Tuesday, July 30, 2013

DFS Q2 2013

     Discover Financial Services reported strong Q2 earnings.  This quarter we passed our price target of $49.74 .  This was due directly from our original thesis playing out.  It has continued its strong internal growth which was the focus of our thesis. I foresee this continuing but at a slowing rate.  After discussing with another analyst we decided it would be best to look into other payment exposure without the credit and interest rate risk.  We will continue to explore other options. 
     DFS had a very good quarter overall.  Both their direct banking and credit were strong.  Their total loans growing by 6% to a total of 61.7 billion.  There was also a 5% growth in their credit card loans, with their credit card sales volume growing 4%. Some of these gains were offset by losses in payment services due to the Diners franchise overseas.  Net interest margin being up 9.44%.  This is due to an overall decrease in funding costs.  Overall delinquencies were significantly down y/y but only slightly down from last quarter.  DFS is currently benefiting from the low delinquency rate and sustaining it is unlikely.  

     Going forward I am looking to sell DFS and replacing it with a similar company with less credit and interest rate risk. This is due to a successful thesis playing out and our price target being reached.  I do feel that there is still upside in discover because the core thesis of organic growth still holds strong.  There may be a similar company with more potential upside which I will begin looking for.  

Monday, July 29, 2013

Halliburton Issues $3 Billion in Senior Notes

Announced pricing today of an offering of $3 billion aggregate principal of senior notes.  The notes will be issued in four separate tranches.  The first will be $600 million with a 3-year maturity due on August 1, 2015, with a 1% coupon.  The second will be $400 million with a 5-year maturity due on August 1, 2018, with a 2% coupon.  The third will be $1.1 billion with a 10-year maturity date on August 1, 2023, with a 3.5% coupon payment.  Finally, the fourth is $900 million with a 30-year maturity, due on August 1, 2043 and will have a 4.75%.  This offer is expected to close on August 5, 2013.  This financing will be used to repurchase $3.3 billion of common stock, with a price between $42.50 and $47.50.  

Diamond Offshore Q2 Results

Diamond Offshore reported a net income of $185 million this quarter or $1.33 per share, which is lower than the same time last year when we saw net income of $201 million, or $1.45 per share.  However, if we revaluate these numbers and pull out the one time event of the sale of 5 jackup rigs in Q2 2012 ($50 million), 2013 was an improvement over last year. 

            The firm’s profits were higher than what the street had anticipated, however the revenue numbers they offered were lower than expected.  The company has continued to see slow growth due to the large number of rigs that are going through surveying or restoration.  It appears that over the rest of the year we can expect the same with faster growth taking place more in H2 of 2014 and thereafter. 

              The biggest news out of the company is that their first drillship the Ocean Blackhawk is going to be delayed at least 2 months.  This is due to engine cooling problems that will have to be taken care of before the ship can begin its’ first contract with Anadarko.  It appears that this will be the only drillship of the 4 that has this problem; so at this point the rest of the schedule remains unchanged.

            Overall, I would rate Diamond Offshore as a Hold.  This is because I believe their cash flows will be relatively flat over the coming 6 months and that the only news surprises we could see would be negative.  Until the company has its drillships working there is no large growth story, the company is trading at $67.93 and I anticipate we could see a movement to $63-$65 by yearend.  If it is in this range than during Q1 of 2014 it may be worthwhile to evaluate taking a position on within the above mentioned range.      

Halliburton Reports Strong Q2 Results

Halliburton had another strong quarter as the firm witnessed record-breaking revenues again as they rose to $7.3B and we saw operating income of $1.0B.  From these revenues we saw income from continuing operations for the second quarter of $677 million or $.73 per diluted share, which is $13 million less then what we had been looking for and 1 cent less per diluted share.  Halliburton’s results did beat analysts’ expectations of $.72 per diluted share.

