PSB Monthly Issue March 2012
March 2012
THIS COOLING COMPANY
Staying cool in the summer heat is something I don’t take for granted.
Ice cold air conditioning is an essential part of life in the brutally hot desert summers here in Arizona.
Whether it’s at home, work, or the car, the cool artificial breeze keeps life tolerable when temperatures soar into the triple digits. I couldn’t imagine life without it…
But air conditioning and heat management systems do a lot more than keep people cool.
In fact, managing heat is essential for just about everything that can be powered up or turned on today.
Think about it, everyday things like your computer and refrigerator have systems in place so they don’t overheat and breakdown.
And, of course, cooling systems are an important part in cars, trucks, buses, and tractors.
Keeping a gas or diesel powered engine from overheating is no small undertaking. Especially now that manufacturers are being forced to meet more restrictive fuel efficiency and emissions standards.
You see, increasing the fuel economy of a vehicle entails massive changes.
Manufacturers will be improving aerodynamics, reducing vehicle weight, and using new technologies like electric or hybrid engines. Additionally, more stringent emissions standards mean engines will run hotter.
Those changes also mean cooling systems must change. They have to be redesigned and made out of new materials in order to meet the new requirements. And in some cases, entirely new systems need to be developed.
Best of all, the auto part manufacturers that help the likes of Ford (F), General Motors (GM), Caterpillar (CAT), and John Deere (DE) meet those requirements will be handsomely rewarded.
Clearly, there’s a lot of money for the business with the ability to develop new and innovative products.
What’s more, the rapidly improving economy is already driving increased demand for commercial vehicles. As demand for agriculture and construction equipment accelerates, it will drive more sales to the little companies who supply the big manufacturers with the parts they need to make their cars, trucks, and tractors.
One undervalued auto part manufacturing company we’re very excited about is Modine Manufacturing (NYSE: MOD).
Name: Modine Manufacturing Ticker Symbol: MOD Market Cap: $424 million Recent Price: $9.08 PSB Rating System 4.8 Stars Raging Revenue: (4.8 stars) Fiscal 2012 revenues are expected to jump 8% to 10%. And the outlook for 2013 is 18% growth. Beautiful Books: (4.9 stars) Earnings are expected to soar between 50% to 100% in fiscal 2013. And the balance sheet is solid with more than $27 million in cash. Stellar Structure: (4.9 stars) Insiders own more than 17%. And 75% of all shares are held by institutions and mutual funds. Big money investors are clearly confident in the company’s future. Valuation Verification: (4.8 stars) The 3rd quarter earnings miss and lower guidance for fiscal 2012 slashed the valuation. The stock is now extremely undervalued. Based on our valuation analysis, we think the stock is worth at least $20.00 a share. That’s upside potential of 120%. Meaningful Milestones: (4.7 stars) The company recently reported they’ve successfully launched the production on several new products in the US and Asia. |
THE HEATING AND COOLING BUSINESS
MOD makes products that are designed to cool or regulate heat. They’re used in light, medium, and heavy-duty vehicles, heating, ventilation and air conditioning equipment, off-highway and industrial equipment, refrigeration systems, and fuel cells.
The company employs approximately 6,800 people at 27 facilities worldwide in 14 countries. And they’ve been in business since 1916.
More than anything, Modine’s ability to innovate is what sets them apart. It’s in their company’s culture. And that’s an invaluable asset in today’s fast paced vehicle business.
Their proven track record of success has allowed them to land lucrative contracts with the likes of Ford, General Motors, Caterpillar, and John Deere, just to name a few.
At this moment, their portfolio of products has them well positioned to take advantage of the growing business of meeting the higher emissions and fuel economy standards.
And management is focused on profitable growth and improving return on capital. That’s music to my ears…
The company has transformed itself over the last few years. They’ve come out the other side as a better company for the struggles they endured. Now they’re set to soar as economic conditions improve.
Let’s take a closer at the company’s financials.
THE NUMBERS
MOD’s fiscal year 2012 comes to an end this month. Unfortunately, they’re not quite living up to expectations. But that’s great news for us!
Let me explain…
MOD returned to profitability last year. And they were expecting even bigger things this year. They gave guidance of 12% to 16% annual sales growth and earnings per share of $0.95 to $1.05. A solid year to be sure…
But weakness in Europe and Asia derailed those plans. The ongoing sovereign debt crisis and high inflation in China hurt economic growth and demand for MOD’s products in those regions.
Additionally, the European crisis spurred some erratic currency fluctuations that delivered an $8 million loss on foreign currency exchanges in the first nine months of the year.
