Hassan Ahmed, Founder and Head of Research of Alembic Global Advisors, says he believes Celanese Corporation’s (CE) margins have been unnaturally high and aren’t sustainable. He says the stock may be overvalued.
“It’s an extremely well-running company, but they had a large earnings beat in 1Q and, on the back of that, the stock rallied very high,” he says. “I think there is an expectation in the market that the strength that was exhibited in 1Q may actually carry on over the next couple of quarters, and I do not believe that may happen.”
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Ahmed says that the first quarter was a bit of an anomaly for Celanese because crude oil prices fell drastically. As a result, the company’s raw material price fell significantly, but their product prices remained in the same range.
“They will eventually move with a slight lag. So because of that lag effect, margins for the company were unnaturally high, which in my mind is not sustainable,” he says. “Keep in mind that the asset yields chain, the main chain of products that they produce, is extremely oversupplied right now.”
Chemtura Corp (CHMT) CEO Craig Rogerson says a key component of the company’s growth strategy is bolt-on acquisitions in which the purchase price or target company’s revenue ranges from $50 to $100 million. He says Chemtura is looking for companies to acquire that offer them more product line extensions, more technology or an opportunity for a broader geographic footprint.
“If you look at where we are right now, the pipeline is probably most full in the industrial performance products segment. In the petroleum additives and urethanes areas, I would expect that we will close on one or more of those over the next couple of years as well,” Rogerson says. “That will add to the kind of the organic growth that is supported by innovation, new product development and the capacity that we have installed.”
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In addition, Rogerson says that the capital investments the company has made in its four businesses will also be a significant part of growth over the next couple of years. With innovation in mind, Rogerson says the company invests in a lot of application development for next-generation products.
“We have some new products that we expect to come out in both the Great Lakes Solutions of the bromine business, the urethanes business and really across the portfolio,” Rogerson says. “We have petroleum additives coming up that are in engine testing right now. That will drive a lot of the growth.”
Hassan Ahmed, Founder and Head of Research of Alembic Global Advisors, says he believes Methanex Corporation (MEOH) is currently undervalued. He says the stock is trading at about half of its replacement value, by which he means 50% of the value of its assets.
“I do consider it extremely attractively valued at the current valuation level,” Ahmed says.
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Because one of the main raw materials for producing methanol is natural gas, Ahmed says Methanex has set up facilities in places where they can go on long-term cheap natural gas contracts. They currently operate in the U.S., Canada, Trinidad, Egypt, Chile and New Zealand, Ahmed says.
“For methanol, like I said, the main growth market tends to be as a fuel additive,” he says. “So obviously demand for methanol has been very robust even in a $60-a-barrel crude oil price environment. I expect that to continue.”
Raymond James & Associates Analyst Pavel Molchanov says Advanced Energy Industries, Inc. (AEIS) is one of his top stock recommendations this year. He says the company announced last year that it plans to exit the solar business.
“In fact, it’s losing money in the solar business,” Molchanov says. “So when they announced last year that there would be an exit in some way from solar, the stock began to trade up, but it still hasn’t fully reflected the value of exiting the solar segment because of how much cash that segment is burning.”
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Molchanov says Advanced Energy’s exit from solar is not a comment on the solar industry in general. Rather, he says the company’s own solar business was not well-positioned.
“If it is an exit as has been the plan, then I would anticipate the Street’s earnings estimates to increase by as much as 30%, because those solar losses would no longer be hitting the income statement,” Molchanov says.
Gabelli & Company Analyst Timothy Winter says he recently upgraded WEC Energy Group Inc (WEC) to a “buy” rating. He says the utility group is down about 15% from its highs in January.
“Well, WEC was down about 20%, and they are about ready to close an acquisition of Integrys Energy (TEG) out of Chicago, which is going to ramp up the earnings growth rate from 4% to 6%, to 5% to 7%,” Winter says. “We think that could be conservative.”
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The companies have contiguous service areas, so the acquisition will result in synergies, Winter says. Integrys has an electric and gas service area in the Green Bay, Wisconsin area, and they own a large gas distribution utility in Chicago.
