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.

Wednesday, October 22, 2014

SanDisk Corporation offers strong Q3 results for mixed reactions.

SanDisk Corporation reported earnings on October 16th after the bell and dropped sharply in the afterhours (-5%). The stock did not hold any of these losses and made a strong recovery throughout the next few trading days. The company beat UASBIG estimates for revenue and EPS coming in at $1746.5 billion USD and 1.45 dollars per share (non-GAAP), respectively. Our estimates for revenue & EPS were $1699 BB USD & 1.4 Dollars per share, respectively.  Street consensus was around 1.36 for EPS and $1766.9 billion USD (Factset).
The company appeared to have very strong results compared to company guidance and is still on pace to meet its revenue guidance for the year. The company is absorbing the very large acquisition that was made this year very impressively, posting strong net margins and revenues. After a very harsh sell-off the results and guidance this quarter were refreshing. The company is aggressively pursuing market-share in the high growth enterprise storage market and having success here. This will result in a decreased reliance on key customers as this business becomes a larger percentage of sales. This will also allow the company to serve higher margin customers during times of supply constraint, the cited reason for the current pressure on gross margins. Supply constraints cause SanDisk to allocate a larger percentage of sales to high volume – low margin customers in the short term. In the past companies have increased capacity during these cycles and destroyed pricing when product releases and computer sales decreased.
The words “supply constraints” should be music to investor’s ears. Oversupply is arguably the most critical factor in explaining sharp drops in margins for semiconductor companies across the board. We are attracted to the oligopoly structure of the NAND market specifically and the apparent supply constraints that are in effect. The only company who announced severe capacity expansion was Samsung. The nature of the facilities was not announced. It could therefore be NAND flash, DRAM, logic, etc. We perceived this news as irrelevant, but also as part of the reason for the severity of the recent sell-off in SNDK stock. These facilities will not be complete until mid-2017, giving the few competitors at least two more years of pricing power.
SanDisk manufactures its NAND with Toshiba, through a joint venture, and the two announced capacity additions of no more than 5% per year. Micron completed NAND capacity expansions in 2013-2014 and the effect on industry pricing has already run its course. SK Hynix has been using capital to repair facilities after a fire in one of their DRAM plants as well as expand DRAM capacity. The company has not announced capacity expansions in NAND to date. Overall, we believe that most capital expenditures going a couple years out will be to upgrade existing facilities. Every other competitor mentioned must also allocate capital to their DRAM, and logic chip businesses. This decreases the likelihood of them adding capacity to NAND, especially as DRAM demand is spiking and the logic market is mainly controlled by only one key player (Intel).
The company has proven manufacturing excellence and this expertise will carry over in the 3D NAND era of flash memory. A look at reviews/tests on Samsung 3D NAND hard drives reveals that the only advantage is a quicker shut-down time. SanDisk will work together with Toshiba and take the time to leverage this technology for performance improvements and cost savings. Samsung appears to have rushed this technology introduction and we believe SanDisk/Toshiba will enjoy a second-mover advantage. Employees of this partnership are responsible for the original invention of NAND flash memory.

To conclude we believe the stock is highly de-risked, and at an extremely attractive valuation. We believe this stock will be a top performer going into 2015 and any near term weakness should be used as a buying opportunity. The company will continue to grow earnings at an alarming rate after it integrates Fusion-IO with the existing business and unlocks many potential synergies. The supply demand situation in the NAND industry will be favorable for the foreseeable future. We believe that SanDisk Corporation stock will specifically outperform due to improving margins, higher sales growth, and higher EPS growth. We believe that the company can return to non-GAAP gross margins above 50% in the next 12 months due to a more favorable product mix, price stability, and reduced manufacturing costs. Success in the Enterprise storage market will allow SanDisk Corporation to grow sales at a faster rate than competitors. SanDisk is able to finance growth with a very cheap rate on convertible debt. This allows them to use a very high percentage of free cash flow for capital return programs including share buy-backs and dividend issuance. Our current price target is $112 per share.

Tuesday, October 21, 2014

Google Inc. 3Q14 Earnings: Continued Growth Despite Earnings Miss

Google Inc. posted revenues of $16.53 B and non-GAAP EPS of 6.35 dollars per share for Q3 of 2014. Consensus was at $6.53 for EPS and $17.2B for revenue. Revenues were up 20% Y/Y and 4% Q/Q. Geographical growths were strong, with Y/Y revenues up 15% in the US, 17% in the UK, and 26% outside those areas.  

Paid clicks were up 17% Y/Y and 2% Q/Q, a slowdown from 25% in Q2, and cost per click was down 2% Y/Y and flat Q/Q. Sales chief Omid Kordestani attributes this to a normal fluctuation that happens from time to time and is actually the lowest CPC decline seen by Google in the last seven quarters. The cost per click metric is an indicator showing pressure from low smartphone ad prices is abating.

Google sites revenues were up 20% Y/Y, attributed to mobile search, and came in at $11.1 BB. Network revenues were up 9% Y/Y coming in at $3.4 B due to growth in the AdMob and the Ad Exchange business, but was lower than expected. Other revenue increased by 50%, fueled by Google Play and ad licensing, to $1.8B. Free cash flow is at an impressive $3.6 billion, up 28% Y/Y.

Heavy spending was the driver behind the lower than expected EPS with R&D spending up 46%, S&M up 28%, and G&A up 20%. CFO Patrick Pichette stated “it’s the time of year when we do equity refresh”, in regards to heavy opex growth and human resource spending. He says that this is a unique quarter because of this. Traffic acquisition costs (TAC), came in at $3.3 BB, representing 23% of ad revenues. The stock lowered in after-hours trading by 1.25% under the $520 range and dropped below $510 Friday, but has made a good gain in the next week back at $520.

