Portfolio Manager Laton Spahr of OppenheimerFunds says one of his firm’s top holdings is Oshkosh Corporation (OSK). Spahr says the company has improved its free cash flow, which isn’t showing up in the multiple the market has put on the stock.
“That is something we look at a lot, where there is an underlying return-on-invested-capital improvement, you haven’t seen it reflect in any multiple expansion, and we saw that over the last 12 months or so within Oshkosh,” Spahr said.
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Spahr points to the concern about an inventory pricing issue at the company, but says his firm researched and found that Oshkosh’s strategy for dealing with the situation was strong. Additionally, the company’s end markets are showing ample opportunities.
“[In] a couple of their big markets, telehandlers are going through a regulatory-driven upgrade cycle. You have to upgrade these in order to meet new EPA guidelines around fuel efficiency,” Spahr said. “We are also seeing their aerial work platform business improve because that product is being used in more and more applications, such as single-family housing construction…You also have a cyclical pickup in nonresidential commercial construction, and you have a refresh cycle within their customer base in the residential channel.”
“Lastly, their military business has really suffered over the last two years because of the maturity at one of their programs, but they are rebidding for a very big contract that they will hear about in the next year. We don’t think that opportunity is priced into the stock at all,” Spahr added.
Associate Portfolio Manager Lawrence J. Haverty Jr. of GAMCO Investors believes that Grupo Televisa SAB (ADR) (TV) is undervalued. The Mexico-based broadcasting company has a monopoly in the area as well as a hidden asset in Univision, Haverty says.
“We have owned Grupo Televisa since it went public, which I think was 1994. It is a wonderful business,” Haverty said. “Televisa is run by very smart people, and they have invested the free cash flow generated by broadcasting very well. Their broadcasting business has close to 50% margin.”
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Haverty says Grupo Televisa now owns large cable systems and is a partner with both DIRECTV (DTV) and SKY Mexico. Additionally, the company owns 38% of Univision.
“We think that private equity folks will eventually want to monetize Univision, and we valued it over $20 billion. So 38% of it is probably worth over $7 billion. So we see [Grupo Televisa] as undervalued, and we see that it has a hidden asset in Univision that eventually will accentuate that undervaluation,” Haverty said.
Aaron James Deer, an analyst with Sandler O’Neill + Partners, L.P., says Umpqua Holdings Corp (UMPQ) is his top stock pick at the moment. He says the stock is currently trading at a discount following Umpqua’s acquisition of Sterling Bank, which roughly doubled the size of the institution.
“At this point they are still going through a lot of the integration efforts, but by midyear we should see significant cost savings from the deal,” Deer said. “So you should see a pretty good ramping of profitability over the course of this year.”
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Deer says that among institutional investors, there are still some question marks about the purchase accounting impact on Umpqua’s net interest margins. As investors get more comfortable with the purchase accounting and impact on margins, Deer expects the stock to get back to a peer multiple or even a premium valuation.
In addition, Deer says Umpqua has some innovative marketing and outreach programs that build trust in the communities where it operates. And, the communities it serves are good, healthy growth markets.
“The Pacific Northwest areas of Seattle and Portland down though the Bay Area and wine country in California are all doing well — including down to Southern California, where Umpqua also has a small presence,” Deer says. “These are all great markets, and I would expect Umpqua should put up a pretty good performance over the coming year.”
Jefferson Harralson, Analyst with Keefe, Bruyette & Woods, says First Horizon National Corp (FHN) is currently under-earning, is asset-sensitive and its margin is low as the company has kept the asset short while they wait for rates to go up. Harralson says First Horizon is his favorite stock pick at the moment.
“It’s relatively cheap on tangible book, and it has a lot of earnings leverage that are going to be exercised over the next year or two that should have it make a lot more money,” he says.
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Harralson says First Horizon has high legal expenses because they have done settlements with Fannie (FNMA) and Freddie (FMCC), but he says the company is one settlement away from finalizing those legal expenses.
“So you layer in the cost savings, the risk reduction and the potential for higher rates to expand this margin out, and this company that’s making maybe $0.80 a share right now annualized, it could be in that $1.20-plus range once all the things happen; it should happen over the next year or two that helps First Horizon,” he says.
Additionally, Harralson says First Horizon’s bond business has been making significantly less money in the low-rate environment.
“What you have is a business that was earning First Horizon about $0.20 per share per year now earning them about $0.04 or $0.05 per share per year, so some interest rate volatility or some rising rates should be able to help them earn more money in that business too,” he says.
