Analyst Macrae Sykes of Gabelli & Company has always liked Waddell & Reed Financial, Inc.’s (WDR) business, but he says in the last year and a half the company has stumbled. He says this is a reflection of different aspects, and he expects the company to rebound and gain strength in the next several years.
“They’ve had management turnover, whether it was one of their stars leaving their largest funds unexpectedly, retiring, and they also had a manager dismissed for cause, and they’ve had underperformance in their largest fund, the Ivy Asset Strategy. So the firm has been dealing with some unexpected turnover and some underperformance, which led to some outflows last year,” Sykes said.
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Sykes says that when a company experiences outflows in the interim basis, the share price is often overly punished, and in his opinion that’s what has happened with Waddell & Reed.
“The franchise is way too cheap based on its outlook and EV/EBITA multiple. We think there is also an asymmetric return aspect to it, because the current return from dividends is about 3%, so good support from income investors,” Sykes said.
“It has some interim headwinds in terms of its business, but we think it will rebound and be stronger than ever within the next several years, and that investors will be well-rewarded,” Sykes added.
In the wake of the Kinder Morgan Inc (KMI) deal, Nathan Judge, Analyst covering the MLP sector at Janney Montgomery Scott, says a question that investors are still asking is whether or not a lot of other companies will follow suit and undo an MLP. Judge’s answer is no.
“We think that the MLP business model is not broken,” Judge says. “There was an unusual situation for Kinder Morgan, and it worked in their instance, but it’s going to be very rare for another company to be in a comparable situation and to choose that route of addressing their issues.”
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Judge says the primary issue for Kinder Morgan was resetting the incentive distribution rights. He says there are a lot of ways companies can go about doing that, including becoming a C-Corp.
“The fact that Kinder Morgan did that wasn’t unique, but it was unusual for them, and I don’t expect that to happen for most everybody else,” Judge says.
Nathan Judge, Analyst covering the MLP sector at Janney Montgomery Scott, says NGL Energy Partners LP (NGL) is one of the stocks he is positive about right now. He says the company has a bit more commodity exposure than other MLPs.
“Only 45% of its cash flows are actually contracted or fee-based, but that’s growing to about 65%, maybe even 70%, by 2017,” Judge says.
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In a recovering or stabilizing commodity price environment, Judge says the outlook for NGL Energy Partners could improve. He says expectations have already come down quite a bit, and he believes the downside has been priced in.
“So if there’s any partial recovery in commodity prices or even stabilization, the upside could be quite attractive for NGL,” he says.
Portfolio Manager Lee Kronzon of Gator Capital Management says AMERCO (UHAL) is a very high-quality business and an attractive investment for many reasons.
“AMERCO is the industry leader in North America as the largest do-it-yourself moving truck and trailer rental firm. But AMERCO is also the second-largest self-storage facility operator in North America. Many of AMERCO’s truck rental facilities also have storage facilities attached to them. And that creates a great vertical integration opportunity that many competitors don’t have,” Kronzon said.
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While AMERCO has industry leadership that is important to the company, Kronzon says that the company benefits even more so from high entry barriers, and that its vast network is its competitive moat.
“That gives AMERCO a network effect: The more locations it has, the more attractive its services are to customers, and as a result, the more pricing power it has. We estimate that the U-Haul network alone would cost a competitor over $6 billion to replicate from scratch,” Kronzon said.
Tessera Technologies, Inc. (TSRA) is one of Lee Kronzon’s favorite investment ideas. A Portfolio Manager at Gator Capital Management, Mr. Kronzon says Tessera has many appealing features and exemplifies what he looks for in an investment.
“Tessera focuses primarily on semiconductor packaging and image-processing solutions. For example, Tessera provides the red-eye removal technology that you see in digital still cameras and smartphone camera features for image processing,” Kronzon said. “Tessera has over 20 years of leadership in I.P. development with over 3,700 issued and pending patents.”
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Kronzon says Tessera is now moving into the auto and security electronics markets. The company has excellent revenue visibility and a recurring revenue base, he says, as well as 100% gross margin because its licensing revenue requires no physical production.
“The key point is that Tessera probably can deliver pretax operating margins in the 58% to 66% range this year. So for every incremental dollar of sales, they can generate over 58% in pretax operating margin, which is very positive for earnings and cash flows,” Kronzon said.
“I think Tessera is attractively priced given its healthy growth prospects, high margins, recurring revenues and high returns on capital of around 25%,” Kronzon added.
Michael R. Wagner, Managing Director and Portfolio Manager at MAI Capital Management, LLC, says Magellan Midstream Partners, L.P. (NYSE:MMP) is among his top holdings. He says Magellan is a major transporter of crude oil with operations both at the crude and refined product levels, both interstate and intrastate, as well as marine facilities. In addition, the company has grown its footprint to shale basins that are quite wet and lucrative.
