Thursday, December 11, 2014

Spirit Airlines falls 12.67% After November Traffic Report Release

On December 9, 2014, Spirit Airlines (SAVE) fell 12.67% to $73.77. There are a couple of reasons for why this occurred. First, today Spirit Airlines reported their November Traffic report. Although they reported gains in revenue passenger miles (15.7%) and total departures (17.3%), they reported a decrease in load factor (1.6%) which indicates a decrease in Spirit’s ability to fill seats. Also, according to the report, Spirit Airlines has noticed a compression in their fare structure for close-in bookings, especially during off-peak hours. This is likely happening because lower fuel costs is driving fare cost down. As a result of this and other factors within the company, Spirit Airlines expects to generate lower profits in the fourth quarter. Furthermore, they adjusted their expected operating margin to 18-19%. This resulted in Raymond James Financial, Inc. downgrading Spirit Airlines from an “Outperform” to a “Market Perform”
Although, Spirit Airlines may not perform as well as the company thought they would, there is still evidence indicating that there will be continued growth going into 2015 as Spirit Airlines takes advantage of low fuel costs. Furthermore, company guidance still estimates that the operating margin for first quarter 2015 will be 20%. Overall, with this news, it seems that the plunge in Spirit Airlines’ stock price was an overreaction as a result of some negative news and with what is going on globally. On December 9th, other airlines fell in price as well such as American Airlines (-4.94%), Delta Airlines (-2.13%), and Southwest Airlines (-3.19%). In short, although the disappointing November Traffic report, Spirit Airlines will continue to see growth going into 2015

Monday, November 24, 2014

Chicago Bridge and Iron Falls 5% on Goldman Downgrade

On November 24th Goldman Sachs issued a sell rating on Chicago Bridge and Iron (CBI).  This news pushed the stock down 4.96% to $54.26.  There was also a much higher volume of options being traded, with a large increase in put options, probably a reaction to the Goldman downgrade.  The bank did not give word on what caused the rating change from neutral to sell.

With a large amount of short interest in the stock, I look forward to a short squeeze after the company reports what I believe will be a strong fourth quarter and solid full year 2014.
CBI continues to be undervalued and maintains strong growth prospects.  The stock is only slightly below our buy-in price, and maintains a consensus target price with 25% upside.

Friday, November 14, 2014

Cisco Reports 1Q15 Earnings/ Sell Thesis



On November 12, 2014 Cisco Systems Inc. reported 1Q15 earnings after market close at 4:05PM.  Cisco beat analyst estimates by $80MM with revenue of $12.24BB.  Cisco did not meet my expectations of $12.47BB.  Cisco also reporting non-GAAP diluted earnings of $0.54 per share, beating analyst estimates by a penny, but missing my optimistic estimates of $0.63.  Cisco returned close to $2BB to shareholders through dividends and share repurchases.  Cisco also announced their CFO Frank Calderoni would step down at the end of the year.

During the first quarter of shipments, Cisco more than doubled its paying customer’s adoption of their new ACI controller that enables automation and programmability of the network.  The Nexus 9000 and the ACI have seen extremely strong demand.  Product orders in EMEA was a big revenue driver this quarter.  EMEA product orders had growth of 6%; U.K. product orders were up 20%, Germany’s were up 6%, and South Europe’s were up 20%.  Excluding service provider growth, growth in the U.S. was 12% and U.S. federal grew 34%.  U.S. service provider however declined 18% which Cisco previously warned could be an issue.  Cisco also faced pressure in Asia-Pacific, Japan, and China which declined 12% and China which was down 33%.  Routing also hurt Cisco as sales were down 4% as a result of lower CapEx spending by major service providers and challenges in EM.  Switching sales were up 3% which represents the first quarter in the last three that Cisco had growth in that segment.

Cisco has also taken numerous steps to differentiate themselves in the highly competitive cloud computing space.  They have taken their ideas of “Internet of Everything” and interconnectivity and created a cloud structure that can unify private, public, and hybrid clouds.  Different from big competitors like Google, Rackspace, and Amazon, Cisco allows its customers to seamlessly move their work between clouds.  This will also allow Cisco to package their software as part of the cloud solution which was one of my main theses.  As a result of Cisco taking the initiative to offer solutions (hardware packaged with software), services revenue grew 5% this quarter.  Services now represents over 23% of Cisco’s revenue.

