Copter Crisis: Investment Opportunity?

5/12/2008  | Stocks

In the May 12th edition of Fortune Magazine, there is an interesting article titled Copter Crisis that delves into how the growth in offshore drilling for oil and gas has led to increased utilization of helicopters to get to and fro from the offshore platforms. This offshore drilling boom combined along with increased usage of choppers for private travel has lead to a shortage of helicopters and their parts. I figured I would attempt to provide more color on chopper related investments through this blog entry.

Based on the earnings forecast of offshore drillers like Transocean (RIG), Diamond Offshore Drilling (DO) and Noble (NE), the offshore oil drilling boom is likely to continue for years to come. In fact Transocean earned over $1 billion in just the first quarter of this year. We picked up Diamond Offshore Drilling (DO) for the SINLetter model portfolio in January 2007 and have been rewarded with a gain of over 70% over 16 months despite the recent pullback in the stock. Diamond Offshore was a proxy investment for rising oil prices and it appears that choppers could be a proxy for the offshore drilling boom based on the number of large offshore oil finds in the Gulf of Mexico and off the coast of Brazil over the last few years.

Four popular chopper models were mentioned in the sidebar accompanying the Fortune article. The Sikorsky S92 and S76 used for executive travel and by offshore drillers, the smaller AW119 Ke used by traffic reporters and the larger Boeing Chinook used to transport civilian cargo.

Given below is a list of public, private and international helicopter companies that make the models listed above and many others.

1. Long Island, New York based Sikorsky Aircraft is a division of the diversified industrial company United Technologies (UTX) and makes the famous Black Hawk chopper as well as nearly half the maritime choppers used by armed forces around the world.
   
   
2. The Boeing Chinook as the name implies is made by Boeing (BA).
   
   
3. The AW119 Ke is made by AgustaWestland, a division of Italian company Finmeccanica. 2007 revenue for Finmeccanica came in at 13.429 billion Euros, an 8% increase year-over-year and net income was 521 million Euros, a drop of nearly 50% year-over-year. However after excluding extraordinary items that affected both 2007 and 2006 results, net profit jumped 49% to 503 million Euros from 337 million Euros in 2006. Finmeccanica  is quoted on various exchanges such as London (FNA.L), Milan (FNC.ML), Berlin (FMNB.BE) as well as over-the-counter (OTC) in the “grey market” (FINMF.PK). If you use a full service broker or E*Trade Global Trade and like the prospects of Finmeccanica, you could pick up the stock from the London Stock Exchange (LSE). Beyond helicopters, the company also has a hand in everything from high speed trains to homeland security in the United States. Finmeccanica is said to be in talks to acquire New Jersey based defense company DRS Technologies (DRS). If you have any social qualms about investing in a defense company, then Finmeccanica may not be your play as the company derives a majority of its revenue from defense electronics. Helicopters are the second biggest division of the company representing 22% of 2007 revenues.
   
   
4. If you prefer a pure play instead of a large industrial company like United Technologies or a company listed on the LSE, you could also consider Kaman (KAMN), a helicopter and industrial distribution company quoted on the Nasdaq. Kaman has a market cap of $666.71 million and appears to be attractively valued with a forward P/E of 11.18 and P/S of  0.57 while sporting an above average 2.2% dividend yield.
   
   
5. While not a pure play, another company to consider is Bell helicopter, which is a subsidiary of aerospace giant Textron (TXT). Textron was ranked number one in the Aerospace & Defense category of Fortune magazine’s list of America’s Most Admired Companies of 2008. As an added bonus, investing in Textron also gives you exposure to the red hot light jet segment as the company also makes the Cessna line of jets. The light jet theme was something I discussed while featuring Brazilian aircraft maker Embraer (ERJ) in the August 2007 edition of my investment newsletter.
   
   
6. European aviation giant EADS (EAD.PA), more commonly known as the parent of Airbus, also has a helicopter division called Eurocopter that makes various models of both civil and military choppers. EADs is listed on various international markets such as Paris and Frankfurt. After suffering setbacks due to the delayed launch of the A380 superjumbo liner, the stock has been in a downward trajectory since 2006 and is now at levels not seen since 2003.
   
