Friday, December 21, 2012

DFS 4th Qt Earnings

Discover Financial Services (DFS) reported earning December 20th, 2012.  The missed analyst estimates by $.04 with a diluted EPS of $1.07.  The news caused DFS to drop 3.42% on the day to close at $38.41.

The earnings were strongly affected by the increase in company expenses.  They have increased 18% mostly associated with their acquisition of  The increase was largely due to higher employee compensation and the marketing expenses associated with Home Loan Center (a piece of, an increased card marketing initiative and a higher headcount.  These increased expenses are anticipated to go into the next quarter.  As we expected card delinquencies did increase.  They increased 5bps however, net charge- offs rates declined 14bps to a new historic low.

The companies ROE was 23%.  DFS is continuing on its goal of organic growth.  The company issued a $.40 dividend which is a 40% increase and also repurchased 2% of the shares outstanding.  Their direct banking pretax income was $827 million which was up 51 million (7%) from the year prior.  Both Discover's sales volume and credit card loans were up 6% from a year prior.  Personal and Private student loans grew 11% from the prior year.  Also other income had an increase of 50 million (11%) from last year largely due to Discover Home Loans which was created from the acquisition.  In the future discover will be switching to a December fiscal year.

Going forward, we expect to maintain these increased levels of expenses.  Because the company is looking for organic growth these expenses will lead to a boost in revenue.  DFS is at the beginning stages with Discover Home Loans, which I believe will be a large revenue driver. The second quarter of 2013 the PayPal deal Discover has will go into affect. This agreement can also lead to increased revenues.  Discover has continued their strong growth and I think we should continue to hold DFS.

Wednesday, December 19, 2012

CBI Earnings Guidance

Chicago Bridge and Iron (CBI) updated its earnings guidance for FY13 on Wednesday Dec 19th. The company is projecting earnings per share between $3.35-3.65 for the year, compared to analyst consensus of $3.51. CB&I’s guidance on revenue of $6.3-6.7 billion is more optimistic than the consensus of $6.26 billion. CB&I further expects new awards of $7-10 billion in 2013. A special dividend of $0.05, scheduled for Dec 31st, has earlier been declared.

In addition to the earnings guidance, the company announced its shareholder’s approval of the acquisition of the Shaw Group. Over 90% of shareholders voted in favor of the $3 billion deal that is planned to be completed in the first quarter of 2013. The shareholders of Shaw still have to approve the deal in a vote on Friday Dec 21st.

The CB&I stock jumped 4.46% to $44.47 on these news today. Looking forward, we will keep CB&I as a BUY. Our thesis needs to be updated with the upcoming acquisition, but we are expecting a significant growth in revenue and new awards in 2013. The Shaw acquisition will allow CB&I to expand and diversify its competitiveness in power generation.

Monday, December 10, 2012

Honeywell 2013 Guidance & Acquisition

Honeywell forcasted earnings for 2013 today and based off an earlier projection, they are on target for the midpoint of their previous target ranges.  Posting a 1-3% organic growth with a total of 4-5% including acquisitions and an EPS growth projected to be at 6-11% to $4.75-4.95, which are being based off of a positive outlook on strong margins.  Keeping in line with previous projections and still not hitting our price target, I feel we should hold Honeywell and with needing an update to the thesis, it may become a potential buy.   

Also with guidance on earnings being released, Honeywell announced another acquisition in which they acquired Intermec, a leading provider in mobile computing, RFID and barcode solutions, label and receipt printers for use in warehouse, field service, supply chain and manufacturing environments, etc.  They were purchased for 10$ a share or a total of $600 million, net of cash and debt. This is bringing more scale to their automations and control services portfolio and providing exposure to new services. 

To reiterate, with an needed update to the thesis, I will keep Honeywell at a hold with a potential opportunity to become a buy in the near future. 

