Portfolio Manager Steve Lyons of Cooke & Bieler says though Reliance Steel & Aluminum Co (RS) may look commodity-like on the surface, it is different from its peers in the industry.
“They have organized their business to perform tasks others find difficult. Notably, Reliance services small customers, and small customers order in small batches — so small, in fact, the competitors can’t profitably service them,” Lyons says.
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
Lyons says Reliance provides exceptionally quick turnarounds, and that small customers lean on Reliance for just-in-time inventories. He adds that this is an attractive value proposition no other player can or wants to fulfill.
“Reliance gets paid well for the service they provide. They generate consistent and industry-leading gross margins, which they are able to leverage into high-single-digit operating margins, which generates decent returns on equity over a full cycle. Cash flow is countercyclical, which helps support the business during the economic downturns,” Lyons says.
j2 Global Inc (JCOM) CFO Scott Turicchi says one of the company’s competencies and differentiators is how it handles M&A. He says the unique approach to acquisitions has been useful in building businesses.
“It is somewhat of a contrary thesis, particularly in the tech world where people want to spend a lot of marketing dollars, build sales forces and do it all organically to get big topline organic growth, often in the early stages of the expense and profits,” Turicchi says.
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
j2 Global management’s view is exactly the opposite of that, Turicchi says. They want profits from acquired businesses from day one, even though they may be more modest if the business is small.
“Then, we will use that cash flow to build our businesses in size through follow-on acquisitions,” he says. “Also, it allows us to pay dividends. All the cash flow that we generate allows us to pay a dividend, so that’s another unique element of j2.”
Mark Argento, Analyst at Lake Street Capital Markets, says Wall Street allows Amazon.com, Inc. (AMZN) to play by a different set of rules than many other smaller competitors. One area that has been impacted as a result is automation, using robots and logistics to better serve customers.
“Three years ago Amazon bought a company called Kiva that had an automated warehouse robot that moved product around more efficiently related to order fulfillment, pick, packing and shipping,” Argento says. “They figured they needed to get ship costs to a small percentage of sales and become more efficient than anybody else, and the acquisition of Kiva was the best way to do it.”
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
At the time of the acquisition, Kiva had been serving a lot of large customers like Costco and other large retailers. When Amazon bought the technology and brought it in-house, it became unavailable for new facilities of existing customers.
“Obviously whatever contracts they had were upheld, but the point in all this is it’s a cutthroat business to remain competitive,” Argento says. “It is always a challenge, and one that probably won’t go away.”
Portfolio Manager Steve Lyons of Cooke & Bieler says Donaldson Company, Inc. (DCI) is a filtration company whose strength is in its technology and innovation.
“They only play in markets where their value proposition is valued by their customers. So they avoid markets like water filtration or light vehicle filtration. Instead, their filters typically protect high-value engines or assets where downtime and the cost of insufficient filtration far exceeds the cost of the filters,” Lyons says.
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
Lyons sees attractive secular trends in the industry over the long term, which will benefit Donaldson Company.
“Any regulation that forces clean air emissions or higher fuel efficiencies, anything that increases complexity, is a positive for Donaldson,” Lyons says. “Similarly, increased usage of biodiesel and low-sulfur fuel along with fuel injection pressures that have increased fourfold over the past decade all require a higher-performing filter to prevent engine damage. All of this plays right into Donaldson’s expertise and position as a technology leader.”
Additionally, Donaldson should see a significant revenue opportunity for their aftermarket filters, Lyons says.
“More and more of the company’s business requires end users to use Donaldson’s proprietary aftermarket filters too, making it increasingly a razor and blade business. Importantly, they have been able to maintain their dominant market share with manufacturers while introducing this proprietary technology. With an aftermarket many times larger than the first-fit market, there exists a significant revenue opportunity for Donaldson,” Lyons adds.
Credit Suisse Group Analyst John Pitzer says Intel Corporation (INTC) is one of his top stock picks, even though PCs are one of the end markets he does not like at the moment. But, he says Intel is actually more dominant in the data center space than they are in the PC market.
“They are about 92% of the PC market, but they’re close to 94%, 95% of the server market, and this data center business is about 20% to 25% of revenue but is now approaching 50% to 60% of overall profits for the company,” Pitzer says. “So that is a very profitable business.”
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
Pitzer says the data center group alone earns about $1.30 of EPS. He says it has been growing at a 15% topline CAGR, and he says it’s not difficult to model the data center business earning $2 of EPS over the next few years.
