Atwood Oceanics Announces Contract Extension, updated model - new Price Target

Atwood Oceanics, Inc. announced last week that it has successfully secured a 1-year contract extension for one of its rigs, the Atwood Aurora until February 2015.  The Atwood Aurora is a jack up rig that is currently operating in offshore Cameroon, and this contract is essentially a continuation of its previously secured contracts.  The drilling rig will bring in a day rate of $193,000 (if the 15% Cameroon withholding tax is applicable at the time), or $164,000 if the withholding tax is not applicable.  Effectively, any excess taxes applicable to this rig's operations are paid for by the customer, and it will be bringing in revenue that is above what the Aurora is currently earning, and also above the day rate that is specified in its first contract extension.

This contract helps to alleviate some of the worry surrounding downward price pressure in the drilling industry.  It shows that companies are actively looking to expand operations in major offshore areas.

I have updated the model and uploaded a copy to Dropbox.  The investment thesis is still intact, and ATW has a new 12-month price target of $63.89, representing a 15% upside over today's closing price of $55.77.

-Nick Randone

Verizon Wireless Dividend To Be Paid June 25

Verizon Wireless, a joint venture of Verizon Communications Inc. and Vodafone Group  PLC, will pay out $7 billion to its owners before the end of next month. Verizon, which owns 55% of the partnership, has been publicly pushing Vodafone to sell its 45% stake in the massive mobile phone company.  Based on their ownership, Verizon Communications will receive $3.85 billion in cash and Vodafone will get $3.15 billion. The dividend will be paid on June 25, according to a regulatory filing.

At this time, with its dominance in the telecom industry and managements ability to enhance shareholder interests, we plan to hold the stock. However, we will be analyzing the stock in the next couple days to see whether it is best to sell or continue to hold our position.

Actavis Rises 12.2% After Confirming Merger Talks With Warner Chilcott (WCRX)

Actavis Pharmaceuticals (ACT) confirmed merger talks with Warner Chilcott (WCRX), a nearly $5.0B specialty pharmaceuticals company, on Friday May 10^th, 2013. Warner Chilcott focuses their attention on Women’s Healthcare, urology and gastroenterology of branded pharmaceutical products. Their U.S. Sales accounted for 70.8% of their total sales for the first quarter of 2013. On a year over year basis, revenue was down 13.6%, attributed mostly to a decrease of $35.0MM in revenue for ACTONEL, a drug used to treat osteoporosis, and management decision to cease shipments of ASACOL 400mg, an anti-inflammatory drug, and transition to a similar drug in DELZICOL. Although revenues were down significantly, the low costs incurred for the first quarter of 2013 led to flat growth in GAAP net income and EPS, reporting $113.0MM and $0.45 respectively. Non-GAAP EPS, however, fell 20.7% to $0.92 when compared to $1.16 in the same period last year. Despite negative growth on both top and bottom line, Warner Chilcott did beat estimates. Reported revenue of $593.0MM and Non-GAAP EPS of $0.92 beat average street estimates of $588.1MM and $0.85, respectively. Warner Chilcott had total cash balance of $290.0MM and total debt of $3,682.0MM. 

This seems like a perfect opportunity for Actavis as they have been vocal about expanding into Women’s Healthcare, a specialty of Warner Chilcott. Additionally, Warner Chilcott’s tax structure can benefit Actavis in the long-term, in terms of tax rates. Analysts state that Warner Chilcott’s debt, comprised mostly of $2,425.0MM term loan borrowings under the senior secured credit facilities and $1,250.0MM of senior notes at 7.75% due in 2018, give Actavis flexibility in financing options for the deal while concurrently keeping their debt multiples stable. Many analysts within the sector, particularly within the generic pharmaceuticals industry, believe that company mergers and takeovers are inevitable, as organic driver and growth is becoming more and more rare. EPS accretion is estimated in a range of 20.0% - 50.0%, assuming the deal goes through. 

UASBIG suspects that deal talks between the two companies are due mainly to these two factors: 1) as Actavis looks to move into the Women’s Healthcare space, they would like to acquire a company with hallmark products and cost-effective strategies. Warner Chilcott’s tax-structure coupled with their specialization in Women’s healthcare products make them very attractive to Actavis; and 2) four recent FDA approvals between February and April. These approvals include two new oral contraceptives, with one expected to launch commercially by August of this year. Following this news, Goldman Sachs Analyst, Jami Rubin, raised their price target from $110.00 to $122.00, but maintains their neutral rating. Actavis ended the day at $119.86, an increase of 12.2% when compared to the previous day close of $106.81. Warner Chilcott price targets were raised to $20.00 from $16.00 and $21.00 from $18.00 by Jefferies and Susquehanna International Group, respectively. Warner Chilcott ended the day at $18.01, up 20.0% when compared to the previous day close at $15.01.

Update: 5/13/2013 12:18 PM - Actavis reiterated as a BUY at Buckingham Research Group. Price target raised to $140.00 from $125.00

Davita HealthCare Partners released 1st quarter 2013

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Davita HealthCare Partners released 1^st quarter 2013 results on May 7, 13. Adjusted income from continuing operations for the three months ended March 31, 2013 was $196.9 million, or $1.84 per share. HCP's performance was solid in the quarter with operating income of $110 million. Total capitated HCP members grew 5.8% sequentially, of which 2.1% was acquisition-related. Year-on-year, member months grew 20.3%, of which 16.2% was acquisition-related. For the rolling twelve months ended March 31, 2013, operating cash flow was $1,148 million and free cash flow was $764 million. For the three months ended March 31, 2013, operating cash flow was $379 million and free cash flow was $299 million. Adjusted operating income for the three months ended March 31, 2013 was $467 million, excluding a pre-tax loss contingency reserve of $300 million, as further discussed below. Operating income for the three months ended March 31, 2013 including this item was $167 million.

