Walgreen's: Moving ahead

Walgreen’s: Moving Ahead:  Walgreen’s (WBA) and RiteAid deal concludes, finally.   After several unsuccessful attempts at getting government approval for its acquisition of RiteAid, WBA has adjusted its appetite for more stores and has agreed to purchase 2,187 locations around half of RiteAid total sites.   While smaller than initially desired, the $5.75 bill purchase should quickly get FTC approval.  

Since its beginning in 1901, WBA has been one of the most effective retail operators and has emerged a major player within the pharmaceutical supply chain. The firm processed approximately 19% of total U.S. prescriptions during its fiscal 2016, which makes it one of the largest retail pharmacies. The firm filled 929 million 30-day equivalents prescriptions last year.  With the merger of European-based Alliance Boots, WBA has a unique global retail pharmacy footprint.  

About 2/3 of revenues are derived from the distribution of pharmaceuticals, and puts WBA squarely in the crosshairs of healthcare reform and costing.  WBA’s profitability will be driven from synergies of the acquisition of additional stores and pushing more sales from the “front end” or non-pharmaceutical items.   

As most investors can appreciate, the competition for drug sales continues to intensify.  With fewer third party payers, which are the majority of WBA’s clients, distribution profits have been squeezed as payers negotiating positions improve with volume strength.  WBA has been countering margin pressures by growing both in size and importance in the distribution channel, hence the addition of almost 2,200 more stores. 

The merger with Boots has altered Walgreen's front-end retail marketing approach to emphasize higher margin cosmetic’s and limited grocery items.   However, if the most recent quarter is any indication with total same-store-sales SSS growing by 2.4%, the -0.8% decline in front-end continues to be an issue.

Historically, WBA has been a retail growth powerhouse with same-store-sales SSS in the low double digits, driving high Return on Invested Capital.  However, as SSS declined, so did ROIC.  According to fastgraph.com, in 1996, WBA generated ROIC of 20%, in 2006 18%, and in 2016 8.5%.  As a comparison, Walmart generated ROIC of 12%, 13%, and 11%, and Target generated ROIC of 7%, 11%, and 12%, respectively.  

Over the past year WBA has been an obvious under-performer vs S&P 500.  WBA is down about 5% while SPY is up by a bit more than 15%.  

With the overhang of the RiteAid drama now in the rear-view mirror, management can focus on improving performance.  

The bullish case for WBA is as compelling as the bear and neutral case.  

75% of the US population resides within the geographic reach of its 8,100 stores. This coverage increases its desirability to drug providers and provides scale in pricing negotiations.  

Indisputably, pharmaceutical sales will continue to grow, both in the US and Europe.  WBA is unique in the combination of both these markets, giving investors both the benefits and pitfalls of a multinational health care company.

WBA has generated strong operating cash flow.  In FY (Aug) 2016, WBA generated $7.8 billion in operating cash flow and $8.1 billion over the previous 12 months.  OCF has almost doubled from an average of $4.4 billion from 2007 to 2015and has created a current cash balance of $11.8 billion, before the RiteAid acquisition.  OCF growth is expected to continue its growth with the addition of more retail locations.       

Cost containment and cost reductions continues to be a key focus of management. since 2010, operating expenses as a percentage of sales has declined from a high of 23% to 18%, offsetting drug distribution margin pressures. 

In addition to higher operating cash flow and lower operating expenses, WBA has been aggressive in its cash and working capital management.  In 2013, the average cash conversion days, or how fast a company can convert cash on hand into inventory and accounts payable, through sales and accounts receivable, and then back into cash, was 32 days. As of last quarter, conversion days had dropped by almost 2/3s to 13.5 days, representing a substantial improvement in working capital management. 

In March 2013, WBA and wholesaler AmerisourceBergen Corp (ABC) announced a 10-year agreement (subsequently extended to 2026) to source all drugs through a newly formed strategic partnership which would enable sharing of synergies by layering ABC's generic volume into WBA. Previously, WAG sourced branded pharmaceuticals through Cardinal Health Inc., specialty pharmaceuticals through ABC and generics directly from manufacturers. WBA currently owns approximately 26% of ABC.  This relationship helps build profitability for the longer term.  

WBA’s valuations are in line with its major competitor, CVS Heath.  Investors should expect the Beta to come down as the trials and tribulations of the RiteAid acquisition fall by the wayside.  

While not all is rosy at WBA, most analysts have a favorable opinion of the future for Walgreens.  The average price target is in the $95 range, for a potential gain of 21%.  Driving share growth will be earnings growth from the current $5.00 estimates for this year to $6.00 in 2019.  

This article first appeared in the July 2017 issue of Guiding Mast Investments.  Thank you for reading, George Fisher

HollyFrontier: Buy for income; Stay for the capital gains

HollyFrontier’s current weakness offers long-term investors a prime buying opportunity.  Mid-cap value stock HollyFrontier (HFC) is one of the largest independent petroleum refiners in the U.S., with operations focused in the Mid-Continent, Southwest and Rocky Mountain regions.  

On May 3rd, HollyFrontier reported a first quarter net loss of $(45.5) million, or $(0.26) per diluted share. The Company also declared a quarterly dividend of $0.33 ($1.32 annually) per share to shareholders. At the end of the qtr., book value stood at $26.00.

First quarter results were negatively impacted by planned and unexpected refinery outages for repairs and routine maintenance.  There is no major downtime planned until Nov, and these issues could be considered as “one-time”. For the balance of the year, quarterly earnings per share are expected to be $0.77, $0.62, and $0.22. EPS for 2017 is expected at $1.47 to $1.52 and for 2018 between $2.26 and $2.77.  

HFC rallied after the election from around $23 to a high of almost $34, but fell back in May after the earnings disappointment to $25.   

Driving investor interest was the belief the current administration would reduce the regulatory cost of renewable identification numbers, or RINs.  RINs are a bio-fuel tracking mechanism that is like “carbon credits” where bio-fuel companies generate RINs that can be sold to refiners like HFC to offset production of fuels like E85. RINs are a positive for ethanol makers and an expense for refiners. HFC currently spends over $100 million a year to purchase RINs.  The thought process is that presidential advisor Carl Icahn, a large investor in refining firms, would be instrumental in reducing the burden and expense of the RIN program.  

However, that has not yet happened.  From HFC 1st qtr. 2017 10-Q:  The (RIN) regulations, in part, require refiners to add annually increasing amounts of “renewable fuels” to their petroleum products or purchase credits, known as renewable identification numbers (“RINs”), in lieu of such blending. Compliance significantly increases our cost of products sold, with RINs costs totaling $66.0 million for the three months ended March 31, 2017. Year-over-year increased costs of ethanol blended into our petroleum products, which exceeded the cost of crude oil, also contributed to lower refining margins for the quarter.  

RIN payments are somewhat volatile and during the first quarter, the RIN program reduced profits per share by $0.38.  Annualized, a 50% reduction in RIN expense could add between $0.30 and $0.68 per share to profitability.  At a 10x valuation, this increase could add $3 to $7 a share to HFC valuation.    

HFC maintains one of the most complex refinery operations.  HFC’s complexity ratings is 12.1, on a scale of 1.0 to 14.0, with a US average refinery complexity of 9.0. For investors, this means that HFC operates one of the most complex and potentially profitable chains of refinery assets in the US. The higher complexity factor allows HFC to refine lower grades of crude into gasoline and diesel, potentially expanding comparable margins.

This advantage shows up as a substantially higher ROIC than its peers. In 2016, HFC exceled in generating returns on invested capital. At a ROIC of 17%, HFC bested its peer 5-yr average of 13% by 30%, and was second only to Western Refinery’s 19%. HFC has generated first class operating profits per barrel and its 5-yr average profit per barrel is best of its peers. In 4 of the last 5 years, HFC has been either #1 or #2 in industry profitability.

In Feb, HFC completed the acquisition of the Canadian lubricant business from Suncor (SU). Wall Street is expecting the acquisition will stabilize commodity-driven refinery spreads and overall operating profitability.  

HFC owns 22.4 million limited partner units of its midstream MLP spin-off, Holly Energy Partners (HEP), representing a 39% stake, and also holds a 2% general partner interest.  At current valuations, HEP shares owned are worth $4.75 per HFC share and contributes $0.30 per share in distributable income for HFC stakeholders. 

Catalysts for higher share prices are: 
1) improving refining margins, partially created by a higher spread WTI to Brent; 
2) reduction in the RIN program; 
3) reduction in federal income tax rate;
4) increased profitability from the lubricant business expansion; 
5) increased contributions from Holly Energy Partners.

At the current price, HFC offers a 5.7% dividend yield, providing strong support to total stock returns.  While patience may be needed for HFC to realize its full potential, buy for its current income and stay for the capital gain potential.  

