In June, American Water Works Company Inc (AWK) announced that it signed an agreement to purchase Keystone Clearwater Solutions from Rex Energy for a total value of $130 million. CEO Susan Story says the deal is expected to close in July.
“This is a company with 350 employees. They serve water to the wells that use hydraulic fracturing to release gas and oil in the Marcellus and Utica,” Story says. “They supply the water, they treat the water, and they recycle the water for reuse in these shale wells. They provide sand and other ancillary services.”
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Story says the acquisition means two things. One, she says, is that shale offers the U.S. the opportunity to be the global leader in energy and move toward energy security.
“The second part is we are very environmentally strong, and in partnering with a company that has an excellent environmental and safety reputation, we want to be a solutions provider for the water part of the shale renaissance that’s taking place in this country,” Story says.
Janney Montgomery Scott Analyst Michael Gaugler says Eversource Energy (ES) has one of the most impressive regulated investment programs he’s ever seen. He points to two large-scale projects in the company’s capex deck with Northern Pass Transmission and Access Northeast.
“One is an electric transmission project, another one is a natural gas pipeline to get gas to the generators,” Gaugler says. “Eversource is trying to provide solutions to New England and its high power prices and power supply issues.”
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Gaugler says that Eversource unfortunately operates in what he considers to be the worst regulatory environment in the United States. He believes the company does have customers’ best interests at heart, even if that is not always compatible with the political agenda.
“Again, it’s hard to imagine a scenario where their earnings don’t grow at above the peer group average for many years,” Gaugler says. “Two projects in excess of $1 billion between Northern Pass and Access Northeast, and that’s in addition to the normal capex that they’ve got planned.”
Greg Orrell, President and Portfolio Manager of the OCM Gold Fund, says in in a broad-based precious metals portfolio, it is worth the risk to include AngloGold Ashanti Limited (ADR) (AU).
“When we are looking at geopolitical risk in the portfolio, we break down our country exposure by looking through each company and at each asset and its country location,” Orrell says. “AngloGold is a South African-domiciled company with an international business that produces gold in Australia, Latin America and West Africa, with only 28% of its gold in South Africa, yet its South African headline risk dominates its valuation.”
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Orrell says AngloGold has a long history of managing its South African risks, and he is comfortable that the value of the stock outweighs them.
“However, the last thing investors want is to wake up and hear about a labor strike, union violence or nationalization talk. It is a risk we feel we can take in a broad-based precious metals portfolio that limits and dilutes out geopolitical risk. For investors looking to own one or two gold shares it probably is not acceptable risk,” Orrell says.
Dr. Beda Bolzenius, Vice President, Vice Chairman — Asia Pacific and President, Automotive Experience — of Johnson Controls Inc’s (JCI) says the Automotive Group is not focused on topline growth but rather margin improvement. He says the company is well positioned to report improved margins over the next two to three years.
“We reacted to the market trend of component sourcing — customers buying the components of the seat separately and not buying the seat as a complete system — and were out of the starting block first,” Bolzenius says. “We made a lot of good acquisitions.”
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Bolzenius says the Automotive Group has clear plans to take advantage of its number-one market position for fabrics, foam and trim. He says management is particularly focused on the metals and mechanisms area.
“So we will take that advantage, we will grow these businesses, and we will significantly improve our margins,” he says. “And as I mentioned, innovation is happening on the component level in the seating system, and we’re investing in bringing new solutions, driving the weight of the seat down while further improving the safety performance and the comfort level of these seats.”
Stifel, Nicolaus & Co. Analyst James Albertine says his current top stock recommendation is LKQ Corporation (LKQ). He says LKQ is the largest player – the 800-pound gorilla – in the collision and mechanical aftermarket parts distribution industry.
“When a vehicle comes off warranty, the propensity to use alternative parts — be it recycled, remanufactured or refurbished parts — rises substantially,” he says.
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Based on where in the cycle of the space SAAR recovery is, Albertine expects to see growth in three- and four-year old vehicles at the beginning of next year. He says that should support the LKQ story for the next four to five years.
“LKQ’s ‘sweet spot’ is between three- to eight-year-old vehicles,” Albertine says. “So where we are in the cycle really determines our call on LKQ.”
Stifel, Nicolaus & Co. Analyst James Albertine says Tesla Motors Inc’s (TSLA) share price could reach $400 in the next 12 months. He says Tesla has remained successful despite plateauing demand for alternatively fueled vehicles.