Following Cisco’s great quarter we have decided to take our money and run.  Cisco provided disappointing guidance and cited issues that I foresaw and believe will stagnate their growth.  Cisco expects $0.50-0.52 EPS and revenue growth of 4-7% which are below consensus as well as my estimates.  They also face severe headwinds in their service provider segment and in emerging markets.  Cisco has fulfilled all my theses which include making numerous acquisitions, returning tremendous value to shareholders, offering software and hardware packaged as solutions, and cutting operating expenses.  Although Cisco has been good to us returning 20% on two occasions, and a generous dividend, I don’t see much potential for future growth so we will exit our full position.


Wednesday, November 12, 2014

Fossil Group jumps 8% on great Q3 earnings

There were lots of positives that Fossil announced in their recent earnings call. The biggest driver of the jump in their share price was that they signed a renewal contract with Michael Kors (MK). This is significant for the company because MK has been a huge driver of sales, especially in the US, but is also now taking large strides to expand internationally. The contract was set to expire at the end of 2015 which left investors very worried since MK has recently been about 22% of Fossil's sales. This contract renewal is a very positive sign that addresses one of the biggest risks that faced the company.

Aside from renewing this contract Fossil still reported a great quarter in sales. This was needed after a lackluster 2nd quarter which saw US sales growth drop down to 2% and a 410-basis-point drop in operating margins. The third quarter showed a return to growth in the US with wholesale sales increasing 6%. This 6% is significant because Fossil Group already has a significant market share of watches in the US with over 40% of the market. While US growth will be small compared to internationally, there is still room to grow in jewelry and handbags.

Where the company has expected large growth is in Europe and Asia, and this quarter they delivered with Europe wholesale increasing 15% and Asia-Pacific increasing 11%. Also Direct-to-consumer sales increased 11% due to store expansion internationally which was slightly offset by a decline in the US.

Overall Fossil had a great quarter with the renewal of the Michael Kors contract and addressing some issues when it comes to operating margins as well as sales growth in the US. One of the soft spots for the quarter was their sales growth in China. Although it still grew double digit in sales it was less then expected considering how large their sales growth has been there of late, with growth being as high as 50% in 2013. They attribute this to a softening retail environment but are still working to grow their infrastructure in China since it has is a large growth potential for the company. Fossil currently has a small market share in China which is a bigger watch market then the US that is only expected to grow.

Thursday, November 6, 2014

US Ecology Q3 Earnings

          US Ecology reported their Q3'14 earnings yesterday after the market closed.  Their top line was reported at $170.9 million which beat estimates of $157.8 million.  Their earnings per share was reported at $.65 compared to estimates of $.48.  Their robust earnings were led by growth within landfill volumes in the legacy business and double digit growth within their base business. In addition revenue realized from the Environmental Quality Company was around $111.3 million which was stronger than expected.  This was primarily driven by strong treatment and disposal volumes received. 

         The revenues and earnings per share beat my estimates of around $150 million and $.50 respectively.  US Ecology increased their 2014 FY EPS guidance from 1.70-1.80 to 1.90 to 1.97 which is in line with what I had originally projected.  One of my investment thesis points was that the experience management team within US Ecology will help increase EQ's margins and overall drive growth within bottom line growth in which it did for the third quarter.   The integration within the two companies has been efficient and quicker than expected and therefore they are currently ahead of schedule.  The stock price was down about 163 basis points today, therefore I do not believe the market has yet to fully appreciate the strong guidance and success from US Ecology's Q3'14 earnings report.  The stock is currently trading around $46 and I re-iterate my price target of $58.21 and will continue to monitor margin improvement and the efficiency within the integration process. 

Tuesday, November 4, 2014

Integra LifeSciences 2014Q3 Earnings


IART released their 2014Q3 earnings yesterday, November 3, following the closing bell.

IART reported $229.7MM in revenue, representing a 7.7% or $16.5MM YOY increase, although missing analyst estimates by about $2MM.  The main revenue driver, as we expected, was the US Neurosurgery and US Extremities segments, which consists of the DuraSeal product line, Bilayer Wound Matrix, and a number of other surgical tools.  Net income was positive this quarter with $9.8MM, or $0.30 per share, compared to IART’s net loss of $30.3MM a year prior. 

