Friday, October 12, 2007

Industry Review (continued)

Wireless Networking: USA Mobility Inc (USMO) Industry: Low

Companies in the wireless networking industry sell to wireless carriers who buy the amplifiers, antennas and server software while demand can also come from consumers and businesses for cell phones and other wireless devices. This industry had a bit of a downturn in 2006 and seems to be moderately recovering. The long-term outlook for the industry is strong, assuming 3G adoption materializes, and capital spending by wireless carriers should fuel future growth assuming it picks up after significant consolidation in the wireless carrier market (such as ATT/Cingular). This industry is tough to gain a sustainable long-term competitive advantage due to the rapid advancements in technology and tough competition.

One stock in this industry that has been experienced some recent downward pressure on its stock price due to declining revenues is USA Mobility (USMO). The company has no long-term debt, trades close to book value, has a forward P/E under 11, and a P/CF under 4. According to their SEC filings, USA Mobility, Inc. provides wireless communications solutions to the healthcare, government, large enterprise and emergency response sectors. As a single-source provider, USA Mobility’s focus is on the business-to-business marketplace and supplying wireless connectivity solutions to more than 80% of the Fortune 1000 companies. The recent pull-back in stock price may make this stock worth a closer look.

Apparel: Cherokee Inc. (CHKE)

This is always seemingly a boom-or-bust industry for the individual participants. If the company is making a product that is fashionable, profits can be extremely high. If not, results can abysmal and not easy to turnaround in the short-term. Companies in this industry are at the mercy of consumers tastes in fashion, which are ever-changing. Another note of caution is the health of the industry is tied to consumer spending. Falling housing prices and rising oil prices could curtail consumer spending and hurt the apparel industry.

An interesting company in this sector is Cherokee, Inc. This company has probably popped up on a lot of people’s value screens due its extremely attractive valuations, which are misleading due to a one-time license termination agreement in the 4th quarter of the 2006 fiscal year that bumped up revenues. The company has a unique business model in which they market and license clothing such as Cherokee and Sideout brands to major retailers including Target (United States) and Tesco (Europe). Cherokee is dependent on these two retailers for close to 75% of its total sales. However, it does no manufacturing and keeps capital requirements extremely minimal. This allows it to have high returns on capital and no debt. I wouldn’t be a buyer of Cherokee at these levels but would be interested at a lower price.

Financial Services (Diversified): optionsXpress Holdings Inc. (OXPS)
This industry incorporates insurance companies, credit businesses, asset managers, and other financial operations. This industry has been challenged recently with the credit crunch which has slowed the gluttony spending for corporate acquisitions and residential real estate. At the root of many investors’ worries is the question of how deep and far-reaching is the subprime mess. The financial engineering that allowed risk of mortgage loans to be transferred differently to investors based on their preference provided an abundance of available credit for new home buyers. New fears that these loans are not properly valued, and in some cases worthless, are putting the industry in a fragile state. This is because the costs of loan defaults are not restricted to the lender. These loans were sliced and sold to pension funds, hedge funds, and other big money buyers and major defaults on these loans would have a dramatic ripple effect.
One company in this industry that has been enjoying solid growth is optionsXpress Holdings Inc. (OXPS). This company aims to make options trading easy for the individual investor and hopes to do the same for futures trading. They compete with the likes of E-trade and Ameritrade for online brokerage and since they went public on Jan. 27, 2005, its earnings have grown at a 44% average annual rate and sales by 43%. I am still not clear if they have a sustainable competitive advantage and it does not seem to be available at any real discount right now.

Medical Services: Atrion Corp (ATRI)
The Medical Services industry marks the first look at healthcare. The industry-wide challenge right now is rising bad debt expense from treating uninsured patients and there is no solution in sight as uninsured patients are only rising in numbers. The two major laboratories are Laboratory Corporation of America and Quest Diagnostics and they compete fiercely for contracts with the big health insurers. These health insurers face risk of funding cuts in the Medicare program. This industry faces challenging times ahead despite the appeal of rising demand from an aging population.
Atrion Corporation has had a great 5-year run of steady stock price appreciation. Trading at around $17 per share in early 2003, the stock price trades at around $119.65 per share today. Atrion Corporation offers, among other things, an intravenous fluid delivery line for therapy procedures employed in anesthesia administration, intravenous fluid therapy, critical care, and oncology therapy. Altrion continues to grow revenues and profits so right now the good times keep on going for this company.

Oilfield Services/Equipment: Patterson-UTI Energy Inc. (PTEN)
Oilfield Services/Equipment companies provide drilling rigs and other products and services to integrated oil companies. Many companies in this industry are recording record profits at this time due to the rising worldwide energy demand and high price of oil. The worldwide rig count in service is currently at 2,790, with 1,775 in North America. Canada is one of the few markets experiencing a downturn in rig count due to poor weather and lower activity. Earnings in this industry are closely tied to the price of oil and natural gas whose prices have been going in opposite directions lately.

Since the industry has been doing so well lately, it is hard to find good values here. One exception may be Patterson-UTI Energy, Inc. This company, together with its subsidiaries, provides onshore contract drilling services to independent oil and natural gas operators in North America. It provides pressure pumping services consisting of well stimulation and cementing for completion of new wells and remedial work on existing wells to oil and natural gas operators primarily in the Appalachian Basin. Right now offshore drilling is getting more attention which may be the reason PTEN is trading at more attractive levels compared to others in the industry.

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