Wednesday, August 28, 2013

JOY Reports Q2 Earnings

Joy Global reported earnings today, beating the general consensus. Joy reported an EPS of of $1.70, beating estimates of $1.36, and reported revenue of $1.32 billion, beating estimates of $1.18 billion. Bookings fell 36% to $695.4 million amid lower commodity prices. There was an 87% decrease in the order of original mining equipment, part of a 27% decrease of surface mining equipment. Underground mining machinery bookings also decreased 43%, and net sales fell 5% to $1.3 billion. Joy also intends to buyback $1 billion in stock.
            Joy fell 4.72% today at close, driven by consumer being skeptic on the future of the company. Joy is maintain their fiscal year revenue guidance of $4.9-5 billion, despite them coming out and stating that the market would have a difficult time sustaining anything about $4 billion. Joy’s 2014/2015 EPS guidance is way above where it should be, and should be getting corrected in the coming weeks.
For the future, Joy is expected a less than stellar fourth quarter, as they have depleted $1 billion of their backlog. While Joy is stating that the coal market is beginning to recover, the numbers for that market continue to decline. I see Joy as more of a value trap right now as they have projections that won’t be met and are preparing for a subpar quarter; we should evaluate our options of bringing it into the portfolio going forward. 

Anadarko sells a Natural Gas stake in Mozambique

Anadarko Petroleum (APC) sold a 10% stack of their natural gas development block offshore Mozambique for $2.64B in cash to India’s state-controlled energy company ONGC Videsh.  Anadarko now controls a 26.5% working interest in the project off the coast of the country.   This extra cash will help the company fund its’ plans to invest $5.5B in the US to boost oil production during 2013.  The news caused Anadarko to move past $93 today, touching a new 52-week high of $93.12.

Friday, August 23, 2013

Target Reports Second Quarter 2013

Target released its second-quarter earnings on Wednesday the 21st which had net earnings coming in at $611 million, or .95 cents per share, up 6%. Target opened 44 stores in Canada during the quarter, bringing its total to 68, but diluting per-share earnings by 21 cents.  Sales increased 2.4 percent to $16.8 billion from $16.5 billion last year, EBIT increased .4 percent from $1,324 million in 2012 to $1,330 million in 2013, net interest expense decreased to $171 million from $184 million in 2012, and gross margin rate increased by .2% to 31.4 percent. In the second quarter, the Company returned more than $1.1 billion to shareholders through dividends and share repurchase. Year-to-date, the Company has repurchased approximately 21.9 million shares of its common stock at an average price of $67.41 for a total investment of $1.47 billion, and paid dividends of $463 million. Gregg Steinhafel, the CEO of the company says that "Target's second quarter financial results benefited from disciplined execution of our strategy and strong expense control, offsetting softer-than-expected sales”.
In third quarter 2013, the Company expects adjusted EPS of $0.80 to $0.90 and GAAP EPS of $0.55 to $0.65. The 25-cent difference between the adjusted and GAAP EPS ranges reflects expected dilution of 22  cents related to Canadian operations and 3 cents related to the expected reduction in the beneficial interest asset. For full-year 2013, Target now expects adjusted EPS will be near the low end of its previous guidance of $4.70 to $4.90.

Thursday, August 15, 2013

BE Aerospace Announces Acquisition

BE Aerospace announced yesterday that it was acquiring Blue Dot Energy Services for $75 mm. Blue Dot is an energy services company that provides parts distribution, rental equipment, and on-site services to the industry. BE Aerospace is currently experiencing strong growth from its very cyclical commercial aerospace business, however the company has been looking to diversify into the oil and gas as others in the industry have done (i.e. Precision Castparts Corp.). The goal is to profit heavily from these cyclical swings in the aerospace market, however also diversify that risk to an extent during the troughs. With close to $800 billion in commercial aircraft backlog between the big 3, BE Aerospace is poised for strong growth in its aerospace business for at least the medium-term. We reiterate a HOLD rating as recently the stock has become close to fairly valued and believe now is not the time to enter new positions in the stock.

