PSB Monthly Issue June 2012
June 2012
Basic materials have been slaughtered over the past few months… just absolutely crushed.
In total, the basic materials sector has lost 8.3% in 2012. What’s more, over the past 52 weeks, the sector has shed a total of 18.1%.
Clearly this sector has been out of favor with investors…
If you look closely at the reasons for the sector selloff, you’ll find the US Dollar is to blame for the recent losses.
While basic materials were down 18%, the US Dollar has been rising. In total, the greenback is up by over 13% as of the end of May.
And while the downward spiral looks threatening, we’re finding the sector more and more attractive. When looking at the charts of the materials sector, one thing’s clear… materials are oversold.
As this sector gets set to rebound from an oversold condition, we’re going to be ready to take advantage.
One stock poised to benefit from the recovery of the basic materials sector is Metalico(AMEX: MEA).
Name: Metalico Ticker Symbol: MEA Market Cap: $111 million Recent Price: $2.46 PSB Rating System 4.8 Stars Raging Revenue: (4.8 stars) Revenues are expected to grow 8.4% this year and 6.4% in 2013. But a turnaround in metals pricing could easily fuel growth beyond these conservative estimates. Beautiful Books: (4.5 stars) While debt to equity is high, it’s in line with the industry. In addition, their current ratio gives them enough cash to keep operations running. Stellar Structure: (5.0 stars) Insiders own a solid 14.8% stake in the company. More importantly, institutional ownership is a massive 50.7%. Clearly the pros like what they see here. Valuation Verification: (4.9 stars) After recently dropping to a 52-week low, MEA shares are a steal at just $2.46. Based on our valuation analysis, we think the stock is worth at least $5.10 per share. That’s upside potential of 100% or more. Meaningful Milestones: (4.9 stars) Metalico has made 20 acquisitions in the past 4 plus years. These new assets position MEA to capture more market share and provide cost savings through vertical integration. |
THE SCRAP METAL RECYCLING BUSINESS
Metalico is in the scrap metal recycling business.
They have three distinct divisions of recycling… platinum metals group (PMG) and minor metals, scrap metals recycling, and lead fabricating. Combining all of their subsidiaries, MEA has over 30 locations throughout the US.
Let’s take a closer look at each division…
Platinum Metals Group (PMG)
The PMG and minor metals division is run through six locations in Texas, Mississippi, and the NJ/PA area. The source of these metals comes primarily from truck and auto salvage yards. And with auto production slated to grow by over 15% into 2017, Metalico should have an ample supply of vehicles to recycle.
With the scarcity of mined Platinum and Palladium available to manufacturers, the demand for PMG is very high. For example, in 2010, over 2.9 million troy ounces of the 18.0 million ounce global supply came from the secondary market. That’s up from the 3 million troy ounces supplied from recycling in 2009.
Not to leave out the minor metals, MEA recycles high value metals such as Molybdenum, Tungsten, and Tantalum. These types of metals are a niche business, which Metalico has firmly planted themselves in. And demand for the metals comes not only from rising steel production, but also from the aerospace industry and innovations in the healthcare sector.
Scrap Metal Recycling (Ferrous & Non-Ferrous Metals)
With over 20 locations in the US, Metalico has a strong presence in the scrap metal recycling business. MEA recycles pretty much any metal you can find on a car, including steel, aluminum, and other non-ferrous metals. When you think of what’s being recycled here, think fenders, hoods, aluminum parts, motor blocks, and various other metal parts found on a vehicle.
This division is Metalico’s main source of revenue. Non-ferrous metals provide 24% of total revenues, while 36% comes from ferrous metals. And with over 74 million tons of iron and steel recycled in the US in 2010, there’s plenty of room for MEA to grab market share.
Lead Fabricating
Keeping auto recycling in mind, where else would MEA source their lead from? If you said car batteries, you’d be correct!
Metalico just happens to be the largest non-battery lead fabricator in the US. Some of the lead products made by MEA include sheet lead, shot, cast lead, and machined lead products. With just four lead product manufacturing sites in the US, this division is by far the company’s smallest division.
Still, lead fabrication provides roughly 10% of Metalico’s annual revenue… so it’s not to be overlooked.
Now that you know what MEA does, let’s take a closer at the company’s financials.
THE NUMBERS
MEA is performing well in a difficult industry…
Revenue in 2011 reached $660 million. That’s an increase of nearly 19% from 2010’s $553 million. On a quarterly basis, sales grew in the first quarter of 2012 by 25% to $164 million from $132 million in December last year.
In an industry with tight supply and high competition, that’s impressive growth!
What’s more, MEA’s earnings per share grew to $0.05 this past quarter from a loss of $0.06 in December 2011.
Here’s the best part…
Some metal prices have been trending lower as result in a slowdown in manufacturing. However, MEA has a number of different metals it sells and is strategically changing their product mix to increase overall revenue.