Multiple segments of the business witnessed continuing strong growth especially within Bariod, Cementing, Completion, Multi-Chem and testing.  The Eastern Hemisphere sustained its pattern of mid-teens growth YoY with revenues improving 11% and operating income improving 23%.  The Middle East/Asia was the fastest growing region with revenue increasing 12% and operating income improving 17%.  We saw stagnant numbers come from Latin America where revenues were flat and operating income was down 7%.  The beginning of the year is typically a slow period for Latin America and I expect that we will see most of the LATAM growth this year in the final quarter due to increases in technology sales to the region. The U.S. saw improvement, but land rig counts stayed flat for the quarter and Canadian activity was relatively flat.  Operating margins improved 120bps to 17.5%.

Going forward I believe that we will continue to see strong growth from Halliburton as their operating margins abroad and in North America improve.  They have continued to be the leader in hydraulic fracturing and have seen the fastest YoY growth numbers international within the industry.  I would restate that Halliburton is a BUY and still has the potential to move to $57.50.  We can anticipate that Halliburton will continue its share buyback program as they announced on July 18th a target of $5B in repurchases.  

Sunday, July 28, 2013

Qualcomm Beats 2Q13 Earnings and Raises Foward Guidance

Qualcomm Inc. reported 2Q13 earnings on July 24 that shows revenues up by 35% year-over-year. Revenue was reported for the quarter at $6.2BB versus street expectations of $6.1BB. The rise in revenue comes primarily from the company’s CDMA, its mobile hardware division, which has 47%year-over-year growth. Qualcomm’s technology license division was up by 17% and its hardware business, which represents the company’s net revenue, was up the most. Qualcomm‘s 35% year-over-year revenue growth was offset by a 40.75% increase in total operating costs which was expected as they are shifting their strategy to lower margin system-on-chips for emerging market devices. Non-GAAP EPS was reported at $1.03 up 22.2% year-over-year, slightly lower than our $1.09 estimate and in-line with street consensus of $0.91. Over the quarter Qualcomm repurchased 16.7 million shares for $1.04B and increased their dividend from $0.25 to $0.35 a share.

Paul Jacobs, the CEO, stated that the future possibilities in mobility are near endless (HD audio, proximity based communication, wireless charging, ultra-HD video, etc). This seems likely due to a global geographic basis that 80% of the world’s population resides in emerging regions. 3g/4g mobile computing technology and devices are still in an early stage of adoption in the majority of the world and offer attractive growth potential. The company also estimates that high end device sales should improve by around 15.8% by the end of the fiscal year due to an increase in projected disposable income in foreign countries. 

Initial guidance was offered for 4Q13 at $5.9B-$6.6B sales and $1.02-$1.10 Non-GAAP EPS. In addition, the company raised previous guidance for FY 13 to $24.3B- $25.0B up from $24.0B- $25.0B and narrowed in on FY 13 EPS to $4.48-$4.55 up from $4.40-$4.55. 

Qualcomm has traded at an average 3-year historical price to earnings of 15.9x. We view the current ttm price to earnings of 17.2x as justified due to its industry leading position in the market. Our FY EPS of $4.60 assumes a p/e multiple of 16.5x which leaves us constructive on the stock. We reiterate our Buy rating with a blended p/e, trading comp, dcf, and ev/ebitda price target of $75.33 representing a 21% upside.

Saturday, July 27, 2013

B/E Aerospace Quarter 2 Earnings Release

BE Aerospace reported another very positive quarter, exhibiting strong growth across all segments as the market for commercial airplanes continue to experience a cyclical shift upward led by the strength airlines are experiencing, coupled with an industry shift towards more fuel efficient planes as prices continue to increase.

BE Aerospace reported earnings per share of $.89 for the quarter beating analyst expectations of  $.85 a year over year increase of 29% on revenues of $850 million, an 11% increase over the prior year's quarter. Growth was driven by commercial aircraft demand, and a surprise bounce back in business jet revenues despite negative conditions surrounding that segment. The commercial aircraft segment grew 9.9% as deliveries the Boeing 787 increased to 7 per month, with a target of 10 per month by the end of the year. Deliveries of the 737 max and the 777 remained strong, and Airbus orders on the a380 and a320 remained strong (including a 75 plane order from Spirit Airlines for the a321 to begin shipping in 2016). Business jet orders was the biggest surprise for the quarter as revenues grew 19% over last year. A strong mix of revenues (including General Dynamics Gulfstream g650) contributed to the growth. Consumables management also grew almost 10% as a result on strong deliveries.

