Today's best stock ideas (October 5)

Argus Research analyst Marie Ferguson reaffirms a BUY rating on Exelon Corp. (NYSE:EXC) citing positive evolution after it transformed into a pure-play transmission utility post the spinoff of its competitive energy business, Constellation Energy (CEG). This evolution is expected to lower earnings volatility, make it benefit from favorable rate case decisions, and allow focus on hydro power. Despite some unfavorable factors such as lower 2Q23 operating EPS of $0.41 from $0.44 a year earlier and a $46 million civil penalty to settle SEC fraud charges against its ComEd subsidiary, Ferguson is optimistic due to long-term earnings growth projections of 6%-8% from its utilities. The expectation is based on capital investments improving reliability, providing cleaner energy, and increasing the rate base by 8%. Moreover, the current share price is seen as a buying opportunity for income-oriented investors. Despite the recent downside, the shares have outperformed the Utility Sector index XLU over the last quarter and year. The investment thesis considers several factors including favorable rate case decisions, cleaner transmission mix, focused capital investments, expected operating earnings growth, and value-offering share prices following a recent dip. The target price is reiterated at $50.

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The author advocates for Westlake Chemical Partners (WLKP) due to its unique position in the chemical industry, stable earnings via an ethylene sales agreement with parent company Westlake Chemical Company (WLK), 8.8% dividend, and potential asset drop-down opportunities amidst possible decreasing interest rates. The undervaluation of WLKP, ascribed to lack of publicity and institutional investor disengagement, alongside a consistent high dividend from the sales agreement, positions it akin to preferred stock of certain MLPs. Asset drop-downs are seen as favorable especially if corporate tax rises, making WLKP’s tax structure more attractive. Interest rate reductions could uplift fixed income-like equity valuations and lower WLKP’s interest expenses. Financial analysis reveals a strong balance sheet and stable long-term cash flows with a projection of rising MLP distributable cash flow. The partnership with WLK offers fixed input costs, preferential taxation, and asset monetization benefits. Analysis suggests a 50% upside to the current share price, projecting a $33.10 intrinsic value per share. Risks include third-party margin compression and potential unattractive future drop-downs, yet management's incentives are seen as aligned with investors. WLKP is perceived as an attractive income play with potential for modest distribution growth, hinging on several outlined scenarios and assumptions.

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In this in-depth analysis of Alibaba, the author presents a strong bullish argument, despite acknowledging risks. Alibaba, a diversified Chinese tech company with a foothold in various sectors from e-commerce, digital media, and cloud computing is discussed. The author's bullish stance is predicated on two main points. Firstly, the easing of the Chinese government's tech sector crackdown, which initially shed a trillion dollars in value from the country's major tech companies. The author argues that with the government softening its stance and calling on tech companies to champion economical support, this presents an opportunity. Secondly, the author points to Alibaba's restructuring into six business units as a way to unlock shareholder value, allowing each unit to be individually valued without penalizing the entire company. Alibaba has also committed to comply with US regulations and the Chinese e-commerce market is projected to grow to $3.3 trillion by 2025. Despite the growth of rivals like JD and Pinduoduo, Alibaba still holds a significant market share.

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Despite multiple crises over the past decade, Rolls-Royce (RR) has made a significant turnaround, with its stock up 260% within the last 12 months. The company's business model centered on long-term service contracts for their aircraft engines faced severe challenges during the pandemic, as the severe reduction in flights led to huge losses for the company. However, under new CEO Tufan Erginbilgic, Rolls-Royce managed to mitigate the impact by better cost management, ushering in 438% growth in underlying operating profits on a YoY basis in the first half of 2023. Analysts believe that RR is well-positioned for future growth due to a trifecta of factors: streamlined operating costs, increased income from service contracts, and the return of idle planes to operation. The renewed focus on servicing existing contracts over selling new engines at a loss is expected to bring in immediate servicing income. UBS predicts that Rolls-Royce could achieve £2 billion of Free Cash Flow by as soon as 2024 and £2.8 billion by 2026. Despite execution risks and macro uncertainties, the projection for the fair value of Rolls-Royce's stock is £6, a significant rise from the current trading price of GBP 2.21. The company's shift in focus, coupled with promising market dynamics, makes Rolls-Royce an interesting investment proposition moving forward.

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The author conveys a bearish stance on Rollins Inc. (NYSE: ROL), voicing concerns over the accuracy of its financial statements and its competitive edge in a rapidly evolving pest control industry. Their skepticism stems from Rollins’ recent SEC settlement over “improper earnings management,” auditor switch, and a $350 million leveraged acquisition of Fox Pest Control which they suspect is a cover for core margin pressures. They attribute the industry's attractiveness to its historical growth, high margins, and its essential service status during the pandemic. However, they caution that the influx of private equity platforms with a $300 billion backing is threatening Rollins’ growth, which heavily relied on M&A for 40% of its annual revenue growth. The heightened industry competition is exemplified by Rentokil's acquisition of Terminix, making it the largest player, while new sales strategies and private equity continue to intensify the market rivalry. They also critique the Rollins family’s use of the company’s balance sheet to expedite family stock sales, amounting to $1.5 billion at $35/share. Moreover, they argue that the favorable conditions prompted by COVID-19 are reversing, and evolving global issues like inflation and declining insect populations due to various environmental factors are emerging as new challenges. They express alarm over rising debt levels and an unjustifiably high valuation of ROL, likening its valuation to a high growth SaaS company despite glaring discrepancies such as a high customer churn rate of ~25%. The author posits that with a valuation significantly higher than recent industry M&A deals, and an enterprise value at odds with its global market share, Rollins’ stock presents a 30% - 40% downside risk, casting doubt on its investment appeal.

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The author is bullish on Olympia Financial Group Inc. (OLY), citing its dominant position in Canada's alternative investment-focused trust administration via Olympia Trust Company. Strategic acquisitions in 2021 bolstered its funds held in trust by 65% to $9.6 billion, a timely move before a global interest rate-hike cycle, potentially quadrupling OLY's net income in 2023 to around $25 million. The author believes the market underestimates OLY's sustainable earnings power, bolstered by the relaunch of Corporate and Shareholders Services division, digital enhancements in its Private Health platform, and a surge in mortgage origination due to tighter bank loan conditions. Additionally, Olympia Trust's near-monopoly in managing alternative investments within self-administered registered retirement savings plans and tax-free savings accounts is seen as a growth driver, further supported by Canada's lenient private securities regulatory framework. Valuation-wise, the author projects a 50% upside in OLY’s share price if 2023 earnings targets are met and a 20% upside even if the P/E multiple remains depressed. The anticipation of further dividend hikes, strong balance sheet, and significant insider ownership are seen as additional positives. Identified risks include leadership dependency and potential interest rate reductions by the Bank of Canada, but these are viewed as mitigated by OLY's market position and robust financials. The author, holding a material investment in OLY, sees the earnings increase, growth initiatives, and the mainstreaming of alternative investments as catalysts for stock appreciation.

Read the full article here (free with guest account). Read time: 8 min