Great companies are always a good buy. They're an even better
buy when their stock price is depressed as a result of some
temporary setback, and/or when no one has a buy recommendation on
them (presuming, of course, that their underlying business model
is solid, their balance sheet sparkles, and their earnings look
"destined" to increase based upon some favorable social,
business, political or demographic trend. And it doesn't hurt if
they have a pretty good moat around the business). Here are three
companies in three different sectors that I believe share these
Travel and Leisure
Right now I think the above factors describe very well the
ocean-going cruise industry. They are not yet screaming buys but
if Carnival sees one more piece of bad news, the last hedge fund
will bail, leaving the stock
short-term friendless. (The symbol is CCL and CUK, CUK being the
old Pacific & Orient/Princess brand but really both share
classes share the same management and the same share of profits.)
Pardoning the pun of CCL having a very big moat, it not only has
a physical moat called the world's oceans but is far and away the
biggest of the cruise companies. While everyone is focused on the
problems "Carnival" is having, few realize that CCL's "other"
company-owned brands include Costa, Princess, AIDA, Holland
America, P&O, Ibero, Seabourn, and Cunard, each with their
own subtly different marketing and demographic target audience.
Between them these lines owned a 48% share of worldwide
passengers in 2012.
Want to talk moats? Eat your heart out, Apple and McDonalds. The
next biggest carrier is Royal Caribbean Cruises (
), which owns Royal Caribbean, Celebrity, Pullmantur, CDF and
river cruise company Azamera, which enjoys a 23% market share.
The rest of the cruise companies vie for the remains in a crowded
field at the bottom - Norwegian Cruise Lines (NLCH) gets 7.6%,
) has a 2.5% share, Norway's fabulous Hurtigruten (HRG.OL) 1.3%,
and most of the rest all less than a singe percent.
In a nutshell, my case for CCL rests upon precisely the factors I
discussed above. Their well-publicized problems of late have
dropped the stock from $39 to $33, at which price it sells at a
PE of 17 and pays a 2.9% yield. At this price, it sells at an
eminently reasonable P/B ratio of 1.15 and a PEG ratio
(Price/Earnings Growth) of 1.34.
Like all cruise lines, CCL carries a lot of debt; it isn't cheap
to build ocean-going palaces. In fact, it typically costs about a
half-billion dollars per ship with a wait time of three years or
so to get the job done, which is another reason why the moat
around the biggest carrier seems pretty strong.
Plus, even with this high debt they get a lot of years' revenue
from each new build and the assets themselves have continuing
value. They operate in what is currently a $36 billion dollar
industry, but ask yourself this: with the Baby Boomer generation,
the largest demographic segment in U.S. history, now retiring in
huge numbers, what does the future look like for this business?
More cruisers or fewer? Cruising takes chunks of wonderful time.
Will today's Boomers have more or less time when they retire?
Only in North America do we have a relatively mature and
knowledgeable base of cruisers; last year three out of every 100
Americans took a cruise. In Europe, that was just one in 100. In
the emerging markets, it is infinitesimal. So is cruising
something for poor people or the middle class? Are the emerging
markets descending into poverty or moving up in huge numbers into
the middle class?
I'm not saying you need to go out and buy shares today. But we
will be accumulating on any weakness. And there is one reason to
buy right away - if you plan to take a cruise in the near future
on any CCL or RCL line, they both give you a shipboard credit of
$250 toward whatever discretionary items you choose to spend on
if you are the owner of 100 shares or more.
If the current thinking in Washington prevails, the defense
industry will be downsized precisely when officers will be RIF'd
(a "Reduction in Force") and many of the best NCOs will be
encouraged to retire--all while the U.S. Department of
Agriculture is spending millions of dollars to "market" food
stamps to more middle-class Americans who only qualify because
the threshold for applying has been liberalized.