This article first appeared in the June 2017 issue of Guiding Mast Investments. Thanks for reading, George Fisher

Updates: Glaukos (GKOS), Ferrari (RACE). Syericycle: Interesting combo of medical waste disposal and information destruction

Updates on recommendations Glaukos (GKOS) +42% and Ferrari (RACE) +62%:   Based on a 42% capital gain in 4 months Jan 1017 to April 2017 for GKOS and the high-risk nature of the single-product ophthalmic medical firm, I took profits and moved on. My concern is the high valuations with little in the form of cash earnings on the horizon.  In addition, there will be plenty of competitive products from both hard devises like the iStent and less invasive eye drops.   

Ferrari has done a bit better with a 62% gain in 7 months and is also trading at elevated valuations compared with other ultra-luxury brands.  Profits were taken as well and the positon was reduced by half.   If share valuations return to those experienced over 6 months ago, I would again be a buyer of RACE.   If not, I am happy with retaining a half position and the cash profits.     

Stericycle (SRCL) offers an interesting combination of medical waste disposal and “information destruction” services.  SRCL has historically been focused on surgical and medical waste disposal of items such as needles, sharps, gloves and gowns, mainly generated at large hospitals with active surgical centers.  As a service provider to cost-constrained facilities, SRCL grew by acquisition and consolidation in their market.

There used to be 2,000 medical incinerators in the US.  Due to more stringent regulations and a growing preference to sterilize and reuse (autoclave process) than disposal, the number of medical waste disposal incinerators has shrunk to under 50.  There are only 15 sites that accept outside generated waste, and SRCL operates 10 of these facilities. In addition, SRCL operates 200 transfer stations to efficiently move waste through its disposal network.    

The company maintains relationships with over 500,000 customers with an annual retention rate exceeding 92%.  The company believes it has a 10% global, and 30% of US, market shares in the fragmented industry of medical waste management.  

In 2015, SRCL moved past its medical focus and into document shredding and disposal, interesting known as “information destruction”.  Management bought market leader Shred-it, adding mobile units, an established customer base and routes, and shredding equipment.      

The addition of document management adds to the plate of services offered to existing clients.  Management believes shredding adds a minimum revenue potential of 5% and 6% per hospital client and 7% to 10% for physicians’ offices.   

US Domestic Regulated Waste and Compliance Services generated $2.4 billion in 2016 revenue and constituted 66% of total receipts.  Communication Services was $300 million in revenue, 8% of the total, and International was $900 million or 26%.

Under Communications Services, SRCL offers comprehensive solutions to patient communication issues for hospitals and doctor offices.  These include, from their website: 
•    Live customer service during the day or after business hours to provide superior service, capture additional revenue and enhance customer/patient satisfaction.
•    Book appointments online in a self-serve manner or through trained agents over the phone at time that is most convenient for customers or patients. 
•    Reduce no-show rates and missed appointments with appointment reminder notifications via call, email or text.
As costs are being squeezed across the spectrum of medical expenses, SRCL strength is its relative size and diversity of product offerings.  For example, in 2016, management generated $411 million in free cash flow.   Debt is being reduced by 8% to 9% annually, and should be below $2.6 billion by the end of this year.  

However, investors have been burned recently based on stumbles with integrating Shred-It.  Share priced peaked in 2015 in the $140s, and have fallen about 50% since. 

Management is calling for flat earnings comparison 2016 to 2017.  According to the latest investor presentation, 2016 EPS of $4.75 should be adjusted as follows:
Price Concessions          -$0.25 to -$0.30
Corporate Expenses         -$0.17 to -$0.21
Revenue Growth        +$0.17 to $0.21
Merger Synergies        +$0.13 to $0.15
Share Repurchase         +$0.05 to $0.07

Net result is 2017 EPS in the $4.60 to $4.75 range.  Of concern is the high relative price concessions already identified as a hurdle.  

Investors looking for exposure to the medical sector should review Stericycle.  Their niche businesses and extensive cross selling opportunities should allow management to get back on the growth track after stumbles caused by customer consolidation, claims of inappropriate price increases, and auditor concerns with financial controls.  These issues appear to be already priced into stock valuations, and a return to its historic growth projections would reward long-term investors.     

Consensus EPS growth is expected to be in the 8% to 10% range and SRCL does not currently pay a dividend. Price targets vary from $95 to $100 range, offering a 9% to 10% total annual return over the next 2 years.   

This article first appeared in the May 2017 issue of Guiding Mast Investments.  Thanks for reading, George Fisher

Silver Run Acquisition II: Replay of SRA1's 92% 1-yr return?

Silver Run Acquisition II (SRUNU):  A replay of SRA1’s 92% 1-yr return? A year ago, we offered a new IPO company as an Off the Radar Screen choice – Silver Run Acquisition Corp SRA1.  Due to increase risks, we don’t usually review IPOs or newly formed companies, especially in the high-risk area of oil and gas exploration.  There are plenty of small-cap carcasses discarded along the side of the energy superhighway. 

However, SRA1 is different.

The investment strategy is to buy into a “special purpose acquisition corporation” SPAC, which is also known as a “blank check” corporation, and is formed with the specific purpose of building a new company with fresh capital to purchase oil and gas assets.    In this type of company, investors are relying on the partners’ management abilities to locate, purchase, and execute a business plan.   In the case of SRA1, the attraction is Mark Papa, founder and retired CEO of EOG Resources (EOG), one of the industry’s most revered managers.   Papa came out of retirement for the opportunity to develop and manage SRA1.  The original $400 million blank check nature of the structure, combined with issuing addition shares over the past year, has allowed Papa to build an $3.6 billion market cap oil and gas E&P company with no debt.     

Backed by Riverstone Holdings, SRA1 has morphed into Centennial Development Corp (CDEV) and share prices have risen from a post-IPO price of below $9.48 (including excised warrants) to $18 today.  Investors who bought the SRA1 SPAC shares received 1 common share and 1/3 of a warrant. Recently, the warrants were converted into additional shares. CDEV is currently focused on the opportunities in the Permian Basin, one of the hot drilling areas in the US.  Of the 809 drilling rigs currently operating across the US, almost 40% are working in the Permian Basin. Analysts at Wunderlin recently upped its price target on CDEV to $28.     

Now along comes Silver Run Acquisition II (SRUNU) another Riverstone Holding SPAC.  The concept is to duplicate the success of CDEV.  Similar to Papa, James Hackett, former CEO of Anadarko Petroleum (APC), is the attraction of SRUNU. 

During his CEO tenure at APC from 2003 to 2012, Hackett proved to be a good steward of shareholder capital, taking on a minimum of debt and equity issuance while focusing on delivering above-average returns on invested capital. Hackett’s management style included an insistence on maintaining a strong balance sheet. which has helped APC weather the current low-price environment.   

Silver Run Acquisition II recently had its IPO and sold to investors 100 million shares of stock and 33 million warrants, including overallotment, worth $1.0 billion.   The IPO proceeds are being held in escrow until the company starts making acquisition transactions.   

Riverstone owns 20% of SRUN's current shares, giving them an incentive to make sure subsequent transactions are in the best interest of all shareholders. In addition, Riverstone has given a forward commitment to purchase $400 million in common shares and warrants (40 million shares plus 13.3 million warrants) at $10 per share at the time of the initial purchase transaction. Combined, Riverstone could own upwards of 37% of SRUN.   

The SRUNU “units” consists of one share of common stock and 1/3 of a warrant to buy additional shares at $11.50.

While CDEV's CEO Mark Papa had broad experience in onshore oil and gas, it should be noted that Mr. Hackett's expertise also includes companies with significant offshore assets, including Anadarko, Devon, Ocean and Seagull. That is not to say that the offshore arena would be an area of focus, but it is one possibility.   

While the use of SPAC structures are becoming more popular, the risks involved have not diminished.  As unproven entities, it is extremely important investors feel comfortable with management’s past abilities as this is all they have to evaluate, coupled with the expertise of Riverstone.  On this front, I support both Hackett and more importantly Riverstone Holdings.  

Speculative investors may want to review SRUNU as the IPO and Riverstone commitment has generated over $1.4 billion in capital for Mr Hackett to spend – one sizeable blank check and definitely sufficent capital to acquire assets that are being offered on the cheap by financially distressed energy firms.

The key to both SRUNU and CDEV is their ability to find undervalued oil and gas assets. In these days of stress and over-leverage in the energy field, private equity firms are offering stiff competition at times.  Yet, both SPAC companies have the envious position of carrying no debt in an industry overflowing with bad loans. 

Having $1.4 billion in cash and no debt certainly improves SRUNU’s negotiating position.  In today’s energy segment, there should be plenty of profitable opportunities to pick from among the dying carcasses lying along the side of the energy superhighway.    

However, speculative and unproven it is and investor need to be comfortable with this level of risk. 

As an add-on to my position in CDEV, I also bought into SRUNU.   

This article first appeared in the April 2017 Issue of Guiding Mast Investments.  Thanks for reading.  George Fisher

Who is the Boss? It's founder-run companies with a 310% history of out-performance.

Who is the Boss?  It’s founder-run companies with a 310% out-performance history.    ETFs are not a new investment vehicle and have been around for over 20 years.  Developed by Morgan Stanley to counter index mutual funds, ETFs have their roots in MS’s WEBS, or World Equity Benchmark Shares, which represented the components of various international stock exchange indexes. For example, the Malaysian WEBS included stocks that make up the Kuala Lumpur Composite Index.  In their heyday, WEBS were offered for market indexes of 16 mainly developed countries including Australia, Canada, Hong Kong, Japan, Malaysia, Mexico, Singapore. 