Wednesday, December 5, 2012

AAPL Slides 6%

Ryan Stern, Junior Technology Analyst:
            Today Apple shares declined 6.43% to $538.79 representing a $37.05 loss off a slew of negative company news. Media companies including CNBC cited reports that Apple’s margin requirements have been raised by at least one clearinghouse. Apple is still up 33% this year, but is down nearly 24% from its record high in September of $705.07. While the raised margin requirements have not yet been confirmed by Reuters, the sell-off was mainly fueled by an influential research firm who projected Apple is losing market share in the table space. International Data Corp said Apple has likely shed market share in 2012 to competitors such as Google and Microsoft. IDC projected Apple’s worldwide tablet market share will slip to 53.8 percent in 2012 from 56.3 percent in 2011, while Android products will increase their share to 42.7 percent from 39.8 percent. IDC also projected Windows tablets to rise from 2.9% in 2012 to 10.2% of the market in the year 2016 due to the recent launch of Windows 8 and Microsoft’s Surface tablet. The decline has also been attributable to Investors taking profits concerned about increasing tax rates on dividends and capital gains. Despite Apple’s worst decline in 4 years, it is now gearing up for the introduction of its latest iPhone 5 and iPad mini in international markets. It will begin selling the iPhone 5 in 50 countries in December, including China and South Korea. Apple still remains a leader in the computer hardware industry and we believe Apple’s quarter 4 will benefit from the release of the iPad mini and revenue growth from iPhone 5 sales.
            We reiterate Apple as a buy and believe uncertainty has unjustifiably caused this sell off despite leading industry margins, substantial earnings growth and continued innovation. In addition, we will reevaluate the portfolio’s exposure to the tablet market within Apple (and potentially, Microsoft) to determine if the portfolio would be overexposed. 

Wednesday, November 28, 2012

AEO 3Q12 Earnings

Pre-market, American Eagle Outfitters (AEO) released earnings for 3Q12.  The company is trading at 20.69, up 6.7%, on the release. They reported net sales of $910mil compared to $819mil last year, which represents an 11% increase year-over-year, and beats street expectations of $873mil.  Sales were driven by a 10% increase in comparable store sales (including e-commerce), higher store traffic and conversion, and an increase in the average selling price. The company's AE Brand, aerie and e-commerce reported a growth of 8%, 5% and 28%, respectively, in comparable store sales.  An EPS of  $0.41 marks a 37% increase year-over-year.  Gross margin improved 350 basis points to 41.6%. Operating margin expanded to 14%, the best since 2008. Increase in margins was driven by strong top-line growth, lower product costs, reduced markdowns, and rent leverage.  AEO opened 13 new stores, of which 12 were outlet stores, during the quarter. It closed 19 locations, including 4 Aerie stores.  In 3Q12, the exit of the 77kids business was completed. An after-tax loss of $4mil was incurred during the the quarter. 

EPS estimate for the fourth quarter is between 54 – 56 cents, excluding potential impact of Hurricane Sandy impairment charges.  For the year, adjusted EPS is expected to be $1.38 to $1.40 which assumes comp store sales growth in the mid single-digit range. So far in Q4, AEO had record sales volumes on Black Friday and plan to see more sales growth during the upcoming holiday season. CEO Robert Hanson announced the plan to upgradge the existing store base through a robust remodeling program and to close approx. 35 to 40 "unproductive stores" this year and continue closings at that rate for the next several years.

Sunday, November 25, 2012

TGT Q3 2013

November 15, 2012:

Pre-market, Target Corporation (TGT) reported Q3 net earnings of $637 million, or $0.97 per diluted share (including a $0.15 gain from the pending sale of the company's receivables portfolio), representing a 17.6% increase over the prior-year period. Adjusted EPS, which omits expenses related to investment in the Canadian segment during the quarter, totaled $0.90, representing a 4.3% increase year-over-year. A comparable-store sales increase of 2.9% was in-line with management guidance. Comp growth continues to be driven by the company's 5% REDCard rewards and PFresh store remodel program.

