May 12, 2016 - Current valuation implies price target is reasonable; 35% upside ... with Dish are at a standstill, Comca
Stealth Growth Insider 5/12/2016 The S&P 500 lost half its gains for the entire year yesterday, down 0.96% bringing its 2016 return down to 1.0% in 2016. It’s time for defense and one of the most consistent ways to find growth is through acquisitions. Two of the companies we found are in the midst of mergers and will likely see estimate increases simply by cutting costs, something management teams do well. The other is a counter cyclical play, a used equipment auctioneer, that is seeing its business increase despite economic pressure. Good hunting!
David Eller
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MKS Instruments (MKSI): Merger brings low risk cost synergies leading to EPS increases Cross selling opportunities should lead to additional upside in the future Current valuation implies price target is reasonable; 35% upside MKSI recently closed its cash acquisition of Newport Corp and analysts are beginning to publish estimates based on the combined company. Stifel analyst, Patrick Ho raised his PT to $49 from $43. From an integration standpoint, the key people have been chosen and when the combination occurs there is expected to be $5 million in cost savings in 2016 an another $25 in 2017. Newport had let each of its businesses manage their own operations rather than centralizing them under one roof which will change as they are all absorbed into MKS. Usually when this occurs, management is conservative with its goals leading to upside both when analysts update their models and again, after the financials are reported and the savings is greater than expected. Even though the analyst's price target increased, it was solely due to cost synergies. There are no revenue synergies in the model even though there are usually cross selling opportunities as the sales force account mix changes. Valuation is in line with the industry at 15x current year earnings and with the price targets based on 15x 2017 earnings, the increase is very realistic. Rovi Corp (ROVI): Rovi shares are under pressure for two reasons that should be resolved in the coming months. On an earnings basis the stock is cheap at less than 10x FY17 EPS. A cheap way to buy the stock would be to buy shares of TIVO and collect the deal premium. Rovi shares have been under pressure for two reasons that will be resolved in the coming months. The company reported solid earnings and guidance for 1Q. The weakness is due to concerns over patent renewals that trump the low valuation. There are three customers that are pressing Rovi's hand. Currently negotiations with Dish are at a standstill, Comcast has been sued for patent infringement and a third carrier, possibly Verizon, is out of license but talks are advanced far enough that a lawsuit does not seem necessary. PiperJaffray analyst, Mike Olson, believes that the AT&T settlement, at the end of last year, provides a precedent that makes the patents enforceable leading to a resolution within the next few months. Besides the patents, Rovi is in the process of acquiring Tivo for $10.70 per share, $2.75 in cash and the rest in stock. Because there is an 10% deal premium and the mix is stock as well as cash, arbs are buying Tivo and shorting Rovi. When the deal closes and this trade unwinds, one significant element of downward pressure will be removed. If you assume that the Tivo deal closes and that negotiations with the three large customers are resolved in a similar manner to AT&T, the stock would be free to trade toward the analyst's price target of $29. And this isn't even counting the cost Allassociated rights reserved To Subscribe to this Daily service click here. To Subscribe to SI Premium click here synergies withStreetInsider.com the deal.
Stealth Growth Insider
Ritchie Bros Auctioneers (RBA) RBA is in a countercyclical business that is benefiting from the purchase of used heavy machines The company is expanding its business into fee based financing which is accelerating profit growth The negative correlation to the economy and regular earnings beats makes this an interesting idea Ritchie Bros is an auctioneer for used equipment that in 2013, launched EquipmentOne, an online marketplace. This combination of having an online presence with 44 physical auction sites offers the company a competitive advantage not easily duplicated in a fragmented market. Heavy equipment used to be a local business but now 60% of auction GAP goes to buyers outside the selling region; RBA made it global. In the most recent quarter gross auction proceeds, revenue and EPS significantly beat expectations. Gross auction proceeds (GAP) totaled a first quarter record at $1.020B (+7%y/y). Auction revenue of $131.9M (+14% y/y) beat consensus of $119.7M and EPS of $0.27 (+23% y/y) also topped consensus of $0.21. As you can see, EPS is rising much faster than auction revenue. This is due to the expansion of financing, "Private Treaty Services" and technology services. The treaty service engages the company as a broker to sell specialized, high value items. The only downside is the valuation. After earnings, 2017 EPS increased to ~$1.40 leaving the stock trading at 23x out year earnings where it has been trading at 25x. There seems to be some upside left but major moves will require additional earnings increases, or an acquisition.
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