Valmet Corp. is an Under-Appreciated Spin-off

Company Background: After a spin-off from Metso, Valmet Corporation (VALMT) was listed on the Helsinki stock exchange on January 2, 2014. The company is a global market leader, either number 1 or 2, in paper, pulp, and bioenergy manufacturing equipment. It is also the market leader in servicing all of the aforementioned equipment. The company has three segments, servicing (39% of sales), pulp & energy (35%), and paper (26%).

Investment Thesis: Sales and margins are improving and the market will eventually give the company credit for running a great business with a clean balance sheet. Price is held down by the selling dynamics impacting spin-offs, a 2013 hiccup in earnings, and negative perceptions of the paper industry. Cost cutting measures and increased sales should return earnings to previous levels, eventually leading to margin expansion.

Since 2006, the company has returned EBITA margins between 5.5% and 8%, and increased sales steadily to a peak of €3B in 2012. In 2013 sales fell by €392mm and margins fell to 2%. Paper and energy equipment sales fell short. Lower demand for newspapers drove slow paper equipment sales, and inexpensive natural gas led to fewer bioenergy equipment sales. It appears that these business lines bottomed out and are now rebounding, driven by emerging market growth. Tissue and cardboard equipment, which are also in the paper segment, remain stable growth products. The company is putting increased focus on the higher margin services business, and on much needed cost cutting. The services business had a 7.4% CAGR between 2010 and 2012. Services then grew from 34% of company sales in 2012, to 39% in 2013. More money can be made servicing the equipment than selling it. While the company has a 50% market share of installed equipment, it only has about a 14% market share in services, which is a highly fragmented space. I expect consistent high single digit growth in this space. Sales are improving. The order backlog increased from €1.9B in Q2 2013 to €2.4B in Q2 2014.

To increase margins the company is laying people off, standardizing products, and subcontracting work to low-cost countries. Close to 2,000 workers have been let go, including white-collar employees. The company has a €100mm cost savings plan that will be completed in 2014. 2013 margins were also depressed by a one time project delay in Brazil that cost the company €30mm in profit. Just these two events alone make up half the peak 2011 EBITDA of €265mm. Management has guided towards EBITA margins of 6-9% in 2015. In just the last three quarters EBITA margins have gone from -3.7% Q4 2013 to 3.7% in Q2 2014.

The company is making strides to restore margins and increase sales, but analysts have not priced in the recovery. Management is now incentivized with VALMT stock instead of Metso stock, so they will work hard to continue to produce results.

Valuation: At the current price of €8.20 per share, the company has an EV of ~€1.2B. This is approximately 6.7x 2015 EBITDA, hitting only the bottom end of analyst estimates. Assuming an 8.5x 2015 EV/EBITDA multiple, the median of VALMT’s Nordic peer companies, VALMT could be worth €10.50. 2015 Margins could come in realistically between 5.5% and 8%, and sales could grow between 3% and 10%, creating a valuation range of €9.50 to €15.50.

Team Health Will Not Catch The Obamacare Tailwind Investors Expect.

Team Health Holdings, Inc. Short Thesis

  • The shift from a pay-for-service to a pay-for-performance business model in the healthcare industry will decrease ER visits and hurt TMH’s business.
  • Bulls believe that Obama-care will reduce medical bad debt by improving the payer mix, but the affects will be partially offset by defaults from the middle class on high deductibles.
  • TMH price hikes and the lack of doctor patient relationships concerns many hospital executives and will slow company organic growth.
  • Having an Obama-care stock play was envogue in 2014 but will lose luster.

 

Business Description: Team Health Holdings, Inc. (TMH) outsources emergency room (ER) and other healthcare services. In addition, the company provides billing and collections. Because the volume of patients in the ER is constantly changing many hospitals use outsourcers like TMH for staffing needs. The hospital only needs to supply the facilities because TMH offers a turnkey solution. In 2013, 69% of sales were from ER services, 12% from Inpatient services, and 10% from anesthesiology. 84% of contracts are based on services rendered and are dependent on collections. Most other contracts are based on hourly rates. TMH is a rollup and has been buying up other outsourcers. It was taken public by Blackstone in 2009, and it has had 12% sales CAGR ever since. In February of 2013 Blackstone finished selling its shares.

