Good morning investors. Hope everyone had a great weekend, got lots of rest and enjoyed the last week of July. This week will be a complete fiasco with earning season kicking off in high gear.
This week four of the seven companies that are in the “Top Idea” portfolio will be reporting earnings. Two of these companies will be reporting after the close on Monday afternoon. One of the companies will report on Wednesday morning and the fourth company will be reporting earnings Thursday morning.
Subscribers of the premium newsletter can find the initial research reports on these four companies below:
The other three companies that I currently still hold in the “Top Idea” portfolio will likely be releasing their earnings at random times throughout the month of August. These remaining three companies are less vocal about when they will report given their absolute small size and less shareholder centric values.
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So what am I expecting?
A few things to note here. I am pretty confident the first two companies reporting on Monday will post blowout earnings and forward looking guidance. The company reporting on Wednesday should have a decent earnings call and potential asset sale monetization. And the company reporting Thursday should do well as advertising revenue is making a come back. Here is a quick overview of what I think will happen with each of these companies.
Company One: I wrote a quick blurb to subscribers on what could happen to this company when their earnings are reported. Please see here if you missed it. As an overview, this company is a met coal producer. Met coal prices have skyrocketed this year and continue to increase in pricing. This company should announce a contract with their steel partners over the next month or so with higher contracted pricing for the next 12 months which should significantly increase their operating leverage. In addition, production will begin to increase as a new low volatile mine comes online and the recent capital raise will allow this company to move ahead with additional production at other incremental properties. I’m forecasting 2022 EBITDA north of $100 million. With an enterprise value of only $300 million I am underwriting this company at only 3.0x EV/EBITDA. And based on the recent commentary from steel companies I think the super cycle with steel demand could continue for years.
Company Two: I’m pretty excited to see what happens when this company reports. As a background, this company manufacturers and sells fertilizers to farmers in North America. Fertilizer pricing has skyrocketed recently with no signs that pricing has come down. The closet competitor, LSB Industries (“LXU”) is up 81% over the last 12 days and reported decent earnings. UAN prices came in at $231/ton (my company usually does $40-50/ton more than LXU) which could result in significant EBITDA should these prices translate. In addition, a lot of smart guys are estimating a $5-7/unit distribution in Q2 2021 which would result in a massive re-rating. Imagine what would happen if a stock that is trading at $65/unit announces a distribution in the $5-7/unit range. If distributions are started back up and forward looking guidance looks strong (looked great at $LXU - decent comp) I think we will see a massive rotation of high yield investors into this stock as they try to capture the yield.
Company Three: This company is a little harder to predict how the future will be. I do think this company will report decent results in both of their segments with strong guidance for the remainder of the year. There could be some asset sales that help strengthen up the balance sheet. The stock price has dropped over 30% over the past few months and I have begun to make this a major position in my portfolio. I would welcome any weakness in the share price to continue to buy more shares.
Company Four: This company is also a little harder to forecast. However, they have recently reinstated their former dividend which shows that management is bullish on future results. I think by 2022 we are back at a normalized earnings environment, which should bode well for cash flow generation. Competitors for this company will be releasing earnings this week as well. I will be providing updated notes from competitors for subscribers so we can gauge how the future might look.
Overall I am pretty excited to see if my “theses” are going to playout like I initially expected them to. As a note, I invested in all four of these companies for the long-term asset value and potential free cash flow they can all generate. However, I do think the first two companies have key catalysts that will be revealed to investors over the coming earning report which have potential to re-rate these stocks.
If you can’t tell, I am pumped to see if my research was spot on or just completely wrong. If I am right I think there is good money to be made. If I am wrong, I do think I purchased these assets at absolute low prices so my downside will be limited.