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Updates on NNBR and GSF

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August 03, 2007 – Comments (0)

     NN, Inc. (NNBR)

As I noted in an update to my pitch for NNBR, the company lowered guidance on 25 July.  In addition to an outperform pick in CAPS, this was also my blog topic a while back.  I also own a few shares.  I wanted to hear what management had to say in the quarterly conference call before deciding whether it was worth holding on. 

NN, Inc. is a small $200M market cap company that makes bearing components and precision metal and plastic parts.

The lowered guidance and poor quarter’s performance were primarily caused by missing revenue targets at the Whirlaway division and continued problems getting all the approvals needed to get a new facility in China up to full production capabilities.  Whirlaway’s miss was due to softness in the home air conditioning market and their truck and automotive business.  The other parts of the company are operating at or above plan. 

Even with the poor quarter and lowered guidance, there’s a lot to like about this company.  They have significant exposure to international markets as well as manufacturing operations in several European countries and China.  With a strong global economy, demand for bearing components should be strong.  The stock is cheap here IF they can get the business back on plan for 2008.

I was impressed by how the CEO handled the conference call.  He didn’t try to sugar coat the quarter and was clearly not satisfied with the companies performance, but did point out that other parts of the company are doing quite well.  He seemed very confident that the Chinese plant was making progress and would be contributing to earnings next year.  He also reiterated his belief that Whirlaway was a good acquisition for NN, Inc. and would be making positive contributions soon.  For what it’s worth, the market gave a little boost to the price during the conference call.

I’m still not sure what I’m going to do with my NNBR stock, but am inclined to hold on and reevaluate next quarter.

My humble apologies to anyone who followed my lead on this one.

     Global SantaFe (GSF)

Hey, I got one at least partly right.  As described in “RIG & GSF - Let’s do the math,” I thought the run up in price after the merger announcement was overdone, I ended my CAPS pick on GSF and sold my position at 78.85.  Apparently the market agreed with me because GSF has been sliding down hill ever since.  I did start buying it back when it dropped below 75, but haven’t bought back all I sold yet (gotta love those free trades at WellsTrade).  I also re-upped my CAPS pick at 73.50.  GSF closed on Thursday at 68.84, so clearly my timing isn’t the greatest. 

I listened to the GSF conference call recording and didn’t hear much besides good news.  Rigs continue to be fully utilized; day rates are high and going higher.  Company management thinks there’s plenty of work in the near term for all the rigs in the market and new ones coming on line.  The biggest concern among the analysts seemed to be rising costs for GSF and the other drilling companies.  Company management acknowledged their costs were going up, but didn’t seem overly concerned with it.  IMHO, at the rate they’ve been able to raise rig dayrates as they rollover contracts, I don’t see how there’ll be any trouble passing those costs on to their customers (who will ultimately pass it along to us at the gas pumps).

GSF is trading at 7.5 times forward earnings.  RIG is trading at 9 times forward earnings.  Those PE’s are for companies with strong earnings growth and that are merging to create a dominant company in the marketplace.  Yes it’s a cyclical business, but the end of the cycle doesn’t seem to be anywhere in sight.  As demonstrated with NNBR, I’ve been known to make mistakes, but this sure looks like a huge mark-down sale to me.

If you’re interested in buying the newco, which will be called Transocean and trade as RIG, the better deal seems to be buying GSF.  At Thursday’s close you’re getting newco through GSF at about a 2.7% discount to RIG’s closing price.  Every time I’ve checked the numbers, GSF has been a slightly cheaper way to buy the new company.

Maybe I’ll sell the NNBR and load up on GSF. 

As always, thanks for reading and feel free to join in with your comments.

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