NYU Students Cut Through the Earnings Noise
10/30/07 - 05:34 PM EDT
Stockpickr Staff
The small-cap fund buys into Switch & Data and Kendle. Shannon noted the purchase, on Sept. 19, of colocation and interconnect services provider Switch and Data Facilities Company (SDXC Quote - Cramer on SDXC - Stock Picks), at $16.85.
The managers really liked Switch and Data. According to Zach it was "almost a unanimous choice." Why? Shannon breaks it down: "We felt that the overcapacity left over from the dot-com era is over, and that in fact the reverse is occurring. Bandwidth supply is growing at 3% (while demand is growing at 20% due to demands such as YouTube videos, video gaming and video streaming. The industry has high fixed costs and high barriers to entry (high switching costs and capital expenditures). "The company trades at 12 times
our 2008 EBITDA estimate -- a reasonable metric compared to the industry, which trades at 14 times EBITDA (Source: Yahoo Finance). We used the enterprise value [divided by] EBITDA multiple because Switch and Data is not profitable . Switch and Data's multiple is better than its competitors, such as Equinix (EQIX Quote - Cramer on EQIX - Stock Picks), which trades at more than 18 times 2008 EBITDA (Source: Yahoo Finance). In addition, Switch and Data raised guidance on Aug. 13. Switch and Data has been public since Feb. 8, 2007. We have set a price target of $22.50 by next year."
Another recent purchase was Kendle International (KNDL Quote - Cramer on KNDL - Stock Picks) on Oct. 3 at $43.36.
According to Zach:
"Kendle is a contract research organization that helps pharmaceutical companies navigate through the maze of the regulatory approval process, not just the FDA but worldwide. In fact, the largest revenue growth area is outside the U.S. The U.S. accounts for about 80% of global R&D [research and development] spending, but this market is growing at only 5%. Meanwhile, European research spending is growing at 20% and growth in Latin America is as high as 40% depending on the country, according to the PhRMA 2007 Industry Outlook.
Kendle draws 45% of its revenues internationally, which is the second highest percentage among its peers. It also has the largest number of international offices. Using a discounted cash flow analysis, based on projected cash flows over the next five years and discounting terminal value based on a 4% perpetual growth rate , we set a price target of $50 by next year."
The MPSIF's small-cap fund is up 2.2%. Its benchmark, the Russell 2000 Small-Cap Index, is up 3.3%. Why the lag? Zach says the small-cap team "significantly" underperformed their benchmark in August.
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