Looming Tax Hikes Could Prompt Surge in Corporate Stock Buyback Plans

With new taxes, or at least the possibility of tax changes, looming in 2013, some investment experts are predicting a surge in company stock buyback plans, according to the New York Times (http://www.nytimes.com/2012/11/28/business/companies-are-expected-to-increase-buybacks.html). The Times cites a recent survey by the financial data firm Markit of 100 American companies. Half of them told Times reporter Nathaniel Popper that if tax rates on dividends increase, as has been suggested, they would consider using corporate funds to buy back their own stock.

Photo courtesy of buydearborn.com

Generally speaking, there are two ways a company can return money to investors, the story notes: dividends and buying back stock, also called a share repurchase. Stocks that are bought by a company are absorbed meaning the total number of outstanding shares is reduced, which increases the value of each share still on the market.

Most often, stock buybacks are accomplished in two ways, as outlined in a recent Investopedia article titled “A Breakdown of Stock Buybacks” (http://www.investopedia.com/articles/02/041702.asp#axzz2DY4Vf9xy):

Open market. In this case a company buys shares just like an individual investor, on the open market. That’s the path chosen by Poway, CA-based Digirad * (Nasdq: DRAD, http://www.digirad.com/), which has two business divisions: one manufacturers and sells medical diagnostic imaging systems including solid-state gamma cameras; the other, called Digirad Imaging Solutions, provides diagnostic imaging services to physicians at their offices. DRAD has a market cap of about $43 million and a 52-week trading range of $1.72-$2.44. DRAD closed Nov. 29 at $2.09, down 3 cents on the day. In Digirad’s case, the Board of Directors approved spending up to $4 million in its stock repurchase program.

Tender offer. In this case shareholders are presented an offer, called a tender offer, by a company to submit (or tender) a portion or all of their shares for a certain designated time period. Typically, the company will pay a price at a premium to the market price. That’s the path chosen by Mountain View, CA-based IRIDEX * Corporation (Nasdaq: IRIX, http://www.iridex.com/), which manufactures and sells laser-based medical systems and delivery devices for the ophthalmology market. IRIX has a market cap of $36 million, a 52-week trading range of $3.07-$4.50 and closed Nov. 29 at $4.00, up 1 cent on the day. In its tender offer, IRIX has offered to buy back 5.5 percent of their currently issued and outstanding shares (487,500 shares) at $4.10 until Dec. 7 (although that deadline could be extended).

The Times article outlines some of the criticism of buybacks, basically suggesting that they can lead to the misuse of corporate funds. One of the main complaints is that the money could be better used investing “in their businesses and staff.” But in recent months many large companies have announced stock buyback programs, including Chipotle, Starbucks, BeBe Stores, Proctor & Gamble and News Corporation.

* Denotes client of Allen & Caron Inc., publisher of this blog

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Chinese Wind Tower Companies Latest to Be Hit by U.S. Tariff

It was only a few weeks ago that the U.S. Department of Commerce announced plans to slap duties on Chinese solar panel manufacturers. On May 30, the Commerce Department followed suit by announcing plans to tax Chinese manufacturers of towers for wind turbines after determining that they receive unfair government subsidies, according to the New York Times (http://www.nytimes.com/2012/05/31/business/energy-environment/us-imposes-duties-on-chinese-wind-towers.html?partner=rss&emc=rss). The proposed duties range from 13.7 to 26 percent, according to the Times article.

While all the major news outlets covered the story, there are several reasons why the wind tower stocks didn’t really rally on the news. First, the entire market is in the midst of a serious slump: The month of May saw Nasdaq dip 7.2 percent, Dow drop 6.2 percent and the S&P 500 decline by 6.3 percent. Second, as noted by Forbes, most of the wind tower stocks aren’t “pure plays” (http://www.forbes.com/sites/tomkonrad/2012/05/31/us-imposes-tariff-on-chinese-wind-towers-why-wind-tower-stocks-are-down/).

We covered a few randomly chosen companies in the wind power space last October. Here’s a comparison of then and now, as of close of market June 1.

China-based China Ming Yang Wind Power Group Ltd. (NYSE: MY, http://www.mywind.com.cn/) makes, services and sells wind power turbines in China, which means they may be the focus of a tariff. Formerly China Wind Power Equipment Group Ltd., the company’s  market cap dipped from $334 million in October to $165 million currently. Daily trading volume dropped from about 170,000 shares a day to 145,000.  Its stock has gone from about $14 in late 2010 to $2.45 on Oct. 7 and closed at $1.35 June 1, down 10 cents on the day.

