Friday, May 27, 2011

MSG at 2011 Global Communications, Media and Technology Conference

MSG presented at the 2011 Global Communications, Media and Technology Conference on Wednesday May 25th 2011. Throughout the MSG presentation President and CEO Hank Ratner reiterated that the company believes capital expenditures for the Garden venue reconstruction will prove profitable in the coming sports seasons. Product introduction includes event level suites which aim to provide the luxury of skybox with the up close sports action. Event level suites will return higher prices, as they are closer to the ice/court. The lower level suites will become available for use in October and all but one are already sold showing a better then expected response to the new product.

Furthermore the presentation highlighted the company’s non-playoff dependent business model meaning that the company builds the business to succeed without making the playoffs. If a team moves forward into the playoffs essentially it is a bonus for the company rather then something they depend on. Both the NY Rangers and NY Knicks did make the playoffs this season however neither team made it to the finals. While the company cannot make direct comments on the possible NBA work stoppage for 2011 they do not feel that this would affect the funding for the Garden transformation. However a NBA work stoppage would reduce earnings because while costs of hosting NBA games would decrease there would be no revenue coming in from one of the company’s large earnings producers.

In regards to the acquisitions the company is still valuing the L.A forum for purchase. L.A is the second largest market in the United States for entertainment and is predominantly run through one venue with 3 sports teams. The company states that it will make the acquisition if the find it to be profitable, as it would feed their entertainment business including Fuse. UASBIG will continue to watch MSG through the transformation process this summer but remains optimistic about the future of the company.


Wednesday, May 25, 2011

RL 4Q Review

Polo Ralph Lauren reported 4Q and FY11 results before the open this morning. Net revenue for the quarter grew 7% to $1.43 billion from $1.34 billion in 2010 and above street consensus of $1.39 billion. Despite the revenue growth, diluted EPS was reported at $0.74, a 34.5% decline from 4Q10 EPS of $1.13 and missing expectations of $0.79. RL reported gross margin for the quarter to be 56.8%, 220 bps lower than the 59% mark last year. The decrease in gross margins is attributable to pressure on global commodities and other sourcing cost issues.

Revenue growth was driven primarily by sales in the retail segment, rising 14% quarter-over-quarter, led by 7% consolidated comps growth and incremental revenues from new operations in South Korea. Comps at the segment level included: (3)% at Ralph Lauren, 8% at factory stores and 10% at Club Monaco. E-commerce sales increased 21% quarter-over-quarter. Wholesale sales only rose 2% from the prior year level, as domestic growth in shipments and expended distribution in Europe were offset by a large decline in the Japanese business.

Management provided guidance for FY12, as they expect consolidated revenues to increase by mid-double-digits with retail expanding at a greater rate than wholesale. A noteworthy comment was made in regards to industry-wide inflationary concerns; “based on the anticipated impact of cost of goods inflation and increased investment in strategic growth initiatives, in addition to business disruption in Japan, the Company expects the operating margin from continuing operating for FY12 to be 100 – 150 basis points below the prior year.” The company has not increased pricing points to offset any inflationary costs to date, but plans on doing so during the upcoming fall season.

While margin pressure remains a serious concern, RL has shown their ability to generate top-line growth and we believe this trend will continue through fiscal 2012 as the Company expands its international operations and focuses on key strategic initiatives. The stock has traded down as much as 12% today on the EPS miss and weak margin guidance, however, the inherent business underlying Ralph Lauren remains intact and we remain long-term bullish. Macro commodity increases are a concern that the entire world faces, and RL will likely be able to mitigate the pressures more effectively than comparable peers.


Tuesday, May 17, 2011

HPQ 2Q Earnings

Hewlett Packard dropped almost 10% after it missed 2Q earnings. HP took a really big hit today, plunging bellow its 52 Week Low of $37.32.