All this and yet the big defense companies are all selling near
their highs for the year. Does someone know something others
Yes. The smart money knows that these contractors have "been
there, done that" a dozen times before. They're used to having to
contract when Washington, D.C. gets all peace-and-love gushy,
like we did at the end of the Cold War, or simply decides defense
contractors don't carry as many votes as seniors or some favored
social or ethnic class.
This sector is the ultimate cyclical play. Of the big boys like
Lockheed Martin (LMT,) Northrop (NOC,) Boeing (BA,) et al, I like
) the best. The reason has less to do with their numbers and
valuation, though both are at or near the head of the pack, than
what segment of the defense and aerospace industry they occupy.
RTN is huge in sensing technologies, kinetic and non-kinetic
effects-based warfare (the latter to include electronic war-fare,
cyberwar and directed energy, this last where competitor Boeing's
CHAMP system is also cutting-edge,) C4I-Command, Control,
Communications, Computers and Information/Intelligence, and
direct mission support via engineering, training and logistics
management. This administration will be anxious to cut defense
spending to fund favored social engineering, but I think the big
targets like warships, airframes, and the Future Future Future
Combat System version 17 will be the cuts of choice. Training,
readiness, cyber-defense C4I, and game-changing non-kinetic
effects will be needed more than ever, to compensate for the loss
of personnel and leading-edge warfighting equipment. I'm going to
look to buy Raytheon at a lower price as the defense cuts start
making it to page one and investors begin to panic out.
In the meantime, we'll be buying a pip-squeak (by comparison)
competitor in this space whose products I've had some dealings
with in the past: Kratos Defense & Security Solutions (KTOS.)
Boeing's market cap is more than $64 billion. Kratos? $280
Boeing employs 174,000 workers. Kratos? 4,300. Boeing had gross
revenue of some $82 billion last year - that's right, almost
triple the entire cruise industry! KTOS? Not so much. Just under
a billion. Ah, but
that's their present situation; we're more interested in the
future. And their $1.2 billion backlog is in absolutely every
niche that makes Raytheon my favorite pick of the biggies, but in
even more specialized areas.
The company is currently unprofitable, making it a candidate for
our Aggressive Growth portfolio. If you decide to join us in this
more speculative investment, please bear in mind that the company
is growing assets faster than revenues and that revenues "have
been" in decline, and their net cash position is perilously low.
So why buy them? All these caveats I've noted are based upon
current snapshots or are backward-looking. I see KTOS's backlog
expanding significantly mostly because I know most of the
programs in which
they are involved. In many cases, there is literally no other
competitor, which means they will likely bid on single-source
contracts, enhancing their profit margins and cash flow as their
sales increase. It's more risky than RTN or BA, of course - but
one I'm willing to take...
At first blush, energy services midget Pacific Drilling (
) appears to be every bit as speculative as Kratos at first
seemed. After all, their entire asset base currently consists of
a grand total of four drillships they contract out to Big Oil.
Why bother, you ask? Let me count the ways:
- PACD has the newest fleet in the world. Newer means
higher-tech and lower-cost.
- PACD is exclusively focused on "ultra" deepwater drilling.
This is where I believe the future lies. Bakken may have
hundreds of little finds but one elephant lurking deep under
the surface of the earth's crust deep under the ocean will
trump every one of them. PACD's drillships can drill below 2.5
miles of water.
- PACD has three more drillships being built for them right
now and another on order. With contracts in hand from major oil
companies like Chevron (
), Total (
)and Petrobras (PZE), all costs are covered.
- PACD gets an average of about $550,000 per day per ship.
That's $550,000 x 4 ships x 365 days a year, or $80 million in
revenue. When the next four ships come on line between this
quarter and 2015, that should double. The demand worldwide for
these drillships outstrips the supply. That situation will not
improve in the next 2-3 years.
- I see PACD's revenues, cash flow and earnings accelerating
rapidly over the coming years.
We have established a pilot position in each and will buy more on
general market weakness.
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