Friday, February 21, 2014

Masimo 2013 Financial Results

Masimo Corp is global leader in non-invasive patient monitoring technologies. Their major products fall under their SET series, a breakthrough in pulse oximetry that can detect life threatening events and their Rainbow SET series, which is a noninvasive monitoring platform enabling the assessment of multiple blood constituents and physiologic parameters that previously required invasive or complicated procedures. On February 13th, Masimo reported earnings for fourth quarter and year ended December 28th, 2013.

Fourth quarter had an 8% increase in total revenues to $142.4 million with an equal 8% rise in product revenues to $134.7 million. Masimo rainbow revenue rose to 34% to $14.8 million and SET and Rainbow shipments were $42,000.

For 2014, Masimo had an 11% rise in total revenues to $547.2 million and equal 11% rise in product revenues to $517.4 million. Rainbow revenues rose 21% to $14.8 million and combined SET and Rainbow shipments were 42,000.

Despite positive full year results, Q4 revenues missed expectations. Q4 saw net income of $9.3 million compared to $15.0 million in Q4 2012. Net income for the fourth quarter included $4.6 million in charges for inventory write-downs. Masimo also payed out $8 million in various charges related to an arbitration award ruling.

The award ruling led to a $5.4 million payout to two former sales employees who claimed to being forced to sell faulty devices, which consequently created an intolerable work environment. Masimo who insisted on going through an arbitrator will be asking a federal court to overturn the decision.

Masimo’s stock price has seen a 10% dip over the past week. The poor performance in share price can mainly be attributed to soft 4th quarter results. There has also been growing skepticism in Masimo’s recent expansion in India given the late uncertainty in emerging markets.

Management expects revenues in 2014 to fall between $578 and $598 million. As a current global leader in non-invasive patient monitoring technologies Masimo’s target growth in their current products as well as the success within their pipeline will tell the story moving forward.

In Masimo’s earnings call CEO Joe Kiani addressed questions regarding target revenues for the Rainbow sensors. Rainbow revenues for 2013 reached $14.8 million, which are expected to hit $60 million by the end of 2014. Kiani reported this was a conservative estimate in absence of some disaster occurring that should be met with large orders of SpCO expected towards the end of this year.

In 2013, Masimo had their eye on three potential acquisitions in which Kiani has responded that the company still has their eye on two of the candidates. It is important to note that these acquisitions if they take place would be smaller “tuck-in” types, comparable to previous acquisitions such as PHASEIN, SedLine, and Masimo Semiconductor.

In 2014 I expect to see moderate growth in Masimo’s SET and Rainbow devices and a positive response to Masimo’s new CE Marking of O3 regional oximetry for the Root patient monitoring and connectivity platform. The CE Marking O3 for the root enables monitoring of tissue oxygenation saturation and arterial blood oxygenation. Having just been announced in January of this year the O3’s addition to the root could be key in driving sales for that platform. Moving forward I remain with concerns due to Masimo’s expansion into India. In the earnings call CEO Joe Kiani restated his confidence regarding continued growth within the US. However, expansions into emerging markets, which may continue down a path of volatility should raise investor awareness. Currently I have a neutral position on Masimo. It’s recommended to pay close attention quarterly targets for the Rainbow SET devices and new product and pipeline announcements soon to take place this year.

-Jerome O'Grady
Healthcare analyst

Thursday, February 20, 2014

Spirit Airlines Earnings Report

On January 19th, 2014 Spirit Airlines reported their 4th Quarter financial results.  Spirit Airlines beat consensus earnings per share estimates by 6 cents, $.56, and reported $420.0 million in revenue missing consensus by $1.44 million.  Harsh weather was factored in Spirit's stock price as shareholders were expecting revenue to be impacted by the conditions.  Spirit was up 5% yesterday, reaching a new 52 week high of 51.95.  This was due to shareholder's valuing Spirit's growth year over year, operating revenue was up 27.9% year over year, as well as RASM was up 3% to $.1143.  Another strong result was their completion factor increased to 99.5% compared to 98.4 year over year and CASM ex-fuel down 2.5% year over year.

