Friday, November 30, 2018

A Current AIM Program International Equity Holding: Rio Tinto Plc, Inc. (RIO) by: Nicholas Goehring. "Time to Mine Rio Out?"


Rio Tinto Plc, Inc. (RIO, $48.98): “Time to Mine Rio Out?”
By: Nicholas Goehring, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

Rio Tinto Plc, Inc. (NYSE:RIO) is the second largest mining company in the world, specializing in the extracting, transporting, and sale of raw mined metals and minerals.

• In 2018Q3 159.7 thousand tons of copper were mined, up 32% from 2017Q3, primarily from higher grades and increased production form the Rio Tinto Kennecott mine.

• On August 15, 2018 a truck operator was fatally injured at the Paraburdoo Australia Iron Ore mine and is currently under investigation.

• RIO is on track to reduce long-term debt by -30% YoY. Down to $30.3MM as of end 1H18 from $33.3 at end FY17.

• Global increase of stringent environmental protection laws restrict production and pressure mine closures.

Key points: 

It might be time to sell Rio Tinto. Even though Rio benefited strong commodity prices in 2016, commodity prices have fallen in FY 2017 adding significant downward pressures on the company’s profitability. Iron ore prices are down 18% over the last six months as trade uncertainty in China has impacted infrastructure growth outlooks. In FY 2017, iron ore made up just over 44% of Rio’s total revenues and will continue to be a significant operating segment.

Mined copper productions was 32% higher versus 2017Q3 as a result of increased production and higher grade mines. In FY 2017, copper made up 11.5% of their total revenue. Even though these efficiencies have benefited over the past 3 quarters, copper prices have also fallen 18% since their peak in early June.

Management believes that “mine-to-market” productivity systems will improve Rio to top the industries margins. Efficiencies are generated by focusing free cash flows on innovative practices and developing new technologies. In 2018, 11 Automated Drilling Systems (ADS) have drilled more than 5,000 kilometers, and they have increased their “AutoHaul” autonomous rails stems operations to an average of 34 trains per day or 290,000 kilometers per day.

What has the stock done lately?

Over the last month the stock price has traded between $53 and $46. This is dangerously close to their 52-week low of $45.62, which was reached on September 11th.  The stock price has only increased ~2% in the last 12 months. It is concerning that the stock has not grown, is it poised to go up?

Past Year Performance: 

Rio has increased 2.27% in value over the past year, but Iron Ore prices have dropped from $60.70 to $49.07 over the last six months driving the stock down 7.8% YTD. Even though they have a high dividend yield of 6.3%, they have reduced their long-term debt by almost 30% YoY. They have one of the best capital structures in the industry.


Source: FactSet

My Takeaway:

Rio’s stock performance is heavily dependent on commodity pricing and efficiency improvements. Even though Rio has made significant technological improvements and divested underperforming mines over the last 18 months, but their stock price is trading near its 52-week low. Earlier this year, both the CFO and the chairperson stepped down. It is concerning to see two senior members to leave the company at the same time. Long operating cycles and poor performing commodity markets have dampened the returns of this stock. If the commodities markets recover, the returns of this stock could be noteworthy.


Source: FactSet



A Current AIM Program International Equity Holding: Accenture Plc (ACN) by: Alex Penkwitz. "Service This!"


Accenture Plc (ACN, $160.29): “Service This!”
By: Alex Penkwitz, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary:

Accenture Plc (NYSE: ACN) is one of the world’s leading professional services companies engaging in the provision of management consulting, technology, and outsourcing activities. ACN serves clients in a variety of industries in three geographical regions: North America (45% of 2018 revenue), Europe (36%), and Growth Markets (19%) such as Asia Pacific, Latin America, Africa and the Middle East. Accenture Plc was founded in 1989 and is headquartered in Dublin, Ireland.

• ACN reported very strong FY2018 numbers. Net revenues grew by 10.5% in local currency and roughly 80% of overall growth was from strong organic growth of 8%.

• ACN just announced a semi-annual cash dividend of $1.46 per share, a 10% increase from their previous dividend.

• ACN had their second highest bookings on record, reported as $10.8 billion for Q4-18.

• ACN has shifted their core business to the “New” digital, cloud, and security related services. The “New” accounted for 60% of their total revenue in FY2018.

Key points:

Accenture’s strong results for FY2018 demonstrates that they continue to execute their profitable growth strategy of differentiation and competitiveness very well. Their strong revenue growth displays that there is an increasing demand for their services.