In regard to our thesis, Target's 5% REDcard rewards and PFresh store remodel program continue to be effective sales- and profit drivers. Q3 2013 penetration of sales on REDCards was 14%, which is almost 3x the 5.5% experienced in the third quarter of 2012. As of the end of Q3, Target operated 1,130 stores that have been remodeled under the PFresh program. In regards to Target's expansion into Canada, the company currently has 45 stores under renovation and 1 distribution center operational. Management plans to have a second distribution center online in the near future. Stores in Canada are expected to open in April of 2013. 

Looking towards the holiday shopping season, 2 initiatives will differentiate Target from competitors and support sales and profit growth. The first is the company's partnership with Neiman Marcus. Under the partnership, starting December 1st, Target will offer 50 unique products created by 24 sought-after designers. In addition to the Target-Neiman Marcus partnership, Target has expanded its price matching program. Currently, customers who show a competitor's print ad for an identical product within 7 days of the purchase can take advantage of the company's price matching program. Under the expanded program, price matching has been extended to November 1st through December 24th, and includes prices offered by online competitors.  

     For Q4, management expects GAAP EPS of $1.45 - $1.55 and adjusted EPS of $1.64 - $1.74. Investors reacted favorably to Target's Q3 results, as shares opened +1.4% following the earnings announcement.

Thursday, November 22, 2012

Deere Fiscal Quarter 4 Earnings

       Deere reported fiscal 4th quarter earnings yesterday, that missed on profit and EPS. Revenue grew 14 percent to 9.79 billion with net income of 687.6 million representing 2.7 percent growth and EPS of 1.75 which missed consensus of 1.88 a 7.4 percent miss . As a result the stock dropped $3.16 or 3.67 percent. The 14 percentage point gain in revenue was offset by a 15 percent increase in costs of sales attributable to rising overhead and plant expansion as well as a 15.7 percent increase in research and development spending. Additionally, the company had a write down of 33 million on the water/irrigation aspect of their business which the company attributed to trying to integrate the water business into the agriculture and turf segment. All of this contributed to reducing Deere's profit to 2.7 percent. For the current quarter, agriculture sales rose 16 percent, and the forestry and construction segments had 7 percent sales growth. Looking forward, expect Europe to be the biggest negative and Latin America being the most positive. Deere expects sales growth of 10 percent in Latin America, flat to negative 5 percent growth in Europe, and flat sales growth in the US in 2013. The zero growth in the United States and Canada is being blamed on drought related effects on dairy and livestock farmers. The decline in Europe is due to the overall economic situation in addition to wet seasons especially in the UK which resulted in a lower harvest for the year.
      Going forward, costs especially research and development and overhead should increase as a result of opening two new plants in South America and hiring employees to fill positions. However benefits outweigh costs especially going into quarter one of next year. Deere is expecting sales to increase by 10 percent next quarter which is well above what analysts expected of 3 percent. Additionally, early next year is looking very productive when you look at early orders. Combines have sold out for quarters one and two, sprayers have almost been sold out for the entire year, and high horsepower tractors have sold out for the spring. This is an early indication that at the very least, fiscal quarter one is looking to improvement. Additionally, a continued housing market in the United States is positive for Deere's smaller construction and forestry segments. The construction segment should benefit from an improving housing market, and increased demand for lumber as a result should help Deere's forestry segment going forward. As a result I think that we should hold Deere at least through early next year as signs point to a strong quarter 1.