After a disappointing third quarter that ended in December, Modine slashed their forecast. They’re now calling for just 8% to 10% sales growth and earnings per share of $0.70 to $0.75.
That’s well below their previous guidance and analysts’ earnings estimates of $0.91. And missing estimates is never good!
But don’t worry…
MOD will still deliver solid revenue growth, margin improvement, and significant earnings growth this year. And now that the bar has been lowered, there’s a great chance MOD will be able to deliver an upside earnings surprise.
And it’s expected to be even better next year.
Revenue is expected to increase 18% to $1.9 billion. And earnings per share could double from $0.75 to $1.50 per share. That’s stunning growth any way you slice it.
Better yet, the balance sheet is rock solid.
MOD has $27 million in cash and $165 million in debt. And more importantly, they have a current ratio of 1.5. So they should have no trouble meeting short term liquidity needs.
INVESTMENT RISKS
As with any investment, Modine has a few risks.
As a manufacturing company, MOD’s sales would be negatively impacted by a slowdown in the world economy.
Another risk comes from the challenges of bringing their newly designed products into production.
Finally, they could be hurt by a shortage of components or materials they receive from their suppliers.
POTENTIAL RETURN OF 120% OR MORE
MOD is significantly mis-valued by the market.
Right now, MOD is trading at only 7.7x projected earnings. That’s a huge discount to the industry average PE of 24.8x.
If MOD were to trade up to the industry average PE, it could surge 322%!
What’s more, MOD is trading at a huge discount to their projected growth rate with a PEG ratio of just 0.21. Any way you slice it, MOD looks like it’s undervalued.
Based on our analysis, we see the stock trading up to at least $20.00. Grab your shares of MOD now for potential gains of 120%!
ACTION RECOMMENDATION
BUY Modine Manufacturing (NYSE: MOD) up to $10.00 per share.
Recent price is $9.08.
Use a stop-loss of $6.50 on this position.
Don’t forget your position sizing and stop-loss rules.
Oil prices are surging…
Just a few months ago, the price for a barrel of West Texas Intermediate Crude Oil (WTIC) hit a low of $76.25. But since then, the price of oil has been on a way train higher.
Last week WTIC came within pennies of reaching $110 per barrel. That’s an incredible 44% jump in oil prices in a few months.
What’s behind the recent surge?
As you might guess, it’s the improving economy and rising tensions in the Middle East.
First off, a series of stronger than expected US economic reports are fueling optimism about the world’s largest economy. As economic growth surges, more oil will be needed to fuel the increase in activity.
Additionally, Western nations are heaping economic sanctions on Iran over their nuclear program. In turn, Iran is threatening to shut the Strait of Hormuz.
Get this…
Nearly a fifth of the world’s oil passes through the Strait of Hormuz. So a disruption to the oil supply at this strategic point would have a dramatic impact on global oil supplies.
That’s right, the mere expectation of rising demand and the potential of a supply disruption have spurred oil prices higher.
Here’s the thing…
The US economy appears to be well down the road to recovery. And the Iranians don’t look like they’re going to give up their nuclear ambitions anytime soon.
As long as those conditions persist, there’s only one possible outcome… oil prices are going higher.
That’s great news for independent oil and gas companies. More specifically, I think it’s a boon for US onshore oil companies.
They get all of the upside from higher oil prices without the risk of production disruptions the companies working offshore or in foreign countries face.
With that said, no place in the US holds more promise for oil and gas exploration than the Williston Basin. Located in eastern Montana, western North and South Dakota, and southern Canada, it’s home to Bakken formation.
The Bakken is a 200,000 square mile shale rock formation deep underground. And here’s the key… it’s estimated to hold around four billion barrels of oil.
The only problem is the oil’s trapped in the rock. And until recently, it was impossible to get the oil out of the ground economically.
Now, thanks to new technology called Fracking, oil can now be recovered from the Bakken and other shale formations. It works by pumping high pressure water down the well and breaking up the shale formation so the oil can flow up and out.
One small oil and gas exploration company taking full advantage of the booming Bakken is Triangle Petroleum (AMEX: TPLM).
