SmallCapInvestor.com: Sector Watch

Sector Watch: Healthcare REITS

Wed, 08 Oct 08 06:20:04 -0400

Investors seeking a safe haven from stock market turmoil may want to look to healthcare REITs National Health Investors, Inc. (NYSE:NHI) and Omega Healthcare Investors, Inc. (NYSE:OHI) for steady growth, generous dividends and reasonable valuations.

Healthcare REITs (or real-estate investment trusts) own long-term care facilities, medical office buildings and related medical assets. This group is positioned for steady growth as aging baby boomers reach retirement age and demand more healthcare-related services. Healthcare REITs are generally immune to the effects of economic downturns; their occupancies and rents that are more stable than other REIT types. REITs offer attractive dividends since they must pay out the majority of their earnings to shareholders to retain their REIT status. REITs also help diversify investment portfolios; according to industry trade association NAREIT, the correlation rate between REITs and the S&P 500 averages only 37%.

Omega Healthcare Investors, Inc. owns or holds mortgages on 241 skilled-nursing facilities, seven assisted-living facilities and four rehabilitation hospitals. Omega’s properties are spread across 29 states and many tenants. The company has invested over $1.9 billion in these facilities. Omega’s largest tenant, CommuniCare Health Services, represents 22% of the portfolio.

During the six months ended June 30, 2008, Omega produced net income of $34.4 million, or $0.41 per share, on operating revenues of $84.6 million. This compares with net income totaling $36.7 million, or $0.50 per share, on operating . . .

Sector Watch: Lender stocks

Wed, 01 Oct 08 06:20:31 -0400

The mortgage industry meltdown has distracted investor attention from high quality lenders, such as SCBT Financial Corp. (Nasdaq:SCBT) and Southside Bancshares (Nasdaq:SBSI), which continue to perform well. Both companies have conservative loan portfolios and double-digit earnings growth.

SCBT Financial has been providing commercial banking services in the Carolinas for over 73 years. The company owns South Carolina Bank and Trust, South Carolina Bank and Trust of the Piedmont, and The Scottish Bank. It operates through 50 financial centers across the Carolinas.

Location influences regional bank growth rates and SCBT is well-located in a fast-growing region of the Mid-Atlantic. A recent study ranked Raleigh-Cary and Wilmington in North Carolina and Charleston, S.C., among the top 10 cities nationwide for employment growth.

Mortgage loan defaults have not been an issue for SCBT since the company never participated in subprime lending. In the 2008 second quarter, non-performers represented only 0.33% of its total loans. Because of its high asset quality, SCBT is able to capitalize on current growth opportunities that are contributing to record net income.

SCBT’s earnings rose 12.3% in the first six months of 2008, to $12.1 million from $10.8 million in the same period one year ago. Per-share earnings rose modestly to $1.18 versus $1.17 one year earlier, limited by dilution from The Scottish Bank acquisition. Earning assets expanded 20.8% year over year to $2.51 billion from $2.08 billion, and deposits (a source of future loan growth) increased 16.1% year over year to $2.0 billion from $1.7 billion. Analysts think SCBT will produce 12% growth next year and 11% annual growth over the next five years. My $42 target price for SCBT is 12% above Tuesday’s . . .

Sector Watch: Keep on truckin’

Wed, 24 Sep 08 06:20:34 -0400

Although record fuel costs have hurt transportation stocks for the most part, Marten Transport (Nasdaq:MRTN) and Dynamex (Nasdaq:DDMX) are faring better than most due to their focus on niche markets and should be among the first to recover when the economy strengthens.

Marten Transport is a leading transporter of food and other goods that require a temperature-controlled environment. Approximately 80% of the $560 million in revenues Marten generated in 2007 were from deliveries of temperature-controlled products. The company’s main transport routes are between the midwest and west coast, southwest, southeast and the east coast. Average haul length is around 900 miles.

Marten’s fleet includes over 2,400 company and independent contractor tractors. Its track record of 99% on-time delivery is a major selling point to customers shipping perishable goods.

