Today’s news: PBF Energy (PBF) moves from Strong Buy to Hold; watch for earnings announcements from Delek US Holdings (DK) and Martin Marietta Materials (MLM); valuation metrics for the KLX Inc. (KLXI) Energy Services Group spinoff; clarity from the Universal Electronics (UEIC) conference call.
Delek US Holdings (DK – yield 1.6%) is expected to report first quarter earnings per share of (-$0.13) this afternoon (May 7), within a range of (-$0.23) to $.06. I love the stock, but I’d prefer that new investors wait for a pullback, in order to buy at a lower price. Hold.
Martin Marietta Materials (MLM – yield 0.9%) announced that they’ll report first quarter results tomorrow morning, May 8. Analysts expect $0.22 EPS, within a range of $0.03 to $0.49. Martin Marietta’s industry peer Vulcan Materials (VMC) reported a huge earnings beat last week, driving both stocks upward. Strong Buy.
PBF Energy Inc. (PBF – yield 3.0%) – I’m moving PBF from Strong Buy to Hold. I’d like to see the stock rest for a while before encouraging people to buy. Hold.
KLX Inc. (KLXI) – Please refer to the Special Bulletin from May 2 in which I described the KLX decisions to allow Boeing (BA) to acquire its Aerospace Solutions Group (ASG), and to spin off its Energy Services Group (ESG) to shareholders. At a current price of $71 per KLXI share, minus the value of the Boeing-ASG transaction at $63, the market is valuing the ESG business at $7 per share. Here’s how we know that $7 per KLXI share is a ridiculously low valuation for ESG:
Within the fourth quarter earnings report, KLX estimated that the company would achieve $390 million in adjusted EBITDA in 2018 (EBITDA = earnings before interest, taxes, depreciation and amortization). Then within the May 1 Boeing transaction press release, KLX estimated that its ESG business will earn $110 million in adjusted EBITDA in 2018, representing 28% of the $390 million expected 2018 EBITDA of the total company (ASG + ESG businesses).
If ASG is worth $63 per KLXI share, and ESG makes up 28% of KLX’s total earnings power, then I can roughly assume that the two company segments combined should equal approximately $87.50 per KLXI share, giving ESG a fair value of about $24.50 per KLXI share.
$110 million ESG EBITDA + $280 ASG EBITDA = $390 total KLX 2018 estimated EBITDA
28% ESG contribution to EBITDA + 72% ASG contribution to EBITDA = 100% KLX 2018 estimated EBITDA
$24.50 ESG value per share + $63 ESG value per share = $87.50 total KLXI theoretical value per share
The market will naturally assign differing values to an aerospace business vs. an energy services business, and the energy services portion of KLX is growing at a vastly more rapid rate than the aerospace business, so we can’t really make an apples-to-apples comparison and derive a specific dollar value for the ESG business. And there’s no guarantee that anybody will mirror my valuation approach when determining the future price of the ESG business. However, this illustration is meant to reiterate the basic point that the market is not currently assigning ESG anything close to a fair value, and that there is an opportunity remaining for near-term capital gains.
If you buy KLXI and are willing to wait for the two M&A transactions to take place, you will have $63 cash per share returned to you, and you will own shares of the new KLX Energy Services (KLXE). The Boeing cash transaction is expected to be completed by September 1, and the KLXE spinoff could happen at any point between now and the completion of the Boeing transaction. (You are free to sell KLXI on any business day prior to the spinoff and prior to the completion of both transactions. You could, for example, receive the spinoff shares in July, at which time your remaining shares of KLXI will trade near $63 until the Boeing transaction is completed. You could sell your remaining KLXI shares on the open market, or just wait for the Boeing transaction to be completed, at which time the cash will show up in your brokerage account.)
I expect KLXI to rise to a more fair valuation in the coming weeks, reflecting a true value of the ESG spinoff. I see incredible value here. Please visit the KLX website and view the webcast and slide presentation to learn more about KLX’s rapidly-growing ESG business. Strong Buy.
Universal Electronics (UEIC) reported first quarter results last week that were close to analysts’ estimates. Gross margins improved in the quarter, reflecting operational efficiencies in their Chinese factories. However, the company guided revenue and profit numbers down for the second quarter, due to some customer shipments being pushed into the third quarter and beyond. Investors are welcome to listen to the first quarter 2018 conference call.
Universal Electronics creates next-generation TV set-top technology, wireless remote control products, intuitive voice-activated platforms, software, climate control and audio-video accessories for the smart home and more. Its customers – including Comcast, Daikin, Samsung, Sony and Toshiba – use Universal Electronics’ technologies as they build their next-generation products. Those product launches are sometimes pushed out as the manufacturers tweak their system upgrades, in order to present the best possible product to their customers. Therefore, it’s not unusual for customers to delay taking shipment of Universal Electronics’ products as they work through technical issues in preparation for new product launches. That’s essentially what’s happening right now during the second quarter. Some customers are reducing orders of existing platforms in front of planned upgrades. Order flow typically ramps up again as new products are introduced to the public.
On the conference call, a management representative stated, “We are the de facto standard for what TV and remote controls will be in the future.” Confidence is high in preparing for customers’ new platform implementations, and no projects have been cancelled. The news of the slowdown in current order patterns unnerved investors and caused the share price to plummet, yet similar slowdowns have happened in the past, and represent a normal ebb and flow of the order cycle, especially when customers are transitioning to next-generation products.
In the first quarter, Universal Electronics saw an uptick in design wins for their voice remotes. They have 20 new voice remote control products that are in development or going through design review. The company does a tremendous amount of work globally, and continues to work on proposals and win new business in EMEA, while also expanding in Latin America and India. Universal Electronics technology will be embedded in television brands that represent nearly 40% of the global TV market in 2019.
The stock is volatile, and very cheap right now, after plummeting on disappointing news of lower second quarter shipments. UEIC is not yet ready to recover, and will likely trade liberally between 30 and 40 for a while. Patient investors could dollar-cost-average into the stock as they await its next upturn. Strong Buy