Market Update
10/4/13
Government Shutdown
Congress could not agree on increasing the borrowing limit
to fund government operations
Controversy surrounding Affordable Care Act: Republicans
using fiscal policy as a bargaining chip for the defunding of
“Obamacare”
More than 800,000 government employees furloughed
Economic Ramifications
Morgan Stanley economists estimate .15% decrease in
quarterly GDP
Inability to get federal loans
No jobs report on Friday
Could make Fed’s decision more difficult
Financial Markets
U.S. Dollar
Dollar fell to 8 month low against Euro
19 month low compared with Swiss franc
Fears that country could plunge into another financial
crises if debt ceiling is not raised
Peter Gora, head of FX Research at BNP Paribas: “The
debt ceiling is creeping into the psyche of investors, and
that’s why the dollar is weaker.”
Goldman Sachs
Goldman landed the lead role on Twitter’s IPO
Pulling ahead of Morgan Stanley for lead in internet IPO
deals
Rewarded Goldman’s effort to rev up internet IPO
franchise
Important because of prestige: Facebook, Pandora
Looking Ahead
Despite volatile conditions, most investors expect
improvement
Too much at stake not to find resolution
Keep an eye on new from Congress in coming weeks
October 17th potential debt ceiling impasse
Stock Valuation
Understanding How Stocks Are Compared And Valued
Types of Valuation
Fundamental Analysis – “A method of evaluating a
security that entails attempting to measure its intrinsic
value by examining related economic, financial and
other qualitative and quantitative factors.” –
Investopedia
In other words you have to look at the big picture when
fundamentally looking at a company.
You have to consider things like; Industry (Competitors,
Market), Earnings, Income, Cash Flow etc.
Essentially you need to find out the Companies DNA.
How do we do this?
Balance Sheet - A statement of the assets,
liabilities, and capital of a business or other
organization at a particular point in time. (Loans/
Short term/long term Debt)
Income Statement - a financial statement that
gives operating results for a specific period.
(expenses/ COG’s)
Cash Flow - The total amount of money being
transferred into and out of a business, esp. as
affecting liquidity. (solvency, the cash health)
All three things can publicly be viewed online,
these statements are released Quarterly, and
Annually.
What's Next?
Once you have considered “The Big Picture”, you have
an understanding of the companies fiscal figures, the
next question I always ask myself, is where the hell is
this stock going and how does it compare to its market
and competitors?
A great tool to use are ratios that you can use to
valuate these companies and see how they match up.
Most of these ratios point out if the stock is “cheap” or
“expensive” or “undervalued” or overvalued”.
Once you understand where the company stands in
comparison to the market, you can see if these are the
right “levels” to get in.
Ratio’s
Here are some of the Ratio’s used to valuate companies.
P/E – Price Earnings
PEG – Price Earnings Growth
EBITDA - Earnings before interest, taxes, depreciation,
and amortization
EV/EBITDA – Enterprise Value to EBITDA
Price/Earnings
This valuation ratio compares the company's current
share price to its per-share earnings.
This can be a valuable tool in evaluating companies
within the same industry.
P/E is often used as a multiple when noting how much
an investor/trader is willing to pay per dollar of earnings.
You will often hear analysts or traders say, “Its trading
10 times earnings” or “At a multiple of 14 the stock
seems cheap”.
Formula: Market Value per Share / Earnings per Share
(EPS)
PEG (Price Earnings Growth) Ratio
A huge valuation tool for estimating potential earnings
growth.
A company with a low PEG ratio closer to 0 is most
likely undervalued.
However, just like P/E it has its limits.
These are projected numbers, so of course are subject
to change.
This is still a great tool to see how it compares to
industry leaders, also a huge tool used by Growth
Investors.
Formula: Price/Earnings / Annual EPS growth
EBITDA
A measurement of a company's operating profitability. It is
equal to earnings before interest, tax, depreciation and
amortization (EBITDA) divided by total revenue.
In essence you have a look at the company’s total
profitability outlook.
Enterprise Value/ EBITDA
First Enterprise Value is not to be mistaken with market
cap.
Market Cap only deals with is limited to common equity.
Enterprise Value sums up everything and gives you the
market value of the whole business.
EV/EBITDA is important because it can compare any
company to another.
It ignores tax structures of other countries, and it also
can be a great tool for potential takeover targets.
A company with a low ev/ebitda multiple is considered
by some as undervalued.
DCF – Discounted Cash
Flow
This a great method for
evaluating what your
investment may be down
the road.
In essence, DCF is = the
money you would
receive from an
investment and adjusts
for the time value of
money.
DLTR vs. FDO
Josh Silver and Brad Marshall
Business model
Dollar Tree (everything $1)
4763 stores 48 states
Family Dollar – cheap goods at low price
7100 stores 45 states
Competitors
Sector is being hit, but good future
Dollar General
Walmart
Target
Big Lots
Dollar Tree
Family Dollar
Family Dollar
Dollar Tree
Key Statistics
DLTR
FDO
P/E
23.5
19.5
Estimated P/E
20.8
19.1
EPS
2.5
3.7
Estimated EPS
2.8
3.8
PEG
1.3
1.7
Market Cap
13.15 Billion
8.35 Billion
Stock buy-back
Seen as a positive thing among the investors
Management thinks its stock is undervalued, so they are
going to use their assets to buy cheap and sell high later
on
Now, each stock will be more valuable (supply and
demand)
Proposition
Add to position:
DLTR
Sell position:
FDO
Catalysts
Micro: Dollar Tree
Bad business plan
inflation -- they are stuck with $1
Macro: Economy
What happens when economy gets better?
Southern Copper
Corporation
NYSE: SCCO
Mac Ahsler and Sean O’Toole
Company Overview
One of the largest integrated copper producers in the
world.
