Image representing Itron as depicted in CrunchBase
Image via CrunchBase

ITRI : NASDAQ : US$39.85
Target: US$48.00

Itron is a leading provider of advanced metering systems and intelligent infrastructure solutions for electric, gas and water utilities worldwide


Investment recommendation
We expect that Itron will extend its leadership in the international advanced metering market over the next few years. 2013 looks to be a transition year as a new executive strategy, enhanced R&D plan and building order pipeline are geared to show results in 2014+ time frame.
Investment highlights
 An ugly start to the year, with a more challenging macro environment (Europe), project-specific issues and restructuring actions leading to a much weaker than expected Q1. While issues persist near term (austerity, competition, etc.), core business trends stay intact (b2b 1.0x), volumes continue to rebound in April and ~$47M in buyback dry powder helps to support shares.
 With management talking down (but not yet updating) the outlook, we go ahead and drop below guidance ($3.00-3.25) as shares will likely remain range-bound through the summer on this issue. We stay constructive on improved trends and cash flow metrics longer term and find the current risk/reward more favorable.
 Our 2013 revenue/non-GAAP EPS estimates adjust to $2.0B/$2.85 from $2.06B/$3.05 while our 2014 estimates remain $2.18B/$3.60.
Our $48 price target (from $50) is calculated using a 7.7x EV/EBITDA multiple off of our 2014 EBITDA estimate of $286M.
Utility-centric sales cycles are long, lumpy and subject to regulatory review, along with increased competition.


Range Resources Corporation

RRC : NYSE : US$74.00
Target: US$72.00


Range Resources is an exploration and production company with assets in the Anadarko, Appalachian, Permian and Williston Basins.
Investment thesis
We our lowering our target price $5 to $72 per share due to a ~5% higher capital allocation toward gas (~$3/share) and the second half ‘13 commencement of Marcellus ethane production (~$2/share).
Specifically, the company anticipates producing ~5 Mbpd of ethane via transport to Sarnia, Ontario in the 2H13 and ~15 Mbpd of ethane in early ’14 via transport to Sarnia, Ontario and Mont Belvieu, Texas. As the ethane price net back is ~50% of natural gas, selling Marcellus ethane in North America has a negative impact of ~$2 per share.
Our target price is anchored on a $5.25 long-term NYMEX gas price, which is only modestly above the gas price reflected in E&P equities. RRC offers twice the CFPS growth prospects of the sector (’13-’15E) though trades at twice the expensiveness (’13E EBITDA).
Investment highlights

Marcellus, New York
Marcellus, New York (Photo credit: Dougtone)

Liquids-dominant Marcellus footprint: In SW PA, about 110,000 net acres of the company’s Marcellus leasehold is “super-rich” (1,350+ Btu/Scf), ~220,000 net acres is “wet gas” (1,050-1,350 Btu/Scf) and ~210,000 net acres is “dry gas” (<1,050 Btu/Scf). In NE PA, Range has ~145,000 net dry gas acres. Super-rich wells (~3,900’ laterals, ~18 frac stages) recover ~1.4 Mmboe (~60% liquids) and wet gas wells (~3,200’ laterals, ~13 frac stages) recover ~1.5 Mboe (~50% liquids) for a cost of $5-$6 million.
 Superior Mississippian well performance: Mississippian wells (~3,600’ laterals, ~19 frac stages) along the Nemaha Ridge have commenced production at ~500 Boepd and averaged ~400 Boepd the first 30 days and recover ~400 Mboe (33% oil, 33% NGLs, 33% gas) for a cost of ~$3.5 million

Digital Realty Trust

DLR : NYSE : US$69.86
Target: US$70.00

The largest data center operator in the US that primarily focuses in the wholesale market with presence in key markets in the US and in Europe, Digital Realty Trust offers customers large data center space at key aggregation points where major enterprises and telecommunications service providers exchange traffic. The company operates as a REIT for federal income tax purposes and has its headquarter in San Francisco, California


