Will Fluctuations in Insider Transactions Affect Investor's Returns?
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tracking insider transactions helps investors identify investment opportunities, as management is well aware of their company's future business prospects. If they're all running for the exits, it's probably a pretty bad sign. Here are three companies with significant insider transactions in the last six months.
Table: Percentage of Insider Transactions
The management of Southern Company and Eli Lilly have increased their stakes in their respective companies over the past six months, whereas CBS’ management reduced their stake in the company. So are their investing opportunities to be had?
Increased cost hampering growth
In April 2013, Mississippi Power, a subsidiary of Southern Company, announced an increase in cost overrun from $2.88 billion to $3.42 billion for its Kemper IGCC project. This project will capture and warehouse a considerable amount of carbon dioxide produced while burning coal for electricity. The company’s cost for the construction of the IGCC project has increased due to higher labor cost and the installation of better quality piping. This increase in the cost reduced the net income of the parent company by 78% in the first quarter of this year from $368 million in the same period last year.
On the other hand, in April 2013 Southern Company, in partnership with Turner Renewable Energy, acquired the 139-MW Campo Verde solar project in California -- an effort meant to increase performance and reliability to generate electricity. This project will be spread over 1,443 acres in Imperial County, California. Construction was initiated in December of last year and operations are scheduled to start in the middle of this year. This project will generate sufficient electricity to provide a power supply to around 48,000 houses per year. Moreover, it will cut down the emission of carbon dioxide by 80,000 metric tons per year. The electricity generated from this project will be supplied to San Diego Gas & Electric Company under a 20 year power purchase agreement.
It is estimated that the company, with cost increases from the new projects, will see a decline in total revenue from $2.35 billion in fiscal year 2012 to approximately $2 billion in 2013. However, in fiscal year 2014 Southern's total revenue should increase again to around $2.55 billion.
Acquisition driving towards growth
On May 31, 2013, CBS acquired a 50% stake in TV Guide Digital for $100 million. Under this acquisition, CBS received full ownership of TV Guide’s online and mobile apps divisions. CBS will benefit from the updated version of a programming grid, for which TV Guide is famous. Additionally, the mobile app has a Celebrity Watch List feature, entertainment news and an auto-play feature. TVGuide.com attracts around 16.5 million monthly unique visitors, and retains growth opportunities in the coming years. The mobile app has been downloaded more than 9 million times, and is attracting around 2.5 million average monthly users, up by 100% since September 2012. With this acquisition, CBS' total revenue is estimated to be around $14.88 billion by the end of this year, up from $14.08 billion last year.
CBS’ deal with Time Warner Cable will expire on June 30, 2013, and then Time Warner will have to pay a retransmission fee for renewal of the deal. Though the current deal will end in June, CBS is unlikely to receive the retransmission fees until September. The majority of the company's deals are up for renewal in 2014-2015.
Under the current deal, CBS received no fee in 2005, but this time, upon renewal, it's estimated that CBS will receive $3 billion in fees. The company has set a goal of earning $1 billion from retransmission fees by 2017.
Patent expiry offset by new initiative
Eli Lilly is losing its market potential as the patents for its top-selling drugs will expire in 2013-2014. The patent for Cymbalta, which is prescribed to patients suffering from low back pain and chronic pain due to osteoarthritis, will expire in December 2013. Eli Lilly's global product sales amounted to $22 billion in 2012, of which 22% came from Cymbalta.
Further, the company’s patent for its drug Evista, used to reduce the risk of invasive breast cancer, will expire in March 2014, and its patent for Humalog, a diabetes medication, will expire in June 2014. These contributed almost $3.4 billion to the company's total revenue in 2012. These patent expirations are the key concern for the company at present.
In order to sustain their market share, the company has initiated a Phase III study for Ramucirumab, which is a version of a successful gastric cancer drug re-purposed to target breast cancer. Ramucirumab is a completely human monoclonal antibody, used for the treatment of solid tumors. Eli Lilly has undertaken this project because the number of breast cancer patients are increasing faster than that of gastric cancer patients. There is more than $7 billion per year market potential in the breast cancer treatment market, whereas gastric cancer treatment has a potential of $2 billion per year. This phase is supposed to commence in mid-2013.
The increased costs at the Kemper IGCC project will reduce the earnings of Southern Company in the short term. On the other hand, it has invested in the Campo Verde solar project, which will enhance its long-term returns.
CBS, with the acquisition in TV Guide Digital, will boost its total revenue. Moreover, CBS is receiving retransmission fees from cable and satellite clients, which is a growth driver for the company.
Eli Lilly's expiring patents are limiting the company's products pipeline, though the initiation of Phase III testing for a new breast cancer drug will generate returns offsetting these losses. CBS is a "buy." Southern Company and Eli Lilly are a "hold."
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Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Southern Company. 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!