   
7. The Robinson Helicopter Company  according to their company website “produces more helicopters annually than all of the other North American manufactures combined”. Unfortunately Robinson is a privately held company that may only be accessible to deep pocketed private equity investors or hedge funds. According to the Fortune article, the biggest helicopter operator CHC Helicopter Corporation http://www.chc.ca/  was recently acquired by private equity firm First Reserve for $3.7 billion. Other privately held helicopter companies include Enstrom Helicopter, RotorWay International, Brantly and MD Helicopters.

A table comparing the public companies  mentioned in this article is given below.

If I had to pick two companies from this list to invest in, I would pick Textron (TXT) and Kaman (KAMN) based on their current valuation, estimated 2008 revenue growth rates and because they seem to be the closest to pure plays. I am going to add these two companies to our watchlist and may add them to the model portfolio and my personal portfolio in the future.

Voluntary Disclosure: I do not own any positions in any of the companies mentioned in this blog entry.

References:

1. Finmeccanica 2007 Financial Statements (PDF) 
2. EADS 2008 Guidance
3. EADS Key Figures

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  Taking Profits in Canon (CAJ)

5/2/2008  | SIN Picks

In anticipation of a big purchase later this year, I am liquidating part of my stock portfolio and as I mull over which stocks to sell, Canon (CAJ) and Nokia (yes I am still holding on to it since I featured it in the October 2005 edition) stand out the most. Canon has had a nice run in recent weeks with the stock appreciating almost 30% since early February and 13.48% since we added it to our model portfolio at the end of 2007.

One of the reasons I mentioned while picking Canon was the extreme sell-off in the stock due to concerns about a stronger yen affecting profits in 2008. The yen continued appreciating against the dollar through mid-March but the stock has instead appreciated year-to-date as you can see from the chart below.

Canon is an excellent company and long-term investment but on account of my short-term need for liquidity and the recent appreciation in the stock price, I am going to take profits by selling the stock in my personal portfolio after this blog entry goes out to subscribers. I will also be selling it from the SINLetter model portfolio based on the closing price of the day.

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  NetSuite Beats Earnings, Stock Plunges After Hours

5/2/2008  | Stocks

Correction (5/6/2008): As the Senior Director of Investor Relations from NetSuite correctly pointed out to me in an email yesterday, NetSuite beat analyst earnings expectations by a penny a share instead of missing earnings by a penny as I had originally mentioned in this blog entry. Earnings according to GAAP (Generally Accepted Accounting Principles) have included stock based compensation as an expense since the rule went into effect in 2005 and NetSuite reported a GAAP loss of 3 cents a share. The mistake I made was to compare the GAAP loss of 3 cents a share against analyst expectations of a 2 cent loss, which did not include stock based compensation. NetSuite's earnings excluding stock based compensation was a loss of one cent a share, hence beating estimates by a penny.

On-demand software provider NetSuite (N) reported its first quarterly results as a public company yesterday with a 3 cents a share or $2 million loss, which came  in below above analyst expectations of a 2 cent loss. The stock registered a sharp drop in reaction to the results, falling $3.81 or 17.08% in after hours trading. It appears that my concerns about NetSuite's valuation, as published in the April investment newsletter, were well founded. However it is always a good idea to go beyond the headlines (even mine) and take a deeper look.

Based on what I heard in the conference call, NetSuite had a strong quarter with $34.1 million in revenue that topped analyst estimates and $1.5 million in cash flow from operations. Management sounded confident on the call and they raised their 2008 revenue forecast to a range of $154 to $157 million.

The only logical explanation for the after hours sell off would be that investors were probably expecting NetSuite to meet or exceed earnings expectations and were not satisfied by the 47% growth in Q1 revenue. As mentioned in my last article about NetSuite, growth in the last four quarters was 71.64%, 64.28%, 56.35% and 57%. As the law of big numbers starts catching up (it is usually harder to grow from $100 million to $200 million than it is to grow from $10 million to $20 million, even though both scenarios represent 100% growth), it is not uncommon to see growth moderating.

