Stephens Inc. MLP Analyst Matt Schmid says Plains All American Pipeline, L.P. (PAA) is likely to be acquisitive in the current environment. He says the company is investment-grade rated, has a very low cost of capital and a great asset footprint.
“They made a small acquisition of a Williston crude oil terminal that they announced earlier this week,” Schmid says. “They also had a couple of nice project announcements, and with their asset footprint they’re ones that really can take advantage of companies in more stressed positions, being able to pick up assets over the course of the year. This week they also announced a partnership with Magellan (NYSE:MMP) for the Saddlehorn pipeline from the DJ Basin to Cushing.”
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Schmid says Plains also has a great management team. He says they recently reset guidance to $50 average oil for this year. He says he thinks Plains will still do about 6.5% distribution growth this year.
“They’ve got a strong project backlog. They’re close to 80% fee-based on their cash flows,” Schmid says. “Their core growth business is the pipeline transportation business; I think that’s still going to grow over 20%, 25% this year, so the core business remains very strong.”
Research Analyst Macrae Sykes of Gabelli & Company says he continues to hold T. Rowe Price Group Inc (TROW) because of the company’s improving fundamentals, exposure to the retirement market and extraordinary margins.
“One holdover from last year is T. Rowe Price. It has a wonderful brand, a very strong management team, is extraordinarily well-capitalized and has a terrific lineup of funds,” Sykes said.
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Sykes says that with the improving economy there is more demand for retirement savings as people try to catch up. As one of the larger firms in that channel, T. Rowe Price directly benefits from that secular growth. Additionally, Sykes says TROW has a nice price-to-value proposition.
“The firm’s margins are almost at 50%, which is extraordinary for any business. The shares have basically gone nowhere over the last year, while business fundamentals have improved due to higher AUM,” Sykes said.
CEO Nicholas Galluccio of Teton Advisors, Inc. says AAR Corp. (AIR) is a stock his firm has held for many years, and continues to hold as airlines increasingly outsource their spare parts inventory and maintenance.
“AAR Corp. is a company that is a spare parts supplier and a logistics manager for the global airline industry. Many of the large airlines are their major customers,” Galluccio said. “AAR historically refurbishes spare parts and resells them to the global airline industry, and contracts to be the inventory manager for those spare parts as well.”
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Galluccio says AAR also buys used airplanes to strip for parts, then refurbishes the parts to resell them. With its recurring-revenue-stream model, Galluccio will continue owning the stock.
“It’s a free cash flow business, it’s run by a competent management team, and we are very comfortable owning the stock for many years. The stock has doubled since our original purchase,” Galluccio said.
Investment Research Analyst Marc Roberts saw many opportunities a year ago for Physicians Realty Trust (DOC) to parlay capital into the small and midsize medical office market. Roberts says Physicians Realty has delivered, and grown its asset base along with its net operating income.
“What they focus on are small to midsize transactions in medical office buildings, so they are owners of the real estate. This is an asset class where you have pretty long-term leases,” Roberts said. “The management team worked at other health care realty companies before, so they were experienced and in the process of raising more capital. We saw that there were many opportunities a year ago for them to put this money to work in these smaller and midsize medical office buildings at what we thought were pretty attractive rates of return.”
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Roberts says his team also saw that the management team was appropriately conservative, and that after a year his thesis played out well. However, the stock is now trading at a premium so Roberts is currently trimming shares.
“REITs are not cheap right now. Physicians Realty Trust, when we first purchased their stock, was trading at a discount to net asset value, but since then, it has performed very well,” Roberts said. “I expect that, at some point, we will have to sell the holding simply because it has done so well that it’s trading at too expensive of a price.”
Equinix Inc (EQIX) is converting to REIT effective this year. David Rodgers, Analyst with Robert W. Baird & Co., says he hasn’t decided yet whether he’ll add the stock to his coverage, but he believes it will receive a warm reception in the REIT market.
“I think with regard to the pluses and minuses of conversion, I don’t know that there are too many detrimental impacts for a company like that,” Rodgers says. “Obviously over time they end up picking up the tax efficiency benefits, the ability to return more capital to investors, and I think that a company like Equinix can probably continue to generate a sufficient amount of cash flow to support their own growth as we see with CoreSite and DuPont in particular.”
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Rodgers says the change opens Equinix up to a broader group of investors. Historically, he says technology investors will invest in REITs as they see appropriate, but REIT investors are often hesitant to invest in technology stocks that are outside of the major indices.
“And I think with regard to the reception to Equinix from the REIT investors, it still looks like the company’s holders are fairly highly skewed toward generalist investors, hedge funds and technology-oriented investors from what I can tell,” Rodgers says. “So I think the bigger read through will be after Equinix is added to the major REIT indices; how does the REIT market adapt at that point? We think that it will be accepted just as Digital, DuPont, CoreSite and the others have been.”