For 2013, Spirit Airlines grew capacity by 22.2% and net income increased 71% to 178 million year over year.  For the year Spirit's CASM ex-fuel was down 1.5% year over year as well as no debt on their balance sheet, with 531 million in unrestricted cash flow.  Spirit Airline's was able to grow significantly with continuing to offer their customers with low ticket prices, but being able to charge customers for any other fee.

Outlook:  In 2014 Spirit Airlines is expecting higher costs that will ramp for growth in 2015.  These higher costs are due to depreciation and amortization.  There are heavy maintenance events and increases in pilot costs that will drive costs higher.  In the first quarter CASM ex-fuel is expected to grow 1 to 2 percent year over year as well as due to Easter being shifted to April it will affect RASM by 1.5 percent.  The fuel price per gallon is also expected to be $3.17 and capacity is expected to increase by 21 percent year over year.  For the year in 2014 there will be 11 new aircraft's, fuel prices per gallon are expected to be $3.12, capacity increase by 17 percent and full year CASM ex-fuel increases by 2%.  In 2015 the higher costs and expenditure on new aircraft from 2014 will drive lower maintenance costs and revenue from new aircraft will be realized.  In 2015 capacity is expected to grow 29% compared to 2014 with an addition of 14 new aircraft.

Spirit Airlines has continued to show that their extremely low ticket prices are attractive to customers and will continue to be in the future, as well as an increase in their completion factor represents efficiency in travel and customer satisfaction.  It will be important to monitor in 2014 how much higher maintenance costs will affect profit, but given that Spirit has no current debt on their balance sheet I believe they will be able to monitor these costs while continuing to increase operating revenue. Spirit Airlines is still expected to grow capacity by 17% year over year and provide customer's with their valuable prices and services.  Capital expenditure in new aircraft is a positive sign that Spirit is looking to continue expanding. Spirit still has upside in 2014, but monitoring weather effects and higher cost's on operating revenue will be crucial.

Industrial Analyst- Guillermo Dilone

Tuesday, February 18, 2014

Cerner Corp. 4Q13 and FY Earnings: Decent Results, Exiting Position

Cerner Corp. reported 4Q13 and FY earnings February 4th and held a corresponding conference call after market at 3:30 E.S.T.  Quarterly revenue came in at $795.3M, a little lower than our estimate of $802M, and substantially lower than street estimates of 811.4M, up 12% YoY.  Quarterly EPS came in at $0.36, which was well below our estimate of $0.44 as well as the street’s estimate of $0.39.  EPS did however grow 9% YoY.  As for FY13, Cerner reported $2.91B in revenue, up 9% YoY, which is in line with our prediction but slightly below analysts’ estimates of $2.96B.  Yearly EPS was reported at $1.32, well below our estimate of $1.40 and consensus of $1.44.  Cerner Corp showed strong numbers through 4Q13 and throughout 2013 as well.  We are impressed with Cerner’s total bookings increasing to a record $3.77B for 2013, proving that they can still increase their revenue.  In order to fight the dilution from options, Cerner has also approved another stock repurchase program of up to 217M shares of common stock. 

Cerner’s revenues were driven by not only an increase in bookings, but more efficient gross and operating margin.  A major highlight of 2013 is their continued success in gaining market share.  With much success in 2013, Cerner believes they can further improve in 2014 due to the shaky economy causing customers to reevaluate their suppliers, ultimately resulting in them switching to Cerner.  To reiterate upon our 3Q13 report, Cerner’s Intermountain Healthcare selection has proven to be important to their growth.  This imperative win over their competitors have positioned Cerner well and strengthened their vision for population health to carry more weight in the selection process.  Since health care doesn’t have a true costing system, Cerner believes their work with Intermountain Healthcare to build an activity-based costing system will further their differentiation.  Cerner’s regional medical center with 2 hospitals, ITWorks, had a great year, including a new contract in Q4.  ITWorks focuses on optimizing user experience, as well as shifting systematic work from into Kansas City, freeing clients to focus on providing care.  Another sector of Cerner, Revenue Cycle had a stellar year.  Revenue growth of approximately 50% represents Revenue Cycle’s success with premier client Adventist Health. 

