3 Top Picks of Ferox Capital You Should Buy
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ferox Capital Management is a U.K.-based, privately-owned hedge fund, having $738 million in assets under management. The firm uses fundamental analysis, which includes economy and industry outlook, for its investments. It focuses on capital preservation by managing the series of funds in a planned way, which offers distinctive views on equity, credit, and convertible markets.
Ferox bought stocks worth $641.5 million in the quarter ending in March. In its portfolio, the top three holdings are 26.94% in Danaher (NYSE: DHR), 8.54% in Triumph Group (NYSE: TGI), and 2.26% in ArcelorMittal (NYSE: MT).
These three companies are aggressively focusing on enhancing their market size through mergers and joint ventures. Let's find out the factors that led Ferox to show confidence in these companies.
Acquisitions all the way
In March 2013, Triumph completed the acquisition of the pump and engine control system business of Goodrich Corporation, or GPECS, an independent aerospace fuel system supplier. The acquired business will operate in the aerospace segment as Triumph Engine Control Systems and will help the company provide world-class facility and proprietary capabilities in the market, where it is not currently participating.
Additionally, this acquisition will enhance its customer base from the existing customers of GPECS. The acquired company has a diversified customer base from the commercial, military, helicopter, and business jet segments. It is expected that Triumph will receive approximately $195 million in revenue annually, which will immediately benefit its earnings in 2014.
Triumph's aero-structures segment contributed 73% to its revenue in fiscal year 2013. In May 2013, the company, with a strategy of enhancing its footprint globally and to expand its structural composite potentials in its aero-structure segment, acquired Primus Composites. Primus is a global supplier of the composite and metallic propulsion and structural composite components and assemblies. It operates businesses at two different manufacturing facilities located in Farnborough, England and Rayong, Thailand.
After the acquisition, these businesses will become a part of the Triumph aero-structures segment; and they will operate as Triumph Structure - Farnborough and Triumph Structure - Thailand. The company's revenue for the fourth quarter ending in March 2013 stood at $986.3 million and it is expecting additional revenue of $250 million annually from these acquisitions in the next fiscal year.
Cost cutting and expansion plan leads to enhanced revenue
ArcelorMittal posted its first-quarter earnings last month. The company reported revenue of $19.7 billion, up 2.3% quarter over quarter. EBITDA increased marginally to $1.56 billion from $1.55 billion in the previous quarter. The company is aggressively employing cost controls and corporate restructuring measures to raise its EBITDA per ton back to $150 from the current level of $87 within the next two years.
It is planning to optimize the utilization of its plants' capacities, which will contribute $11 per ton. Increasing production from the mining business will contribute $19 per ton and $15 per ton by increasing shipments from the current level of around 70 tons to 95 tons.
With these measures, the rise in its EBITDA per ton would be to $132. Another $18 will be gained through the program called “management gain.” Under this, the focus will be on increasing employee productivity and reducing energy consumption. The company is expecting a drastic rise in its earnings in next two years from cost controls and corporate restructuring.
To increase its revenue, the company has started phase two of its mining operations in Liberia. In this phase, the project will increase the annual capacity of the iron ore mine from 4 million tons per year to 15 million tons by 2015. The company is planning to install the new fixed ship loader, with a loading capacity of 6,000 tons-8,000 tons of iron ore per hour, at the mining site in Yekepa, Liberia, to increase production. This will help the company in producing iron ore pellets and reaching the desired target of 15 million tons per year.
It has also signed a $40 million contract with the government of Liberia to construct a 70-km road between the towns of Ganta and Yekepa, close to the company's iron ore mine. This will be beneficial to the company in transportation of its iron ore. This construction is to start in November 2013 and will be completed by 2015.
PayPal at fueling station and diversifying portfolio
Gilbarco Veeder-Root, or GVR, a wholly owned subsidiary of Danaher, signed a deal with PayPal in February 2013 to accept digital payments at its fueling stations and for in-store items across the U.S. PayPal is a wholly owned subsidiary of eBay. PayPal will be integrated into Gilbarco's Passport Point-of-Sale product, or POS.
In North America, around 30,000 POS systems are already installed. Currently, customers are paying for their purchases either by scanning a Quick Response Code, or QR code, or through Gilbarco's mobile application. With this initiative, customers will able to pay using their PayPal account through their mobile devices, eliminating the need of carrying cash and credit cards. Through this deal, it will gain access to PayPal's user base, which is around 125 million globally and 55 million in the U.S. It will also give an opportunity to Gilbarco's equipment merchants to sell additional items using PayPal.
Danaher is also known for its acquisition activities. In January 2013, Danaher acquired Navman Wireless, its first acquisition in fleet and asset management space. Navman is one of the top five fleet management technology suppliers in the world. It currently monitors more than 175,000 vehicles and assets owned by over 14,000 organizations worldwide, making it the global leader in GPS-based fleet optimization products and services. It has a real-time vehicle tracking and analytics system, which helps the companies monitor, measure, and improve fleet-related costs and efficiencies.
After the acquisition, Navman will work as a standalone Danaher operating company, which will help in expanding its technology with a wide customer base in local services, transportation, construction, mining, and oil and gas. Also, it will help Danaher by expanding its operations in new geographical markets like Mexico, Italy, China, and Taiwan.
Looking at the inorganic growth and synergy from the acquisition of Goodrich Corporation and Primus Composites, Triumph expects a rise in revenue in the long run.
ArcelorMittal, with cost controls and the expansion plan in Liberia, is focused on increasing its revenue and production activity which will help company in achieving higher earnings.
Danaher, with its vertical acquisition of Navman, will diversify its product portfolio and increase its footprint in new markets. The deal with PayPal and its plan to get benefits from the PayPal user base will help in future growth.
I recommend a buy for all three stocks.
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Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of ArcelorMittal. 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!