Investment recommendation
With a quarterly report that was slightly above our expectations but largely in line with the Street, Digital Realty Trust’s results caused the stock to trade 2% lower for the day. We believe the fears on the stock were focused on notable pricing pressure in some key markets and on the company’s announcement it would become a more significant competitor in the interconnection business. Unfortunately, given that this business is currently managed in part by its partner Telx and it puts the company in direct competition with one of its largest customers, Equinix, we feel investors are rightfully concerned. Even so, with a 4.2% dividend yield along with strong secular tailwinds of the industry, we find the stock to be a safe defensive investment in this market.
Investment highlights
Pricing pressure in key market – With the rental rates of lease renewals in NJ down 18% (12% overall) and comments about three aggressive price competitors, investors are increasingly concerned over the state of the wholesale data center market.
In-line quarter with no change to guidance – With revenue, adj. EBITDA and AFFO metrics all slightly above our estimates, we believe the company delivered a solid quarter. However, we note that both TKD and PBB revenues came in lighter than expected, largely a reflection of softer than expected rates at renewals.
Global interconnectivity could be harbinger for M&A – With cap-rate guidance down it is clear that M&A activity has become increasingly difficult to move the needle for the company. Should Digital be interested in acquiring meet-me-room partner Telx, the announcement would be in line with such a strategy.

March Madness Pick: Buffalo Wild Wings

Great tasting profits from Buffalo Wild Wings


Buffalo Wild Wings (BWLD) is one of the official sponsors of the NCAA basketball tournament:  one of my favorite sports pastimes ever.    Certainly, we have been bombarded with advertisements reminding us that they are “the official hangout of March Madness”.

If I were to fill out a March Madness bracket that was full of potential equities that are a must buy at the moment, Buffalo Wild Wings would be a Final Four pick.

A month ago, Buffalo Wild Wings. Inc reported solid results for the fourth quarter of 2012.   Net revenue increased by nearly 38% while net income rose 22.3%from the same period in 2011.  The aforementioned result was sparked by strong same store sales as well as the addition of  over 60 firm-owned restaurants.  Additionally, company-owned sales grew by nearly 40% over the course of the quarter.  Overall, Buffalo Wild Wings.Inc’s annual net income increased by nearly…

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Keystone XL demonstration, White House,8-23-20...
Keystone XL demonstration, White House,8-23-2011 Photo Credit: Josh Lopez (Photo credit: Wikipedia)

TRP : TSX : C$49.14
Target: C$51.00

TransCanada is a North American energy infrastructure company. Its gas pipeline network spans approximately 68,500 km across North America. The company has ~380 Bcf of gas storage capacity and owns or has interest in over 10,900 MW of power generation in Canada and the US. The company also owns the 3,460 km Keystone Pipeline system which began deliveries in 2011 to Cushing, Oklahoma from Hardisty, Alberta


Investment recommendation

TransCanada reported first quarter recurring earnings of $0.50 per share, below the $0.53 consensus and our $0.55 expectation. Earnings per share were negatively impacted by lower than expected availability at Bruce Power, lower hedge prices on Alberta production, and continued throughput decline on the U.S. natural gas pipeline systems. These negative issues were offset by recording a higher allowed ROE (11.5% versus 8.08% last year) on the Mainline, which added about $0.03 to Q1/13 EPS. Importantly, given the company’s revised outlook on the timing of a U.S. Department of State decision for Keystone XL, management has shifted the expected start-up date for the project to the second half of 2015 (versus late 2014/early 2015 previously). With timing delays, the company expects its capital costs for the project to escalate from its current estimate of $5.3 billion, although management will not provide any details on the magnitude of potential cost increases until it receives U.S. Department of State approval for the project.


Our 12-month target is derived from a combination of valuation metrics, including earnings and dividend yields relative to long-term interest rates, a dividend discount model, and earnings multiples relative to its energy utility peers. We value the company on the longer-term potential of existing assets and projects under construction. We note that there is the potential for upside to our target price once more certainty is provided surrounding the timing and likelihood of an approval for the cross-border section of Keystone XL. We also incorporate an approximate 100 basis point increase for our estimate of the future long-term Government of Canada bond yield.


Former P&G logo
Former P&G logo (Photo credit: Wikipedia)

PG : NYSE : US$77.13
Target: US$87

What’s new?

