On May 10, we hosted a meeting at our office for clients and friends who wanted to take a closer look at Research Frontiers.  Joe Harary, CEO, just leased a Mercedes SLK 250 with Magic Sky Control technology from Research Frontiers.  Aside from the sports car being really nice to drive and look at, the Magic Sky sunroof was the true cool factor for this car.

Sitting in the driver’s seat with the sun overhead, with a touch of a button, sky goes dark, the glare disappears and the heat instantly dissipates.  There is no sunshade to pull across the sunroof to block the sun, only the touch of button to darken the interior.  Everyone who sat in the car was impressed with Magic Sky.

Joe spent about an hour with clients and friends to discuss the history of Research Frontiers and the opportunities for the company going forward.  With the unanimous opinion that Magic Sky was cool, we wanted to know what other cars from Mercedes would come with this as an option or as standard equipment.  Joe pointed out that Mercedes did not spend 5 years testing this technology and promoting it today as a unique benefit of Mercedes only to have it put only on two sports cars. When the E class and S class are up for refresh, there is a high likelihood that it will be made available on those cars as well. That should be very good for owners of Research Frontiers stock as the SLK has yearly production of about 42,000 cars, and the E class has annual production of about 200,000 cars.  Joe said if just one car model came with Magic Sky as standard equipment, Research Frontiers would be profitable on that alone.

Universal Display’s earnings on Wednesday May 8, 2012 sent the stock lower as the timing of revenues to Universal Display are going to show up in the second quarter.  Samsung is increasing its annual licensing fee to Universal Display to $30 million per year from $20 million per year last year.  The payments are divided into two equal parts, $15 million, and payable in the second and fourth quarters.  Since this earnings report was for the first quarter, the $15 million payment was not included.

Universal Display management indicated that the company should not have a problem reaching the revenue estimates of analysts of $48 million for the first half.  If that is the case, the second quarter should bear analysts estimates and the weakness of the stock recently will turn into strength.

The items that should drive the company’s growth this year are the following:

1. The introduction of the color green in the second half of the year.  Currently, the company is selling mostly red. By selling green as well, the company could nearly double its growth rate if Samsung incorporates both colors in its new production lines.  The company is hinting at this but cannot announce this unless Samsung announces it first.
2. The introduction of TVs.  The idea that we would have OLED TVs in the market in 2012 was a pipe dream two years ago.  This year, both Samsung and LG, both licensees of Universal Display are introducing 55 inch OLED TVs. Depending on the adoption of TVs , Universal Display could reap significant rewards as TVs are big users of emitters.  The number of TVs sold will be low at first, but even a small number will have an impact.
3. Green host material.  Universal Display also makes chemicals that enhance the function of its emitters.  The company has indicated that Samsung will use its green host materials as well.
4. New products from existing licensees such as LG, AU Optronics, Sony and others who are working feverishly to get their own OLED displays into the market will benefit the company.
5. Lighting.  Universal Display’s technology is essential for the development of OLED lighting.  This is more of a 2013 revenue ramp.

In short, the weakness of the stock price this week is a timing issue in my opinion.  In fact, the weakness now is actually a polarity of the strength last September and the expected strength this coming summer.

Energy Transfer Partners (ETP) has purchased Sunoco Inc. (SUN) and subsidiary Sunoco Logistics (SXL) for $5.3 billion. The purchase will create one of the largest and most diversified Master Limited Partnerships in the United States.

“This transaction, which will be immediately accretive, represents the next step in Energy Transfer Partners’ transformation into a more diversified enterprise with an integrated and expanded footprint,” said Kelcy Warren, ETP’s chief executive officer and chairman of the board of directors. “As we have said in the past year, our goal is to derive more of our distributable cash flow from the transportation of heavier hydrocarbons like crude oil, NGLs, and refined products. With this transaction, we make a major move in that direction, bringing our cash flow mix related to the combined enterprise’s pipeline businesses to approximately 70 percent natural gas and 30 percent heavier hydrocarbons.”