Additional highlights from the conference call are given below,

• First quarter 2008 revenue grew 47% to $34.1 million when compared to Q1 2007 and increased 8% when compared to the previous quarter (Q4 2007).
  
  
• The company posted a net loss of $2 million or 3 cents per share. On a non-GAAP basis after excluding stock based compensation, the company posted a loss of $420,000 or 1 cent per share when compared to a non-GAAP loss of $842,000 in the previous quarter.
  
  
• NetSuite posted a smaller loss this quarter by reducing external professional services and because revenue growth outpaced expense growth. Gross margin came in at 71% (typically high for software companies) when compared to 70% in Q4 2007.
  
  
• As expected NetSuite's investment in a data center (the company mentioned spending $10 to $15 million in its IPO filing) will impact gross margins throughout 2008.
  
  
• The company signed up 400 new customers in the first quarter, which is within the range of 300 to 500 customers they have historically signed up in previous quarters.
  
  
• International revenue grew faster than domestic sales with a 64% growth rate and international revenue now represents 19% of total revenue.
  
  
• NetSuite appears to be excited about its new OneWorld product with 30 companies like Six Apart (the makers of TypePad blogging software) live on this product and another 50 currently under implementation. NetSuite OneWorld has helped one of their customers manage 100 subsidiaries using the software.
  
  
• British Telecom, one of the resellers NetSuite is working with, will help introduce NetSuite products to 1.6 million small business customers in the United Kingdom and Europe.  
  
  
• Subscription revenue renewal rate was 90% of revenue in Q1 2007. Upselling other products to current customers has usually offset churn and effectively helped NetSuite retain 100% revenue. It would have been interesting to see what the attrition rate was quarter-over-quarter instead of year-over-year and even a 10% rate of churn appears a little high.
  
  
• The company recently announced the NetSuite E-Commerce Company Edition product and the NetSuite Business Operating System or NS-BOS for developers. It estimates that nearly 1,000 developers are using NS-BOS to develop industry specific applications.
  
  
• The first quarter of 2008 represented the 34th straight quarter of revenue growth and 10th quarter of improving non-GAAP results.
  
  
• The company recognized $1.5 million in revenue from the distribution rights of their Japanese product. It expects to continue recognizing similar revenues for the rest of 2008.
  
  
• Product development expenses grew 2% quarter-over-quarter to $3.6 million. The company expects to spend 12 to 13% of total 2008 revenue on product development.
  
  
• Marketing and sales expenses grew 11% to $7.5 million primarily due to hiring in their new sales office. The company expects to significantly increase hiring in sales and marketing in 2008.
  
  
• NetSuite experienced a sharp 28% increase in general and administrative (G&A) expenses to $5 million. This increase when compared to Q4 2007 was on account of being a public company. G&A is typically high in the first quarter for NetSuite and the company expects G&A expenses to come in at 12 to 13% of revenue in 2008.
  
  
• 35% of Q1 2008 expenses were in currencies other than US dollars. This could be on account of their global support centers and may not bode well for the company in a strengthening dollar environment as it expects this percentage to grow.
  
  
• The company hired 99 new employees in Q1 and plans to hire a total of 350 employees in 2008, mostly in sales and marketing. The employee headcount stood at 765 at the end of the first quarter.
  
  
• The company recorded a $229,000 income tax provision in Q1 2008.
  
  
• Cash flow from operations was $1.5 million compared to $3.7 million in Q4 2007 and -$0.5 million in Q1 2007. Year end bonuses and commissions reduced cash flow in the first quarter.
  
  
• Capital used in investing activities such as hosting account capacity and equipment purchases was $1.1 million when compared to $1.4 million in Q4 2007 and $1.4 million in Q1 2007.
  
  
• Free cash flow was $379,000 in Q1 2008 when compared to negative $1.9 million in Q1 2007.
  
