Diary of a Financier

Quant screen: Core Value & Low EV (March 2014)

In Trading Desk on Tue 18 Mar 2014 at 17:13

My quantitative screens scored the following names as the highest ranking outputs for March…

Low Enterprise Value (3/12):

  1. Argan Inc ($AGX)- watch
  2. Myriad Genetics ($MYGN)- previously
  3. Nvidia Corp ($NVDA)- watch, new
  4. Qlogic ($QLGC)- watch
  5. Vishay Intertechnology ($VSH)- watch, new
  6. Raymond James Financial ($RJF)- previously
  7. Advanced Energy Industries ($AEIS)- veto
  8. Marvell Technology ($MRVL)- bought 2/18
  9. FXCM Inc ($FXCM)- bought 6/21/13

Low EV 2014.03.12

Core Value (3/13):

  1. Transglobe Energy ($TGA/$TGL.TO)- bought 3/17, new
  2. Sanderson Farms ($SAFM)- previously
  3. Barnes Group ($B)- watch, new
  4. Magna International ($MGA)- previously

Core Value 2014.03.13

~~~~

You’ll notice a number of semiconductor stocks in the Low EV list this month and last.  As they’ve proven time and again, my screens have success in rooting-out cheap names in cheap sectors (e.g. healthcare, gaming, autos, asset managers, autopart suppliers, and brokers).  I like select semiconductors here, and I’ve started with a position in $MRVL with the expectation that I’ll supplement it with a $VSH or $NVDA stake…

~~~~

Transglobe Energy (NASDAQ:$TGA, CAN:$TGL.TO)

We opened a 1% position in TGA yesterday.  Transglobal is an oil and gas exploration and production (E&P) company with most of its projects in Egypt and Yemen.  Over this past weekend, Caracal Energy announced a merger with TGA, in which Caracal would essentially acquire TGA for US$626.9mm (C$9.32/share or +11% premium).  The deal is expected to close in June, after shareholder and regulatory approval.

I’ll discuss TGA’s prospects on their own first…

With such concentration in Africa, the geopolitical risks to TGA’s business have been more than manifest in its stock.  Shares peaked >$20 in 2011, right when the multi-year Arab Spring unrest began in the MENA region with Egypt at the epicenter. Fittingly, TGA bottomed ~$6 when the former Egyptian President was removed from office in 6/2013.  Over those two years, the stock dropped 70% despite more than doubling operating cash flow (OCF), production, and [almost doubling] proven reserves.

Before and after the coup, Egypt’s government has always been supportive of foreign oil companies.  (After all, they take 65-85% of TGA’s profits in royalties.)  There was a period between 2012-13 when TGA’s receivables started to compile due to the Egyptian government’s preoccupation with civil unrest, but Egypt has since resumed a repayment schedule, leaving $175mm balance as of YE13.  (Egypt has a 6% 10y sovereign bond yield, for what that’s worth in terms of creditworthiness.)

This is a great company with a great management team.  They have a proven track record of grow production–not just in the last 3 years, but across their careers.  Nevertheless, 2 of TGA’s largest fields (80% of production) are forecast to start declining rapidly by YE15.  Even worse, they had to downgrade proved and probable reserves in 1/2014, which pessimism has sent shares -10% to date.

So, what’s so good about this stock?  The catalysts:

  1. Valuation
    • Discounted cash flow (DCF)- Accounting for the forecast decline rates in TGA’s 2 major assets, DCF analysis ascribes almost zero value to TGA’s other, development-stage assets at today’s stock price; base case¹ sum-of-the-parts says fair value is $10.40/share (+37%)
    • Comps– Recent private market transactions by Apache Egypt, Vegas Oil, and Sea Dragon Energy were at 65-85% premiums to TGA assets’ carrying values–although no two oil assets are the same
  2. Short squeeze– 20% short interest with 41 days to cover, so the Caracal takeover could start a short covering scramble; this is a structural short position due to a Canadian banking tax scheme (as documented by TGA’s IR), so it’s possible that shorts will not have to cover
  3. Shareholder value– in both 4q13 and 1q14 management said it was considering a return of cash to shareholders, and they’ve favored at least a dividend because it would force the unwind of that structural short position

The risk seems asymmetrically to the upside, hence, we bought some shares.

~~~~

Vishay Intertechnology ($VSH)

Vishay is a semiconductor manufacturer with a very upbeat management team.  The CEO admitted that 1q14 forward guidance was conservative–mere numbers picked out of the c-suite’s habit to target stable, modest y/y growth:

“We had no specific reason to guide down [sequentially q/q]. It was basically vis-à-vis prior year [y/y], we thought it’s a stable and a solid way up, and vis-à-vis the [4q13], it was maybe a little conservative maybe.”

I should mention that VSH’s executives were bullish on both 2012 & 13’s outlook for their company, but the semi industry (along with VSH) failed to launch in both years.  Fact is, a combination of the European crisis and structural trends conspired against semis: given the recent global crises and secularly declining PC/laptop sales, developed market OEMs–VSH’s buyers–are holding much less inventory than historical norms.

However, on their 1q14 conference call, VSH management noted a couple trends that should counteract those effects in 2014:

  1. European automotive & industrial recovery– US & Asian auto sales were “historically” strong throughout 2013, but a continued pick-up in Central Europe will really help y/y comps
  2. Chinese industrial penetration– VSH investments (“boots on the ground”) in China’s industrial markets should start paying dividends in 2014
  3. Automotive “infotainment”- a secular increase in cars’ electrical components for digital information & entertainment devices “helps to balance the decline in laptops and PCs”

In addition, VSH reacted to the more structural trends by announcing a restructuring in 10/2013.  They expect to realize some cost savings starting in 2h14, but the majority of the $36mm annual savings will arrive in 1q16, when they’ll roll-out a new, high-voltage MOSFET product.

In January, VSH announced their first ever dividend distribution (ex-date 3/3).  Since their balance sheet remains iron-clad with strong free-cash-flow (FCF) generation, VSH explicitly named a couple, additional catalysts that remain for the stock’s growth plan, including:

  1. M&A– $50-100mm “tuck-in” acquisition
  2. Share buybacks– potentially launch another repurchase program

That all sounds great, but the stock is +12% ytd and +13% since that bullish earnings call 2/4, so I have to watch for an entry point that makes sense–particularly since we recently initiated a position in $MRVL.

~~~~

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:

$BMA +8.92%
$FL +33.41
$FXCM +0.54
$HCI -7.32
$JOSB +48.16
$MRVL +1.32
$NDZ +21.56
$TGA -2.46
$VMI +7.32

Here are the total returns of positions closed ytd:

$ARII +61.93%
$GCO +19.04
$IBKR +39.97
$SMP +10.80

Here’s a followup on the last Low Enterprise Value screen 2/10:

Active & Passive +6.17% (alpha= +1.73)
SPX +4.44%

Low EV 2014.02.10_update

Here’s a followup on the last Core Value screen 2/13:

Passive & Active +10.23% (alpha= +7.68)
SPX +2.54%

Core Value 2014.02.13_update

–Romeo (hattip Global Contrarian)

¹Analysis: Sum-of-the-parts using DCF on assets…

Proven reserves= $360mm (NPV of current, producing assets @ 20% discount rate, excludes probable reserves & pre-production fields)
Net cash= $120mm (mrq)
Net receivables= $183mm (mrq)

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  1. […] a followup on the last Low Enterprise Value screen […]

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