Renowned Analyst Richard Bove of Rafferty Capital Markets, LLC, says Morgan Stanley (MS) is a company that has developed necessary business disciplines that may allow it to benefit from where the economy and financial system are headed.
“Morgan Stanley has superb management, and I think it has developed a business model based around selling a large amount of financial products, not just stocks, but mortgages and loans, which seems to make a great deal of sense,” Bove said.
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Bove says that Morgan Stanley management, particularly CEO James Gorman, has put in place disciplines both on its balance sheet and the selection of executives.
“if any company is going to benefit from where the market is going — I’m sorry, where the economy and financial system are going — it will be Morgan Stanley. I think that is a very attractive stock,” Bove said.
Pete Hess, CEO of Advent Software, Inc. (ADVS), says the company plays globally across many verticals within investment management. He says the space remains very fragmented, and he sees an opportunity for Advent to grow by displacing older solutions on the market.
“There are a lot of older enterprise on-site-deployed solution providers that may not be making the same level of investment to take full advantage of the new technology paradigm of cloud, mobile and social,” Hess says. “As consumers of technology, we all have new expectations for ease of use, user experience and cost of ownership. These expectations are now working their way into the workplace, and that’s why we’re making investments to engineer our solutions so that they can be easily deployed in the cloud and integrated with other applications.”
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Hess says Advent is making a greater level of investment in new solutions than a majority of other players in the space. But, he says there are some competitor firms that are making investments, and that competition compels his team to continue to make improvements.
“It’s hard for a company to get scale when their growth is dependent upon accounting-system replacement, whether it’s cloud-based or not,” Hess says. “The new entrants we see coming in are almost all in the advisory market — the wealth management space. Ten years ago, everybody was building for hedge funds because that was the market that was fragmenting, and now, everybody is building for wealth management because that’s the market that seems to be growing.”
Catamaran Corp (USA) (CTRX) CFO Mike Shapiro says the company has deployed capital through an aggressive M&A strategy over the last several years. He says management believes that the best way to create value for shareholders is by continuing to deploy capital for M&A.
“We’ve done eight highly accretive acquisitions over the last six years, primarily by acquiring middle-market PBMs, which are subscale and don’t have the span of services and capabilities that Catamaran has,” Shapiro says. “And within those acquisitions, a number of those, interestingly, were legacy Catamaran technology partners. So the integration of the acquisitions over the past several years has been relatively low from a risk perspective, given the fact that we already had an existing relationship with most of these PBMs.”
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Shapiro says Catamaran drives value for shareholders through the scale the company has amassed to better drive cost-of-goods synergies across its book of business. At this point, Catamaran’s capital structure is very strong, and the company is positioned to continue to generate meaningful cash flow from underlying operations while also pursuing M&A, Shapiro says.
“As we look at the universe of opportunities, we continue to manage a very robust pipeline of opportunities, and they include subscale, small and middle-market PBMs where we believe we can drive cost-of-goods synergies and create value for the shareholders,” Shapiro says. “We’re increasingly focusing on specialty pharmacy assets as we build complementary capabilities to our Briova specialty pharmacy, as well as potentially complementary health care IT solutions, that could complement our best-in-industry RxClaim pharmacy adjudication platform.”
Managing Director Marvin Kline of Logan Capital Management says his firm added Toyota Motor Corp (ADR) (TM) in the second quarter because they found the company had a strong dividend yield and balance sheet.
“Toyota, at the time we brought it, had a 3% yield. They announced that they are buying back stock,” Kline said.
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Kline says people may not be aware that Toyota’s balance sheet is comprised of cash and marketable securities. Therefore the company has a lot of asset value in addition to its operating business.
“If you subtract the value of the company’s investments from its market value, it is selling at a very low multiple of earnings,” Kline added. “At the time we bought the stock, Toyota’s stock price had been knocked down because it announced a major recall of 6.4 million vehicles. So at the time of purchase, we found the stock attractive because of the dividend yield, the strong balance sheet and its earnings growth.”
