I follow quite a lot of companies, so the usefulness of a watchlist for me cannot be overstated. Without my watchlist, I'd be unable to keep up with my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, and I don't guarantee I'll take action on the companies being discussed. But I promise that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
If you happened to gloss over last week's announcement from the Environmental Protection Agency regarding power plants, then you missed another subtle reminder of how crucial a role Cummins is going to play in cleaning up our country over the coming decades.
Roughly a week ago the EPA proposed reducing power plants carbon emissions 30% by 2030. While this has no direct effect on Cummins, it serves as a reminder that the EPA also issued a proposal, which was subsequently signed into law, that automotive manufacturers deliver cars capable of averaging 54.5 miles per gallon by 2025. This was a big extension from the 35.5 mpg mandated by 2016. What these proposals demonstrate is that the EPA and Congress take the negative effects of greenhouse gases seriously, and that companies which benefit from alternative emission technologies, like Cummins, could be set to benefit in a big way.
Cummins isn't your traditional engine manufacturer in that its focus is primarily on trucks and diesel-powered vehicles. One of its most exciting joint-ventures is with Westport Innovations (NASDAQ:WPRT) which combines Cummins' diesel technology expertise with Westport's natural gas know-how to create heavy-duty engines capable of running on cleaner-burning natural gas. As fuel prices continue to rise not only do these natural gas engines reduce harmful emissions, but they can also help save money for trucking companies over the long run.
The evidence of Cummins' success is readily apparent in its first-quarter results reported back in April. During the quarter sales grew 12% to $4.4 billion with much of its growth coming from within North America. This is another factor that'll make Cummins such a strong play or decades to come: Even when the U.S. trucking market begins to get saturated with cleaner-technology engines (which I don't expect to occur for a full two decades), it'll still have emerging market economies to turn to, such as China and India where its engines can proliferate.
In other words, even with Cummins valued near a 52-week high it may still deliver solid gains to investors willing to hang on for a decade or longer.
International Game Technology (NYSE:IGT)
If gambling is in your blood you've probably played on a slot machine designed by International Game Technology, which caters to a number of large casino customers in Las Vegas and Atlantic City.
As you might imagine, with casino and resort growth soaring in Macau but only inching forward in the U.S., casino operators have really scaled back their expansion in the U.S. and have opted to throw much of their capital at overseas markets. Since the recession this has meant a pretty tough environment for International Game Technology, or IGT. In its latest quarterly report, IGT noted that revenue sank 15% to $513 million while adjusted EPS plummeted 44% to just $0.20. Some of this can be blamed on the nasty weather that covered much of the U.S. in January and February, but we can also pinpoint weak machine sales as an ongoing source of weakness for IGT.
Earlier this week, though, Barron's reported that IGT may be considering putting itself up for sale. With consolidation the name of the game in the casino and resort sector, its management team may be looking to maximize shareholder value and step to the sidelines. Personally, I don't believe a sale of IGT is necessary to maximize shareholder value; but if one were to go through I would anticipate a considerable premium from its current levels.
To begin with, we have to consider that even if U.S. casinos are cutting back on some of their capital expenditures, one area where they won't be able to skimp for long is new gaming machines. The replacement cycle for these systems is ongoing, and IGT's 4% increase in machine prices in the second quarter proves that even with a sales slump it commands impressive pricing power. IGT knows casinos need updated machines simply to keep customer levels steady in the U.S., so I'd look for gaming sales to bounce back in the coming years.
Secondly, IGT is working on a leaner cost structure that should help improve its margins moving forward. For shareholders this should mean an abatement of downside EPS surprises as it'll be able to maintain its profits even if sales fall in the low-to-mid single digits.
Finally, and this is perhaps the most key point of all, IGT possesses one of only two online gaming software licenses in the U.S. If online gambling is ever legalized, IGT is going to be one of only two companies capable of legally providing the gaming software to casino operators. This license could wind up being worth its weight in gold if online gaming takes off as it has in other parts of the world.
Do yourself a favor and consider getting IGT on your watchlist and giving it a closer look.
Achillion Pharmaceuticals (NASDAQ:ACHN)
It's been a wild week for biotech, and that's truly saying something, with Merck agreeing to pay more than triple Friday's closing price for Idenix Pharmaceuticals (NASDAQ:IDIX) in order to get a hold of samatasvir and its two other clinical compounds, and to complement its own hepatitis C development pipeline. In turn, this sent shares of Achillion Pharmaceuticals screaming higher with investors wondering if it would be the next hepatitis C-focused company on the auction block.
Consider for a moment that every smaller-scale hepatitis C company before Achillion has basically been gobbled up, though with mixed success. Gilead Sciences purchased Pharmasset in order to get its hands on what it now known as Sovaldi, an oral game-changing hepatitis C therapy. Conversely, Bristol-Myers Squibb purchased Inhibitex for a substantial premium and wound up getting a dud which was scrapped in midstage trials after the death of a patient. With fewer and fewer hepatitis C pure-plays remaining, the thought from investors is that Achillion count find a buyer sooner rather than later.
But that was just the beginning for Achillion. Yesterday its shares soared an additional 83% after announcing that its lead drug, sovaprevir, had finally been taken off of its clinical hold by the Food and Drug Administration, clearing the way for Achillion to recommence its phase 2 studies.
As for me, I think Wall Street is off its rocker.
Achillion simply hasn't shown any ability to get its investigational drugs past a phase 2 study, and until it does it's likely unwise for investors to bet on a buyout, even if Idenix's buyout was made under similar circumstances.
Achillion lost a year waiting for the FDA to lift its hold on its bread and butter product sovaprevir, and it's fallen considerably behind its peers which have begun to bring groundbreaking new therapies to market. Even if Achillion manages to have success with sovaprevir there simply may not be much market share left to doll out by 2017, which is the earliest I believe its product could make it to market. Not to mention, with a cash burn rate that I suspect could top $70 million in each of the next two years it'll likely be looking to raise cash via a dilutive offering very soon.
As such, I would suggest considering Achillion as a potential short-sale opportunity if this emotion-based rally takes its shares even higher.
Is my bullishness or bearishness misplaced? Share your thoughts in the comment section below and consider following my cue by using these links to add these companies to your free, personalized watchlist to keep up on the latest news with each company:
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Cummins, Gilead Sciences, and Westport Innovations. 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.