Year of deals pushes many local stocks higher
Jan 01, 2013 (The Kansas City Star - McClatchy-Tribune Information Services via COMTEX) --
Kansas City's local-stock landscape is shifting fast.
We've got a Japanese company buying control of Sprint Nextel Corp., which boosted the wireless phone company's shares to the top of the region's best stocks this year.
DST Systems Inc. shed its longtime chief executive in September and is selling off parts of itself.
Mediware Information Systems Inc. took its stock off the market with a $195 million buyout, and Topeka-based Collective Brands Inc. sold to private equity investors.
Layne Christensen Co. is leaving town after 88 years, and little Blue Valley Ban Corp has deregistered its shares with the Securities and Exchange Commission.
"Is anybody left " analyst Jon Braatz at Kansas City Capital Associates asked jokingly.
If 2012's wheeling and dealing made investors a bit dizzy, those fat extra dividend checks in the mail probably calmed their nausea.
At least a half dozen area companies -- Commerce Bancshares Inc., Epiq Systems Inc., Capitol Federal Financial Inc., Waddell & Reed Financial Inc., Kansas City Life Insurance Co. and NIC Inc. -- paid special year-end dividends to shareholders in anticipation of tax law changes coming today as part of the fiscal cliff.
The cliff -- a combination of federal tax increases and spending cuts -- includes an end to the 15 percent tax rate most investors saw on stock dividends last year. Dividends will face an investor's regular income tax rate this year.
And if Washington overcomes the cliff, the New Year offers investors plenty of action.
Much of it will involve Sprint.
The Overland Park-based company will spend most of the first half of this year completing the plans it unveiled late last year.
By mid-2013, Sprint expects to spend $2.2 billion to buy the 49 percent of its wireless network partner Clearwire Corp. it doesn't already own, sell 70 percent ownership of itself to Tokyo-based SoftBank Corp. for $20.1 billion, and shut down its aged Nextel Communications wireless network as part of its $5 billion to $6 billion Network Vision upgrade.
"In terms of strategic pieces, they should be in good shape," said Will Power, an analyst at Robert W. Baird & Co.
And investors can stick around for the ride. SoftBank will own 70 percent of Sprint's shares, but the other 30 percent will continue to trade publicly. SoftBank, which has no U.S. operations, has pledged to keep Sprint's headquarters in Overland Park.
Getting all that done won't be easy.
The Clearwire deal faces opposition from some of Clearwire's minority owners who contend the price tag is too small. They argue that Sprint's offer undervalues Clearwire's vast holdings of wireless spectrum, which are the licensed air waves that carry cell phone calls, text messages, video streams, app downloads and all the other traffic consumers increasingly consume.
Buying Clearwire may involve too much wireless spectrum, according to Dish Network, which Reuters reported, has asked federal regulators for time to interject its reservations about Sprint's twin deals with Clearwire and Softbank. Reuters said Dish questions allowing so much wireless spectrum to come under control of a non-U.S. company, namely SoftBank.
At the same time, Dish has won federal approval to use its own spectrum to start a wireless network and some have speculated that it may tap Sprint as part of that effort.
Assuming Sprint's plans work out, which means shareholders and regulators approve, the company's work won't be finished.
Power said No. 3 wireless carrier Sprint may need still more financing than the $8 billion Softbank has promised to help it compete against the top companies Verizon and AT&T. Sprint also would benefit from greater scale, he said.
One way to boost Sprint's customer count beyond its current 56.4 million would be a merger with T-Mobile USA. And the higher Sprint's shares climb, in additional to the 142.3 percent gain last year, the easier it will be to bid for the No. 4 wireless carrier and its 42.5 million subscribers.
No investor should be surprised that Cerner Corp. turned in another good year. It has been a perennial performer since the financial crisis wrecked markets in 2008.
The North Kansas City-based company is making hay out of the health care industry's push toward electronic record keeping and information technology in general. Its shares gained 26.6 percent in 2012, putting it among the top 10 in the region.
Analysts find it easy to praise Cerner's strategies and its ability to make them work.
If Cerner has a weak spot, it may turn out to be its current success. The better it does now, the harder it will be to improve on that success.
So analysts are watching Cerner's bookings of new business.
These harbingers of future revenue remain strong thanks in part to federal incentives for hospitals and other health care groups to embrace information technology like the kind Cerner sells. At some point, however, the incentives fade.
What then becomes of Cerner's bookings Perhaps they struggle to keep up as 2014 starts rolling in.
Such would be the bearish case for Cerner's stock, according to Jamie Stockton, an analyst at Wells Fargo Securities. Mind you, he's not making that case, just acknowledging it's out there.
Instead, Stockton is advising investors to know Cerner's situation well and be ready for a moment to buy in.
But such moments have been hard to come by. Cerner's third quarter results included stronger bookings than analysts expected and helped lift its stock sharply.
Cerner's most recent guidance offers no worries for investors.
"We are very encouraged that Cerner stated there is no reason bookings should not grow in 2013," analyst Richard Close at AvondalePartners LLC wrote after the third-quarter report.
Deals were behind most of the top performing local stocks in 2012.
Owners of Mediware, the blood-management software company, cashed in 2012 stock gains of more than 70 percent from the Lenexa-based company's sale in November to Thoma Bravo LLC, which has offices in Chicago and San Francisco.
Collective Brands, which operates the Payless Shoe chain, turned in a 51 percent gain in its shares with its October sale to Golden Gate Capital and Blum Capital Partners, both based in San Francisco.
DST's parts sale
Another top performer in 2012 agreed to a sale, but not of itself.
DST Systems has been selling some of its parts.
A group of investors have been after DST for years to turn some of its own stock holdings, real estate investments and other assets not related to its business into cash. Increasingly, DST is obliging them.
