Saturday, March 29, 2014


Because of it's rejection of their capital plan, Citi was refused it's request to  raise dividends and share buyback. They do have a month to resubmit the plan and go through the stress tests again, but I believe the chance of them fixing their internal issues to comply with the Fed will take longer.

Many believe this has pushed back their return of capital to shareholders into 2015.  This has led to four firms to downgrade the stock to market-perform, cutting their price targets to $52.

 For this reason, I have decided we should cut to a half position.  We should be able to get out right around our buy-in price. I do believe it's a good idea to keep a half position because of other possible positive catalysts like their upcoming earnings on April 14th, and good vibes from the banking industry overall.

Wednesday, March 26, 2014

Integra LifeSciences Expands Skin and Wound Portfolio

Yesterday, Tuesday, March 25, 2014, Integra LifeSciences launched their new skin and wound product: Integra Wound Matrix (Thin).  It has received 510K clearance from the USFDA and Integra is anticipating a full market release next month after being featured at the American Burn Association Annual Meeting which taking place in Boston this week.  This product expands the opportunities for treatments from their original Integra Wound Matrix and can now be useful on more “complex anatomical sites” than the original version.  The treatments of the product includes, but is not limited to: second degree burns, various types of wounds, and various types of ulcers.  It can be purchased in a number of different sizes, and has a shelf-life of one year.  Integra closed today at $45.26 representing a 12% upside from our original buy price of $40.41.
Today after the market closed Citigroup's Capital Plan was rejected by the Fed.  This was part of the Comprehensive Capital Analysis and Review (CCAR).  In it's statement, the Fed objected it because of qualitative, not quantitative reasons. These include  deficiencies in it's capital planning processes which had been identified by supervisors and hadn't sufficiently improved in the eyes of the Fed.  Specifically Citi's ability to project revenue and losses under extremely stressful scenarios, and internal stress testing that adequately reflect it's full range of businesses and exposure.   The Fed noted "Citigroup has made considerable progress in improving its general risk-management and control practices over the years".

In the capital plan they requested a $6.4 Billion share repurchase and an increased  quarterly dividend to $.05.  They will not be allowed to increase either, but will continue with their $1.2 billion buyback and $.01 dividend. They will be given 30 days to resubmit their plan, hopefully complying with the Fed.

Although they performed poorly in the stress test, they were still above the Fed's minimum 5% Tier 1 common ratio, at 6.5%.  Citi is clearly being subjected to the highest standards because of it's global scale and complex operations.  Citi remains one of the best-capitalized financial institutions in the world.  In their statement they said they will work closely with the Fed to bring their capital planning process in line with their qualitative standards.

The stock is down 5.6% in after hours, which diminishes the return since our buy-in.

Precision Castparts to Acquire Aerospace Dynamics

March 20th, Precision Castparts Corp. (PCP) agreed to acquire Aerospace Dynamics International (ADI) from The Marvin Group for $625 million.  ADI is a major player in the aerospace supplier industry with differentiating expertise in hard metal machining, large complex components, and critical assemblies.  Operating out of Valencia, California with a staff of 625 employees ADI has competitive positions across high growth platforms including the Airbus A350.

The cash acquisition will be treated as an acquisition of assets for tax purpose and will be immediately accretive to earnings.  The transaction is expected to be completed during the first quarter of fiscal 2015—after the scrutiny of regulatory approvals—after which ADI will be reported as part of PCP’s Airframe Products segment.  This acquisition goes hand-in-hand with PCP’s historical trend of acquisition binges.  PCP has a good record of instilling better management in the acquired companies which translates to stronger margins.  That being said, I do not believe PCP is dependent on acquisitions for earnings growth or is too bloated with acquisitions to have a sustained management advantage.

Tuesday, March 25, 2014

Cisco Joins Cloud Computing Industry with $1B Plan

Two weeks ago we took a full position in Cisco Systems Inc. (CSCO) purchasing approximately 275 shares at $21.77.  Cisco has recently released news that they will spend $1 Billion over the next two years to launch the world’s largest global intercloud.  Cisco plans to use the money to build data centers to run their new service Cisco Cloud Services.  Cisco believes that they will disrupt the market by offering unmatched capabilities such as bringing a network of partners within their intercloud, focusing on apps rather than infrastructure, and incorporating real-time analytics.

The market reacted extremely positive to this news as Cisco was up 3.5% today and 4% since the announcement.  This expansion bolsters my belief that Cisco’s diversification into all areas of IP-based networking and its goal of reaching “Internet of Everything” will drive its share price.

Visa in Russia

In the global market, Visa and MasterCard are facing a big threat from China’s UnionPay, which is accepted in 141 countries and was used for $3.3 trillion in purchases in 2012. That was less than the $5.7 trillion that went through Visa-branded cards, but more than MasterCard’s $2.7 trillion.
As the risen issue between the US and Russian. Legislation has already been introduced in Russia’s parliament that would ban the use of payment systems based outside of the country. As Visa and MasterCard cut off services to sanctioned organisations. Last Friday, the payment networks said they could stop servicing the sanctioned Bank Rossiya, along with three more banks connected. It means any Visa and MasterCard issued by sanctioned banks cannot make payment.
Visa Inc. and PULSE, a Discover Financial Services company, announced an agreement to enable financial institutions that issue EMV debit cards on both the Visa and PULSE networks to use Visa’s common debit solution. Visa’s common application identifier (AID) supports U.S. debit regulations requiring the ability to route transactions over multiple, unaffiliated networks. A common debit solution shared among all participants will help to accelerate EMV chip adoption in the United States and provide a uniform platform that will enable network innovation. In addition, as reported in the beginning of the semester, an appeals court upheld a ruling in a case on debit-card swipe fees. Retailers challenged the Fed Cap in a multi-billion fight over transaction costs. The court said the Fed acted within its authority when it capped debit card swipe fees at 21 cents.