I use ETFs as a means of garnishing exposure to industries or sectors which would be difficult to replicate by investing in a few specific stocks.  I look for ETFs with a twist or a focus that sets them apart from typical market-oriented products.  Equal-weighted S&P 500 (RSP) is an example of the type of ETF I gravitate to.  

Another such ETF is the new Global X Founder-Run Companies ETF (BOSS).  BOSS is a bet that company founders will be better managers than subsequent generations of executives, resulting in stock outperformance.  The ETF, with an inception date of 2/13/17, invests mainly in mid- and large-cap firms where the founders are still in charge.  While the portfolio is expected to be equally weighted and rebalanced annually, sector exposure leans towards tech and healthcare.  

The strategy behind BOSS is simple: firms run by founding fathers (and mothers) outperform over time.   In a report by Chris Zook, Bain Capital  shows that since 1990, founder-run companies outperformed the S&P 500 index by 310%.  The most outperformance has been since the crash of 2008-2009.    

The reasoning behind this is pretty straightforward.  From the Bain report:  In his blog, Ben Horowitz lists three reasons his VC firm prefers founder CEOs: founders have the moral authority to make the hard choices, they know the detail of the business and have better instincts, and they have a long-term perspective on investments and building a company that lasts.

Zook lists three basic business model and management style differences that clearly separate founder-run companies from firms managed by post-founder teams. 

The first is the unique, spiky feature, or capability that gives a business special purpose. We call it business insurgency. My co-author James Allen refers to this as waging war on industry norms on behalf of underserved customers, as Netflix did for video rentals, or to create a new market entirely, as Google has done, following its mission to organize all of the world’s information. 

The second element of the founder’s mentality is a front-line obsession — as the founder had. It shows up in a love of the details and a culture that makes heroes of those at the front line of the business and gives them power.

The third element is an owner’s mindset, the fuel that propelled the rise of private equity, whose essence is dialing up speed to act and taking personal responsibility for risk and for cost.

In addition, founders tend to have significant personal wealth tied to the companies they lead, and thus often focus on long-term value creation through innovation and entrepreneurial-ism.  Global X adds: For example, the average annual compensation for founder/CEOs is 32% less than that of the average S&P 500 CEO, as founders understand that maximizing their salary could come at the expense of deploying cash to fund long-term growth opportunities, and thus hurt their equity value over the long term. In addition, these CEOs are careful to not take on excessive debt, as bankruptcy would wipe out the value of their equity stake. As a result, founder-run companies exhibit 52% lower debt-to-equity ratios than the S&P 500 as a whole.  

The list of the top 15 holdings out of a current total of 96 is an interesting list of stocks, many of which are probably unknown to most investors:

While the 0.65% ETF fee is higher than many would like, the diversification this ETF offers is unique.  As a traditional growth-focused portfolio, many of the fundamental aspects could seem expensive, especially in an overvalued market.  For example, the average PE of the BOSS’ portfolio is 32, average price to book value is 2.97, and the average ROE is 9.5%.   

I have taken a starter position in BOSS and expect to add to it over time.  I like the concept and strategy, and it fits my overall ETF selection framework.

More information can be found in the Bain Report titled “Founder-led companies outperform” and at the Global X ETF website, both links are below.



This is one ETF worthy of your time for due diligence. 

This article first appeared in the March 2017 issue of Guiding Mast Investments Newsletter.  Thanks for reading.  George Fisher

MLPs: Don't Fret Rising Interest Rates

MLPs for income.  MLPs should be in your portfolio for income.  In a low rate environment, investors have been hamstrung for the past several years looking for income. In their 1st qtr. Investment Recap, JP Morgan offers the following table of average yield by asset class.  

There are tax implications to owning MLPs, such as the need to file K-1s and the debate concerning investing with tax-deferred accounts.  It is important that investors review these issues with their tax preparer.  For DIY tax payers, tax filing software includes easy to complete forms for MLP income.     

Many investors are concerned about buying stocks in the face of rising interest rates. JP Morgan also addressed this issue with a chart of the 2-yr rolling correlations between weekly stock returns and interest rate movements going back to 1963.  Along the bottom is the yield on 10-yr Treasuries and the left side number is the correlation coefficient, with the horizontal line in the middle at 0.  Above the line indicates a positive correlation, i.e. they move together.  Below the line is a negative correlation, i.e. stocks decline and rates increase.

When 10-yr Treasury yields are below 5.0% (red line), rising rates have historically been associated with rising stock prices.  The break point is at the 5.0% yield level where stock returns turn negative as rates continue to increase.  

Many fixed income forecasters peg 10-yr Treasury yield in the 3.0% to 3.5% range at year end.  While this is creeping up from the current 2.49% yield, it is still below the 5% threshold suggested by JPM.  

With an anticipated decline in stock price returns, income will become a higher portion of total investment returns, hence a focus on dividend and distribution yield.  

Midstream MLPs have been making a comeback after being decimated with the decline in oil and gas prices since 2014.  For many firms, the darkest days should be behind them as oil settles into a $50 to $60 range over the next few years.  

Investors who are seeking long-term income should review the following four MLPs:
o    Spectra Energy Partners – SEP – 5.8% yield
o    Enterprise Products Partners – EPD – 5.7% yield
o    Dorchester Minerals – DMLP – 5.4% yield
o    Dominion Midstream – DM – 3.25% yield

More speculative firms worthy of further research include:
o    Summit Midstream – SMLP – 8.8% yield
o    Enable Midstream – ENBL – 7.7% yield
o    Phillips 66 Partners – PSXP – 3.7% yield

As the energy midstream markets continue to improve, investors in these MLPs will see distribution increases, improving their yield on cost.  For example, EPD continues to raise its quarterly distribution.   Since the partnership’s IPO in 1998, EPD’s latest hike represents the 59th distribution increase and the 50th consecutive quarterly increase.  As more projects come online, Dominion Midstream management has set a goal of raising its distribution by 20% a year over the next few years.  

Thanks for reading.  This article first appeared in the Feb 2017 issue of Guiding Mast Investments.  George Fisher

Glaukos Medical: Small-Cap Firm with Big Opportunities

Glaukos Medical (GKOS) is an interesting small ophthalmic medical technology company.  GKOS, with 2016 revenues of around $110 million, has devised a “stent” that is surgically implanted in the eye to allow the organ to consistantly drain, reducing eye pressure.

According to the company, there are over 4.5 million people in the US with glaucoma, and 83 million inflicted worldwide.  The vast majority have open-angle glaucoma, which manifests itself through elevated intraocular pressure (IOP), aka high eye pressure.  GKOS believes the current global glaucoma treatment market is around $5 billion, and could grow to $7 billion in 2021.  

Left untreated, glaucoma can cause loss of vision, and is the leading cause for blindness across the globe.  Conventional treatments include eye drops multiple times a day, laser surgery, and invasive surgery.  However, each treatment has its severe drawbacks.  The drops are uncomfortable and for many patients causes consistent eye irritation; laser treatment results typically last only 1 to 5 years; and invasive surgery is highly complicated with lower success ratios.   Typically, eye drops are prescribed, but 40% to 60% of patients stop taking them.

I can appreciate the problems with the drops as I have been taking them for several months.  

There is a new area of treatment called micro-invasive glaucoma surgery, or MIGS.  Treatment typically involves implanting a device in the eye to relieve eye pressure, and is often used in connection with cataract surgery.   

Usually the treatment goal is to reduce IOP to the 15 range, with a reading of 20+ being the level to begin treatment.  In 2012, the FDA approved the GKOS stent, called iStent, after clinical trials showed a mean reduction in IOP from 23.0 to 14.9 after 3 years and to 16.3 after 5 years.  

iStent is the first and only FDA-approved MIGS implantable micro-surgical devise to help regulate eye pressure, but there are others in the works.  Competitors are working on similar devices (Alcon’s Cypass and Ivantis’ Hydrus drain tube pictured above next to a penny for comparison), but they are substantially larger in design and appear to be more cumbersome.  At 1 mm, iStent is quite a bit smaller than the 6.5mm Cypass or 8.0mm for Hydrus.  The iStent is smaller than the “L” in the word “Liberty” on the front-side of a Lincoln penny.  Pull one out of your pocket for comparison and you may be amazed at its small size.  iStent is also the smallest surgical device ever approved by the FDA.  

While there will eventually be competition, it seems the iStent product benefits and “first out of the gate” positioning will favor GKOS for some time.  

iStent has been approved for 100% reimbursement coverage by Medicare and most national private insurance companies approve of its use. 

There are currently 2,200 surgeons in the US approved to use iStent, out of a total of 5,500 surgeons who perform the majority of cataract surgeries. GKOS is expanding its surgeon base by around 60 per month, or about 30% annually.   GKOS is currently seeking 2 new FDA approvals for spin-off and improved designs of the iStent.  

