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Zeke Ashton thinks you should buy DO: His main Thesis

February 04, 2012 | About:
Federico Flom

Federico Flom

6 followers
Zeke Ashton manages Centaur Capital Partners and is also in charge of the investments for Centaur Value Fund. Before becoming managing partner he served as general partner and portfolio manager for Centaur Investments LP, a predecessor to the Fund and a private investment partnership.

Before entering the sphere of Centaur Capital, Mr. Ashton worked as investment analyst and writer for The Motley Fool. This company specializes in investments and personal finance.

At an interview he said “In the end, it appears to me that when faced with an extreme environment like 2008 and early 2009, there are really only two things that can save you: the luck or skill to see it coming and get out of the way, or a portfolio structure and risk management approach that is specifically designed to promote survival in a catastrophic scenario that you didn’t see coming. I feel very fortunate that we had a portfolio that was able to take some hits and survive to play another day.”

From his picks I like ACOM and DO because both are Companies that have solid growth prospects, a proven management team and attractive valuations. I think it is an opportunity to research stocks that passed Centaur research procedures.

Ancestry.com (ACOM): Ashton bought ACOM at an average price of 33,92

Ancestry.com is a leader in developing Web-based solutions for family history research. In recent years, ACOM has significantly increased its database. The rise in the number of subscribers and fixed costs were translated into larger margins. In addition, this number will be modified with subscriptions in summer and holiday seasons.

In 2011, the subscribers amounted to 290k. Given the simple user interface, the increasing content and the integration with online social networks, the database will surely amount to 1.7 million subscribers.

ACOM Net Profit margins is 12.24%, currently higher than its 2008-12 average of just 1.21%. This shows that the business is solid, as margins are increasing. Average 2010-12 ROE for ACOM is 11.19%, not the 20% standard I like in Companies I invest but higher than its average 2008-12 ROE of 1.1%. So, in terms of profit margins and ROE, ACOM business is performing better than previous years.

ACOM has a 3 year revenue growth of 21% and 3 year Net Income growth of 78%, very impressive numbers. Its average 2010-12 revenue growth of 33.81% y/y is higher than the average 18.76% y/y from 2008-12. This shows that sales are accelerating.

ACOM has a P/E of 25.8x , P/B of 4x and P/S of 3.9x in comparison to Industry averages of 25.8x, 3.6x and 5.4x.

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Westell Technologies(WSTL): Ahston bought WSTL at an average price of 2,32

Westell Technologies provides digital and analog access products, thus allowing end users to connect with a telephone company´s central office. The company´s modems, routers and other products with DSL technology allow customers to profit from high speed data transmission over copper wires.

That is not all. The company also provides networking and conferencing products and services.

By the end of 2011, WSTL closed a transaction to sell its subsidiary Conference Plus, Inc. The purchaser was a subsidiary of Arkadin S.A.S.

WSTL Net Profit margins is 35.72%, currently higher than its 2008-12 average of negative 36%%. I like when Companies have better net margins than in the past. Average 2010-12 ROE for WSTL is 55%, higher than the 20% standard I like in Companies I invest and higher than its average 2008-12 ROE of negative 58%. So, in terms of profit margins and ROE, WSTL business is performing better than previous years.

WSTL has a 3 year revenue growth of negative 3% and 3 year Net Income growth of zero%, very depressive numbers. Its average 2010-12 revenue growth of 4.79% y/y is higher than the average of negative 22% y/y from 2008-12. This shows that sales are accelerating.

WSTL has a P/E of 1.9x , P/B of 0.9x and P/S of 1x in comparison to Industry averages of 16.9x, 2.1x and 1.5x.

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Diamond Offshore(DO): Ashton bought DO at an average price of 73,8

Diamond Offshore is an offshore contract driller that operates 46 rigs around the world for the purpose of drilling natural gas and oil. The company enters into agreements with larger oil and gas companies to be able to drill in places such as Brazil and Australia.

Diamond Offshore announced order for Deep water Semi-submersible Rig. The total cost is expected to be near $300 million and would be paid from DO available funds. Furthermore, one of its subsidiaries has started negotiations with Keppel AmFELS shipyard in Brownsville, Texas to build a semi-submersible rig. The delivery has been scheduled for 2013.

For investors, DO is an undervalued company as it trades at 1.8 times book value per share. Most importantly, it is financially healthy and has good cash flow.

