Barron's this week interviews portfolio manager, a Mr. Ross Margolies. I hold several of the stocks that he discusses. Fwiw, I'll post some parts of Andrew Bary's interview:
online.barrons.com
Mr. Margolies seems to be another guy besides me who likes CE for the ethanol possibility:
"Speaking of chemicals, you like Celanese.
Celanese [ticker: CE] is a diversified company. Its biggest segment is acetic acid, which is suffering right now from weak global demand. It's the low-cost manufacturer of acetic acid. If prices continue to go down, you'll see some Asian competitors closing capacity.
The stock is around $39 and trades for nine times estimated 2013 earnings. We think trough earnings are no worse than $2.75 a share. Once the global economy recovers, it has well over $5 a share of earnings power from its existing business. It also has a big potential kicker.
What's that?
Celanese has developed a process that can make ethanol from natural gas and coal. The cost is substantially below the cost of making ethanol from corn. We recently visited the company's R&D plant in Texas. It's a small facility that uses this process to make ethanol, and the technology is being developed there. The first commercial plant will open in China in the third quarter of next year, and it will make both industrial and fuel ethanol. Given the huge requirements of ethanol in the U.S., it's ironic that a U.S. company is opening its first ethanol plant in China. If the U.S. ever changes its policy, which now mandates that ethanol be made from corn, it could be a home run for Celanese."
Why he likes the disk drive makers (I hold WDC):
"We own Seagate Technology [STX] and Western Digital [WDC]. About a year and a half ago, the industry started consolidating, going from five players to three. Western Digital and Seagate both made acquisitions. The smaller remaining competitor is Toshiba. At the same time, the floods in Thailand wiped out a lot of capacity. So you had a squeeze. That moved the pricing structure up, and it also created a capacity rationalization. Now the threat to the disk-drive companies is that as more tablets and mobile phones displace PCs, the market may get smaller.
But the fact is that disk-drive storage is far cheaper than alternatives like solid-state memory, or NAND. To displace a meaningful part of the disk-drive market would require an enormous amount of capital expenditure, and is unlikely to happen. As long as these companies maintain a pricing discipline, the stocks are very, very cheap. Unlike some other areas of technology, the cost structures and business models of the remaining players are comparable. So there is no incentive for a price war.
Do you worry about the earnings outlook?
There's a wide range of earnings estimates for these companies, but in no case are they trading at double-digit price/earnings multiples. So you have single-digit multiples where companies are returning cash to shareholders [Seagate raised its dividend Thursday and now yields 6%], and the share counts are going down.
One of the things we look for in a contracting or slow-growth industry is management redeploying the capital, returning it to shareholders, and reducing the share count. So, while the industry might be smaller, the company's equity base is smaller, too."
I like the aircraft leasing stocks, and I hold AER(AerCap), AYR, AIR. I don't find much mainstream media info or positive recommendations on this sector. So, for me, nice to see a positive review in Barron's:
"Tell us about AerCap.
It buys planes from Boeing and Airbus and leases them to airlines. We view AerCap [AER] as a portfolio of high-yield bonds secured by aircraft, trading at a steep discount to book value. The leases typically run for well over a decade. The credit quality of leases is good. Even during the financial crisis, losses against leased planes were relatively small. The stock trades around $12.50, which is 70% of its tangible book value of just over $18.
Do investors value the company based more on earnings or book value?
More on book value. The cap on the stock tends to be tangible book value, or maybe 10% above that. People also look at earnings. AerCap is expected to earn $2 a share next year, so it's trading at just six times forward earnings.
Does it pay a dividend?
No, but the company bought back 18.5% of its stock over the past year and a half. As long as the stock stays depressed, I think AerCap will continue to buy back stock.
What may unlock the value in the company?
It ultimately could get sold to a large financial-services company with low-cost funding. AerCap generates a spread of 5.5% annually after depreciation and interest expense on a very safe portfolio. There are not many places to get a $9 billion portfolio at that type of spread with a great management team."
More about Intel in which several of us own shares, I believe. I like this guy's positive comments about INTC, and I hope he is right about Intel's being able to enter (enter successfully) the mobile market and also maintain its dividend.
"What do you see in Intel that the market doesn't?
The stock is around $19.50 now, and it trades for 10 to 11 times next year's earnings. The consensus for 2013 is around $2 a share, but we are assuming projections come down to between $1.75 and $1.85 because the PC market is very tough. It has a dividend yield of more than 4%. We know that Intel [INTC] is cutting back production, and that process takes about six months, and is detrimental to margins while it's happening.
How bad is the situation?
The core PC-chip business is weak. Intel has low penetration in the mobile market, and, to top it off, CEO Paul Otellini announced that he is going to retire in six months. So why are we buying it instead of selling it? The answer is that Intel has transformed its business dramatically over the past five years from a manufacturing standpoint and taken out a lot of costs. Technology companies historically have not been disciplined manufacturers. Intel also has a technology lead over other semiconductor makers.
What's the key there?
Intel has developed a new three-dimensional chip design called Tri-Gate that allows Intel to develop chips with either more processing power or better battery life. The reason Intel missed the mobile market is that it was always focused on speed, not battery life. As the world went mobile, battery life became more important. Intel has addressed that now. In addition, Intel is the dominant company in making chips for servers, which are very profitable.
So you think Intel will crack the mobile market?
Intel should pick up share in the mobile markets where it has none. People are concerned about Intel losing share in PCs, despite the fact that its main competitor, Advanced Micro Devices, is pulling back. Intel should pick up meaningful market share in phones and tablets over time, and if that happens, it should offset what occurs in PCs.
Do you think the dividend is safe?
It's very safe. If anything, Intel is going to keep on raising it, although probably not in the next few months. Intel spends an enormous amount each year on capital expenditures. It could easily cut back on a few billion dollars worth of capex, and generate a lot of extra free cash. Intel controls its own fate. As long as Intel keeps its technology lead, it's going to be hard for anyone to keep up."
Also, fwiw, Hormel (HML) and JPM were also discussed by Mr. Margolies. (I have no shares of these.) |