“They just released earnings last month, and even though the price of oil fell, their margins have increased significantly,” Wagner says. “Their crude-oil segment’s operating margins grew by over 40%. So here is a company that, despite crude oil falling in price, its operating margins in the crude-oil segment grew, and it grew because they are shipping more crude oil, it’s as simple as that, the volumes grew.”
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Wagner says Magellan’s profit margins have increased more than 30% in the marine segment from increased volumes and higher storage rates. In addition, he likes Magellan’s management team and the company’s growing dividend.
“On a quarter-over-quarter basis, Magellan increased its dividend 4.9%. That’s not bad. On a year-on-year basis, it increased its dividend 18.8%. And this isn’t just a rare occurrence; its dividend distribution growth rate is 13% for the past five years,” Wagner says. “So if we can identify a company that has a current yield of 3%, let’s say, and it’s growing that dividend at a double-digit clip, we think that’s a good value proposition.”
Michael R. Wagner, Managing Director and Portfolio Manager at MAI Capital Management, LLC, says that although EQT Midstream Partners LP (EQM) is small compared to others in his portfolio, he has given it a 2.5% weighting in his Vertical Fund. He says he believes EQT is well-positioned and will be a “meaningful grower.”
“This is a play on Marcellus Shale natural gas. It’s increasing its throughput, it’s increasing its volumes, and it’s growing its network — its spider web, if you will — of pipes throughout the Marcellus region,” Wagner says. “Its volumes were up 40% year over year; it released earnings last month as well. Volumes are up, despite the pricing.”
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Wagner says he doesn’t bet on natural gas or commodity prices of crude or West Texas or sour crude. Instead, he is looking for stocks with long-term contracts, and he says EQT fits the bill.
“They are projecting, and we believe based on what we see them doing, that they’re going to have around 15% to 17% distribution growth rate this year, next year, and going forward for that matter, based on the growth of the natural gas in the Marcellus region, and the power plants that are using that natural gas to fire up and produce electricity,” Wagner says. “And so that’s an example of a very small company. VMLPX can give a very small company a meaningful allocation in the portfolio in order to drive performance and drive results.”
Shneur Gershuni, executive director in the Energy Group at UBS Investment Bank, says MPLX LP (MPLX) is one of his favorite MLP investment options this year. MPLX was created by its parent, Marathon Petroleum Corporation (MPC), and Gershuni says Marathon has a good deal of assets to sell to MPLX.
“So we’re expecting the growth rate to be in the high 20s on a go-forward basis,” Gershuni says. “We think that they may potentially sell and move more assets down into the MLP structure.”
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In addition to the attractive growth rate, Gershuni says he also likes MPLX’s relative valuation.
“What you’ll notice is it does have a relatively low yield, and that is because it reflects the fact that investors are expecting it to grow, and so it manifests in the lower yield because of the growth rate, because the expectation is going to be that much higher later on down the road,” he says.
In 2013, The Wall Street Transcript interviewed Mark Thierer, the Chairman and Chief Executive Officer of Catamaran Corp (CTRX). UnitedHealth Group has just announced that it will be acquiring Catamaran for $61.50 per share, a premium over the closing price of $50.29 per share at the time the interview was published. Mr. Thierer details his growth strategy in detail in his interview.
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Mr. Thierer has been instrumental in redefining the way pharmacy benefits are managed by successfully merging two industry-leading PBMs — SXC Health Solutions and Catalyst Health Solutions — to create Catamaran, a $10 billion company scaled to drive significant client savings. In his interview, he stated that “by acquiring our own clients who are running on our technology platform, we are executing on a pure play roll-up strategy.” This strategy has now paid off in an exit to one of the largest health care companies in the United States.
Stephens Inc. MLP Analyst Matt Schmid says one of his top picks this year is Markwest Energy Partners LP (MWE). He says the company has a best-in-class processing asset base in the Marcellus and Utica, serving top customers there like Range (NYSE:RRC), Antero (NYSE:AR), EQT (NYSE:EQT).
Schmid says the company has a bit of commodity sensitivity, and took its distribution guidance down a bit from 7% to 4.5% growth this year. But, he says Markwest is really growing its fee-based agreements.
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“I think approaching 90% of their cash flow is going to be fee-based this year on this updated guide,” Schmid says. “Really, the assets are leveraged to some of the lowest-cost gas production in the country in the Marcellus and Utica, so even if you stay in this subdued net gas environment, this is an area where you’re going to see continued volume growth.”
In spite of the rollover in commodity prices from November and Markwest taking down its distribution guidance a bit, Schmid says was encouraged by the company’s most recent earnings call because their guidance for Marcellus and Utica processing and fractionation growth stayed largely intact.
“So you’re really seeing no impact on the volume side, and they are becoming more and more levered to volumes versus price,” Schmid says. “I think long term they’re going to be a great grower and another core position.”