DO Net Profit margins are 28.75%, currently lower than its 2008-12 average of 37%. I do not like when Companies have better net margins than in the past. Average 2010-12 ROE for DO is 25%, higher than the 20% standard I like in Companies I invest but lower than its average 2008-12 ROE of 42%. So, in terms of profit margins and ROE, DO business is performing worse than previous years.

DO has a 3 year revenue growth of 8.97% and 3 year Net Income growth of 4.12%, neutral numbers. Its average 2010-12 revenue growth of -9% y/y is lower than the average 48% y/y from 2008-12. This shows that sales are decelerating.

DO has a P/E of 8.5x , P/B of 2x and P/S of 2.5x in comparison to Industry averages of 16.8x, 1.3x and 2.3x.

I think that Zeke Ashton like the fact that DO has a strategy to increase its footprint in emerging markets (such as Brazil and West Africa) to reap benefits from the recent discoveries of deepwater fields. There is a trend that the gradual improvement in the drilling market in the Gulf of Mexico, will prove beneficial for a contract drilling company like Diamond Offshore.

The second positive is that DO Brazilian backlog saw solid growth with two-year extensions on Ocean Valor and the Ocean Baroness from Petrobas, as well as on deepwater rigs Ocean Quest and Ocean Star from OGX at dayrates of $270,000 and $300,000, respectively.

A gradually improving regulatory environment in the GoM region is expected to drive significant performance from Diamond s domestic fleet. Moreover, Diamond has also signed 10 new agreements recently that will likely contribute total revenue of approximately $1 billion and represent over 14 years of contract drilling backlog.

In terms of valuation, DO has a $65 price target objective that is based on 9.8x Zacks 2011 P/E estimate.

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Calamos (CLMS):Ashton bought CLMS at an average price of 12,72

Calamos provides investment management advice and services to institutional and individual investors. The company operates mutual funds, closed-end funds and separately managed accounts. Most importantly, Calamos has expanded to include fixed-income, and alternative investments.

As regards the expansion, the company included a new fund, Discovery Growth Fund, which focuses on small and micro cap equities. In 2008, it opened the Evolving World Growth Fund to let investors invest abroad. The fund invests in developed and emerging markets and can invest in assets across sectors, countries, market caps and security types.

In terms of relative valuation, the stock trades at P/E 7.4 net cash. Calamos is undervalued vis-a-vis its competitors; for instance Franklin Resources (BEN) trades at 16.5 P/E ratio net of cash and Eaton Vance (EV) and T. Rowe Price (TROW) both trade at a P/E ratio of 19 net of cash.

CLMS Net Profit margins are 6.11%, currently higher than its 2008-12 average of -6.6%. I do like when Companies have better net margins than in the past. Average 2010-12 ROE for CLMS is 11%, lower than the 20% standard I like in Companies I invest but higher than its average 2008-12 ROE of -13%. So, in terms of profit margins and ROE, CLMS business is performing better than previous years.

CLMS has a 3 year revenue growth of -11% and 3 year Net Income growth of -10%, negative numbers. Its average 2010-12 revenue growth of 15% y/y is higher than the average -17% y/y from 2008-12. This shows that sales are accelerating.

CLMS has a P/E of 11x , P/B of 1.3x and P/S of 0.7x in comparison to Industry averages of 15.6x, 1.4x and 2.4x.

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HiMax (HIMX): Stock that Ashton probably be interested based on his past comments.

Himax Technologies designs display drivers for large, medium and small-sized TFT-LCD panels used in desktop monitors, notebooks, televisions, mobile handsets, tablet PCs, digital cameras, photo frames and car navigation displays.

Now, it is trying to expand its services to include timing and touch controllers, CMOS image sensors, and 2D to 3D conversion solutions.

HIMX Net Profit margins are 5.17%, currently lower than its 2008-12 average of 9.17%. I like when Companies have better net margins than in the past. Average 2010-12 ROE for HIMX is 8.05%, lower than the 20% standard I like in Companies I invest and also lower than its average 2008-12 ROE of 16%. I consider essential to see stable or increasing ROE. So, in terms of profit margins and ROE, HIMX business is not performing better than previous years.

HIMX has a 3 year revenue growth of -11% and 3 year Net Income growth of -33%, negative numbers. Its average 2010-12 revenue growth of -7% y/y is higher than the average -9% y/y from 2008-12. This shows that sales are accelerating.

HIMX has a P/E of 13x , P/B of 0.6x and P/S of 0.4x in comparison to Industry averages of 13.6x, 2.9x and 2.3x.


Rating: 2.7/5 (13 votes)

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