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 

Friday, October 26, 2012

Cerner Beats Expectations, Up 11%

Cerner Corporation released earnings Thursday with their fifth consecutive quarter of double-digit growth. Their revenue was $676.5 million which was an 18.5% increase from Q3 2011, and beat analyst estimates of $638.1 million. Cerner reported adjusted net income of 60 cents per share which beat analyst estimates of 55 cents per share. Cerner also was able to add several new clients, both in the United States and Globally. One of Cerner’s new initiatives that our thesis was based on was their cloud-based solutions, and they made great progress rolling them out. Cerner has not changed their outlook for the fourth quarter and remains at 61 cents per share, which leaves full year EPS estimates at $2.22 per share. Cerner released after the bell and the stock rallied 10% following the announcement. At the bell the next morning Cerner opened up as high as 15% before retracting to gains of about 11%. This earnings release confirms our thesis and we will continue to hold Cerner Corporation with a price target of $95.

Ryan Ranado, Technology Sector Head

Thursday, October 25, 2012

Alexion Pharmaceuticals (ALXN) 3Q12 Earnings

Yesterday, October 24th, Alexion Pharmaceuticals released its earnings for the 3Q12. Overall, the company had positive results showing improvements from the last quarter. Through the sale of their only commercialized drug, Soliris, ALXN increased sales 44% year-over-year to $294.1 MM, marginally about Street estimates of $293.1MM. The main driver for this was the addition of new patients diagnosed with PNH in their core territories of the U.S., Western Europe, and Japan. The increase in PNH patients demonstrates the efficiency of ALXN's disease awareness program. Top-line also benefited from the commencing of Soliris sales in the aHUS indication. Approval for Soliris for the treatment of aHUS in Japan should be complete in 2013. Alexion is further looking to extend the approval for Soliris in other emerging markets such as Brazil and Turkey. Furthermore, the company reported a 66% increase of non-GAAP net income to $120.7MM, or $0.60 per share, beating Consensus by $0.13. On the balance sheet, the company had $905.5MM in cash and cash equivalents, compared to $806.2MM in Q2 2012.  Alexion has also reduced total debt to $161.0MM from $228.0MM in Q2. The goal of the company for the fourth quarter of 2012 is to continue to serve the increasing amount of patients diagnosed with PNH and aHUS globally, and continue to research and develop treatments for patients with severe and ultra-rare disorders. Alexion is currently leading development programs consisting of five therapeutic candidates, including Soliris, investigating across eight disorders beyond aHUS and PNH.

For 2012, Alexion is raising its revenue guidance from about $1.110-1.125B to $1.120- 1.130B as a result of the ongoing launch of Soliris globally. The company is reducing its ranges for SG&A, R&D, cost of sales, and tax rate.  Guidance for the 2012 EPS is being raised from $1.78-$1.88 to $1.99-$2.04 per share. Shares outstanding are expected to be approximately 201MM for the full year. With the expansion of Alexion’s global platform of Soliris, and advancing pipeline, the company should continue to benefit, and increase revenue into the final quarter of 2012.

Notably, analysts expect full year earnings of $1.90 per share on revenues of $1.13B.

- Monica Kotowski

Wednesday, October 24, 2012

Marvell Sell Thesis

Marvell Technology Group released revised guidance figures for Q3 on Thursday October 17th, and it looks as though Marvell is headed down even further. Due to negative PC growth in the last quarter, Marvell’s Hard drive storage segments have lagged behind previous guidance, causing them to revise revenue guidance to the range of $765 - $785 million, down from $800 - $850 million. Marvell still holds the best technology in the Hard Drive sector, being the only company that can put 500GB of storage on a single platter, but overall market demand is down and that is not enough of a competitive advantage to overcome the macro-environment. The SSD, Networking, and Mobile segments have remained at their previous guidance levels, which is a bit of bright news for Marvell. EPS guidance has fallen from $.22 - $.26 per share, down to $.17 - $.22 per share. Also announced with the guidance revision was the resignation of CFO Clyde Hosein, he was brought in to make fundamental strategic and business reformations at Marvell, however he was unable to accomplish this which leads us to believe that Marvell’s culture and founder-CEO have made changes near impossible. Due to being a semiconductor company, Marvell is trapped in one of the cyclical downward spirals that we often see in this sector. The slowing PC market is affecting Marvell more than we had anticipated. Although Marvell still remains in a great financial position, with $3.83 per share of cash, their slowing revenue growth is too big of a factor for the company in the short term. With Windows 8 coming out shortly, there is a strong possibility of a turnaround for the PC market for the next few quarters at least, if the operating system performs well. Given these circumstances we would like to sell Marvell to prevent any further downside, and revisit the stock once Windows 8 sales figures are available to find a possible buy opportunity. 

-Ryan Ranado, Technology Sector Head

PH Sell Thesis

On Friday October 19, 2012, Parker-Hannifin reported 2013 Q1 earnings, where we saw a decline in profit due to Sales being down and an increase in the costs. They reported EPS of $1.57, which missed analysts’ projects of 1.73, a miss of 9.24%, with revenue at $239.74 million. This is compared to last year’s first quarter when the company had an EPS of $1.91 with revenues of $297.02 million. This miss could be representing the beginning of a strong slow down for the company. This does not fall in line with our investment thesis for the company, where growth was expected to pick with the United States economy. Along with this, a rise in cost of goods sold has further squeezed the margins for a company that does not necessarily have room for much further decreases. Their international industrial segment declined by 8.9% year over year. This decline was much worse than the model or the market anticipated. These factors combine to create a situation where Parker-Hannifin was removed from the UASBIG portfolio.

