24984418 literature-review-on-stress-management-by-martin-kwasi-abiemo
Yale School of Management Kwasi Kyei, Chris Martin ... · BIOMASS PELLET INDUSTRY OVERVIEW Biomass...
Transcript of Yale School of Management Kwasi Kyei, Chris Martin ... · BIOMASS PELLET INDUSTRY OVERVIEW Biomass...
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YaleSchoolofManagement
KwasiKyei,ChrisMartin&VictorZhu
EnvivaPartners,LP(EVA)StrongMidstreamPlayerwithFavorableDemand/SupplyDynamicsandPublicPolicyDriversRecommendation:Buy UnitsOutstanding:24.8MPrice(asof10/27/2016):$27.65 Float(%): 87%52-weekrange:$13.4-$28.6 EPS,Adj+: 1.98MarketCapitalization:685M ShortInterest(%) 1.1%EnterpriseValue:874M Industry:Forestry&WoodProducts,MLPs
EXECUTIVESUMMARYTheworld’sdemandforrenewableenergyisrapidlyaccelerating.Woodpelletsarerecognizedasacleanrenewableenergysourceforindustrialpowergenerationandhaveemergedasoneofthemostcostefficientandpracticalwaystoadoptrenewableenergyatscaleandreducegreenhousegas(GHG)emissions.Envivaisahiddengemthatoffersthebestexposuretothegrowingdemandforrenewableenergy,andwoodpelletsinparticular.Thecompanyhastremendousgrowthprospectsandisrunbyawell-seasonedmanagementteamwithatrackrecordofbringingaccretiveacquisitionsthatbringpositivecashflowstothefirm.Asthedominantsupplierintheglobalwoodpelletmarket,Envivahasaclearproductioncostadvantageversusitscompetitorsandisbestpositionedtoseizeextensiveopportunitiesofferedininternationalmarkets.Withadividendyieldof7-8%,Envivaisundervaluedandshouldofferanupsideof37%fromitscurrentprice.
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RecentStockPerformancevsPeersandS&P
Enviva WoodProducers Non-TraditionalAssetClassMLPs TraditionalAssetClassMLPs S&P500
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Theendof2016isaparticularlyopportunistictimetoinvestinEnviva:1. Theglobaldemandforwoodpelletsisforecastedtorapidlyincreaseinthenear-term,in
particularduetoincreaseddemandfromEuropeannationsthatarewellbehindscheduleinreachingbinding2020renewableenergytargets.Suppliesarelimited,soamassiveglobalshortageispredicted.
2. TheUNParisAgreementonclimatechangewillbecomeinternationalbindinglaw(“enterintoforce”)onNovember4,2016requiringits195signatories(includingtheUnitedStatesandChina)tocutdownonGHGs,creatingashort-termcatalystonthedemandforEnviva’sproductandstrengtheningthelegislationitdependson.
3. Envivaoffersthebestbiomassexposuretocapturetherisingrenewableenergydemandduetoitscurrentdominantposition,itslowcoststructurerelativetoitscompetitors,pipelineofprojectstoincreaseitscapacityanditsworldclassmanagementteam.
