Liquor, cop cams and automobiles seem a volatile mix, but Wall Street liked them this year judging by the performance of local stocks.
The region’s best performer was MGP Ingredients Inc. of Atchison, Kan., which operates two distilleries. Its shares more than tripled in value through Monday.
Investors also bid up shares of Digital Ally Inc., the Lenexa maker of video equipment for law enforcement, and O’Reilly Automotive Inc., the Springfield company that supplies car parts to do-it-yourself mechanics.
We also saw some dogs — notably Sprint Corp. and Waddell & Reed Financial Corp. — that failed to ride the rallying stock market’s climb to repeated record highs during 2014.
With only two trading days left in the year, more than half of the 46 regional companies’ shares led the stock market averages topped by the Nasdaq’s 15.09 percent gain through Monday. A closer look showed the pecking order of performances wasn’t exactly random.
Cerner Corp. has long been a local economic dynamo.
The North Kansas City-based company’s penchant for selling information technology to the health care industry has sparked thousands of area jobs, millions in construction spending and plenty of fattened investor portfolios.
Stockholders, however, might have noticed Cerner’s 18.59 percent stock gain through Monday as uncharacteristically mild. It beat the Standard & Poor’s 500 index, but this is Cerner’s second smallest advance since Wall Street’s meltdown in 2008 knocked shares for a loss.
One explanation is that the company is growing up.
For example, Cerner has agreed to pay $1.3 billion for rival Siemens Health Services in its first big corporate coupling, which is due to wrap up early next year. The $1 billion or so of new-found revenue and the inherited customer base are pushing some 2015 revenue forecasts close to $5 billion.
Another first: Cerner is stepping into the bond market. It is raising $500 million by selling bonds in a private placement. The company will pay between 3.15 percent and 3.58 percent interest, though it doesn’t even have a credit rating yet. Cheap money means a trusted borrower.
“Cerner has really evolved into a mature growth company,” said analyst Steven Halper at Friedman Billings Ramsey & Co.
Maturity hasn’t hurt Wall Street’s interest in the company. Bloomberg counts 26 analysts with “buy” recommendations on its shares, including Halper. Five analysts suggest holding the shares you have; only one suggests selling, by the unofficial count.
Gene Mannheimer, an analyst at Topeka Capital Markets in New York, found a sign of maturity by reading between the lines of the Siemens’ merger announcement.
“The very notion that Cerner is buying market share paints a picture of slowing growth in our view,” he wrote in a note to clients.
Mannheimer still likes the stock, partly because the deal gives Cerner a stronger hand in the big hospital information technology market. Customers of Cerner and privately held rival Epic Systems Corp., Mannheimer wrote, account for “half of the nation’s hospital beds and near two-thirds of the patients.”
The two tower over their remaining competitors in something approaching a shared monopoly, or what Mannheimer called a duopoly.
A duopoly can be good, if you’re part of the duo. It’s a major problem if you aren’t, as shareholders of Sprint Corp. can attest.
Sprint shares — this year’s worst local performer —– have slumped a painful 60.74 percent through Monday’s close. Much of the damage came since mid-summer when plans to take on the two giants through a merger with smaller rival T-Mobile US Inc. fell apart.
Instead of supersizing itself, Sprint turned into an unwilling contributor of customers to all three of its national wireless rivals. Tokyo-based SoftBank Corp., which owns 80 percent of Sprint, replaced longtime chief executive Dan Hesse in August with self-made billionaire Marcelo Claure.
Sprint cutting costs
Claure has targeted 3,700 job cuts as part of a campaign to slash spending by more than $1.5 billion. And he has taken the industry’s lead in fighting for customers this holiday season with promotions and price cuts, efforts that have started to show some results.
In a Twitter post on Sunday, Claure told one customer the company had been “overwhelmed by our Christmas campaign” as the reason for a long wait for service.
The bigger rivals admit they are feeling some heat. Verizon has told shareholders the battle for customers is cutting into its profits. AT&T has said it is seeing an increase in customer defections.
Markets won’t know the outcome of consumers’ choices until the companies update their subscriber counts in the coming months.
It will mark a tense moment for Sprint. Its customer losses had gotten so bad that T-Mobile’s CEO promised his company, posting big customer wins, would surpass Sprint in total subscribers by the end of this year.
Sprint still has some believers, including Nomura’s equity analyst Adam Ilkowitz, who had recommended buying the shares last December. This December, he issued a report “in defense” of his continued buy rating on shares.