  
• The balance sheet currently had $170.2 million in cash. Accounts receivables dropped to $16.2 million from $18.7 million at the end of 2007. As a customer I can attest to NetSuite's cash collection capabilities.
  
  
• Short-term deferred revenue (their pipeline, if you will) was $67.1 million, an increase of $1.3 million from the end of 2007. Long-term deferred revenue was $8.9 million, a decrease of $2.2 million from the prior quarter as the company shifts from multi-year contracts to annual contracts and some revenue from their Japanese product became current.
  
  
• Stock based compensation declined to $1.6 million when compared to $2.4 million in Q4 2007.
  
  
• NetSuite plans to reinvest most of its top line growth into the company and plans to add 2% to the bottom line every year.
  
  
• The company projects Q2 2008 revenue of $36 to $36.7 million and a loss of $1 million to $250,000.
  
  
• NetSuite increased its full year 2008 forecast to a range of $154 to $157 million and expects to post a non-GAAP loss of $2.4 million to $1 million. With an expected 61.3 million shares outstanding at the end of 2008, this should translate into EPS of -4 to -1 cents.
  
  
• If you get a chance to listen to the conference call, check out the comments about SAP in the Q&A section towards the end of the conference call.

Voluntary Disclosure: I currently hold no positions in NetSuite.

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  And The Winners Of The Second Stock Contest Are...

4/1/2008  | Others

"D2cold" with an overall gain of 23.37% in just one month through his picks soft drink maker Cott Corp (COT), Canada based paper and wood products company AbitibiBowater (ABH) and the unstoppable fertilizer company Potash Corp. of Saskatchewan (POT). POT, which is currently trading at $155.21 was a $29 stock less than two years ago and "D2cold" made a good point with his question "what goes up, must... come down?" while shorting the stock. I did not think I would see the day when a fertilizer company would trade for more than 10 times its sales, a P/E of 45.61 and a dividend yield of just 0.30%. The forward P/E of 16.62 implies expectations of tremendous growth in either potash prices or fertilizer volume in 2008.

The runner up of the subscriber stock contest was "yc" with his brilliant move of shorting Bear Sterns (BSC). You can check out the rest of his picks along with the rest of the contestants here.

Gary of biiwii.com remained the unchallenged king of the stock contest for the top financial bloggers with a gain of 21.52%. Interestingly every other blogger (including myself) posted negative returns. A decision to short Washington Mutual (WM) helped the blogger Accrued Interest win the second prize in the blogger contest. You can check out the rest of his picks along with the rest of the bloggers here. I certainly hope that the first prizewinners do not pick the Nintendo Wii and instead pick the $250 Amazon.com gift certificates, as the Wii's are still difficult to get hold of. Maybe it is not too late to look into Nintendo (NTDOY.PK) as a potential candidate for the model portfolio.

It was fun to watch how this contest unfolded. If there is enough interest, we will launch a longer contest for the second half of 2008. So please drop me a note and let me know if you would be interested in such a contest.

First Prize:	Second Prize:

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  Taking Profits in Monster Worldwide (MNST)

1/31/2008  | SIN Picks

On a day when the Dow is up 140 points or 1.1% as I write this, Monster Worldwide (MNST) is down over 6% ahead of its earnings release this evening. Reflecting economic conditions, Monster Worldwide's January employment index declined 9 points to 160 from 169, representing the third straight monthly  decline leading to a downgrade of Monster Worldwide by Deutsche Bank analyst Jeetil Patel. Anticipating slowing job growth, we picked up $30 March 2008 put options on Monster Worldwide back in September as mentioned in the Hedging Your Bets section of the September 2007 investment newsletter.

These puts are now up almost 125% and I think it is prudent to close this position ahead of the earnings call today and because we are less than 2 months from options expiration. There have also been increased buyout rumors with former chairman and CEO Andrew McKelvey's voting stake cut to 7.4% from 31% following an options backdating settlement. Hence I believe at this point the risk of holding on to these options far outweighs potential future gains and I will be closing this position both in the SINLetter model portfolio as well as my personal portfolio after this blog entry is published. The closing price of the day will be used as our selling price for the model portfolio.

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