IART invested a notable $8.8MM in capital expenditure this quarter and CEO and President, Peter Arduini, announced a new portfolio realignment strategy to promote IART’s long term growth.  This is a plan to spin off its Spine business to its own publicly traded company, specifically focused on the marketing, selling, and development of its spine business. 
After specific charges due to the spin-off, IART lowered their FY2014 GAAP earnings expectations from $1.06 to $0.81 (bullish), but plans to maintain their diluted earnings estimates of about $2.88.

Sunday, November 2, 2014

Invesco Ltd. Q3-14 Earnings


Invesco Ltd. reported Fiscal Q3 EPS of $.64 beating consensus of $.62.  This represents an increase of 16.4% YoY. The stock is currently trading at $40.47, up 1.99% in After-Market trading.

Total operating revenues for the quarter were $1.3B compared to our estimates of $1.2, reflecting an increase of 11.96% from last year’s Q3. Ending AUM for the quarter were $789.6B, up 5.92% from the same quarter last year. Long term net flows are at $6B representing a 186.96% increase from $-6.9B reported last quarter. Net revenue rose 11.9% from year ago to $913.7 driven mainly by higher investment management fees which are up 14.18% to $1B from $938M Q3-13.

The company is showing a positive outlook on their fundamentals after the departure of Neil Woodford, a longtime fund manager and praised investor, who left the company in April. Woodford departure led to a long term outflow of ($6.9B) in Q2-14 from a $5B in Q3-13. The company since has gained its client confidence up resulting in LT net flows increase of 186.96%.

Thursday, October 30, 2014

Visa Inc. Q4 Earnings & Sell Thesis; Strong transaction growth and increased share buyback propel stock

Visa Inc. reported Fiscal Q4 EPS of $2.18, beating street consensus of $2.11 by 3.3%. This EPS figure is up 17% YoY, from $1.85 in Q4 fiscal 2013. This marks Visa’s fourth consecutive earnings beat. The stock is currently trading at $234.34, up ~9% from yesterday’s close- pushing to our price target.

Total net operating revenues for the quarter were $3.3BB compared to our estimates of $3.6BB, and an increase of 8.6% from the prior year’s quarter. Of this, Q4 service revenues came in at $1.5BB (up 8% YoY) and data processing revenues were $1.3BB (up 4% YoY). Total processed transactions for the quarter were $16.9BB, up 9% from the prior year, very much in line with the original investment thesis. Growth in emerging markets continue to drive top line growth.

The company continues to show effort in returning cash to shareholders. Visa authorized a new $5B share repurchase program, in addition to the previous 20% quarterly dividend increase.
After updating our model and checking our investment thesis, we believe the market has fully priced in future revenues that were being discounted originally, and the stock is now fully valued.


We are booking a capital gains return of 16%, excluding dividends, which would bring us closer to the 20% originally forecasted.  We are pleased with Visa being a strong part of our portfolio, and will continue to monitor the stock for another buying opportunity.

Ralph Lauren Q2 2015 Earnings



Ralph Lauren reported better than expected earning this morning for their second quarter 2015. They reported net income of $201 million, or $2.25 per diluted share compared to net income of $205 million, or $2.23 per diluted share year-over-year. Net revenues increased 4% to $2.0 billion led by retail segment expansion, including double-digit international growth. Retail sales grew 7% on double-digit international growth and global e-commerce. Consolidated same-store sales edged up 1%. Wholesale segment sales rose 2% to $943 million, and licensing revenue increased 2% on higher royalties.




Jacki Nemerov, President and COO, was very pleased with the results and stated, "Our better-than-expected second quarter results showcase the operational discipline of our organization. Despite the challenging global macroeconomic environment, we continue to experience strong momentum in key areas of strategic focus, including double-digit revenue growth internationally and for our e-commerce business. We’re also delivering improved profitability for underlying operations, which is helping to fund investments in our longer-term objectives. I am confident we are well-positioned for the upcoming Holiday season, supported by the distinctiveness of our luxury lifestyle positioning and the desirability of our products." 