Share prices collapsed in Jan 2015 from $25 to $15, based on a temporary slowdown of growth.  However, in May 2016, investors started to regain confidence in the GKOS story, and share prices climbed to over $30 by Aug, and the stock has traded between $30 and $40 since.  The current price is $34.  

William Blair, Wells Fargo, Piper Jaffery, Roth Capital, GMI, and Cantor Fitzgerald have GKOS rated as a buy or outperform with three analysts rating the stock as neutral.  The average price target is $41.    

Anticipated earnings per share are $0.12 in 2016, $0.22 in 2017, and $0.54 in 2018.  Revenues are anticipated to grow to $110 million, $142 million and $172 million, respectfully.  The firm lost
-$2.12 in 2015.  

Technically, the stock appears to be about its support range of $32, and if it falls below that level, it could hit $28. 

While the company has potential to continue growing in the 40% range, and is on the cutting edge of ophthalmic medical technology, it is difficult to peg a valuation on shares.  I like the exposure to a growing glaucoma medical treatment, but GKOS is not for the faint of heart as it is a very speculative buy.   Interesting but speculative.  


This article first appeared in the Jan 2017 issue of Guiding Mast Investments.  Thanks you for reading.  George Fisher

Algonquin Power: Growing US Utility Based in Canada

Algonquin Power (AQN) is a Canadian-based diversified utility with growing holdings in the US.  AQN operates windmill farms in Canada, water utilities in the west, and electrical and gas utilities in the east.  With the recent $3.2 billion acquisition of Empire District, AQN has materially expanded its utility operations in the US. AQN’s Liberty Utilities subsidiary now serves over 782,000 customers within a regulated US utility profile.  AQN also operates regulated and non-regulated power generating facilities on both sides of the border with a total capacity of over 2,500 MW.

AQN has been building its US business for many years.  In 2009, AQN partnered with Nova Scotia based Emera (EMRAF) to purchase electrical transmission lines around Lake Tahoe, and has been acquiring smaller US utility asset ever since.   

Liberty Utilities has operations in Arizona, Arkansas, California, Georgia, Illinois, Iowa, Kansas, Massachusetts, Missouri, Montana, New Hampshire, Oklahoma, and Texas. 

AQN was recently listed on the NYSE and should begin to appear on income investor’s radar screen.  Unlike many foreign utilities with US assets, AQN’s dividend is paid in US Dollars.   There is sufficient operating cash flow from US operations to cover the cash dividend outlay to US investors.  

While the value of shareholdings carry currency risk, the distribution payout does not, and this advantage should be attractive to income seekers.   AQN currently offers a 4.9% yield.

For the past 7 years, AQN has partnered with Emera on many US projects, with Emera acting as an active buyer of newly issued shares to finance various US expansions.   Emera, known for being shareholder friendly, has several directors on AQN’s board.  It seemed like an eventual good match, with Emera having a 62 million share head start.  However, Emera decided to purchase Florida-based TECO utility and sold its position in AQN to finance this expansion.  Since buying in 2010, I have been “hoping” for a merger as AQN could help EMRAF’s Canadian-government mandated renewable energy generating profile. 

The company expects to invest C$9.7 billion between 2017 and 2021.  Returns on this capital budget should allow earnings to grow at an 8% or higher rate, with matching dividend growth.

Investors should expect AQN to continue to expand by acquiring smaller utilities assets across the US. Its diversified footprint reduces overall utility risk, and coupled with its US dollar payout, should be considered as a core small-cap utility holding.  

Thank you for reading.  This article first appeared in the Jan issue of Guiding Mast Investments.  


Hill Rom: Underfollowed medical equipment firm

Hill Rom Holdings (HRC) is a mid-cap medical equipment company overlooked by many investors.  Their product portfolio is extensive and growing with a concentration in patient mobility. The company also sells services for their products such as hospital room and facility design, training, and clinical solutions as well as providing rental and leasing of their equipment. The company has recently completed several acquisitions, including point of care diagnostics and testing equipment manufacturer Welch Allyn in 2015, German operating room equipment manufacturer Trumpf Medical in 2014 and disposable surgical blades and scalpels manufacturer Aspen Surgical in 2012.  Management plans on more acquisitions over the next few years. 

Of interest is the firm’s focus on acquiring mainly privately-held firms with strong niche markets that expand HRC’s product offering to their existing customers.  Only 40% of 2016 revenue was generated from hospital’s capital expenditure spending, such as beds and operating room equipment.  60% of revenues was from services, leases, and medical disposables. A strong non-capital expenditure dependent focus allows HRC to better maneuver some of the market fluctuations seen by its equipment peers.    

Years ago, HRC’s main products were hospital beds and funeral caskets, but in 2008 spun off the casket business and has been expanding its medical equipment business, mainly through acquisitions. For example, in 2015, HRC purchased privately-held Welch Allyn, a manufacturer of home- and doctor/hospital- based blood pressure testing equipment.   HRC reports with a Sept fiscal year end.  Total FY2016 revenues were $2.7 billion

The company focuses on patient care solutions in several core areas:

·    Advancing Mobility focuses provides patient care systems including a variety of bed systems, such as Medical Surgical (MedSurg) beds, Intensive Care Unit (ICU) beds, and Bariatric patient beds, as well as mobility solutions such as lifts and other devices used to safely move patients.

·    Wound Care and Prevention offers non-invasive therapeutic products and surfaces designed for the prevention and treatment of a variety of acute and chronic medical conditions, including pulmonary, wound, and bariatric conditions.

· Medical Equipment Management and Contract Services leases to health care providers a wide variety of moveable medical equipment, such as ventilators, defibrillators, intravenous pumps and patient monitoring equipment.

· Surgical Safety and Efficiency offers surgical tables, lights, and pendants utilized within the operating room setting. It also offers a range of positioning devices for use in shoulder, hip, spinal and lithotomy surgeries as well as platform-neutral positioning accessories for nearly every model of operating room table. In addition, it offers operating room surgical safety and accessory products such as scalpel and blade, light handle systems, skin markers and other disposable products. The products offered within this category are primarily recurring, consumable revenue streams.

·    Respiratory Health offers therapeutic products that provide bronchial hygiene (airway clearance) for acute and home care patients.

Hill Rom reports in three groups: Patient Support Systems, Surgical Solutions, and Front Line Care.  

Patient Support Systems FY2016 revenues were $1.4 billion, up 2% over previous FY 2015.  The company is forecasting low-single digit revenue growth for FY2017. 

Surgical Solutions FY 2016 revenues were $408 million, down 1% from FY2015. The company is forecasting mid-single digit revenue growth for FY2017.   

Front Line Care FY2016 revenues were $810 million, up 6% from FY2015. The company is forecasting mid-single digit revenue growth for FY2017. 

While revenues were relatively flat for 2016, margins are expanding as the firm realizes cost synergies from its Welch Allyn acquisition. In addition, the company is on an overall cost savings plan to boost profit margins.  

It is management’s goal to expand earnings per share by approximately 14% to 18% while growing revenues by 3% to 5%.  Although it is tall order, the street seems to believe management can deliver on these targets.

Of the six analysts following HRC, three have the stock recommended as a Strong Buy, two as a Buy and one as a Hold.  The average price target is $67, or 26% above HRC’s current price.  To achieve this price target, earnings will need to grow to over $3.94 per share and the PE ratio will need to expand from its current 15 PE to 17 PE.  This falls in line with EPS estimates of $3.78 in FY2017 and $4.19 in FY2018.  

Zack’s commentary on its Hold recommendation:  Hill-Rom ended fiscal 2016 on a promising note with its fourth quarter numbers squarely beating the Zack’s Consensus Estimate. The company’s outcome on a yea rover-year basis was also impressive. The company’s year-over-year outcome was impressive along with record level of gross margin. We are upbeat about the company to remain on a solid growth trajectory over the near term based on its strong 2017 guidance. Based on several positive catalysts, we expect the company to expand geographically in the coming quarters. Notably, in the last reported quarter, Hill-Rom posted strong growth in both Asia-Pacific and the U.S.

However, Hill-Rom’s persistent poor performance in the International front, especially in the Middle East and Latin America keeps us concerned. Unfortunately, no near-term improvement can be expected in the existing capital crunch condition that eventually led to economic and political downturns in these economies.

Hill Rom does not lack competitive pressures.    HRC competes with a variety of small and large companies such as Stryker Corporation, Universal Hospital Services, Philips, Covidien, GE Healthcare, Skytron and DeRoyal.

Investors seeking a smaller healthcare company would be well served to review Hill Rom. The company stock has almost doubled since Jan 2013.  While not as flashy as biotech or as massive as Johnson & Johnson, HRC is well positioned for a continuation of its expansion through acquisitions. 