BIOMASSPELLETINDUSTRYOVERVIEWBiomasspelletsarearenewablefuelthathavetraditionallybeenusedforheating,butareincreasinglybeingusedasanalternativeenergysourceforpowergeneration.Woodpelletsarethemostcommontypeofbiomasspellets.1TheUnitedStatesistheleadingproducerandexporterofwoodpelletswithproductionconcentratedinthesoutheast,oneoftheworld’sstrongesttimber-producingregions.AlargeportionofthisproductionisexportedtoEuropeforpowergeneration,astheEuropeanUnionisthelargestconsumerofwoodpelletsanditsforestresourcesaremuchmorelimitedthanthoseoftheUS.In2014Europeancountriesaccountedfor80.9%ofglobalpelletconsumption,with60%ofEuropeanimportscomingfromtheUS.2Theglobalmarketforbiomasspelletswasvaluedatjustunder$7billionin2014.3Theindustryisgrowingrapidlyasglobaldemandforrenewableenergysourceslikewoodpelletsincreases.Demandforutility-gradewoodpelletsisprojectedtogrowfromabout11millionmetrictonsperannum(MTPA)in2014to36millionMTPAin2020,reflectinga21%compoundannualgrowthrate.EuropeanUnionpoliciesmandatingGHGsreductionsandincreaseduseofrenewableenergysourcesarelargelyresponsibleforincreaseddemandandindustrygrowth,withmanyEuropeanpowercompaniespursuinglargewoodpelletpowergenerationprojects.FurtherbutlesssignificantdemandcomesfromAsiaandtheUS.Globalwoodpelletsupplyisprojectedtoincreaseto17millionMTPAby2020,
1http://www.pelletheat.org/what-are-pellets- 2RBCCapitalMarkets,EnvivaPartners,LPEquityResearchReport,Dec.6,20153http://www.prnewswire.com/news-releases/global-biomass-pellet-market-size-share-development-growth-and-demand-forecast-to-2020--industry-insights-by-application-heat-sector-power-sector-300217373.html
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fallingfarshortoftheprojected2020demand,resultinginapotentialshortageof19MTPA(Exhibit1).2 ENVIVAPARTNERS,LPBUSINESSOVERVIEWEnvivaPartners,LP(NYSE:EVA)istheworld’slargestproducerofwoodpellets,acost-effectivealternativetocoalofferingelectricutilitiesapracticalcleanenergysolution.EnvivaownsandoperateswoodpelletproductionandtransportationinfrastructurestrategicallylocatedinthesoutheasternUnitedStates.Sincefoundedin2014,ithasbecometheworld’slargestsupplierofutility-gradewoodpelletsforpowergenerators.Woodpelletsareaparticularlyattractiverenewableenergysourceforelectricutilities,offeringcarbondioxideemissionreductionsofapproximately80%withnopowergenerationinterruptionnecessary.4EnvivaPartners,LPisapublicly-tradedmasterlimitedpartnershipthatownsandoperatessixwoodpelletproductionplantsinNorthCarolina,Virginia,Mississippi,andFloridawithanannualproductioncapacityofabout2.3millionmetrictons.Envivaexportswoodpelletsthroughadeep-watermarineterminalitownsandoperatesatthePortofChesapeake,Virginia,aswellasthroughlong-termcontractswithportsinAlabamaandFlorida.Envivadevelopsandbuildsitswoodpelletproductionandtransportationinfrastructurethroughaseparateentity,EnvivaDevelopmentHoldings,LLCawholly-owned,privatecompany.AsimplifieddescriptionofEnviva’sbusinessmodelisasfollows:thecompanyprocureswoodfiberintheregionssurroundingitsproductionplants,convertsthisfiberintopellets(aneasilytransportable,compactformofwoodfiberidealforcombustion),transportsthepelletstoexportterminalsviatruck,train,andbarge,andultimatelyshipsthepelletstoEuropeviaoceanvessels.Exhibit2belowshowsEnviva’smidstreamoperationwithinthelargerrenewablewoodfibersupplychain,andcomparesthissupplychaintothatofconventionalfossilfuels.
4http://www.envivabiomass.com/about/
Exhibit2
Source:Enviva Partners,LP,2016Enviva’s midstreamoperation
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INVESTMENTTHESIS1.Massivesupplygap:AsexplainedintheIndustryOverview(pg.2),globaldemandforwoodpelletsisprojectedtoincreaseby21%CAGRbetween2014and2020,resultingina2020demandof36MTPA.Thisgrowthindemandwillnotbematchedbyasimilargrowthinsupply,whichisprojectedat17MTPAin2020.Theresultwillbeashortageof19MTPAinglobalwoodpelletmarkets.UsingEnviva’s2015revenueof$192.7permetricton,thisgaprepresentsapproximately$3.5billion.Asthemarketleader,Envivaisprimedtocapitalizeonthisopportunity.2.Woodpelletsofferapracticalsolutiontorenewableenergytargets:Manyindustrialeconomiesfacethechallengeofexpandingtheirrenewableenergygenerationcapacitytomeetenvironmentaltargets.Woodpelletsrepresentaparticularlyattractiveoptiontomeetsuchtargets.Whilemostrenewableenergysourcesaredifficultandexpensivetoimplementatscale,coalpowerplantscanquicklyandcost-effectivelybeconvertedtorunonbiofuels.Whenwoodpelletsareusedasareplacementforcoals,carbondioxideemissionscanbereducedbyabout80%.Thismethodofgeneratingrenewableenergycapacitybasedonwoodpelletsofferssignificantadvantagesrelativetootherrenewableenergysources:
• Cost:Installationcostsaremultipletimeslowerthanthoseofotheralternativeenergysourcessuchassolarandwind(Exhibit3).Furthermore,theunitcostofmegawatt-hourisalsosignificantlylowerthanthatofotherrenewableenergysources.2
• Gridcompatibility:Existingpowerplantscanbeconvertedtorunonwoodpellets,sonoalterationstotheelectricgridarenecessary.