During the first six months of 2008, Martin boosted truckload revenues 5.5% year over year to $255.2 million from $241.9 million and logistic revenues, which consisted of brokerage and intermodal operations, logistics revenue increased 69.7% year over year to $48.2 million from $28.4 million. However, net income fell to $6.1 million, or $0.28 per share, for the six-month 2008 period from $8.9 million, or $0.41 per share, one year earlier due to soaring fuel costs, Marten is addressing fuel cost challenges by expanding its asset-light logistics business, reducing fuel consumption per load through shorter hauls and regional routes, and installing auxiliary power units on rigs that provide heat, air conditioning and electricity to its drivers without running . . .

Sector Watch: Personal-care products

Wed, 17 Sep 08 06:20:42 -0400

Consumer products companies face real challenges during times when consumer spending is soft, but Helen of Troy Limited (Nasdaq:HELE) and National Presto Industries (NYSE:NPK) are weathering the current storm far better than most.

Helen of Troy Limited produces personal care products such as hair dryers, curling irons, shavers, hair accessories and skin care products under well-known brand names such as Vidal Sasson, Revlon, Sunbeam, Pro Touch and Salon Creations. The company added housewares to its product line in 2004 by acquiring OXO International, a manufacturer of kitchen tools and cutlery. HELE’s houseware sales grew nearly 20% last year and offset slower growth in the personal-care products segment. While only about a quarter of the size of its personal-care business, the housewares division contributed 43% of HELE’s 2008 operating income.

The company markets its products through mass merchandisers, drug chains, groceries and specialty stores. Product line extensions were a major driver of earnings growth last year, with FY 2008 per-share earnings improving 22% to $1.93 from $1.58. HELE introduced 526 new products in 2008 and has an additional 389 new products in its 2009 development pipeline.

The company surprised analysts in the first quarter of FY 2009 by reporting non-GAAP per-share earnings of $0.42, up 31% from last year’s first quarter and 40% above analyst estimates. This marked HELE’s third-consecutive quarter of positive earnings surprises. In addition to new products, the company expects to fuel future earnings growth with expense reductions and possibly an acquisition. Analysts target 10% annual long-term growth for HELE. These shares are reasonably priced compared with other consumer product companies at a 13 times P/E multiple and an 11 times forward P/E multiple. My $30 price target for Helen of Troy shares is 30% above . . .

Sector Watch: Solar energy stocks

Wed, 10 Sep 08 06:20:48 -0400

With both political parties promising further development of alternative energy sources, the future looks bright for solar energy companies Canadian Solar, Inc. (Nasdaq:CSIQ) and Solarfun Power Holdings Co. (Nasdaq:SOLF).

Canadian Solar is a leading global supplier of solar modules. The company, which incorporated in Canada but manufactures in China, serves a global customer base of tier one suppliers, solar farm project developers/installers and OEMs.

Canadian Solar is growing through capacity additions, vertical integration and new products. A new manufacturing facility opened in February increases solar module production to 400 MW. A further increase to 620 MW is planned by year-end 2008. The company began deliveries of its high-tech e-Modules in May and has secured a 9 MW e-Module sales contract. With two differentiated product lines (regular and e-Modules), Canadian Solar is able to sell at different price points. The company maintains a strong foothold in Germany and Spain and has diversified its markets to include Italy, the Czech Republic, North America and Asia.

Silicon supplies and prices are a major issue for solar module manufacturers. Canadian Solar has addressed this issue through supply agreements covering 70% of its 2009 silicon requirements. A new supply agreement signed with GCL Silicon Technology in July further strengthens company feedstocks.

Canadian Solar recorded its fifth-consecutive quarter of sequential growth in the 2008 second quarter. Quarterly revenues rose 250% year over year to $212.6 million from $60.4 million in the 2007 second quarter, and earnings jumped to $10.5 million, or $0.36 per share, from a net loss of $2.9 million, or $0.11 per share, last year. The company also increased 2008 revenue guidance to $850 million to $979 million from $750 million to $870 million. Analysts predict this company will produce 31% . . .

Sector Watch: Health-care information stocks

Wed, 27 Aug 08 06:20:31 -0400

Caps on Medicare and Medicaid reimbursement are requiring health-care providers to manage costs more effectively, spurring demand for software systems marketed by MedAssets (Nasdaq:MDAS) and Quality Systems, Inc. (Nasdaq:QSII).