Saturday, November 17, 2012

Newmont Mining Corporation (NEM) Q3 Results

     Newmont Mining Corporation (NEM) reported earnings below analyst consensus and UASBIG estimates. The company reported revenues of $2.5bn and adjusted EPS of $0.86 per share, down 10% and 33% year-over-year. NEM missed analyst EPS estimates by $0.03 on lowered production volumes and increased costs and guided to the higher end of their cost guidance.
     Newmont Mining reported revenues of $2.5bn based on consolidated gold and copper sales volumes of 1,370kOz and 58Mlb respectively. NEM realized average gold and copper prices of $1659/Oz and $3.55/lb, up 2% and 24% respectively. Metal sales volumes fell 6% and 37% based on lower production throughout the quarter. Despite out performance from the core operations in the Americas, overall gold production attributable to the quarter fell 5% to 1,200kOz. Mines in the Asia-Pacific region, specifically Batu Hijau and Tanami in Australia and Ahafo in Ghana, lead to the underperformance in production. Performance in the Americas was strong with Nevada operations increasing production by 7% with the initialization of the new Emigrant mine, which is expected to add 80-90kOz of gold going forward. Additionally, the Yanacocha mine in Peru had a particularly strong quarter, with gold production increasing 8% and costs decreasing 15%.
     Despite increased production at Boddington, costs increased 25% on higher maintenance costs associated with unexpected equipment failure. Tanami production volumes decreased due to backfill shortcomings which limited access to expected high-grade ores. Lastly, production at Batu Hijau decreased by 89% due to low-grade ores caused by a wall failure in April. Overall, the strong performance out of the Americas and poor performance out of the Asia-Pacific region resulted in average costs of $693 per kOz of gold produced, up 11% year-over-year, which eroded gross margins.
     Going forward, we are expecting a strong fourth quarter for NEM as the company resolves mine issues and sells accumulated inventories. Resolved issues at Boddington should increase production and decrease costs attributable to sales, although Tanami and Batu will take longer to overcome. Production in the Americas will be bolstered by continued development of the Emigrant mine, although the outperformance in Yanacocha is expected to undergo some mean reversion. The Akyem mine in Africa continues to go smoothly and its completion in 2013 will serve as a positive catalyst going forward. Lastly, with the reelection of President Barack Obama, and the continuation of Federal Reserve Chairman Ben Bernanke, the macro environment remains conducive to gold appreciation. Bernanke, who would not have been reappointed under Mitt Romney, remains committed to loose monetary policy until 2015, which should bolster gold prices going forward. In addition to higher realized revenues and thus higher EPS, increases in the gold prices will create shareholder value through NEM's gold spot-linked dividend. NEM has already declared a Q4 dividend of $0.35 (3% annual yield) based on average spot prices in the $1600's, and this is expected to increase to $0.43 (3.7% annual yield) based on Q3 average spot prices in the $1700's. Going forward, if gold spot rises $85 or 5.0%, the dividend will jump to an annual yield of about 4.5%. Considering our expectation of strong fourth quarter production, favorable mine developments in Ghana, increased dividends, and favorable economics for gold appreciation, we maintain our BUY rating on Newmont Mining Corporation.

Thursday, November 8, 2012

Qualcomm beats expectations

Qualcomm Inc. released its fourth quarter statements on November 7th.  The company’s fiscal fourth quarter ended September 30 and reported a profit growth of $1.27 billion, or 73 cents a share from $1.06 billion, or 62 cents a year. The reason for Qualcomm Inc.’s 20 percent profit growth was due to a rise in demand for chips in smartphones. Qualcomm also reported a revenues growth of 18% year-over-year to $4.87 billion. Net income was reported at $1.24 billion, up 20% year over year.  The operation income was reported at $1.24 billion, down 11% year over year.
The chairman and CEO of Qualcomm, Dr. Paul E. Jacobs released his statement saying ““I am very pleased with our performance this year. We delivered record revenues, earnings and MSM chipset shipments driven by increasing global consumption of wireless data across a diverse range of devices, particularly smartphones, As we continue to invest in and execute on our strategic priorities, our broad licensing program and industry-leading Snapdragon and 3G/LTE chipset roadmap position us for double-digit revenue growth again in fiscal 2013.”

The fiscal revenues of 2012 were reported at $19.12 billion as a 28% increase and the net income was reported at $6.11 billion as a 13% increase. The Diluted earnings per share were reported up 39% to $3.51 per share. The return of capital to stockholders were reported at $6 billion, up 22%, and consisted of 31% of revenues.

