We continue to help readers find some of our best ideas for consideration, and some of the companies in this article didn’t make the cut for our long-term perspective. We’re allocating resources elsewhere.
Clean Diesel Tech (CDTI)
Clean Diesel Tech is a leading global manufacturer and distributor of emissions control systems and products to the automotive and heavy duty diesel markets.
Clean Diesel Tech is a leading global manufacturer and distributor of emissions control systems and products to the automotive and heavy duty diesel markets. It uses patented technology to reduce emissions and lower the carbon intensity of engine applications. The company was founded in 1996 and is based in California.
Clean Diesel Tech expects to realize a shit in revenue mix in the coming months as partner revenues increase. Margin expansion is projected as technology and material revenues advance, and operating expenses are anticipated to continue trending downward.
The company operates in two primary divisions: a Heavy Duty Diesel Systems division, which specializes in the design and manufacture of verified exhaust emission control solutions, and a Catalyst division, which produces catalyst formulations to reduce emissions from gasoline, diesel and natural gas combustion engines.
Clean Diesel Tech believes it has significant opportunities in China and India. The firm expects China to become the world’s leading new car producer by 2021, when it will account for 30% of all new vehicles manufactured. India boasts an auto market based on diesel engines growing at a strong 9% CAGR.
Clean Diesel recently signed a partnership with automotive supplier DENSO to provide its emission control technology to the heavy-duty market in North America. PowerEdge diesel after-treatment will be manufactured by Clean Diesel and distributed by DENSO.
Our published fair value estimate range for Clean Diesel Tech is $1-$3 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.
Seacor (CKH)
Seacor’s offshore marine segment often generates double-digit returns, but most of its vessels do not have long-term contracts.
Seacor has four segments: offshore marine services, which operates equipment supporting offshore oil and gas exploration/production; inland river services, which operates tank barges in the US waterway systems; shipping services, which transports petroleum products in the US; and Illinois Corn Processing (ICP), which operates an ethanol processing plant in Pekin, Illinois.
Dividend investors are well aware that Seacor is known for its special dividends. The board declared a special dividend of $5 per share in December 2012 and declared a $15 per share special dividend in December 2010. Its payout can fluctuate wildly.
The firm’s offshore marine segment often generates double-digit returns, but most of its vessels do not have long-term contracts. Its inland river services segment generates low-single digit returns, but the resilience of its dry cargo fleet has been promising.The firm’s shipping services segment benefits from the Jones Act, but mid-single-digit segment returns aren’t anything to write home about.
Seacor defines the outlook for offshore marine services as ‘cold, damp, and wet,’ and the pressure on the price of oil has hurt performance in the segment as of late.The executive team believes its outlook for its inland river services business is ‘cloudy,’ and rates and margins are under pressure. On an optimistic note, management believes the outlook for its shipping business is ‘bright,’ noting a balanced order book.” &” ICP is its ‘favorite child’ thanks to higher sales volumes of alcohol and ethanol, however. The company’s economic performance will remain ‘lumpy.
Our published fair value estimate range for Seacor is $36-$60 per share, with a Valuentum Buying Index rating of 5 and an Economic Castle rating of Unattractive.
EV Energy (EVEP)
EV Energy’s financial leverage is significantly elevated, a recipe for disaster for an upstream MLP.
EV Energy is a limited partnership engaged in the acquisition, development and production of oil and natural gas properties. Its properties are located in the Barnett Shale (40%+ of its SEC proved reserves), the Appalachian Basin (Utica Shale), the Mid–Continent, among others. EV Energy’s primary business objective is to manage its oil/natural gas assets for the purpose of generating cash flows and providing growth of distributions per unit. The MLP’s distributions were once an attractive attribute, but it was forced to suspend distribution payments in April 2016 in an attempt to shore up its balance sheet. Debt levels remain elevated, however.
For MLPs, our valuation considers only maintenance capex (as opposed to total capex) in the derivation of enterprise free cash flow, consistent with the definition of ‘distributable cash flow’. This peculiarity results in MLPs’ fair value estimates receiving a boost for future operating cash flow growth without organically subtracting the ” &”growth capital associated with driving such expansion. This is a valuation imbalance that exists as a result of the inherent structure of an MLP (for MLPs, growth is typically funded via new capital as opposed to organically). Investors should be aware that, under a scenario in which all capex is deducted, our fair value estimate would be considerably lower.
EV Energy’s financial leverage is significantly elevated, a recipe for disaster for an upstream MLP. The worst may still be ahead for units as hedges eventually roll off. We wouldn’t touch EV Energy with a 10-foot pole.
Our published fair value estimate range for EV Energy is $0-$4 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Unattractive.
Fuel Tech (FTEK)
Cash on the books represents a material portion of our estimate of Fuel Tech’s intrinsic value.
E Fuel Tech is a leader in air pollution control systems. Products include customized NOx control systems and proprietary urea-to-ammonia conversion technology. Its FUEL CHEM programs help utilities meet environmental regulations. The firm was founded in 1987 and is headquartered in Illinois.
For Fuel Tech tends to announce awards frequently but it is important to keep deal size in perspective. The company’s revenue has faced material pressure, and profit levels aren’t much to speak of. Cash on the books represents a material portion of our estimate of its intrinsic value.
