Sunday, October 27, 2013

Cerner Corporation 3Q13 Earnings: EPS in Line, Tepid Guidance, Neutral Rating

Cerner Corporation reported earnings October 25th and held a corresponding conference call after market close at 4:30 E.S.T. Revenue came in at $728.0MM up 8% yoy, shy of our bullish $771MM estimate. Lower technology sales had an impact on revenue but the impact on earnings was limited. Non-GAAP EPS was reported at $0.35 which is up 17% compared to 3Q12, shy of our estimate of $0.38 but in-line with street consensus of $0.35. In 3Q13 $28 million worth of shares were repurchased bringing year to date purchases at $170 million completing the share repurchase program authorized last December. In addition, 3.6 million shares have been repurchased post stock-split. 

Q3 highlights involve international opportunities for the firm. Cerner has gained clientele at two prestigious hospitals, CHU de Nantes in France (6th French client), and their first Brazilian client, Albert Einstein. Brazil is an emerging area of opportunity with 7,000 hospitals having limited EMR penetration. The company has also signed its first contract with the Saudi Arabia ministry of health as part of a plan to cover 200 public hospitals across the country. Domestically, Cerner had a big win with Salt Lake based Intermountain Health Care against their main competitor and look to this project as an opportunity to create a unique new system. The depth and breadth of Intermountain’s information provides a challenge for Cerner and calls for innovation to solve this issue of managing the information and keeping up Intermountain’s high quality standards. Cerner has also continued success with small hospitals, adding six new clients using their CommunityWorks software suite. The cloud-based platform Cerner has released has been able to become compatible with non-Cerner systems, allowing more flexibility for clients. Also, Cerner has become an authorized reseller for all apple-computing products, which will streamline the purchasing and deployment of devices to clients.

Initial Q4 guidance was offered at sales of $775MM-$815MM up 12% yoy at the midpoint and Non-GAAP EPS of $0.38-$0.39 compared to our estimates of $850MM and $0.45 EPS. While the Quarter offered highlights of strategic wins, looking forward we are disappointed with the light revenue guidance. Lower technology margin resale was noted as impacting revenue and Q4 will be the last quarter with a tough comparable technology resale comp. We will be selling out of our position and maintain a neutral rating on the stock.

Our decision to sell out of Cerner is based largely on valuation. Historically the stock has sold at an average of 35.5x times trailing twelve-month earnings. Currently the stock is selling for 44x ttm earnings, which represents a significant premium, indeed (close to peak) for Cerner. This premium is justified due to a Class A management team, leading market position and capitalization of domestic and international growth opportunities. However, the current premium valuation against what we expect will be another lower-than-expected revenue result in Q4 is not likely to lead to multiple expansion in the near term. The stock is now valued at 41.2x our FY13 EPS estimates. While there are still significant merits to our long-term investment thesis, in lieu of the recent earnings report we are not convinced that material multiple expansion in Q4 is likely, and remain on the sidelines for a more attractive entry point.

-Jeevan Sunny

Wednesday, October 23, 2013

Masimo Posts Positive Clinical Results; Earnings Call and Results Scheduled

The American Society of Anesthesiologists Annual Meeting, held in San Francisco, CA, presented the benefits for Masimo Rainbow Acoustic Monitoring (RAM) and Pleth Variability Index (PVI). 

Acoustic Respiration Rate (RRATM) is a measurement that captures and analyzes the trends of a person’s breathing, increasing the rate of respiratory problem detection juxtaposed with effective patient pain management. In conjunction with Masimo’s revolutionary Signal Extraction Technology (SET), the RAM device noninvasively monitored respiration rate by comfortably sitting on the neck of the patient. The measures are continuously captured for better detection of irregularities in ones breathing capabilities. Three clinical studies were performed thoroughly at three different locations – Stanford University Medical School, Loma Linda University Medical Center, and Tokyo Women’s Medical University – all of which proved RAM to be more effective than its competitors, including Covidiens Capnostream. Results seemed to be quite uniform, with a similar trend of high accuracy of respiratory problem detection and lower probabilities of errors.

PVI, a continuous measurement which assesses fluid status and administration in a patient, also proved to be quite beneficial. It is critical to a patient’s health, as poor fluid levels or inconsistent flow of fluid inflow on a patient undergoing surgery yield increased problems. Because it is noninvasive, the costs for hospitals and private clinics are much lower than some of the invasive counterparts. It concerns the relationship balance of airway pressure and fluid levels pumped into vessels. It can help predict and prevent cardiac failure and hypovolemia, a state of shock that induces decreased blood volume pumped into the body from shock of blood loss or sickness. The Study at the University of California Irvine Medical Center evaluated the reliability of fluid optimization, concluding that “Goal-oriented fluid optimization based on respiratory variation in the pulse oximeter waveform is feasible, and may help to standardize intraoperative fluid management”. 

Masimo will report 3Q2013 earnings after market close next Wednesday, October 30, 2013. I am estimating revenue increasing 12.4% to $133.9MM, vs. $119.1MM last year, largely in-line with street consensus of $132.5MM. EPS is expected to increase 13.9% to $0.27 vs. $0.24 last year, a bit higher than Street consensus of $0.26. My price target stands at $31.00, but is subject to potential revaluation due to both increased positive scientific and financials results.

Monday, October 21, 2013

Halliburton Reports Q3 2013 Numbers

Halliburton today released Q3 results, reporting net income of $745 million and $.83 per diluted share, excluding restructuring charges of $38 million.  This result in fact beat the street’s estimates by $.01 per share.  However, Halliburton reported revenues of $7.5 billion (quarter record), which was $60 million below expectations.  The major regional drivers behind their improving numbers were Latin America and Europe/Africa/CIS.