HP posted $31.3 billion profit, or $1.05 a share, significantly lower than what analysts had expected ($1.23). HP’s revenue was $31.1 billion versus expectations of $31.8B. Quarterly revenue generated by the company’s personal systems group, its largest business segment, declined 5% from the same period last year as sales of both desktop and laptop PCs slipped. The company lowered guidance for the next quarter and is expecting to earn $0.90 per share.

At this point we see two primary factors for company’s performance. The first factor is the weakening computer demand all over the world. On the top of that, the earthquake in Japan has also reduced demand for HP's products in the region and increased logistics costs, as the company needs to find alternate suppliers and ship more by air. The second factor, and probably as much important as first one, is the company’s management. It seems that company has been struggling and delivering inconsistent results since Mark Hurd was replaced by Leo Apotheker. Its revenue for the fiscal quarter ended Jan. 31 increased 3.6% to $32.3 billion, coming in below the company's projection of $32.8 billion to $33 billion. In February, H-P also revised down its earnings-per-share and revenue targets for the current fiscal year.

Recently Mr. Apotheker sent email to senior 10 executives that was leaked and resulted in a major sell off by investors. In his email Mr. Apotheker mentioned that HP needs to cut back on expenses and slow down hiring; “We must watch every penny and minimize all hiring." With this pessimistic outlook and weakening demand we think that our position in HP should be revaluated.


Monday, May 16, 2011

Joy Global Inc. Acquire LeTourneau Technologies

Joy Global Inc. has entered into an agreement to acquire 100% ownership interest in LeTourneau Technologies from Rowan companies for $1.1 billion in cash. LeTourneau designs, builds, and supports equipment for the mining and oil and gas drilling industries. The transaction is expected to be completed within 60 days.
LeTourneau has two business segments, mining and drilling products. The mining products business is the world leading manufacturer of large wheel loaders for surface mining. In 2010, the mining products business provided $259 million and $67 million in revenue and EBITDA, respectively. The drilling products business is one of the leading designers of offshore jack-up drilling as well as a manufacturer of the primary components for these rigs. In 2010, the drilling products business provided $556 million and $38 million in revenue and EBITDA, respectively.
Joy Global Inc. President and Chief Executive Officer, Mike Sutherlin, foresee this acquisition as a ‘perfect fit’ for their P&H business. Letourneau is the only manufacturer of electric drive loaders and has the most extensive and largest size of wheel loaders. These wheel loaders are capable of hauling 400 ton trucks. The company will finance this acquisition through a combination of cash and additional borrowings.
Today Joy Global closed $ 88.36 + 0.88 (1.01%), upon the announcement of this acquisition.

Wednesday, May 11, 2011

Cisco 3rd Quarter Earnings 2011

Cisco posted net sales of $10.9 billion a 5% increase year over year. Earnings per share were 42 cents. This was better than the forecast of 35 to 38 cents. Earlier on in the day many analysts were expecting Cisco to miss their earnings. CEO John Chambers has thus far done well in restructuring Cisco. Yesterday, shares were up over 1% on news that Cisco hired David Yen a previous executive of Juniper, one of Cisco's main competitors. David Yen specializes in the server access and virtualization technology group. Cisco has not turned around yet, the company needs to continue to take effective steps in the near future. Shares jumped over 4% after hours but quickly fell to negative as the conference call discussed negative effects on margins and a plan for global workforce reductions of full-time and contract workers.

-Simeon Kawakami

Thursday, May 5, 2011

The Hartford Q1 Result and Outlook

           On May 2nd, The Hartford (HIG) announced Q1 earnings of $1.01 per share, modestly exceeding estimates of $.95. CEO Liam McGee stated full year EPS is trending towards the top of the previously issued 3.70–3.90 range. He noted, “First quarter core earnings were up 24% over prior year... [and] book value per share was $45.93; up 3% during the quarter.” Since the announcement, the consensus Yahoo estimate for FY2011 has been raised by 11 analysts from $3.81 to $3.92 (3%), nearing UASBIG’s modeled EPS target of $3.94. According to Bloomberg, the consensus target price is now $32.64 up 4% from the pre-earnings estimate of $31.36, which is still shy of the pitched 12-18 month target price of $36.49. As of today’s close HIG is trading at $27.10, which is 0.7 % under our cost basis of 27.28.