Ann Arbor, MI-based Kaydon (NYSE: KDN, http://www.kaydon.com/) makes parts such as custom bearings for windmills. In 2008 they built a manufacturing facility in Monterrey, Mexico devoted to servicing the wind energy industry. On Aug. 9 2011 KDN was trading for $32.48, dropped to $28.81 on Oct. 7 and closed June 1, 2012 at $21.79, down 52 cents on the day. It trades about 375,000 shares a day.

St. Louis-based Zoltec Companies (Nasdaq :ZOLT, http://www.zoltek.com/) was mentioned in an Investopedia article as another way to play the wind energy market (as was Kaydon and Ming Yang Wind Power Group). ZOLT makes carbon fibers used to reduce weight in turbine blades so they spin faster and recently won a $3.7 million grant from the US Department of Energy for carbine fiber research. If you go back to February 2011 its stock was trading at $16 but had dropped to $5.93 by Oct. 7. It closed at $7.95 on June 1 2012, down 40 cents on the day.

Another way to look at this market is through two ETFs that offer a group of wind energy companies to invest in. They include PowerShares Global Wind Energy (Nasdaq:PWND), which dropped from $7.09 last Oct. 7 to close at $5.10 on June 1, down 15 cents on the day (52-week range is $5.18-$10.38) and First Trust Global Wind Energy (NYSE: FAN) which closed Oct. 7 at $8.31 but had dropped to $5.89 (52-week range is $5.92-$11.18).

As Halliburton Goes, So Goes the Oilfield Sector

What’s good for Halliburton is good for the entire oilfield services sector. That’s the investor sentiment behind this week’s news that Halliburton’s fourth quarter earnings had more than doubled. In fact, the news about Halliburton, the second largest oilfield services company in the U.S., did more than boost oilfield services stocks, it lifted U.S. equities overall on January 24, according to the Financial Times. Alcoa, the world’s largest aluminum producer; Cliffs Natural Resources, the iron ore and coal mining company; and the S&P materials index, all ticked upwards following the Halliburton announcement.

That lift didn’t seem to last long. Smallcap stocks in the oilfield services sector generally dropped back down on January 25. But the Halliburton dose of optimism was no doubt welcome nonetheless. Here’s a short capsule look at a few randomly chosen smallcaps in the sector. We’ll check back on this sector in the coming months.

Texas-based Lufkin Industries (Nasdaq:LUFK, http://www.lufkin.com/), a company that sells, manufactures and repairs oil field pumping units, enjoyed an initial bump from the Halliburton news, but dropped nearly 1.5 percent to $60.62 the next day (Jan. 25). Only two years ag this was a $90 stock.

Midland, TX-based Basic Energy Services Inc. (NYSE:BAS, http://www.basicenergyservices.com/), which provides a range of oil and gas drilling and producing companies in the U.S., also ticked down to $16.32 January 25 after getting an initial bump from the Halliburton news. BAS, with a market cap of $673 million, is trading near its 52-week high of $17.84. Earlier this month, TheStreet.com Ratings stock model upgraded BAS from sell to hold.

Houston-based Cal Dive International (NYSE:DVR, http://www.caldive.com/), a contractor of offshore platform, diving and underwater pipelay services with a market cap of $567 million, got a small bump from the Halliburton news, but is languishing around $6 a share. Investopedia picked DVR in early January as one of six stocks (and one of the few small companies) that will profit from ongoing Gulf infrastructure upgrades. It’s currently trading near its 52-week high of $7.97 which it hit last April, just before the BP disaster.

Huntington, WV-based Energy Services of America (AMEX:ESA, http://www.energyservicesofamerica.com/) is a $50 million market cap company that provides contracting services including construction, replacement and repair of natural gas pipelines and construction of intrastate and interstate pipelines, among other services. The Halliburton news may have provided a short lift to their stock price, but nothing that lasted a day of trading. The stock has enjoyed a nice roll since early November, moving from $3.43 to about $4 a share but its average daily volume is only a little more than 16,000 shares a day.

The Woodlands, TX-based Newpark Resources (NYSE:NR, http://www.newpark.com/), a $508 million market cap company that provides fluids management, waste disposal and well site products and services to the oil and gas exploration and production industry.did get a small boost to $5.67 on the Halliburton news and managed to keep most of that through January 25. The stock trades strongly, averaging nearly 1.8 million shares a day, and was as high as $9.50 last September. For more insight into its year-end 2010 results and outlook for 2011, tune into the senior management on its results conference call February 18.