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Trinseo

Trinseo PLC is a materials company and manufacturer of latex and plastics products. The company's operating segments include latex binders, feedstocks, polystyrene, Americas styrenics, engineered materials, and plastics solutions. Majority of the revenue is generated from its Polystyrene segment which provides a variety of general purpose polystyrenes, and high impact polystyrene. These products provide customers with performance and aesthetics at a relatively low cost across applications, including appliances, packaging, including food packaging and food service disposables, consumer electronics and building and construction materials. Geographically, the company generates majority of the revenue from Europe and also has its presence in United States, Asia-Pacific and other regions.

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<li>Raymond James believes that the key to predicting E&amp;P stock outperformance is PDP equity growth.</li>
<li> Stocks with strong PDP equity growth have significantly outperformed their peers during the commodity downturn.</li>
<li>The firm has created a five-point checklist to use to identify PDP equity growth.</li>

In a new report, Raymond James analyst Jeremy McCrea explained how conventional tools for assessing energy E&amp;P stocks typically miss the mark. Instead, McCrea used Raymond James&rsquo; five-point checklist to search for value among Canadian E&amp;P stocks.
<h3>Convention Isn&rsquo;t Working</h3>
According to McCrea, conventional metrics used by investors fail to effectively differentiate winners and losers when it comes to E&amp;P stocks. &ldquo;Common metrics such as payout ratios, CFPS, production growth rates, and valuation metrics (EV/DACF and 2P NAV Valuations) do not truly demonstrate the profitability of a business and the long-term share price performance,&rdquo; he added.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/analyst-ratings/analyst-color/15/11/6008386/energys-down-cycle-has-officially-had-its-one-year-anniv">Energy's Down Cycle Has Officially Had Its One-Year Anniversary</a></bzrelatedlink>
<h3>The Alternative</h3>
Instead of conventional metrics, McCrea explained that PDP (Proved-Developed-Producing) Equity Value Creation is the best indicator of share price outperformance. In fact, over the past two years, stocks of companies with the largest increases in PDP equity value have risen 17 percent compared to the average 43 percent decline of the rest of the E&amp;P field.
<img alt="" src="/files/u81483/pdp.jpg" style="width: 480px; height: 242px;" />
<h3>Five-Point Checklist</h3>
To assess and compare E&amp;P names, Raymond James has developed a five-point checklist that captures the critical elements of PDP equity growth. The checklist includes the following five factors:
<ul>
<li>1. Management</li>
<li>2. Asset Economics</li>
<li>3. Growth/ROC</li>
<li>4. Leverage</li>
<li>5. Valuation</li>
</ul>

<h3>Top Stock Picks</h3>
By using this checklist, Raymond James analyzed the Canadian E&amp;P group and came up with the top stocks of the bunch. Among E&amp;P names on the Toronto Stock Exchange, Raymond James names <a href="https://www.google.com/finance?q=TSE%3AKEL&amp;ei=eSRjVrGlGMWJ2Aa89YTYDQ">Kelt Exploration Ltd.</a> and <a href="https://www.google.com/finance?q=TSE%3APPY&amp;ei=kyRjVsK4ApPQjAH5rqDwBg">Painted Pony Petroleum Ltd</a> as Strong Buys.
The firm rates the following TSX-listed stocks at Outperform:
<ul>
<li><a href="https://www.google.com/finance?q=TSE%3AARX&amp;ei=pCRjVsnhK8LejAGK1Ij4Cw">ARC Resources Ltd.</a></li>
<li><a href="https://www.google.com/finance?q=TSE%3ABNP&amp;ei=wCRjVsmdGMS52AbdkY_AAw">	Bonavista Energy Corporation</a></li>
<li><a href="https://www.google.com/finance?q=TSE%3ABNE&amp;ei=3CRjVqGVLZbCjAHkv6LgCQ">Bonterra Energy Corp.</a></li>
<li><a href="https://www.google.com/finance?q=TSE%3APSK&amp;ei=ICVjVqHyDtXLjAGW37awDA">PrairieSky Royalty Ltd.</a></li>
<li><a href="https://www.google.com/finance?q=TSE%3AYGR&amp;ei=JiVjVujWOcWJ2Aa89YTYDQ">Yangarra Resources Ltd.</a></li>
</ul>

Disclosure: The author holds no position in the stocks mentioned.
Image Credit: <a href="https://pixabay.com/en/charts-graphs-data-finance-macbook-925810/">Public Domain</a>

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This Unconventional Metric Is The Key To E&P Outperformance

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<a href="http://www.barelkarsan.com/2008/08/security-analysis-chapters-37-and-38.html">For various reasons</a>, value investors are encouraged to use an average of several years worth of earnings as an estimate of a company's earnings power. But when a company grows quickly (e.g. through the acquisition of a competitor), average earnings are no longer representative of earnings power. In such cases, other methods of estimating a company's earnings may be more useful.<a name='more'></a>
Consider Canam Group (<a href="http://www.google.com/finance?q=TSE:CAM">CAM</a>), a company that went on a bit of a buying spree when the recession began. As competitors have been shutting down units to conserve cash, Canam has been strategically purchasing competitor plants at attractive prices. As many industries are currently at overcapacity, the benefits of these acquisitions won't be seen for years. But the costs of these acquisitions (i.e. the cash used to finance the purchases) are seen immediately. How does one value the fact that future earnings will be higher than past earnings?
One method applicable to manufacturing companies is based on a company's historical return on its fixed assets. If similar assets to the company's current assets have been purchased, the company may be expected to generate the same type of returns on those fixed assets that it generated over the last business cycle. Of course, this exercise only results in a starting point for estimating future earnings. Adjustments may have to be made based on the age of the assets acquired, their quality, and a whole slew of other factors (e.g. geography).
When times are good, companies will often fall over themselves in bidding wars to acquire potential targets or business units. Value investors realize, however, that the best time for companies to acquire such assets is when business conditions are poor (financing in general is hard to come by, there is overcapacity in many industries, and sellers are desperate to raise cash), due to the great price discounts that are available.
This recession has offered many companies with great balance sheets the opportunity for future growth at excellent prices. However, valuing these companies is a challenge. Using past, average earnings (as is often <a href="http://www.barelkarsan.com/2008/11/earnings-reversion-to-mean.html">advocated for value investors</a>) would be inadequate, since an acquiring company's earnings power is now greater than its past earnings have shown. Estimating earnings power based on a return-on-fixed-assets measure may provide better accuracy, leading to more profitable investment decisions.
In a similar vein, we have previously discussed using this method <a href="http://www.barelkarsan.com/2009/08/earnings-capacity-example.html">when a company has reduced its capacity</a> in this recession, as in this case, average earnings of the past would overestimate the company's earnings power.
Disclosure: Author has a long position in shares of CAM 
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