20th AIM student update by Conor Conelly. Sberbank of Russia (SBRCY): Russian Bank Dominates

SBRCY (Sberbank of Russia): Seizing Russian Growth!

By Conor Connelly, Student at Marquette University

 

Disclosure: The AIM International 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

·       Sberbank is a corporate and retail bank that serves corporations, small businesses, financial institutions, and individuals in Russia. It has over 17.000 subbranches across the Russian Federation and Eastern Europe.

·       SBRCY’s management has unveiled a plan to optimize efficiency by cost cutting and margin expansion.

·       The worst of Russia’s recession is behind them as consumers have began to use domestic substitutions for imports, driving domestic growth and decreasing dependency on other nations.

Sberbank of Russia (OTC: SBRCY) was added to the AIM International Equity Fund this past December. 2015 marked a year of economic turmoil in Russia. Four macro-economic themes have propelled the country into a recession: accumulated structural problems and decelerated economic growth, a radical drop in oil prices, geopolitical sanctions, and the depreciation of the ruble. While the last year has proved to be difficult for Russian banks, with particular negativity surrounding profitability and asset quality as well as low loan growth, deleveraging, and a rise in nonperforming loans, Sberbank has performed exceptionally.

Sberbank has continued to see mortgage orignination, a growing deposit base, and an extension of credit into corporate segments through 2015. While these metrics have provided Sberbank’s investors with positive returns, the changing economic framework in Russia is pushing Sberbank to adapt heading into 2016.

At a recent investors’ meeting in London, CEO Herman Gref announced Sberbank’s updated strategy to decrease expenditures and push the cost to income ratio below 40%, increase investments in technology, and expand profit margins as revenue growth decreases over time. Revenue trends are expected to become more muted at roughly a 10% CAGR through 2017 while cost cutting and margin expansion is expected to propel ROE to 19.0% by 2017.

Cost cutting is the key lever Sberbank can pull to support returns against a challenging macro backdrop. Sberbank plans to meet these goals by reducing the total number of branches by 10-20% by 2018 and lowering the domestic employee count by 14% over the next 3.5 years.  

What has the stock done lately?

The stock is up 22.8% in the fourth quarter of 2015 as investors have reacted to management’s new strategy. A drop in oil prices has seen the stock fall in the last month, but we believe that this is more of a reaction to short-term volatility and that the intrinsic value of the bank will not be affected.

Past Year Performance

The stock has appreciated 50.9% in 2015 as numerous competitors have struggled. We strongly believe in management’s ability to continue to drive the value of the company higher as they move out of a recession.

Source: FactsSet

My Takeaway

I believe that the best time to get long an emerging market is when their economic growth is low, the currency has depreciated, and the economy is going through an adjustment. That is typically when investors have sold off and the market hits a trough, so you can capture value. Russia is not out of the weeds yet, but the worst of the recession is behind them and Sberbank has shown resiliency and adaptability during a challenging period. I strongly believe in management’s ability to perform and attain their goals. Sberbank will provide value to the AIM International Equity Fund in 2016.

The past quarter has been a strong one for this Russian bank - 2016 should be interesting.

AIM Fixed Income Fund Calendar Year 2015 Performance

The students in Marquette University's AIM program also are responsible for a managing a fixed income fund (consisting of various fixed income ETFs). The total return for the fund for calendar year 2015 was -0.03% versus the benchmark return of 0.55% (Barclays Core Bond Index).

The tables below show various statistics for the overall fixed income market and the AIM fund for 2015. Generally speaking, the under-performance of the AIM fund was a result of an overweight in corporate bonds (which generated an average annualized return of -0.68% or123 bps below the benchmark). The AIM fund also had some exposure to high yield and floating rate bonds, which also contributed to the below benchmark return. The AIM fixed income fund had a slight short duration tilt during the course of the year.

19th AIM student equity update by Michael Reardon. Flotek Industries (FTK): Underlying Fundamentals Strong Despite Recent News

FTK (Flotek Industries, Inc.): Battleground Story Belies Underlying Fundamentals

By: Michael Reardon, 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

• Flotek develops and distributes oilfield products, services, and equipment to the oil, gas, and mining industries in the U.S. and internationally. Its stock is under a cloud after allegations that well production data was misrepresented

• Management has appointed a special team and retained independent consultants to investigate the accuracy of these claims

• Oil & gas completion environment has further pressured the stock as Middle Eastern producers try and squeeze shale oil producers out of the market

• FTK has potential to trade back to its October highs as the CnF demand story comes back into focus following the annual report

Flotek Industries, Inc. (NYSE: FTK) has languished over the last six weeks. In early November, activist hedge fund manager John Hempton published a research report refuting the well production data related to Flotek’s key Complex nano-Fluid (CnF) product, and investors have been skittish around the stock ever since.

