Spectrum Brands Holdings Q4 2015 Earnings

Spectrum Brands Holdings (SPB) reported its Q4 2015 earnings on Thursday, November 22, 2015. The company reported Q4 EPS of $1.13, $0.04 worse than the analyst estimate of $1.17. Revenue for the quarter came in at $1.31 billion versus the consensus estimate of $1.33 billion. Although the company missed on both top and bottom line, the stock reacted positively to strong updated company guidance for FY 2016. Before the company released earnings the stock was priced at $92.45 per share but then rose approximately 4% to $96.18 post earnings. Spectrum Brands expects fiscal 2016 net sales, as reported, to increase in the high-single digit range compared to fiscal 2015 reported net sales of $4.69 billion. Fiscal 2016 free cash flow is projected to be approximately $505-$515 million compared to $454 million in fiscal 2015. Capital expenditures, which were $89.1 million in fiscal 2015, are expected to be in the rage of $110 million to $120 million. I believe the company’s strong updated guidance including expected growth in sales and increase in capital expenditures will provide expansion, and support of technology innovation for the company which could definitely create an increase in value of the stock in the future. 

ORCL 11/15

ORCL began trading the month of November at $39.05, and then reached a three month high on November 6^th trading at $40.64. ORCL closed on November the 13^th trading at $37.30 representing a 4.5% decrease for the month of November thus far. Additionally, this represents an 11.7% decline off of our purchase price of $42.25. This is close to where ORCL’s stock price has remained for much of the current quarter. ORCL’s cloud component continues to grow rapidly, however that growth does not appear to be well represented in the stock price. ORCL plans to hire more than 50 engineers in the next 6 months to build up its growing portfolio of Data-as-a-Service offerings. In early November ORCL launched a new cloud data product that can identify age and gender targeting with twice the precision of methods currently available on the market. On November 5^th FBR & Co’s Daniel H. Ives downgraded the rating on the company from Outperform to Market Perform, while maintaining the price target at $44. The downgrade was due primarily to ORCL lack of ability to cope with foreign currency headwinds over recent quarters in addition to the lack of M&A expected to maintain ORCL’s new cloud business. However, late last month ORCL executive Larry Ellison alluded to the idea that they were saving cash for a large acquisition in the future. Additionally, ORCL was downgraded at Morgan Stanley which maintains a $45 price target.  

Jeff Sherman

KORS Q2 Earnings Blog

Michael Kors reported second quarter revenue and earnings that both topped the Street’s expectations. Revenue came in at $1.13B, which beat estimates by $50M and represented a 7% increase year-over-year. Revenues were driven by strength in the company’s retail and wholesale segments across all geographies. Retail sales were up 8% due to 39 new store openings, strength in North American digital flagships and continued momentum internationally. Japan led the way, with sales increasing 61% on a constant currency basis. Comps were down 8.5% for the quarter, which was in line with expectations. The comparable store sales decline in North America was slightly offset by comp increases in Europe and Japan. If the U.S. digital flagship stores were included in the calculation, comps would have only been down low-single-digits in the quarter. Wholesale sales for the quarter grew 8% mainly attributed to continued strength in the accessories category. During the quarter 223 globally located wholesale stores were converted into shop-in-shops. The company continues to expand its wholesale business across all geographies. Licensing revenue was down 8% in the quarter primarily due to lower watch sales, somewhat offset by increased sales of jewelry, outerwear and eyewear. Gross margins were down 220 bps primarily due to the foreign currency impact on sales. SG&A was up 250 bps as a result global retail expansion, digital flagship initiatives, infrastructure investment for Korea in the men’s business, the building of a new European distribution center and continued investment in corporate systems. On the bottom line, earnings were reported at $1.01, which was $0.12 higher than expectations. This beat included a $0.06 negative impact from foreign currency exchange rates. Turning to the balance sheet, cash and equivalents decreased 57% from the same quarter last year due to the company’s ongoing share repurchase program. KORS purchased 9.4 million shares, totaling $400 million, during the quarter. To date the company has repurchased 23.2 million shares for approximately $1.2B. Inventory was up 15% YoY attributed to increased European inventory, acceleration of holiday merchandise and the consolidation of MK Panama. The remainder is due to normal growth as the company continues to expand its store base and e-commerce capabilities.