ACN recently announced that they will be increasing their semi-annual dividend $1.46. This represents a 10% increase from the previous semi-annual dividend that was declared in March. This newly declared dividend will be paid on November 15, 2018. Taking effect in Q1-20, ACN will move from a semi-annual dividend payment schedule to a quarterly dividend payment schedule.

Accenture posted their second highest bookings on record in Q4-18, only behind their numbers in Q3-18. In addition, Consulting bookings were $6.1 billion, which also represented an all-time high.
ACN has begun to shift the core of their business to “New” offerings such as digital, cloud, and security related services. With the technological tilt that the world is seeing now, it has proven to be a good strategy for Accenture. The New services have delivered double-digit growth and is a key catalyst in order for ACN to differentiate themselves from competitors. In FY2018, the company saw 60% of their total revenue come from New services.

What has the stock done lately?

Technology stocks got hit hard in the recent past and ACN’s price has seen these fluctuations. From early August to early October, Accenture saw a 10% increase, starting at $159.09 on August 1st and ending at $174.82 on October 3rd. This is followed by an immediate decline of 13.8% until October 29th where the stock began to recover again. I think that as the technology industry stabilizes, the stock will continue to rise as ACN begins to take more market share from their shift towards their new business core.

Past Year Performance:

ACN has increased 12.58% in value over the past year. As I mentioned in the above section, the stock saw extreme declines during the month of October in 2018. The overall increase in value is due to the confidence investors have in the growth that ACN will continue to have in their New services. Look for Accenture’s stock to stabilize soon and get back to its constant growth that was displayed in early August and November.


Source: FactSet

My Takeaway:

When this stock was first pitched, it was currently at $156.84 and the target P/E multiple was set at 24.0x which resulted in a price target of $201.03. That price target seems achievable in the long run with the continuation of the growth that Accenture Plc has shown in the past. I expect to see ACN bounce back from their October downturn to get back on track to achieve this price target.

Sources:
Factset
Accenture Plc. (2018). Q4 2018 10-K. Retrieved from Factset online database.
Accenture Plc. (2018). Q4 Earnings Call Transcript. Retrieved from FactSet online database.





Tuesday, November 27, 2018

Chief Investment Strategist of Nuveen/TIAA Visited Marquette's FMA Students on Tuesday, November 27th

Brian Nick and Bryan Brooks Spoke to the Marquette Finance Club Students

Brian Nick addressed Marquette finance students
Marquette finance students were treated to an excellent macroeconomic and market discussion today by Nuveen Investments / TIAA investment professionals. A standing-room-only crowd of over 40 students heard from Brian Nick, Chief Investment Strategist, and Bryan Brooks, Vice President at Nuveen Investments / TIAA.

Nuveen Investments, a subsidiary of TIAA, is an asset management firm located in Chicago, Illinois. Nuveen's products include separately managed accounts, retail mutual funds, exchange traded funds and closed-end funds, and Nuveen's services include fixed income, alternative investments such as private equity funds, hedge funds, real estate, and other real assets, and global equities.

Nuveen has nearly $1 trillion in assets under management with holdings in more than 50 countries, with $400 billion in fixed income, $350 billion in equities, and over $200 billion in alternatives. 

Bryan Brooks of Nuveen
TIAA, a leading financial services provider, completed its acquisition of Nuveen in 2014. Nuveen maintains its international headquarters in Chicago, with major offices in New York City, Charlotte, San Francisco, London and secondary offices in Los Angeles, Shanghai, Singapore, Minneapolis, Montreal, Washington DC, Sydney and Hong Kong across their investment affiliates.

Brian Nick works with the Nuveen’s investment management team to forecast investment trends and provide insights on events driving market activity, with a long-term view. He is also a voting member of the asset allocation committee for TIAA multi-asset funds. Bryan Brooks works with the distribution segment of Nuveen.

The students received a briefing of the current macroeconomic domestic and global climate. Brian talked about the various market drivers, including tariffs, Federal Reserve policy, political events in Europe (Brexit and Italy budget issues), and commodities. A Q&A session followed the presentation which allowed Brian to expand upon some of the themes he mentioned during his talk.
Over 40 students attended the FMA presentation

It was a great way for the FMA to conclude its semester - there have been many events (including trips to NYC and Chicago). The spring semester FMA schedule will be published soon.







A Current AIM Program Small Cap Equity Holding: Lending Tree (TREE) by: Matthew Prinske. "Will the Giving Tree Keep on Giving?"