CnF and other products in Flotek’s Energy Chemical Technologies segment represent over 60% of the company’s revenue and essentially all its profit. CnF is a specialty chemistry solution designed to help shale oil producers get more oil out of the ground – the product acts as a surfactant, getting between oil and shale rock and reducing surface tension in order to help oil flow to the surface more easily. Following the oil price crash in the second half of 2014, oil producers and services companies have scrambled to find a way to get wells to produce more oil in an effort to recover the high sunk costs of a shale well and to generate cash flow to cover high-cost debt payments. Many of these companies – including the world’s largest services companies, Schlumberger and Haliburton – have turned to specialty chemical solutions like CnF to get the job done.

What’s Hempton Saying?

John Hempton ran the numbers and determined that some of the well production data Flotek used in investor presentations did not line up with public information published by the Texas Railroad Commission, the regulator of the oil and gas industry in Texas. Hempton wrote a scathing research report characterizing management as either fraudulent or inept, and concluded that CnF didn’t work as well as advertised – in fact, maybe it did not even add any economic value to the well.

The company quickly issued a mea culpa, saying that it had indeed detected certain coding errors in its FracMax software package – basically a sales tool used to demonstrate the efficacy of CnF to potential customers – that led to the misreporting of the Texas RRC data. The issue arises from differences in the way that multi-well and single-well data is aggregated, and management believes the problem affects a small number of wells reported by FracMax.

Hempton’s conclusion may be more concerning if the only thing dictating CnF sales were the numbers reported by FracMax – but this is not the case. It is important to recognize that the big players in the energy industry have their own validation systems in place to ensure that the products and processes used to get oil out of the ground are the most efficient and effective methods available. A major oil company will not blindly accept the results published by a supplier and continue to buy a product that doesn’t improve well performance. Put bluntly, Haliburton would not be buying and using CnF if it didn’t get the job done, and it is abundantly clear that reorder volumes from large customers have been strong over the last year.

What Do the Financials Say?

With some of the biggest players in the industry behind the technology, it should come as no surprise that sales of the product have grown rapidly. CnF sales volumes grew 59% year over year and – perhaps more impressively – by 34% quarter over quarter in the quarter ended September 30, 2015. This growth happened in an environment where drilling rig counts fell nearly 60% year over year and completion activity significantly slowed.

Despite this decline in activity, Flotek has also been able to hold pricing on CnF since 1Q15. Low oil prices have forced producers to pressure every link of their supply chains in an effort to cut costs and protect cash in an effort to stay solvent – in fact, prices for some services and products used in the fracking process have fallen by 40% or more over the last year. CnF has been largely immune to this pricing pressure – in fact, Energy Chemical Technology segment gross margins have actually expanded by 300 basis points year over year. Clearly, producers see the value in the product even if Hempton does not.

Source: FactSet

My Take

The underlying business is in as good of shape as any in the energy industry. Flotek has continued to produce strong operating cash flows despite the weakness of the larger energy market and has a solid balance sheet with plenty of liquidity. The business fundamentals and long-term demand story are unchanged and the potential for growth is unparalleled within the energy sector. Despite Hempton’s math, there is ample evidence that the CnF product is highly effective in squeezing more oil out of a shale well, and I believe specialty chemistry products will continue to be a vital part of the fracking process into the future.

The stock has been strong over the last six weeks – it cratered 50% the week of Hempton’s report, however, it regained nearly 30% and its trading behavior suggests investors are entirely discounting the upside potential from the Energy Chemical Technologies segment. Management believes it will be able to share the report of the independent consultants in January 2016, and I believe that report and the annual financial report should serve as the catalysts for the stock’s re-rating to recognize the company’s fantastic growth potential. I believe we can see Flotek trade back in the mid-teens by mid-2016 irrespective of what happens to the broader energy industry.  

An Important New Year's Statistics to Know - The U.S. Population is Now Over 322 Million People!

On New Year’s Day the U.S. Population Hit  322.7 Million and the World Population Totaled Nearly 7.3 Billion People

  

The U.S. Census Bureau projected the United States population was 322,762,018 on January 1, 2016. This represents an increase of 2,472,745, or 0.77%, from New Year’s Day 2015. Since Census Day (April 1) 2010, the U.S. population has grown by 14,016,480, or 4.54%.

In 2016, the United States is expected to experience one birth every eight seconds and one death every ten seconds. Meanwhile, net international migration is expected to add one person to the U.S. population every 29 seconds. The combination of births, deaths and net international migration increases the U.S. population by one person every 17 seconds.