CIT Group 3rd Quarter Earnings Report

CIT Group reported Quarter three earnings pre market open on November 3^rd. CIT Group posted EPS at $.80 and revenues of 520.9M. CIT Group beat estimates by $.09 and $.54M, yet the street reacted negatively to the beat, dropping CIT Group 2.5% on November 3^rd. In the Transportation and North American banking business, CIT Grew to just over a billion dollars excluding the recent acquired assets. In transportation the commercial aircraft utilization rose slightly to 98%, and railcars declined to 97% which is because of the weaknesses in the commodity markets. CIT Group is continuing to participate in a share buyback program, and they provided investors a total of $170 million dollars.

Acquiring OneWest Bank increased CIT’s assets by almost 22 billion, which included 6 billion in cash, 8 billion in loans, and 6 billion in a run off mortgage portfolio. Net financing margin increased by 30 basis points to 3.7%, mostly because of a lower funding cost now. CIT’s transition to a commercial bank looks like it paying off, and with the possible increase in interest rates, CIT Group would only become more profitable, especially with the new acquisition. 

CIT Group 3rd Quarter Report

CIT Group dropped 13.9% since July 1^st. CIT Group ended the quarter trading at 39.61 which was right above the stop loss. This is mainly attributable to the stock market sell off in late August and the continued downward trend of the financial sector in mid-September. CIT Group was heavily depending on an interest rate hike due to them growing the commercial banking side of their business. The big news for CIT is that they acquired OneWest Bank in the third quarter in early August and the acquisition was complete on August 8^th. CIT Group won lead lefts for middle market capital raising plans. CIT Group also formed a joint venture for commercial lending with TPG Capital. This was done to grow the commercial lending franchise of CIT.

Even though the steep drop of CIT Group this quarter I still find it a very strong company. They are releasing earnings on November Third pre-market open. CIT Group is looking to sell off CIT China and CIT Canada and also sell or look into other options for the 10 billion dollar airline financing wing. Once earnings are released and more solid details are released about the company the investment thesis needs to be revisited and the model to be updated to see if the company still fits the investment horizon. 

CIT Group Rises 15.7% Today as Thain Announces Retirement

CIT Group is up 15.7% today to $46.14 as big news comes out announcing John Thain's retirement. This announcement surprised Wall Street after his short 5 year term at the lending company. Over the past five years, Thain recovered the company from Bankruptcy after 2008, cut costs, and improved returns. He also oversaw the recent $3.4B acquisition of the California bank OneWest. Thain will remain the chairman of CIT. Ellen Alemany will now lead the bank beginning in March and will be one of the few women leading a large bank. CIT also announced that they have taken a few steps to transition to a commercial bank model. They are planning on selling CIT Canada and CIT China. CIT Group is also exploring "strategic alternatives" for its $10B commercial aircraft business. The recommendation is still a BUY with a price target of $54.75. I will be revisiting the investment thesis to update it. I still view CIT Group as a sound company that has been cutting costs while transitioning to more profitable ventures. CIT Group is releasing earnings on November 3rd.

U.S. Ecology Earnings Preview (11/4)

U.S. Ecology closed this week at $46.39.  This price represents a 4% decrease over the last month, a 2.9% increase QTD, and a 15.6% increase YTD.  We entered this position at a price of $44.13 nearly one year ago, a 5% gain ITD.  ECOL is scheduled to report earnings on November 4^th, the latest such date in our sector.  To recap the previous earnings release, UNP surprised the markets by posting revenue that more than doubled its previous quarter; the same held for operating income.  However, EPS only arrived at a disappointing $0.10, due entirely to a one-time good-will impairment. 

There is no reason U.S Ecology shouldn’t repeat this performance.  It is currently in the midst of numerous long-term contracts, and its backlog is strong and growing.  Its environmental service divisions are slated by management to have an unprecedented year.  In fact, management expects that, even despite the downward adjustment of Q2 EPS, ECOL will finish 2015 at the upper-end of its previously forecasted $1.76-1.92 EPS range.  Wall Street shares this opinion, predicting a consensus EPS of $0.66 this quarter.  Based on the contributions of six analysts, it has assigned an “overweight” rating to the equity—this matches the ratings from three months ago.  U.S. Ecology will pay its $0.18 dividend, as announced, on 10/19. 