Bull Story: TMH has become a popular play on Obama-care for three reasons. The increased number of insured through Obama-care could drive higher volumes in the ER. The newly insured are more likely to visit the ER. People without insurance usually skip preventative care and go straight to the ER when their problem is bad enough. The newly insured are accustomed to taking problems directly to the ER. Lastly, bulls are expecting better collections from patients. Since a larger percentage of patients will be insured under Obama-care there could be fewer defaults on medical debt.

The stock price has gone from $12 at IPO in 2009 to $56.18, up over 360%. 2Q 2014 EPS beat consensus estimates by over 15%, with EPS of $.61 versus consensus estimates of $.53. Last quarters positive performance is attributable to 8.6% less uninsured patients during the quarter. Sixteen analysts cover the company. Fourteen rate it a buy or strong buy, and two rate it a hold.

Why It Is A Short: TMH faces many obstacles that have been overlooked by bulls. There has been a structural change in the business environment that will reduce patient volumes, and disappoint investors who are expecting growth. The government and private insurers are now focused on patient outcomes, and not just paying hospitals for services performed. TMH’s business is not suited for the current business landscape because the new goal is to keep patients out of the ER. In addition, debt collections will be hurt by the recent FICO change, and by the growth of high deductible insurance plans. It is getting harder to win new contracts because the company has a poor reputation among hospital executives. Lastly, good acquisition targets are getting more expensive and harder to find. The company has been a roll-up for years and most of the low hanging fruit acquisitions are gone. The company is also facing increased competition for deals. Competitor Envision Healthcare raised $966mm in its August 2013 IPO.

The ER is the most expensive setting for care and will be the prime target of pay for performance initiatives aimed at reducing costs and improving patient outcomes. Government initiatives link hospital reimbursements to metrics based on adherence to certain care processes, scores on patient satisfaction surveys, and patient outcomes. Medicare advantage is one such plan that now makes up +25% of medicare plans provided. Private insurers are beginning to collaborate with hospitals. These insurers could potentially steer customers to specific hospitals that provide the best value to patients. This creates an incentive for hospitals to be efficient. Also, insurers use algorithms to track when patients are likely to go to the ER. Case managers can then call the patients to steer them towards preventative care. It is clear that all this will negatively impact TMH growth.

Because of the increased costs of insurance the number of high deductible plans is increasing. Large employers are projecting a 6.5% increase in health-care costs in 2015 and that is on top of a 7% increase in 2014. To share the burden with consumers, employers are offering high deductible plans. In a recent National Business Group on Health survey, 81% of corporations plan on offering a high deductible plan in 2015 and one-third of companies plan on only offering such plans. In addition, FICO recently made a methodology change to its credit score calculation that has not received much attention. The change will improve the credit score of the average person with late payments on medical debt by 25 points. These two factors will lead to more uncollectible accounts among low-income and even middle-income consumers.

Once a hospital decides to outsource its ER, the hospital becomes dependent on its outsourcing company. It is not easy to bring an entire ER room staff onboard at once. TMH has used this dependence to increase its prices. Hospital executives have become weary of outsourcing and TMH has earned a poor reputation. Robert McNamara, M.D., past president of AAEM, thinks that hospitals should have learned there lesson years ago when they started buying private practices and it didn’t work. “They saw drops in productivity and commitment because the doctors no longer had an ownership stake.” I predict that organic growth will slow down at TMH.