• Baseloaddemand:Woodpellet-basedpoweriscapableofprovidingreliableandconstantelectricitytomeetbaseloadelectricitydemand(unlikewindandsolar,whichvarywiththeweather).
• Dispatchable:Powergeneratedfromwood-pelletscaneasilybeturnedonoroff.Thus,woodpelletsrepresentacheap,fastandpracticalwayformajorpowergeneratorstomakesignificantprogresstowardsmeetingrenewableenergytargetsatscale.Envivaissosuccessfulbecauseitisthegloballeaderintheprovisionofthispracticalsolutionforthegrowingchallengeofincreasedadoptionofrenewableenergy.3.EuropeanUnionpoliciesdrivemarketgrowth:Undercurrentpoliciesknowncollectivelyasthe“20-20-20”plan,EuropeanUnionnationsarerequiredto:1)reduceGHGsby20%relative
Exhibit3
Source:Barclays,2015
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to1990GHGemissionslevels;and2)reachtargetsthatensurethat20%ofallenergysuppliedtoconsumersintheEUisderivedfromrenewablesources.Bothofthesetargetsmustbeachievedbytheyear2020.MostEUmembersaresignificantlybehindinmakingprogresstowardsthesebinding2020targets.Overall,renewableenergymadeuponly15%oftheEU’stotalenergyconsumptionin2013,agapthatissometimesevenmorepronouncedatthecountrylevel.Forexample,theUKhasonlyaccomplished28%ofitsrequiredrenewableenergymix.2Asaresult,Europeandemandforcost-effectiverenewableenergysolutionsthatcanbeimplementedatscaleisincreasingsubstantially.4.Dominantplayerintheworldmarket:Astheworld’slargestproducerandsupplierofutility-gradewoodpellets(Exhibit4),Envivaispoisedtocapitalizeonthetrendsinthegrowingwoodpelletmarket.Historically,thebiomasspelletindustryhasneverhadaverystrongorconsolidatedsupplybase.Envivasetsitselfapartwithitsenterpriseindustrial-scaleapproachincluding:anexpertteamofforesters,engineers,andlogisticians;multipleplantsallowingforoptimizedproduction;yearsofexperienceandasuccessful‘buildandcopy’framework;aconservativebalancesheet;andmulti-billiondollarinvestorsexperiencedinenergyandforestproducts.Responsiblefortheproductionof45%ofwoodpelletsintheUSand15%globally,2Envivaisclearlythedominantplayerintheglobalsupplyofwoodpelletsandreadytotakeadvantageoftheforecastedmismatchbetweensupplyanddemandincomingyears.
5.Highlyreliablecashflowsoverthelong-term:EnvivaexportsthemajorityofitswoodpelletstocreditworthyEuropeanelectricutilitiesandlarge-scalepowergenerators.Itssalesstrategyistocontractallofitsproductioncapacityunderlongtermagreements.Itdoessothroughlong-term,take-or-payagreementswithanaverageremainingtermof9.6years.5Enviva’stake-or-paycontractsareusuallydenominatedinUSDollarsandincludeclausestoprotectEnvivaagainstchangesinlawthatcouldaffectthecost-competitivenessofwoodpellets.Suchastrategyprovidesforstabilityanddependabilityoffuturerevenues,significantlyreducingtheriskassociatedwithEnviva’sbusinessmodel.6.Strategiclocationofassets:AllofEnviva’sassetsarestrategicallylocatedinthesoutheasternUnitedStates,oneoftheworld’sstrongesttimber-producingregionscharacterizedbyaclimateandsoilregimeidealforplantationforestry.ThesoutheasternUS
5http://www.envivapartners.com/sites/envivabiomass.investorhq.businesswire.com/files/doc_library/file/Enviva_Investor_Presentation_Aug_
_2016.pdf
Exhibit4
Source:Enviva Partners,LP,2016
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timbermarketischaracterizedbywoodchippricesthataremuchlowerthanthoseofmarketswithhighdemandforEnviva’swoodpellets(Exhibit5).TheareassurroundingEnviva’splantscontainabundantforestresourcesandthousandsofwillingsellersoflow-valuewoodfiberthatgenerallycomesfromwastewood.Theresultisalow,stablepriceofdeliveredwoodfiber.