Thanks for reading.  This article was first published in the Dec 2016 issue of Guiding Mast Investments.  George Fisher

Eight high-yield stocks with capital gains potential

Morningstar offers a premium stock screening tool which allows users to filter specific results.  I recently ran a screener looking for higher yielding stocks that are well liked for current undervaluation and offered above average historic dividend growth.  The screen criteria:

·         US Domestic Company

·         Morningstar Rating of 4 or 5 Stars (their highest)

·         Current Yield Over 4.0%

·         5-yr Dividend Growth over 7%


It is not surprising 7 out of the 8 stocks are either energy or financial asset managers.  These are the two most beaten down segments of their respective out-of-favor industrial sectors.  Five out of the eight are master limited partnerships.

An undervalued stock offering greater than a 4% current yield with a history of raising annual distributions by almost 3 times the inflation rate should be of interest to investors on many fronts.  These eight stocks should be on your research list or in your portfolio. 

Keep these names on your radar screen with their respective discounts to Fair Valuation:


Stock                                                    Discount

HollyFrontier Corp (HFC)                    46%

Magellan Midstream LP (MMP)             13%

Spectra Energy LP (SEP)                      17%

Sunoco Logistics LP (SXL)                    16%

KKR & Co LP (KKR)                               24%

Blackstone Group LP (BX)                    36%

Waddell & Reed Financial (WDR)         26%

The Mosaic Co. (MOS)                           26%


Thanks for reading.  This article first appeared in the Nov issue of Guiding Mast Investments.  George Fisher

Putnam Investment's parent, Power Corp of Canada is undervalued and overlooked

Founded by the Demarais family, Power Corp of Canada (PWCDF, PWF.TO) is a powerhouse Canadian financial company unfamiliar to most investors.  However, it offers stable exposure to Canadian and European markets.  Power Corporation of Canada is a diversified international management and Canadian holding company. Through its subsidiary, Power Financial Corporation, it has interests in companies in the financial services sector in Canada, the United States and Europe. Through its subsidiary, Square Victoria Communications Group, it holds interest in companies from the communications and media sector. Power Corporation also holds and actively manages a portfolio of investments in the United States, Europe and Asia. The company manages assets of $1.22 trillion.

Power Corp’s largest investment is a 68% owner of Power Financial.   PWCDF also owns a communications and media firm along with various other investments.   The investments include private equity positions in companies in Europe, the US, China and the Pacific Rim. 

The company reaches 12 million Canadians and serves about 1 in every 3 Canadian households, a statistic that makes Power Corp the envy of most US financial firms. 

Power Financial, its largest holding, is a financial services company involved in insurance, money management, and European equity investments.  Power Financial offers some well-known financial services brands, such as Canada Life, Great-West Life, Irish Life, London Life and Putnam Investments.   ICM Financial offers wealth management services along with commercial employee benefit packages.  Power Financial, through its interest in Pargesa (PRGAF, PARG.SW), owns about 12.5% of Groupe Bruxelles Lambert (GBLBF, GBLB.BR.), itself a holding company with concentrated equity investments in major European companies.    For example, GBLBF owns a 3.6% interest in the French oil giant Total (TOT) and represents about 20% of GBL’s book value. 

Power Corp pays a $1.04 annual dividend for a current 4.8% yield.  Unlike many of its US counterparts, Power Corp improved its long-term value during the financial crisis of 2007 to 2009 by earning their dividends and maintaining their payouts.  However, like much of the financial sector, Power company stocks slid by about 50%. PDWCF raised their dividend by 7% earlier in the year.

As interest rates turn up in the US and Canada, insurance companies are expected to be positive benefactors of higher interest rate spreads.   As the US Dollar weakens against the Canadian Loonie, PWCDF investors will benefit as well though higher share prices and dividends. However, as a thinly traded ADR, limit orders should be utilized for all buys and sells.

Investors seeking greater exposure to foreign financial firms should review Power Corp.


Thanks for reading and this article first appeared in the Oct issue of Guiding Mast Investments.  George Fisher

HollyFrontier (HFC) is out of favor, but valued priced.

HollyFrontier (HFC) is an out of favor oil refiner whose stocks has collapsed by 50%.  However, according to Morningstar, there should be a lot to like for patient and contrarian investors.  In addition, the current yield of 5.2% allows investors to generate above average income while waiting for oil markets to improve. 

HFC is among the largest independent refiners with operations in the Midwest, Southwest and Rocky Mountain regions.  HFC operates five large refineries producing gasoline, jet fuel, asphalt, heavy oil and lubricant products.  53% of recent production is gasoline.  HFC has current capacity of 457,000 barrels of processing per day, and is planning on expanding its capacity to over 500,000 barrels.  Similar to its peers, HFC has been dropping down terminal and pipeline assets to a MLP, Holly Energy Partners (HEP).  HFC is the General Partner and owns 39% of HEP outstanding shares. 

While the refining segment has been weak in operating profits from a substantial drop in crude prices, a shrinking of crack spreads, and a buildup of gasoline and finished products, HFC has historically out earned many of its peers.  Comparing a list of operating profit per barrel of crude refined for its peers from 2011 to 2015, as offered on their investors presentation, HFC has generated first class operating profits per barrel.  Its 5-yr average profit per barrel is best of its peers.  In 4 of the last 5 years, HFC has been either #1 or #2 in profitability.   

At 17%, HFC also excels in generating returns on invested capital.  HFC bests its peer 5-yr average of 13% by 30%, and is second only to Western Refinery’s 19%.  Even in today’s tough operating environment, HollyFrontier continues to generate operating results that exceeds its peers.

One important advantage for HFC is the complex nature of its refinery assets allows the firm to utilize lower cost heavy sync crude from the oil sands.  HFC’s complexity ratings is 12.1, on a scale of 1.0 to 14.0, with a US average refinery complexity of 9.0.  For investors, this means that HFC operates one of the most complex and potentially profitable chains of refinery assets in the US.  The higher complexity factor allows HFC to refine lower grades of crude into gasoline and diesel, potentially expanding comparable margins.   When the oil market returns to more normal pricing, HFC’s profitability should improve.

Morningstar rates HFC as 5 Star with a price target $47, and believes HFC is trading at a 45% discount to its fair value.  M* is looking for West Texas crude to average $50 in 2017, $65 in 2018, and $60 in 2019.  This pricing level for WTI will support higher profits for HFC.  While many Gulf Coast refiners rely on water-borne oil for supply whose pricing reflects the Brent price collar, the mid-continent locations of HFC refineries allow the firm to utilize WTI priced crude.  The spread between Brent and WTI (with WTI lower) can be as much as $5, giving HollyFrontier a distinct cost advantage in a low margin, commodity business. HFC’s ability to utilize both sync crude and WTI will continue to allow the company to operate with one of the higher profits per barrel of throughput.   

HFC announced its second quarter earnings at a loss of -$2.33 per share after non-cash charges for impairment of goodwill and asset write-downs.  Before the $650 million of charges, HFC earned $0.28 a share for the qtr.  For 2015, HFC earned $3.90 a share and is expected to earn between -$0.68 and $1.07 (after and before charges) in 2016, $2.19 in 2017, and $3.08 in 2018.  The upcoming 3rd quarter historically has been the best of the year, followed by the 4th which is the worst of the year.   

The dividend of $1.34 offers a yield of 5.3% and is qualified.  Investors should note the dividend was cut by 60% in early 2015 due to the weak commodity environment.  The dividend is supported by operating cash flow in excess of $720 million over the previous 12 months and $533 million in cash on the balance sheet. 

HollyFrontier has a current book value of $27.80 and trades at a 6% discount to BV.  The 5-yr average price to book value is a 30% premium, which would represent a share price in the high $30s.

Investors looking to stretch for higher yield and willing to accept a higher risk over the short term may consider HFC.  While rated only B (Below Average) for 10-yr consistency in earnings and dividend growth, the prospects of a turnaround in profitability leading to higher share prices combined with a comfortable current yield should offset a lack of dividend growth. 


Thanks for reading and this article was first published in the Sept issue of Guiding Mast Investments.  George Fisher

Interested in buying a new Ferrari for "free" every year? It's actually quite simple.

Interested in buying a new Ferrari for “free” every year? It’s actually quite simple.  Just buy 400,000 shares of Ferreri NV stock (RACE) and receive a $0.51 per share annual dividend.  This will total about $16,000 more than the entry level Ferreri at $188,000.  (However, the stock will cost you $18 million to begin).

Last fall, Italian auto maker Fiat/Chrysler spun off its ultra-high end luxury and race car division.  Now publically traded, RACE is rated 4 Star by Morningstar and generated an interest for further research. 

Of instant notice is Ferreri’s profitability.  RACE generates high ROIC in the upper teens and low twenties, and gross margins of over 50%.  As with many luxury goods manufacturers, one feeds the other, with the image of exclusivity driving both.  There is almost no other automotive brand that competes with Ferrari as the retail brand plays heavily on its Formula One success.  As the global economy continues to expand, the pool of high-net-worth potential customers is expected to grow. 

Morningstar’s comments: We calculate that Ferrari's median EBITDA margin during the past 10 years is 25.8%. The only other automotive company that had matching profitability in the same time frame was Porsche at 26.3%. The next closest, BMW, was roughly 10 percentage points lower at a 16.2% EBITDA margin.

