Sunday, March 28, 2010

BAGAKOAA; March 28, 2010 Water Works if you do your homework


March 28, 2010 Water Works if you do your homework

Well, I spent some time looking at the 30 or so stocks. If you want to play along, I opened the subscription level of Morningstar, FINVIZ, Ycharts, and Edgar and began plugging each symbol in and seeing which had value, which had or was trying to improve Shareholder’s Yield, and then did my best to confirm using SEC data on Edgar online. I will not bore you to death with all thirty, but will tell you the worst first and then the best and do my best to explain why.

The worst first.

None of the 30 were pitiful. Surprisingly, the segment seems to be sound even though they might be regional dependence upon municipalities needing clean water. It’s like you can’t live without the stuff or something. Oh yeah they do even if they are bankrupt. (It reminds of the day when I would try and get a marginal casino a line of credit to buy wire and cable. I learned very quickly not to get industrial trade references; I always gave home office, food and beverage payees. They always pay those first. But I digress)

MWA Mueller Water Products, servicing the US and Canada is probably the weakest of the herd, but could benefit from the stimulus packages mentioned in the post from last night. They have a forward looking PE of 17+, a 1.5% yield which is nothing to excited about, it is small with a market cap (outstanding share times current price of those shares) of 732 million which makes them small enough to be a possible target by IT&T. Real Money and Motley are pimping this stock as cheap, but I can see values between 2 and 7 for this 4.50 cent stock. That again might make it a TO target for IT&T. I would not buy this stock unless you got the “rumor” they were a TO target or if you delved into the sec reporting to match stimulus monies with their operational locations.

Purcycle is a mico stock with a market cap of 50 million. Its regional focus is strictly Colorado. Typically this is not the type of company IT&T would acquire, but they could do it with lunch money. I can’t describe it any better than their Jan Sec filing, “Revenues for the three months ended November 30, 2009, decreased 7%, over the comparable period in 2008. This was mainly attributable to decreased water usage at our largest customer due to a reduction in funding experienced by the customer as a result of the economy, which resulted in the closing of certain dormitories resulting in reduced water usage. As a result of the decreased usage we reduced the use of our wells and this reduced our energy usage which resulted in cost savings which resulted in a 1% decrease in our overall gross margin.” If you think that the enough business in CO are going to recover (I am guessing mining or industrial), in the short run, this two dollar stock might be a fun play. Valuations are all in the two dollar range. Free cash flow is non existent and so is their income, a loss of 1 million in 2009. I don’t like it but come to your own conclusions.

OK one more of the weaker ones, VE, Veoila Environmental is a 16 billion dollar multi national based in France. Because VE is an ADR traded here in the states, some of the data is a little harder to get. The have a waste management segment as well as a water infrastructure. I would guess this to be to big to be acquired, unless they spun off the water sector, but the would be a poor strategic move on their part. UK and Euro currencies have played havoc with their financials in 09 along with the poor economy. If you read some of the analysts comments they have 150 years experience in urbanizational (cool I just made a Danerism) support. The bad news is they are not equipped from a technological or personnel stand point to compete in today’s market. In other words their competitive moat gets thinner and thinner. JP Morgan is one of the few that is downgrading the stock and the 4.87 dividend yield might be interesting, but from my reading there are better eggs to fry.

The Better Eggs

The 6 billion dollar MIL Milipore Corp looks the best, but Merck has already figured that out and is in negotiations for their acquisition. However if Merck wants to stay focused on Pharms and med equipment it might create an opportunity for IT&T to pick up some water resource divisions. I don’t know how to play that from an investment angle other than buying Merck and IT&T.

Calgon Carbon is a 1 billion (Market cap) maker of activated carbon systems. Their free cash flow is about 20 million which is not a lot for a billion dollar company, but it has been headed in the right direction for 4 quarters. They have eliminated their long term debt, increased their assets and increased their shareholder value over the last 5 quarters. Their Return on Equity (How management uses the resources at their disposal) is a respectable 14 %. The forward looking PE is 17 just barley above the S & P average. Deane Dray, one of the talking heads at CNBC had some nice things to say about CCC as well as PLL and DHR, all mentioned in the blog last night. I am liking this as a stock all by itself and a possible acquisition target, but it would be a big bite for IT & T. This would be a 1.2-1.5 billion dollar acquisition for IT&T. Perhaps another player (GE or BRK.A) They stopped paying a dividend in late 2005. Look for them to get back to it soon. Here is how I am going to play it. I am going in long on small amount add on the dips, and look for a may June call in the money. I’ll keep you informed. I ended up getting May 17.50 calls for 95 cents assuming my limit order happens in the morning.

Badger Meter BMI from the land of sky blue waters (I justed date myself) in Wisconsin is a nice looking play in the water field. Their market cap is just under 600 million which makes them a target but a sizable target for IT & T. They have had positive and strong free cash flow since 07 and their shareholder value is headed in the right direction. Their long term debt was zeroed out in 08. The have increased dividend since 2006 currently paying 12 cents a share which is about a 1.25% yield. Analysts are getting in the pool with this equity as 5 have initiated coverage on the stock in the last year. I am liking what I am seeing. Ned Davis research likes the stock while saying it is overbought, but has it as a buy. Schwab does not like it and gives it D. If my number are correct and a 2.11 earnings in 2011, based upon known business, this has the makings of a 60 dollar stock selling at 39 and change. I was going to play this with some August calls, but the 40.00 august calls at selling for 3.60 each which means you have to see 43.60 before you are in the money. It’s possible but a stretch. It goes on the watch list.

Dionex Corp in Sunnyvale CA DNEX is a 1.3 billion (Market cap) analytical equipment manufacturer with distribution all over the globe. Free cash flow is wobbly and sitting at about 10 million which is not debt. It has been 6 years since the company has had any long term debt. It is trading at 74 a share up quite a bit since Motley and Seeking Alpha did articles on the company as being an acquisition target in February. I can see a 90-95 dollar stock in ther and possible 100 with the right dance partner. I like their global diversification and emerging market exposure. I am going to play this by watching closely. Ya see we have a “Watch Closely” watch list.

The other 24 are middle of the roaders, some winner, some diamonds in the rough and if I find anything exciting I will let you. If you did not catch Friday’s Mad Money, it worth a download at iTunes. Cramer was in his Professor Cramer mode and gave some valuable insight into the critical need to keep continually educated on the market.

I’ll post later about the week ahead.

Salve Lucrum


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