The market opportunity for water infrastructure repair and replacement is significant and growing, according to Evan L. Hart, the Senior Vice President and Chief Financial Officer, Mueller Water Products, Inc. (MWA). He was speaking at Baird’s 2014 Industrial Conference, held at the Four Seasons Hotel in Chicago, Illinois.
Mueller’s portfolio includes fire hydrants, valves, metering systems, piping component systems, leak detection and pipe condition assessment. Its business is 20% residential construction, 5% energy, and 75% repair and replacement of municipal water distribution and treatment systems, with its residential construction driven primarily by new community development.
As municipalities continue to recover from the recession, Mueller is anticipating “consistent revenue growth between 5% to 10% per year” in its base organic growth, assuming normalized end market conditions, Hart said. Its metering and leak detection products and services are targeted for 20% long-term growth, Hart said.
“We navigated a fairly significant challenge,” Hart said of the recession. “Over the last year or so, we began to see increased demand for our products driven by residential construction in several regions.”
Demand will be driven by population growth, Hart said. “But we see the greatest demand to repair and replace existing infrastructure. We’re in a period of accelerating demand.”
New growth opportunities for Mueller include smart metering and leak detection, Hart said. The metering business is 14% of revenues, Hart said, and are “well–positioned for growth.” Mueller expects 20% compound growth rates in metering over the next several years, with leak detection a $1 billion market globally, Hart added.
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The Manitowoc Company Inc (MTW) is “situated quite well,” said Glen E. Tellock, Chairman/CEO of the Manitowoc Company, and will start to “go on the offensive” in the coming months after “being on the defensive” for some time. He was speaking at Baird’s 2014 Industrial Conference, held at the Four Seasons Hotel in Chicago.
The Wisconsin-based Manitowoc has two business platforms — food service, which accounts for 38% of sales, and cranes, which is 62% of sales. It does 56% of its business in North America, with Europe accounting for 23% and the Asia Pacific region at 12%.
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Although acknowledging that “you don’t see a lot of growth in the crane business and some stubbed growth on the food side,” Tellock said Manitowoc is focused on improving its margins through operational tweaks, and is positioning itself to “leverage the upside in the opportunities we may have.”
The company’s number one priority is “paying down debt,” but Tellock also said, “We will invest in the business.”
Manitowoc is under construction for a multipurpose food service plant in Monterrey, Mexico, consolidating its beverage facilities in Tijuana, Mexico, and consolidating its oven business in Cleveland, Ohio, among other maneuvers. Tellock said the company “has some egg on its face” with regard to declines in forecasted financial guidance for its cranes business. He said geopolitical uncertainty has made customers “nervous to punch that ticket and buy something new” in the cranes business, but noted that customers continue to rent their equipment.
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Major organizational changes are driving new sales for WESCO International, Inc. (WCC), according to John Engel, Chairman, CEO and President of the company. He was speaking at Baird’s 2014 Industrial Conference, held at the Four Seasons Hotel in Chicago.
The company, which specializes in supply chain solutions, is headquartered in Pittsburgh, Pennsylvania. It has 9,200 employees working at 475 locations in 19 countries.
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“This year, the company made major organizational changes,” said Engel. “We never had a global sales and marketing leader. We set up new functions in the front end, reorganized our business into a smaller number of P&Ls. We’re very focused on making this new organization work. It really builds off strengths we had.”
The result has been “accelerating sales momentum,” Engel said, resulting in organic sales growth expected to hit the $8 billion mark by year end. Of that, over $400 million in annual sales comes from outside the U.S. and Canada, he said.
Engel pointed to “double-digit growth” in the utility market, with communication and security resulting in $1 billion in WESCO sales. Lighting and sustainability saw $780 million in WESCO sales, with more than a third in LED.
Long term, WESCO’s financial objectives are to grow sales faster than the market and strengthen its business through acquisitions, all while maintaining its cost structure. The company has done 40 acquisitions since being spun out of Westinghouse 20 years ago, Engel said.
