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Stock Screen: Stocks with Healthy Price Appreciation Potential - May 14, 2012
In this screen, we focus on stocks that are expected to perform well both in the next six to 12 months and for the pull to 2015-2017. To be included in our list, issues had to be ranked 3 (Average), or better, for Timeliness (i.e. relative price performance in the year ahead), one of Value Line’s many proprietary rankings. Additionally, capital-appreciation potential over the next three to five years, as derived from our analysts’ earnings projections, had to be at least 165%, compared with the median of 70% for all stocks under our review. Next, the minimum annual total return potential (a combination of price appreciation and dividends) was pegged at 28% versus a 16.5% median for Value Line’s universe. Meanwhile, to eliminate stocks that have more-than-normal risk, we called for Safety ranks (another one of Value Line’s proprietary measures) of no worse than 3 (Average). That is, Safety ranks of 4 (Below Average) and 5 (Lowest) were excluded. Finally, any stock that had recently traded at a price of less than $10 a share was dropped from the list.
The resulting group is expected to perform at least in line with, if not better than, the broad market in the near term. Better yet, our analysts feel that these stocks appear to be good long-term holdings. Investors should note that all data for this screen are from The Value Line Investment Survey dated May 18, 2012. To see the complete list of 16 stocks (limited to those ranked to outperform the broader market in the year ahead), investors can click here.
Further, given their excellent price-appreciation prospects, these equities might be expected to trade at a premium to the market. Nonetheless, our list does not neatly conform to such logic, since only about 25% of the stocks in the current roster are trading at price-to-earnings ratios above 15.0. In fact, some appear to be trading at a meaningful discount to the market.
Halliburton Co. (HAL) is one of the world’s largest diversified energy services providers with operations in 80 countries. The company’s Completion and Production division (61% of 2011 sales) offers well cementing, well stimulation, intervention, and completion services. Meanwhile, the Drilling and Evaluation division (39%) provides services to model, measure, and optimize well construction activities. Based on the location of services provided and products sold, 55% of HAL’s revenues came from the United States in 2011, and no other country accounted for more than 10% of sales.
Halliburton shares have come under pressure recently, largely attributable to a glut in North American natural gas reserves causing reduced pressure pumping activity. This forced the U.S. natural gas rig count to decline by 151, or 19% since the beginning of the year. Fortunately, much of this will eventually be fully offset by the addition of 125 new oil-directed rigs during that same timeframe, however, the shift from gas to oil has been somewhat disruptive to near-term operations. Once transition costs are fully incurred, the mix shift toward oil rigs should benefit profitability as oil rigs require a higher level of service.
Investors also appear concerned with the potential for margin recovery. Indeed, the excess equipment capacity for pressure pumpers is hurting fixed cost leverage. Escalating prices of a key raw material, guar gum, is also a headwind. The company’s massive scale ought to help it purchase the raw material at better prices than smaller rivals. Too, after an expected quarter-long delay, Halliburton should be able to pass off inflated COGS onto customers through higher prices. Still, margins are expected to decline 200-250 basis points in the second quarter and probably won’t bottom until at least the third period.
Elsewhere, international volumes are trending higher and we expect offshore drilling activity to continue rising rapidly in the years ahead. Halliburton’s customers have been adapting to new regulations in the Gulf of Mexico, leading to increased permitting activity there. Lastly, any favorable ruling in the Macondo oil spill incident will surely propel the shares.
Overall, recent weakness in this issue’s price, and its favorable earnings growth prospects, give this stock ample room to run over the next three to five year period, in our view.
Golar Limited LNG
Golar LNG Limited (GLNG) operates a fleet of ships that carry and process liquefied natural gas (LNG). A unique aspect of Golar’s business is its collection of floating storage and regasification units (FSRUs), which process natural gas at sea rather than simply transporting the commodity from port to port. These vessels serve a niche market that the company hopes to use as a growth platform. Its fleet contains eight liquefied natural gas carriers, representing the core of its current business, and four FSRUs. It has multiple ships on order with expected completion dates in 2013 and 2014.
Consumption of LNG is on pace to grow sharply in the years ahead, driven by a build-out of natural gas fired electric power generation capability in Asia; reduction in nuclear power generation in LNG importing regions, such as Japan and Europe; and conversion of coal- and oil-fired power generation to natural gas. These trends are contributing to tight supply and demand conditions at present, as evidenced by Golar’s achievement of a 100% fleet utilization rate in the first quarter. Demand from Asia is certainly having a positive impact, with power companies helping push total 2011 LNG imports up by 39% year over year in Japan and 30% in China. Value Line analyst Craig Sirois believes the infrastructure necessary to transport LNG (terminals and pipelines) will get built, allowing companies to take advantage of the strong regional disparities in natural gas prices. Other evidence of rising demand is the recent 22% increase in the spot rate for carrier services from $110,000/day to $135,000/day. The company expects the higher rate to sustain for the near future. Although industrywide liquification capacity is expected to grow around 15% by 2015, there will likely be a few delays.
Golar is in the midst of refurbishing previously retired vessels to meet demand. It plans on building nine new LNG carriers and two SDRU’s for deliveries in 2013 and 2014. Company negotiators are getting good pricing terms on those new builds. We view the fleet additions as a major growth engine over the three to five year period.
Golar Limited reports March-quarter results on May 31st. As charters for new and existing vessels come on board, earnings should see a significant upswing in the second half of 2012.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.