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Energy Takeout Menu, Part 2

By Roger S. Conrad on May. 27, 2014

The strength in Newalta’s energy-related business fueled a 10 percent increase in it first-quarter revenue, lifted its cash flow by 16 percent and supported a 14 percent hike to its dividend.

Management plans to increase the company’s capital expenditures by 38 percent from year-ago levels, suggesting more growth is in the offing.

But sluggish industrial demand partially offsets the strength in Newalta’s energy business. Divisional revenue slipped by 6 percent year over year, though cost cutting bolstered gross profit as a percentage of sales by 8 percent. The company has shuttered four facilities over the past 12 months and continues to review others for potential closure.

These efforts have reduced Newalta’s selling, general and administrative expenses as a percentage of revenue to 11.1 percent, compared to 12.3 percent a year ago.

A strategic review of Newalta’s operations by RBC Capital Markets could include a spin-off or outright sale of its industrial division, a move that would make the firm a pure play on cleaning up drilling sites. Such a move would increase the company’s appeal to potential acquirers.

Our ironclad rule when picking takeover targets: These names must be able stand and grow on their own, deal or no deal. Newalta definitely measures up on that score. Management’s guidance calls for the firm to grow its cash flow by 20 percent in 2014, despite the drag of its industrial business.

Although the stock has delivered a 27 percent return since joining our International Portfolio, the shares still trade for 1.6 times their book value–a remarkably low price for a company growing so quickly.

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