Exhibit5
Source:EnvivaPartners,LP,2016
7.World-classmanagementteam:Enviva’smanagementteamischaracterizedbysignificantexperienceintheforestproductsindustryaswellasexperiencemanaginglarge-scalepubliccompanies.Seniormanagementhasdemonstratedsuccessinacquiring,construction,operating,andcontractingEnviva’sassets.TheteambringsavarietyofexperiencewithindustryleadersincludingBP,Exxon,theEnvironmentalProtectionAgency,GM,andPlumCreek,amongothers.WHYNOW?TheUnitedNationsParisAgreement:TheUNParisAgreementonclimatechangewasreachedatthe21stConferenceofthePartiestotheUnitedNationsFrameworkConventiononClimateChange(UNFCCC)inDecemberof2015.However,inorderto‘enterintoforce’andbecomebinding,theagreementhadtobeindividuallyratifiedbyatleast55PartiestotheConventionrepresentingatleastanestimated55%ofglobalemissions.ThiswasaccomplishedmuchmorequicklythanexpectedonOctober5,2016.Asaresult,theagreementwillnowbecomebindinginternationallawonNovember4,2016,whenall197PartiestotheUNFCCC(includingboththeUSandChina)willberequiredtostrengtheneffortstoreducegreenhousegasemissions.6Furthermore,the22ndConferenceofthePartiestotheUNFCCCwillbeginjustafewdayslateronNovember7,whenUNFCCCPartieswilldiscussconcreteimplementationstrategiesforthecommitmentsmadetheyearprior.Furthermore,theConferenceissuretoputaspotlighton
6http://unfccc.int/paris_agreement/items/9485.php
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theagreement’snewbindingstatus(whichhasnotyetseensignificantnewscoverage).Ultimately,inearlyNovemberweexpecttosee:
• Countriesmakemoresignificantcommitmentsspecifyinghowtheywillachievetheirrenewableenergytargets;and
• Investorsandthebusinesscommunitybecomeawareoftheagreement’sbrandnewstatusasbindinginternationallaw.
Asaresult,weexpecttoseealargeincreaseindemandforEnviva’swoodpelletsbeginninginearly-tomid-November.Materializationofexistingandfuturecontracts:Envivaisgrowingintermsofproductioncapacityandtransportationefficiencywiththesupportofitscommittedinvestors.Inearly2016,ajointventurebetweenEnvivaHoldings,LLCandJohnHancockLifeInsuranceCompany(“theHancockJV”),completedtheconstructionoftheEnvivaPelletsSampsonproductionplantinNorthCarolina,withanannualproductioncapacityofover500,000metrictons.TheHancockJVhasofferedtoselltheplant,alongwithoff-takecontractsrepresentingtheplant’sfullproductioncapacityforitsfirst10yearsofoperation,toEnvivaPartners,LP.Itisexpectedthattheacquisitionwillbeclosedby1/3/2017,andtheplantwillprovideapproximately$20millionincrementaladjustedEBITDAannually.TheHancockJVisalsofinalizingtheconstructionoftheEnvivaPortofWilmingtoninNorthCarolina(projectedforOctober2016),whichwillprovideabout$7millioninitialincrementaladjustedEBITDA.7COMPETITORANALYSISThebarriertoentryintheindustrialwoodpelletindustryisveryhigh.Theindustryhashistoricallybeencharacterizedbyfragmentedworldwidesupplybase,withalimitednumberofsuppliersworldwide.Envivadistinguishesitselffromitscompetitionwithanindustrial,enterprise-scaleapproach.DuetotherisingregulationinEurope,thereisahugedemandforitsproducts.Approximately58%oftheworld'sutility-gradewoodpelletproductioncapacityislocatedinNorthAmerica8.EVA’scompetitorsinNorthAmericaincludeFramRenewableFuels(whichisownedbyanindividualinvestor),GeorgiaBiomass(aplantownedbyRWEInnogy),RentechInc.,PacificBioEnergy,PinnacleRenewableEnergyInc.,DraxBiomassInc.(affiliatesofGermanPelletsGmbH),TheNavigatorCompany,S.A.,ZilkhaBiomassLLCandTheWesterveltCompany.RISKSOutcomeofthe2016USPresidentialelection:IfRepublicanpresidentialcandidateDonaldTrumpwinstheelection,hemayattempttoannultheUS’ssigningoftheUNParisAgreement.ThiscouldadverselyimpactthefuturegrowthofcleanenergyproviderssuchasEnviva.
