Drugs, Cash, or Pork? Take Your Pick
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Markets have been taking things a little easy of late, coming back from recent highs, but holding broader upward trends. Followers of my Investing Strategy will see we are in a 'Hold' phase. The S&P came close to a 'Take Profit' cue, but recent weakness cooled things off. This hasn't stopped buyers from shopping for bargains, and a number of stocks have enjoyed good volume trading in recent weeks. Of the qualifying stocks I examined, some of the more interesting movers include Jazz Pharmaceuticals (NASDAQ: JAZZ), Associated Banc-Corp (NASDAQ: ASBC) and Zhongpin (NASDAQ: HOGS).
Jazz Pharmaceuticals saw a huge surge in buying following a patent ruling in its favor. But while the ruling unleashed the proverbial hounds, it was its earnings report in May that set the groundwork for the move higher. In January, Jazz Pharmaceuticals merged with Azur Pharma, and move that fed into Q2 earnings and brought with it a 27% increase in net income. The acquisition also helped raise annual guidance from an EPS of $4.15 to $4.40. Jazz Pharmaceuticals’ latest acquisition, EUSA Pharma, has the potential to take revenues and profit to another level and help diversify revenue from Jazz Parmaceuticals’ lead narcolepsy drug, Xyrem.
Azur's drug pipeline may not pack the revenue punch of Xyrem, coming in at under $10 million a drug; but EUSA's leukemia drug Erwinaze boasts sales of $115 to $125 million, nearly 40% more than Xyrem currently brings in. Jazz has a history of beating guidance, posting steady improvements over the last eight (profitable) quarters looks set to continue into future quarters. Jazz's continued expansion into the European market, combined with the benefits of Ireland's 12.5% corporate tax rate, will only add fuel to its earnings fire.
Associated Banc-Corp is more of a slow burner. Whereas Jazz Pharmaceuticals has been up-up-and-away since 2009, Associated Banc-Corp has traded below $15 for the best part of 3 years. Regional banks have been one of the few bright areas in the banking sector, with MT&T Bank Corp one of my recent features. Banks have spent the past few years trying to manage their bad loan book, and Associated Banc-Corp has reported solid progress in this regard, reducing exposure to problem loans. Bad loans dropped from $699 million in July of last year to $410 million in the current year.
Ironically, the bank is seeing good growth in commercial real estate lending. This division was up $193 million on what were termed "solid results" by company executives. Growth came from 'multifamily' units (a blend of residential and commercial development), totaling $40 million. The company also saw plenty of construction activity in Cincinnati, Minneapolis and Wisconsin, which enabled the bank to make new hires. Growth in a heavily depressed sector is good news for signaling economic improvement, but also demonstrates Associate Banc-Corp's strong positioning in the commercial sector. Further expansion with commercial lending will mean better yields in a low interest rate / low margin environment.
In addition, Associated Banc-Corp has discussed a change in its dividend, or even declaring a special dividend. This will make the stock more attractive to investors seeking yield. It would also kick start the steady process of rebuilding the dividend - and confidence in the company - after the credit crunch.
The third stock, Zhongpin, is relatively illiquid; this means it's relatively easy for it to qualify under the conditions of my scan. The stock has performed well after a torrid IPO back in 2005. Buyers have defended $9 and now look ready to push it beyond $11, but what has them buying? This is a stock which has made similar non-news moves in the past.
The Chinese government has been driving the pork industry towards centralized properties, to the expense of smaller slaughter houses. This consolidation creates a void which Zhongpin is seeking to fill, but it’s competing heavily for the space. However, it is working towards a goal where it will account for two thirds of Chinese pork production by 2015, but this should be viewed as a long term goal.
Hog prices have declined in recent months, as farmers thinned herds to reduce animal feed costs. But there has been a general increase in hog prices since 1999, making the current situation look like a seasonal blip. Increased supply of pork on the market has suppressed margins for end products, and this has weighed on Zhongpin; not to mention falling domestic consumption bringing prices down. But supply issues will balance themselves out as farmers consolidate to fewer, but more productive sows.
This will help Zhongpin in the quarters ahead even if it doesn't help in the now. Earnings have come in below expectations in recent quarters, but the company has consistently reported profits. There was a rumor of a company buyout in March at $13.50, but this looks to have drifted off into the ether. However, the price tag gives an indication as to what executives publicly think the company is worth (which is no doubt less than what they privately think it's worth).
fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.