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JeffryClarke (48.96)

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Notes on a Good Week for WAC, SWKS and ABGB - With a Short-Term Money Making Idea

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June 08, 2014 – Comments (7) | RELATED TICKERS: WAC , SWKS , ABGB

It’s been an eventful couple of weeks for the five stocks that I’m holding, with my portfolio up 14% over that time frame.  Every stock is a good story, but a few are standing out right now:

Walter Investment Management (WAC) – Q2 Earnings Estimates are Far too Conservative

WAC was up 7% last week from its low point on Monday morning, largely due to a strong showing by management at the KB&W mortgage finance conference on Tuesday.  Management sounded more relaxed and upbeat than usual, and especially when talking about Walter Capital, which is expected to start up this month.  Walter Capital will eventually be a REIT affiliate of WAC which they can use to help finance MSR acquisitions with cheaper capital, which will in turn help WAC transition to a ‘captial light’ business model with an emphasis on fee revenue (i.e. more like a true investment manager than a bank.)  PennyMac Financial Services (PFSI) has a similar REIT affiliate that paid it $32M in fee revenue in Q1 alone.   

WAC management also dropped an interesting tidbit for those people who like making money in the short-term (which I know is against the rules here at MF, but anyway.)  They mentioned that HARP refinancing activity was materially higher in April and May versus the average level in Q1.  HARP refinancing activity has been a major driver of profitability at WAC in 2013 and thus far in 2014 and it helped contribute to WAC beating consensus earnings by 60% in Q1.  Q1 earnings were $1.57 per share and the consensus for Q2 right now is $1.21 per share.  With HARP activity accelerating in Q2, WAC looks poised to beat the Q1 marker of $1.57 and once again annihilate the consensus.  The last time that happened the stock popped 20% in a day so just saying… 

Skyworks (SWKS) Slowly Digs an Economic Moat

I’ve dabbled in the stock market for 15 years but have only really gotten serious in the last year or so.  So I’m far from an expert, but still, I have to believe that what is going on at SWKS is unusual.  On April 22 they guided Q2 earnings to 73 cents per share, which at the time was 16% above consensus.  Then on Tuesday they issued a statement saying they now expect Q2 earnings to be 80 cents per share.  Who issues two revisions to earnings in the course of six weeks for a total of 27%? 

SWKS is the stock in my portfolio that I know the least about.  I really bought it based on the numbers (low P/E) and macro industry trends (smartphone adoption and ‘internet of things’).  So I went back and did some reading this week and was embarrassed by how much better this situation is then I thought.  One quote in the Q1 earnings conference call stood out to me especially:  “…there is going to be a shake out most likely in the analog space where there are companies who have scale, customer relationships and the breadth of technology that can ramp a system integration mindset and capability. And I think companies who can do that, there aren’t many are going to win, they are going to win a lot because this market is going to grow. And I think that will continue.”

It is becoming clear that the RF component industry is undergoing change and transitioning from commodity status to what the CEO is calling a “system integration mindset.”  The technologies are getting more complex, the customers are getting more demanding and certain competitors without the scale and technical expertise are falling by the wayside.  On a run rate right now, SWKS is spending close to $250M a year on R&D.  They are throwing down the gauntlet and making it hard for competitors to stay half-way in. 

The quote above reminds me a lot of a quote from the CEO of Cummins (CMI), the diesel engine manufacturer, on an earnings call last year (CMI was one of my main holdings last year).   CMI has been a 12-bagger since 2004 largely because increased regulations for diesel engines caused a shakeout in the industry when smaller and less sophisticated players couldn’t handle the complexity.  I’ve always wanted to find an industry right on the cusp of transitioning from commodity to valued partner, and it looks like analog RF components may be making that transition right now. 

Abengoa (ABGB) – Still Misunderstood, Still going to $40

It there is a company more misunderstood in the market than Abengoa SA, I’d be interested to hear about it.  ABGB was up 14% last week on news that it is commencing an IPO this week for a new wholly owned yieldco.  The yieldco will be valued at at least $2.0B.  So it appears that at least a few people noticed that if a small portion of the company is worth $2.0B, that an overall valuation of $3.6B for the company is probably too low (I’ve written about this several times for anyone who wants more detail).