For the first quarter of the 2013 fiscal year the company expects an adjusted per-share profit of $1.08 to $1.16, with revenue of $5.6 billion to $6.1 billion.  The company estimates for the fiscal year of 2013 that revenues will increase from  the fiscal year results of 2012 of $19.12 billion to anywhere between $23 billion to $24 billion. They also expect that GAAP operating income will increase 16-25% for the fiscal year of 2013. The earnings per-shares expectations are between $4.12 to $4.32 a share for the upcoming fiscal year.
Shares jumped 7.7% after-hours to $62.60 after the company released its earnings and expectations. The stock is up 6.3% so far this year.

-Kristen Pfaffe, Junior analyst

Tuesday, November 6, 2012

Neustar (NSR) 3Q12 Earnings

Neustar reported financial results for their fiscal year 2012 third quarter yesterday after the close. Diluted earnings per share increased 50% to $0.90 per share and total revenue for the quarter grew 38% to $211.2 million. The street was looking for EPS of $0.72 per share on revenues of 210.25 million. Shares of NSR have reacted favorably to yet another “beat and raise”, up ~6% mid-way through trading Tuesday.

The integration of TARGUSinfo, reported as Information Services (IS), continues to proceed extremely well. While only the back office has been fully integrated into the company and management did not expected to see revenue synergy until late 2013 or early 2014, revenue synergies are already being realized. Neustar is reaping the benefits of a single coherent sales operation platform they have just finished developing, allowing them to cross-sell and up-sell new and existing services. IS revenue totaled $42.3 million, representing an 11% sequential growth. We see the early success of the IS segment as a positive near-term catalyst for Neustar as it is showing strong early signs of being a significant contributor to the company’s overall business, further diversifying revenue mix.

Neustar continues to participate in the recompete process for the NPAC contract. President and CEO Lisa Hook believes that based on the three criteria the RFP uses to evaluate potential bidders, Neustar is “well-positioned to retain the contract to manage the impacts of any term that will begin in July 2015”. Neustar has been the NPAC administrator for the past 15 years building the world’s largest and most complex local number portability system.

The company repurchased 688k shares for approximately $25 million during the third quarter. Despite the share repurchase, cash, cash equivalents, and investments increased $34.2 million, to $269.2 million. 

Friday, November 2, 2012

Life Technologies 3rd Quarter Earnings Release

Life Technologies reported earnings on Thursday November 2nd, 2012 after the markets closed.  Revenues came in at $911 million, coming in above the high range they provided in July of $900-$910 million, while non-GAAP EPS came in $0.92. Analysts’ estimates were at $0.89 prior to the earnings release, and the stock reacted favorably after the release. Their beat on prior estimates were driven mainly by a significant increase in sales of the Ion Proton platform, continued strong growth in emerging markets, and lower R&D spending.

Excluding currency headwinds, they managed to stay inline with estimates with growth in the US and Europe, grew 10% in Asia-Pacific, and 4% in a flat Japanese economy. Gross margins in the third quarter came in at 65.6%, approximately 50 basis points lower than the same period in 2011. Operating margins were 28% in the third quarter representing a 1.4% decrease year over year, mainly due to unfavorable currency rates and greater investments in Asia-Pacific and their medical and diagnostics business.

Life continues to face unfavorable currency exchange rates and uncertainty in academic funding in US and Europe, especially with the upcoming election and the fiscal cliff coming up. In spite of this, management has been proactive in making sure that they are prepared if things go sour for academic funding. They have outlined a strategic share-repurchasing program and continue to look for ways to pull back on discretionary spending while still investing in up and coming markets and businesses, which should continue to offset these headwinds. In the case that the current favored candidate wins the election and congress reaches a deal, revenues could come in much higher for the fourth quarter than they expected.

In light of this, LIFE continues to increase revenues each quarter by utilizing both a product differentiation strategy and offering its new machines at a discount compared to their competitor Illumina, Inc. Currently, Illumina is the favored player in the up and coming genome sequencing market, because of slightly higher accuracy in their machine. Compared to Illumina, LIFE’s machine offers much lower test times at a lower cost, but still offering quality comparable to Illumina’s machine. We feel that these advantages, as well as a possible downturn in academic spending, will push customers to buy LIFE’s product over Illumina’s in the short to mid-term, since researchers will have to find good quality products at cheaper prices. Furthermore, LIFE is always updating and advancing the technology that will improve the accuracy of their machine.