For 2014, Cerner expects stronger free cash flow, which will be driven by growth in operating cash flow, as well as a decline in CAPEX.  For 1Q14 Cerner expects revenue between $770-810M compared with out estimate of $842M.  Cerner also expects 1Q14 EPS of about $0.36-0.37 where as we expect EPS of $0.40.  This range lowballs consensus, being that consensus factored in the growth off of 1Q13 tax benefit.

Based off Cerner’s stock price appreciation leaving little of evidence to support further multiple expansion, we are forced to sell out of our position.  Historically, the stock has sold at an average of 35.5x times trailing twelve-month earnings.  Currently the stock is selling at 53.7x ttm earnings, representing a large premium.  While we praise Cerner’s success and remain attracted to the name, we see no current upside and must remain on the sideline for a more attractive entry point.

CMI Q4 2013 Earnings

CMI reported earnings, beating consensus by 16.9% on earnings by reporting $2.32 per share and had sales improve by 7% to $4.6 billion. However, CMI reported poor outlook for 2014 in sales, falling short of expectations set by analysts.

Weakness in the global mining market's did not hurt the sales of Cummins earth-moving mining equipment, as Cummins stated that their engines that are used in power construction had a strong quarter. Cummins reported higher demand for on-highway truck components in North America, Europe, and China. While Cummins revenues improved versus the industry, fourth quarter shipments were still considered to be weak with a rebound not likely as they head into their peak selling season. Power generation customers were down 33%, as stronger demand for engines and components ahead of new emission standards being put into place on January 1st. There was an overall weak global demand for Power Generation products. In distribution, Cummins had acquisitions totaling $60 million, increasing their market share in North America and increasing North American revenues by 11%.

Looking forward to 2014, Cummins expects revenue growth for the engine segment to be between 4-6%, as on-highway revenues in North America should be a major driver for growth. The Component segment is expected to have another record year, with revenue being up between 8% to 12%, primarily due to penetration of some of their products in the North American medium duty truck market. The Power Generation segment is expected to be somewhat volatile, with revenue being estimated between -3% to 3%. Lower military revenue could contribute to slow to moderate growth in the segment.  The Distribution segment is expected to have a great year, with revenue growth expected to be between 22% to 30% over 2013 levels. Acquisitions in North American have made this possible, with an extra $400 million in revenue expected to be added in 2014. Total company revenue is expected increase between 4%-8%, with the majority of the growth being attributed to the distributor acquisitions, with market share growth and demand growth also being contributing factors in the other segments. Our investment thesis still holds true for Cummins, as emission standards should continue to be a driving force for revenue, along with distribution purchases and the development of natural gas. Our full position should be held.

Sunday, February 16, 2014

Visa Inc. Q1 2014 Earnings.