In light of the significant decline in the share price following the Q3 results we are compelled to reiterate our BUY recommendation on Procter & Gamble, especially considering our forecasts are essentially unchanged. Though some disappointment on the results day was probably warranted, given that the FY guidance range was not raised despite the 3c beat and that, against the backdrop of a slowing HPC market, organic sales remained tepid (+3%), the 7% sell-off on the day was a considerable overreaction in our view. A slowdown in HPC is unhelpful, but the share prices of other HPC companies (e.g. L’Oréal, Unilever, Colgate) have not come under similar pressure, and P&G arguably has the advantage thanks to its $10bn of savings to come over the next 3+ years, some of which is already being re-deployed behind the brands in the current year.
P&G met top-line targets and exceeded bottom-line targets during Q3, and market share trends are moving in the right direction across more of the portfolio. FY guidance was not raised due to brand investments expected in Q4, FX headwinds and a slowing HPC market – the latter two factors are hardly unique to P&G (nor self-inflicted) and the former is a sensible step timed around new launches.
The restructuring programme remains on track, with improving market share performance the clearest measure of this. The phasing of savings drop-through and organic sales re-acceleration will not always be steady each quarter but this is normal during restructurings and is no cause for alarm (see Unilever’s quarterly progress throughout its 4 yr. turnaround on pg. 6). P&G remains committed to returning cash to shareholders; in the current year it has raised the dividend 7% and is repurchasing $6bn worth of shares. We tweak our F13 forecast down 4c to $4.04, the high end of the guided range, but our medium-term forecasts already incorporated a weak HPC market and are left virtually unchanged.
P&G currently trades at a discount to peers (16x cal ’14E PE vs. peers on almost 19x). We can easily reach our $87 target using Quest™ by delaying the fade in cash returns by just 2 yrs, which we consider very conservative (we delay by 3 yrs for Unilever).
Share performance catalyst
P&G presents at a competitor conference in Paris (June 11-13), where investors are likely to demand an update on its brand investments and sales growth trends.


Chevron Corporation
Chevron Corporation (Photo credit: Wikipedia)

CVX : NYSE : US$120.1
Target: US$136.0

What’s new?
Chevron’s 1Q EPS of $3.18 came in 3% ahead of the $3.09 consensus. The company raised its quarterly dividend by 11% and reiterated guidance on share buybacks.
We reiterate our BUY stance on Chevron, and our $136 price target. In our view Chevron’s growth outlook remains the strongest of the supermajors, and its valuation looks reasonable. Although its near-term free cash yield is limited, this is to be expected given the scale of growth capex, and Chevron continues to have the financial strength to maintain good cash distributions through this phase of the cycle.
Chevron produced 1Q earnings of $6.18bn, with EPS down 3% y/y. Relative to consensus, the main positive variance was in International E&P (c.$0.6bn ahead and +3% y/y), partly due to a lower effective tax rate. Downstream results were mixed. In the US, R&M income was weak at $0.14bn (vs $0.46bn a year ago). Refinery throughputs were down 38% y/y, with heavy maintenance at the Pascagoula and El Segundo refineries. With these now back on line and Richmond now restarting crude processing after its previous fire, results should start to return to normal. International R&M was strong, with income of $0.57bn vs $0.35bn a year ago.
Upstream production volumes were 2645kboed, up 1% y/y. Chevron expects upstream output to grow 1.5% in 2013, and retains its 2017 volume target of 3.3mbd (4.8%pa vs 2012). We forecast 2017 output of 3.12mbd, +4%pa.
Chevron’s 1Q cash flow from operations was weak at $5.7bn. However, this was mostly because of a $3.4bn adverse move in working capital (mostly in downstream), which is expected to reverse in the coming quarters. As a result, the company’s net cash position shrank to $4.9bn at end-1Q vs $9.7bn at YE12.
Cash distributions remain strong. Chevron raised its quarterly dividend from $0.90 to $1.00 (+11%), giving a prospective dividend yield of 3.3%. In addition, it guided to 2Q share buybacks of $1.25bn, unchanged vs previous levels. Combined with the new dividend, this puts Chevron on a healthy distribution yield of 5.5%.
Chevron’s shares have 29% upside to our SoP valuation of $155/share vs the supermajor average upside of 34%. The shares trade on a 2014E EV/DACF multiple of 5.5x vs a supermajor average (ex-XOM) of 4.8x.