Blue Moat

I thought I’d let you know why the posts have dwindled. It’s because I’ve moved about 200 Km, started a new job, and began my first structured education in finance. I’m laughing at some of the material in the table of contents, while excited to put my finger on some more knowledge I can learn.

After I finish this education, I’m going to take a page from Alan Greenspan …and attempt to sell research. First, I’m going to write reports for free, and judge the response. I figure, I’ll do this for 3 or 4 stocks and see how it goes. I think this will allow me to illustrate my palette of quantitative and qualitative analytic tools I bear, yet have never put forth an effort to utilize nor collectively organize.

HEK is up first. Stay tuned.

Heckmann Corp (HEK) owns a 48% stake in China Bottles. China Bottles recently submitted to the SEC that they had “comprehensive income” of $8.8M and $7.7M in net income, on $38.3M in revenue, for the first 6 months of this year.  China Bottles is aiming to double capacity by 2010. This is due to their estimates that the PET packaging industry will have a 9% CAGR between now, and 2015…this being the first among many other reasons’.

Everybody should check out the new amendment to the S-4 filed by Heckmann corp, as well as the 10-Q.

In case you haven’t found it yet, http://www.heckmanncorp.com is the official website.

Terex (TEX) sells cranes, among other things.  This is a play on urbanization.  You’ve heard the word before.  It’s this generations form of the baby boom, sortof.  People all over the planet are moving towards cities.  It started when condos started sky-rocketting a decade ago, or so.  They also sell equipment for mining, forestry, roads, and recycling.

They just announced earnings tonight, and beat by a mile.  They re-iterated sales targets but warned margins would be hurt from rising steel costs.  They said they were going higher with their own prices to reflect this problem.

A $5B company, which after the release of this quarter earlier this evening, has trailing eps of $7.03.  The company is growing, I can assure you.  Based solely on everything I’ve said, what is the stock worth?  Give it a PE of 10, it’d be a bargain at $70.  Or, by discounting cash flows, it’s easy to make a case for a $90 stock.  But no, this one could have been purchased all day long today, at $50.  I’m looking forward to tomorrow.

I’m long, from $44, and I bought more today, then again in the after hours.

I just wanted to share my analysis on Gardner Denver, before the earnings release. It’s a stock I recently picked up, to add fluid transfer exposure to my portfolio.

Trailing 12 months eps = $3.60, current stock price is $56.60. Analyst Estimates for this quarter says $0.92 - $0.94 - $1.03. Next quarter, it’s $0.90, and for the year, it’s $3.81 per share, next year it’s $4.21.

Conservatively speaking:

Growth at 9% for the next 5 years, and only 3.5% after, discounting cash flows at 12% means the stock is worth $54.87, today.

Speaking more bullishly:

growth at 10% for next 5 years, 5% after that, discounting cash flows at 12% means the stock is worth $66.41.

Now, I have my own year by year analysis on what I think will happen to the sector they operate in, and taking the present value of the next 32 years worth of earnings, discounted at my own MARR which is 18%, the stock is worth $53.21 today.

There has been allot of pumping, and upping of estimates in the last 3 months, so I would expect traders to want to take profit on any reason to sell. However, by my DCF analysis, the downside if they hit the number, is non-existent - so long as the company is firing on all cylinders.

Long GDI.

Earlier this week Canadian solar increased the mid-range of their revenue guidance by 13%.  Then, that same evening, they announce they were diluting shares by offering 3.5 Million new ones at $34 each.  A significant dilution.  The shares surged, then have since pulled back - appropriately.

But take a look at this, the last four quarters earnings are, according to yahoo finance, in order:

$-0.11 $0.02 $0.20 $0.61

Analysts estimates for the 2nd and 3rd quarter of this year are:

$0.45 $0.55

CY estimates of $2.18 and next year’s estimates are $3.52

Well, talking pre-dilution, and considering the raised guidance they should at least meet the previous estimates (made before the raised guidance)…this is going to mean, within the next four months, the ttm eps are going to go from $0.72 to (hopefully) at least $1.81.  More than cutting the PE ratio in half, if the stock stayed flat.

After the dilution that $1.81 figure falls to $1.61. The current PE is about 50.  Even if the multiplier fell to 25, it’s still a $40 stock looking at the ttm, four months could bring.  Obviously, provided they have a good four months and maintain the positive outlook.  My point isn’t really that the PE could be halved, and share holders still win, it’s that within the next two quarters this stock is going to start showing up on allot of stock screens.  I mean, replacing that $-0.11 with a $0.45 quarter, will get this stock noticed.

I would also like to comment on the pull-back due to dilution.  At the time of writing the stock was at $31.70, and before the announcement, the stock closed at $38.20.