In the Eastern Hemisphere this year revenues have improved 17% and operating income has improved 30%.  New projects in Russia, the North Sea, and Angola have helped to drive the revenues throughout the year and should continue into the future.  The slowest growth was in fact seen in North America, as pricing for pressure pumping has declined due to an influx in offerings from multiple firms.  This trend will most likely continue in the coming quarter as services in North America typically slow down in the 4th quarter and new contracts will be signed with some clients.  Services were also halted for an extended period of time in Colorado this past quarter due to extensive flooding in the state.  Many energy firms experienced these delays and production should hopefully be back at full capacity within a month or so.

Looking towards Q4 of 2013 we should see continued growth especially within Latin America where the end of the year is a very strong time for software and consulting.  We also have seen strong growth in rig counts in Canada as there are now 388 rigs operating compared to about 190 in the second quarter.  This revival of activity should help fuel revenues in the region.

Halliburton also had multiple new technologies come out this quarter and they signed a contract to support Gazprom in all their technology needs regarding improving operational efficiency of their fields.  They also opened their newest manufacturing and technology center in Malaysia, which should help them extend their offering of products to eastern hemisphere clients. 

Halliburton had strong results for the quarter and after evaluating the firm and updating the model, I recommend HAL as a buy with a 2014-year end price target of $66.46, representing a 31% upside.

General Electric Orders Bode Well for Commercial Aircraft and Gas Turbine Supplier Precision Castparts Corp

General Electric today posted strong earnings from its industrial segments, and record orders, foreshadowing strong growth for our newest holding Precision Castparts Corp from which 15% of revenues derive from General Electric in the form of parts for commercial aircraft (primarily jet engines), and for industrial gas turbines. General Electric's quarter included a $1.9 billion order from Algeria's Soneglaz for turbomachinery, and a $2.5 billion commitment from Lufthansa for 34 engines stemming from its order of 34 Boeing 777-900 aircraft. Overall, orders in the power segment rose 39% and orders in the aerospace segment orders rose 92% year over year (300% growth for jet engine orders). Overall this supports our thesis for Precision Castparts Corp, as orders in the power markets stemming from a shift to natural gas continue to strengthen, and commercial aircraft orders remain at all-time highs which will drive revenues and the stock price as we remain in a bullish cyclical trend over the medium-term. We maintain our Buy rating on Precision Castparts Corp with a 12 month price target of $278, a 15% premium to current levels.

Saturday, October 19, 2013

Google Inc. 3Q13 Earnings: Accelerated Growth Rates Across Board, Shares up ~13%, Maintain PT

Google Inc. released 3Q13 results market close on October 17th and held a corresponding conference call 4:30pm EST. Gross consolidated revenue came in at $14.9BB, up 6% qoq and 12% yoy. Non-GAAP EPS was recorded at $10.74 beating the street consensus of $10.35, and continuing its reputation for never missing street consensus in 2 consecutive quarters. The stock reacted extremely positively after the call and was up about 13.77% at market close the following day after closing at $889.2 per share before the conference call. This is a new height for Google’s shares as they have reached beyond the $1000 mark, a huge milestone for the company.
            Earnings were ahead of expectations due to profitable growth in the company’s “google” segment, which made up about 92.35% of total revenue. This segment had revenue growth of 19% yoy 5% qoq with revenues amounting to about 13.8BB. The success is attributable to strong core advertising income as their sites revenue grew 22% yoy accelerating from an 18% gain last quarter. We applaud Google’s new enhanced ad campaigns as appropriate steps toward multi-screen advertising further monetizing mobile devices. YouTube traffic is now 40% mobile users and Google was able to increase operating profits despite a decrease in cost per click of 8% yoy 12% qoq. The cost per click is the amount of money that is paid to Google by advertisers for people clicking their ads on Google’s websites. This was outpaced significantly by the volume of paid clicks with aggregate clicks up 26% yoy 8% qoq, and rest of world revenue up 32% driving the company’s positive results.
            The outstanding results in the “google” segment were more than enough to cover for the Motorola segment that is responsible for one of the company’s most recent hardware release, the Moto X smartphone. This segment is still relatively new and a developing part of the company’s business that comprises of fewer than 10% of revenue streams. This segment recorded a $248MM operating loss which is a 29.17% increased loss yoy for the segment while the marginal loss was -21% down from -11% a year ago. Despite this, Net Income was at $3.54BB a 22.97% increase yoy.
            Google flaunts a market leading position and has an array of new products and services that will continue to drive revenue streams. Currently, Google is trading at 29.1x times earnings and has a 5 year historical average price to earnings of 21.6x times. We are maintaining our $1,074 Price Target which reflects a 22.6x multiple to our FY 14 EPS of $47.51. Google play and android continue to be worthy competitors of Apple and IOS while products like “Chromecast”, have gained considerable momentum topping Amazon’s kindle devices as the retailer’s best-selling item in the electronics category.

-Kyle Cruz 

Friday, October 11, 2013

Spirit Q3 RASM Trumps Management Expectations-Rises 10%


Spirit has blown through our price target of $39.50, and we are currently re-evaluating estimates based on the positive RASM numbers released last week. An updated price target will be announced by the end of the week.

Spirit Airlines rose nearly 10% in intraday trading today after a benchmark revenue gauge came in much higher than expected. Revenue per available seat mile (RASM) was announced to be in the low double digits after volume in September increased nearly 29%. This RASM figure trumped Spirit’s expectations of a mid-single digit number. As a result, Citi upgraded the stock to a BUY from a HOLD and Evercore Partners raised its price target to $44 from $41. We maintain our BUY rating on the stock, with a price target of $39.50.