A longtime resident of Madrid, Spain, James Levy has been a
wealth management advisor for twenty years - first, in the Madrid
office of Merrill Lynch International Private Banking, and later as
a Founding Partner at Private Wealth Advisors. In 2009, PWA was
acquired by Madrid based Banco Inversis, where James is currently a
Patrimonial Banker.
PWA's principle areas of interest are efficient portfolios of
European registered international mutual funds, sector selection
strategies and microcap opportunities.
Note:
This Q&A represents James Levy's own personal opinions - he is
not acting here in the capacity of representing Banco Inversis.
• • •
Seeking Alpha: What is your highest conviction stock
position, long or short?
Our highest conviction position is a new long holding in Telvent
(Nasdaq:TLVT). We are buying aggressively this week to take
advantage of the recent price correction and situate ourselves
before quarterly earnings are released tomorrow, February 19th.
Telvent is a global Information Technology solutions and
business information services provider. Its central focus is to
help leading companies worldwide to improve efficiency, safety and
security of their systems and networks. The company receives most
of its revenues from the energy, transportation, agricultural and
environmental sectors. While headquartered in Madrid, Spain (
note:
Telvent shares trade on the Nasdaq), Telvent receives only 40% of
its revenue from Europe, with the rest coming from fast-growing
markets in North and South America and Asia. With more than 6,000
employees and a market capitalization of just over $1 billion,
Telvent is a small multinational company with a long history of
impressive and consistent earnings growth.
Telvent is ideally positioned to take advantage of demand for
its services to better manage and control power grids,
transportation systems and oil and gas pipelines. Many of its
contracts come from fast-growing emerging countries such as Brazil
or China which are now building entirely new networks and are
hiring this Spanish company with leading edge technology, as it is
often more politically acceptable than hiring an American firm.
Millions of people worldwide benefit from Telvent's services
each day without ever being aware of the fact. Just to mention a
few examples, over 60% of all the gas and oil which moves through
pipelines in the Western Hemisphere is controlled through Telvent
pipeline efficiency solutions, while Telvent traffic control
systems impact 56 million people daily, including users of the EZ
Pass system in NY, which is a Telvent product.
To what extent is this an industry pick as opposed to a
pure bottom-up selection?
This is both an industry pick and a bottom-up pick. Providing
services for the optimization, control and security of networks is
a terrific sector for the coming years as emerging countries build
these networks for the first time, and developed countries seek to
improve their energy efficiency and security through upgrading
their existing network infrastructure. As a leader in this segment,
Telvent provides a high value service with little capital
requirements, its main asset being the brainpower of its
employees.
At the same time, Telvent captures consistent recurrent
revenues, as existing contracts tend to continue for many years
even as the company is enjoying great success in signing new
customers such as PetroChina (
PTR
) for pipeline control, the control systems for the subway of Rio
de Janeiro in Brazil, or the integration of the new light rail
system into a traffic control network in Morocco, just to name a
few recent contracts. The combination of recurrent revenue with new
contracts gives us confidence that Telvent will be able to continue
to deliver consistently high margins and steadily increasing
revenues in coming quarters.
How would you describe Telvent's competitive environment?
Telvent is classified by Standard and Poor's as a mid-sized
Information Technology Services company. While this industry has
been adversely impacted by the global financial crisis and the
recession in the developed world, it is widely thought that the
worst is already past as companies are forced to upgrade their
systems in order to remain competitive in the coming years. Telvent
has carved out a particular niche in this industry as a leading
¨green¨ company, providing solutions to build a more sustainable
and secure world through increased efficiency and control of
networks, be they pipelines or traffic or energy transmission. (Jim
Cramer has recommended Telvent as a ¨smart grid¨ play and a ¨one
stop shop for everything that is the future.¨ In fact, the Telvent
David is tied with the General Electric (
GE
) Goliath for the number two ranking for systems that monitor and
control power for efficiency gains.)
Another advantage for Telvent within this industry is its
Spanish origins and headquarters. Spanish companies are very
successful competitors in Latin America, where Spain is the leading
foreign investor, even ahead of the United States. At the same
time, Telvent is able to gain contracts in countries such as China
which for geopolitical reasons might not want to grant an American
company a contract for control of vital infrastructure such as the
oil pipeline network.
