Last week we saw some good economic news from jobless claims to homebuilders. However, the good news put upward pressure on interest rates and the 10-year Treasury surpassed 2.8 percent. Remember when it was 1.6 percent not too long ago?
Along with some weakness in retail, the stock market pulled back somewhat and I began to see some “buys” in my portfolio filled. Will there be more of a pullback? No one knows for sure. What I do know is I wouldn’t recommend waiting too long to buy; there still is a lot of cash on the sidelines waiting for some good buys.
It’s a good idea for an investor to be always on the lookout for a good investment. Maybe it is a little pricey now, but it could be a better buy in the near future. I’m always hearing about companies that could be a good buy from my columns, TV appearances and my Saturday morning radio show.
One company I received a call on just last week that has some potential is Calumet Specialty Products Partners LP (Nasdaq: CLMT). The company is headquartered in Indianapolis and has a market cap of $2.1 billion; current employees stand at 1,250.
The company produces and sells specialty hydrocarbon and fuel products in North America. The stock just hit its 52-week high in late February of $40.25; it has since fallen back to about $29, which is closer to the 52-week low of $25.75.
The current PE caught my eye trading at 13.9, well below the industry at 67.5. Price-to-sales also looked very attractive at 0.4, compared with a much higher industry average of 3.30. The price-to-book value was the same for both the industry and the company, coming in at 2.30. Price-to-cash flow did favor the industry at 6.6 when compared to a slightly higher company PCF of 8.3.
What will be attractive to many is the 9.2 percent dividend yield. However, as I’ve written before and discussed many times, be sure to discuss with your tax adviser how these limited partnerships can affect you tax-wise.
Year-over-year sales look good for Calumet, climbing 25.2 percent when the average for the industry was only 6.4 percent. Year-over-year earnings per share are as attractive, falling 30.6 percent, yet the industry average fell 61.6 percent.
I was curious why the earnings per share declined by 31 percent, so I took a look at the income statement for the past eight periods and discovered that interest expense from non-operations increased 188 percent from the previous year. It was $39.2 million for the trailing 12 months one year ago, and over the last 12 months it shot up to $112.1 million.
If I were to invest in this company I would want to know why — hint, don’t invest until you know why — the interest expense was up so much if you’re attracted to that juicy dividend.
The balance sheet looks pretty good, showing a current ratio of 2.1, well above industry standards of 1.13. The industry average debt to equity is 61.8; Calumet checks in with a debt to equity of 67.3. Return on equity looks OK at 12.2 for the company, well above the industry at 3.3 percent.
The company net profit margin, I think, was hurt by the interest expense I discussed earlier; it was only 2.80 percent, when the industry managed a 4.9 percent profit at the bottom line.
Efficiency of the company proved to be strong, with the receivable turnover coming in at 18.6 for Calumet, which was over three times the industry average of 5.7 times over the last 12 months. Inventory turnover also looked good at the company with an 8.23 times turnover for the last 12 months, which compared favorably to the 6.6 times for the industry over the same period.
Looking forward to December 2014, the mean of seven analysts is looking for earnings per share of $2.17, which is up from $2.04 in December 2013. It should be pointed out that just 90 days ago, the 2014 EPs estimate was $3.15; that’s a 31 percent drop in EPS estimate in just 90 days. Also, the low estimate is $1.59, compared with a high estimate of $2.90 for 2014. This is not a very close range, which tells me $2.17 number may not be that strong.
Using a multiple of 16.5, times forward earnings yield a target sell price of $35.81, which from current levels is only a 22 percent potential gain. So either the stock needs to pull back to about $27 or the forward earnings per share should increase before I would look at buying this company. Why, you may ask? Because I like to have at least a 30 percent potential gain before I consider investing into a business.
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.