Johnson Controls Inc (JCI) has “a lot on its plate,” according to Bruce McDonald, Executive Vice President/Vice Chairman of the company, and he anticipates 2015 as the year when the company’s recent maneuvers become firmed. He was speaking at Baird’s 2014 Industrial Conference, held at the Four Seasons Hotel in Chicago.
Johnson Controls has spent the last year divesting some businesses, acquiring new ones, doing a stock buyback and trying to seal some deals. A new CEO, Alex Molinaroli, “really comes in with a fresh vision to transform us to be more of what we’ve been in the past, a large automotive supplier with some other businesses on the side,” McDonald said.
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The company has three main businesses: building efficiency, which includes HVAC equipment and controls plus service work for the equipment; an auto interiors business; and a power solutions business, specializing in automotive batteries, McDonald said.
McDonald said the company is still working out details on a deal with Hitachi to buy 60% of Hitachi Appliances’ global air conditioning business. The deal is expected to close by July of 2015, McDonald said. A memorandum of understanding was originally announced in December, 2013.
McDonald said he expects Johnson’s auto business “to stay strong in terms of margins” in 2015, with building efficiency “starting to see a pickup in coating activity and orders flipped to positive on a year-to-year basis.”
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Allegion PLC (ALLE) is unlocking its potential as a standalone company after its spinoff from Ingersoll Rand, according to CEO David D. Petratis. He was speaking at Baird’s 2014 Industrial Conference, held at the Four Seasons Hotel in Chicago, Illinois.
“We touch you every day,” said Petratis, detailing the many ways the company’s security products are used in homes and industries. The company has 19 production facilities, 8,000 employees and 700 sales people worldwide. They produce over 30 brands, including Schlage and Von Duprin, for hospitals, government, industry and residences.
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Mechanical locks and key systems are the core business. “We have over 38 million applications of just the Schlage master key system,” said Petratis. “In the mechanical world, managing that hierarchy of keys is a key deliverable of our business.”
Allegion has “tremendous cash flow capability and profitability,” said Petratis, noting that six competitors who have controlled the sector’s consolidation represent just 40% of the overall market. Allegion has done three deals since spinning off from Ingersoll Rand last December, and the company is open for more, Petratis said.
Key strategies for the company include expanding in its core markets, innovating in its existing and new product categories, and growing in emerging markets. One of the largest markets for Allegion is North America, where residential and commercial construction provide a strong base, Petratis said.
Petratis added that Allegion is also “well-positioned around the globe,” and predicted the Asian market will double over the next five years. Allegion does 62% of its business in the U.S. and 17% in Western Europe.
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Avery Dennison Corp (AVY) has made strong progress toward achieving its 2015 financial goals, including a focus on improving its return on total capital, according to Dean A. Scarborough, Chairman and Chief Executive Officer. He was speaking at Baird’s 2014 Industrial Conference, held at the Four Seasons Hotel in Chicago.
The company reported sales from continuing operations of $6.1 billion in 2013, breaking down as logistics and shipping, 17% of sales; non-durable consumer goods, 39%; retail apparel, 22%; medical/health care, 5%; and industrial/durable, 17%. Emerging markets are 30% of Avery Dennison’s business, while the U.S. represents 37% of its total business.
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“We feel real good about achieving our 2015 goals,” said Scarborough, adding that the company has momentum toward achieving projections out to 2018. Scarborough said Avery Dennison has improved its margins and has “great free cash flow.”
“We are returning a lot of cash to shareholders. We like this portfolio, and have good exposure to emerging markets. We’ve got a lot of capacity on the balance sheet,” Scarborough said.
The company is projecting 4% to 5% organic sales growth (CAGR) through 2018, numbers that reflect five-year compound annual growth rates with 2013 as the base period. Its 2018 operating margin projections are at 9% to 10%. Its 2018 return on total capital (ROTC) is projected at 16%.
The targets reflect improved growth trajectory and step-function increase in historical operating margin for its two major businesses, Pressure-Sensitive Materials and Retail Branding & Information Solutions, Scarborough said.
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