For fiscal year 2015, RL adjusted its outlook due to foreign currency impacts. Ralph Lauren said it now expects a 5%-7% bump in fiscal 2015 consolidated net revenue, down from prior guidance for a 6%-8% rise. In the third quarter, the Company expects consolidated net revenues to increase by 3%-5%, including a 2% negative impact from foreign currency impacts. Operating margin for the third quarter is expected to be approximately 1-1.5% below y-o-y. The thesis for RL remains intact and I expect in the future they will continue to gain global market share. My yearly price target is adjusted to 194$ which represents a 21% upside from today’s closing price.




Wednesday, October 29, 2014

Solarwinds Inc. 3Q14 Earnings: Beat "Not Suprising", Up ~12%, Downgrade to HOLD


Yesterday 11/28/14 Solarwinds Inc. reported 3Q14 and held a corresponding conference call market close. Revenue and Non-GAAP EPS came in at $112.9MM vs our $109.MM estimate up 28% yoy and $0.50 vs. our $.43 estimate up 22% yoy respectively. Revenue highlights included strength in sales from the U.S Federal business, NA and LATM, license growth of 24% along with robust recurring revenue growth now 62% of total revenue. Bolstered by the top line and effective cost control by operational leaders the ever more scrutinized Non-GAAP operating margin was 45%. This was applauded by investors as the stock was up ~12% today. Pingdom performed well following the June acquisition and contributed slightly more revenue ahead of expectations adding “sizzle” to the beat. During the quarter 54,000 shares were repurchased under the current $2.1MM share repurchase program which began 3Q13 and expired on June 31st. In total $1.1MM shares were repurchased.
While Solarwinds has increased their investment incrementally and focused serving the on premise market, over the first 3 quarters of 2014 sequential growth rates of both Core Netman and Sysman product new license sales were up meaningfully. The company’s product pipeline has been funded by the investments made into the business which kicked off in late 2013, highlighted during their previous record quarter 2Q14. This investment has continued to pay dividends in top line growth despite short-term OM contraction, which to our expectations exceeded company guidance and street expectations by roughly 200 bps.  
The company issued updated Revenue and EPS guidance of $426.4MM-438.8MM and $1.77-1.79 for FY14 respectively up from $420.5MM-$426.5MM and $1.62-$1.72. More updates on 2015 outlook and growth initiates going forward will be provided on the company’s analyst day in NYC on November 12th
As a reminder after our double down in late June our average share price increased to $35.59. Currently we are up ~35% on the name. We continue to be encouraged by the results and operating leverage in Solarwinds business model. That being said we believe the near term positives are largely priced in at current levels. We are downgrading our rating to a HOLD and maintaining out PT of $52.00 which assumes a 27.1x multiple to our FY15 EPS of $1.95. Over the last 3 years the stock has sold for ~29x forward earnings. We believe the slight discount is attractive as the Pingdom acquisition, license growth acceleration and operating leverage of business will likely lead to higher profitability and further multiple expansion.

Tuesday, October 28, 2014

Regions Financial Corp Beats Earnings through Expense Reductions



Regions Financial Corporation reported Q3 EPS of $0.22, beating consensus estimates by $0.01. Total revenue increased by $20MM (2%) from the prior quarter to $1.3B, however revenue is down 1.5% YoY.
Total loan balances at quarter end were $77BB, representing an increase of $94 million from the previous quarter. The consumer-lending portfolio showed consistent growth, with auto lending & credit cards receiving the greatest gains. The indirect auto loan portfolio grew at 4% from the prior quarter and credit card balances increased by 2%. Unfortunately, these increases were partially offset by a $96MM decline in home equity balances.

Regions Financial Corporation’s net interest margin & net interest income were negatively affected by lower asset yields driven mainly by the low interest rate environment and competitive pricing pressures. Low interest rates caused by weakening global economic growth continue to hurt banks’ interest income, forcing them to turn to non-interest income from fee based services. Additionally, Regions continued to manage its expenses, which totaled $326MM for the quarter, while continuing to invest in talent and technology to spur future expansion.