The projected world population on January 1 was 7,295,889,256, an increase of 77,918,825, or 1.08%, from New Year’s Day 2015. During January 2016, 4.3 births and 1.8 deaths are expected worldwide every second.  The Census Bureau’s U.S. and World Population Clock simulates real-time growth of the U.S. and world populations at <http://www.census.gov/popclock>.

http://www.census.gov/popclock/?intcmp=home_pop

Click on the link to update

18th AIM student equity update by Wenting (Mavis) Peng. Argo Group International Holdings (AGII) This Global Reinsurance Company is a Major Player in the Industry

AGII (Argo Group): Still a Great Pick in Property and Casualty Insurance

By: Wenting (Mavis) Peng, 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

• Argo Group underwrites specialty insurance and reinsurance products in the property and casualty market worldwide. Even in the tough environment, AGII has shown a solid improvement of its underwriting results with less volatility.

• AGII offers a diversified global specialty insurance platform with niche focus which will continue to contribute to their reputation in the industry as a leading insurer with strong market position.

• A strong management team has provided a solid return on capital to shareholders through share buybacks and consistent dividend payments.

• AGII’s stock chart remains impressive and it could be heading to a new 52-week high because of the stock repurchasing program and stronger market share.

 Argo Group International Holdings, LTD (NASD: AGII) remains 'in-play'.

While the catastrophe loss ratio has improved about 5 pts since 2012, favorable development has been a consistent 2.5-3.0 pts benefit (versus less consistency in earlier years) and catastrophe volatility has been reduced (through both underwriting and reinsurance buying). I think valuation will better reflect these results over time as the company continues to demonstrate a sustainable track record on the expected improvements.

The company has a global business mix primarily focused on smaller/middle account specialty insurance yet trades at a discount to on shore and Lloyd's specialty companies. AGII’s mix of business is primarily insurance focused at 92% of total GWP with reinsurance accounting for about 8%. AGII has a sizable US Excess & Surplus insurance platform and a large Lloyd’s syndicate in addition to a niche retail commercial business. It serves a wide areas such as grocery, restaurants, dry cleaners and the mining industry and public entity business. The company reach deeply into the market by its diversified distribution network of independent agents, MGA, wholesale brokers and Lloyd’s market. AGII is expected to continuously diversify its business and maintain its strong market position in following year. Specializing in niche market expansion will also drive up its revenue.   

For the three months ended September 30, 2015, AGII repurchased 85,959 common shares for $4.8M, which contributed to 575,055 common shares for $29.7M in the nine months ended September 30. The repurchases were a part of the 2013 Repurchase Authorization to repurchase $150M in common shares; as of September 30, 2015, there was $63.1M remaining on the authorization. AGII continues to return capital to shareholders in the form of repurchases and dividends at a similar annual run rate.

How’s the Stock Performance Recently?

During the past 13 weeks, the stock has increased 8.0%. During the past 52 weeks, the stock of Argo Group International Holdings Limited has outperformed the three comparable companies, which saw gains between 7.2% and 11.8%.

Multiples Performance Well Compared to its Peers?

Three major competitors of AGII are as follow: RenaissanceRe Holdings Ltd. (2014 sales of $1.26 billion of which 47% was Catastrophe Reinsurance), Validus Holdings, Limited ($2.09 billion of which 44% was Validus Re Segment), and Endurance Specialty Holdings Ltd. which is based in Bermuda (US$2.01 billion of which 51% was Reinsurance).

During the last 12 months, earnings per share was $6.34. Thus, the Price / Earnings ratio is 9.85. Earnings per share rose 34.2% compared to last fiscal year. This company's P/E ratio of 9.9 is very close to the P/E ratios of all three comparable companies, which are currently trading between 9.2 and 10.5 times earnings. Argo Group International Holdings Limited is trading at 1.01 times book value. The company's price to book ratio is fairly close to the price to book ratios of the three other companies, which are currently trading between 0.99 and 1.13 times book value. This book value level shows AGII’s potential to grow and continue to realize shareholders’ wealth maximization.

Past Year Performance: AGII has increased 20.57% in price value over the past year, but the stock is nonetheless on the bargain table with book value of 0.99-1.13 times. It also paid $0.8 dividend, yielding impressively 1.4%.

Source: FactSet

My Takeaway

AGII’s management team is confident and optimistic about the company’s 2016 earnings. They expect the stock to perform well and above their peers. Even though the insurance industry is highly competitive and risky due to its uncertainty, AGII still maintains its strong market position by expanding its business through diversifying business mix, platform, distribution networks, and products. Moreover, AGII is actively seeking to improve its capital efficiency, increasing stock buyback, which would potentially drive AGII to a new high price sooner. This industry leader should continue to lead the pack in 2016 and provide stability to a potentially volatile year in global stocks.

