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.
Unless you've been living under a rock, you're likely aware of the recent surge in merger and acquisition activity throughout the marketplace. M&A activity is great news for investors, as it signals businesses' willingness to take on additional risk amid what is perceived to be an improving growth outlook.
Much of the attention of late has gone to the health care sector, where larger U.S. companies have been bidding for or gobbling up European businesses in order to relocate their own headquarters abroad and reduce their corporate taxes. The high-end marginal corporate tax rate in the U.S. can hit 40% prior to deductions. Such rates are considerably lower in foreign nations, so relocation can result in millions in potential tax savings, or perhaps even more than $1 billion for some companies.
But why does health care get to have all the fun?
You might want to put industrial and commercial products developer Ingersoll-Rand on your watchlist. This Irish company on the precipice of a growth surge could be very appealing to a large multinational such as United Technologies, which could save hundreds of millions on its taxes with Ireland's top corporate marginal tax rate of 12.5%.
Keep in mind that this is mere speculation on my part, and there's nothing to suggest yet that United Technologies is in the market to buy Ingersoll-Rand, but the businesses would appear to be complementary.
A combination here would enhance the combined entity's climate product offerings and expand its overall geographic reach. Not to mention that a merged United Technologies and Ingersoll-Rand would be on pace to top $81 billion in revenue and $8 billion in projected annual profit by 2015. This could indeed equate to more than $1 billion in tax savings for United Technologies!
Even if Ingersoll-Rand stays independent I would suggest its fortunes look brighter than in years past. The company has been actively investing in its long-term growth strategy while keeping near-term costs tempered, resulting in margin improvements and big earnings-per-share gains despite low-to-mid single-digit revenue growth. With manufacturing growth hitting a high note in the U.S. and stabilizing in Europe, this is certainly a company I'd advocate keeping a close eye on.
Hercules Offshore (NASDAQ:HERO)
Driller Hercules Offshore looked more like Achilles this past week, with shares falling big-time after it provided a fleet status update last Thursday. The company noted that it was terminating a drilling contract offshore of Angola for its Hercules 267 rig that was originally meant to last for three years. Investors clearly weren't happy to see the debt-riddled Hercules Offshore move away from a three-year deal and punished the company with a hefty share price decline.
But I believe there's more to Hercules than meets the eye. We must consider the whole picture here, and that means assessing the overall outlook for offshore drillers, as well as Hercules' entire fleet.
Perhaps the biggest factor to consider here is that Hercules' fleet consists of more than three dozen active and under-construction drill rigs. The loss of one contract, while most likely representing a few pennies in EPS, is nothing more than a blip in terms of its long-term strategy. The company has had good success in garnering longer contracts abroad, which help to solidify cash flow. In the Gulf of Mexico, however, it's seeing much shorter contracts, which can work positively if dayrates begin to rise but can also make it tough to improve rig utilization as competitors bring newer rigs online.
I'd suggest that there's ample opportunity for all offshore drillers based on improved deepwater drilling technology and a bevy of recent new offshore finds. Furthermore, the recent surge in oil prices will only entice global oil-producers to attempt to boost production. Obviously, this increased output won't occur overnight, but an improved manufacturing outlook in the U.S., coupled with growth stabilization in China, could be all the sector needs to boost capital spending.
At just seven times forward earnings, it seems investors have more than accounted for the company's $1.1 billion in net debt. I'd suggest more risk-willing investors give Hercules Offshore another look.
Normally I give short-sellers something to nibble on with my third watchlist stock each week, but I'm going to skip that tradition just this once and ensure that you're keeping a close watch on handbag and accessories retailer Coach, which is experiencing hard times for the first time since the recession.
As many Fools before me have stated, Michael Kors (NYSE:KORS) has been running circles around its apparel and accessories peers for years, turning in double-digit same-store sales increases almost at will. The affordable luxury and fresh image that Michael Kors brings to the table have drawn away customers from Coach, at least temporarily. In response, Coach last week announced its intention to close about 70 stores, or 13% of its North American locations, due to declining sales. It also forecast a high-teen comparable-store sales decline in North America over the next fiscal year.
While that has many investors running for the exit, and rightly so, I believe it could also mark a good opportunity to give Coach a deeper dive.
One of Coach's most prized aspects is an unwillingness to bend to discounting. The company has in recent quarters struggled due to the removal of third-party events from its North American stores. While this has harmed customer traffic over the near term, Coach's decision not to cave in and discount its merchandise preserves the integrity of the brand and gives it a chance to capitalize on higher margins than its peers during its next cyclical upswing.
Also, don't forget the branding power behind the Coach name. History has shown us that no matter how hot a brand might appear, all brands eventually have a cooling-off period. This means even Michael Kors is likely to fall out of favor with consumers at some point in the future. Coach, though, has a recognizable and sought-after brand that can appeal to both younger and older generations. This emotional bond to the brand between customers and Coach is an intangible factor that is often hard to value, but it should provide decent long-term growth potential for Coach shares.
At 15 times forward earnings it's possible more downside could be in the offing, but Coach's yield of nearly 4% certainly helps make up for any waiting that investors may have to endure.
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:
- Add Ingersoll-Rand to My Watchlist.
- Add Hercules Offshore to My Watchlist.
- Add Coach to My Watchlist.
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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 Coach and Michael Kors. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.