Spirit Airlines Drops Nearly 10% on the Week

Spirit Airlines has fallen close to 10% this week along with the other US airlines despite reporting air traffic that grew 25% over last year, after The Justice Department filed suit attempting to block the merger of American and US Airways. The fear is that if the merger is blocked that airlines will have to compete more competitively on price and will hurt profitability which airlines have only recently become re-accustomed to. The fear with Spirit is that they currently have the lowest total cost to fly. However depending on how competitive other airlines are with price, customers may decide that a Delta or US Airways flight at a new lower price with many more luxuries is preferable over a bare-bones Spirit flight. This seems like a stretch as the average fare price for a Spirit flight is only $77, whereas costs at a major carrier can be multiple hundreds.

Spirit should continue to reap the rewards of its low-cost business model, as proven by its traffic growth of 25%, and how it has continued to take market share in the domestic market. With over 400 markets targeted, and close to 50 Airbus A320 planes ordered, Spirit is poised to continue growing, and we feel that this merger risk is weighted more heavily towards the major carriers who offer similar prices and luxuries, and the true risk is on the higher margin international flights, which Spirit is not currently exposed to. We remain positive on Spirit and believe the low cost carrier (LCC) business model is the area of the industry that currently offers the highest growth, both through new routes, and taking market share from the over-priced large carriers. We reiterate a HOLD rating on the stock pending an updated price target. 

Monday, August 12, 2013

Atwood Oceanics, Inc. Q3 Earnings Release


Sorry that this was not posted to our blog sooner.  It was written up, but not posted.

On July 31, Atwood Oceanics, Inc. (ATW) reported Quarter 3 Diluted EPS of $1.37 on Sales of about $273 million.  This represents outperformance in Earnings per Share of $0.03 and Revenue of $1.5 million. 

Overall, it was an extremely positive quarter for the company.  It was also a very busy one.  Atwood Oceanics successfully secured contract extensions for four of its current rigs, all at price levels above current contracts.  A new contract was also secured for the second (at the time) newbuild drillship, also at a higher day rate than the contract secured for a comparable rig.  Also relating to its fleet, the company placed an order for a fourth drillship at the same price of its current three orders, the first of which is expected to be delivered in the first quarter of 2014 (October 1, 2013 – December 31, 2013).  In order to continue its aggressive newbuild program, Atwood offered an additional $200 million worth of senior notes to its current debt level.  These senior notes carry with them the same terms and interest rate (6.5%) as the notes already outstanding.  Finally, Atwood was able to repurchase 2,000,000 shares from one of its investors in the third quarter at a discount to market value.  These shares were terminated shortly thereafter. 

The outlook is positive for Atwood Oceanics, Inc.  The company is expected to continue aggressively pursuing contract extensions for its rigs currently in operation and for the remaining rigs in its ultra deepwater drillship newbuild program.  So far, management has had much success with this endeavor, and this is expected to continue.  Oil prices have remained elevated, and this has been just one contributing factor to the high dayrates specified in the company’s newly completed contracts.  It is important to note that decreasing commodity prices may have a negative impact on the stock price, but this is only one factor of the company’s operations and should not have a substantial negative effect on Atwood’s financial standing. 

I will continue my ongoing valuation of the company, and have a full recommendation and price target during our first meeting.

Sunday, August 11, 2013

Anadarko Reports Earnings

                Anadarko reporting net income of $929 million or $1.83 per diluted share for the second quarter of 2013, which is nearly $300M better than our estimates had been.  We saw cash flow from operating activities come in at approximately $2.502B and discretionary cash flows totaled $1.98B.  These improved results were fueled by higher onshore production of 20,000 barrels a day.  This helped push daily production figures to 750,000 barrels a day.

