Tuesday, December 24, 2013

Google Inc.

Google has surpassed our former price target of about 1074 US dollars and is currently sitting at $111.84 per share.  As a result we have gone back into the model to revise some estimates. We believe that Google is a hold for the time being. The company still has so much potential and is constantly searching for feasible new revenue streams. They just launched their cloud platform, an industry that has been enjoying profits despite increasing entry, and they have many other projects and acquisitions in development. These include but are not limited to, Google Glass, their self-driving car, and of course their recent acquisition of the reputable robotics firm, Boston Dynamics. We believe that Google will see success in a lot of its new ventures as well as continued increases in their ad revenues but despite all the positive sentiment for this technology giant there are still things that can negatively affect Google’s share price in the future. The probability of success for Google’s Motorola segment is still unknown and this can potentially hurt earnings. The same story applies for any of Google’s various new business ventures that may just result in unneeded R&D costs along with other expenses that decrease their bottom line. Although confidence remains in the company to succeed and be able to introduce some new disruptive technologies to the market in the long term, Wall Street is going to continue placing very high standards on the 1000+ dollar per-share company and the possibility of them missing earnings in the shorter term is very realistic. Also all of the NSA spying allegations that we hear more about every week are sure to hurt the company’s share price. At the same time this will help keep multiples at a more realistic level and prevent an explosion in share price that isn't backed by the company’s performance and the value that Google can bring to shareholders. Google is currently trading at around 31.3x its trailing twelve months earnings. This multiple has made a hefty climb up from the 22.2x that it was trading at when the year began and is trading about 41.5% above its 5 year average P/E of 22.12x (TTM). We are hesitant to go and increase EPS estimates as many analysts have been doing but the P/E multiple used in our valuation was increased because Google along with its peers have seen much higher multiples throughout 2013. We think that this is justified in Google’s case. I have arrived at a new price target of $1,300.00 per share for the time being. We consider this a very modest estimate considering our EPS is below consensus and a P/E multiple of 26.07x was used. This increased multiple was arrived at by taking 10% less than the average between Google’s five year mean and the mean among some of its most closely comparable peers. The tablet and mobile markets are rapidly expanding as consumers are buying more and more tablets and mobile devices rather than PCs and the Android operating system is installed on over 80% of all these devices. If the company meets EPS consensus of around 44 for FY2013 next earnings call this would imply a price of 1147.08 using our P/E and if its multiple continues in the low thirties then the price per share will get above $1300 a lot sooner than we think. The emphasis on P/E is due to the fact that it represents 50% of the weight in our valuation. 15% of the valuation is dedicated to the Enterprise Value to EBITDA ratio, for which we use a multiple of 20.73x. I have not altered this multiple as it represents only a slightly higher level than the average among Google and their peers. The other multiple that holds a significant weight in our model is price to next twelve months free cash flow (P/FCF). This multiple was increased in the same exact fashion as price to earnings and makes up 25% of our valuation. We currently use a P/FCF multiple of 19.46 times the next twelve months free cash flow, which is not much higher than Google’s five year average for the multiple which is 17.16x free cash flows. Our free cash flow projections are 23.236 MM and 26.159 MM for 2014 and 2015 respectively. The remaining 10% of our valuation is represented by our DCF valuation which provided with us a price of only 961 dollars per share. This value would increase with an upward revision in earnings, but again, we are hesitant to being overly optimistic. Still, Google is one of the strongest companies in the world and although an EPS miss and overvaluation in the short term is worrisome, there is too much exciting news that comes out about this company and people seem to be on the edges of their seats waiting to see what it will do next. Our price target still represents an upside of 16.9% and a further upward revision on the price target is still on the table. The market overall has been responding very well to the interest rate increases along with the budget deal but the impacts and details of the budget deal are still under scrutiny. Equity prices across the board will most likely see some decreases because some demand is sure to shift to risk free/ low risk bond investments. Still, if interest rates increase slowly and transparently the allure of high returns in the stock markets should keep current demand intact in the short term at least.

Sunday, December 22, 2013

Spirit Arilnes

Spirit Airlines increased 4.11 percent December 20th due to the new U.S budget deal.  The U.S budget deal consisted of U.S airlines repealed and won $380 million in fees that they pay for aviation security every year. The previous deal consisted of passengers paying $2.50 per flight segment or a maximum of $5 each way. The new aviation charges will increase significantly to $5.60 each way of a trip which is a mammoth win for United States airlines.  The Transportation Security Administration aviation security costs covered by fees will rise from 30 percent to 43 percent under the new agreement, stated the House of Representatives. Passengers will now have to pay more than half of their previous costs to continue airport security that includes passenger and bag screening.