“In addition, Wisconsin Energy had free cash flow that they had intended to buy back stock with,” he says. “Integrys has opportunities to invest in their infrastructure, primarily gas pipeline replacement in the Chicago area, so WEC can use its cash flow to invest in the pipeline replacement program and earn a return, which helps boost the earnings growth rate.”
Timothy Winter, Analyst at Gabelli & Company, is currently recommending NextEra Energy Inc (NEE). He says the company, through its subsidiary Florida Power & Light, is growing its customer base in Florida.
“The regulation is very supportive,” Winter says. “We see them growing the regulated business there at an above-industry average.”
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In addition, Winter says their nonregulated business, NextEra Energy Resources, has a significant pipeline to grow in both the solar and wind businesses. The company created a yieldco, NextEra Energy Partners, of which they are the general partner, and that business has performed well.
“They were going to IPO at $20; it’s now trading at $43. The yieldco is going to be a driver of the renewable business,” Winter says. “As the general partner, they’re going to get a disproportionately high IDR; they get to share at a disproportionately high level the dividends going forward.”
Gabelli & Company Analyst Timothy Winter says he and his team are positive about the use of natural gas as a fuel. As such, they like the gas utility sector right now.
“An interesting name is National Fuel Gas (NYSE:NFG), which has 800,000 acres of Marcellus and Utica mineral rights, and they have a growing E&P business called Seneca that’s going to drill and produce natural gas,” Winter says.
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National Fuel Gas also has a pipeline and midstream business. Winter says the company is planning to bring gas from the Marcellus into other regions of the U.S., as well as to a hub in Canada.
“They plan to form an MLP out of the midstream business shortly,” Winter says. “So there is upside to National Fuel Gas related to gas prices, the MLP and the development outlook for their pipeline business.”
Portfolio Manager Christopher Floyd of QS Investors says NXP Semiconductors NV (NXPI) has done very well for his portfolio due to its connection with Apple (AAPL) and the success of the iPhone 6.
“One of their key products is the near-field communication chips that go into iPhones that enable Apple Pay, for example. Those chips provide the communication between the iPhone and the point of sale technology. Needless to say, going into the iPhone 6 was the huge win for the company, and that really has driven its growth over the last couple of years,” Floyd says.
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Additionally, NXP Semiconductors has recently undertaken the acquisition of Freescale Semiconductor (FSL), which Floyd says is a well-timed acquisition.
“It broadens their product portfolio and should lead to healthy growth going forward. The stock still looks attractive on our metrics and remains one of the bigger holdings in the portfolio,” Floyd says.
Henry Linginfelter, Executive Vice President of AGL Resources Inc. (GAS), says the company is targeting its contribution to earnings from its utilities and pipelines at about 80% of overall corporate earnings. He says historically that contribution has been in the high-60s to mid-70s.
“We’re trying to target a consistent delivery of 80% from those business investments — the utilities and the pipelines — over the five-year plan,” he says.
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Another of the company’s key goals is to continue to grow its customer base. Linginfelter says management is already seeing growth and plans to add about 35,000 new meters across its system this year.
“Last year, we added 30,000, and that probably was the most any gas utility company added,” he says. “As a percentage, it is still less than 1% of our customer base, but as a raw number, it’s probably more activity to add customers in our company than in any other company in the country, with 35,000 new accounts in a single year.”
As part of recent restructuring efforts, Ormat Technologies, Inc. (ORA) sold an interest in three of its assets to Northleaf, a Canadian independent global private equity and infrastructure manager. CEO Isaac Angel says Northleaf offered a price that reflected an 11 times multiple while the stock was trading at around eight times.
“Northleaf acquired 36.75% interest for approximately $162 million that will fuel our growth in the very near future,” Angel says.
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The restructuring efforts, including the Northleaf transaction, are intended to “unlock value for shareholders,” Angel says. Northleaf functions like yieldco, but it is private, so Angel says Ormat can flow more assets into the partnership or build new partnerships.
“As a matter of fact, Northleaf will be partnering in our expansion in the second phase of our Don Campbell power plants, which will be the fourth asset that we’ll bring in by the end of this year, and it will be priced separately,” he says.