U.S. Ecology still expresses confidence in the immediate benefits of its August divestiture of All-State Power Vac, completed in the hopes of streamlining operations.  In addition, just this past month, ECOL has been in the middle of a battle with Detroit taxpayers.  It had begun to expand operations at one of its waste treatment plants in the city, one that specializes in the detoxification of naturally-occurring radiation from fracking.  This plant even gained necessary state approval to begin treating greater quantities of waste from neighboring states.  However, in response to due diligence from a few journalists and the public, this will be halted.  This was a major project, but bearing in mind the history of safety at this plant, management expects the expansion to resume in the near future.  There has been little else in the way of company news.  

Union Pacific Earnings Preview (10/22)

Stock of Union Pacific edged down to $92.94 this week after an encouraging, month-long climb back to $97, peaking last week.  Curiously, this rebound, beginning on September 28^th, does not seem to be tied to a specific piece of news.  More likely, it is a correction to its valuation, which was thought by many analysts to be far below its intrinsic value.  We entered this position over a year ago, and at a price of $92.  To recount since then, UNP equity is down 22% YTD, so despite a slight positive return ITD, we missed perhaps the best time to exit the position.  Union Pacific is scheduled to release earnings before the trading day of 10/22.

We are challenged by current macroeconomic data.  Protracted low oil prices has ushered, as some economists earlier predicted, a structural shift to petroleum and out of coal.  In dollar terms, coal encompasses nearly one fifth of Union Pacific’s revenue.  The U.S. Coal Index, once at 120 nearly a year ago, now rests at 27, having decreased every month in between.  Agricultural price indices have edged slightly lower.  Weakening Chinese demand, evident in revisions to its GDP forecast, has driven commodity prices into the ground.  Commodities represent another key freight item—both directly and indirectly—to Union Pacific.  To make things worse, China in specific is a key endpoint for UNP’s cross-country freight.  This, however, represents a global trend; economists at the UN have already revised estimated global growth down 0.2%.  Though Union Pacific has cut capital spending goals to $4.2 billion from $5 billion, cash flows will be impacted by hits to top-line, trickling down to bottom-line.   

The price target of the revised model, dependent on favorable long-term and perpetual growth rates, can no longer be justified.  As such, cash flow valuations now hover in the low $100s.  This is in line with the average analyst prediction of $104.  The only mixed piece of news is that this analyst consensus has barely flinched over the last three months (during which, much news has taken place.)  Only two of the twenty-two analysts assigning a ‘buy’ rating three months ago, have downgraded.  The aggregate rating, though slightly lower, is still in strong overweight territory.  Nevertheless, it is unlikely UNP will reach the consensus $1.43 earnings per share this quarter; surges in the later part of the year rest on seasonal coal and foodstuffs—both of which are doomed by weak global demand.  We must decide if it would be in our interest to exit the position before this announcement.      

Jet Blue Earnings Preview (10/27)

Stock of Jet Blue finished the week at $24.10.  We were disappointed to see JBLU drop from its high on Monday of $26.82, a 10% drop.  The decline, taking place almost entirely on Monday, occurred after JP Morgan downgraded the stock.  Despite this volatile reaction, the market has a positive opinion on JBLU: there are nearly as many ‘buys’ as ‘holds,’ leading to a strong rating of ‘overweight.’  Investors have received a very good return on stock of JBLU over the past year.  Indeed, it has returned 5% QTD, 52% YTD, and 35% ITD, as we entered this position at $17.84 this past spring. 

There is reason to believe Jet Blue will perform well when it reports earnings on October 27^th.  Wall Street EPS estimates have been periodically revised upward, currently standing at $0.57.  Revenue is expected to increase 10.2% YOY, in part driven by a 13.1% increase in available seat miles to 3.8 billion in the month of September.  In the airline industry, this variable is a crucial determinant of revenue estimates.  Moreover, industry earnings estimates represent a 137% increase from the previous quarter. 

Jet Blue is positioned well in the current economic climate.  The continued appreciation of the USD has enabled domestic flyers to command more buyer power when flying.  On the hand, international flyers will find the rates of the U.S. airlines considerably more expensive in their home currency.  This adversely impacts such airlines like Delta, wielding a large international presence, but for Jet Blue, operating almost entirely within domestic borders, currency values have driven top-line growth.  This will certainly continue, and a decision to raise interest rates will only accelerate this trend. 

Finally, Jet Blue has made a few headlines.  It is currently in talks with Bombardier, a Canadian aircraft manufacturer, over potential acquisition of some of its CSeries models—the largest of its models, all of which are acclaimed for niche quality.  In addition, it announced this month that it will offer Wi-Fi on all of its flights—a move that was well-received by consumers.  Both of these could serve to elevate Jet-Blue’s quality factor without sacrificing its competitive pricing.  