                The company has continued to show strength in their exploration for new opportunities.  The firm reached drilling milestones at four large scale projects in Algeria, Ghana, and the Gulf of Mexico.  We also saw five new deep-water discoveries in the Gulf of Mexico & Mozambique.  Anadarko has had immense success in the deep-water arena, as they have a 70% success rate in their deep-water exploration and appraisal program.  

                We continue to look for Anadarko to show strong growth and we anticipate that the stock could move north of $100/share in the coming 6 to 9 months, with a price target of $122.62/share at the end of 2014.  The biggest risks we see are international unrest (Middle East), increased offshore drilling regulation, and potential oil spills.  We continue to hold that Anadarko Petroleum is a BUY and recommend a full position at its current price of $89.80.  

Friday, August 9, 2013

AmTrust Financial Services Q2 Results

AmTrust Financial Services Inc. reported strong second quarter earnings. This past quarter we surpassed our price target early in July and continued to soar. This increase was a direct result of the original thesis playing out and having a great turn around on their recent acquisitions. AmTrust has made it clear in their Earnings Call that they intend to continue their model of organic growth in addition to target acquisitions. AmTrust Financial has recently acquired Sagicor of London & Lloyd’s which gives them more exposure in Europe. This acquisition in addition to the increased exposure in Asia and Latin America from acquiring Car Care Plan last year alludes that they are diversifying into foreign markets as a safety net. I foresee AmTrust Financial Services having continued success in the near term future however due to the expectation of a violent hurricane season and the potential interest rate risk back-lash from pulling QE3 I will continue to explore other options.

Overall AmTrust had an excellent quarter. Every sector in AmTrust saw substantial growth and as a result Gross Written Premium increased 63.2% year over year beating consensus. Growth was primarily driven by significant improvement in top line and agency acquisitions of Sequoia and First non-profit from this past year. Net earned premiums were up over 60% from last year with the two largest contributors being their Specialty Risk & Extended Warranty segment and their Small Commercial Business segment. Specialty Risk & Extended Warranty contributed 39% of the total net earned premium and as a segment increased 64.3% from last year due to two large one-time premium events. Small Commercial Business segments made up 35% of the total net earned premium and as a sector increased 82.1% year over year from increases in Workers Compensation Premium.

Going forward I would like to potentially switch over to a larger more diversified company with less interest rate risk. I believe there is still upside in AmTrust Financial Services however there is currently too much uncertainty in my mind to be holding a small cap insurance company.  There are still many new opportunities emerging from AmTrust’s recent foreign expansion and their continued domination in niche markets so I will always keep them on my radar. I intend to actively explore all available options and look forward to revisiting this stock after Hurricane season.

Thursday, August 8, 2013

Masimo Pulse Oximeters Taking Over Large Hospitals

8 out of the top 10 U.S. Hospitals are universally using Masimo products hospital-wide. These hospitals include world renowned institutions such as The Johns Hopkins Hospital and the Massachusetts General Hospital. The Masimo SET Pulse Oximetry, which is part of the Rainbow product line, is a handheld oximeter device, meaning it helps analyze different wavelengths of light to determine the contents in your blood, decreasing false alarms and leading to faster detection of any problems that could be life-threatening. Studies have shown it to reduce retinopathy, which is in its simplest form an eye disease caused by damages to the retinal blood vessels, better detection of heart disease in infants, reduce errors in diagnosis, and help save more lives. The hospitals also use this technologically because it is easily upgradeable to help implement the new features that Masimo puts out.

