Diary of a Financier

Quant screen: Core Value (December 2013)

In Trading Desk on Mon 23 Dec 2013 at 18:00

My Core Value screen scored the following names as the highest ranking outputs on 12/20:

  1. Nordion Inc ($NDZ/$NDN.TO)- watch, new¹
  2. Westjet Airlines ($WJA.TO)- watch
  3. Crocs Inc ($CROX)- watch
  4. Magna International ($MGA)- previously
  5. Foot Locker ($FL)- bought 4/30
  6. Mueller Industries ($MLI)- previously
  7. Lear Corp ($LEA)- previously
  8. Activision Blizzard ($ATVI)- watch
  9. Cash America International ($CSH)- vetoed, new

Core Value 2013.12.20

I did not update my Low Enterprise Value screen because it was unchanged from last month’s.

This Core Value output is little changed from last month’s, but I want to highlight one newcomer…

Nordion Inc (NYSE:$NDZ, CAN:$NDN.TO)

Nordion provides healthcare products and services that prevent, diagnose, and treat diseases.  Their major business segments currently include Medical Isotopes and Sterilization Technologies.

NDZ the stock is cheap, but it’s cheap for a reason.  In terms of background, out of Canada, NDZ used to operate the world’s largest nuclear reactor for the production of medical isotopes.   They sold these isotopes to companies like Mallinckrodt ($MNK), who used them to diagnose and treat various diseases from neurological to cancer.

However, that reactor was old and not compliant with new, low-enriched uranium (LEU) standards–considering how taboo anything nuclear has become amidst the geopolitics of Fukushima and Iran.   So, a Canadian state enterprise/regulator, AECL, had to force Nordion to cease private use of the reactor.  That announcement came in 9/2012, upon which NDZ dropped 40%. 

Nordion has been conducting a business review since then, exploring strategic alternatives now that its core isotope business enters this era of uncertainty.  Recently, there have been positive developments to that end.  First, NDZ signed a new isotope production contract² (and legal settlement) with AECL, who will conveniently succeed NDZ as the reactor’s operator.  That supply agreement will extend through 10/2016.  Second, NDZ closed the sale of its [former] Targeted Therapies business (20% of 2012 sales) in 3q13.

The strategic review began 1/2013, and the Therapies sales seems like phase 1 of its execution.  They may announce bigger news during the FY13 earnings report on 1/9/14.

Management still has work to do regarding NDZ’s strategy.  Were we to open a long position in this name, we’d be awaiting one of the following, potential catalysts:

  1. Cash– The settlement with AECL (net $15mm) and the sale of Targeted Therapies (net $190mm) have raised net cash/market cap ratio to 46.6% for an already cash-rich company ($282mm total).  On the 3q13 earning conference call, management mentioned that they had considered both a special dividend and share repurchase/buyback program, but they deferred a decision for the time being, because after-tax considerations diminished the value to shareholders.  Analysts still seem to favor a return of capital to shareholders, but some have mentioned ideas like an outright sale of NDZ (i.e. M&A).
  2. Long term isotope contract– While NDZ has a supply contract in place through 10/2016, the company’s priority is attaining a more secure supplier.  This shouldn’t be too difficult, as NDZ has 20% marketshare of global Moly 99 sales.  There are 5-6 other major reactors across the globe–chiefly in Missouri, South Africa & Europe–so NDZ has to worry more about a sustainable partner than favorable terms.
  3. GammaFIT orders– In 12/2011, NDZ launched its GammaFIT irradiator–a low-cost technology for sterilizing surgeon’s gloves, syringes, sutures, catheters, pharmaceuticals, food, and consumer products.  Management guided toward a long sales cycle ~24 months, so the first order is overdue and would be welcome news.  Sterilization is a stable, cash flow business with huge customers like Johnson & Johnson ($JNJ).  NDZ already owns 66% of global Cobalt 60 sales, which is ~20% marketshare when considering sterilization substitutes.  GammaFit is NDZ’s innovative attempt to tap some growth.  They expect particularly good adoption in Asia, due to the product’s low price point. But, while the opportunity may be huge, management has no expectation as to the market’s potential size.

Since that 40% gap-down in 2012, the stock has steadily retraced almost half of the loss, but that still seems undervalued to me.  Management has continually upgraded its FY13 outlook for the troubled Isotopes segment, guiding toward -7% sales decline–up from -20% at the beginning of this year.  Europe shut down some reactors of its own this year, so some of the upward guidance revision reflects those supply disruptions that’ve pulled-forward demand.

This Isotopes segment represented 41% ($100mm) of 2012 sales and 40% ($29.4mm) of operating income, so the aforementioned 40% stock crash implied the disappearance of this business–especially considering the reliable, terminal growth rate of Sterilization. The current valuation implies around -51% long term decline in Isotope’s net income, assuming Sterilization flatlines.  Again, I think that’s a significant valuation discount to the expected value of the segment, considering the new supply contract through 2016, the potential for a longer term supplier, and the substantial intangible value of NDZ’s brand & book of business.NDZ chart & fundamentals_2013.12.23

Technically, NDZ has been riding a daily bull channel since it bottomed in 12/2012.  Although it’s stuck under 2x bear divergence, the bull channel should lead NDZ higher to fill the gap up through $10.7 (+25%) in the intermediate term.  Longer term, NDZ broke out of a weekly LT falling wedge in May, and it has maintained 4x bull divergence.  That puts its ultimate target at $24 (+180% @ 50% Fibonacci retracement).

~~~~

Here’s the performance to date (total return) of unrealized positions still open from prior screens; buys executed throughout the year, as specified in my trade reconciliations:

$ARII +31.52%
$BMA -10.40
$FL +17.80
$FXCM +6.64
$GCO +18.62
$HCI +25.43
$IBKR +48.46
$JOSB +29.79
$SMP +19.59
$VMI +6.97

Here’s a followup on the last Core Value screen 11/20:

Passive & Active +3.67% (alpha= +1.71)
SPX +1.95%

Core Value 2013.11.20_Update

Here’s a followup on the last Low Enterprise Value screen 11/11:

Active & Passive +9.19% (alpha= +6.24)
SPX +2.96%

Low EV 2013.11.11_Update 2

–Romeo

¹$NDN.TO was vetoed by my screen due to low liquidity (average daily dollar trading volume), but its NYSE ADR, $NDZ, is almost 9x more liquid

²NDZ disclosed that gross margins for Isotopes will only fall from 50 to 45% under the new agreement

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