Wednesday, January 18, 2012

And Now, Turn Your Attention to the Parts Makers

The Detroit auto show had a lot of us buzzing about the carmakers last week.  Let’s face it, new models and new innovations are exciting. But investors might be wise to pay some attention to auto-industry companies that weren’t making headlines at the auto show.
BorgWarner (NYSE: BWA) may have may have slipped under your radar last week, but it shouldn’t have. The Michigan-based parts supplier shot up 14 percent after revving its outlook for 2012. The company now expects earnings to grow at 23% to 27% over last year, with sales growth in the area of 10-12% over 2011. Even after last week’s surge, BWA still sells for 16.7 times earnings. At its projected rate of growth, it’s now selling at a forward P/E of 13.
And despite some serious appreciation in value over the past couple years, BorgWarner has a bright future. The company’s focus is on making components that maximize fuel efficiency and reduce emissions from gasoline and diesel engines. High fuel prices, consumer values and government regulations should only help to heighten the need for those products in years to come.
BWA counts just about every major manufacturer among its customers, as well as John Deere. Electric cars like Nissan’s Leaf and GM’s Volt have generated a lot of attention over the past couple years. But the gasoline engine is not going away anytime soon, especially with American oil discoveries on a furious upward clip. BWA’s products are making the good old gas engine kinder to the environment, not to mention easier on the wallet at the pump.
So while BWA has had an incredible run from the lows of 2009 -- including a near-double in 2010 -- it still has fuel in the tank. Maybe we can chalk that up to the company’s fuel-efficient parts. Any pullback in price could make BorgWarner look cheap. It’s my smallest holding, so I’m willing to add more. I’ll be waiting to see if the stock takes a breather here before adding shares.

And one to watch for ...
Johnson Controls (NYSE: JCI), another maker of auto parts, reports earnings this Thursday. Johnson Controls has increased sales each quarter for the past seven quarters.
JCI’s sales have grown an average of more than 21% percent per year since 2009, and eclipsed its 2008 sales mark of $38 billion last year. It also bested its 2008 earnings, registering $2.36 per share in 2011. Yet Johnson’s selling at cheaper prices than it was in 2007 and 2008. It currently sells at a P/E of 15.
JCI makes car seats, consoles, instrument panels and electronics for Ford, GM, Daimler and other carmakers. It’s the largest car seat supplier in the world. It also makes batteries for hybrid and electric vehicles, as well as for advanced “start-stop” gasoline engines. And it’s building a manufacturing plant to make lithium-ion batteries for hybrids -- with $300 million in help from Uncle Sam. So, like Borg-Warner, JCI has a foot in the future of automotive sales as well as one in the present.
Johnson is far from a pure play on car and truck sales. About 36 percent of its sales in 2011 were from a host of other products, including all types of controls for buildings, whether it be for lights, security, heating or air conditioning. But don’t let that scare you away. Many of Johnson’s building products are designed to improve efficiency, another trend we can expect to continue. If JCI interests you, tune in for Thursday’s quarterly earnings report.

There's always something to worry about
Slowing economies in Europe and other parts of the world could hurt suppliers, including BWA and JCI, since car sales will lag. Inflationary pressures and rising raw materials costs also pose risks.
But BWA’s forecast for growth accounts for those factors, so investors should take that as a sign of confidence from the parts manufacturer. These two companies look attractive at today’s prices and are positioned to do well in the years ahead. Investors would be wise to give them a test drive.

In addition to appearing on this site, this column was syndicated by the Motley Fool. 

Thursday, January 5, 2012

A Case for a Small-cap Biotech Basket

Small biotech stocks are fun for many reasons. The companies often have noble causes. They aim to treat wretched diseases. And their shares sell for small prices. Sure, many run on borrowed money and spend years deep in red ink. But they give us the potential of a five-bagger, 10-bagger, or even better.
In the small-cap biotech world, profits are ephemeral, but dreams loom large. That’s why I’ve always thought it was good to own one, if for no other reason than to keep things interesting.
But maybe owning one isn’t the way to go. Maybe owning a few is far better. Call this a case for a small-cap biotech basket.
I recommend this not because it’s something I’ve done. I do so because it’s something I wish I’d done, but didn’t.