Mining, smelting, refining in Mexico and Peru
Also produce and sell zinc, silver, molybdenum
Exploration into Chile, Argentina, and Ecuador
Overview continued
Worlds largest copper miner by reserves (168 billion
pounds of proven and probable reserves as of year-end
2012)
Among the largest by annual output (1.4 billion pounds in
2012),
Very low cost open-pit mines
Location
Business Model
Copper industry is largely impacted by demand and price
for the commodity.
Much of this is out of their control
Management focus on cost control, product enhancement,
and exploration to stay profitable.
Equity Overview
Price (at close yesterday) - $26.95
Market Cap- 22.73B
Volume/ 30-day Average – 1.77M/ 1.59M
Shares 842.13 M
Beta – 1.46
EPS- 1.91
Price to Earnings Ratio
(P/E)
SCCO Current P/E - 14.2
Industry Average P/E - 13.2
SCCO 5 YR. Average P/E - 18.9
P/E Definition
Market Value per Share/ Earnings per Share (EPS)
Compares share price to per share earnings.
High P/E generally means investors expect high earnings
growth in the future.
Compare P/E to the market or other companies in the
industry.
AKA “price multiple” or “earnings multiple”
Price to Book Ratio (P/B)
SCCO Current P/B - 4.4
Industry Average P/B – 2.3
SCCO 5 YR. Average P/B – 7.0
P/B Definition
Stock Price/ (Total Assets – Intangible Assets and Liabilities
Measures stock value compared to accounting value of
company
Generally, a lower P/B ratio could mean stock is undervalued.
Compare P/B to other companies in the industry.
AKA “price- equity ratio”
Price to Sales Ratio
SCCO Current Price/Sales - 3.7
Industry Average Price/Sales – 2.3
SCCO 5 YR. Price/Sales Average – 5.4
Price/Sales Definition
Share Price/ Revenue Per Share
Compares stock to its own past performance
A low ratio suggests a company may be undervalued
Be careful. Price/Sales doesn’t account for debt or
expenses. Can be misleading
Dividend Yield (%)
SCCO Current Yield - 12.2
Industry Average Yield - 7.1
SCCO 5 YR. Average Yield - 7.0
Returns
*assumes $100 dollars invested in 2007
Risk Factors
Dependent on price of copper
Labor relations have been tense in recent years
Success of expansion projects uncertain
Majority steak (81.3% ownership) by Grupo Mexico
Straight from the Annual
Report
Straight from the Annual
Report
Recommendation
We believe this stock is fairly valued
Appears that it can show sustainable growth in the future.
Buy until it is 2% of portfolio
Nuverra Environmental
Solutions Inc.
Chris and Pete
4,500 shares @ Mkt price
Company Overview
Strategic focus on providing comprehensive
environmental solutions in industrial and
energy markets (exploration and production
solutions)
Services include delivery, collection,
treatment, Recycling and disposal
Asset base has become a significant aspect of
company
Segment Breakdown
Solutions
Delivery
Collection
Treatment
Recycling
- Fresh water to drilling
-E&P liquid waste from
sites for hydraulic fracturing fracking
- Used motor oil (UMO) into - Used oil filters
Reprocessed Fuel Oil
(RFO)
- Drilling fluids
- Oily waste water
- E&P liquid waste from
ongoing production
- E&P solid waste
- Anti-freeze
- E&P flowback water
- Used oil filters
Asset
- Anti-freeze
Delivery & Collection
- Over 1,200 trucks
- Approximately 4,200
frac tanks and 1,900
upright and other tanks
- Over 200 rail cars
- 50 miles of freshwater
deliver pipeline
- 50 miles of produced
water collections pipeline
Treatment & Recycling
Disposal
- Appalachian Water Services, LLC plant - a
wastewater treatment recycling facility
- 46 liquid waste
specifically designed to treat and recycle
disposal wells
water involved in the hydraulic fracturing
process in the Marcellus Shale area
- 34 Thermo Fluids, Inc. treatment facilities process UMO into RFO
Disposal
- Liquid waste
Indebtedness
Risks
Specifically $400MM 2018 note that includes a $150 payment in
2017
It is a VRN, interest rate varies through time
Real risk that NES will not be able to refinance
Acquisition integration and rapid growth
TFI and Power Fuels may not be able to created the anticipated
synergies
Government regulation and litigation
Former China water bottling business, which was disposed of in
2011, law suit could materially adversely affect NES
NES
Profitability
Liquidity
Summary
2012
Profit Margin
1%
EBITDA Margin
8%
Gross Margin
13%
Current Ratio
1.92
Working Capital
421.00
Working Capital Turnover
4.43
Operating Cash Flow Ratio
0.35
Cash Ratio
0.28
Total Debt to Total Assets
0.34
Solvency Ratio
0.08
Price to Earnings
116.50
Price to Book Ratio
0.69
Price to Book Tangible
-1.00
Return on Equity
0.30%
Forward PE
77.67
2011
2010
-14.67%
-97%
16%
-74%
21%
25%
2.83
3.72
79,
Solvency
Valuation
58.25
90,
148,6
342.00
71.00
1.74
0.10
-0.28
-0.08
1.78
1.62
0.27
0.08
-0.01
-0.35
-17.00
-1.25
1.24
1.70
1.40
2.13
-6.73%
-4.85%
Add to Position
Sole provider focusing on surface-related environmental
services.
Key advantage is in the holistic logistical network based
which provides competitive advantage
Only really competition in Tervita, R360 Environmental
Services and Clean Harbors
Growth company with strengthening fundamentals
“U.S. Rises to No. 1 Energy Producer”
Energy output has been surging (22 MM barrels per day)