“I think one of the reasons why Tesla has proven to be successful and will continue to be — is it is by far the best product in the alternatively fueled segment,” he says. “It offers the best range, it offers the best performance, it offers the best customization and it offers, I think, the best customer service at the end of the day. It’s a luxury product, and I think for good reason they have chosen to brand themselves in that way, and that’s arguably helped to secure a more stable demand stream.”
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Albertine says he tries to avoid getting into the non-GAAP versus GAAP profitability question that is often discussed in the media about Tesla. He says the company is, in fact, profitable just based on the Model S, which he says is a positive indicator for Tesla’s financial future.
He adds: “Our view is that it is really becoming less of an auto manufacturer play and more of a technology and ultimately energy storage play, so as we think about Tesla Energy more broadly, all of that has to factor into the near-term key catalysts.”
Wedbush Securities analyst Seth Basham says his top stock pick right now is Advance Auto Parts, Inc. (AAP). He says the company is starting to have some synergies drop to the bottom line after its landmark acquisition of General Parts.
“At the same time, given the integration complexity, Advance hit a couple of speed bumps along the way over the course of the past six months, and that slowed their earnings growth in the first quarter, as well as their sales growth,” he says.
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That created an opportunity, of sorts, for investors. Basham says the stock “gyrated” over the last few months and then bounced up a bit after an earnings report that wasn’t as bad as many had anticipated. Advance is now on track to narrow the large comp and margin gap it has with its peers, he says.
“So you have a self-help story there for a company that’s reorienting itself to the higher secular growth commercial segment,” Basham says. “At the same time you have a valuation discount to peers. So all three of those things combined create a pretty powerful investment story if the company can execute, in our view.”
Wedbush Securities analyst Seth Basham says he is cautious about auto retailers at this point. He says CarMax, Inc (KMX), which is near peak valuations, is one of the names he is cautious on.
“Importantly, most other finance companies in auto finance have multiples somewhere below 12 times forward earnings; if you value CarMax’s finance earnings stream at 12 times, it would imply that their other businesses are being valued at a nearly 30 times forward earnings multiple, which would be the highest within our hardlines retail universe,” Basham says.
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Not only is CarMax expensive from a valuation standpoint, but Basham says the stock is also expensive on fundamentals.
“We’re forecasting same-store sales of approximately 4% for 2015, and that’s down a little bit from 2014 and down a lot from 2013,” he says.
Anthony Pordon, Executive VP of Penske Automotive Group, Inc. (PAG), says the company generated 4.6% organic growth in the first quarter. He says one of the most attractive areas for organic growth is the service and parts business.
“Service and parts in the retail automotive business account for about 40% of our overall gross profit,” Pordon says. “We earned somewhere in the neighborhood of 59.5% to 60% gross margin in that business.”
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He says that with the growth in the new vehicle market, there has been an expansion of the zero- to five-year-old vehicle parc. In addition, he says there is an increasing complexity in the vehicles that are being produced by all the different OEMs and manufacturers today.
“So we believe the service and parts business is a really good business to be in, and we believe there is future growth to come in that side of the business,” Pordon says.
WABCO Holdings Inc. (WBC) CEO Jacques Esculier says the company is planning to spend $17 million over the coming year to build a 145,000-square foot manufacturing facility in Charleston, S.C. He says management decided to invest in the new facility because of opportunities it has identified in the U.S.
“Contrary to the automotive world, where the level of technology used in a car built or assembled in China versus Europe or America is very similar, it’s exactly the opposite in the world of commercial vehicles,” Esculier says. “If you look at a truck in Europe, there is about $3,000 of addressable market for our products and systems. If you look at the U.S. market, it goes down to about $1,000 per vehicle, and if you look at emerging markets like India and China, it goes down to $300 per vehicle of potential revenues of our technologies, and our technologies are obviously advanced technologies.”
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However, Esculier says those gaps are closing due to changing safety regulations. For the moment, the company is focusing on what Esculier calls “interesting opportunities” in the U.S.
“For example, we are increasingly selling our automated manual transmission technology, which optimizes and automates the shifting of gear,” he says. “Traditionally, you shift gear by hand in a truck. With this AMT technology — which has been, by the way, a standard in Europe for years — it’s automated and optimized. It makes driving a truck much easier, meaning that the drivers that customers hire don’t have to be incredibly experienced, and that’s very valuable in a world like it is today with a shortage of experienced drivers.”