On the downside, the cost to stay ahead of the Formula One pack is expensive and a few years of poor racing successes could weigh on RACE brand exclusivity and hence its profitability.  

Over the past 10 years, M* calculates revenues grew by 9% annually while volume increased by 4% annually.  This demonstrates the pricing power enjoyed by Ferrari.  With similar growth, volumes are expected to top 9,000 units in 4 years. 

UBS covers Race and recently issued a description of the company as reported on benzinga.com:  UBS's Michael Binetti commented on Ferrari's positive outlook, previewing earnings. After positive analysis, Binetti reiterated the automotive company's Buy rating and $50.00 price target. Binetti believed Ferrari's future earnings reports would act as a "thesis stress test" for Ferari. "RACE's car shipments declined by less than 5 percent vs luxury auto peers' shipments down over 30 percent in the same period… and the model is about to be tested [again]," said the UBS analyst.

The analyst was seeing "sluggish spending" in global luxury categories; however, Binetti's recent conversations with Ferrari management instilled confidence in the company's ability to continue its "strong" new car innovation initiatives and positive margin drivers' growth.

"RACE deserves to trade in line with global luxury peers due to high visibility into revs & cash flows as most products are pre-sold to wealthy consumers via long waitlists," stated Binetti.

As a European firm using RACE as its US ADR trading vehicle, Ferrari reports in Euros and investors need to factor in currency exchange risks.  M* calculates that for every $0.05 increase or decrease in the Euro:US$ exchange rate will impact RACE Fair Valuation by $2.30. The current Fair Valuation is $52 based on a 1.14:1 ratio.  If the euro strengthens to 1.30:1, Fair Valuation could jump to almost $60.

RACE is trading at $45 and a current M* valuation discount of 13%.  Nibbling here with an eye towards adding more around $41 would be advisable.  You may be able to afford to buy a few more shares of RACE than the cars it produces.   


This article first appeared in the Aug issue of Guiding Mast Investments.  Thanks for your time and interest.  George Fisher

BGC Partners: Potentially 45% Undervalued Plus 7.2% Qualified Dividend

BGC Partners (BGCP) is a unique financial firm with a diversified revenue stream.  BGCP is a financial brokerage firm in third-party markets; a commercial real estate broker for sales, lease, and operational property management; has substantial cash along with investments in exchange-operator Nasdaq (NDAQ). 

BGCP Financial Services offers brokerage facilities to institutions and banks.  These include trade execution, clearing, and broker-dealer services.  As major banks continue to withdraw from proprietary trading and as financial product structures become more complex, BGCP’s services will be more valuable. 

Real Estate Services include commercial real estate sales services, leasing and property management, along with consulting and advisory services.  BGCP’s major brand is Grubb Knight Frank, Newmark, Cornish & Carey.

Revenues for the 2nd qtr 2016 totaled $652 million.  Sales were generated 60% in North America, 32% in Europe, Middle East and 8% in Asia, and were generated by the following areas:

 Financial Services:

Interest Rates, Credit, F/X services 42%. 

Energy, Equities, Commodities trading 18%

Real Estate:

Leasing, property management 26%

Capital markets 13%

BGCP owns about $850 million in Nasdaq stock, payable over the next 15 years. A few years ago, BGCP sold an electronic trading platform for cash and stock to Nasdaq with a multiple year payout.  BGCP is expected to receive approximately $50 million a year in Nasdaq stock.  This asset is not on BGCP’s current balance sheet

In addition, the company has cash on hand of about $450 million and an equal amount of non-Nasdaq investments.   Total debt as of the most recent quarter is $1.1 billion, and is comfortably covered by current cash and investments of $900 million.     

BGCP is co-managed by financial powerhouse Cantor Fitzgerald, with some top executives overlapping responsibilities.  For example, Howard Lutnick is CEO of both firms.  Investors need to appreciate that BGCP stock is used as a compensation tool for management, and is one reason the dividend is quite high. 

BGCP pays an annualized dividend of $0.64 for a 7.22% qualified dividend yield.  Many stocks with this level of income are more complex MLPs or could be non-qualified dividend payers such as REITs or some preferreds.  BGCP’s next ex-dividend date is just around the corner on Aug 16.   

BGCP may offer a clear upside based on valuation.  Updating last fall’s valuation matrix offered by Nat Stewart, Opus Cap Management, BGCP could be worth as follows:

A)     Financial Services: Voice/Hybrid financial services and Electronic trading generated $300 million in annualized 2nd qtr pre-tax earnings x 15 times = $9.04 per share.   

B)     Real Estate Services:  $100 million pre-tax earnings x 11 times = $2.50 per share.

C)      $850 million of future Nasdaq stock = $1.92 per share.

D)     Corporate net debt ($900 million liquidity minus $1,100 million total debt) = -(0.50) per share.  

The sum of these parts equates to $12.98 a share, or about $4.11 above the current price of $8.87.

Adding this 45% potential undervaluation to a 7.22% current yield should gain the attention of most small cap and income investors.     

I have been buying BGCP for a combination of income and capital gains potential.  I feel comfortable with both from a long-term perspective.


This article first appeared in the Aug issue of Guiding Mast Investments.  Thanks for your time and interest.  George Fisher

Spectra Energy Partners (SEP) : Low Risk Natural Gas Pipeline MLP

I have owned SEP for several years, making my first purchase in mid-2012 with share prices at $31 and a quarterly dividend of $0.48 ($1.92 annually).  Shares now trade at $46 and the quarterly dividend is $0.64 ($2.56 annually).  This represents an increase in income of 35% and capital appreciation of 48% over the past 4 years. 

Spectra Energy Partners is one of the largest pipeline MLPs with assets including more than 15,000 miles of transmission and gathering pipelines, approximately 170 billion cubic feet of natural gas storage, and approximately 4.8 million barrels of crude oil storage.  SEP is a MLP spin-off of Spectra Energy (SE), a natural gas utility.  SE is the General Partner and the parent with about $6 billion in projects under construction that will eventually drop down to SEP, fueling SEP’s continued growth.  SE has identified an additional $20 billion in projects that could move forward by the end of the decade.  With a market cap of $13 billion, SEP is the 9th largest US pipeline company, and has strong exposure to the growing footprint in the Marcellus shale, the US’s most prolific gas play.   

SEP’s network of interconnecting gas pipelines connects several major gas fields with substantial user markets.  The core of SEP's gas pipeline system is Texas Eastern Transmission, a massive pipeline that can move 10% of U.S. gas consumption and which runs from the Gulf Coast to New York, directly through the heart of the Marcellus. SEP also owns Algonquin Gas and the Maritimes and Northeast Pipeline, providing gas to New England along with 50% of Gulfstream, one of the major gas pipes into Florida.  The key and unique feature to this pipeline system is that all of Spectra's gas pipelines are interconnected.  Utilization on the pipes is high and all pipelines generate fixed-fee cash flow from long-term contracts, making SEP one of the most stable cash generators in the MLP sector.   

SEP is one of the few MLPs that acts as a pure tollbooth operator--it has no commodity price exposure, and about 95% of its income stems from long-term capacity contracts. The average term of its contracts remaining is between 9 and 10 years.   In the current low gas price environment, many MLPs are struggling with their commodity exposure. 

Over the past 5 years, SEP has greatly outperformed its peers as calculated by the total return of the Alerian MLP Index.  A $100 invested in SEP on Jan 1 2011 would have been worth $188 as of last Dec vs $107 for the Alerian MLP Index and $180 for the S&P 500.  

However, as with most MLPs, SEP pays a pretty penny to SE for General Partner services.  Typically compensated by Incentive Distribution Rights, or IDRs, SEP pays its general partner fees based on cash available for distribution, with incentive thresholds along the way.  SEP currently pays a fee equal to a maximum of 50% of distributable income over $0.45 per share per quarter.  This will total about $300 million in 2016 and is expected to rise to $475 million in 2018, and represents General Partner payments increasing from $1.00 per SEP share in 2016 to $1.58 in two years. 

While typical in the industry, it is important for investors to appreciate the payments going to the General Partner.  Owning both the MLP and the General Partner is an approach I utilize to take advantage of lucrative IDRs.     

Income investors seeking a reasonable 5.5% yield with the tax advantages of a MLP should review SEP if it is not already in the portfolio.  The quality of its assets, the growth platform as laid out by management, and the lack of commodity exposure should make Spectra Energy Partners a quality, long-term investment selection.  


This article first appeared in the July issue of Guiding Mast Investments.  Thanks you for reading.  George Fisher


Johnson Controls: From Hoover Ball Bearing to Tyco's Rolodex of 3 Million Clients

Johnson Controls (JCI) is a mid-cap industrial firm offering steady growth at a fair market valuation.  Founded in 1883, JCI has a long history of earnings and dividend growth, fueled by a combination of acquisitions and organic growth. 

WS Johnson, founder of JCI, is the father of multi-zone heating systems, inventing the multi-zone pneumatic control system.  Called an electric tele-thermoscope, this system of multiple thermostats and heating/cooling zones is still a major component of JCI today. 

JCI has expanded into a major worldwide player in the building and construction energy efficiency business, and the company continues to morph its business.