Monday, October 27, 2014

PCP Sell Thesis

Precision Castparts Corporation reported earnings on October 24th, missing by $.08 and being in-line with revenue. Precision has not lived up to the valuation we have given it, and has fallen below our stop-loss. The vertical integration the PCP is putting into place, along with the acquisition of TIMET, failed to live up to expectations. While aerospace has been a great segment for growth and a main driver of PCP, our investment thesis is not being held true and is no longer applicable. Where Precision was once a leader in the industry, they are now a middling company in a market that is becoming saturated with Boeing 787s. Precision is no longer lucrative at its current price, and its recent earnings report supports that assumption.

Private Bancorp, Inc. Achieves 7th Consecutive Earnings Beat with Q3 2014 Results


The Private Bank recorded EPS of $0.51, beating estimates by $0.03­, with 21% in EPS YoY.  The stock reacted positively and increased by 3.94% on the day. Net revenue grew 10% YoY, mostly driven by sustained growth in earning assets and non-interest income but partially offset by increasing expenses. Operating profit for the quarter was $70.4 MM, up 11% YoY and up 4% from the prior quarter.  President and CEO, Larry D. Richman, announced the reason for Private Bancorp’s impressive net income of 40.5 million was due in part to “building quality client relationships”.

Net-interest income grew to 116.8MM (up 10% YoY), a result of higher average loan balances, especially in the commercial real estate area.  The amount of total loans increased to 11.5 billion, specifically from growth seen within the commercial real estate and industrial area of lending.  Private Bancorp’s net interest margin improved 5 bps to 3.23%.
Non-interest income for the quarter was 30.7MM, driven by growth in treasury management income, syndication fees, and deposit service charges. These increases were partially offset by growing employee salaries and compensation benefits, marketing, insurance, and loan and collection expenses. Total non-interest expenses for the quarter totaled $77.8MM.


Improving credit quality is positively reflected in the earnings report with net charge-offs decreasing to $88,000 for the quarter, down from $2.3MM in 2Q14. Non-performing assets decreased 39% YoY.  Overall, it was a strong quarter for Private Bancorp demonstrated through continued growth in their top line in addition to a strengthening balance sheet. However, concern over weak global economic growth and persistent low interest rates may continue to restrict the company’s future financial performance.

Friday, October 24, 2014

Union Pacific Q3'14 Earnings

            Union Pacific reported their Q3'14 earnings pre-market on October 23rd.  Their earnings per share was 1.53 representing a 23% increase year over year.  Their bottom line growth beat consensus estimates by 2 cents.  Top line freight growth increased 11% year over year to 5.9 billion, overall revenue came in at 6.2 billion.  The robust growth was driven by total volumes increasing 7% year over year including a 2.5 point improvement in operating ratio to a record 62.3%.  In addition core pricing which was a major driver in my investment thesis, improved revenue by carload by 3.5%. The stock price has increased about 5% since their earnings report due to investors appreciating an exceptional Q3'14.

            Agricultural revenue increased 19% year over year led by low commodity prices and high grain demand in China, Canada and Mexico.  Automotive revenue increased 3% year over year led by the North American Automotive production of 16.7 million vehicles (highest since 2006).  Chemical revenue increased 6% year over year driven by a increase in demand for liquid petroleum gas in Canada and Mexico.  Coal revenue increased 2% year over year driven by strong demand from lower inventories.  Industrial products increased 19% year over year led by double-digit growth in fracturing sand shipments and lumber shipments.  Lastly inter-modal revenue increased 15% led by domestic inter-modal revenue increasing interest for new premium services and highway conversions.  More over the personal injury rate was 4% lower than 2013 year to date to a staggering 1.09 ( new record).  Rail equipment incidents or derailment rate improved 7% to 3.04 which is a new record year to date.  Capital expenditure for 2014 is expected to be $4.1 billion for the year which includes an investment in 32 additional locomotives.

           Union Pacific returned 1.2 billion in dividend payments to shareholders and since the beginning of the year they have repurchased 24 million shares amounting to $2.3 billion worth.  All in all Union Pacific has returned $3.5 billion worth to shareholders over the first three quarters of 2014 representing a 47% increase over 2013.  Union Pacific's extraordinary investment in infrastructure continues to improve operating ratio's and safety and performance rates, representing their mission to continue to enhancing their overall value to their customers, workers and shareholders.  It was another record-breaking quarter for Union Pacific and I am expecting Union Pacific to continue to outperform and break new records in Q4'14.  After updating my model I have a price target of $126.