Friday, March 21, 2014

Last week we purchased 127 shares of Citigroup (C) at $47.57.  I will write this blog to give an overview of the company and my investment thesis.  

     After the 2008 crisis, Citi lost all it's shareholders trust, leading to a $450+ decline in share price.  They received over $40 Billion TARP bailout dollars from the government which took a 37% stake in the company.  The gov't put restrictions on the company, limiting the CEO salary to $1 and disallowing dividends.  Within two years Citi repaid the feds in full, who in turn sold off their remaining shares. The company followed with a 1-10 reverse stock split, meaning an investor who owned 10 shares of $4 apiece, now owned one share worth $40. 

After the crisis, Citi split it's segments into Citicorp, it's central operations, and Citiholdings which are all the bad assets from the crisis and are looking to sell off,  Citi sold 25% of Citiholdings in 2013, and now sits at only 6% of assets. They are waiting for an economically proper time to sell the rest. 

Much of my investment thesis centered around it's cheap valuation.  They are currently the lowest valued of the largest US banks.  It's forward P/E of 8.6x is a 45% discount to the S&P's. Compared to a banking index, it's P/B of .74 is a 50% discount to the average.  It's P/E and PEG are also at a 24% and 15% discount respectively.  It's at a 25% discount to P/TB, which leads that the stock should be trading at it's tangible book value of $65/share.  They are actually the only major bank trading below their book value.  (BOA 1.6 BV, Wellsfargo 2.2 BV etc)

This discount may be because the market carries a negative sentiment regarding the company since the crisis, leaving it tarnished after a government bailout.  But as the financial crisis fades and the economy moves towards new heights, the stock should elevate in price.   Also, the current CEO Michael Corbat is focused on turning the conglomerate back into a "boring bank" which I translate into a safer bank.  He is focused on cost-cutting and retracting from poorly performing markets with better asset allocation, has been very successful.  

The results of the Fed's stress test came out yesterday, and deemed well for the banking industry overall.  Citi's position is slightly worse.  They declined in Tier 1 common ratio from 8.3% (which led he banks last year) to 7% this year.  This is still above the fed's requirement of 5%, and will most likely bode for an increase in dividends.  

 The week we bought the stock it declined a few dollars, which was the perfect dip in price I was looking for.  After one week, the stock is trading at $50.36 ( 1pm friday) representing a 5.88% increase since we bought in.  My price target is $58. I will keep you guys posted. 

Tuesday, March 11, 2014

Integra LifeSciences Holdings Corporation

Integra LifeSciences Holdings Corporation released Q4 and FY 2013 Earnings Results, February 25, 2014. The fourth quarter ended with an EPS of $.078 and revenue of $220.76M. Integra missed consensus EPS estimates of $0.81 by $0.03 and revenue consensus of $223.38M by $2.6M. Fiscal Year revenues were $836.2M, representing a 0.6% year-over-year increase. Throughout 2013, Integra launched more than 20 new products in the US and filed for over 50 internationally. U.S. extremities were up 16% and global extremities up 13% versus 2012.

Management predicts the highest growth in their U.S. Neurosurgery revenue for 2014 with an increase 30-35%. Their other segments of revenue drivers, including U.S. instruments, U.S. Extremities, U.S. Spine, and international revenues are expected to increase low-single digits to mid-teens by the end of 2014. For the first few months of the fiscal year, Integra will be focused on a smooth integration of their recent acquisition of the DuraSeal product line into their U.S. Neuro and international segments in order to maximize growth potential, sales, and customer service. In addition, they plan to introduce a number of new products, which include an expandable interbody device, and several products to the wrist, foot, and ankle product lines. A main focus of research and development for Integra going forward is the shoulder market.  They just launched the beginning of their shoulder portfolio last month, which includes total, reverse, and Humeral plating solutions.  Integra also recently launched Titanium Bone Wedges, after receiving clearance from the FDA, as an addition to their foot and ankle portfolio.  This product is used in flatfoot correction procedures.

We hold our investment thesis and expect the international sales and new product development to be drivers for Integra in 2014.  Their newly appointed Corporate Vice President and Chief Scientific Officer, Kenneth Burhop is focused on “developing and commercializing exciting new technologies in regenerative medicine.”  Management guidance puts GAAP gross margin between 61-63% and the adjusted gross margin to be between 64-65%, which is a 1.5 point improvement compared to the current year.  Due to the Medical Device Tax, Integra expects future tax rates to increase to 30-31%.  1Q2014 revenue is expected to be in the range of $210-$215M.  We have an updated 12M price target of $53.14, representing an 8.9% upside from the current price of $48.81.

Tuesday, March 4, 2014

Exit 1/3 of Spirit Airlines Position

We plan to exit approximately 1/3 of our Spirit Airlines position as a result of strong upside over the past 6 months, and minimal upside remaining. We believe that now is a good time to start winding down our position. The stock is up approximately 70% since we initiated our position, and cut our initial position of 175 shares to 150 shares in October, and following the recent move from $47 to $60 we are cutting our position again to around 100 shares. We believe that Spirit continues to have strong growth potential, however the recent stock price move has far outpaced growth, and that is the primary driver for exiting a portion of the position. We have a price target of $67 on the remaining shares, representing an additional 11% upside from today's levels.