24/7 Wall St. Reports That Merrill Lynch Is Bullish in 2016 On These 4 Stocks

Merrill Lynch Has 4 Big 2015 Losers to Buy for Big Potential 2016 Gains

By Lee Jackson of 24/7 Wall St.     December 30, 2015

There is a plethora of reasons why stocks fail in any given year. Sometimes the fundamentals are just rotten, but many times either the sector falls out of favor or a geopolitical or headline incident can mar performance. 2015 was no different from any other year as some of the top performers from 2014 met with consistent selling and got absolutely hammered this year.

We screened the Merrill Lynch research database for stocks that performed well in 2014 but met with not only selling this year, but a degree of scorn from some of the analysts on Wall Street. While there is absolutely no guarantee they do indeed rebound in 2016, they certainly have been rerated to the degree where more downside seems unlikely.

All four stocks are rated Buy at Merrill Lynch.

Alibaba

This time last year, this company was the hottest thing on the planet. Alibaba Group Holding Ltd. (NYSE: BABA) is the largest online and mobile commerce company as measured by gross merchandise volume, and it had the highest profile initial public offering (IPO) of 2014. The stock has acted horrible since, printing highs at $120 in mid-November of last year.

Plain and simple, the dominance in Alibaba’s core business, the very hard barrier to entry for competition and new growth opportunities like cross-border e-commerce make the stock extremely attractive. With most of the damage to the China equity markets seemingly subsided for now, the residual effect to the company may all subside some.

The company recently made a non-binding offer to acquire the 82% of Youku that Alibaba doesn’t already own. This comes as little surprise to Wall Street, given Jack Ma’s vision for digital content and delivery. While a few of the leading video sites continue to struggle, there is a ton of synergies overall in the combination.

Merrill Lynch sees Alibaba as cheap, with outstanding premium growth potential. The firm also notes that Alibaba has reached a Mobile Monetization inflection point as China Online retail continues to go online. This means that Alibaba will be able to sustain premium growth rates in its key Retail segment, which is 80% of the company’s overall revenue for at least the foreseeable future.

The Merrill Lynch price target for the stock is a conservative $101. The Thomson/First Call consensus estimate is even lower at $95.59. Shares closed Tuesday at $83.26.

Adeptus Health

This stock has been absolutely mauled and is down a whopping 50% or so since late September. Adeptus Health Inc. (NYSE: ADPT) is a leading patient-centered health care organization expanding access to the highest quality emergency medical care through its network of freestanding emergency rooms and partnerships with premier health care providers.

In Texas, Adeptus Health owns and operates First Choice Emergency Room, the nation’s largest and oldest network of independent freestanding emergency rooms (ERs). In Colorado, in partnership with University of Colorado Health, Adeptus Health operates UCHealth Emergency Rooms. In Arizona, with Dignity Health, the company owns and operates Dignity Health Arizona General Hospital and freestanding ERs.

The stock was knocked down big again recently after reports questioned freestanding ERs taking in patients that should be treated in lower acuity settings. The company submits this is nothing new, and 93% of the company’s patient fall into the 3 to 5 level acuity silo on a 1 to 5 acuity basis, which is no different than hospitals with attached ERs.

Some Wall Street analysts see the company delivering a 30% compounded annual growth rate over the next three years, as it grows beyond the three state markets where it currently does business. Also strong gains from Medicare/Medicaid reimbursements could bolster earnings. In fact, some have the company’s 2017 EBITDA 17% higher than current Wall Street projections. Adeptus also recently was added to the S&P SmallCap 600 index.

The Merrill Lynch price target is a gigantic $130, and the consensus target is $110.09. The stock closed Tuesday at $55.36, up almost 9%.

Enterprise Products Partners

This stock is down 33% this year but remains one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, just raised the distribution 1%. Enterprise Products maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.

One reason why many analysts may have a liking for the stock might be its distribution coverage ratio, which is well above one times, making it relatively less risky among master limited partnerships. The company’s distributions have grown for several quarters and are expected to continue in 2016.

Investors receive a very solid 6.17% distribution. Merrill Lynch has a $35 price objective, and the consensus target is $34. Shares closed Tuesday at $24.97.