Google’s core business growth has slowed across the board while profitability took a hit due to opex spending. A main factor is that international growth has not been up to par. However the investment seen this quarter should bode well for the future. The long term growth has been supported in areas such as robotics, Android, automation, and internet. There are some exciting upcoming technologies such as the Android One low-cost smartphones, a mobile messaging platform, and Google Fiber Optic. Shares didn't drop too much despite the miss; however the drop off over the month is a cause for concern. Shares dropped nearly 70 points in the past month for a wide array of reasons from competing products to legal battles. This is quite a fluctuation for Google, but a rebound should be in the works. Some investors may be panicking, especially with increased competition in mobile advertising and mobile phones, but the drop is overstated.

Solid growth and strong free cash flow are major contributors to the company’s positive outlook. However consistent estimate misses by Google has become an issue. There has been a growth in these misses over the last quarters. In the last 12 quarters, Google has missed nearly 92% of the time on the top or bottom line. Margins have also decreased, bringing the risk of the business flattening out. We expect margins to increase in the future as expenses drop. We still believe Google is undervalued with strong revenue growth around 20% each quarter and a strong investment into the future over the past months. Expenses should come back to normal levels, but a less than stellar quarter has us scale back our price target. We recommend a hold on the company with a price target around 670.

Thursday, October 16, 2014

Double Down Position on Spirit Airlines (SAVE)

On October 14th, we doubled down on our position with Spirit Airlines (SAVE). Spirit has recently taken a hit in their stock price due to concerns arising from the Ebola virus and capacity concerns. Spirit has airlines that fly to Africa and the worry over loss of business in that region has the street worried about whether this could cause significant impact. In regards to their capacity returns, Spirit recently extended its fleet by about 15 aircraft’s, causing an increase in the supply of seats. Since there has been an increase in supply so suddenly, the demand for the aircraft’s have not been met yet, but we believe this is only due to the fact they were recently added. Spirit’s position is still strong and their business model is intact, which leaves us to believe that this is a great time to double down on our investment.

Wednesday, October 15, 2014

Wolverine World Wide is up 3.2% on mixed 3rd quarter earnings

Wolverine World Wide is up 3.2% on the day since reporting earnings. This is despite earnings that showed mixed results. They have lowered their sales guidance for the year while also missing on sales estimates for the quarter. They now estimate sales to be $2.75 billion for FY 2014 which represents a 2% annual growth down from original expectations of $2.78 billion which would've been 3% annual growth. This revision is due to weakness in US retail as well as weakness in their lifestyle group.

However despite missing sales and lowering guidance they have reaffirmed their full-year earnings guidance and also beat earnings estimates of $.59 adjusted earnings a share reporting $.63 a share. This is the eighth straight quarter that they have beat analyst estimates for adjusted earnings. The primary reason Wolverine was able to beat earnings while coming up short on revenue was due to increased efficiency. They showed a 2.8% year over year decline in operating expenses. This caused operating expenses as a percentage of sales to fall 50 bps and improved operating margin for the quarter by 70 bps. While the investment thesis that the company will begin to grow their margins by cutting costs has proved effective, we need to look for further evidence that Wolverine can start to increase sales in their lifestyle group or we may need to look for an exit opportunity in the near future. 

Tuesday, October 14, 2014

Citigroup Posts Beat on Q3 2014 Earnings

Pre-market Citigroup posted a rise of 6.6% to EPS of $1.15, beating estimates by $.03, excluding one time charges.
Revenue rose 9.5%, to $19.6 billion.

The bank also reported it is exiting 11 poorly performing regions by selling its retail banking branches in: Costa Rica, El Salvador, Guatemala, Nicaragua, Panama, Peru, Guam, the Czech REpublic, Egypt, Hungary, and Japan.  Japan was the only surprising pick, but with the Abenomics form of QE keeping interest rates low in the foreseeable future, it makes sense for Citi to exit the region, inorder to keep their NIM high.
The banks Net Interest Margin to 2.9%
Fixed Income trading revenue rose 5% to $2.98 billion, which has been a soft spot for banks earnings the past year.
Citigroup did however have higher expenses, much in-line with the company's guidance that stress-tests preparation would rise costs. Operating expenses for the quarter rose 5.8%.
Investment banking revenue rose 32%, driven by broad-based strength in the IPO and debt underwriting businesses. Advisory revenue rose 90%.
Shares were up 2.5% in mid-day trading.

Monday, October 13, 2014

Union Pacific taking a hit

   Union Pacific was down 3.22% today to $98.08/share primarily due to the news of a possible merge between their competitors CSX and Canadian Railways.  UNP's share price has taken a hit due to that news and due to the market overreacting to geopolitical news and ignoring the economies steady macroeconomic improvement.  Certain indictors such as increasing job payrolls and a decreasing U.S trade deficit implies the U.S economy is improving. The market has been reacting to the unstable global growth and the Federal Reserve acknowledged that the U.S dollar has been increasing and may hurt exports.  Therefore they are taking that into consideration when deciding when they will increase interest rates in 2015.  All in all Union Pacific's fundamental analysis is still robust and they will be reporting earnings October 23rd.

Saturday, October 4, 2014

Hal Sell Thesis

On Wednesday October 1st Hal fell below our stop loss price of $63. After further evaluation we agree that there has been a fundamental deterioration in both our investment thesis and in the sector as a whole. The oil field services industry has been down recently and Hal has declined near 10% in the month of September. We will continue to monitor Hal and look for a more favorable position to enter this later this year if macroeconomic conditions improve. While Hal still retains its core strengths and strong North American exposure, it simply cannot compensate for systemic issues in its industry at this time.