Let’s take a closer look…
Name: Triangle Petroleum Ticker Symbol: TPLM Market Cap: $319 million Recent Price: $7.17 PSB Rating System 5.0 Stars Raging Revenue: (5.0 stars) Revenues grew at a mindboggling rate of 3,347% over the last year. And they’re expected to continue growing at 35% over the next five years. Beautiful Books: (5.0 stars) $94 million in cash and no debt gives them a perfect mark in my book. No doubt about it, this is a well run company on the verge of a breakout. Stellar Structure: (5.0 stars) Insiders own about 6% of shares outstanding. But institutional ownership at an impressive 61% indicates the smart money likes the shares. Valuation Verification: (5.0 stars) TPLM is trading at a huge discount to other Bakken oil and gas companies with more developed acreage. Based on our valuation analysis, we think the stock is worth at least $21 a share. That’s upside potential of 193%. Meaningful Milestones: (5.0 stars) The company’s drilling like crazy. They’re ramping up production at an astounding rate. And they’re capitalizing on the lack of pressure pumpers in the area with the creation of the majority owned subsidiary RockPile Energy Services LLC. |
THE INDEPENDENT OIL & GAS BUSINESS
Triangle Petroleum acquires, explores, and develops unconventional shale oil resources in the Bakken Shale and Three Forks formations in the Williston Basin of North Dakota and Montana.
Simply put, TPLM is a growth story. The company was founded in 2006. And it’s been growing like gangbusters ever since.
They currently have about 83,500 acres of land in the Bakken where they drill for oil. They’re currently operating in about 52% of the area.
Last quarter they produced an average of 450 barrels of oil equivalent per day (BOE/D). As of December 8, 2011, they had increased production to 800 BOE/D. And they have plans to reach 3,200 BOE/D by the end of the year.
That’s some serious growth…
In order to meet those goals, they have 1-rig program fully funded through 2012. And they’ve devised a Multi-well pad design. This design works great in the Bakken and cuts down on the cost of drilling and fracking the wells.
But that’s just the tip of the iceberg…
TPLM is also getting into the fracking business. They’re the majority owner of RockPile Energy Services, LLC. This subsidiary will focus on providing pressure pumping services essential to frack the Bakken.
You see, at the current rate of well drilling in the area, there’s a shortage of the pressure pumping services. It’s an $8 to $10 billion market TPLM is just starting to tap into.
Simply stated, the upside for Triangle is huge.
And it’s possible because they have a great team. They have an experienced management team and a technical team that knows how to get oil out of shale rocks.
I can’t stress this enough… TPLM is just getting started. Now, let’s take a look at the company’s financials…
THE NUMBERS
TPLM is a growth juggernaut.
In their most recent quarter, TPLM had revenue of $3,462,471. A year ago, they had revenue of $100,444. That’s a year over year increase of 3,347%!
That’s jaw dropping growth…
And that’s when they were producing 450 BOE/D when oil prices were under $90 per barrel. Now they’re producing 800 BOE/D and oil prices are over $100.
That’s a combination for explosive growth.
As a result, this fast growing oil company’s expected to take a giant leap forward in the next 12 months… That’s right. TPLM’s expected to start making a profit.
And they’re expected to continue growing earnings at an average of 35% per year over the next five years.
One more thing, the balance sheet is rock solid. They have $94 million in cash and no debt. No question about it, TPLM’s in sound financial shape.
Now, let’s look at some risks…
INVESTMENT RISKS
One concern is that oil and natural gas prices are volatile. If the price of oil and gas fall, it would hurt sales and profitability.
Another risk to their long term profitability is cost management. If costs unexpectedly rise, TPLM might not be able to become profitable.
Lastly, a substantial portion of their land has limited drilling and production history. This makes their business riskier than drilling in more established formations.
POTENTIAL RETURNS OF 193%
As you can see, there’s a lot to like about TPLM. The company’s growing like crazy and they’re on the verge of making a huge leap forward in profitability.
But we haven’t even gotten to the most compelling reason to buy TPLM yet… their valuation.
You see, an ordinary valuation using their PE or cash flow just doesn’t cut it. We need to dig a little deeper. TPLM’s real value comes from the land.
Right now the total economic value per acre (TEV/acre) of their 83,500 acres in the Bakken is $2,998. But other companies in the Bakken with more established properties are valued at $8,000 and $12,000 per acre.
That’s a huge discount… And it gives TPLM the potential to triple in vale from its current levels.
Based on our analysis, we can see the stock trading up to at least $21.00 per share. Grab your shares of TPLM now for a potential gain of 193%.
ACTION RECOMMENDATION
BUY Triangle Petroleum (AMEX: TPLM) up to $8.30 per share.
Recent price is $7.17.
Use a stop-loss of $3.50 on this position.
Don’t forget your position sizing and stop-loss rules.
Overall, our penny stocks had a great earnings season. All of our open positions are looking good. I’ll update a few of the positions in more detail in the monthly update.
CALD, KKD, WWWW, CFI, and MNTX all hit fresh highs in the last few weeks.
For now, we’re waiting for stocks to work through a technical resisitance zone. But once we clear this hurdle, our stock should be off to races once again.
- Move Callidus Software (CALD) from a buy to a hold.
Category: PSB Monthly Issues