The bull case for LIFE increasingly rests on their new machine, however, management expects that increased sales of their machine can further drive growth in their consumables business through existing clients. Through Ion Torrent, they can offer their broad array of services and tests that they are well known for. Management continues to invest in markets they believe will show significant growth and have raised the lower end of their year end EPS by $0.05 to $3.95-$4.00. 

HLF -5.1%

Herbalife Ltd. (HLF) dropped 5.1% on November 2, 2012 (S&P - 0.9%). Although no company-specific event contributed to the decline, investors may have interpreted Monday's +3% earnings surprise as a sign of weakness - HLF has beat the mean consensus EPS estimate by 14.3% on average over the previous 4 quarters. Despite this dip, we continue to believe that the growth of daily consumption distribution and will drive net sales, and infrastructure investment associated with the company's 'Seed to Feed' initiative will grow margins moving forward.

MET Q3 earnings

MetLife inc. (MET) released quarter three earnings on October 31st.

A loss of $984 million including $1.6 billion in goodwill impairment related to its retail annuity business as MET reduces its exposure to the risky product. CEO Steven Kandarian is targeting back offerings such as variable annuities by 12% by 2016. Variable annuity sales fell 46% year over year in a reflection of this plan moving forward.

Operating profit climbed to $1.32 a share from $0.91 just a year earlier beating street estimates by $0.04. Asian operating earnings rose 17% to 259 million while the America’s grew by 58% to $1.2 Billion.

Management gave no guidance on possible losses incurred by Hurricane Sandy. The market has responded negatively to the stock as they try to price in possible exposure to the storm.

MET continues to progress in its sale of MetLife to GE Capital. This quarter changes were made to the deal to shift regulatory oversight of the deal away from the FDIC. The sale is projected to be approved prior to a January deadline where MET would have to submit a new capital plan to the Federal Reserve. The sale of MetLife Bank is the largest short term driver for the stock as it would allow MetLife Inc. to raise the annual dividend and start share repurchasing programs. 

Thursday, November 1, 2012


Herbalife Ltd. (HLF) released Q3 2012 results on Monday, October 29.

Net Sales of $1.0 billion (+14%) were driven by a 17% increase in volume points over the prior year period. A 100 bps decrease in EBIT margin (15.3%) during the quarter was due to FX headwinds. Net Income totalled $117.8 - a 9% increase over Q3 2011.

Q3 EPS of $1.04 beat the consensus estimate by $0.03 or 3%. EPS guidance for FY 2012 has been raised from $3.88 - $3.98 to $3.99 - 4.03. Management has also introduced full-year 2013 guidance of $4.40 - $4.55.

Regarding our thesis, the expansion of the daily consumption DMO among distributors has continued into Q3. HLF now estimates the number of nutrition clubs worldwide to be 43,000, representing an increase of 18% versus Q2. Daily consumption distribution methods now account for approximately 40% of total sales volume (vs. 37.5% in Q2). Additionally, the company continues to invest in infrastructure to support global growth. During Q3, HLF's board approved the construction of a $130 million East Coast (U.S.) manufacturing facility that management anticipates will be complete and operational in 2014.

Shares opened +4.6% when trading resumed Wednesday (October 31) morning.

Watson Pharmaceuticals (WPI) Q3 Earnings release

Watson Pharmaceuticals released its third quarter earnings this morning. This will be their last stand alone quarter before their Actavis acquisition will begin to shape their financial statements.