SunEdison

This top solar company has been absolutely destroyed, down over 80% since July, after pushing higher since the beginning of the year. SunEdison Inc. (NYSE: SUNE) manufactures solar technology and develops, finances, installs and operates distributed solar power plants, delivering predictably priced electricity and services to its residential, commercial, government and utility customers. It also provides 24/7 asset management, monitoring and reporting services for hundreds of solar systems worldwide via its Renewable Operation Center.

SunEdison bought Vivint Solar in a cash, stock and convertible securities deal that some on Wall Street thought was ill-advised. Some investors are wary of the buying binge and don’t feel the company has the profits to support all the transactions. With the new breath of life from the tax credit extension, the deal was renegotiated with less cash outlay, a positive for SunEdison and its yieldco company TerraForm Power.

Merrill Lynch has a huge $12 price target. The consensus target is even higher at $15.13. The shares closed trading Tuesday at an incredibly low $5.02.

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17th AIM student update by Clare McNamara. Carnival Plc (ticker: CUK): Catching Some New Waves!

 CUK (Carnival Plc.): Cruising for Alpha!

By: Clare McNamara, 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

• Carnival offers cruises (under the names Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn, AIDA Cruises, Costa Cruises, and Cunard) in the US, Europe, Australia, and Asia. It operates 100 cruise ships and is doubling its lines in China. 

 

• The new, diverse management team is gaining experience and seeks to reach broader audiences for cruising - and the timing could be just right for the major expansion in China!

• Carnival’s setting sail on some new seas with its “social impact travel” and access to Cuba.

• Low oil has been good for the consumer and travel industry, but Carnival can’t count on it to boost earnings for too long.

Carnival Plc. (NYSE:CUK) is set to take even more market share within the cruise industry. The cruise industry in China is still in its infancy and has a lot of room to grow, with the middle class still growing at an astounding rate. Other cruise lines like Royal Caribbean have caught wind of the untapped Chinese market and began to invest in it through new marketing campaigns and entertainment geared towards the Asian market. However, Carnival will be adding four new ships from the more iconic Carnival and Aida lines by 2017, to its already existing Princess and Costa cruises stationed at Chinese ports. They will have the most ships out of an cruise line in China by that time, maintaining their 42% market share within the cruise industry.

In an interview earlier this year, CEO Arnold Donald made a pretty big bet on China, saying Carnival is situating itself “to take full advantage of what one day will be the world's largest cruise market”. It is this type of forward, strategic thinking by a fairly new CEO that grew the cruise line’s stock 50% within the first year of his presidency. Donald and his team of Senior VP’s are taking on new initiatives, like the music concert series and penthouse spa suites, to make each of its brands even more unique and appeal to broader audiences.

Carnival will be adding a 10^th line to it’s fleet with the first ever Fathom cruise setting sail in spring of 2016. “Social impact travel” is a completely new concept for the cruise industry and much of the travel industry in general, and Carnival is leading the way. This is attracting a completely new type of cruiser with the unique opportunity to volunteer while vacationing. The ship will also alternate with some weeks going to Cuba, which will most likely drive sales in the Caribbean in the coming years.

Oil will be an issue for Carnival and the rest of the industry coming up, as it has been wind in their sails for the past year. Although Carnival has reduced emissions, oil is still their most used source of energy for their ships. It’s important to keep an eye on oil prices, because a huge rebound in prices could seriously impact Carnival’s margins.

What has the stock done lately?

CUK's stock chart looks impressive as it is up roughly 20% year to date. That may sound like a lot, but remember how much of a tailwind they have had from lower energy costs. This has allowed them the ability to beat earnings for three straight quarters this year. Despite this, the stock has been stagnant for the past 3 months, still recovering from the dramatic news about China’s slowing economy in the late summer. The new ships that are about to be launched in 2016 could bring some new life to CUK. This, along with the improving fundamentals of the company could be just the catalyst it needs.

Past Year Performance: CUK has increased over 15% in value over the past year, but the stock still has value and room to grow. Beating earnings guidance within the past year display’s managements priorities to give back to shareholders, with a dividend yield of 2.24% - also rose in 2015. The firm is about half as levered (37x D/E) as it’s peers (average 129x D/E), and has a mid-range P/E. The street confirms these numbers as well, with 3 out of 5 top shareholders increasing holdings recently.

Source: FactSet

 My Takeaway

Carnival had some rough seas over the past year with the sell off of stocks in China, but it still continued to surpass earnings estimates. The strong leadership within the company is really going to drive the ship forward in 2016 as the innovative cruise line charts new waters. While oil is something to be conscious of, it shouldn’t be a make-it or break-it for Carnival; they have lived through high oil before and can do it again. Watch out for this creative, ever-spinning firm to offer new ideas for travel. This company is an industry leaders and could once again be a surprise performer in 2016.