Value Portfolio

AGCO Corp. (AGCO) posted a much better-than-expected fourth-quarter financial report! The company reported adjusted EPS of $1.18 vs. consensus of $0.67. Revenue was above expectations at $2.5B vs. consensus of $2.4B. Margins were better than expected due to restructuring and cost containment. Inventory levels were lower year-over-year, which is also a good thing. Granted, equipment sales in 2015 are expected to decline in all geographic regions, and 2015 revenue guidance was lowered from $8.5B to $8.1B-$8.3B. Despite the lower 2015 revenue forecast, the company maintained its 2015 EPS guidance of $3.00 per share and felt confident enough about cash flows to raise its dividend by 9% and to initiate a new $500 million share repurchase program.

Bottom line: The trough in earnings should occur in 2015 and the trough in revenues in 2016, with strong growth in both thereafter. CEO Martin Richenhagen is optimistic about the future after this upcoming trough:

As we look ahead, we expect weaker end market demand and currency headwinds to make 2015 more challenging than 2014.”. Lower commodity prices relative to 2014 are expected to negatively impact farm income, pressuring industry demand across the developed agricultural equipment markets in 2015. Net sales for 2015 are expected to range from $8.1 to $8.3 billion, reflecting the impacts of softer market conditions and unfavorable currency translation. Gross and operating margins are expected to be below 2014 levels due to the negative impact of lower sales and production volumes along with a weaker sales mix. Benefits from the Company’s restructuring and other cost reduction initiatives are expected to partially offset the volume related impacts.

Despite the market challenges, our priorities remain unchanged, focusing on margin performance and cash generation while providing superior products and services to our customers. When we look beyond the softer market conditions we face today, the healthy, long-term fundamentals of our industry remain intact. We will continue to invest in new product development, distribution enhancements and productivity improvements to enable our long-term growth and improve our financial performance.

Earnings and revenues in 2015 may surprise to the upside if Section 179 equipment tax credits are adopted permanently and indexed to inflation. These credits were retroactively re-instated for 2014.

President Obama has included permanent Section 179 tax relief in his 2016 budget and the Republican-led House of Representatives is also in favor of permanent Section 179 tax relief (H.R. 636), so it could happen.

I also expect continued share purchases by Director Mallika Srinivasan, who controls India’s Tractor and Farm Equipment Ltd., from the current 12.17% stake up to the agreed-upon 12.50% cap, especially if a new U.S.-India investment treaty is signed, which appears likely:

Furthermore, I am glad to see several well-respected value managers purchasing AGCO shares, including FPA Capital, Third Avenue Funds, and Tweedy Browne.

• Third Avenue  (pp. 4-5)

• Tweedy Brown (page 3)

Lastly, I agree with the positive sentiments of some recent articles:

• Big rebound is coming in AGCO share price

• AGCO is an acquisition target

Alliance Fiber Optic Products (AFOP) announced fourth-quarter  revenues fell 14% to $18.8 million compared to the prior year’s quarter. Excluding a one-time income tax benefit adjustment received in fourth-quarter 2013 and other non-reoccurring items, fourth-quarter earnings came in at $4.18 million compared to $4.72 million last year.

Peter Chang, Chief Executive Officer of AFOP, said in its earnings release:

Despite the softer second half 2014, overall annual revenues grew 13% to a new record level. With our operational efficiency, we achieved quarterly gross margins above the average of our peers throughout the year, which resulted in improved annual gross margins, from 38% in 2013 to 40% in 2014.

Revenues for the full year rose 13% to $86 million. Excluding one-time adjustments, full-year 2014 earnings came in at $19.9 million, or $1.08 per share, compared to $16.5 million, or $0.93 per share in 2013.

The company released first-quarter 2015 revenue guidance in the range of $20 million to $22 million, which is nice sequential growth from the $18.8 million revenue figure in the just-completed fourth quarter of 2014.

Analysts at Zacks upgraded shares of AFOP with a price target of $15.20 per share. Of the four analysts currently covering AFOP, three give it a “buy” and one a “hold”. The consensus price target of $17.25 represents a 15.8% premium to the current share price.

RPC Inc. (RES)  reported fourth-quarter revenues surged 29.8% to $487 million due to higher activity and services as well as a larger fleet of revenue-producing equipment. Earnings more than doubled to $77.6 million, or $0.36 per diluted share, compared to $37.6 million, or $0.17 per diluted share last year.

For the full year, revenues grew 25.6% to $2.3 billion. Earnings jumped 46.9% to $245.2 million, or $1.14 per diluted share, compared to $166.9 million, or $0.77 per diluted share in 2013.