Net Revenue increased to $1.29 Billion based on several new Generic and Branded product debuts resulting in an increase of 19% versus prior year $1.08 Billion. By segment, Global Generics grew by 14% to $920.9 M, an increase of 118.4 M but $300 M shy of street estimates. Global Brands increased to ~10% to $121.3 M and Global Distribution increased significantly by 44% to $243 M versus last year’s $168.8 M. This increase was attributable to new third-party product launches during the third quarter

Total Operating expenses increased 27% to $1,196 B due to Increased marketing expenses from growing international sales, third-party costs in biosimilars, and other costs related to the Actavis Acquisition

Adjusted EBITDA saw a significant increase of 18% to $304.6 M versus 3Q 2011’s $258.2 M

Adjusted Net income showed a significant increase of 24.2% to $172.3 M. This resulted in $1.35 per diluted share on a non-gaap basis versus last year’s $1.09. This landed within the mid to upper end of analyst expectations.

Looking ahead, WPI estimates total net revenue for 2012 to be $5.9 Billion with adjusted non-gaap earnings between $5.85 and $5.95 per diluted share. Adjusted EBITDA should fall between $1.36 and $1.39 Billion

2013 non-GAAP EPS is expected to grow between 30% and 40% over the high end of the combined range of 2012. This is inclusive of an additional 5.5 Million shares outstanding at the close of the Actavis acquisition

Wednesday, October 31, 2012

DaVita Inc. 3Q12 earnings

Yesterday, October 30th, DaVita released its earnings for the 3Q12.  The company posted solid third quarter results with earning per share of $1.52.  Net income jumped 6.9 percent, from $135.4 million, or $1.42 per share, in the third quarter of 2011 to $144.7 million, or $1.50 a share, during the same time period this year.  The company reported an additional $5.4 million after-tax-debt expense, or $0.06 per share, resulting from the potential acquisition of HCP. Operating income for the three and nine months ended September 30, 2012—including related expenses of $78 million—was $909 million, which is up from $801 million in 2011.  U.S. treatments for the third quarter were 5,550,645 or 71,162 treatments per day, an increase of 12.3 percent over the third quarter of 2011.
            Kent J. Thiry, Chairman and Chief Executive Officer, stated in the third quarter earnings call, that he expected the previously announced acquisition of HealthCare Partners (HCP) to close soon.  Once the acquisition is completed and HCP is fully integrated, DaVita’s leverage ratio will be 3.7 times net-debt to EBITDA, which is only marginally above their long-stated preferred leverage range of 3.0 to 3.5.  Therefore, they believe that this acquisition represents a “tremendous upside” to shareholder platform without significant changes to the company’s balance sheet.  The company has also altered its credit limits and facility agreements to allow an additional borrowing of $3 billion to be used to finance parts of the HCP transaction.
            In terms of outlook for 2013, Thiry stated that there are, “ significant number of headwinds and challenges to face on both sides of our enterprise”. More specifically, management is concerned with a potential 2 percent cut to the Medicare reimbursement, which could directly affect the revenues from their dialysis business.  In addition, they believe there is some uncertainty around their commercial book of business, as DaVita continues to lose money on Medicare treatments and has been relying on private insurance to make up for the loss.  On a positive note, Thiry believes that DaVita’s core kidney care business remains strong and is continuing to make improvements in clinical care—allowing the company to retain a strong market position, steady volume growth and strong stable cash generation.
            In terms of guidance for 2013 DaVita updated their operating income to a range of $1.315 billion to $1.33 billion, not including expenses related to the question of HCP.  In the reminder of 2012, management expects HPC to contribute $25 million to $30 million per month in operating income once the merger is completed.  In addition, 2013 operating cash flow guidance of $1.35 billion to $1.5 billion.

Saturday, October 27, 2012

Apple Sell Thesis (1/2 Position)

Before the iPhone 5 announcement, we cut our AAPL position in half (approximately $670) to take profits and eliminate the risk of underperformance after the iPhone release. This is precisely what happened and on October 12th (price $630), we reevaluated the situation and decided to double down on the position ahead of the iPad mini announcement and Q4F2012 earnings. Unfortunately, a number of factors caused the stock price to decline 4% (our stop loss for this particular trade), including iPad mini margin concerns and general fears about the upcoming earnings announcement. Management seemed to drive a point home throughout the conference call: results could be rocky in the short term, but the company is well positioned to take advantage in the long term as costs decline and production inefficiencies abate (see earnings release). Therefore, at this point we are withdrawing from the ST trade at the stop-loss point that was created at the inception of the trade ($605). Our LT AAPL thesis remains in tact, leaving us with a normal weighting position going forward.  