To a 3-bagger ... and back
I’ve owned one small, speculative biotech since I started investing in 2008:  Cytori Therapeutics (NASDAQ: CYTX).
Cytori is one of a handful of stem-cell therapy companies that sell for a low per-share price and have a chance to break out, and break out big. That looked like it might happen with Cytori in early 2010, when the company announced good results from a study for a breast-reconstruction treatment that uses stem cells from a woman’s body fat to regenerate breast tissue lost to cancer surgery.
And the stock appreciated handsomely. I had bought in at $2.70 in 2008. It was suddenly selling for $9.50 a share.
I briefly considered selling half and booking profits. But the company was starting to generate press from financial writers. And what they were predicting had my mouth watering.  I read one pitch that said CYTX is a $30 stock within a few years.
So, I held.
Today, Cytori is a $2.28 stock.

In retrospect, I wish I’d trimmed some CYTX  from my portfolio and added another biotech, or two. Some of the other names I'd had on my radar were appreciating when Cytori was in its long slide. There are many small, interesting biotechs from which to build a basket. Here are a few to consider:

Neurocrine Biosciences (NASDAQ: NBIX) -- Neurocrine looks to be on a breakout. It has grown its revenue from just $1.2 million in 2007 to $33.5 million in 2010. It’s on track to more than double that revenue in 2011. And it’s delivering real earnings -- 55 cents per share last quarter. That leaves it selling at a price-to-earnings ratio of 12.
The company is developing therapies to deal with a number of maladies, from endometriosis and uterine pain to anxiety, post-traumatic stress disorder and schizophrenia. It has deals with Abbott Labs, GlaxoSmithkline and other larger pharmaceutical companies to get those products to market if/when they are approved.
NBIX has a healthy balance sheet, with $133 million in current assets to just $52 million in current liabilities. The company reports no long-term debt.
One worry here is that NBIX has had a nice run up. It was selling for $5.53 a share in early October. It’s now selling for about $8.50.

Repligen -- Here’s another tiny biotech that actually reported positive earnings last quarter. Sure, it’s just 2 cents per share, but earnings from these small biotechs are hard to come by.
It may not be exciting medicine, but RGEN develops proteins that help facilitate the production of antibodies. These are used in treatments of various diseases and also in tests that better determine exactly what ails patients. It has maintained better than a 15 percent average annual growth rate in sales over the past five years.
Repligen is another biotech with a healthy balance sheet, with $72 million in current assets and only $4 million in current liabilities. It reports no long-term debt. At $3.72 a share, it sells for just 1.5 times book value. It also earns a coveted 5-star rating from Motley Fool CAPS members.

PDL Biopharma (NASDAQ: PDLI) -- The bet on PDLI is not so much that its share price will appreciate handsomely, but that it can continue to pay out a massive 10% dividend. PDLI already makes plenty of money. It has earnings of 74 cents a share, on a share price just north of $6. It boasted a net operating margin in 2010 of 27%, and it should surpass that figure for 2011.
PDLI collects royalties from larger drug firms that manufacture and sell the drugs it brought to market. Those include cancer-fighting antibodies used in Herceptin, used mainly to treat breast cancer, and Avastin, which is used to fight a number of cancers.
The company is a cash machine right now, and that dividend looks great in a year when the market ended flat. But in order to keep paying that out, PDLI will need to bring more drugs under its umbrella in coming years as patents on some of its drugs expire.

Plenty more to consider
Those companies should give an investor a start on building a good small-cap biotech basket. There’s still plenty of risk. But they offer a good measure of diversification, and they won’t all move in lock-step. But don’t stop there. There are plenty of other interesting small-cap biotech companies out there, and more research to do before buying.

This column was syndicated through the Motley Fool.