I first learned of JCI in 1985 when the company purchased a firm of which we owned stock. My bride’s grandfather had been on the Board of Directors of the Hoover Ball Bearing Company, which itself had morphed from manufacturing steel tanks and ball bearings in 1949 to automotive seats and interiors.  At that time, JCI was a manufacturer of automotive batteries, looking to expand its auto OEM business.  We owned some shares in Hoover and participated in the acquisition by JCI.  I have owned JCI on and off since 1985, depending on college education tuition payment requirements.   As all my kids have graduated and it’s not yet time for grandkids to suck me dry, I’m a current shareholder. 

JCI continues to transform its business and has announced major restructuring over the past 12 months.  JCI announced it was spinning off its auto interiors business while retaining its auto battery business, now called the “Power Segment”.

The interiors business accounted of 54% of 2015 revenues, making the split a substantial change in business profile.   JCI recently sold some non-core auto assets and established a joint venture with Hitachi for others.  JCI is pursuing a spin-off of its Automotive Experience business. Following the separation, which is expected to take effect in Oct 2016, the Automotive Experience business will operate as the independent, publicly traded company named Adient. 

Management also announced it was merging with Tyco Int’l (TYC), a fire/security alarm system company, and plans to move its headquarters from Milwaukee to TYC’s home country of Ireland.  TYCO offers home and commercial security and fire protection systems, and purchased the Brinks Security firm in 2011. Under the terms of the agreement, JCI shareholders are expected to own about 56 percent of business equity, and Tyco shareholders will own about 44 percent. The company will have annual revenues of $32 billion.

Tyco brings an active rolodex of over 3 million customers.  Johnson Controls has a network of 15,000 heating and air conditioning service providers.  The ability to cross-market security and fire protection programs with building energy efficiency platforms for heating and cooling is an intriguing opportunity.  It is this cross-marketing that is driving the merger and refocus of JCI. 

While auto OEM accounts for 25% of battery sales, the spin-off of Adient will greatly shift JCI’s customer risk away from concentric automotive trends to more ongoing building maintenance and construction.  JCI should no longer be lumped together with low-growth automotive suppliers. 

Being categorized as an auto supplier has hurt share values.  According to Credit Suisse, the “new” JCI, with Tyco merged and Adient spun off, will improve valuations.  The Building Efficiency, Power, and Tyco segments EBITDA could create share prices at 10.5 to 11.0 times while the auto Adient business could be valued as low as 4.5 times EBITDA. 

According to Credit Suisse, JCI is currently worth about $50 a share, while it is trading at a price below $45.  Several other analysts also have price targets in the $50 to $55 range, make the current share price undervalued by between 13% and 22%. 

According to fastgraph.com, JCI has generate an 11.3% 20-yr average annual returns vs 6.9% for the S&P.  However, over the previous 3 and 5 year time frames, JCI has underperformed and the automotive supplies sector has not been an erupting volcano of opportunity.  With the spin-off of Adient and the merger with Tyco, better days should lie ahead for shareholders. 

The restructuring and refocus of JCI comes with a higher execution risk.  It is this risk that is creating uncertainty and a lower current valuation.  The ongoing yield of 2.3% is not very exciting, but is more than offset by a 14% 5-yr dividend growth rate.

Investors looking for growth and income should take the time to review Johnson Controls. As the cloud of uncertainty lifts with increasing earnings growth and a successful cross-marketing campaign, JCI’s PE multiples should expand from its current 11 to a more reasonable 13 to 15. 

This article first appeared in the July issue of Guiding Mast Investments.  Thank you for your time and interest, George Fisher


Affiliated Manager Group: Underfollowed Niche Asset Manager

Affiliated Managers Group (AMG) is a niche financial firm in the asset management business.  From their website:  Affiliated Managers Group, Inc. is a global asset management company, which operates through a diverse group of outstanding boutique investment firms. AMG’s unique partnership approach aligns incentives through equity ownership and preserves the entrepreneurial orientation that distinguishes the most successful investment management firms.

As the name suggests, this company takes a majority interest in investment shops called “affiliates.” Those boutique asset managers continue operating independently with AMG assisting with marketing through its vast global distribution network and with back-office chores. It also shares in the affiliate’s profits.

Affiliated has shopped wisely. It boasts an array of prestigious investment brands, including Tweedy Browne, Third Avenue Management, Genesis Asset Managers, AQR Capital Management Foyston, Gordon & Payne, and Yacktman Asset Management.

These are the kinds of names that will attract money as investors continue to warm up to the markets but realize that the days of buying anything and watching it go up are over. A sideways market calls for smart asset managers, and AMG has delivered.


The firm typically buys a majority interest in small to midsize boutique asset managers, receiving a fixed percentage of revenue from these firms in return.  Given the revenue-share model, AMG has rich margins and cash flow that will continue to fund acquisitions. It is estimated AMG will generate over $1 billion in free cash flow this year and is one reason reason Goldman Sachs on March 21 added AMG to its “Conviction List.”  While the stock has risen since, it still looks cheap given the potential, with a price-to-earnings ratio of 11.4.

AMG's affiliate model provides it with a diverse mix of assets under management AUM, investment styles  and earnings, with exposure to value and growth equity strategies, fixed-income products, and alternative investments.

At the end of 2015, AMG's affiliate network had $611.3 billion in managed assets, which is a sizeable share of the $2.9 trillion in alternative asset held by hedge funds.  

AMG is rolling up small boutique asset managers at a time when the entire field seems to be consolidating because of structural changes that have come about in asset management.  Concerns over higher tax rates and ongoing succession planning at boutique asset managers are expected to spark the sale of equity stakes in many of these types of firms to larger financial institutions in the future.Moreover, the firm’s exposure to institutional money, making up 62% of revenue, should give it an edge in fund flows in coming quarters. Keep in mind less “sticky” sovereign wealth fund assets comprise only 2% of AUM.

Goldman’s analyst reports, "Following a tough 2H15, we expect AMG's flows to see a sharp turnaround in 1Q (GSe +2% organic growth vs -4% in 2H15) which should drive the stock's deeply discounted valuation (12x P/E and 10x EV/EBITDA are 26% and 17%, respectively, below 5-year avg.) higher. Moreover, AMG's secularly relevant product set (Global Equities, Alts and Quant), defensive margins and M&A opportunities should drive stronger long-term growth, setting AMG apart from peers.  Retail flows (source of weakness in 2H15) are inflecting, tracking at +$4 billion 1QTD, driven by robust demand for AQR’s mutual funds (+$5bn) and less outflows from Yacktman (-$0.7bn QTD vs. -$2.4 bn 4Q15).”

AMG offers investors almost a mutual fund/ETF approach to alternative asset management.  By holding pieces of multiple well-known and successful managers, AMG offers better diversification than many singular firms.  

From their website is an explanation of the benefits of their unique corporate structure and wealth management approach: In contrast to other entities which attempt outright acquisitions of investment firms, AMG's investment structure aligns the interests of the Affiliate, its clients, and AMG. Affiliate managers typically retain control of the operational management and distinct culture that shaped their success through a customized revenue sharing agreement that leaves day-to-day operations (including compensation and budgeting decisions) to the management of the Affiliate. In addition, AMG's approach provides a mechanism whereby Affiliate managers can individually realize the value of their retained equity and transfer their interests to the next generation within the firm. Clients of AMG's Affiliates benefit from seamless management and ownership transition as well as an uninterrupted focus on service, performance and growth. AMG also benefits from the continued success of its Affiliates. We believe our structure not only incents the growth of our Affiliates, but is also more attractive to boutique firms that anticipate future growth and want to retain equity upside and independence while implementing a succession plan.

However, AMG is not immune to the recent weakness in the money manager business.  While Affiliated Managers shares have increased nearly 8% since the beginning of the year, the stock has fallen 24% in the last 12 months.

Investors seeking increased exposure to wealth management firms and are a bit skittish about taking a position in just one firm may want to review AMG.  Its divergence of clients, managers and asset strategies positions the firm as one of the most diversified firms in their industry.

This article first appeared in the May 2016 issue of Guiding Mast Investments.  Thanks for reading,  George Fisher  

Boeing: Ready to Take Off

Boeing (BA) has underperformed the market since Jan, but may be ready to make up the shortfall.  Earnings are on a nice upwards trajectory with BA earning $7.71 in 2015.  Management forecasts 2016 EPS at $8.15 to $8.35. BA is expected to earn $9.53 next year and $10.23 in 2018. This would equate to a 3-year EPS growth rate of 11% to 12%.   

The first-quarter 2016 report was better than expected, but more charges against the Air Force tanker and 747 programs cost the company $0.24 in EPS. Still, Boeing continued its buyback program ($3.5 billion in the first quarter) and continues to pay its quarterly dividend of $1.09 per share (a yield of 3.33%). From a shareholder’s point of view, those are solid reasons to like and own the stock.

Since January, BA has underperformed the S&P 500.  From June 2014 to this past January, BA performance has mirrored the overall index.  However, in the 1st qtr, BA declined from $140 to under $110, and has clawed its way back to $135.  Nonetheless,  BA should be a minimum of 10% higher if it were to match the index’s performance.