Demand for cost-management software is increasing due to steadily rising health-care costs. Health-care spending is forecast to grow nearly 7% annually and reach $4.1 trillion by 2016. Spending for hospital care exceeded $650 billion last year. Government agencies and insurance groups seek to control their expenses by limiting medical reimbursement rates through fixed fee plans. Many hospitals are struggling. For example, community hospitals had a Medicaid/Medicare shortfall of nearly $30 billion in 2006. To survive, hospitals are embracing IT solutions as a means for improving efficiencies and reducing costs. MedAssets estimates the addressable market for its software exceeds $6.5 billion.

MedAssets provides software and related services that help hospitals boost operating margins and cash flow. By using MedAssets’ tools, some hospitals have been able to increase operating margins by as much as 500 basis points through increased revenue capture and reduced supply costs. The company’s customers include more than 125 health systems, 3,300 hospitals and 30,000 non-acute care health-care providers.

MedAssets’ revenues have grown nearly 36% annually over the past five years. The company operates through two segments: the revenue cycle management segment has over 1,000 hospital customers and is a leading industry provider of revenue management software. MedAssets’ spend management segment manages $15 billion in health-care supply spending and has the country’s third-largest group purchasing organization (GPO) as its customer.

Revenue cycle management tools help hospitals bolster cash collections, reduce accounts receivable and increase regulatory compliance by managing the revenue cycle all the way from patient admission through claims processing and accounts receivable. A typical customer realizes 1% to 3% revenue improvement . . .

Sector Watch: Medical equipment stocks

Wed, 20 Aug 08 06:30:19 -0400

Paging doctor profits: with medical equipment stocks up about 6.3% year-to-date versus a 10.9% decline for the S&P 1500, manufacturers Somanetics Corporation (Nasdaq:SMTS) and CryoLife, Inc. (NYSE:CRY) both have unusually clean bills of health in today’s market.

Somanetics Corporation manufactures and markets the INVOS System, a non-invasive monitoring device that measures the patient’s blood oxygen levels in the brain and muscles. Blood oxygen must be carefully controlled during surgeries since brain damage occurs quickly without sufficient oxygen. The INVOS device consists of a portable monitor and single-use disposable sensors. Somanetics has an installed base of over 2,000 monitors and sold more than 371,000 disposable sensors last year. The company markets its system through a direct sales force in the United States and independent distributors in Europe, Canada, the Middle East and South Africa

Surgeons and anesthesiologists use the INVOS System to take corrective action when oxygen imbalances are detected, thus improving patient outcomes and reducing care costs. Hospitals have a strong incentive to manage care costs since much of their reimbursement is based on fixed fees. By using the INVOS System to monitor patients during surgeries, hospitals can avoid unnecessary complications and lengthened hospital stays.

The INVOS System is already being used in adult and pediatric cardiac surgeries. Somanetics has also developed and begun marketing a smaller disposable sensor for use in neonatal applications. The neonatal device has already been installed in 33 U.S. hospitals and is attracting considerable attention; some 200 neonatal . . .

Sector Watch: Business software stocks

Wed, 13 Aug 08 06:20:24 -0400

With the advent of software and the Internet, the world may seem as if it’s getting tinier by the day, but no matter how small it is, the market to protect it is still vast. This plays perfectly into software and systems providers Integral Systems, Inc. (Nasdaq:ISYS) and ManTech International Corporation (Nasdaq:MANT).

Both ManTech and Integral, purveyors of software for satellite, defense and homeland security applications, are well-positioned to capitalize on government IT spending, which is forecast to grow 29% to $102 billion by 2012 from $79 billion in 2007. Another trend supporting IT market growth is the impending shortage of government IT workers. Federal IT outsourcing spending is projected to grow to $18 billion in 2011 from $13 billion in 2006. Recent government contract awards include a $124 million State Department contract for its global IT modernization program and a $151 million Navy IT contract. Both contracts were awarded in July.

Integral.builds satellite ground systems and equipment for command and control, data processing and simulation. The company has provided ground systems for over 200 different satellite missions for communications, science and meteorology. Its customers include government and commercial satellite operators, spacecraft and payload manufacturers and aerospace systems integrators. Integral was the first to offer commercial, off-the-shelf software for satellite command and control, enabling its customers to avoid the high cost and development risk of traditional, custom-built satellite ground systems. The company’s EPOCH software is the world leader in commercial applications and has been successfully installed on five continents.