Ilkowitz expects Sprint’s customer counts to stabilize and its finances to improve. Next year’s reports will beat expectations, he argues.
One shift on the financial front is the new management’s decision to invest less in its business next year, considered a sign of slower progress in improving its network. It means, Ilkowitz wrote, that Sprint is unlikely in 2015 to “capture the public’s attention for having a superior network, a faster network or potentially even an improving network.”
It will, however, offer “good enough” network speeds to continue landing value-minded customers, his report said.
The performance of two other local stocks this year show better times can come to companies that get past cathartic moments.
MGP Ingredients, the Atchison distiller and specialty ingredients company, moved past its catharsis in late 2013. A settlement quieted a months-long battle between management and the founding owners that had hung over the company and the community like a cloud.
Share prices spiked higher this summer with the appointment of a new chief executive, Gus Griffin, and a return to “solid profits,” in his words.
“We’ve shown investors we can grow,” Griffin said.
MGP’s distillery business — source of most of the profit growth — benefits from rising interest in American-made whiskey, including bourbon and rye, said Griffin, whose resume includes 25 years in the alcohol industry. The industry, he said, tends to see lasting trends, and he counts this as one.
Griffin also sees tailwinds for the company’s ingredients business, which includes high fiber and protein supplements and replacements for increasingly expensive egg whites.
Insiders have been buying the company’s shares. Between mid-August and mid-November, Griffin and four board members bought more than $505,000 worth of MGP shares.
With the stock up a whopping 211.18 percent through Monday this year, the insiders already are doing nicely.
“We’re all believers,” Griffin said of the stock purchases.
Trucking giant YRC Worldwide Inc. also turned a corner as the calendar turned to 2014. It’s shares have climbed 30.69 percent through Monday.
In January, the Overland Park-based company gained new concessions from its Teamsters employees and from its lenders. Chief executive James Welch had said both were needed to save all employees’ jobs.
Since then, and after a brutal winter, business has rebounded with more room to improve, according to Deutsche Bank analyst Robert Salmon.
Salmon told clients that he sees a turnaround coming in the less-than-truckload industry and that YRC’s national operation, YRC Freight, stands to benefit the most from it. The company’s freight network has room to fill up, and the company has been able to control costs and raise prices; a 5.9 percent general rate increase at YRC Freight began Dec. 1.
A strong stock market is nearly always a good sign for investors in Waddell & Reed Financial Inc. shares. Not this year.
The stock stumbled badly beginning in mid-April and has missed the stock market’s repeated climbs to record heights. Through Monday, the Overland Park company’s stock was down 23.60 percent.
The problem? Mutual fund investors are leaving its two biggest products, the asset strategy funds and high yield bond funds. Jefferies LLC analyst Daniel Fannon has written that fixing this is a matter of improving the funds’ performance. Fannon rates the stock a buy, which tells you how he thinks it turns out.
Optimists also can turn to the tea-leaf readers who have put shares of Waddell & Reed on some promising lists that look less at the company than at trends around it.
Fannon’s firm included Waddell on its list of “ugly sweaters” likely to look a whole lot better a year from now. It cited a “reliable historical phenomenon” in which the worst 20 percent of stocks in the S&P 1500 group each year have outperformed the rest in December and January.
Evercore Group LLC counts Waddell & Reed shares among those likely to rebound from year-end selling pressure produced by “window dressing,” according to Bloomberg News. The sellers are fund managers who strip poor performers’ names from the year-end investment reports they send to investors. Once that selling pressure ebbs, these stocks tend to beat their peers.
Bloomberg also turned up a Morgan Stanley list that counted Waddell & Reed among stocks that would benefit most from a “prolonged expansion” in the economy.
Two area companies have confronted the challenge of limited growth rates in their core businesses.
At Garmin Ltd, business is all about building future markets while managing the decline of its traditional personal navigation device lines, which now account for less than half of total sales.
On one hand, the longer Garmin’s core business holds up, the more financial support and time it gives management to develop and expand its growing fitness, outdoor, aviation and marine markets.
Products in those four markets are getting Garmin’s research and development focus, and they produce higher profit margins, said Efraim Levy, an equity analyst at S&P Capital IQ.
On the other hand, the long decline in personal navigation device revenues continues to get attention from investors who worry about how steep its descent may get.
This year, those revenues fell only 2 percent through the end of September. It’s one reason Garmin shares were beating the four main stock indexes with a 2014 gain of 16.39 percent through Monday.
Still, the Motley Fool investment website recently cited the potential for a sharp decline in Garmin’s traditional business as one reason its stock could tumble. Two other reasons focused on competition in Garmin’s other businesses.