In short, Telvent can have it both ways, succeeding in the U.S.
as an "American" company with a Nasdaq listing and Washington D.C.,
U.S. headquarters, but playing the Spanish card when useful in
Latin America and other countries worldwide where a U.S. company
carries considerable political baggage.
Can you talk about valuation? How does valuation compare
to competitors?
Following its recent decline from all time highs, Telvent shares
are very attractively priced. We have here a company which has
demonstrated sales growth of over 30% per year and income growth of
over 40% per year for the past five years. An investor can purchase
this company now for just over 12 times 2010 fiscal year estimated
earnings. S&P gives Telvent a mean estimated annual growth rate
of 16% over the next five years, but keep in mind the fact that
this company has a history of exceeding estimates through both
organic growth and well executed acquisitions of small players in
its industry focus areas.
Additionally, Telvent pays an annual dividend with a yield of
approximately 1.5%. The recurrent nature of its revenue from well
diversified sources and its consistent success in winning new
contracts in the fastest growing areas of the world give Telvent a
very attractive risk/return profile at the current prices, superior
to any of its competitors at this time.
What is the current sentiment on Telvent? How does your
view differ from consensus?
Current sentiment on the stock has been adversely impacted by a
recent Piper Jaffray downgrade from Overweight to Neutral based on
concerns about the Spanish economy and how this might impact
Telvent´s business. Piper lowered their target price to $37 from
$46, while Zacks has maintained a $41.90 target price. The company
is scheduled to release 4th quarter and fiscal year 2009 earnings
before the opening of the market on February 19th.
Given Telvent´s history of upside surprises and resilient and
well diversified revenue base, we believe that the results may be
better than expected. We believe the current price more than
discounts justifiable concerns for how the Spanish economic
situation could impact Telvent in the future.
Does the company's management play a role in your
position? If so, how?
The quality of Telvent´s management plays a crucial role in our
positive position on Telvent. The management team is stable, well
qualified and highly dedicated to executing Telvent´s ambitious
business plan and realizing Telvent´s objective of becoming widely
known as ¨The Information Company for a Sustainable World.¨ I have
had the opportunity to speak with many Telvent executives,
customers and suppliers over the years here in Madrid, and have
received consistently good input concerning this firm.
Additionally, Telvent is in origin a family owned firmed, and
continues to be managed with the prudence and long term vision
which is a characteristic advantage of these kinds of firms.
Insiders currently own over 66% of shares.
What catalysts do you see that could move the
stock?
Given its modest capitalization of just over $1 billion, and
very attractive valuation and growth rates, Telvent could be a very
enticing acquisition candidate for a larger firm seeking to enter
the fast growing market segments where Telvent has built a name for
itself. Similarly, an improvement in the economic situation in
Spain could well serve as a catalyst to price gains in the
future.
What could go wrong with Telvent as a stock
holding?
The recent decline in the share in response to publicity about
the worrisome state of the Spanish economy demonstrates that
Telvent's share price is not immune to the evolution of the ongoing
European sovereign debt financing crisis. For example, if the
Spanish government is forced to put in place severe spending
reductions, this could impact Telvent's Spanish sourced revenue.
Additionally, if the crisis in Spain reaches Icelandic proportions,
each and every Spanish company, including Telvent, will find its
valuation adversely affected.
However, we believe that these risks are worth taking and are
already discounted in the current stock price. Telvent's contracts
in Spain as in other countries tend to be multiyear contracts in
critical infrastructure, and are not prone to sudden cutbacks in
response to government budget restraints. For example, one of
Telvent's important projects in Spain is the information technology
for data control and border security of over 50 million people who
enter Spain each year. Even if faced with severe budget cuts, it is
very unlikely that the Spanish government would cancel this
contract. In short, we believe that at the actual price just before
the quarterly earnings release, Telvent's shares offer investors an
excellent entry point to a very promising small cap growth stock
for the long term.
Thank you so much for sharing your thesis,
James.
My pleasure.
Disclosure:
Funds managed by James Levy are long TLVT
See also
The Euro: Investing at the Point of Maximum
Pessimism
on seekingalpha.com