-Joe Esposito 

Apple 4QF2012 Conference Call (Thursday 5PM)

Peter Oppenheimer, CFO
            Apple released its fourth quarter fiscal 2012 earnings today AMC. About a half hour before trading, a Bloomberg headline indicated that AAPL would be launching its own Internet radio business in 2013. Pandora’s shares gapped down 20%, at which point trading was halted.
            AAPL released earnings of $8.67 (increase of 24% y/y) compared to expectations of $8.75 and with revenue of $36 billion versus expected revenue at $35.80 billion (Reuters). International revenue contributed to 60% of total revenue for the quarter. Revenue increased 27% y/y while operating margin represented 30.4% of revenue.  The company showed strength in its computer segment, with a 1% y/y growth compared to an industry expected 8% contraction for the quarter. Portable computers not make up 80% of the computer sales mix at AAPL. Strong demand contributed to a lower than expected Mac channel inventory at the end of the quarter (3-4 weeks compared to target 4-5 weeks).
            iPods market share of MP3 players was 70% in September according to independent research by MPD. A new version of iTunes will be launched soon to integrate iCloud while bringing a cleaner interface to the mobile and computer market.  iPhone sales increased 58% y/y compared to industry expectations of 45%. The iPhone 5 has been launched in 31 countries and is targeted to reach 100 before the end of the year. iPhone 5 demand continues to outstrip supply. AAPL recognizes revenue for iPhone products when it delivers the product to the customer, so this backlog will not be recognized until next quarter. Revenue for iPhone accessories increased 51% y/y, driven by new headphones, iPhone 5 cases and an effective marketing campaign. 
            Oppenheimer gave strong comments on corporate sales and iPhone integration into businesses. For example, BBC, WSJ and other media juggernauts have given iPhones to reporters on the ground to take HD video and pictures, which have been used in newspapers, websites and Twitter blogs. Also, companies like Amtrak have utilized the iPhone to save on paper costs. He remains very bullish on iPhone and iPad corporate sales in the face of increased competition going forward. iPad sales increased 26% y/y (less than anticipated). AAPL’s software developers have been working around the clock to fix the Maps App problems.
            New store openings across the globe have been extremely successful, notably a second store opening in Hong Kong. On average, AAPL stores receive 19,000 visitors per week per store.

            Revenue expected to be $52 billion in the December quarter. Gross margin is expected to be 36%, tax rate of 26% and $11.75 EPS expectations. Expecting a 73% y/y growth in iPhones and 80% growth in iPads. Future revenue will continue to benefit form a strong pipeline and movement down the cost curve as production becomes more efficient.

Question/Commentary Notes
            Y/y expected decline in EPS in December attributed to 14th week last year’s quarter, stronger USD, and lower gross margin. All new products currently have higher costs (lower gross margins)—they are high on the cost curve. This has been the case with products in the past. iPad mini margin will be below corporate product average, due to the nature of the product. AAPL has never introduced so many products at the same time, which is why you will see higher costs in the ST. Lower iPhone 4/4s price will contribute to y/y decline as well.
            In significant state of iPhone 5 backlog right now. Output improved significantly since earlier in the month. This is the largest volume ramp in AAPL history for any product.
            Confident that tablet market will surpass PC market. Enormous opportunity for AAPL in this area, extremely excited for Friday when the mini’s go on sale.
            China: Q4 revenue up 27%, mac up 44%, iPad up 45% (Greater China). FY revenue up 78% in China, which is now 58% of AAPL.
            “I haven’t played with the Surface yet, but we are reading that it’s a fairly compromised and confusing product.” –Tim Cook
-Joe Esposito