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Onto the Next Opportunity
The Hot IPO Trader
Wednesday, May 3, 2006
By Louis Basenese
#44
** Onto the Next Opportunity
Shares of Complete Production Services (NYSE: CPX) never pulled back to our desired entry target. So, instead of chasing after them, let’s be disciplined and move on to the next opportunity: DynCorp International (NYSE: DCP).
I mentioned last week that the company boasts several attractive fundamentals. Namely, a proven track record of success, increasing revenues and a mounting backlog. Notwithstanding all these positives, the company also happens to provide an increasingly important service – civilian police forces in the world’s more dangerous places (particularly Iraq and Afghanistan).
With roots as far back as 1951, DynCorp is one of the largest contractors of outsourced civilian police in the world. And the fact that the war on terror is turning into a forever war only cements the growth prospects for DynCorp. Last year alone, revenues jumped 27%. More importantly, with a backlog approaching $3 billion and a history of converting every single dollar into revenue, there’s plenty of growth to come.
Rest assured, the company is more than just a wartime out-source shop. Aside from the high growth area of civilian police support service, the company also provides critical security services for high-ranking officials and diplomats, base operations, logistics support and aviation services and operations. And it enjoys a client list that includes numerous U.S. government departments and agencies, as well as commercial customers and foreign governments.
Other noteworthy items include rapidly expanding cash flow margins (up from 4.9% to 7% in just two years), an active pipeline of business worth an estimated $10 billion in revenues, a seasoned management team with an average of more than a decade of service with the company and of course, the potential for brisk double-digit revenue expansion for the next three to five years.
The only concern I have relates to the company’s leverage post-IPO. Instead of paying down debt, the majority of the proceeds are going to the private-equity owner Veritas Capital. That being said, DynCorp’s strong cash flow will provide plenty of money to make interest payments. I just worry that the high leverage might prevent the company from making timely and strategic acquisitions that would be quickly accretive to earnings.
Shares are expected to price tonight between $15 and $17. The offering size is relatively large at 25 million, so the chances of a huge first day run-up are unlikely. But the potential for a run-up in the short- to medium-term is strong. I’ll get you specific trading instructions once shares start trading tomorrow.
Until then…
Louis Basenese
P.S. – As promised here’s a run-down on our current holdings (and reasons why we shouldn’t bail prematurely):
* Tim Horton’s, Inc. (NYSE: THI): Despite trading slightly below our entry, shares are steadily advancing – up more than 6% in the past week. And it’s easy to understand why. Same-store sales figures jumped an average of 9.2%, handily beating analysts’ expectations. And earnings were up an impressive 34% for the quarter. Although the company isn’t as wildly popular as Starbucks, it’s well on its way. I expect the company to continue posting stronger-than-expected results and shares to keep advancing in the weeks ahead.
* Sealy Corporation (NYSE: ZZ): Shares of Sealy are also headed in the right direction (up just over 7% since last Monday) on the heels of a strong quarterly report. The company noted strong demand, and higher sales helped increase net income by a healthy 11%. These results are right in line with the projections noted in the original recommendation and, therefore, still support a near-term valuation in the $20 to $21 range.
* Chipotle Mexican Grill (NYSE: CMG): Despite some volatility following the announcement that McDonald’s will unwind its remaining stake in Chipotle, shares have rebounded nicely. We’re sitting on a gain of roughly 20%, but considering the company is set to report earnings on Monday, let’s hold on a little longer. Recall: Last time the company checked in, shares rocketed higher on results that included a 36% surge in sales, an 18% increase in profit margins and a 14% uptick for same-store growth. Move your sell stop up to $49 and I’ll provide you with a full update after the earnings report.
Stock
Current Price
Comments
Sealy Corporation (NYSE: ZZ)
$16.10
Buy. Sell stop is $14.50.
Tim Horton’s (NYSE: THI)
$28.05
Buy. Sell stop is $25.
Chipotle (NYSE: CMG)
$54.87
Buy. Move sell stop up to $49.
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