Visa Inc. Reports Fiscal Fist Quarter 2014 net income of $1.4 billion or $2.20 per diluted share, and increase of 9% and 14%. The company also made dividend payable of $0.40 per share to all holders of record of the company’s class A, class B and Class C common stock. The company repurchased 5.5 million shares during the quarter for $1.1 billion and has $4.2 billion in remaining authorization. Net operating revenue in the fiscal first quarter of 2014 was $3.2 billion, an increase of 11% over the past year, driven by growth in service revenue, data processing revenues and international transaction revenues. Nevertheless, there is 2% negative growth during the quarter due to the U.S. dollar impacted. The First Quarter 2014 financial statement shows Visa has solid revenue, net income and earnings growth.
There are some highlights have to be mention that payments volume growth for the three months ended December 31, 2013 was 12% over the prior year at $1.2 trillion. And the total processed transactions growth for the three months ended December 31, 2013 was 13% increase over the past year at $16.0 billion.
For each segment. Service revenues were $1.4 billion, an increase of 9% over the past year. Data processing revenues increased 13% over the past year to 1.3 billion. International transaction revenues, which are driven by cross-border volume, increased 11% over the past year to $891 million. Visa Europe licensing fee were $180 million, flat over the prior year.
The weighted-average number of diluted shares of class A common stock outstanding was 639 million for the quarter ended December 31, 2013. During the quarter, the company spent $1.1 billion cash to repurchase 5.5 million shares at an average price of $199.56 per share.
Looking forward to 2014, the company is the world’s largest processor of credit and debit card payments, and possesses and unmatched payment processing infrastructure. Also the stock price rose significantly during the past year. Recently, the U.S Federal Reserve involved into the fight between banks and retailers over debit-card transaction costs. And decided to cap swipe fees at 21 cents, a ceiling that could cost financial firms $8 billion a year. The company will keep their investment thesis in the 2014 which generate most of their income by service revenue, data processing revenues and international transaction revenues. Visa also keep updating the security system, which can prevent customer’s information from hacker, as the company announced to add chip into the card start from October 2015, and the zero liability policy, which means customer’s won’t have to pay any fraudulent purchases. All these protections make people more convince to use the debit and credit card in the future. I would keep the price target $235.94 base on their strong fiscal Quarter earnings.

Thursday, February 6, 2014

Solarwinds Inc. 4Q13, FY13 Earnings: Revenue Growth, Solid Execution, Reiterate BUY

Solarwinds Inc. reported 4Q13 and FY13 February 5th and held a corresponding conference call market close. In 4Q13 the company delivered the strongest revenue growth of the year up 32% yoy to $97.1MM besting UASBIG and street estimates of $91.0MM and $90.7MM respectively. 4Q13 Non-GAAP EPS came in at $0.41 compared to $0.36 last year matching our estimate of $0.41. Non-GAAP Operating margin was 45% materially ahead of guidance by almost 500 bps. Turning to FY13 Results total revenue was $335.4MM up 25% yoy compared to our estimate of $329.3MM. Non-GAAP EPS was $1.63 vs. $1.36 last year again matching our estimate of $1.63. Non-GAAP Operating margin was 51%. Total recurring revenue, comprised of subscription and maintenance revenue increased to $57.6MM now representing over 59.3% of total revenue.

The lone analyst who screamed ‘double down’. First 4Q remarks and then FY13. Solarwinds had one of the best quarters they have had in the past year with double digit yoy growth in all three revenue categories. Driven by increased levels in product sales from core network management products along with record sales in North America and EMEA. Revenue from Federal business was up 10% but down sequentially as anticipated shared improvement from 3Q13. With license revenue growth back above 20%- another target yet ahead of management expectation this was a significant quarter. Confidence among average transaction size from management reaffirm their continuing climb to ~$8,700, a range that hasn’t been reached since 2Q12.

We applaud Solarwinds prudent ability to fund initiatives that are important to its long term goals. $5MM was invested split relatively even between product development and marketing and sales. Headcount since 1Q13 was up 20% to 1300 employees globally. Indeed these investments are accelerating revenue growth and have put the company in a position to scale more effectively.

Looking forward to 2014 and beyond we see our original investment thesis largely intact and a sizeable opportunity in the companies remarks. Revenue growth is fueling performance and reinvestment in the company is driving acceleration into new markets. The demand for network management tools is large, growing consistently and mildly untapped. In addition we are thrilled to see management focus on new developments in product security driven by several high profile data loss incidents in the past year equate us to feel safe the company is nimble, aware of the pressing need and responding to again a largely untapped market.