Asset sales likely generated $500 million in cash for DST last year, according to analyst Peter Heckmann at AvondalePartners LLC. And he sees more to come.
DST's largest stock holding is a $420 million stake in Boston-based State Street Corp., which is DST's joint venture partner in the mutual fund services business. DST holds other securities, as well as significant real estate properties it doesn't occupy and stakes in private equity funds.
Heckmann expects all of it to go though sales may spill into 2014.
Long time DST chief executive Tom McDonnell had been the investment mind behind the holdings, Heckmann said, and McDonnell retired as chief executive in September. He formally stepped off the company's board of directors on Monday, having recently taken on the chief executive post at the Ewing Marion Kauffman Foundation in Kansas City.
Proceeds from DST's assets sales are arming new CEO Steve Hooley with the resources to build up the company's core businesses in providing financial services to the mutual fund, health care and other industries.
There also should be some cash available for buying back DST's own shares in the market, though the stock advanced 33.1 percent in 2012.
Heckmann said institutional investors still haven't woken up to this company's value.
"It may take all year for DST management to prove to shareholders that they can refocus on the core business and start to generate more interesting revenue growth," Heckmann said. "I'm willing to be patient on that one."
Heckmann said he also will be watching this year to see whether the new management has a new philosophy about telling DST's story to investors. McDonnell had shunned investor trips.
Cash from ATM's
One asset DST shed recently was its ownership in Leawood-based Euronet Worldwide Inc. These were shares that DST had acquired when the smaller company formed privately in 1994.
Heckmann said he's expecting DST's year-end financial report, due in early February, to show a sizable net gain from the stock sale. It had generated $41 million in cash on shares that Heckmann figures DST paid maybe only $1 million for.
Euronet had bought back the shares itself and retired them. This should boost Euronet's earnings per share in 2013 by 6 cents per share, according to analyst Greg Smith at Stern Agee & Leach Inc.
Smith also has been impressed with the recovery in Euronet's international network of automatic teller machines, which he called "a shining star, leading the company's recovery."
Euronet also handles money transfers, for example from immigrant workers in the United States and elsewhere to their former homes.
Both businesses had suffered during the financial crisis and recession. The stronger dollar's value has hurt Euronet's U.S. earnings results recently, but analysts expect that trend to be friendlier this year.
Heckmann, who follows the company for Avondale, said Euronet's business had stabilized in 2010 and grew in 2011, but its stock hadn't kept up. That changed last year with a 27.7 percent gain.
"It wasn't until 2012 that investors really started to believe it," Heckmann said.
Less than legendary
There was one deal at Waddell & Reed Financial that could help its showing this year. The investment management company agreed to sell a Florida firm it owned called the Legend Group.
Legend Group sold mutual funds and worked with retirement plans for schools and other non-profits. Bought in 2000, it didn't live up to expectations. Dan Connealy, Waddell & Reed's chief financial officer, told investors in November that selling the Legend Group increased Waddell & Reed's profit margins.
Waddell & Reed's mutual fund business continued to attract investors' money. The number to watch this year is whether total assets under management top the $100 billion mark, from roughly $95 billion at the end of September.
Shareholders enjoyed the 40.6 percent gain in Waddell shares this year, though Monday's closing price of $34.82 was lower than where the stock had finished 2010.
The year past was kind to many local stocks' owners, as most topped the 7.3 percent increase in the Dow Jones industrial average.
Kansas City Southern, this town's home-grown railroad, barely missed the top 10 list. Its 22.8 percent gain came on top of its 2011 best showing of a 42 percent gain.
And the company will deserve investors' attention this year, said Braatz, who follows it for Kansas City Capital Associates.
Braatz is watching new auto production gearing up in Mexico, and with it sundry other industries that support that industry. The key to Kansas City Southern will be the shipments of automobiles that will hit its rails in the future.
"They'll be coming on stream in late 2013 and in 2014," Braatz said.
Braatz also reasons that a better grain harvest this year won't be hard to come by after the 2012 drought, and that means more rail traffic for Kansas City Southern.
H&R Block Inc., another big winner in 2011, added to its run in with a 13.7 percent gain for 2012. The tax preparer has settled into its niche business after selling its accounting services firm last in 2011. It would like to find a buyer for the H&R Block Bank now that the bank faces stricter rules from regulators.
NIC Inc. shares gained 22.8 percent this year after a strong 2011 showing. Heckmann said the company continues to build and operate new Internet sites for states. It counts 28 among its clients with the addition of Pennsylvania and Wisconsin last year and is awaiting word on bids for contracts with Washington and Connecticut.
"There's not a competitor that has even a single state," Heckmann said.
Perhaps the New Year will include new deals for local companies.
YRC Worldwide Inc. avoided the stock price free falls that came with its restructurings of the two prior years, but its stock still fell by 32.3 percent.
Even that showing took a lot of work from new management, analyst David Ross at Stifel Nicolaus & Co. Inc. wrote after the trucking company's most recent earnings report.
YRC's first quarterly profit in nearly two years owed much to the strength of its regional trucking businesses -- Holland, Reddaway and New Penn. Its national carrier, YRC Freight, took the painful step of shedding some business that made no economic sense for the carrier.
Still tougher tasks lie ahead, according to Ross.
The tractors and trailers in the company's fleet are long overdue for upgrades and there's a $5 billion pension bill looming in the company's future, Ross wrote. "And we do not know where the money will come from to pay for new equipment and pay its retirees."
One question analysts asked management is whether YRC Worldwide might spin off its regional trucking businesses into a separate company. Chief executive James Welch said that wasn't his goal.
To reach Mark Davis, call 816-234-4372 or send email to firstname.lastname@example.org.
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