn ethanol production.
I also think that when/if cellulose ethanol become viable, it could benefit corn ethanol producers in several ways:
- Corn ethanol producers are natural candidates to switch to cellulose with their already built and functioning plants.
- Competition from cellulose feed-stocks should drive down corn costs as less is needed for fuel. Cellulose ethanol producers may be surprised what their feed-stocks cost once there is a market for them. See this story.
- The government will need to support ethanol prices so all of their “friends” who build cellulose ethanol plants can get a decent return on their investments.
I think VeraSun Energy, on its way to becoming the largest ethanol producer, will surprise many with its profitability over the next few years. I have started picking up a small position at current prices.
Note: I am long VSE.
San Francisco real estate is hot again
I really do not have an opinion about this video. Just nice to see there are buyers somewhere for real estate. Maybe it isn’t the end of the world.
Classic value stock - Rex Stores Corp.
I was reading one of Jeff Matthews comments the other day and he was discussing comments by the CEO of Rex Stores Corp (RSC: 16.51 +0.27 +1.66%). Jeff’s comments usually pique my interest so I took a look at Rex Stores. At first glance, you want to take a deeper look, the company has a $184 million market cap, tripled earnings from 2006 to 2007 and trades at a PE of 6.
The closer look reveals a seriously bi-polar company involved in 2 business that have issues. Rex’s main business is consumer electronics and appliance retail stores. The company has 124 stores in 34 states. We can all think of a few very serious competitors in this business. Second, the company has entered the alternative energy arena. Starting in 2006 they have invested in the construction and operation of several ethanol plants. This article from Seeking Alpha give a good look at what many think of ethanol production these days.
Looking at the big jump in earnings, a couple of things stand out. Rex made almost $34 million for 2007. The retail stores earned $9.8 million. Synthetic fuels earned $6.9 million and all of those operations are now discontinued. Renewable fuels (ethanol plants) account for the balance. The company had a $24 million profit on the sale of a single ethanol plant so it appears the balance of the ethanol business was negative about $7 million (34-9.8-6.9-24=6.9). The above figures are culled from the transcripts of the year end earnings call. The company does not even have press releases on their website.
Now for the interesting part. This info is taken from the recent balance sheet and the conference call referenced above. Note: I am not a deep into the figures analyst, so anyone feel free to comment on this.
- The company has a current market cap of about $180 million. The total net equity of the company is $256 million, giving a price to book ratio of about 0.70.
- There is $97 million in unallocated cash on the books or about $9.60 per share.
- The CEO claims the $45 million of book real estate could be sold for significantly more than it is booked for. Let’s value it at the $45 mil. or $4.40 per share.
- Cash plus real estate is worth $14 per share on stock trading for $17.50.
- Another way to look it is the market values the retail chain at about $40 million and it earned $10 million last year. (I am putting no market value on the ethanol business).
Thus, you have company where the market puts very little value on its ongoing business. The wild card is the ethanol plants. Will they make money with their ethanol investments? Only time will tell. Rex has no debt associated with these investments, it appears it is all cash invested. The ethanol plants are owned in conjunction with crop producers (farmers!) so expenses may be better controlled. One plant will be fueled by sorghum instead of corn, and is not on line yet.
My opinion is that if Rex can generate any profit from their ethanol business, the company is severely undervalued. A couple of final notes. The CEO owns about 15% of the stock. Institutional investors hold about 65% with a lot of value oriented mutual funds in their. The stock is followed by a single analyst who estimates earnings at $1.30 this year and $2.40 next.
Note: I currently do not have a position in RSC.
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