Earnings also grew near 30% for the quarter on a significant increase of margins as well. Operating margins expanded 80 bps in the quarter, well ahead of the 50 bps increase management expected.

Orders were strong yet again with book to bill of 1.04 on a number of awards including Bombardier, Boeing, and Airbus orders in the consumables management segment. Also, BE Aerospace was awarded its first lavatory award to be used on all new Boeing 737's and Airbus A320's, as well as a contract to upgrade all existing planes. As a result, moving forward BE Aerospace will be the sole provider for lavatory systems for virtually all commercial narrow body planes (excluding Bombardier).

Going forward the market continues to be very strong for commercial aircrafts, and BE Aerospace is expected to reap the rewards. Expectations are for a 10% CAGR in wide body commercial aircraft deliveries over the next 3 years, and a projected double digit revenue CAGR past 2015. Additionally, management raised guidance for 2013 to $3.50 in EPS, a $.05 raise, based on operating margins that are beating expectations, representing a 24% increase in EPS over 2012.

We remain positive in our outlook for BE Aerospace and the commercial aircraft market. After earnings, the stock rose approximately 2%, crossing our current price target. We are currently reevaluating the stock and expect an updated rating shortly.

Friday, July 26, 2013

Actavis Posts Double-Digit Growth On Both Top- And Bottom-Line

Actavis (NYSE: ACT) posted remarkable results for 2Q13; recording double-digit sales growth, strong non-GAAP EPS, and also revealed some color on the Warner Chilcott (NASDAQ:WCRX) acquisition, which is expected to create a Specialty Pharmaceuticals firm that produces an annual revenue of $11.0B. 

On a segmented basis, ACT posted strong growth through their three divisions. Actavis Pharma, a division that focuses on generic oncology injectables and OTC drugs, posted results of $1,569.2MM, a 57.7% increase vs last year’s $995.0MM, mostly attributed to strong international sales, which was up 209.0% for the quarter. Gross margin expanded 430 bps to 51.9%, due mostly to margin expansion of generic version of Concerta. Actavis Specialty Brands, a primary U.S. division looking to expand internationally, focuses on Urology and Women’s Health products. Revenue for the division increased 21.4% year over year from $119.3MM to $144.8MM this year and saw gross margin expand 30 bps. Selling & marketing expenses increased by 10.6%, utilizing product promotion effectively to drive sales for the quarter. R&D for this segment also increased significantly by 23.2%, putting the extra cash used into investments to expand their biosimilar programs. Lastly, the Distribution segment which, as the name suggests, distributes products from more than 200 suppliers to 62,000 different locations, including hospitals, pharmacies, and nursing homes. Revenue for this segment increased 14.5% due to increased sales to chain customers. Unfortunately, it was the only segment to contract its gross margin, which dropped 30 bps. 

On a consolidated basis, net revenue increased 46.8% to $1,989.8MM vs $1,355.2MM last year, beating UASBIGs estimate of $1839.0MM and in-line with Street expectations of $1990.0MM. $655.3MM was added back to net income due to non-cash impairment adjustment, driving an EPS loss of $4.27 to a non-GAAP EPS gain of $2.01, which was $0.01 above Street expectations and 41.5% greater than the $1.42 posted in the same period last year.

Management gave guidance for FY13, raising the low end of their expectations due to a stellar quarter. Non-GAAP Net Income was raised from $1,087.0MM-$1,141.0MM to $1,094.0MM-$1,141.0MM. Non-GAAP EPS for the full year was raised from $8.10-$8.50 to $8.15-$8.50.