S&P Capital IQ recently trimmed their full-year 2016 earnings per share estimate from $8.57 to $8.45.   Even so, the analyst liked Boeing’s $480 billion backlog and said the backlog is “supportive of top and bottom line growth.” S&P is also “positive on the aggressive share buyback program and 3.3% dividend yield.”

S&P is not the only analyst reporting on BA.  Below is a sampling of recommendations and price targets from various Wall Street firms:

·         S&P Capital IQ rates BA a Buy with a price target of $160.

·         Bernstein raised its price target from $180 to $184.

·         Morningstar has a 3 Star, Neutral, with a Fair Value of $140.

·         Canaccord lifted its price target from $135 to $140 and rates the stock at Hold.

·         JPMorgan raised its price target from $120 to $140 with a Neutral rating.

·         RBC upped its price target from $128 to $132 with a Sector Perform rating.

·         SocGen raised its price target from $129 to $140 and has a Hold rating on the stock.

·         Merrill Lynch offers an underperform rating.

·         Goldman Sachs has a Sell rating on the stock but raised its price target from $100 to $101.

Management generated free cash flow (operating cash flow less capital expenditures) of $6.91 billion in 2015 and $7.88 billion on a trailing 12 month basis after reporting 1st qtr. 2016 results.  Management has pegged free cash flow for 2016 at $7.2 billion. 

Boeing has been buying back large amounts of its shares.  After peaking in 2013 at 767 million shares, the company has bought back 100 million shares, with 665 million shares outstanding in the 1st qtr. 2016.  This represents a reduction of 13% in shares outstanding and around $1.00 in increased earnings per share.    

On the positive side of share ownership is the current backlog of 5,700 commercial airplanes.  This provides future growth visibility and a floor for operating cash flow over the next five years.   BA’s marketplace should continue to experience an underlying 5% annual air travel growth.   The recent moves to rework the 737 and 777 aircraft rather than develop entirely new planes has saved BA billions in development costs.  It has been reported BA is looking at another generational variation of the single-aisle 737.  With a change in Administrations, the slump in defense spending may be coming to an end.  BA could be well positioned to capture a larger share of increased defense spending.   

In addition, management is starting to emphasize the total customer approach to the sales cycle. In the past, BA tended to leave the aftermarket for parts to their vendors and suppliers.  With the huge backlog and increasing inventory of planes in the field, management has begun to focus on the “life cycle” approach to its business.  This involves both maximizing new product orders and capturing a bigger piece of the aftermarket opportunities.  The impact on BA’s vendor relationships will be an interesting topic to follow.  

On the negative side, some believe the current airplane replacement cycle may be topping out and new order comparisons may begin to falter. Low jet fuel prices are delaying some airlines from upgrading their fleet.  Delta Airlines, for example, has slowed its pace of plane replacement as the cost to operate older, less fuel efficient planes is not as much of a burden as when jet fuel pricing was much higher.  Plus, there continues to be stories of a Chinese-made airplane to compete with the Boeing 737 and Airbus A320.     

There are pictures of the debut of the first single-aisle Chinese-made commercial aircraft known as the C919. While the major components are produced by either foreign companies or Chinese joint ventures, the C919 currently has orders for over 500 airplanes. The C919 is expected to be put in service in 2019 in the domestic Chinese air travel market.    

Although not directly affecting BA, a separate state-owned company also has developed a smaller regional jet, the ARJ-21, to compete in the market dominated by Brazil's Embraer and Canada's Bombardier. 

Investors looking for an industrial and aerospace/technology stock which has lagged the market but still offers reasonable value should review Boeing.  There is a lot to like about BA from its earnings growth potential to its current and growing income yield.

This article first appeared in the May 2016 issue of Guiding Mast Investments.  Thanks for reading, George Fisher

Silver Run Acquisition: New Energy Vulture Fund to Compete with PE Firms

Silver Run Acquisition: New vulture fund in the energy sector.  Silver Run Acquisition (SRAQU) is a new IPO focused on investing in oil and gas opportunities.  Similar to KKR, Blackstone, and other private equity firms, SRAQU was formed to acquire distressed assets from financially shaky E&P firms. Silver Run will look for companies that are fundamentally sound but under-performing due to current commodity prices, according to its IPO prospectus.

Bloomberg reported on February 2 that several major private equity firms, such as Carlyle Group, Apollo Global Management, Blackstone Group, and KKR, are in the midst of taking massive positions in indebted oil companies. KKR, for example, provided $700 million in credit to Preferred Sands LLC, a producer of sand used to frack oil and gas wells. In exchange for the emergency loan, which carried a 15 percent yield, KKR took a 40 percent ownership stake in the company. Blackstone did a similar deal with Linn Energy LLC, another struggling oil firm.

Mark Papa, the "Godfather" of U.S. shale oil, retired from EOG Resources and has come out of hibernation to manage this opportunity.  Papa is known as a pioneer in the shale business and in 2007 switched EOG’s focus from finding natural gas to shale oil. Papa acquired some of the initial (and very low cost) leases in the Eagle Ford and Bakken shale oil plays for EOG.  These have since become prolific producing regions for shale oil.

Mark Papa’s new firm raised $450 million in its IPO in Feb.  From the PR Newswire:  The Company's units began trading on the NASDAQ under the ticker symbol "SRAQU". Each unit consists of one share of the Company's Class A common stock and one-third of one warrant. Each whole warrant entitles the holder thereof to purchase one whole share of the Company's Class A common stock at a price of $11.50 per share. Once the securities comprising the units begin separate trading, the Class A common stock and warrants are expected to be listed on the NASDAQ under the ticker symbols "SRAQ" and "SRAQW," respectively. The warrants become exercisable either 30 days after completion of an initial investment or by Feb 2017 – whichever is later

In Feb, Papa was quoted:  "I would predict in the next six to 12 months, you’re going to see a decimation of the industry — just bodies (companies) all over the place — a lot of bankruptcies, Chapter 7’s and Chapter 11’s.   From those ashes, you’re going to see the companies who survive, a lot of them will be grievously wounded. And the management teams who survive will be a lot more conservative as they go forward. We are pretty much convinced that there are no large shale plays in North America containing oil that are unfound.  It would surprise me very much if the industry discovered another Eagle Ford or Bakken." 

Unlike other vulture funds, Silver Run will be acquiring operational control and ownership, not just offering high interest loans to distressed firms.  

Based on the belief there are no unfound large shale plays in the US, Papa will be looking for existing businesses or land leases that can be acquired within these existing fields. 

Papa now has a $450 million blank check to develop a business around the distressed state of the industry.  Silver Run could leverage its potential asset base by taking on reasonable amounts of debt, by bringing in private equity joint venture partners but must retain a minimum of 50% of voting ownership, or by issuing new shares.

The prospectus is found linked below:


If investors are looking to bottom fish in the energy sector and willing to take on the substantial risk of an IPO, Silver Run is worthy of consideration. As with all IPOs, quality of management is critical, and with the pedigreed of this management, Silver Run has an above average chance of success in this low oil price environment.  

This article first appeared in the April issue of Guiding Mast Investmentsw.  Thanks for reaeding,  George Fisher

Spectra Energy Partners: MLP Worthy of Your Due Dilligence

Spectra Energy Partners:  Master Limited Partnership beating consensus earnings 4 out the last 5 quarters.

Spectra Energy Partners (SEP) is the MLP dropdown of Spectra Energy (SE).  SEP announced 4th qtr. earnings above consensus, which lifted the stock about 15%.  However, the company has little volume or commodity exposure (the soon-to-be-death-kneel of some smaller MLPs), making its 5.5% yield a bit more secure than some peers.

This is not the only quarter SEP has out earned estimates.  In 4 of the last 5 quarters, SEP has beaten expectations, with the only non-beating quarter was a match with projections.  Over the previous 5 quarters, the average positive surprise is 23%.

As a MLP, income investors seek dependable, tax efficient, and growing distributions. The company announced a distribution increase of 1.25 cents and is the 33rd consecutive quarter the company has increased its quarterly cash distribution. Management believes its project expansion plans will continue to allow for a growing distribution base, as indicated by the guidance offered below by management.  

The annual rate of dividend growth over the past three years was at 8.0%, and over the past five years was at 7.4%.

Of concern to MLP investors in the current low energy price environment is the credit worthiness of customers.  It does not matter if a pipeline has 100% of its assets spoken for if those who signed the contracts file bankruptcy or fail to maintain their business.  Of 2015 revenues of $2.7 billion, over $2.4 billion is with customers with credit rating above BBB, and about half rated are AAA/AA/A.  

 Management is planning on $5.7 billion in capital projects in 2016 and 2017. 

While MLPS are controversial in today’s low energy commodity pricing, SEP’s low exposure to prices and volumes should be seen as a very strong positive.  Income investors should use the current weakness to add or initiate a position.


This article first appeared in the March issue of Guiding Mast Investments.  Thanks for reading,  George Fisher