At $38.20 CY EPS estimates are $2.18 and next year analysts see $3.52.  After the math from the dilution, CY EPS estimates become $1.93, and $3.12.  That means this recent drop of $6.50, meant the ttm PE of 53 has fallen to 49.7, the CY PE has fallen from 17.5 to 16.4, and FPE from 10.9 to 10.2.  Clearly, either the street over-reacted to the upped revenue guidance in the first place, OR, the street over-reacted to the dilution and the shares are both price point cheaper AS WELL AS fundamentally cheaper.  I should also add, the company is fiscally stronger after a dilution too.

Bottom line, the stock pulled back 17%, but should have only pulled back 11.3%, assuming it was fairly valued at $38.20.

Update: practically as I was writing this, some other news was hitting the wires.

Disclosure: I wrote $35 puts for July, and will likely be assigned the long underlying position tomorrow.

Johnson controls released a press release yesterday discussing the details about a new win they had for some water chillers in Bahrain. Now, normally Johnson Controls would never cross your mind as a ‘water play’, but in the press release they said:

“We see this [the Bahrain order] as the beginning of a new trend of using seawater as cooling water for large district cooling plants in the Middle East region. Johnson Controls has the best suitable equipment for such application, we expect to gain a leading position in this potentially fast growing market segment,”

Let me tell you, by my research into the world’s water problems - they are right, this will be a growing sector. And, according to them, they have a technological lead because their chillers are already made of titanium, where most of the competition’s isn’t. In the same press release:

• The use of titanium tubes permits the use of sea water for heat rejection. Other chillers using sweet water cooling towers for heat rejection could have consumed up to 1300 gallons per minute of sweet water to make up for evaporation from the cooling towers.
• Titanium is highly resistant to both erosion and corrosion. This facilitates the use of internally enhanced high performance tubes and permits water to be circulated at high velocities through the tubes resulting in greater heat transfer and higher operating efficiencies

Even as the shares slide, in a market like, this I am continually impressed by the leadership at Johnson Controls. They announce earnings tomorrow. I’m confident in the long term, but a little worried about this current quarter’s results. I think a miss and re-iterate guidance is priced in. The market currently expects the worst. If they hit the eps targets, and maintain guidance, and cash-flow doesn’t become more of a problem, the stock should pop up 5% or 6% on that. A beat and a raise would send it flying, more than normal, but a miss and the stock shouldn’t fall too hard. I’d hold through any dip, and buy more trying to pick a bottom.

At the time of writing, JCI was trading at $28.40.

By the way, I went to the RIMM shareholder meeting last night. That was fun, I was pretty impressed by the new Bold and everything I heard.

Long JCI & RIMM

The slide show Richard Heckmann et. al, has made to encourage investors to buy shares in his SPAC shows a CAGR of 17.5% for the market of Chinese bottled water drinkers.

Here is the data (at least I believe) he referenced. Just wanted to share.

Long HEK

T. Boone Pickens and I seem to be on the same page. Especially when it comes to water. But also, wind, natural gas, and deep sea drillers.

I tore down PHO, for a good reason, only to find Boone Pickens pop up on the cover of Business week, touting his plan to help Texans with water.

I got long UNG only to then see Boone on Paul Kedrosky’s blog weeks later. Although I sold UNG at $62.30, but am buying the dips now.

Then, I started buying Vestas, and searched through FAN, only to today see this, today:

And if all this wasn’t enough, I bought RIG, then it turned out it was his top holding.

Long Boone, Vestas, RIG, FAN, Kedrosky and Boone…buying UNG soon, maybe even today.

If you think that Beijing will be the last major city, where water scarcity becomes the largest economic and political force, you are horribly mistaken.  Beijing is actually going to start to move, and shut down facilities, as they are going to run out of water in the next 5 to 10 years.    Beijing is actually tapping into emergency water reserves, right now.  That’s really scary when you think about it. Especially, to a Canadian who can’t fathom their job being relocated, having to boil any water they consume, or having family members die, all due to the lack of water.  Wake up Canadian philanthropists & investors! This is going to become our problem, whether we like it or not.  Proof it will, can be found between the lines of this piece dated April 2008, in the Toronto Star. It summarizes the deliberations of the United Nation’s Water Plan. It’s one of the first signs political tension over water is hitting home, and makes Canada look like an informed capitalist.  For once, I’m proud of our government.

Long Canada, and a bunch of water companies.

This blog’s popularity pretty much started on the back of my Sandvine coverage, so I have to give my thoughts, even if I am trying to turn the blog’s focus to water stocks.  They announce earnings tomorrow, and I have no idea how the market would treat another poor quarter, however I’m optimistic management was buying back shares at an opportune time. Even though I don’t support management’s decision to do so. I doubled up on Sandvine at $1.20, after I attended the share holder meeting in May. Between the market’s sour mood right now, people’s low expectations of anything positive from Sandvine, Roger’s new bandwidth policy implementations, the lift the shares have seen over the last week, the upgrades from analysts, I’m leaning towards optimistic results in price action tomorrow, for this lottery ticket small cap stock.

Long Sandvine.