Weekly Findings – January 6th, 2019

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SEE LAST PAGE OF THIS REPORT Graham Copley / Anthony Salzillo

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gcopley@ / asalzillo@ssrllc.com

January 6th, 2019

Weekly Findings – January 6th, 2019

Thought for the week: “Winners and Losers – Some Common Traits from 2018 – M&A Mattered”

Chart of the Week

  • Chart of the Week

2018 was generally a very poor year for investors in Industrials and Materials in terms of stock picking as valuation was, for the most part, a very poor guide.

Focusing in the top five and bottom five – there was generally a very good correlation with revisions – charts below. In some cases, the revisions were a function of more positive or negative corporate guidance, but in the case of TiO2 the sell-side has taken a more negative view than the producers.

Expanding on the M&A theme we covered in detail on January 2nd, the better performers for 2018 for the most part experienced change. – BLL being the exception, although the company did make some small M&A moves in 2018.

  • MOS acquired a significant business from Vale – for $2bn – we still see upside for fertilizers in 2019
  • KWR is in the process of finalizing its acquisition of Houghton – having recently received all outstanding regulatory approvals – we like this story, but it is now all down to the execution
  • CSX has had a major management overhaul in addition to major estimate revisions.
  • ENS completed a meaningful acquisition in December.
  • Like BLL, DHR appears to have simply been a relatively safe haven – BRC is a positive revision story.
  • RPM has been the target of a well thought through activist plan and while the stock has fallen this week on poor earnings, the plan was never going to have an immediate impact and we like both the new path proposed for the company and see a greater likelihood of take out.

At the other end of the scale we also see some similarities:

  • Covestro, IPHS and CC have a strong dividend yields and given ratios to cash flow this makes all three interesting buy opportunities today in our view – again see the M&A piece.
  • TROX and FCX have better yields because of their underperformance in 2018 – but not good enough to qualify as a “paid to wait” incentive
  • AA and VNTR have no dividend at all and this would be an easy strategic shift to gain some investor attention.
  • X and BDC have minimal yields even with the stock pull backs
  • GE needs no further commentary – the dividend cut was a major headline for the year – the stock is having a good start to 2019 in part because of a rebound from tax loss selling at the end of 2018. Our thesis is unchanged – GE Capital is the key and there are no indications that the next piece of news will be positive. – see all our prior work on GE.

Performance versus revisions lines up quite well for the top and bottom 5 – chart below – with BLL doing much better than revisions would suggest.

Performance versus valuation really does highlight the benefit of the doubt that is still being given to GE – and while there are likely others if we look at our entire coverage group, GE stands out among the worst performers of the year – chart below

In conclusion, the companies that have done something proactive in 2018 have generally fared better than those that have not. There is not a perfect correlation but there is enough evidence to suggest that action is much better than inaction. While some of the companies that have fared poorly have a reasonable dividend yields, many have not enough to keep investors interested. Our work on “what makes a good company” shows that dividend growth correlates with outperformance and EBITDA growth – more a consequence of being a good company than a driver, but you can’t grow a dividend if you don’t have one!

EPS revisions for 2019 for the top five and bottom five are shown in the charts below.

  • Weekly Winners and Losers

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