In this screen, we only focus on stocks that are expected to perform well over the pull to 2017-2019. To be included in our list, capital appreciation potential over the next three to five years, as derived from our analysts’ earnings projections, had to be in the top 100 or 6% of all the 1,700 stocks covered in The Value Line Investment Survey. The resulting group is expected to have varying degrees of success over the near term, but all are projected to have above-average long-term price appreciation potential. We think Rosetta Stone, Inc. (RST) and LSB Industries, Inc. (LXU) may be of particular interest to investors. To see the complete list of 100 stocks subscribers can click here.
Rosetta Stone, Inc.
Founded in 1992, Rosetta Stone pioneered the use of interactive software to learn foreign languages. The company's solutions help individuals, students, and public/private sector professionals around the world learn new languages. It claims that its system works faster and is more effective than conventional classes and textbooks. Rosetta offers courses in 30 languages across a broad range of applications, including online subscriptions, digital downloads, mobile apps, and perpetual CD-Rom packages. This language learning company is divided into three reportable segments (as of March 31st): North America Consumer (60% of revenues), Rest of World Consumer (11%), and Global Enterprise & Education (29%).
Rosetta Stone has experienced some weakness in North America of late, i.e., lower revenue from its global retail and kiosk sales channels, as the company is in the midst of a business transition. Management has implemented a channel shift away from call centers and kiosks, toward recurring, largely digital revenue streams. Meanwhile, the company is downsizing its Asian operations, which has pressured its Rest of World Consumer segment.
Website and mobile platforms are an area of focus. In fact, online learners and digital downloads now represent roughly 40% of consumer revenues. Moreover, we expect subscription and service revenues, which accounted for 47% of the March-period total, to become a bigger piece of the pie over time.
The company has made considerable efforts to expand the enterprise and education (E&E) business. It has acquired several education-technology companies in recent history, including Livemocha, Lexia Learning Systems, Vivity Labs, and Tell Me More S.A. These new assets are expected to bolster bookings growth and support product development, trends that should ultimately generate healthy long-term returns. We anticipate Rosetta to continue making profitable bolt-on acquisitions.
Overall, consolidated bookings are expected to grow in the mid-single-digit range in fiscal 2014. Although the company’s business transformation will likely continue to create short-term headwinds, we believe these changes will position Rosetta Stone on a path for substantial long-term growth. Consequently, at the recent quotation, the equity offers above-average appreciation potential over the pull to 2017-2019.
LSB Industries, Inc.
LSB Industries is a diversified holding company involved in manufacturing and marketing chemicals. The company operates two discrete businesses: The Chemicals segment (65% of March-period sales) manufactures and sells nitrogen-based products through four facilities located in El Dorado (Arkansas), Cherokee (Alabama), Pryor (Oklahoma), and Baytown (Texas). Its chemicals are mostly used in agricultural, industrial, and mining applications. The Climate Control business (34%) makes and sells a broad range of heating, ventilation, and air conditioning (HVAC) products (primarily heat pumps), as well as parts for other residential and commercial uses.
LSB has faced significant headwinds over the past few years. Specifically, there was an explosion at a nitric acid plant in El Dorado, Arkansas (May of 2012); a pipe rupture within its Cherokee, Alabama facility (November of 2012), which caused damage primarily to the heat exchanger portion of its ammonia plant; and the suspension of production at the Pryor Oklahoma operation, which stemmed from ongoing mechanical issues. All of these setbacks resulted in significant production losses and adversely impacted top- and bottom-line growth. As a result, operating income was reportedly $104.6 million and $120.6 million lower than it should have been in 2013.
After a series of events, including insurance claims and recoveries, the company has made progress, but has yet to fully recover. It is now in the midst of building better, more efficient facilities, which ought to provide higher-production capacity.
LSB Industries has made significant investments in expansion as well as plant reliability enhancements and safety upgrades, and we expect this to continue in coming years. However, this requires a significant amount of capital. In fact, total planned expenditures for the Chemical business are expected to be in the $437 million-$539 million range, most of which will be on El Dorado Facility projects. This is comprised of the construction of the ammonia plant, a nitric acid plant and concentrator, as well as support infrastructure.
For a more recent update, the company reported increased production at the Cherokee Facility and Pryor Facilities during the first quarter of 2014, which augurs well for revenues and profits. And, although there have been some hiccups of late, LSB’s facilities are operating and performing at acceptable, yet most likely not optimal, production levels.
All in all, improvements in the Chemical business, combined with growth in the Climate Control Business, should be a recipe for significant top- and bottom-line gains. In fact, analyst Warren Thorpe expects earnings to reach approximately $6.30 a share, on revenues of $1.35 billion, over the 2017-2019 time frame. Based on these projections, the stock offers worthwhile 3- to 5-year capital appreciation potential.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.