           The conference call featured two bearish topics: Japan, and the recent domestic tornado damage. Management implied that Japan is no longer an important issue for HIG, “[our hedging program] will limit The Hartford's downside risk under severe capital markets conditions, while preserving some of the upside should markets improve.” On the Tornados, “second quarter catastrophe losses may exceed last year's second quarter total of about $200 million.” However, P&C is only about 40% of total revenues and I find it hard to believe that management would give optimistic guidance if it thinks losses are going to be extreme.

           There were four bullish topics: a recovery in insurance pricing, solid results in the financial products segments, renewed optimism for their embattled variable annuity business, and possible capital returns. First, the Council of Insurance Agents & Brokers finds, “fifty-seven percent of the brokers responding to the survey said they saw an increase in demand, compared with forty-seven percent last quarter.” Hartford’s P&C commercial written premiums grew 9%, and individual life sales were up 13%. Second, “Wealth Management, retirement plans, and non-proprietary mutual funds each reported double-digit sales growth.” Third, McGee provided more color on the company’s pending return to the variable annuity market, “We are working toward an all-weather, rational portfolio of products in 2012… [some] we expect to launch this year. And overall, I'd say that we remain confident about our goal of $5 billion in sales in 2012.” This is important because UASBIG is currently projecting half that. A move to four billion or five billion in annuity sales would put 2012 EPS in the $4.10 to $4.32 range, ahead of the modeled $3.80 and current consensus of $4.05. Fourth, as the balance sheet continues to stabilize, management will have more free cash to accelerate gains in shareholder value, “it could be for dividend actions, it could be share or warrant repurchases, it could be risk mitigation.”

           Ultimately, Q1 results and commentary further solidified UASBIG’s investment thesis and 12-18 month target price of 36.49, or 34.6% above today’s close. It doesn’t seem prudent to revise the target price at this early stage, but we’ll continue to monitor the position.


Wednesday, May 4, 2011

Chesapeake Earnings Q1 2011

Chesapeake Energy (CHK), the second largest producer of natural gas, reported Q1 adjusted EPS of $0.75. This topped industry estimates of $0.70 per share. Revenue fell 43% to $1.6 billion compared to the same period last year. The company attributed the fall in revenue to a decrease in the price of natural gas. CHK realized a sales price of $5.31 per million cubic feet of natural gas compared to a price of $6.31 a year ago. Production increased 20% on a per day basis to about 3.12 billion cubic feet of gas.

The company announced a one-time charge of $725 million due to a loss in its hedging operations. According CEO Aubrey McClendon, CHK has met its goal of reducing debt by 25%. The company is also finalizing its purchase of Bronco Drilling Company Inc. (BRNC) for $315 million. The acquisition would include 22 high-quality drillings rigs. Chesapeake is already the most active driller of new wells in the United States.

Alex Perez, Energy Junior Analyst

Monday, May 2, 2011

Alcoa Inc.

Alcoa Inc. was upgraded by Goldman Sachs to a "Buy" rating on Monday, May 2nd and is trading up 2% since this morning. Goldman Sachs also increased their outlook for Alcoa from a 6 month price target of $17 to a new price target of $22. A Goldman analyst said, “We view the structural industry change, driven by the de-linking of alumina from the aluminum price, as a potential major long-term contributor to Alcoa, which is the largest global third-party alumina seller.”

In response, Alcoa Inc. adjusted their 2011 and 2012 EPS from $1.10 and $1.25 respectively, to $1.40 and $1.65.

Jeremy Pellizzari, Junior Analyst