Lending Tree (TREE, $236): “Will the Giving Tree Keep on Giving?”
By: Matthew Prinske, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary: 

Lending Tree (NASDAQ: TREE) Provides online credit-based transaction, offering varying types of loans to the general public.

• Lending Tree Management is focused on growing diverse revenues through marketing and brand name recognition in the consumer sphere.

• The C suite executives believe the industry is just starting to switch to a more online based lending environment.  

• Management has indicated that it will pursue acquisitions that look to grow and diversify the business, a promise they have followed through on this past year.

• Tree has fallen to 41% under the firm’s 52 week high of $404, the company has been fighting back from a poor earnings report in late April.

Key points:

Lending Tree holds a unique position as a brand recognition leader in the online credit marketplace.  The company is well situated to benefit from the increasing shift in consumer sentiment to be more willing to bank online. 

On the 31st of October Lending Tree acquired QuoteWizard.com for $300M in an attempt to grow stockholder value in the long term.  QuoteWizard was one of the largest insurances comparison marketplace, allowing Lending Tree to brand themselves better in the online credit advertising marketplace.

While mortgage loans – A leading source of revenue for Lending Tree – is as cyclical business that concentrates around the spring and summer months, the business will likely see revenue growth slow or even decrease year over year in the winter quarter.  As Interest rates rise the company expects refinances to decrease and for overall traffic to the company website will lead to a slow year over year growth.

What has the stock done lately?

Since reporting earnings on November 1st and announcing the recent purchase of QuoteWizard on October 31st the company’s stock has gone up 18%.  This large bump in price came as the market was correcting and many stock had taken a beating.  The purchase signaled to investors that Lending Tree will continue to be a growth stock that is willing to invest heavy funds to increase their brand.

Past Year Performance: 

TREE is down 30% since January and of 2018.  The firm failed to meet earning expectations in April and has subsequently fallen. The recent acquisition has spurred a run up in the stock in the last three weeks, however the firm has still seen the stock price fall significantly this past year.



Source: FactSet

My Takeaway:

Lending Tree’s persistence on growth in brand recognitions and thus loan growth has been expressed to investors in the firm’s most recent acquisition.  This purchase is likely to see a quick spike in traffic to the cite, and stable long term growth prospects.  The firm is unlikely to be seeing refinances for the next several quarters, and will have to grow revenues in unique and efficient ways.  The outlook for the industry is bright as more people are willing to trust online banking.  It is difficult to call this company a true fallen angel, but it is likely that their P/E ratio will continue to inflate now that management has expressed a clear focus on sustained growth.


Source: FactSet


Monday, November 26, 2018

A Current AIM Program Small Cap Equity Holding: Johnson Outdoors (JOUT) by: Paul J. Cox. "Adventure Awaits"



Johnson Outdoors (JOUT, $70.38): “Adventure Awaits”
By: Paul J. Cox, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

Johnson Outdoors (NYSE:JOUT) : Is a small cap manufacturer and marketer of seasonally branded outdoor recreation products that offers equipment for recreational activities focused on fishing, paddling, diving, hiking and camping based out of Racine, Wisconsin.

• Johnson Outdoors has recently increased its annual cash dividend, reflecting the confidence of the firm’s performance and commitment to it’s strategic plans indicated by David W. Johnson, Vice president and Chief Financial Officer.

• Johnson Outdoors has experienced topline growth of 13% increase in revenue from 2016 to 2017, and three quarters into 2018 we have witnessed significant earnings per share growth.

• Consolidated net sales for the three months ended June 29, 2018 were 170,799, a 10 percent increase compared from three months ended June 30, 2017.  The company has seen strong sales increases from its fishing and camping businesses, up 17% during the third quarter of the previous year.  The company asserts strong performance of new, innovative products drove growth over the last year.  Additionally, the companies camping business has seen sales increase by 15% from the sales the same quarter of last year.  Management asserts that the revenues were driven by expansion into military sales and the Eureka tents product line growth.

• Due to the seasonality of the business, with the majority of sales during the year coming from the second and third quarters during the spring and summer months, Johnson Outdoors has dropped from $101.2 on 9/14/18 to $70.38 as of 11/15/18.

Key points:

Johnson Outdoors announced its three strategic priorities this past august, which consist of consumer insights, enhanced innovation processes and digital sophistication.  Johnson Outdoors expects product innovation to maintain its strong growth numbers.  On the earnings conference call on August 7th, 2018, CEO Helen Johnson-Leipold announced that “Next year’s new fishing products include another award-winning first, the Minn Kota Ultrex, with built-in MegaDown Imaging which grabbed the best Boating Accessory honors at the 2018 ICAST, the world’s most prestigious fishing show”.  The company has announced select models of its Minn Kota bow-mounted trolling motors will be available early next year.