Spectrum Brands Holdings Bi Weekly Report

Spectrum Brands Holdings, Inc. began the month of October at a price of $92.37 per share. The stock rose as high as $96.76 last week but closed today at its low of the month at $92.71. Today, a multi-year commitment between Spectrum Brands Holdings and the Red Cross took place. This commitment involves one of SPB's brands Rayovac; which will be donating batteries, flashlights, and power packs to the American Red Cross Ready 365 giving program. This reflects Spectrum Brand Holding's ability to sustain a well rounded business model involving a plethora of brands and philanthropy's as well.

Citigroup 2015 Q3 Earnings; EPS Jumps Roughly 37% YoY on Significant Expense Reductions

Citigroup reported a diluted EPS figure for Q3 of 2015 of $1.31 per share, translating to an approximate increase of 37% from the prior year’s number ($0.95 per share). Despite revenues declining ~8% year over year to $18.50 billion, the decline was significantly offset by an 18% Y/Y decline in non-operating expenses, converging on a reported figure of $10.66 billion. Analysts reacted positively to the earnings and the stock traded approximately 2% higher in early market hours.

To provide greater detail, adjusted revenues for Citicorp came in at $17.05 billion, a decline of 5% Y/Y. Breaking this down, revenues from the Institutional Clients Group and Global Banking segment decreased 3% and 8%, respectively, Y/Y while revenues from the Corporate/Other segment increased significantly. At Citiholdings, adjusted revenues came in at $1.44 billion, a decline of 32% Y/Y due to reduced net gains on asset sales and a decline in client’s assets. The significant decrease in non-operating expenses reflect drastic declines in legal and repositioning costs.

With respect to the balance sheet, Citigroup reported a decline in both deposits as well as loans. Deposits declined 4% Y/Y to $904 billion while loans declined 5% Y/Y to $622 billion. At the end of the period, total assets were $1.81 trillion, a decline of 4% Y/Y. Provisions for loan losses also decreased to 2.21% of total loans ($13.6 billion) from 2.60% of total loans ($16.9 billion) in the prior year quarter.

We think the results represent a pretty good quarter for Citigroup. While revenues declined Y/Y and the low interest rate environment continues to hurt net interest figures, Citigroup’s expense management, and therefore decline in non-operating expenses, helps support and reveal its underlying value. We think that Citigroup will need to continue to practice diligent expense management while rates remain low in order to outperform its competitors. We purchased 143 shares of Citigroup at an average cost of $48.25 per share and remain confident in a price target of ~$58.00 per share.

PNC 2015 Q3 Earnings; Street Reacts Negatively Despite Increase in Profits

PNC Financial Services reported Q3 earnings yesterday at 11:00 am. For the quarter ended September 30^th, PNC reported revenues of $3.78 billion and net income of $1.07 billion, translating to a Diluted EPS figure of $1.90 per share. This number is greater than the $1.88 of earnings per diluted share reported in Q2 of 2015 as well as the $1.79 per share reported in Q3 of 2014. However the quarterly revenue figure contracted on a Y/Y basis by ~2%, mainly caused by lower net interest income and lower non-interest income. The stock reacted unfavorably after earnings and traded down ~2% to $86.20 per share.

To provide more color to quarterly performance, net income in the Retail Banking and Other (including BlackRock) segments increased 45% and 20% respectively Y/Y. This was partially offset by decreases in net income in each of the Corporate & Institutional Banking, Asset Management, and Non-Strategic Assets Portfolio segments (8%, 4%, 17%). The Residential Mortgage Banking segment reported a net loss of $4 million which compares to net income of $12 in the prior quarter. Non-interest expenses remained stable at $2.35 billion from Q3 of the prior year, mainly driven by savings being reinvested in firm technology and infrastructure. Net interest income and net interest margin declined 2% and 31 bps to 2.67%, respectively, on a year over year basis.

Turning to the balance sheet, total loans increased ~3% Y/Y driven mainly by growth in commercial loans and large corporate/real estate lending. Investment securities were also up $2.6 billion (4% Q/Q) resulting largely from an 8% Y/Y increase in deposits. Provisions for loan losses increased 47% Y/Y and net charge-offs climbed 17% Y/Y.