The year’s performance was extremely successful given the recent downturn of oil prices. Like most other companies tied to the energy sector, RPC plans to reduce capital spending in 2015 to cope with the challenging conditions. RPC’s President and Chief Executive Officer, Richard Hubbell said in a statement:

We have prepared contingency plans to address factors under our control, most of which relate to expense and capital expenditure reductions. The extent to which we take action is dependent upon the severity and expected length of this downturn…We have no plans to reduce our equipment maintenance or other programs which differentiate us as a high-quality provider of oilfield services.

Rayonier Advanced Materials (RYAM) is one of my favorite stocks right now. Fourth-quarter earnings were poor because the company increased its environmental liabilities by $69 million related to dissolving wood pulp mills and wood treating sites that it no longer owns. It’s important to remember that this increased liability reserve applies to clean-up costs spread out over 20 years. The company stated that the increased reserve is not expected to “materially” impact cash flows in 2015.

The company basically “threw the kitchen sink” into the fourth-quarter report and financial results should look much better going forward. I am very optimistic about RYAM’s future and was thrilled to see that the company was able to reduce its debt load to $880 million from the $930 million that existed at the time of the spinoff in June 2014 despite weak business conditions. It just goes to show the power of the company’s cash-flow machine.

My favorite quotes from the earnings press release are the following:

“Despite the difficult environment and aggressive pricing offered by competitors, the Company maintained its volume and increased its share of customers’ requirements. This success is largely due to the Company’s differentiated, high-quality product and long-term customer relationships.”

“When the markets do improve, we will not only be the leader, but the clear winner, in the cellulose specialties arena.”

Given RYAM’s tremendous growth prospects and the recent temporary price sell-off that makes its already-cheap shares even cheaper, I am making RYAM a “best buy” in the Roadrunner Value Portfolio.

Werner Enterprises (WERN)  reported strong a fourth quarter as freight demand continues to drive growth unhindered by the adverse weather that plagued volumes in 2013. The company noted that it was overbooked for most of the quarter due to this strong demand. Revenues for the quarter rose 7% to $553.2 million, compared to $517.9 million in the same period last year.

Earnings jumped 48% during the quarter to $32.7 million, or $0.45 per share as the company benefited from increased revenue and a $0.55 per gallon decrease in diesel fuel costs in waning months of 2014.

For the full year, revenues rose 5% to $2.14 billion and earnings rose 14% to $98.6 million, or $1.36 per share.

Following the strong quarter, analysts at Wolfe Research upgraded Werner shares to “outperform” from a “market perform” rating. Although analysts at Deutsche Bank maintained its “hold” rating, they raised their price target for WERN to $30 per share from $26 per share. Credit Suisse analysts raised their buy target to $31 from $26 per share. Citigroup also raised its target price to $30 from $27.

Momentum Portfolio

Hill-Rom (HRC)  reported first-quarter fiscal 2015 adjusted earnings per share rose 36% to $0.49, compared to the prior year’s quarter. Revenues for the quarter rose 18% to $465 million driven by the company’s acquisition of Trumpf Medical in August 2014.

U.S. revenues rose 14% to $284 million as revenues outside the U.S. jumped 34% to $181 million. The company noted both its North America Capital and Surgical/Respiratory Care businesses performed well during the quarter. The acquisition of Trumpf last year boosted Surgical/Respiratory Care’s revenues by more than double to $126 million. Excluding Trumpf’s contribution, organic growth was up 6% compared to last year.

Management amended its full-year 2015 guidance for adjusted earnings and revenues.  The company now expects revenue growth of about 11% to 12%, down from a prior estimate of 11% to 13%. This is due to the expected negative currency impact of 4% in 2015, compared to a prior estimate of 1% to 2%. Management raised its adjusted EPS range to between $2.44 and $2.50, from $2.42 to $2.48 earlier. Its outlook on cash flow from operations remains the same at $250 million for the full year.

Vipshop Holdings (VIPS) skyrocketed more than 14% to new all-time high on positive investor reaction to its fourth-quarter financial report. The “daily deals” Internet company known as the “Groupon of China” reported huge revenue growth of 108.9% on equally-huge 114.2% growth in active customers. Earnings per share also increased by a triple- digit percentage (122.8%) to $0.09 from $0.04. Also good was the company’s forward revenue guidance for the first quarter of 2015, which is expected to show year-over-year growth of between 75% and 85%, which equals a range of $1.25 to $1.30 billion — significantly above analyst expectations of only $1.21 billion.

We are very pleased with our robust fourth quarter and full year 2014 financial and operational results, which were largely driven by our continued efforts in enhancing our mobile shopping experience. As mobile is increasingly becoming the ideal solution for eCommerce users, we believe our flash sales model, which allows shoppers to act instantly on sales events any time and anywhere, is particularly well suited for users shopping via mobile devices. Going forward, we will continue to strengthen our mobile capabilities and focus on attracting new customers by continuing to provide a convenient and pleasant shopping experience.