Today we’re looking at a new pitch from Tyler Laundon, who is one of the analysts over a Ian Wyatt’s shop and who apparently is helming a pretty new newsletter called Pay Dirt that’s aiming to capitalize on the sometimes-rabid investor interest in commodities stocks. From what I can tell, he started publishing this one back in June and I haven’t seen his picks teased before … so let’s see what he’s got, shall we?
The ad, which came in today, got my attention because he says he’s recommending the “IBM of the Commodities Industry” — a company that supplies virtual picks and shovels for oil drillers, in particular, in the data that they need. “Big data” is a term that’s bandied about quite a bit, with the increasingly data-driven world in which we live, and there aren’t that many wildcatters out there who will go kick dirt around and smell the air and muck about with a dowsing stick to find the best spot to drill … in most cases, the huge cost of exploration means firms are investing in any data they can get that gives them a better chance of hitting, well, pay dirt. Sometimes that’s seismic data that they collect themselves or hire a supplier to collect, sometimes it’s historic maps or production data from 100 years ago … and apparently this company we’re being teased about is somehow involved in that data collection and dissemination. So that’s the short story.
Laundon in his longer sales pitch, by the way, also takes credit for some impressive picks — including Africa Oil at $1.85, which would mean that he was recommending stocks a year ago, perhaps not for this particular newsletter. He’s been a rising analyst at Wyatt for a while, so perhaps he picked it for one of the other Wyatt letters. That’s a good price, close to my personal average cost on those shares, and it means he probably bought it in mid-February, about six months after Christian DeHaemer started teasing it and I wrote about it and started buying, but before the first drill result that sparked its meteoric rise to $11. I still own my “let it ride” shares on that one, which makes it my largest common stock holding (if you include warrants, Sandstorm Gold is bigger for me) and I post notes on it on occasion here if you’re curious. So if he did indeed pick that one, kudos to him … shall we see if he’s got another winner?
Here’s how he teases it in today’s “free article/ad”:
“In the high-tech world, the top honor for data collection and dissemintation goes to International Business Machines (NYSE: IBM). Big Blue is trading near all-time highs just a few weeks before its 2012 Information On Demand annual conference.
“In the commodities industry, a much smaller information company has been growing since 1959, and is also trading near all-time highs for the same reasons that IBM continues to excel.
“Business demand for energy, transportation and economic data collection and analysis is at an all time high. Companies must efficiently make strategic decisions on natural resource-related topics, from capital spending to acquistions to government risk assessment….
“Right now I’m recommending this commodities consulting company to Pay Dirt subscribers.
“It is a different kind of commodity-related investment. It’s not a gold or silver miner, or an oil and gas driller. It’s not a shipping, freight or pipeline company. And it doesn’t build any equipment.
“It’s a technology company that provides mission critical information to companies engaged in all of the above activities, and more. This stock won’t rise and fall on the price movement of any one commodity, because it doesn’t sell any. Instead, it sells information. And customers are flocking to its products.
“As part of the company’s energy portfolio, it owns production information on more than 90% of the world’s oil and gas wells. If you’re a company that wants to drill for oil, you’re more than likely relying on at least some information from this company.”
So … not a huge amount of clues, but it’s a fairly unique business so the Thinkolator ought to be up to the challenge … let’s feed that data in to the “IBM of the Stock Sleuthing Industry” and wait a moment. There, a lovely little answer emerges: This must be IHS (IHS).
Which is not, despite what my brother might think, his alma mater Ithaca High School … it was named Information Handling Services when it was started in 1959, and it has gradually expanded every since, with lots and lots and lots of acquisitions of information collecting, organizing and disseminating services over the years. I have little bells in the back of my brain on this one from my days as an academic, since IHS got its start as a major supplier of microfilmed information and associated indices, but they’ve certainly gone beyond that now — if you follow other companies in technology or energy you’ve almost certainly heard quotes from their proprietary data and reports, like the IHS iSuppli data about expected volumes for the iPhone 5. Energy is still their biggest business, but they have their finger in a lot of pies.
IHS is not an inexpensive company, they trade at a PE of about 60 and a forward estimated PE of 25 or so depending on which estimates you look at, which indicates both big growth and a stock that’s trading at a substantial premium to the average company. But they are, of course, not average — or at least, that’s the pitch. Their business is largely subscription-based (about 75%), which usually leads to rising margins if the subscriptions are “sticky,” and they’re putting out really big growth numbers this year. IHS is expected to post double digit earnings growth in earnings in 2012 and is on track for that so far, with better growth expected next year. They’re expected to earn $3.98 this year, $4.92 next year, so that’s almost 25% earnings growth — extremely good for a big company, and IHS is fairly large with a market cap of about $7 billion.
I haven’t looked over IHS’s numbers before — truth be told, I didn’t even know they were a public company before I started looking into them today — but my main concern after a quick look at the numbers would be that even though they’re growing earnings quite well, and focusing more on their higher-margin businesses (subscriptions, upselling current customers), their margins are much weaker now than they’ve been for most of the past decade. I don’t know if that’s because of their steady acquisitions (over the past decade they’ve acquired an average of a half dozen or so companies every single year, though most of them are quite small) or if there’s some other reason, most of the increased cost seems to come from Selling, General and Administrative costs and “Other”, their gross margin has been steady or growing … as, indeed, has their free cash flow margin, so the decline in the actual profit margin might be nothing to worry about. The stock has just tickled a new 52-week high around $118, so clearly investors are not particularly concerned.
So that’s all I’ve had time to glean from a quick glance at IHS — it’s certainly the kind of company that I always find intriguing, with strong subscription-based revenues that should provide steadiness, and a very scaleable business (you only have to create a data set once, you can sell it a million times), but it’s equally certain that it ain’t cheap. Sound like your kind of pick? Let us know with a comment below if you’ve got an opinion on IHS … and, of course, if anyone has taken Tyler Laundon’s Pay Dirt out for a spin, please click here to review it and help out your fellow investors. Thanks!