The day after the New Year holiday was light with news, as expected, but there were three developments that we thought you should be aware of.
We recently highlighted the third-quarter performance of USG (USG), the maker of wallboard under the SHEETROCK name, as it scored one of the highest ratings of a 9 on the Valuentum Buying Index in late October. Warren Buffett on Thursday announced that he has increased his stake in the firm, to 30.5% (more than double previously-reported figures). According to a recently-filed Schedule 13D/A, he now owns 43.4 million shares of the firm. USG continues to be significantly undervalued on the basis of our discounted cash-flow process, and we peg its fair value estimate north of $40 per share (its shares are trading at roughly $28 each). If it weren’t for USG’s tremendous financial leverage (hefty debt load) and meager current cash-generating capacity, we’d be scooping up shares along with the Oracle of Omaha. In any case, USG’s valuation opportunity is worth noting (despite the additional financial risk posed by its debt), and we continue to keep a close eye on the company.
Thursday also brought news that generic pharmaceutical giant Teva (TEVA) will appoint director Erez Vigodman as its CEO this month. Vigodman will replace Jeremy Levin, who had stepped down from the position as a result of a difference of opinion with the board regarding strategy just a day before Teva announced third-quarter results. We think Vigodman is the person for the job and are excited by the rumored personnel move:
Erez Vigodman joined Teva’s Board of Directors in 2009. Since January 2010, he has been President and Chief Executive Officer of Makhteshim Agan, the world’s leading generic crop protection (agrochemical) company. From 2001 through June 2009, Mr. Vigodman served as President and Chief Executive Officer of Strauss Group Ltd. Mr. Vigodman is a member of the Advisory Committee to the Israel National Economic Council and member of the International Advisory Board of the Israel Science Technology & Innovation Policy Institute. Mr. Vigodman received a B.A. in accounting and economics from Tel Aviv University in 1987 and is a graduate of the program of Management Development at Harvard Graduate School of Business Administration. Mr. Vigodman is a certified public accountant. Mr. Vigodman was determined by the Board of Directors to be a financial and accounting expert under Israeli law and applicable SEC and NYSE regulations.
We don’t think the expected management announcement changes Teva’s attractiveness as a potential acquisition target, nor do we think it means the company will skip a beat in operational execution. Vigodman’s primary focus as CEO will be to replace lost revenue and profits in coming years associated with the expiration of exclusivity of the company’s primary drug Copaxone. We think downside is limited in Teva and point to its vast NTE pipeline as reason for upside in shares.
In other news, stock prices of oil producers in the Bakken (1) have come under pressure as a result of an explosion of a train that was carrying crude oil near a southeastern North Dakota town. Concerns that increased regulation of the shipment of crude by rail may impede production expansion in the Bakken may be exaggerated (especially considering that there remains opposition to the Keystone XL pipeline), but this incident is the fourth of its kind in North America in just the past six months. If that weren’t enough, the Pipeline and Hazardous Materials Safety Administration (PHMSA) announced that the “recent derailments and resulting fires indicate that the type of crude oil being transported from the Bakken region may be more flammable than traditional heavy crude oil.” Though we think such a study will open the door to new safety measures during shipment, the transportation of crude by rail is a trend that will continue, especially in regions where pipeline infrastructure is constrained.
(1) The Bakken field of North Dakota and Montana is one of the premier crude oil resource plays in the United States. It has been described by the United States Geological Survey (“USGS”) as the largest continuous crude oil accumulation it has ever assessed. Estimates of recoverable reserves for the Bakken field have grown from 4.3 billion barrels of crude oil, as published in a report issued by the USGS in April 2008, to potentially 11 billion barrels of crude oil in North Dakota alone, as reported by the North Dakota Industrial Commission (“NDIC”) in January 2011. In October 2011, the USGS began a study to update their 2008 assessment of recoverable reserves for the Bakken field to include reserves from the Three Forks formation and take into account improved well performance due to advances in drilling, completion and production technologies. Source: CLR 2012 10-K (page 10).
Continental Resources (CLR) is the largest leaseholder in the Bakken, but other major players (based on average daily liquid production) include Statoil’s Brigham, ConocoPhillips’ Burlington Resources, EOG Resources (EOG), Hess Corp (HES), Marathan Oil (MRO), Oasis Petroleum (OAS), Whiting (WLL) and XTO Energy, a subsidiary of Exxon. Union Pacific (UNP) and Burlington Northern Santa Fe, which is owned by Berkshire Hathaway (BRK.A, BRK.B) are two of the major rail operators west of the Mississippi.
Valuentum’s Take
We’re not surprised by the news that Warren Buffett is doubling down on USG, one of the cheapest stocks in the market. Reports that Teva will hire Erez Vigodman are consistent with the firm’s ongoing management transition, and we do not think it lessens the company’s attractiveness to a potential suitor. The stock prices of oil producers in the Bakken have come under pressure recently, but we think the crude-by-rail accidents will set in motion new crude-by-rail safety measures, not regulations that will impede production growth in the region. We do not expect to make any changes to our fair value estimates at this time. Our best ideas continue to reside in the Best Ideas portfolio and Dividend Growth portfolio.
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