A key growth driver of Integral’s business is demand for satellite bandwidth. Industry analysts forecast government and military demand for commercial satellite bandwidth will continue to rise through 2015 and look for 43% growth in in-service units to 557,200 by 2012 from 388,900 in 2008.

Integral has enjoyed 18% annual revenue growth and 20% annual earnings growth since 2001. In 2008, demand for its services from the U.S. Air Force and other government agencies has pushed growth rates higher. The company’s revenues rose 34% year over year in the first nine months of FY 2008 to $123.9 . . .

Industrial equipment stocks ride oil wave

Wed, 06 Aug 08 06:01:49 -0400

Companies that manufacture drilling equipment are gushing earnings because of drilling activity fueled by record oil prices. T-3 Energy Services, Inc. (NASDAQ:TTES) manufactures so-called blowout preventers (BOPs) used on wells to prevent disasters. Circor International (NYSE:CIR) produces a variety of valves used on oil and gas wells and pipelines.

T-3 recently shifted its focus from rebuilding and servicing other companies’ equipment to manufacturing its own equipment. This strategy shift was in response to customer requests. Its drilling customers desperately needed more subsea blowout preventers but were experiencing lengthy delays on new orders. BOPs are car-sized valves installed on wellheads that instantly seal off the well when excessive pressure is detected. T-3 added these devices to its product line last year by acquiring Energy Equipment and HP&T Products, two related companies that manufacture deep sea BOPs and related equipment. These acquisitions gave T-3 access to new technologies and markets and manufacturing capabilities at 21 locations across North America.

The company is benefiting from robust demand for its blowout preventers. Sales grew 33% last year to $217.4 million, from $163.1 million in 2006, while net income jumped 40% year-over-year to $25.3 million, or $2.15 per share, from $18.1 million, or $1.71 per share. With drilling activity on the rise, demand for blowout preventers continues to expand. China and Russia are expected to deploy 200 new drilling rigs per year over the next several years, and an additional 149 new offshore rigs are scheduled for delivery between 2008 and 2011...

Sector Watch: Precision instrument stocks

Wed, 30 Jul 08 06:20:17 -0400

Surveillance and targeting is one of the fastest-growing sectors in the DoD budget. The U.S. military is increasingly deploying unmanned vehicles and remote weapons stations to fight the "war on terror," and Axsys Technologies (Nasdaq:AXYS) and Argon ST (Nasdaq:STST) are on the front lines, providing the advanced optics and control systems vital to this transformation.

Axsys Technologies designs and manufactures precision optical systems for defense, aerospace, homeland security and commercial applications. Its technologies are deployed in weapons systems, long-range surveillance cameras and high-precision telescopes. Axsys’ principal customers are the U.S. military, the U.S. Border Patrol and large defense contractors who integrate its tools into larger platforms. The company’s Surveillance Systems Group produces high precision camera systems used in ground, marine and aerial vehicles. Its Imaging Systems Group builds optical and control subsystems deployed in larger systems such as visible and infrared lenses, scanning systems, laser-positioning devices, motion control components and imaging optics. Axsyx participates in large-scale U.S. defense department programs such as the MRAP vehicle, Apache helicopter, Stryker vehicle, M1A2 Abrams tank and thermal weapons.

Axsys ended 2007 with record contract backlog of $140.2 million. During the first six months of 2008, the company’s sales rose 49% year over year to $116.7 million from $78.5 million, and earnings improved 64% year over year to $11.2 million, or $1.02 per share, from $6.8 million, or $0.64 per share. Margins improved because of faster growth in the higher-margin surveillance systems segment. Axsys contract backlog increased to a record $174.1 million at the end of the June quarter as a result of new lens orders from DoD remotely operated weapons and thermal weapons programs. The company recently increased its full-year 2008 guidance and is targeting sales in a $237 million to $241 million range and per-share earnings in a $2.09 to $215 range. This compares with 2007 sales and per-share earnings of $171.6 million . . .