Three Stocks Post-Exit of Citadel

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Citadel Advisors LLC, the hedge fund managed by Kenneth C. Griffin, mainly invests in Tech companies. Around 46% of its portfolio is invested in such stocks. However, in today's article I have picked three stocks in which Citadel liquidated its entire position according to the last 13F fillings. These companies are Covanta Holding (NYSE: CVA), Sally Beauty Holdings (NYSE: SBH) and Hertz Global Holdings (NYSE: HTZ). Let's discuss the current positions of these stocks. 

Covanta Holding

Out of the total waste generated in the U.S. every year about 69% is processed through land filling. However, the continuous reduction in land fill sites has increased the importance of alternative disposal methods such as Energy-from-Waste (EfW), which currently processes ~7% of the total waste. This market has less than 5 players in all and Covanta Holdings dominates it with ~50% of market share. The company will continue to dominate the same in the future because of the low-level of competition. The reason I feel Covanta will face low competition are the significant barriers to enter the market which includes high Capex requirement and long repatriation period.

In addition, Covanta's business model is highly defensive. The majority of its revenues are derived from long-term contracts with municipalities that helps the business from any external market headwinds. Nearly 75% of the company’s energy revenue is protected from near-term external market conditions because they are either contracted or hedged. I estimate that in 2013 it will go up to ~85%. In addition to this, many of its exposed electricity revenues have built-in floor prices and are periodically updated. This has become increasingly important because the price of natural gas, an alternative of waste to produce electricity, keeps on fluctuating and serves as an obstacle for electricity rates. These hedges, contracts, and floor prices make Covanta's future cash flows highly visible and predictable. The free cash flow for 2013 is estimated at ~$276 million, this could be returned to investors either in form of share buybacks or special dividends considering the company's track record of returning cash. A clear and visible future regarding the absence of competition and strong cash flow makes the stock of the company a Buy. 

Sally Beauty Holdings

Sally Beauty holdings is a market leader in the ~$9 billion professional beauty products with ~32% market share. But the Same-Store-Sales (SSS) for 2H12 for the company had been relatively low. The slowdown in 4Q12 was because of weak sales of nail products, hair extension and flat irons. I believe that the slow growth will continue in the first half of 2013 as well. But it should pick up in the next half because of the strong hair care and colorants business and the company could achieve a positive comp of ~4% for the year.

Along with that, the Capex of Sally for the FY13 will fall somewhere around $85 million, which is considerably higher than last year's ~$69 million. The Company has large number of new projects planned for future, one of them being a new Point of Sale system in the US. This will enhance the effectiveness of the CRM program and could create a shift toward higher-margin retail customers. These customers currently contribute ~75% of the company's revenue and the new project will increase their share by ~1% every year. The roll out is halfway complete and will be available in all US stores by the end of FY13. Another key project is the new distribution centre in the UK that is expected to be operational in March 2013. It will make the company’s distribution channel in the country much smoother and lower the costs significantly. Hence, although there are some headwinds in near future, a strong business model and focused capex expenditure strengthens its long-term position. 

Hertz Global Holdings Incorporated 

In November, 2012 Hertz completed the acquisition of Dollar Thrifty Automotive Group for ~$2.3 billion. The combination is expected to create synergy through higher productivity and efficiency from shared assets and improved deals from suppliers. Earlier, it aimed to achieve a cost synergy of ~$160 million from the acquisition. But with the latest filing of Form 8-K it is estimated that the company will generate a cost synergy of ~$200 million. Out of which ~40% of the synergy is expected to be achieved in 2013. Apart from the cost synergy the acquisition provides the company an enhanced reach with two deep-rooted brands, Dollar and Thrifty, with airport concession infrastructure in the mid-tier leisure value segment. Considering Dollar's strong global presence the company will come out as a strong and competitive player not only in the US, but in other markets such as Europe as well. Including the benefits from the synergy and increased revenue from the acquisition, I estimate that because of the added advantage of Dollar and Thrifty's rental services, the EPS of Hertz for the year 2013 will be ~$1.90 per share and by 2014 it will reach nearly twice the current level.

Along with that Hertz Vehicle Financing (HVF) LLC, a wholly-owned subsidiary of Hertz Global recently issued the Rental Car Asset Backed Notes worth ~$950 million. The proceeds from the notes will be used to pay for vehicles acquired and other liabilities incurred by it under the Hertz Holdings ABS program. Balance, if any, will be used either by HVF or Hertz Global to meet out the general expenses, which will increase the company's liquidity. With the synergy from acquisition on track and strong liquidity of the company in the future, I feel its stock will gain some momentum. 

Summing it up, I can say that, in absence of additional competition in the near term, market dominance and visible cash flows because of hedged positions will help the stock of Covanta to grow in the future. Sally Beauty Holding's increased investment in new projects and strong core business segment of hair care and colorants will help the company overcome the effect of slow same-store-sales. And, synergy generated from the acquisition of Dollar Thrifty will help boost Hertz’s overall profitability.


madhudube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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