CoreSite Realty Corp (COR) CEO Tom Ray says the company is working to respond to market demands as customers become more sophisticated. He says that in the 15 years that CoreSite has been in business, customers have become significantly more aware about what they buy in the data center colocation and interconnection space.
“So we have been driven to getting better and clearer around how we create value for the customer,” Ray says. “Being a one-size-fits-all data center colocation provider, approaching the market in this very generic fashion, really doesn’t work very well any longer, or at least we believe it does not generate strong investor returns.”
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In addition, Ray says CoreSite is working to respond to different kinds of data center requirements from the same customers. Previously, most data center customers primarily wanted one kind of data center capacity, he says.
“Now they might want half of their data center architecture to be of that same capacity, say, five 9’s reliability and redundant systems and high power, but they might want 25% of their architecture to be very cost-effective,” Ray says. “And they might seek a low price point, but with less redundancy, less uptime, and they might choose to maintain their network uptime via their nationwide or global network, as opposed to making sure one data center never goes down.”
Lead Portfolio Manager Matt Moran of River Road Asset Management sees many reasons to include Twenty-First Century Fox Inc (FOX) in his portfolio. Moran says the company has the highest return on invested capital among all the studios, and is inexpensive for such a high-quality business.
“You’ve got probably the world’s best collection of cable assets. They have the largest group of regional sports networks. If you think about the DVR world that we live in, the one form of content that is immune to DVRs is sports because people tend to watch sports live, and that’s very attractive to advertisers,” Moran said. “They also have a broadcast segment with retransmission agreements that will grow over time.”
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Moran also says that while many media stocks have gotten cheap due to weak advertising, Fox is only 20% exposed. Additionally, Moran says Fox is inexpensive relative to the quality of the company.
“Rising affiliate fees with cable companies are going to grow EBITDA at a midteens rate over the next couple of years. What are investors paying for that? They are paying around nine times EV to EBITDA. Other media companies have historically traded for 12 times. Transactions get done in the midteens range. So we think that’s too cheap for such a high-quality business. Their balance sheet is fantastic, and they have just raised the dividend 50%,” Moran said.
Lead Portfolio Manager Matt Moran of River Road Asset Management says there is a misunderstanding in the investment community in terms of Microsoft Corporation’s (MSFT) business and what is driving the company.
“Some investors think that Windows is really driving the bus here, but it’s not. In fact, consumer Windows is just 6% of total sales and business; Windows is more like 11% and actually growing. If you value the company based on the cash flows that come from the Office division and the servers business and then add back the cash, you get to a low $40s value. The stock ended 2014 in the mid $40s,” Moran said.
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Moran says that at the end of the year Microsoft was trading at 11 times free cash flow and 8 times EV to EBITDA, which is very cheap. He also likes the company because of its AAA credit rating.
“Why is that important? Because they can issue $10 billon of 40-year debt with a 4% coupon. Think about that financial arbitrage — they are issuing debt at 4% for 40 years, and they are buying back stock aggressively that earns 25% to 30% on equity. We think that is a great recipe for compounding success when it comes to Microsoft in the future,” Moran said.
February saw a number of surprising changes in executive turnover as tracked by Liberum Research. Unlike previous months, Liberum registered declines in all four key categories, CEOs, CFOs, All C-level, and Board of Directors. We have not seen this level of a drop since the financial crisis back in 2008. A precipitous drop of this kind could present a problem for the North American Economy if it continues for a number of months. Liberum believes the drop is an outlier and will not continue as we move into the early spring. It is likely some of the drop might even be attributed to the severe winter weather in the U.S. Northeast. Liberum Research remains positive overall about the North American economies, particularly the United States. Early in March, ADP released its February Private Employment Report. The numbers, while not reaching most analysts expectations, were far better than the executive turnover numbers for February from Liberum Research.
Nicholas F. Galluccio, President & CEO of Teton Advisors, Inc., says Patterson-UTI Energy, Inc. (PTEN) is a core holding in his company’s small-cap fund. Patterson-UTI, Galluccio says, has the best fleet of high-performance domestic land-based drilling rigs, and is better insulated from weak oil prices than others in the industry.
“We think that oil prices weakened as a result of the OPEC situation. Service providers will bear a significant negative impact from the reductions, but we believe Patterson will be more insulated because the company has more high-end electrical, not mechanical, rigs that are suited to unconventional horizontal drilling, and they command higher rates, and the industry will move to upgrade its fleet of rigs leased out to energy customers for greater productivity per rig,” Galluccio said.
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Galluccio also says Patterson-UTI Energy has a strong balance sheet with plenty of borrowing capacity and very low debt, making it an attractive stock for his portfolio.
“We think it’s capable of earning $2 per share in the next cycle. We think that the upside in the stock is $30, and the downside is $15, so it has an attractive risk/reward ratio, and it sells at around four times cash flow or enterprise value to EBITDA — EV/EBITDA. So it’s very reasonably priced,” Galluccio said.