In the Q3 earnings call, CEO Johnson-Leipold also announced its progress in targeting sales and marketing programs to leverage company-wide digital transformation and data analytics in order to enhance accelerated growth for all of it’s channels, long term.  Specifically, Johnson-Leipold discussed the importance of expanded e-commerce sales in regards to both the customers and brand strength.  The company has moved into the implementation phase of its desired digital transformation, and have begun to see an uptick in e-commerce sales for every brand the firm offers.

A big concern of Johnson Outdoors’s management has been the Chinese tariffs.  The company imports products from china, mainly raw materials and electric components, and we are yet to see the impact they have had on the cost of operating.  The tariffs pose uncertainty and it is yet to see how the company plans to mitigate the risk.

What has the stock done lately?

The recent market corrections saw the price of JOUT stock dropping from $105 in early September to trading at $71.75 at market close on November, 15 and represents the risks of the high seasonality of the business, as Q4 generally reports the lowest EPS of the fiscal year by quite a substantial margin, as well as the unknown effects of the tariffs, making the stock experience high volatility in the past couple months.




Past Year Performance

JOUT has experienced a 13.35 YTD change in the past year, yet over the past three months the price has dropped by 29.44%, which is a concerning number for current shareholders.  The 52 week change has shown an increase of just 3.36%.  These recent declines in the past couple months could also have been effected by institutional investors like Tredje AP-Fonden closing their position on the stock during the market corrections, dumping 82,000 shares.

My Takeaway:

Management has shown it is committed to it’s corporate strategy, and has shown solid topline growth from quarter to quarter.  It is likely shareholders may see a decline in share price within the next couple of weeks as the fourth quarter has historically had the lowest sales as the business is highly seasonal.  This could offer potential investors a better value as earnings will likely rebound in the second and third quarters of 2019.



A Current AIM Program Small Cap Equity Holding: Axos Financial, Inc. (AX) by: Brandon Shanklin. "Inorganic Bounce Back?"


Axos Financial, Inc. (AX, $30.24): “Inorganic Bounce Back?”
By: Brandon Shanklin, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

Axos Financial, Inc. (NYSE:AX) engages in the provision of banking and financing services for single and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables.

• AX has completed 3 acquisitions in the past 7 months further diversifying their lending and funding.
o   Acquired WiseBanyan, Inc. on October 25th, 2018.
o   Acquired COR Clearing LLC on October 1st, 2018, pending for approval.
o   Acquired business and assets of bankruptcy trustee and fiduciary service business of EPIQ Systems Inc. on April 4th, 2018.

AX inorganically acquired $3 Billion of deposits from Nationwide Bank on August 4th, 2018, which could very much lead to lower interest costs and an addition of customers.

• Over the past year and a half there has been a 17% drop in institutional holdings, which may signal a loss in faith from institutions, but 73% of holding are still owned by institutional investors meaning there is still belief that AX is poised for long term growth.

• Introduced and integrated a new platform called Universal Digital Bank, which converts Axos’ platform to a single platform where they have full control of the data which introduces mass customization.

Key points:

In attempt to rebrand, Axos Financial, Inc. switched their name from Bank of The Internet (BOFI).  This attempt to rebrand and deliver a different assuring perception to its clients lead to Axos Financial, Inc. making a large amount of costly money moves as of late to improve production and operations.  This rebranding may not have been effective and did not taste well with clients as their stock price has dropped significantly since. 

In the last earnings call, CEO Greg Garrabrants said that “banking will distribute itself such as vertical software providers linked to banking services”, which comes after their Universal Digital Bank implementation. With this new introduction of Universal Digital Bank, or UDB, it will provide banking products and services from Axos and it’s clients through a single software system.  UDB was developed in-house instead of outsourcing to a third party company for development, making it a lengthy and expensive feat for AX.  This platform will give the company the ability for mass customization, automation, and increase cross-selling opportunities to clients. 

In August, Axos Financial acquired $3 billion in deposits from Nationwide. The deposits are made up of $1 billion in low-cost checking, savings, and money market accounts, along with $2 billion in higher-interest time deposits.  In October, Axos Financial furthered its business with Nationwide and signed a master relationship agreement which Axos will provide co-branded banking products and services to Nationwide clients and joint marketing of Axos banking products and services to existing Nationwide clients.  This is a strategic move for Axos as it should introduce them to new clients and more guidance from a strong brand like Nationwide.