Keefe, Bruyette & Woods Analyst Jefferson Harralson says Synovus Financial Corp. (SNV) is one of his favorite stocks right now. He says the company hasn’t announced a specific goal, but Harralson believes Synovus is poised for significant loan growth.
“They are very aggressively hiring, which should translate into strong loan growth,” Harralson says. “They’re also very asset-sensitive; that should help the margin as rates go up.”
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Additionally, Harralson says Synovus is relatively cheap based on tangible book value. And, he says the company is aggressively buying back its shares.
“They recently put in an 8% buyback, and they brought back 2.5% of their shares in one quarter alone,” Harralson says. “So they’re generating very significant excess capital, and they have very significant earnings leverage coming in the next kind of four to six quarters, and the combination of that should push Synovus shares higher.”
Analyst Will Green of Stephens Inc. says Pioneer Natural Resources (PXD) is an independent oil and gas name worth paying attention to because it is starting from a solid position with one of the strongest balance sheets in the sector.
“They have a great asset base in the Permian Basin, very well-hedged for this year, so they’re not going to see too bad of an impact from the price of crude,” Green said.
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Green says Pioneer is better positioned than other independent oil names in the U.S. from both a balance sheet and asset base standpoint.
“I do think that it also — because it’s more oil levered, you do participate in some upside whenever oil, the supply and demand kind of fixes itself, and you actually get a rally in crude prices. I do think it’s well-positioned to benefit there,” Green said.
Analyst Will Green of Stephens Inc. says in the current natural gas environment, it is important to be mindful of balance sheets. With that in mind, he believes Range Resources Corp. (RRC) is well-positioned over the long term.
“It’s a company that has added value in a large way over the last several years, grown its EBITDA significantly, grown its production significantly despite dealing with lower natural gas prices,” Green said.
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Green says that Range Resources has learned to cope with struggles in the natural gas sector in a cost-effective manner. While it’s been impacted by lower price trends, Green says Range Resources is a solid long-term holding.
“They’ve reduced costs pretty significantly during that time frame, and I think it’s also come in along with the sector,” Green said. “I do think that it’s a long-term core holding that has learned how to add value and drive EBITDA growth over the long term and despite low prices, and I think they will be able to continue to do so.”
Senior Analyst Daniel Katzenberg of Robert W. Baird & Co. says Whiting Petroleum Corp (WLL) is a stock investors should keep an eye on, despite its underperformance through the downturn.
“The Bakken names have been hit the hardest. Whiting is one of my weakest performing names through this downturn. Because the Bakken is a higher-cost basin relative to other leading oil shales; stocks with exposure here typically underperform when crude prices decline,” Katzenberg said.
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Katzenberg says Whiting took on additional debt when it acquired Kodiak Oil and Gas last year, which created concern from investors. Katzenberg, on the other hand, believes Whiting is a name investors can feel comfortable with.
“We think their assets are top-tier, and their operating efficiencies and skills in the Bakken will prove out over time,” Katzenberg said.
Brady Gailey, Analyst with Keefe, Bruyette & Woods, Inc., says Hilltop Holdings Inc. (HTH) is one of his favorite stocks this year. One positive catalyst he sees for the company is that it is likely to exit the P&C insurance business.
“They have a more complicated business model. Their business is part commercial bank, part mortgage bank, part investment bank, and then they have a small P&C insurance company,” Gailey says. “I think that they will likely sell their P&C insurance company and focus more on the bank this year.”
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Currently, Hilltop trades between 10 to 11 times earnings. Gailey thinks the company could grow through M&A if the right opportunity presents itself.
“So we think there are a couple of positive catalysts coming up for Hilltop in 2015, and we like the valuation here,” Gailey says.
Keefe, Bruyette & Woods Analyst Brady Gailey says he is getting more positive on Cullen/Frost Bankers, Inc. (CFR) despite the company’s exposure to energy. He currently has a “market perform” rating on the stock, but says he likes the outlook for Frost over the next several years.
“Their stock has traded down with oil, and they are one of the most conservative energy lenders in the state of Texas,” Gailey says. “They have been in the business over a century. They were one of the only banks that survived the 1980s.”
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Gailey says another positive for Frost/Cullen is its strong dividend yield. He says the current dividend yield is 3%, which is attractive to investors in the current environment.
“We have a lot of investors focusing more on the dividend yield nowadays just with a 10-year bond yield being below 2%,” Gailey says. “If you can have a 3% dividend yield, that’s something that investors are focusing on a lot today, and Frost is solidly asset-sensitive, so I think over time we will see higher rate. It’s just kind of a matter of when, and Frost is one of those names that will do really well.”