Masimo Reports 2Q Earnings; New Valuation Leads to Target Price Increase

Masimo Corporation (MASI) posted their 2Q13 earnings on July 31st, 2013 showing improvements on the Balance Sheet and strong figures on the Income Statement. Total Revenue for the quarter rose 11.9% to $137.4MM vs $122.8MM last year, beating out Street expectations of $136.4MM and narrowly missing our expectations of $141.9MM, mostly due to our higher anticipated revenue from their Rainbow products. Gross margin for the quarter expanded 10 basis points to 66.4%. Operating Income fell 160 basis points, mostly attributed to costs related to R&D and SG&A which grew overwhelmingly. Tax rates for the quarter skyrocketed to 36.2% vs 20.0% last year, due to the medical device excise tax, which began in the beginning of 2013, as well as a $2.0MM income tax provision for deferred tax assets of Cercacor, a separate company formed by Masimo in 1998. Net Income fell 12.3% to $17.0MM, or $0.30 per share on a non-GAAP basis, vs $19.4MM last year, or $0.30 per share. Masimo’s reported EPS beat Street expectations of $0.28 and was directly in-line with our expectations. 

On a geographical basis, all parts of the world that Masimo sells and distributes to are up; most notably in the Europe, Middle East and Africa region which saw a growth of 35.3%. The Asian and Australian market grew 9.7% and the Americas 8.5%. The Europe, Middle East and Africa region are expanding more rapidly because Masimo is continuing their efforts in investments of facilities and infrastructure in those key areas to help expand their operations in a more global scale. As a percentage of sales, these three geographical regions are now contributing nearly 280 basis points more than they did last year, accounting for 16.6% of all product revenue. 

On a segmented basis, product revenue, which breakdowns to worldwide direct products and Original Equipment Manufacturer (OEM) products, posted a 12.0% growth to $129.6MM over last year. Worldwide direct accounted for 83.0% of all total sales, and grew 10.0%. OEM Products, which accounted for the other 17.0% of revenue, grew 27.0%. Our main thesis of high growth in the Rainbow products still holds, as we saw a 19.0% increase to $11.5MM. The Rainbow line at Masimo is a monitoring device administered outside of the body to assess blood flow and physiological conditions, such as hemoglobin count, oxygen level & content, pulse rates & patterns, as well as various other measurements. The Rainbow product is in a class of its own, and as this unique product grows, we could see it expanding rapidly soon. 

To touch briefly on guidance, the future looks quite bright for Masimo. Rainbow products are expected to generate $50.0MM or more for the full year, with expectations of rapid growth towards the back half of the year. Mark P. de Raad, Chief Financial Officer at Masimo, states that the 19.0% growth we saw this quarter is expected for at least another couple of years, but expects a 40.0% supernatural growth in the later years as Rainbow begins to mature. Full year guidance of $548.0MM total revenue ($520.0MM product revenue; $28.0MM royalty revenue) and $1.14 EPS was not changed, and is still expected. 

Prior to releasing earnings after the market closed, Masimo ended the day at $23.29 a share. Stock price the next trading day quickly jumped, hitting a peak early in the day of $25.94, representing an 11.4% increase, before eventually cooling and ending the day at $24.75, or a gain of 6.3%. Masimo has since held steady, closing August 7th, 2013 at $24.92, a 7.0% gain since reporting. My original valuation of $26.11 has since been revaluated, leading me to increase my target price to $29.82. My Rainbow thesis still holds, and we expect a much more successful back half to 2013.

Tuesday, August 6, 2013

FL - Down 6.22% @ 11:15AM

Retail worries throughout the market due to American Eagle guidance.

