I always liked to look for investments that might have huge up-side potential. Of course, this up-side comes at a cost such as political risks or lack of liquidity. Here, I present two very un-covered companies that I have been looking at for very specific reasons, and I which I believe offer limited downside and huge up-side potential. These companies will not be a huge part of my portfolio, but I think they might deserve a bet.
Betting on M&A
Moreover, the company’s fundamentals are strong. PESA continued to report strong results in the fourth quarter of 2012, on the back of increased revenue in local currency and improved operating margins in the exploration and production (E&P) segment. EBITDA benefited from higher gross profits, mainly driven by the E&P segment, along with sizable reductions in operating expenses resulting from controlled SG&A management and lower exploration expenses. Results comparisons versus the previous year were impacted by substantial non-recurrent expenses undertaken by PESA throughout 2011. As a result, EBITDA in 4Q12 and FY2012 increased substantially by 218% year-over-year (yoy) and 95% yoy, respectively, with marked margin expansions.
As previously mentioned, during April of this year, several newspapers reported that Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) was studying the possibility of selling 51% of its current stake in PESA (Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) currently owns 67% of PESA) to Oil Combustibles. The deal did not go through, but I am sure we shall see much more activity going forward. After all, PESA trades at 1 time EV/EBITDA and pays a growing 3.7% cash dividend yield. This is just a fraction of the price you need to pay if you want to buy Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). The Brazilian oil giant trades at 6 times EV/EBITDAX and, since it’s controlled by the Brazilian government, it has zero chances of becoming an M&A target.
A market leader with huge growth ahead
The company is poised to nearly double its size through the highly profitable acquisition of Pratt & Whitney Rocketdyne, and I think it should also fetch a much higher valuation. The addition of Rocketdyne will provide Gencorp Inc (NYSE:GY) with a dominant position in space launch engines.
After the Rocketdyne acquisition, Gencorp Inc (NYSE:GY) will enjoy +80% market share in domestic medium and large rockets for launch vehicles, 70% market share in missile defense propulsion systems, 75% market share in tactical missile propulsion systems, and +80% market share in in-space propulsion systems.
Additionally, Gencorp Inc (NYSE:GY) owns 12,000 acres of land outside of Sacramento, of which it could sell half over the next several years. Adjusting for this valuable land, which could be worth over $300 million, the stock trades at only 4.5 times EBITDA. Moreover, Gencorp Inc (NYSE:GY) generates an ex-land 24% Free Cash Flow yield. I think it is a great opportunity for any investor who expects growth and value.
Foolish bottom line
In the long term, at current market prices, these two companies will end up being good investments. That said, I am looking at them now because I think there are short-term catalysts that might empower their value. Only time will tell, but I am about to take my chances right now.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article High-Quality Companies You Should Consider originally appeared on Fool.com is written by Federico Zaldua.
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