-Matthew Buechele, Industrial Sector Head

Tuesday, October 23, 2012

CB&I Earnings Release Q3

     On October 23rd, Chicago Bridge and Iron released earnings for the third quarter of 2012. The company reported a net income of $80.2 million, equivalent to $0.82 per diluted share for 2012 Q3, versus $72.2 million, or $0.72 per diluted share for the same period of 2011. It further reports revenue for the quarter of $1.45 billion, increasing from $1.3 billion in 2011. Revenue and earnings per share were estimated at $1.47 billion and $0.81 respectively. Out of the company’s businesses, project engineering and construction and Lummus-technology increased their revenue versus 2011 Q3, while revenue from the steel-plate structures business decreased. New awards for the period were $930 million, compared to $3.8 billion in 2011, and the company had a backlog of $9.5 billion by the end of the quarter. A total of $4.8 million was paid in dividends to shareholders during the quarter.

     CB&I is looking at the future with confidence. In addition to the strong recent results, the company announced that they are expecting to finalize its acquisition of The Shaw Group Inc. in the first quarter of 2013, further improving and diversifying CB&I’s competitiveness in power generation.

Saturday, October 20, 2012

BSX F3Q12 Earnings 10/18/12 - (Ryan Kennedy)

     Boston Scientific released Q3 earnings on 10/18 and subsequently traded down 7% over the next two days compared to market losses of 2%. The company reported adjusted EPS of $0.16 per share, which was in-line with analyst consensus estimates and towards the upper range of management's guidance. Despite this, the stock fell heavily due to continued weakness in the firm's revenues, which fell 5% on a constant currency basis.
     BSX reported revenues of $1.74bn compared to $1.87bn over the same period a year ago. The firm has faced significant headwinds in its two main divisions, the Cardiac Rhythm Management and International Cardiology units, which account for 55% of BSX's total revenues. The Interventional Cardiology unit, which produces coronary stents, reported a 20% decline in sales driven by eroding market share from Medtronic's Resolute stent system. Goldman Sachs' analyst, David Roman, estimates the firm lost 5.2% market share YOY in the drug-eluting stent (DES) market primarily due to the Resolute Integrity. Management now estimates the company has mid- to high-30s in DES market share. Going forward, management expects to recapture market share due to the Promus Element, however, we expect the DES market to remain highly competitive with Abbott Laboratories, Medtronic, and Boston Scientific continuing to one-up each other.
     BSX also has faced difficulties in the Cardiac Rhythym Management (CRM) unit. Revenues in the CRM unit declined 8% driven by weaknesses in the broader CRM market. The use of implantable cardioverter defibrillators (ICDs) has declined since a research paper in the Journal of the American Medical Association suggested that 23% of ICD implantation were not evidence based, and the procedure should not have taken place. The research paper sparked a Department of Justice investigation into ICD implants, which has made physicians reluctant to perform the procedure without overwhelming evidence. Despite this, current research by UCLA Medical Center found that there are over 850,000 heart failure patients in the US who are eligible for an ICD but have not received one, countering the claim of overuse and suggesting potential growth in the area. Out of the firm's two main segments, CRM is the one with the highest potential for growth. Despite a weakening market, BSX has managed to increase market share with its Ingenio platform. Additionally, BSX has the first subcutaneous S-ICD, which has received early FDA approval, through the acquisition of Cameron Health. The S-ICD has the potential to be a blockbuster product for BSX, as it is the first device of its kind that doesn't require the attachment of electrical wires to the heart, and eliminates serious risks associated with previous devices. Lastly, a recent research paper has suggest the CRM has the potential to become a $12.5bn market by 2017 due to international growth (BSX's CRM sales are currently $462mm), and BSX plants to spend $150mm over the next 5 years to expand into the untapped Chinese market.
     Aside from the two main units, BSX saw above-market growth in 7 of 12 business units. Endoscopy and Peripheral Interventions both grew 7% on a constant currency basis, and are the firm's third and fourth largest units. These two units now account for 29% of the firm's revenues, and continue to post mid to high-single digit growth YOY. As these segments continue to growth, less emphasis will be placed on growth in the CRM and IC units.
     Despite disappointing sales, BSX has made tremendous strides in profitability. Gross margins expanded 400 bps, from 64% to 68%, as the product mix has shifted from the Promus stent to the Promus Element stent system, which carries significantly higher margins. This trend, however, is not expected to continue into the near future as the shift to the Element is nearly complete.
     Overall, Boston Scientific has continued to meet expectations on bottom-line growth and generate strong operating cash flows. Despite this, the stock has continued to trade off top-line growth, particularly within the CRM and IC units. Given the strides in profitability, any signs of strength in the franchise segments will warrant significantly higher valuation for the company. Given the prospects of the S-ICD, international growth in the CRM unit, and continued growth in the PI and Endoscopy units, we believe BSX may finally be on track for positive revenue growth. Management believes the stock is undervalued and is committed to using 50% of cash for share buybacks, which should create shareholder value going forward. BSX currently trades at a discount to peers in P/E, P/S, P/BV, EV/FCF, EV/EBITDA, and PEG, and we do not believe this is an opportune time to exit the stock. In conclusion, we reiterate a BUY rating for Boston Scientific Corporation.