“Right now it’s a shadow that hangs over the company,” Levy said.
At H&R Block Inc., growth confronts the reality that tax filings in the United States increase only 1 percent to 2 percent a year. The Kansas City-based tax preparation company has found two ways to manage for more growth.
Levy, who also follows Block for S&P Capital IQ, said one key is Block’s ability to raise prices. It’s why he expects revenues to climb by 3 percent in the tax season just getting started and by 4.6 percent a year from now.
“They generally want to get a price increase every year,” Levy said.
H&R Block, whose shares were up 16.12 percent through Monday, also has emphasized its Tax Plus strategy, offering products and services besides tax preparation. Those include its Emerald prepaid debit card, unsecured advances up to $1,000, refund transfers and its Peace of Mind warranty, all of which generate income for Block.
This year Block expects extra tax work will come its way thanks to the Affordable Care Act, though executives weren’t offering estimates on the size of this new revenue source.
Still, its core business remains helping customers get the biggest refunds allowed, which the company’s research has found remains the task customers will pay for first and foremost.
“The H&R Block business model is a live and well,” chief marketing officer Kathy Collins recently told analysts during the company’s annual investor day in New York.
Cerner’s somewhat subpar year
Since Wall Street’s horrific 2008 declines, shares of Cerner Corp. have gained an average of more than 37 percent per year. That makes this year’s gain seem pale.
* 2014 return through Monday
The Ferguson effect
Shares of Lenexa-based Digital Ally Inc. soared after the August police shooting of a man in Ferguson, Mo., heightened interest in body-worn cameras for members of law enforcement.
Police departments, cities and counties have hit the company with a “dramatic increase in inquiries” for its body and vehicle-mounted video equipment, said Tom Heckman, the company’s chief financial officer. They want equipment for tests or to run pilots to evaluate potential purchases.
Sales will take longer to show up as agencies’ purchasing processes tend to be slow. But Heckman said the company expected a sales bump to be evident in its fourth-quarter report and a stronger impact evident in 2015 revenues.
Digital Ally, whose shares this year had gained 74.86 percent through Monday, plans to add a second and possibly a third shift to meet demand for its products.
Comings and goings
Four companies that became publicly traded last year turned in some big price swings this year.
Tallgrass Energy Partners LP completed its Pony Express oil pipeline as planned and is looking at expanding it to reach more shale oil, one reason management says the Leawood company is a growth story. Units in the partnership had jumped 68.88 percent through Monday.
Owners of QTS Realty Trust Inc. have seen their shares climb 41.04 percent through Monday, the first full year they’ve been on Wall Street. The Overland Park company operates data centers used by client companies.
Theater owner AMC Entertainment Holdings Inc. has been publicly traded for barely a year, but it has been a good year. Shares have risen by 28.18 percent.
AMC has benefited from adding leather recliners, upgraded concessions, reserved seating and other amenities to many theaters. The moves have bolstered revenue at the theaters where they’ve been made, welcome business in a tough year at the box office.
Rival theater chains are making some of the same changes, but they’re playing catch-up, Drew Borst, an analyst for Goldman, Sachs & Co., said in his first report on AMC in November. He considers AMC’s lead on this front well-timed preparation for 2015 when moviegoers will find offerings on the silver screen much more to their liking.
The industry may see a shake-up next year as rival Regal Entertainment Group, which is bigger than AMC, considers a possible sale or some other big change.
Aratana Therapeutics Inc., based in Kansas City, Kan., is the only new local name to tumble this year, down 7.33 percent through Monday. The company is developing medicines for pets.
We may be losing 2013’s top local stock performer, which followed up with a 32.57 percent gain this year through Monday’s close. Olathe-based Elecsys Corp.’s shareholders will vote Jan. 22 on a $17.50 per share offer from from Lindsay Corp. in Omaha.
Olathe gained a new headquarters company last spring when New Jersey-based Hooper Holmes Inc. officially moved from New Jersey. The company provides health screening and related services for employers, health care insurance providers and others.
Tom Collins, chief financial officer, said Hooper sold its laboratory testing and other businesses that served the life insurance industry. The result is a smaller, more focused company with designs on growing again.
Its shares closed Monday at 52 cents, down a penny from the end of last year.
Four companies joined the ranks of local stocks last year, and three posted strong performances this year.
Tallgrass Energy Partners L. P.
QTS Realty Trust Inc.
AMC Entertainment Holdings Inc.
Aratana Therapeutics Inc.