On shedding some light around the Warner Chilcott acquisition, management stated that they hope to close the deal by early 4Q13, creating an anticipated $11.0B annual revenue-generating global Specialty Pharmaceutical firm. A potential $400.0MM saved annually is expected due primarily to operational synergies and a transition of headquarters into Ireland, which gives them exposure to lower tax laws, potentially dropping their current taxes of approximately 28.0% to around 17.0%. This acquisition gives them a deeper exposure into Women’s Healthcare, a project they now plan to heavily pursue. This acquisition increases product portfolio size in Women’s Health, Urology, Gastroenterology, Dermatology, and a pipeline with 25 additional products, 15 of which are oriented for Women’s Health. After quarter end, approximately 6.4% of revenue is attributed to the Specialty Brands segment; Actavis seeks to address this problem through the acquisition of WCRX, which aims to increase the contribution to nearly 25.0%.  Based on their own valuation, they expect this acquisition to be more than 30.0% accretive to 2014 EPS.

Our thesis of aggressive acquisitions and portfolio expansion still holds true, and I personally believe ACT is going to be a leader in the Pharmaceuticals space, but due to our valuation and a price target of $133.00, we will bench our position for now until we can see a better entry point and/or a revaluation of the company. I believe management has done a great job, and will continue to do great but for now we must stay true to our principles and for that reason, and that reason alone, we are downgrading our position from a BUY to a HOLD until further analysis.

EDIT: Since releasing before market open on Thursday July 25, 2013, Actavis share prices have appreciated 4.7% to end the week at $132.71 a share.

Friday, July 19, 2013

Google Inc. 2Q13 Earnings: Surprising miss, Optimism regarding new revenue streams

Google Inc. Reported 2Q13 earnings on July 18th and held a corresponding conference call market close at 4:30pm E.S.T. The stock reacted negatively sliding approximately ~3.5% in after hours to the low $870’s as investors were thwarted over a top and bottom line miss. Gross consolidated revenue came in at $14.1BB up 19% yoy and non-GAAP EPS of $9.56 vs. $10.16 last year missing Street consensus of $14.5BB and $10.80 EPS respectively.

Earnings were affected by an uptick in expenses caused by a revaluation of their depreciation policy in regards to their real estate portfolio. This resulted in additional $121MM in depreciation expense, about half of which were one-time charges for assets that are now fully depreciated. Despite the earnings miss Google’s standalone business saw steady performance in the U.S and in the rest of the world.  Advertising revenue posted a respectable gain up 20% yoy, which continues to be the main driver to our thesis. 

Not surprisingly, the Motorola Division posted another operating loss as it has continued to since its acquisition in August of last year. Nonetheless, we view the hardware division as marking an exciting opportunity for Google as chatter of a smartphone dubbed “Moto X” is confirmed and speculated to be released in the next month- as soon as “in the coming weeks,” hinted by Google's senior vice president, Patrick Pichette. The move adds ‘fuel’ to the ‘fire’ as a speculated low price smartphone available across multiple carries can make Google a notable player in the hardware industry as it’s hardware and software businesses advance in conjunction. 

We are reiterating our BUY rating on Google as their standalone business continues to capture meaningful advertising revenue across an expanding ecosystem of devices. The deal enhances as Google continues to fund strategic acceleration in new businesses such as hardware, digital content and enterprise with the same discipline it has grown Android, YouTube and Chrome.

Capital One Financial (COF) Q2 Earnings

Capital One (COF) reported Q2 2013 financial earnings after the market closed on July 18th.  Earnings per share for the 2nd quarter increased to $1.87 from $1.79 in the 1st quarter, beating analysts’ consensus of $1.72. Net income increased 4% to $1.1 billion from $1.06 billion in the first quarter. Total revenue increased 2% to $5.6 billion from $5.5 billion while non-interest expense increased 1% to $3.1 billion from $3 billion.

Interest earning assets were down 2%, but interest-bearing liabilities decreased 3%. Net interest margin increased 12 bps to 6.83% and tier 1 common capital was reported at 12.1%, up 30 bps. Net charge-offs were down 15 bps to 4.28% and the delinquency rate was down 32 bps to 3.05%.  The provision expense dropped about 10% to $969 million, which helped to boost profits. Capital One delivered solid results across all business segments and generated significant capital during the quarter, positioning itself well to meet all regulatory requirements. Going forward management is looking to manage costs and maintain strong credit quality. Returning capital to shareholders is a strong focus, which will mainly be achieved by the $1 billion share buyback program. Shares were up after hours 2.31% to $68.60 after the earnings announcement.