“And this is the type of business that if it was standalone, the market would be willing to pay a 15 to 20 multiple on,” he says. “If you put a 15 multiple on $2, you get to $30 stock, and if you put in 20 multiple on $2, you get to $40 stock, and the stock is trading under $30 today. We think that the current valuation does not actually reflect the overall earnings power of the data center group.”
Credit Suisse Group Analyst John Pitzer says he likes Analog Devices, Inc. (ADI) because of its exposure to industrial, auto and infrastructure. By contrast, he says the company has relatively low consumer exposure, but that exposure is increasing because of a specific application that is being introduced to Apple.
“In fact, that’s caused consternation of investors, because investors really don’t like Apple exposure because it’s great when you have it, but you can lose it very quickly,” Pitzer says.
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
Independent of any investor concerns related to Apple, Pitzer says Analog Devices has a dominant footprint in analog-to-digital converters. He says the converters are an important part of the overall segment chain of any electronic device, and therefore, that business is likely to drive growth for Analog Devices.
“We do think that that this stock will continue to do well. This company has a more dominant footprint in A-to-D converters than anyone out there,” Pitzer says. “As a standalone entity they can use that to drive faster revenue growth, earnings growth, and/or they are also a potential takeout.”
Nam Hyang Kim, Senior Analyst at Arete Research Services LLP, says Samsung Electronic Co Ltd (KRX:005930) is a value stock with various growth stories. He says the stock has been punished this year by shareholders.
“On a relative basis, it is not that bad compared to its peers, but the stock is trading below one-time forward book value,” Kim says. “Samsung has barely traded below one-time forward book value since 2000, so this is a really low valuation for the company.”
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
Kim says Samsung is a very strong cash generator. He expects their net cash next year to be over $60 billion, which is approximately 40% of current market cap.
“Besides, people are not aware that Samsung is the number one earnings generator in its semiconductor business — more than Intel (NASDAQ:INTC) — this year, but they get no credit on this,” Kim says. “We also like that they are number one in many important growing sectors.”
While many investors like Lenovo Group Limited (HKG:0992), Arete Research Services LLP Senior Analyst Nam Hyang Kim is bearish on the stock. He says many investors are attracted to the well-known Chinese brand because it generates good margins in the PC market.
“We believe the big mistake Lenovo made was to acquire Motorola Mobility,” Kim says. “The last time Motorola made money was before the iPhone launch, which was a long time ago, and then Motorola went through a series of restructuring.”
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
Kim says other PC makers that have tried to transition to the mobile space have failed. He believes that Lenovo’s transition, using Motorola to lead the way, may fail as well.
“Nobody really cares about the Motorola brand anymore, but Lenovo thinks it is still a good brand and that it still has name recognition,” Kim says. “Motorola also has a very high cost structure. They are not profitable and have not been profitable for a long time.”
Brien M. O’Brien, Chairman and CEO of Advisory Research, Inc., says Markel Corporation (MKL), a Virginia-based specialty insurance company, has many characteristics his firm looks for in a company and a management team.
“The company has a long history and an earned reputation as a conservative underwriter of specialty insurance products; a strong, entrepreneurial culture; and an exceptional group of managers who think, act and appreciate the responsibilities of capital allocation,” O’Brien says.
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
O’Brien adds that Markel Corporation has a proven ability to create shareholder value through the long-term compounding and growth of book value. He believes that management’s ability to to continue to grow book value, even in today’s market, can continue.
“When, and if, interest rates normalize, Markel has the ability through their short-duration and conservative fixed income portfolio to materially increase their investment income, strengthen their long-term returns and further improve their capital deployment, whether within the insurance operations, equity and fixed income portfolios or other business operations,” O’Brien says.
Sarangan Rangachari, Vice President and General Manager for Red Hat Inc (RHT), says the company’s revenue for the first quarter of its 2016 fiscal year was up 10%, compared to its first quarter in 2015. He says applications and the emerging products, including storage, grew 3.5 times more than the Red Hat Enterprise Linux traditional business.
“What comprises that big basket are things like our middleware product portfolio,” he says. “This is the open-source equivalent of things like WebLogic and WebSphere.”
FOR MORE INFORMATION ON THIS INTERVIEW CLICK HERE.
Rangachari says that as companies start to build the latest and greatest application that are more web-facing than before, Red Hat’s middleware products are coming to the forefront. For instance, he says Cigna has seen a tremendous amount of success building their solution based off of Red Hat’s middleware portfolio.
“So middleware is one with storage, cloud and mobile, making up the four big areas,” he says. “If I were to overly simplify it, the four growth vectors that comprise Red Hat’s emerging markets are platform/middleware, cloud and cloud management, storage and mobile.”