Book value per share for AX has been increasing at an average growth rate of 8.15% and was reported at $14.59 in the past earnings report meaning Axos has been able to take a step in the right direction by utilizing their new acquisitions and take advantage of their big money moves and increase their equity through production. 

What has the stock done lately?

Since their rebranding attempt and name switch, Axos Financial stock is actually down -20.33% in the past three months.  Although this is alarming, it should not overshadow its 19.9% stock  growth overall in the past year.  In the past 6 months it reached its high at $44.38 and currently is at $30.24.  With the recent acquisitions, Axos must take advantage of its inorganic additions and improve production and in turn might give them a boost, if not thy will continue this downfall.

Past Year Performance: 

AX is on a current downward trend, but has increased 19.90% in value over the past year. The closing gap between AX’s market valuation and book value per share is slightly concerning as investors may be losing confidence in management and operations ability to implement and integrate affective strategies.



Source: FactSet

My Takeaway:

Axos attempt to rebrand started on a sour note to their clients and obviously the market, but with recent acquisitions and progress with Universal Digital Bank they are taking a big step in a positive direction. Even though it will take time to fully see the results and actual impact these acquisitions will, management is definitely taking the initiative to improve production and efficiency which is promising. These moves could lead to lower operational costs and interest costs, and higher productivity, but management must utilize it in the right way for its value to increase.


Source: FactSet



Wednesday, November 21, 2018

A Current AIM Program Small Cap Equity Holding: Wintrust Financial Corporation (WTFC) by: Ryan Dahlen. "When We Trust"

 Wintrust Financial Corporation (WTFC, $77.86): “When We Trust”
By: Ryan Dahlen, AIM Student at Marquette University

 Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

Wintrust Financial Corporation (NYSE: WTFC) operates as a bank holding company, which engages in the provision of banking and financial services. It operates through the following segments: Community Banking, Specialty Finance, and Wealth Management.

• Wintrust has completed many acquisitions in recent years including Delaware Place Bank with an aggregate purchase price of $33.4 million. The transaction is not expected to have an impact on 2018 earnings per share.

• Since the financial crisis in 2008 Wintrust has increased their interest income every year. While seeing their earnings per share go from 0.76 in 2008 to 5.67 currently. During the same time period, dividends per share have grown by 97.2%.

• Wintrust’s financial performance reflects the improved profitability of our banking subsidiaries as they mature, offset by the costs of establishing and acquiring banks and opening new branch facilities.

• The company has employed certain strategies since 2013 to manage net income amid an environment characterized by low-interest rates and increased competition. In general, the company has taken a steady and measured approach to grow strategically and manage expenses.

Key points:

Within life insurance, Wintrust continues to experience increased competition and pricing pressure from the current market. Life insurance is the primary form of collateral and these loans are often secured with a letter of credit. In some cases, Wintrust Life Financial may make loans that have a partially unsecured position.

During the 3Q earnings call, Wintrust announced that the company has achieved its 11th straight quarter of record earnings, with a net income of almost $92 million ($1.57 per share). Over the same quarter last year, the pre-tax earnings were up 18% or $122 million. Wintrust’s loan to deposit ratio is down to 92%, which is not at the desired rate of 85%-90% but management has a positive outlook with their goals.

With the acquisition of Delaware Place Bank in Q2, five new branches opening, Delaware contributed to $552 million of deposit growth. Contributing to the positive outlook management has to reach their desired loan-to-deposit ratio range.

CEO, Edward Wehmer believes that this positive quarter will do well for earnings growth and balance sheet growth will benefit franchise value. The reduction in taxes and increased interest rates have helped Wintrust reach record quarters with respect to earnings. Additionally, Wintrust is also looking to cut processing costs 50% by using different outsourced companies.

What has the stock done lately?

Over the last three months, WTFC’s stock has decreased -.13% from $89.14 to $77.21. Throughout the past year, the stock has fluctuated from $72.17-$99.96. Midway through October, WTFC reached a low point of $72.29. Currently trading slightly above the 52-week low, WTFC needs a positive catalyst to reenergize the stock price.

Past Year Performance: 

Wintrust has increased in value 1.92% over the past year. With the current stock drop-off, I believe that Wintrust is a strong buy and should be looked at with a positive outlook. I hope to see the stock price bounce back from the recent volatility. 