So I was feeling a little better about ABGB’s plight until Moody’s issued this ridiculous affirmation of the company’s B2 credit rating:

https://www.moodys.com/research/Moodys-Initial-Public-Offering-of-Abengoa-Yield-plc-is-credit--PR_301261?WT.mc_id=NLTITLE_YYYYMMDD_PR_301261%3C/p%3E

I suspect that not many readers here at MF are buying corporate debt, so I won’t go on a detailed epic rant about the stupidity of this corporate debt rating.   As such, I’m going to go on a high-level epic rant about the stupidity of this corporate debt rating. 

Yes ABGB has a high debt load, but it’s primarily project financing that is non-recourse to the parent, and it is secured by a relatively small portion of the company’s assets, a situation that is made possible by government guarantees on its project debt.  Yes that is an atypical situation, but ABGB is an atypical company.  The fact that both the equity and the debt markets don’t seem to understand the business model drives me nuts. It makes me even madder that a company as dumb as Moody’s (or S&P for that matter, both are dumb companies that nearly sank the economy in 2008 and got nowhere near enough blame for it) can issue these proclamations that actually dictate company strategy.  So Moody’s – ABGB shouldn’t take the dirt cheap project financing with government guarantees that is non-recourse to the parent?  You feel that would materially help its corporate credit rating?  Weird.

That's it.  Happy hunting everyone!

7 Comments – Post Your Own

#1) On June 17, 2014 at 10:28 AM, TMFDeej (99.43) wrote:

Hi Jeffry.  I see that you went long BBSI in CAPS recently.  I am a former shareholder of the company who thank goodness sold out a long time ago.  I was wondering what made you give it the thumbs up if you don't mind me asking.

Thanks.

Have a good one.

Jason

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#2) On June 17, 2014 at 4:47 PM, JeffryClarke (48.96) wrote:

Hi Jason.  I added a pitch and plan to write more this weekend if I get the time.  I like the numbers and the overall situation a lot.  I think this guy and SeekingAlpha has some pretty good insights too....

http://seekingalpha.com/article/2226743-barrett-business-services-growing-pains-have-subsided-leaving-large-upside-potential?source=yahoo 

 

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#3) On June 18, 2014 at 3:59 PM, TMFDeej (99.43) wrote:

Thanks Jeffry.

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#4) On July 30, 2014 at 12:25 PM, boozalex (34.93) wrote:

Jeffry,

 This thread on WAC might be of interest to you: 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/wac-walter-investment-management/20/

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#5) On August 11, 2014 at 11:28 PM, boozalex (34.93) wrote:

Any thoughts on the quarter?

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#6) On August 12, 2014 at 6:55 PM, JeffryClarke (48.96) wrote:

Made me very nervous.  Earnings from servicing was only $20M while originations was $70M.  It was supposed to be the opposite this year, with revenue and earnings transitioning to mostly fee based.  Seems like the regulatory environment is severely holding things up and they mentioned in their 10-Q that they won't get resolution on MSR transfers until April 2015. I honestly don't see how they make even the bottom end of their guidance ($5.25/share) this year.  Too many things working against them right now.  But at least they're not Ocwen!

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#7) On August 13, 2014 at 6:14 AM, JeffryClarke (48.96) wrote:

Sorry - I got confused by their new name for Core Earnings, which is now 'Adjusted Pre-Tax Earnings' which they then report after taxes.  OK, so they can still hit the bottom end of the range and maybe the mid point.  But the story has changed a lot just is in the last 3 or 4 months.  They haven't (and aren't) transitioning to fee based revenue like they thought.  Not necessarily their fault, but still creating a lot risk.  I got out at $29 on the morning they announced earnings.  Still a lot of potential but I need some time to reconsider given how the model is changing...

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