Initial guidance was offered for 1Q14 and FY14. 1Q14 revenue was forecasted in range of $92.0- $94.0 up 27.5% yoy at the midpoint and Non-GAAP EPS of $0.34-$0.36. For FY 14 revenue is expected in the range of $408.0-$420.0MM and Non-GAAP EPS of $1.55-1.65.

Despite a challenging year viewed by the investment community Solarwinds combination of growth, cash flow and profitability are metrics that can only be matched by a few technology companies. Revenue growth has led metric outperformance- not underinvestment. Alongside absorbing 2 of the largest acquisitions in the company’s history while exceeding Non-GAAP operating margin for not only 4Q13 but year end is to put bluntly- impressive. Historically the stock has sold for 42.4x earnings. 

Our Price target of 46.10 represents a 25.4x multiple to our FY14 EPS of $1.83. Indeed a significant discount vs. historically and in our view quite unwarranted as not limited to management execution, inherent operating leverage, revenue growth, and the acquisitory nature of the company. Multiples should recover in conjunction to its peer group at the minimum if not exceeding them. We maintain our “buy” rating on this name.

Precision CastParts' Risk Exposure

     Like most of the stocks in our portfolio, the volatility in the markets have been the impetus for sluggish movement in Precision CastParts (PCP).  Although there has been record global demand in the commercial aerospace industry, it is important to understand how PCP's business model fits in the frame of macroeconomic events.  A substantial part of PCP's contracts are conducted with a small number of very large customers.  For example, both General Electric and Boeing account for nearly half of PCP's total organic revenue.  Any slowdown in the global economy could translate to order cancellations in the aerospace market which would obviously hurt PCP's profitability.  For this reason it is valid to understand how PCP's customers are reacting to global events.
      With currencies in emerging markets falling as a result of the Fed's change in monetary policy, aerospace manufacturers are finding better ways to maintain an equilibrium between production and demand.  For example, to mitigate the risk of order cancellations stemming from plummeting currencies in developing nations, Boeing is cushioning itself from the turmoil by backlogging orders of its highly demanded 737 jet.  By keeping factories busy for several years, airline manufactures are reacting much better to external stimuli than they have with previous boom-and-bust cycles.  Emerging countries' potential to cancel orders is what I think is the key risk component of PCP and we will have to be sure to monitor this risk accordingly.

Wednesday, February 5, 2014

Sluggish Week is Nonevent for Masimo. Look Forward to Earnings Release Next Week

Since its opening price of $29.31 on Monday, February 3rd, Masimo Corp. has fallen 5.8% to $27.62 as of today’s market close.  The stock has reacted directly to the recent bearish toll of larger macro events.  With earnings set to hit next week the 6% dip has not been directly correlated to any company specific events.

The sluggish performance this week points to a bigger picture.  Emerging markets have suffered at the start of this year from currency devaluation.  In January the Argentinian Peso fell 23%, the most dramatic depreciation since its financial crisis in 2002.  Currencies in South Africa, Turkey, and Russia have also taken hits between 7 and 9 percent.  The currency volatility has led to a loss of faith by investors in the emerging markets and consequently an economic slowdown.  With Masimo’s recent commitment to expansion in India it is paramount that management monitors the exposure of the dollar to the Indian Rupee.

In other news, former Chief Medical Officer (CMO) Michael O’Reilly has left Masimo and joined Apple to help rollout Apple’s new Healthbook for IOS 8.  Healthbook contains advanced health and fitness monitoring features that will be directly built into the next IOS update. 

Tuesday, February 4, 2014

International Markets Put Integra LifeSciences at Risk

Yesterday we saw Integra LifeSciences (IART) fall 4.18% alongside the market.  Both European and emerging-market stocks are facing an especially dismal start to 2014. Emerging-markets alone have decreased 8.5% this year, which is the most it has in over twenty years. This puts Integra at risk, being that approximately 23% of their total revenue is international and 12% of that European.  Today the stock bounced back .63%, closing at a price of $44.80.