Singular Research: More Top Picks for 2012

Robert Maltbie |

As we discussed in the first part of Singular Research's outlook and top picks for 2012, we feel that the theme will be "selective decoupling." What's interesting is we think the old art of stock picking will make a nice comeback in this age of the ETF. There's going to be a continuation of the political dissonance, fears stemmed from Europe, and other market factors that affect investors in 2011. In the U.S., there will be opportunities against the backdrop of low expectations and attractive valuations, hence a strategy of focusing on individual, uncovered issuers will provide exceptional outperformance. Companies like Apple (AAPL), Baidu (BIDU), Priceline (PCLN), Netflix (NFLX) and Google (GOOG) have all done quite well during this flat market over the last decade.

 

Here are a few more names that we like for 2012:

Flotek Industries, Inc. (FTK)

Recent price: $8.17
Price target: $18
Analyst: Jonathan Hegranes, CFA

Based in Houston, TX, supplies drilling and production products to energy and mining industries. Operating segments include chemicals and logistics, drilling products, and artificial lift. Primary customers are domestic and international integrated energy and petroleum (E&P)

Third quarter revenues grew 88% to $75.1 million, 20% ahead of our estimate of $60 million. Sequentially, revenues grew 34%, driven by strength in all business segments. Chemicals and Logistics’ revenues grew 140% due to pricing and market share gains. Drilling Products’ revenues grew 57% driven by increased drilling activity, particularly in key regions and basins – such as Eagle Ford shale. Profitability exceeded expectations, with operating margins of 21.5%, above our 16.4% estimate. On a continuing basis, EPS for the quarter came in at $0.21 versus our estimate of $0.10. Including a non-cash gain due to the FMV of a warrant liability, GAAP EPS was $0.38. We have increased our FY: 11, FY: 12 and FY: 13 forecasts, as well as our price target from $14 to $18.

Computer Task Group, Inc. (CTGX)

Recent price: $ 14.19
Target price: $19
Analyst: Frank Dilorenzo, CFA

CTGX provides information technology and staffing solutions for clients in the tech, healthcare, financial, energy and other industries. Within healthcare, the company has seen strong growth in electronic medical record applications and services. We see solid potential in both the company’s staffing and IT consulting businesses.

The company’s staffing business has strong potential in the typically stable healthcare industry, and its consulting business is seeing increased demand as companies are upgrading systems and technology in this slow-growth economy. CTGX also represents attractive value, trading at 15x our 2012 EPS estimates. Over the next couple of years, we actually expect the company to grow at a rate of 20 percent or more.

While it’s IT consulting business comprises about 35 percent of the company’s focus, we think healthcare is where the real growth driver is at, primarily in electronic medical records. Currently, the higher-margin healthcare solutions segment makes up about 30 percent of the company’s business, but it’s also been the company’s fastest growing segment.

In addition, the company also has a major partnership with IBM (IBM), which is responsible for about 30 percent of the company’s revenues. It is important to note that while Computer Task Group is contracted to be a supplier to IBM for the next three years, there is no guarantee that there will be continued extensions. With that said, we do think that the relationship is a positive for CTGX at this point. So, the general trends in IT demand, employment rate, and in healthcare bode well for the company going forward.

Nymox Pharmaceutical (NYMX)

Recent price: $8
Price target: $18
Analyst: Greg Garner, CFA

Is a pharmaceutical development company that is in Phase 3 clinical trials for NX-1207, with indications for enlarged prostate. This compound also has been shown to be effective with prostate and liver cancer. The company has additional drugs in early stage development and generates revenues from three diagnostic kits.

At end of Phase 3for compound to address enlarged prostate (BPH). Urologists involved in study independently speak very favorably medical meetings about benefits of using the new compound. Enrollment in the Phase III clinical trials for NX-1207is close to completion. Safety study results indicated no significant safety issues in August and again in November. Urologists involved in the pivotal Phase III clinical trial for NX-1207 have published a new paper indicating how the procedure to administer the drug is quick and uncomplicated. The authors also indicate the new drug does not have side effects common with current drug therapies. After quarter-end, Nymox announced the clinical trial was over 80% enrolled. We anticipate full enrollment within a few months. We pushback our timeframe for NDA filing to the end of Q1:13.Although the long term benefits of NX-1207 are evident by patients in earlier clinical trials, there can be no assurance the FDA will approve the compound in the time frame we forecast.

Dorman Products (DORM)

Recent price: $38
Price target: $56
Analyst: Greg Garner, CFA

Dorman Products is a leading manufacturer and distributor of replacement auto parts. The company focuses on developing new aftermarket parts that are prone to fail and for which the OEM is the only supplier. DORM has been a beneficiary of the great recession in increased share of OEM markets due to dealership closures and consumer deferral of new auto purchases, which has lengthened the average vehicle age in the U. S to greater than 10 years.

Last quarter revenues grew 12.6% to $134.2 million, above our forecast of 12.0% growth. Margins were below our forecast primarily due to one-time expenses related to discontinued operations. Gross margin was 34.7% and operating margin was 14.8%. Absent the onetime charges, gross margin was 36.9% and operating margin was 17.4%. Pro-forma EPS of $0.82 was above our forecast of $0.79. DORM has no debt and reported $11.5 million in cash from operations in Q3. We increase our 2011 EPS forecast to $2.95 from $2.92. We increase our FY: 12 EPS estimate to $3.39, up from $3.35 driven by more stable gross margins and the introduction of a new product line.

Farmer Brothers Co. (FARM)

Recent price: $7
Price target $11
Analyst: Tom Kerr, CFA

The company has a 100 year history of coffee and beverage production and distribution. Its product line includes roasted and liquid coffee and related products such as filters, sugar, creamers, assorted teas, cocoa, and spices. Its customer segments include restaurants, convenience stores, lodging and retail coffee roaster, private label distributor (cappuccino one-serve in 7-11 stores, independent coffee shops, and major supermarkets). Grew by acquisitions in 2007 & 2009, and now fully integrated to benefit. May reinstate dividend in next year.

FARM reported revenues of $121.2 million compared to $108.7 million in Q1:11, substantially above our estimate of $112 million. Gross margins declined to 33% from 40% due to the 81% increase in green coffee costs compared to the prior quarter. There was a substantial improvement in general operating expenses which decreased 21% to 37% of sales compared to 51% in Q1:11. Pro-forma operating income in the quarter came in at $2.0 million compared to our estimate of $2.6 million and $12.0 million in Q1:11. GAAP Net loss was $7.6 million, or $0.50 per share, compared to the prior quarter loss of $9.9 million or $0.66 per share. Pro-forma net loss was $0.06 excluding LIFO charge, above our estimate of $0.14. Increasing EPS in FY: 11 to $0.14 from $0.11 due to the strong Q1 performance.

Disclosures: To read Singular Research’s important disclosures, click here.

Singular Research

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CTGX Computer Task Group Inc. n/a n/a n/a 0
FARM Farmer Brothers Company 36.37 0.12 0.33 111,887
FTK Flotek Industries Inc. 14.00 1.12 8.70 1,382,311
INCDZ Independence Contract Drilling Inc n/a n/a n/a 0
NYMX Nymox Pharmaceutical Corporation 3.26 -0.07 -2.10 140,602

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