In addition to steady growth, the company’s balance sheet looks healthy.
Metalico currently has just over $5.5 million in cash on hand. After making over 20 acquisitions in the previous few years, MEA is holding debt of $139.6 million. In addition, debt grew in the past quarter as a result of borrowing to finance $26.5 million in receivables.
However, the company’s current ratio is 3.8x… so managing debt repayment won’t be an issue in the foreseeable future.
INVESTMENT RISKS
As with any investment, Metalico has a few risks.
While the entire basic materials sector has fallen, there’s no guarantee metals won’t continue to fall. And as a metals recycler, MEA relies heavily on the prices paid for metals.
Another risk is a continued tightness in the supply market. Even though Metalico has a number of internal feeder yards, the aging US vehicle fleet could keep pressure on supply.
Finally, any significant increase in metals recyclers coming to market could threaten Metalico’s market share.
POTENTIAL RETURN OF 100% OR MORE
MEA is trading at a serious discount right now. For starters, the price to book ratio on Metalico is just 0.6x. That means you can buy MEA for around 60% of what the company would be worth if you sold off the pieces.
The industry average price to book ratio is up near 2.0x… so relative to the industry, MEA is trading at a discount.
What’s more, Metalico’s forward P/E is just 5.6x. The industry average P/E is near 14.8x.
We think MEA deserves a valuation more in-line with the industry.
Based on our analysis, we see the stock trading up to at least $5.10. Grab your shares of MEA now for potential gains of 100% or more!
ACTION RECOMMENDATION
BUY Metalico (AMEX: MEA) up to $2.69 per share.
Recent price is $2.46.
Use a stop-loss of $2.00 on this position.
Don’t forget your position sizing and stop-loss rules.
For anyone following the solar industry, they know what’s going on… it’s been a bloodbath in solar stocks. The selloff has been so bad, many top industry names are down by 80% or more over the past year.
Unfortunately, much of the selloff has been warranted…
The industry transformation started with a crash in polysilicon prices. As raw material prices have come down, competition in the industry ramped up. In fact, a price war led to major price drops for finished solar products. And the big name players in the industry have seen margins slashed to nothing.
In many cases, products are being sold below production cost which has led to a US tariff on Chinese solar imports!
After claiming Chinese manufacturers were “dumping” products in the US market, theUS Commerce Department took a bold step and enacted a 31% tariff on Chinese solar exporters.
This caused a massive selloff in an already beat down industry… pushing solar stocks to new 52-week lows in the days that followed.
While well intentioned, the US Commerce Department has effectively caused a negative ripple effect on many levels.
First, access to cheap solar products in the US will be hampered. And that will have a negative effect on the burgeoning US solar market. Those hurt by this decision will be local US companies selling, upgrading, and installing these higher efficiency renewable energy products.
Second, the US has agitated its already delicate trade relationship with China.China immediately announced “displeasure” with the US regulators’ decision. They’re calling it trade protectionism and damaging to the entire clean energy sector. China may respond by placing tariffs on other important US exports as retaliation. That could hurt industries outside of clean energy.
Finally, the US only singled out Chinese exporters… not solar manufacturers from other countries. In essence, regulators may have done nothing for the price of solar as other exporters could step in and continue to provide cheap solar panels. One of the beneficiaries, for example, could be Taiwanese companies.
All of the bad press has dropped solar stocks off a cliff. We think the sell off is incredibly overdone… and a buying opportunity has presented itself.
To benefit from the actions by the US government, we’re looking for a large Chinese company that has sales all over the globe… not just in the US.
One company that fits the bill perfectly is JinkoSolar (NYSE: JKS).
Let’s take a closer look…
Name: JinkoSolar Ticker Symbol: JKS Market Cap: $90.3 million Recent Price: $4.04 PSB Rating System 4.6 Stars Raging Revenue: (4.6 stars) While set to drop this year, revenues are slated to grow into 2013 and beyond. Beautiful Books: (4.5 stars) $69 million in cash looks adequate to cover near term expenses. But their short-term debt of $401 million knocks them down a peg. Stellar Structure: (4.5 stars) Over 45 institutions currently hold shares of JKS. Ownership is up at 12.7%, or 2.8 million shares. Valuation Verification: (4.9 stars) JKS is trading at a huge discount. The mass investor exodus has left solar stocks oversold. Based on our valuation analysis, we think the stock is worth at least $9.70 a share. That’s upside potential of 140%. Meaningful Milestones: (4.7 stars) The company has been selected by the Chinese government to provide 50MW for their GSHHSD Solar Project. This should help counteract potential loss of export revenues. |
THE SOLAR TECHNOLOGY BUSINESS
JinkoSolar is a fast-growing, vertically integrated solar power product manufacturer with cost efficient operations based in Jiangxi Province and Zhejiang Province in China. JKS has sales offices all over the globe, including:
- Shanghai
- Singapore
- Munich, Germany
- San Francisco
- Queensland, Australia
- Ontario, Canada
- Bologna, Italy
- Montpellier, France
- Zug, Switzerland
JinkoSolar has built a vertically integrated solar product chain with an integrated annual capacity of approximately 1.2GW each for silicon ingots, wafers, solar cells and solar modules (as of December 31, 2011).