Overall, I still believe PNC is in a solid position for growth. The company continues to show its ability increase profitability, despite the decreases in revenue and net interest figures. I think that the Street overreacted to the decline in revenues and net interest income, both of which have been compressed for most banks and will be boosted when the Fed raises rates. Additionally, PNC has also demonstrated its ability to grow loans and deposits while returning value to shareholders through dividends and share repurchases. We purchased 81 shares of PNC Financial Services at an average price of $94.47 per share and remain confident in our ~102.00 price target.

Bank of America Q3 Report & Earnings

Bank of America reported earnings on October 14^th before the market opened. Bank of America reported EPS of $.37 which beat estimates by $.04 and posted revenue of 20.91B which beat estimates by 140M. Net interest income was 10.3B, and non-interest income was 11.171B. The biggest reason why Bank of America was able to be very successful on EPS was due to cost cutting. Noninterest expense was 13.6B fell 4% and LAS noninterest expense excluding litigation of 900M fell 32%. Bank of America rose .8% due to the strong earnings, and is up another 1.4% today. Many analysts are very bullish on Bank of America, and the strong earnings in the reported “rough” conditions banks are dealing with due to the fall of commodity prices backs up why analysts are bullish. Bank of America is still waiting for an interest rate hike, which would greatly benefit them. The most important thing to come out of this earnings, the tangible book value continued to grow in the third quarter. This is important because Bank of America has been extremely discounted according to the price to tangible book ratio, and I believe when interest rates increase, this discount will not exist anymore and then that will increase the price of a share of Bank of America to our price target at $22.00. 85% of Bank of America’s operations occur in America and protected us from a lot of the commodity price drop, except for oil.

Over the past quarter, Bank of America dropped 5.58%, and reached highs of 18.48 in July. Bank of America has had less fines and litigations this past year and looks like they will be continuing to not have these litigations. The CEO and chairman of the Board mentioned that the commodities markets have been extremely low and it has hurt the trading revenue of Bank of America by 5-6%. This is why the latest earnings were so surprising. Bank of America grew their third quarter loan book which is prepping them for the higher interest rate environment. With the economy looking at normalizing right now, I expect interest rates to have a definite answers on being raised in December. Bank of America has also been making smart loans because once again their net charge offs declined again this quarter and this has been the trend for the past year. 

ORCL 10/15 Update

ORCL began trading the month of October at $36.12. ORCL closed at $37.82 on October 13^th, representing a 4.7% increase thus far this month. This after a rebound in ORCL is expected after a mixed earnings report and a volatile few months in the market. The competition for ORCL became a little bit more complex this month as Amazon introduced a database system that will compete with companies like ORCL and SAP; this occurring as ORCL is transitioning its primary focus from database systems to cloud related technologies. On Wednesday morning as a result of increased competition ORCL was downgraded to "market underperform" from "market perform” with a $31 PT by analysts at JMP Securities. Despite the recent downgrade from JMP, other analysts still remain positive, as Jeffries has ORCL at a PT of $50. ORCL’s growth prospects remain strong in the cloud component, as they are growing faster into that market as compared to many of their competitors.

Jeff Sherman

ORCL Q1 2016 Earnings

This past Wednesday September 16^th Oracle Corp. released Q1 2016 earnings report. Earnings per share (EPS) beat the street’s expectations by a cent and revenue missed expectations. Total revenue was down about 1.7% YoY as the company continues to transition much of their product offerings into the cloud-space. New software licenses were down about 16% YoY as expected with the product transitions. Cloud SaaS increased 33% YoY beating growth expectations; additionally cloud infrastructure was up about 16% YoY. All of the other revenue line items were relatively flat YoY. ORCL continue to be plagued with the issue of currency headwinds associated with the strong USD, on a constant currency basis ORCL’s revenue was up 7% YoY. Additionally the fact that EPS beat expectations and that total revenues missed expectations indicates that ORCL is succeeding in consolidating operating expenses as they transition their major product offerings. Growth prospects for ORCL remain strong in the Cloud SaaS and PaaS industries, as they appear to be making the transition into cloud services with more success than many of their competitors like SAP, and IBM. The earnings report was released on Wednesday after the market close, immediately following the mixed earnings release ORCL was trading up. The following day (same day as FED announcement on interest rates) ORCL traded down about 3% and continued to close the week on Friday at $36.38. The ORCL model has been updated and consists of a new price target of $53.48 representing a 47% upside off of the current price and a 27% upside off of our purchase price of $42.25

Jeff Sherman