Monday, May 20, 2013

Is this Warren Buffet's next acquisition target?

It has been 3 months since Warren Buffet has bought Heinz, Inc. In looking for other potential buyout targets for Buffet in the future, I came across Campbell Soup, which is a stable consumer name with a solid dividend. This along with a market cap at $15 Billion is right in the sweet spot for Buffet to potentially make a buyout in the future. Then again, the stock has run 25% since the Heinz acquisition, and 36% this year. Is the stock still a good value play today? Let's look at the internals..

Campbell Soup is a manufacturer and marketer of branded convenience food products. The Company operates in five segments: U.S. Simple Meals; Global Baking and Snacking; International Simple Meals and Beverages; U.S. Beverages; and North America food service.

They just announced their quarterly earnings report with an EPS of .62 vs estimates of .56, revenue also beat $2.09B v $2.04B. They are boosting their forecast range and see FY sales at the upper end of the 10-12% range. They also see FY EPS $2.58-$2.62 vs $2.51-$2.57. Their acquisition of Bolthouse added 11% to revenue; US Simple Meals sales rose 11%, earnings increased 30%. US soup sales rose 14% year-over-year, condensed soup rose 11% year over year, and Global baking an snacking sales were up 5% year over year. The only component that fell was US beverages, down 5% year over year, which hurt earnings 27%. Their Bolthouse acquisition looks to add $750M in sales to FY 2013 revenue. I will be listening in on the conference call at 10:00 AM EST to see if there is any more clarification going forward. 

My current target price is $44.12, 7.3% below the closing price from Friday. Though the target price is below the market price, I would rate it as a buy, especially seeing that it is still a potential buyout target, and with a 2.5% yield, it still proves to be a good long term investment.  As of 9:00 AM, it is up 3% in the pre-market to $49.00

Follow me on Twitter @Peter_Eller10 as well as our school investment funds @Bonasimm and @Simmenergyfund

Friday, May 17, 2013

Why Teva Pharmaceuticals is a good buy

After looking through the financial statements, I have concluded that generic pharmaceutical drug maker Teva, Inc. is trading at a discount right now, and looks to go higher. I will state my rationale, then show you the DCF model.

Teva, Inc. is a global pharmaceutical and drug company that develop generic drugs in all treatment categories. Their global operations are conducted from North America to Latin America to Europe and Asia; they are headquartered in Israel. They have operations in over 60 countries including 40 dosage pharmaceutical manufacturing sites in 19 countries, 28 research and development centers and 21 active pharmaceutical ingredient manufacturing sites. Their most recent major acquisition was Cephalon, Inc in the Fall of 2011.

In their conference call two weeks ago discussing their Q1 2013 earnings, they mentioned that their generics business performed in line with expectations, particularly strong in Eastern and Western Europe. Sales of their most widely sold drug, Copaxone were up 17% year over year and continued to lead the US and global Relapse Remitting Multiple Sclerosis (RRMS) market in sales. Revenue for their other CNS drug, Azilect gained 29% year over year and continues to experience strong prescription growth.
Their Oncology business was up 13% year over year with new plans to launch tbo-filgrastim in the fourth quarter of this year.

They reported revenue 4% lover year over year, mainly due to the anticipation of Provigil going off patent in Q2 2012, along with costs in creating generics for Zyprexa and Lipitor. These expenses were offset by strong generic sales in Europe. Their OTC business this quarter brought in 306 million in revenue, up 56% year over year. They expect US generic business to materially improve in the second half of the year with launches of new generic products in parallel with solid performance of their European generic business increasing revenue by 11% year over year to 873 million.

Looking ahead, they plan to make $5.02 a share this year, which would mean they are trading at a very low P/E of around 8.00 compared to their peers (Mylan 20.8, Jazz 13, Perrigo 26.2). Revenue is expected to say right about the same as last year at $20.2 Billion.

With our population aging, more people in the US and around the world will demand prescription medication, and what better place to invest in than generic drug manufacturers, that reap the benefits after the big pharma names go off patent? Plus, they boast a 2.8% dividend yield, higher than their main competitors (Mylan no dividend, Perrigo .3%). Their shares are currently trading at around $40.00, just $1.50 off of their 2008 low, but went down further after the financial crisis to hit an at that time 4 year low of $35.46. Their all-time high occurred in March of 2010 when they hit $64.54.  

My price target on the stock is $46.89, and I think it is a definite buy for the aging population we will be experiencing in the coming years.

Follow on Twitter @Peter_Eller10 as well as our school investment funds @bonasimm + @simmenergyfund

Monday, May 13, 2013

Should you trust the refiners going forward?

I have done a Discounted Cash Flow (DCF) analysis on one of the larger oil refiners in the US HollyFrontier (HFC). They have benefited the past year and half due to the wide Brent/WTI spread and Crack spread. The Brent/WTI spread is the difference in price between WTI crude oil, the US benchmark and Brent crude oil, the European/global benchmark. What we have seen recently is weakening demand for Brent and steady demand for WTI. With more technology, we are able to draw more supply out of Cushing, OK and push the price of WTI up, despite the EIA showing our current WTI supply near 20 year highs. It seems as though the US is trudging along, and Europe continues to remain weak.

The crack spread is the difference between the price of crude oil and its petroleum products; basically it is what an oil refiner's profit margin will be after breaking apart the oil. The most widely used crack spread is the 3:2:1 (3 barrels of oil, 2 barrels of gasoline, 1 barrel of heating oil).

Within the past two months, we have seen the Brent/WTI spread go from $20.00 to currently $7.88, as well as the crack spread go from $44.00 to $24.78.

Looking longer term at the Brent/WTI spread, it has kept between 0-$10 while the crack spread remains elevated, but looks to break lower.

Below is the DCF model I have worked out:

Even though I have a price 25% above today's current market price, I believe that the days of the wide Brent/WTI and Crack spread are just about over, and their profit margins going forward will substantially be hurt. The refiners have run up over 100% in a one year period due to these spreads widening, but I believe their current market price has not put in the fact that the spreads have fallen this far this fast. HFC is down 17% since the beginning of March, it's all time high; at the same time, the Brent/WTI spread was also at its widest point ever. I would advise not to get stuck in this trap, and not buy the stock, or if you own, take profits.