JinkoSolar distributes its photovoltaic (PV) products to a diversified customer base including Italy, Germany, Belgium, Spain, the United States, France, Eastern Europe, China and other countries and regions.
In essence, JinkoSolar has plenty of markets outside the United States.
More impressively, JKS is one of the top solar companies working to expand China’s own solar capacity. If you’re not aware, China has issued one of it’s very serious “5-Year Plans for National Economic and Social Development”, and has outlined expanding solar capacity as a focus.
This plan started in 2011, and so far, JinkoSolar is one of the top recipients of domestic support. For JKS, this means a locked-in, guaranteed domestic revenue stream for the next four years!
As far as quality is concerned, we’re not looking at “cheap” mass produced products from JKS. In fact, Jinko’s 235P models ranked highest for unit power yield in PHOTON Laboratory’s January 2012 outdoor field test. Additionally, IMS Research Institute ranked JinkoSolar among the top six PV manufacturers in the world.
With markets all over the globe and top quality products, JKS is positioned to remain a top solar industry player for years to come.
Now, let’s take a look at the company’s financials…
THE NUMBERS
There’s no getting around the fact that revenues in the solar industry have fallen over the past year. For example, revenues for JKS were roughly $1.2 billion in 2011. And this year, JinkoSolar is slated to do $1.08 billion in sales.
While this is an industry-wide issue, JKS is positioning to address revenue and earnings concerns which have materialized this year. In fact, analysts have Jinko slated to do $1.25 billion in 2013 and $1.5 billion in 2014!
Earnings for JKS have a similar projected path…
In 2012, earnings per share are expected to decrease to just $0.80… a drop of nearly 40% from 2011’s $1.32. But much like revenues, analysts are forecasting JKS will be turning the corner in 2013 and beyond.
EPS forecasts for next year are up at $1.84, and reach $2.12 per share by 2014. That’s amazing earnings growth from where the company is at this very moment. Simply put, JKS is positioned to grow at an astounding rate over the next two years…
Much like many in the solar industry, JKS has taken on a fair amount of short-term debt. As of their most recent financial report, JKS had $401 million in outstanding short-term debt… but just $3.7 million in long-term debt.
What’s important to note is, JKS still has over $68.9 million in cash on hand but will only need $17.4 million of that for repayment of debt obligations for equipment purchase agreements in 2012.
The remainder will be used for R&D and working capital for operating expenses. Moreover, their decision not to expand capacity past the 1.2GW level this year will help the company to conserve cash.
Now, let’s look at some risks…
INVESTMENT RISKS
One of the risks faced by JKS is the reduction in demand for solar power equipment. If governments fail to continue subsidizing renewable energy programs, revenue for solar companies may fall.
Another risk comes from outside competition in a rapidly evolving market. These competitors may have better access to raw materials, greater economies of scale, and stronger brand recognition.
Lastly, while solar prices are near a bottom, they could fall farther. Any deterioration in solar cell, wafer, ingot, or module pricing may lower profitability.
POTENTIAL RETURNS OF 140% OR MORE
With all of the recent negative news priced into this stock, now’s the time to grab your shares of this solar component manufacturer.
The market has dramatically oversold the solar industry over the past year. In fact, JKS shares are trading at a huge discount to the industry.
For starters, JKS is trading for just 2.8x earnings. The industry average P/E is up near 28.1x. If JKS trades up to just a quarter of the industry P/E, we could see this stock absolutely soar.
What’s more, shares of JKS are trading at an absurdly low price to book of just 0.2x. That means if the company were sold off into pieces, you’d be buying the assets at an 80% discount. That’s pretty oversold in my book!
When evaluating all facets of this company, we can see JKS trading up to at least $9.70 per share. Grab your shares of JinkoSolar now for gains of 140% or more!
ACTION RECOMMENDATION
BUY JinkoSolar (NYSE: JKS) up to $4.30 per share.
Recent price is $4.04.
Use a stop-loss of $3.20 on this position.
Don’t forget your position sizing and stop-loss rules.
Despite the continued weakness in the Russell 2000 small cap index, our penny stocks are having a fantastic month.
In fact, we ringing the cash register on two successful trades…
- Modine Manufacturing (MOD) has breached our stop loss of $6.50. Unfortunately, shares fell to a low of $5.50 on June 4th after announcing a weak 2013 outlook. MOD shares have recovered slightly, trading just above $6.00. Let’s sell shares of MOD to preserve capital for another trade.
Category: PSB Monthly Issues