With the purchase, ETP will move from primarily a natural gas transportation company to a diversified company with thousands of miles of pipelines carrying refined products, crude oil and natural gas liquids. On top of the pipelines, ETP will receive refined products and crude oil storage facilities, as well as 4900 retail-marketing outlets.

As we witnessed in the recent Kinder Morgan/ El Paso deal, Master Limited Partnerships continue to gain more mainstream attention as they continue to make large deals to further the development of energy infrastructure in the United States.

That is why when InterDigital announced the successful integration of its video compression technology with Verizon’s broadcast partner Livecast, I got intrigued.  I have been hearing about this technology for over one year. InterDigital’s technology allows for a 52% reduction in the amount of bandwidth necessary to stream video to internet connected devices.  If widely adopted, this could save the industry billions in spending to increase capacity be decreasing the demand for capacity.

Although the stock market is not valuing InterDigital for its patent portfolio right now, the value of its technology just keeps increasing.  InterDigital has created the inventions that are inherent in LTE and 3G which allow us to stream video on our internet devices.  Now the company has figured out a way to reduce the demand for such access which eases the growing burden of exponentially rising demand for broadband access.

“Increases in live video streaming makes a LiveCast solution that leverages InterDigital’s technology very compelling for OEMs, operators, broadcasters, and the increasingly diverse range of content providers that continue to grow in importance."   

The natural gas boom is having positive effects on many different industries. The Wall Street Journal recently highlighted the positive outlook for the steel industry do to the large domestic supply of natural gas. The steel industry is benefiting from the boom in two ways:

1. Cheap natural gas prices result in savings in the production of steel. U.S Steel recently announced that using natural gas instead of coal to run the furnaces used in production cuts the costs by $8-$10 a ton. This could save the company over $200 million this year.
2. The increased demand for steel piping by natural gas producers has led to increased shipments of steel. In 2011 US Steel shipped about 1.8 million tons of tubes used in the drilling and transporting of natural gas.

The low natural gas prices are also leading to other types of businesses such as textiles and chemicals to relocate their businesses from abroad to the United States.  PGT Trucking, a Pennsylvania trucking company has seen revenues grow from $1 million to $10 million due to the increased shipping of steel products. Many other small businesses around shale plays have experienced similar growth.

The CEO of PGT Trucking, Patrick Gallagher, recently said, “We're on a paradigm shift with natural gas becoming our main energy source." 

As tax time is upon us, and the Obama Administration has released its proposed tax code for 2013 and beyond, we thought we would take this opportunity to share some pertinent tax related information about Master Limited Partnerships.  DeWitt Capital Management has been working with MLPs for over 20 years and we are intimately aware of the estate and tax benefits that this asset class provides to investors.  We hope you find this information, as well as the second edition of MLP Monthly, helpful.

1. It is possible that the tax rate on dividends will be going up in 2013 from a maximum of 15% to as high as the highest marginal tax rate on ordinary income. MLPs do not pay dividends and therefore will not be affected by an increased tax rate on dividends.  MLPs pay a distribution, a nontaxable occurrence.

2. MLPs do not pay a corporate income tax, as they are pass-through entities owned by the limited partners.  This means that income, which would normally be allocated to paying corporate income, is available to the owners of the partnership units.

3. The limited partners are entitled to the depreciation generated through direct ownership of the pipelines in the MLP.  The depreciation, which is a non-cash offset to partnership income, is used to defer income.  This means that owners of MLPs only pay taxes on the net income of the partnership, which is usually less than 20% of the actual cash received.

4. The taxes are deferred until the owner sells the units.  Because many MLPs invest in an expanding network of pipelines, either through building them or buying them, depreciation and tax deferral can sometimes last as long as the unit holder is alive and still holds his or her investment.

5. If an MLP unit-holder owns them at death, the tax that has been deferred will be included in the stepped up cost basis of the MLP at the date of death.  Hence, income that had been tax deferred becomes tax free to the heirs.

Please feel free to call us at any time to discuss!