7http://www.businesswire.com/news/home/20161017006493/en/Enviva-Partners-LP-Receives-Offer-Acquire-Sampson 8EVA201510Kfiling
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Highconcentrationofrevenue:EnvivaderivessubstantiallyalloftheirrevenuesfromcustomersinNorthernEurope.Mostnotably,DraxGDFSuez,andE.ONaccountforasignificantportionofEnviva’srevenue.IfEnvivafailstodiversifyitscustomerbase,itsfutureresultsofoperations,businessandabilitytopaycashdistributionscanbeadverselyimpacted.Regulatoryrisks:Changesingovernmentpolicies,incentivesandtaxesimplementedtosupportlow-carbonandrenewableenergycouldaffectthecost-competitivenessofwoodpellets.Government’sregulatoryinitiativesonforestryproductsandpotentialforlitigationmayincreasecostsandofferadditionaloperatingrestrictionsanddelaysforEnviva’ssuppliersandcustomers.Thiswouldresultinadeclineinthedemandfortheirproducts.Transportationinstability:Enviva’sbusinesscouldsufferafailureoftheshiploadingequipmentatthePortofChesapeakeorPortPanamaCityorbeadverselyimpactedbytheclosureofitsport.Majorfluctuationsintransportationcostsandtheavailabilityofshipping,railortrucktransportationcanimpairthecompany’sabilitytodeliveritsproductstotheirendcustomers,whichultimatelyaffectthetoplinerevenue.Contractingrisk:FailuretorevieworrenewEnviva’scontractswithfavorabletermscanimpactthecompany’sabilitytosustainitscashdistributiongivenasizeableportionofitsrevenueistiedtoitsexistingcontracts.Acquisitionrisk:Enviva’sfuturegrowthisdependentonitsabilitytoexecute3rdpartyacquisitions.Ifthecompanyisunabletoexecutesuchtransactions,itsabilitytogrowatitscurrentratemaybehindered.Fundingrisk:Thefundingofequityanddebtmaynotbeinfavorabletermsoverthenextyearastheinterestrateisexpectedtorise.
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VALUATIONGiventhehighdividendpayment/yieldnatureofMLPbusinesses,weuseDividendDiscountModelandGordonGrowthModeltovalueEVA.Weutilizeablendedrateofthetwovaluationsandthisleadstoa$37.00perunit(a37%premiumoverEVA’spriceof$27.65).Ourvaluationuses2017Easthebaseyear.
UnitsoutstandingforvaluationproformaforEVA’s$100MequityissuanceFINANCIALMODEL
Gordongrowthmodel
2017Edistributionperunit $2.07
Discountrate 8.7%
LongtermDistributiongrowth 3.0%
Valueofunit $36.02
Currentpriceofunit $27.65
Premiumtocurrent 30.3%
Totalunits 32.517
ImpliedEquityValue $1,171
ImpliedEnterpriseValue $1,561
Dividenddiscountmodel
Presentvalueofprojecteddistributions 15.86
Presentvalue-unitvalueatterminalyear 23.89
Valueperunit $39.75
Currentpriceofunit $27.65
Premiumtocurrent 43.8%
Totalunits 32.517
ImpliedEquityValue $1,293
ImpliedEnterpriseValue $1,683
Valueperunit-Gordon $36.02Valueperunit-DDM $39.75Blendedpriceperunit $37.89Premiumtocurrent 37.0%
2016E 2017E 2018E 2019E 2020E
IndustrialwoodpelletDemand 14.538 17.155 19.900 22.885 26.318
EnvivaMetrictons(inmillions) 2.472 2.916 3.284 3.719 4.211
EnvivaRevenuepermetricton $193.16 $192.91 $191.91 $190.00 $190.00
TotalRevenues $477 $563 $630 $707 $800
Costofgoodssold 399.4 473.8 512.5 583.6 657.0
GrossProfit 78.0 88.9 117.7 123.0 143.1
GrossMargin 16.3% 15.8% 18.7% 17.4% 17.9%
SG&AD&A 0.0 0.1 0.1 0.1 0.1
Generalandadministrative 18.5 22.5 25.2 28.3 32.0
Operatingexpenses 18.6 22.6 25.3 28.3 32.1
Operatingincome 59.5 66.3 92.4 94.6 111.0
Operatingmargin 12.5% 11.8% 14.7% 13.4% 13.9%
Totalotherexpenses 13.5 18.5 21.4 31.5 31.5
Netincome $46.0 $47.8 $71.0 $63.1 $79.5
NonGAAPMeasures:
AdjustedEBITDA $93.6 $105.3 $134.9 $140.8 $161.7
DistributableCashFlow $77.1 $81.3 $107.3 $102.4 $122.3
CashAvailableforDistributiontoLP $75.7 $77.4 $98.4 $94.2 $112.5
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ComparableCompanyAnalysisSinceEVA’spurecompetitorsareprivatelyheld,weutilizethreecompsets:woodproducers,non-traditionalMLPs,andtraditionalMLPs.