Coal-fired utilities continue to seek solutions that enable them to compete cost-effectively while maintaining compliance with increasingly stringent emissions requirements. Low natural gas prices and relatively weak electricity demand, however, have created a challenging environment. Fuel Tech’s backlog has been quite volatile since 2014 and is worth keeping an eye on.
Despite continued revenue pressure, Fuel Tech remains confident that it is well-positioned for the changing regulatory environments around the world.The firm is focused on the US, Europe, Latin America, and China. As of 2015, the firm had solutions installed in 26 countries on four continents.
China remains a market of significant interest and opportunity for Fuel Tech. The firm’s portfolio of NOx reduction solutions is well-positioned to address the country’s needs to enhance pollution standards.
Our published fair value estimate range for Fuel Tech is $0-$4 per share, with a Valuentum Buying Index rating of 5 and an Economic Castle rating of Unattractive.
Layne Christensen (LAYN)
Backlog trends haven’t been very encouraging as of late for Layne Christensen.
Layne is a global water management, construction and drilling company. The firm operates throughout North America, as well as Africa, Australia, Europe, Brazil, and through affiliates in other South American countries. The company recently sold its Geoconstruction business. Layne was founded in 1981 and is headquartered in Texas.
Backlog trends haven’t been very encouraging as of late. Total backlog fell to ~$183 million at the end of the second quarter of fiscal 2018 compared to ~$194 million a year prior. Orders will continue to be lumpy, however.
All of Layne’s businesses are leaders in their respective spaces. The firm is #1 in US water well drilling, #2 in US trenchless pipeline rehabilitation, the #3 mineral services driller in the Americas, and the #5 US water pipeline repair and construction contractor.
Layne Christensen registered the worst rating of a 1 on the Valuentum Buying Index in March 2013 at a price north of $20, and shares have fallen significantly since that time. We’re not particularly enthused by its investment prospects.
The company continues to lose money, and while a return to profitability may be a catalyst for shares, we’re just not that excited. Layne lost ~$52 million from continuing operations in fiscal 2017.
Our published fair value estimate range for Layne Christensen is $7-$14 per share, with a Valuentum Buying Index rating of 5 and an Economic Castle rating of Unattractive.
Liquidity Services Inc (LQDT)
Liquidity Services operates several leading online auction marketplaces for surplus and salvage assets.
Liquidity Services operates several leading online auction marketplaces for surplus and salvage assets. Its marketplaces are www.liquidation.com, www.govliquidation.com, www.govdeals.com, www.networkintl.com, among others. The company was founded in 1999 and is headquartered in Washington, DC.
Liquidity Services benefits from a network effect. Sellers benefit from a liquid, transparent market and the participation of a large base of buyers, while buyers benefit from the firm’s relationships with high-volume, corporate and government sellers.
The online services market for auctioning or liquidating surplus and salvage assets is competitive. Excess returns will continue to face pressure, and the company recently lost a large contract with both the DoD and Walmart that has weighed on performance. Management has had difficulty predicting near-term results.
Investors should monitor the firm’s top-line closely for potential upside during what we would describe to be a very difficult environment in the near term. Even modest revenue growth ahead of depressed expectations could drive upside to the company’s equity value.
Our published fair value estimate range for Liquidity Services Inc is $5-$11 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.
Matson (MATX)
We’ve lowered our fair value estimate for Matson as a result of new competition entering its west coast-to-Hawaii shipping business.
Matson has been around since the late 19th century. The company owns a fleet of ~25 vessels including containerships and custom-designed barges and is a leading US shipper in the Pacific, offering service to several island economies, including Hawaii and Guam. It also offers service from China to Southern California.
Though economic returns in prior years could be better, we assign the company an attractive Economic Castle rating. Matson has a strong and defensible position, and its unique expedited service between China-California offers premium pricing dynamics.
Matson’s recent growth efforts have focused on Alaska, as it is acquiring strategic assets to serve key Alaskan hubs, Dutch Harbor and Kodiak. The company’s operations serve as a critical lifeline to these communities, which speaks to the sustainability of demand and a stable revenue profile, and the integration of such operations will remain a focus.
Matson has several other things going for it as well. Construction activity in Hawaii continues to fuel demand for its shipping services, and its China operations may be the most attractive proposition of all. The company has the fastest transit time from China to Long Beach, offering customers a 3-6 day competitive advantage. The freight rate premium Matson can charge relative to the spot market falls straight to the bottom line. However, we’ve lowered our fair value estimate as a result of new competition entering its west coast-to-Hawaii shipping business. Top-line expectations have been ratcheted lower.
Our published fair value estimate range for Matson is $23-$39 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Attractive.
McClatchy Co (MNI)
We’ve lowered our fair value estimate for McClatchy as the slowdown in traditional print advertising spending continues. Its debt load is massive.
McClatchy Co is the third-largest newspaper firm in the US based on daily circulation and a digital publisher. The firm owns and operates 30 media companies in ~30 US markets, which are growing faster than the US average. It has stakes in CareerBuilder.com and Classified Ventures (Cars.com, Apartments.com).
McClatchy’s debt load is just too much for any reasonable equi