Value Investing

Meryl Witmer Top 2015 Picks From Barron’s Round-table

Meryl Witmer Barron’s Roundtable Picks for 2015 below via Barron’s

Also see Meryl Witmer Barron’s Roundtable Picks 2002-2014

H/T  modestproposal


Barron’s: The natural-gas boom has been one of the most exciting economic developments of recent years. But it is hard to ship natural gas. That’s where your first pick, Navigator Holdings [NVGS], comes in. Tell us more.

Meryl Witmer: Navigator owns and operates ships that transport liquefied petroleum gas [LPG], mainly propane and butane, and some ethylene. It has ordered ships that will also be able to transport ethane. These are gases produced by fracking, or hydraulic fracturing. You need a lot of technical competence to ship gases, and this company has it. It has the infrastructure in place to operate specialized ships, and it has a good balance sheet. Capital allocation is critically important to us, and Navigator’s management excels at it.

What makes it so hard to ship LPG?

You have to reduce the temperature to negative-100 degrees Celsius, and put the gas under great pressure. When you do that, however, you can store about 900 times more gas than you could at ambient temperatures. The after-tax free cash flow run rate is $1.60 a share now. We see it growing to over $2.80 a share by late 2016.

It’s a lot easier to contain beer and cereal, which Graphic Packaging Holdings [GPK] products do.

That’s right. Graphic Packaging makes paperboard packaging for food and beverage products. The company has consolidated the market nicely. Depending on the product, it has between a 33% and 50% market share. Management has done a great job of allocating capital. The company bought back almost 20% of its shares at $8 a share or below. The stock trades at $11.50 a share now. Our target is about $20. We see free cash flow growing within a few years to a fully taxed $1.50 a share.

The company will generate about $3 a share in excess cash, which it can use to buy in shares, make other acquisitions, pay dividends, or spend in another way. This is a stable business with growth ahead. We really like the CEO, who has made Graphic Packaging a low-cost producer.

Why is free cash flow twice earnings?

A few things are going on. The company has $811 million in net operating loss carryforwards. It also has more in depreciation than capital spending.

As one of Graphic Packaging’s competitors says, it is the 500-pound gorilla in the market. We like owning companies like that. They can control their destiny. We also think food prices will fall, which could be a positive for them, especially in the cereal market. Cereal has gotten pretty pricey, but prices could drop now that corn and wheat and other agricultural products have become a lot cheaper.

Thanks, Meryl.

ON-BG776_AOSI_C_G_20141031234544 Meryl Witmer