Monday, August 5, 2013

CBI - Chicago Bridge and Iron - Earnings Q2 7/30/13

CBI – Chicago Bridge & Iron
          CBI released 2nd quarter earnings on July 30th with a beating of estimates by one cent on EPS ($1.04) which has been the norm for recent years and revenue of $2.9 billion.  This represented a gain of more than double of 2012 2nd quarter revenue with additional revenue being attributable to $450 million coming from growth of the business segments including ECM (Engineering, Construction and Maintenance), Fabrication Services and Technology & Government Solutions combined and the remaining $1.1 billion attained from acquisitions.  On top of growth, all three segments of business represented strong activity in the larger projects and an inflated back log from the beginning of the year. 
           Although gross and net income have risen, there has been a strong contraction in margin levels due to the comparatively lower margins of the acquired business (The Shaw Group) which was discussed and acquired in Q1 and also from changes in revenue mix of different their 3 different business units.  SG&A expenses have had an increase of almost near double but mainly due to the recent acquisition in which they have synergy savings greater than previously estimated and down almost a full percentage point of total revenue compared to Q2 2012.  Ending income from operations was 195.4 million having a 6.9% margin compared to a margin of 8.1% in Q2 2012 which is due to the same reasons as gross margin reduction.  Although there was a reduction in bottom line margin, the negative impact of the acquisition and revenue mix was subsided partly to show a lower decrease YoY compared to gross margins changes.
          Engineering, Construction and Maintenance has shown to benefit greatly from synergy of all divisions of the ECM group on big projects and this has been established as CBI’s main point of direction for the group to achieve growth and efficiency throughout. 70% of this division’s revenue has been deemed by the Oil & Gas business units this quarter, an increase from 63% which is evidence to the change in revenue mix affecting margins.  CBI has seen new awards and growth from new projects and additional work from the ongoing ones and deems this group “continuing to be healthy”.  LNG has also played a big factor in this where the Department of Energy has continued to issue licensing for the export of LNG which will give the opportunity to CBI to convert existing import terminals of LNG into export terminals and create opportunities for more project and backlog growth through this pipeline.  The major projects that make up the rest of this division were all moving at full force with some even ahead of schedule other than the one Gorgon project which is a joint venture with Kentz dealing with LNG where some contracting issues have delayed the project slightly but seem to not be an issue going forward with no materialization being seen as a threat.
          Government Solutions has shown a strong quarter with a book-to-burn ratio of 1.1 which puts an abrupt turnaround to the short term negative sentiment of sequestration.  This has to be taken hesitantly as operating income has seen improvement but at the lower end of forecasts.  There are 3 main factors impeding operating income which are new awards, overhead and performance on projects.  Overhead has been seen as being excessive relative to the size of the group and guidance has displayed a possible reduction in funding in 2014 compared 2013 levels.  This division is normally seeing projects small in caliber but of high quantities which a $150 million environment project in western United States initiated this quarter, will be a great addition in feeding the back half of the year with backlog and work.  As far as the Technology division goes, nothing that impedes guidance for the year and projects and development seem on course for pushing CBI’s growth prospects and objectives.
          Fabrication Services has remained a strong component for CBI and has had great diversification in market exposure in both domestic and international scope. In which markets are seeing a strengthening in shale gas, petrochemical and LNG developments and CBI has a good mix of backlog throughout, LNG, Nuclear, Gas Processing and petrochemical end markets.  This is the one division that has assisted in margin expansion with 95% of contracts consisting of higher-margin and fixed price characteristics.
           Overall, CBI has the market penetration and diversification to keep the company moving forward with growth.  As with almost all acquisitions, short term effects will inhibit the financials from expansion in hopes of long term synergies and expansion.  I see the different branches of CBI bringing a good product group moving forward as seen before and the acquisition of The Shaw Group being a great addition to the team. With the diversified products provided by CBI, the demand for LNG does not seem to be slowing down globally and I feel this will be a key driver on the supply side for business with demand driving the supply side for more quantities.  As CBI penetrates this market in many directions, I feel it will be a driver for CBI and the energy market will be pushing growth as they have a great umbrella into all different aspects and will be able to divert around volatility in the commodity markets as a whole.  I view CBI has a strong company in the industrial sector and one that will be a great addition as we repopulate our portfolio in the beginning of the academic year.  However only part of our investment thesis holds true and needs to be updated accordingly regarding back log levels and the prices of certain commodities for current timing before we can see this as a definite buy going into the semester. So I iterate this position as a HOLD until the updating of the investment thesis.