Current 2017E 2017EPrice Yield EV/EBITDA P/CF
EnvivaPartners $27.65 7.5% 7.8 7.7
WoodProducersTrexCompany $52.76 -% 11.2 14.8UniversalForestProductsInc. $86.41 1.04% 7.1 12.6Average 0.52% 9.2 13.7Median 0.52% 9.2 13.7
Non-TraditionalAssetClassMLPsWestlakeChemicalPartners $21.15 6.26% 3.7 1.4HI-CrushPartners $17.50 -% 26.9 25.7SunCokeEnergyPartnersLP $16.75 14.13% 7.1 3.9ForesightEnergyLP $6.09 11.25% 8.7 3.8TransoceanPartnersLLC $12.05 12.03% 6.9 2.7Average 8.73% 10.7 7.5Median 11.25% 7.1 3.8
TraditionalAssetClassMLPsConeMidstreamPartners $21.09 4.99% 13.4 8.9DelekLogiticsPartners $25.25 10.36% 8.8 7.8PBFLogisticsLP $21.74 8.90% 7.7 8.3SunocoLP $28.41 11.19% 9.3 4.2GasLogPartnersLP $21.25 8.99% 8.6 5.0Average 8.89% 9.5 6.8Median 8.99% 8.8 7.8
PeerComparison
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AdditionalPerformanceStockPicksFacebook,Inc.(NASDAQ:“FB”)
Advertisingtechnologyrevenueisexpectedtogrowby300%+by2020-upfrom$30Bin2015to$100Bby2020.Facebookremainsaleadingadvertisingtechplayerwith13-15%marketshare(secondandgrowing).FBisexpectedtogenerateROIC’sof25-30%overthenextfiveyears.
Basedonourpreliminaryfinancialmodel,wehaveplaceda$140persharepricetargetonFB,basedsolelyonitsadvertisingfranchise.Webelievethatanalystscontinuetoplacelesssignificanceonthefirm’sabilitytomonetizeitslongertermprojectse.g.virtualreality/Oculus,Enterprisepotential.
Near-termcatalystsinclude:1)Q4tendstobestrongquartersforadvertisersasmarketingofficersandcompaniespushtohitfullyearnumbers,2)Instagram,FacebookVideos,andFacebookDynamicAdshavebeenstrongadplatformsforclientsandexpectedtocontinuetoshowsolidmomentum,3)Strongex-USrevenueacceleration:AsiaPacifichasremainstrongandEuropebouncedbackandisexpectedtoasolidcontributortogrowth,and4)leadingmobileanddesktopchannelsallowFBtocapturemultipleadvertisingrevenuestreams.
Long-termdriversinclude:1)GrowthofmultipleproductsincludingWhatsApp,Messenger,andOffers/Local,2)virtualrealityremainsadisruptiveplatformformultipleindustries.