All in all passengers will be required to pay extra for security purposes and don't have a choice if they want to travel with U.S airlines.  The new aviation security fee is to be repealed on October 1st, 2014.  While reaching this deal congress agreed to eliminate one of the 17 unique taxes on the aviation industry.  The TSA has never increased aviation security costs since it was first established after the 2011 terrorist attack and they agreed that with a significant amount of technology improvements and high technology explosive scanners.  In my opinion I believe that this new deal with have an affect on the majority of the U.S airlines and a key factor to keep in mind is if increases in taxes for passengers and fees will result in decreases in air travel.  However I believe it will have minimal impact because I strongly believe that passengers will comprehend that if they demand increases in security and airport safety this new deal was necessary and passengers will continue to travel especially under the new aviation costs standards, they don't have many ways to work around it if they want to travel.

-Guillermo Dilone, Junior Industrial Analyst

Monday, December 16, 2013

Anadarko Petroleum Sell Thesis

Anadarko Petroleum Corporation reported their third quarter earnings which climbed 50% due to higher oil sales boosting its sales results. The company’s oil and condensate sales rose by 10% to $2.39B because volume grew to 775k which is up from 739k a year earlier. The company also saw that its Quarter three onshore sales volumes rose by 61k a day and also is because of a 16% rise in liquid volumes. The company initiated well completion activities at 80k a day in the deep-water Gulf of Mexico. The project remains on schedule, with the first oil production expected during 2014. The company did lower its full-year sales volume guidance, now expecting 281M-284M. Though all this positive Quarter three news, The Company is still undergoing some serious financial troubles due to a pending lawsuit.
Andarko Petroleum Corporation (APC) and its Kerr-McGee Unit, Acted improperly in its spinoff of Tronox Inc., in 2005. This improper dispensing of Tronox may lead Andarko to have to pay as much as 14.12B Dollars in Damages for environmental clean up as well as health claims. Last night (12/13) the stock plunged 9.3% and reduced its Market Value down to 38 Billion. This case became a threat to the company when yesterday when the judge was trying to decide how much money can be recovered from the successor to a polluting company even after bankruptcy has cleaned up whatever obligations the company may have as far as debt. This case originally stems from Kerr-McGee’s spinoff of its chemical business and environmental liabilities as Tronox in the beginning of 2005. Just over three months after the transaction took place, Anadarko offered to buy Kerr-McGee’s oil and Natural Gas Assets.  Because of this pending lawsuit, I believe the time is right to sell the company because the company does not have the assets to sufficiently pay off this lawsuit without it impacting its stockholders.
 -Andrew O’Brien, Junior Energy Analyst

Wednesday, December 11, 2013

Masimo Launches New Product to Reduce Global Newborn Mortality

Masimo on Friday Dec. 6 announced the launch of iSpO2™ Rx Pulse Oximeter with M-LNCS™ connector.  The new product enables adhesive use on newborns for accurate and cost-effective screening with mobile devices in low-resource settings.  The new technology has shown through studies to be the most accurate pulse oximetry during challenging conditions and has proven to help physicians in identifying life-threatening conditions in newborns.  Pulse oximetry is a noninvasive method of monitoring a patient’s O2 saturation, pulse rate, and perfusion index.  Globally, about 3.3 million newborns die within the first month of month of life.  Pulse oximetry is critical for newborns in determining the early onset of neonatal infection, sepsis, pneumonia and birth defects among other major killers.

On Friday Dec 6. At around 2PM Masimo’s stock quickly appreciated following the announced launch of iSpO2 Rx.  iSpO2 Rx’s launch is unique to its competitors in its accuracy and cost efficiency to monitor newborns in low resource environments.  The device adhesive sensor attaches across the infant’s foot and has capability to wirelessly transfer test results to an iPhone, iPad, iPod touch, and soon Andriod.  These key features are completely new to this category of devices.  iSpO2 Rx is currently also available outside the U.S.

Moving forward iSpO2 Rx serves as the lynchpin of an ongoing collaboration with the Newborn Foundation and marks the debut of the BORN Project (Birth Oximetry Routine for Newborns).  Masimo’s collaboration with the Newborn Foundation marks the first global health initiative to reduce infant mortality through access to mobile-enabled technology.  Masimo’s iSpO2 Rx currently the clear leader in this category.