Source: FactSet



My Takeaway:

Since Wintrust was introduced into the AIM small-cap equity fund in 2013, on the drivers of strategic acquisitions, rising interest rates, and an improving national economy the stock has done very well. In 2013 the economy was much different than today. Following the financial crisis, banks were carnivores acquiring smaller regional banks. However, Wintrust survived and has continued to thrive making acquisitions and gaining a strong market share in the Chicago-land area. Today interest rates are rising, but not from a low point. Increasing interest rates could prove to put a strain on Wintrust. An improving national economy has allowed Wintrust to also increase their revenues by allowing customers the ability to deposit and make more loans. Since then many things have changed but Wintrust is a strong company and has weathered through the worst so far. I expect the stock to continue to do well despite the recent downturn in stock price.  


Source: FactSet




Monday, November 19, 2018

A Current AIM Program Small Cap Equity Holding: KMG Chemicals, Inc. (KMG) by: Cole Froemming. "Cabot Wait to Merge"


KMG Chemicals, Inc. (KMG, $76.43): “Cabot Wait to Merge!”
By: Cole Froemming, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

KMG Chemicals, Inc. (NYSE:KMG) Produces and distributes specialty chemicals and performance materials for the semiconductor, pipeline, and industrial wood preservation markets.

• KMG entered into a merger agreement with Cabot Microelectronics (CCMP) on August 14th, 2018, resulting in the acquisition of KMG by Cabot for 1.6 billion in cash and stock.

• This company operates internationally, with 55.5% of revenues from the Americas and 43.3% coming from Europe.

• In FY2018, net sales in the performance materials segment increased 187.9%, largely due to the recent acquisitions of Flowchem and Sealweld.

• Demand for high purity electronic chemicals, such as those manufactured by KMG, has been driven by a 9% CAGR in semiconductor units worldwide.   

Key points: 

KMG entered into a merger agreement with Cabot Microelectronics that will result in the acquisition of KMG by Cabot. The deal is expected to close near year end and is valued at $1.6 billion in cash and stock. This strategic acquisition is synergistic with CCMP and their existing product line of chemical mechanical planarization slurries and pads, which are also used in the manufacturing of semiconductors.

For FY18, KMG experienced record results, with growth in both operating segments. Income from operations in the electronic chemicals segment, which primarily supplies the semiconductor market, increased 32.0% from FY17. This growth is also due to increased volume globally, and increased operating efficiencies after the restructuring of their electronic chemicals segment in Asia. The performance materials segment faired even better, with income from operations increasing 298.6% in FY18 over FY17. This was largely due to contributions from the recent acquisitions of Flowchem, in June of 2017, and Sealweld in February of 2017, but was also attributable to their legacy businesses within the segment.

In October of 2017, KMG completed a public offering of ~3.5 million shares of common stock priced at $54 per share. KMG used all of the proceeds to pay down their outstanding $550 million term loan that was taken out in the acquisition of Flowchem. This equity offering took their D/E ratio from 3.56 in FY17 to .96 in FY18, a much more manageable level of leverage for KMG.

What has the stock done lately?

One day prior to the announcement of the merger with Cabot, KMG was trading at $66.84. Once announced, KMG quickly jumped to $76.97. This was on target as shares of MKG will have the right to receive $56.65 in cash plus .200 shares of Cabot common stock. This equated to an implied value of $78.65 based of CCMP’s closing price that day. Since then, the stock has hovered right around $76. It is important to note that the .200 ratio is fixed for the stock portion of the merger and that the market price of CCMP will continue to fluctuate until the completed merger date.

Past Year Performance: 

Today, the stock is trading at $24 more than a year ago to date. Prior to the merger announcement, KMG was on the rise, with large spikes after both Q2 and Q3 earnings reports. We saw a spike of ~$8 from $61.92 to $70.04 after Q2 earnings were announced and a spike of ~$9 from $70.51 to $79.26 when Q3 was released.
These spikes of more than 10% post earnings are largely standard as a small cap stock.



Source: FactSet

My Takeaway:

The merger agreement with Cabot Microelectronics confirms that KMG is a solid player in the specialty chemicals and performance materials space. With the semiconductor industry booming, KMG benefited from the continued increase in demand for their electronic chemicals used in the manufacturing process. The acquisition makes sense for Cabot as they will further increase their semiconductor product offering and establish themselves as a leader in the industry. KMG receives a “hold” as the acquisition is expected to close near year end.

Source: FactSet