TMH trades at 16.3x ttm EV/EBITDA, which is nearly twice what an efficient hospitals multiple would be. The two multiples should be similar but with a small premium given to TMH for growth. The company will continue to grow, but I think that it will disappoint bulls expectations. The company is facing major headwinds that bulls are not factoring in. Public and private insurers are focused on bringing down the number of ER visits. The payer mix benefits that bulls are waiting for will also have negative impacts as people begin to default on deductibles. Lastly, organic growth is now harder because TMH has a poor reputation among hospital executives. I predict a 30% downside in the next 6-18 months

If You Build It, They Will Come

Quantum Fuel Systems Technologies Worldwide Inc. (QTWW) is a compressed natural gas (CNG) fuel tank and fuel system manufacturer. Its tanks and components are used in vehicles that are powered by CNG. The primary customers are OEMs and fleets of medium and light-duty trucks, which are classified as Type IV vehicles. Vehicles that use CNG as fuel realize a significant cost savings compared to standard gas vehicles. Company sales are predominately in the U.S., and also in Europe, Canada and Asia. The company also designs parts for electric vehicles and has a wind power subsidiary, Schneider Power.

The company’s stock price took a hit after the announcement of the Agility/Hexagon partnership, and after 2014 Q1 earnings came in below consensus. The stock price started to dip after the deal was announced on May 6, and then took a sharper plunge when earnings were released on May 14. The company had EPS of -$.16 in contrast to consensus estimates of -$.05.2 In addition management revised full year guidance downward. Since then, the price has moved up from ~$3 to ~$5 on announcements of securing new customers. The company secured Ryder, Peterbilt, Swift Transportation, Kwik-Trip, McNeilus, Dillon Transport, and others as customers.

To read full report click here: QTWW Report

Investment Results Over Last 12 Months Look Good!

I have recommended seventeen stock positions in the last year and I wanted to go over the results. It has been a successful twelve months, especially when factoring in that most of my blogs were written in the last six months. The average position has been in my portfolio for less than 5 months, with a total return on investment of 17.3%. Extrapolating these returns on a full 12 month basis would mean returns in excess of 40%. 11 recommendations have been short sales, and 6 have been longs. In my portfolio, I have never had more than 35% in short positions. It just turns out that over the last year the majority of the best investments that I found were shorts. In the last year my personal portfolio is up over 45%. I hope to keep the good ideas coming, and I will continue to post blogs. I have been thinking of closing several of my recommendations, and there are many more stocks that I have been monitoring to invest in.

To view full results click here: Investment Results

Parked in Cash but Will Keep Blogging Ideas.

I apologize that I have not updated the blog recently. The truth is that I am bearish right now, which is evident by recent sell posts. I do have a few long ideas that I will share soon, but right now is a good time to have money parked in cash. In addition to my job and blog, I have started writing company reports for SmallCapIR. I release reports periodically, and I will start including those on the blog as well under the category – Published Reports. These new reports will be a little bit longer 3-5 pages, and I will write them in weekend. I usually follow a stock a bit longer before blogging about it.

Updates are coming soon.

Methanex Corp. is a Market Leader with Potential to Unlock Value

The current stock price for Methanex Corporation (MEOH) provides a solid entry point for investors. Declining methanol prices, and a plant shutdown in Eygpt created a stock pullback from recent highs.  These problems are temporary and even in a bear case the company offers normalized 2015 FCF yields of ~9%. MEOH has the potential to unlock further value if methanol prices increase, if U.S. assets are converted to an MLP structure, if a natural gas feedstock contracts can be obtained in Chile, or if positive NPV projects are undertaken. I would wait until after the Q2 earnings release to buy-in as a negative surprise is more likely than a positive surprise.

To read full write-up click here: MEOH Write-up

Energous Corporation – Cool Technology, but Potential Market is Too Small

Energous Corporation (WATT) attracts speculative investors who are interested in the company’s upside potential. I do not believe it will materialize. Bulls do not understand the difficulties that WATT will face related to competition, regulatory approval, getting to market on time, and monetization of its technology. As WATT does not yet have any revenue, stock price movements will be driven by events related to the companies deteriorating future business prospects. There are numerous points in the future when investors could be let down. I expect mass selling when lockout periods end in September 2014 and March 2015.

To read the full write-up click here: WATT Write-up