IncyteCorporation(NASDAQ:“INCY”)
INCYisabiotechcompanyfocusedondrugdevelopmentinhematology/oncologyandinflammation.INCYremainsoneofthedifferentiatedbiotechassetsofscalewithsolidoncologyproductandlatestagepipeline.INCYhasonemarketedJAK1/2inhibitorJakafi.JakafiwasapprovedbytheFDAformyelofibrosis(inNovember2011)andforpolycythemiavera(inDecember2014).Myelofibrosisandpolycythemiaveraarebothrarebloodcancers.
INCYholdspatentsthatcoverthecompositionofmatteranduseofJakafithroughlate2026,whichpatentshavebeengrantedextensionsthroughlate2027.TheJakafifranchise,alone,isexpectedtohavea$3.5-4Bpeaksales.INCYhasacollaborationandlicenseagreementwithNovartisforJakafiex-U.S.
Near-termcatalystsinclude:1)pipelineincludes-baricitinib(withEliLilly)isunderregulatoryreview(USandEurope)forrheumatoidarthritisandcouldbeapprovedin2017,2)oncologyandrarediseaseshavebeenhottakeoverareasforlargepharma,3)significantuncertainty
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overthelastfewmonthsasbiotechsbecameatargetofthepoliticalrhetoricexpectedtocalmpost-election.
Long-termdrivers:INCYhasanemergingrichearlystageoncology/inflammationpipeline,withmultiplephaseIIstudiesongoingandcompleted.
BioMarinPharmaceuticals(NASDAQ:“BMRN”)
BioMarinisabiopharmacompanyfocusedonthedevelopmentandcommercializationofdrugsforthetreatmentofseriousrareandultrararediseases.BMRNhasahighlydiversifiedportfoliothathasthepotentialtogeneratesuperiorgrowthandperformance.
BMRNhas5marketedproducts.BMRN’smostrecentlyapproveddrugisVimizim;itreceivedmarketingapprovalintheU.S.andtheEUinFebruary2014andApril2014,respectively.BMRNisexpectedtohavetwonewproductsbytheendof2017–BrineurainCLN2(aformofBattendisease)shouldreceiveFDAapprovalbyJanuary2017,andPegvaliaseinPhenylketonuriainlate2016/early2017.
Near-termcatalystsinclude:1)InitialreadofVimizimsales,2)Pipeline.Pipeline.Pipeline.PotentialapprovalsofBrineuraandPegvaliase,3)rarediseasesandoncologyhavebeenhottakeoverareasforlargepharma,3)significantuncertaintyoverthelastfewmonthsasbiotechsbecameatargetofthepoliticalrhetoricexpectedtocalmpost-election
Long-termdrivers:BMRN’sVosoritide(forachondroplasia)isalsoapromisingpipelineopportunity,andisexpectedtoinitiatePhase3trialslater2016.
EnergyRecovery,Inc(NASDAQ:ERII)
ERIIisaleadingmanufacturerofenergyrecoverydevicesusedinthewaterdesalinationindustry.ItsclientsincludelargescalewaterdesalinationandtreatmentplantssuchasAccinoaWater.Itoffersthebestexposureintothegrowingglobaldemandforfreshwater,whichdoublesevery20yearsandoffersalargeupsideinoil&gaswithlimiteddownsiderisksofatraditionaloilexplorationcompany.ERII’shighgrossmarginover65%andlowCapExshouldleadtoanexceptionalreturnonequity.ERIIisundervaluedonahistoricalandrelativebasisanddeservestobetradedatEV/EBITDAmultipleclosertoitspeers.Thiswillleadtoa35%upsideforthestockoverthe1-yearhorizon.
Itsinvestmentthesisissimple.Drinkingwaterisscarce;lessthan1%percentofEarth’swaterisdrinkable.ERIIhasalltheattributesofalong-termwinnerinthewaterdesalinationmarket:anearly-moveradvantageandanindustry-standarddevicewith60%+grossmargin.
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Inadditiontoitswaterdesalinationbusiness,therecentsuccessfulintroductionofitsgroundbreakingproduct“VorTeq”intheoil&gasindustryofferslargeupsidetothecompany.Onanindustrylevel,theStratisticsMRCpredictsthatglobalpressurepumpingmarketwillgrowataCAGRof~17%toreach$225billionby2022.Managementanticipatesitsoil&gasrevenuetooutpacewaterdesalinationrevenuebytheyear2019.
Neartermcatalystsinclude:SchlumbergerMilestonetests,Watershortageevents,Crosssellingbenefitsmaterialize,ShareBuyback,IPPatentsapproval.