Davita took a 300 million contingency reserve—relating to the two physician relationship investigations—that is part of a comprehensive offer to settle all the related civil administrative and criminal matters. DaVita may not reach a final settlement the 300 million figure was just an estimate. The investigation is solely about physician relationships. It primarily relates to their physician joint ventures, which are subject to complex regulations under both anti-kickback and other loss. There have been no allegations concerning: the quality of care Davita provides, the cost of the government or the utilization of medical services.

Davita showed strong growth in the U.S. dialysis treatments with 5,628,799, or 73,579 treatments per day, representing a per day increase of 8% over the first quarter of 2012. Non-acquired treatment growth in the quarter was 4.3% over the prior years first quarter.  Normalized non-acquired treatment growth in the quarter was 4.4% over the prior years first quarter. U.S. dialysis revenue per treatment increased $10.28 from the prior quarter.

Management updated guidance for 2013. They have increased their consolidated operating income guidance to now be in the range of $1,800 million to $1,900 million. In addition, they updated their operating income guidance for dialysis services and related ancillary businesses for 2013 to be in the range of $1,400 million to $1,450 million. Their previous dialysis service and related ancillary businesses guidance was in the range of  $1,350 million to $1,450 million.  Operating income guidance for HCP for 2013 is still expected to be in the range of $400 million to $450 million and consolidated operating cash flows for 2013 are still expected to be in the range of $1,350 million to $1,500 million. Also as a result of sequestration there is a 2% cut in Medicare rates, which is about $20 million per quarter reduction in dialysis Medicare revenue.

Anadarko Earnings

Anadarko Petroleum Corporation released first quarter earnings on May 6th. Anadarko had surpassed the Street's earnings and production estimates. The company reported a profit of $1.08 per share vs. consensus estimates of 93 cents. This also represents 17.4 percent growth year over year. Anadarko's sales volumes rose 10.3 percent year over year this quarter to 71 million barrels of oil equivalent (MMBOE) or 793 thousand BOE per day (MBOE/d). This was primarily due to an expansion of crude oil and natural gas production in the U.S. and international operations.Additionally, liquid sales were up 14.6 percent year over year primarily due to onshore plays in the Wattenberg, Eagleford, Marcellus, East Texas HZ and Permian. Average realized prices for oil and condensate, natural gas, and NGL were $102.97 per barrel, $3.33 per thousand cubic feet, and $38.17 per barrel. 

Anadarko announced two new deepwater wells in the Gulf of Mexico's emerging Shenandoah Basin. Anadarko's Shenandoah-2 puts out more than 1000 net feet of oil pay, making it one of the largest Gulf of Mexico discoveries to date. Additionally, the Coronado well, located in Walker Ridge block 98, encountered more than 400 net feet of oil pay. The company continues to aggressively pursue deepwater plays around the world with six wells currently drilling. Anadarko continues to make discoveries in Mozambique, finding a distinct natural gas reservoir in Offshore Area 1 block.

Despite the positives, falling natural gas prices could curb future growth. Additionally, failure to manage costs could adversely affect future profitability.

Anadarko lowered its production estimates for the second quarter due to temporary shut-ins in Texas’ Eagle Ford, and other temporary setbacks. However, it slightly raised its 2013 production goals.

Going forward, I still believe Anadarko is an attractive investment opportunity. The company achieved record daily sales volumes of 793,000 barrels of oil equivalent (BOE) and it monetized assets totaling more than $1.2 billion showing its commitment to unlocking value for the shareholders. Furthermore, it's trading at a steep discount to its competitors. If it was trading in line with its competitors in terms of net asset value, shares would appreciate by at least 15 percent. 

Fifth Third Bancorp Q1 2013 Earnings

Fifth Third Bancorp (FITB) has released Q1 2013 earnings.  The company reported a profit of $413 million, or EPS of $0.46 per share.  This represents a 2% increase in EPS, but a 2% drop in net income as compared to Q1 2012, which produced $0.45 EPS on $421 million of revenue.  FITB net income increased just over 6% sequentially.  This year-over-year decline of $8 million in revenue was led by falling earnings from deposits and loans, also known as “Net Interest Income”, as well as “Income from Fees and Other Sources”.  A major positive point for the bank’s operations was a decreasing amount of “Net Charge-Offs”, or the amount of money lost on bad loans.  This number was reported at $133 million, which is the lowest level seen since 2007.  This number follows the recent trends downwards, and can be seen as a positive sign looking into the future.  Fifth Third Bancorp operates in Florida and Michigan, two of the areas that took the largest losses during and immediately after the financial crisis shook this country.  As these areas have been bouncing back, and are expected to continue, operations spanning these areas of the country should continue to thrive.  Recently, there has been news that the Fed will not stop quantitative easing.  This will continue to take the country on its current path of easy money, possibly increasing the volume of loans originated, especially in Florida (housing) and in the Midwest, as automobile companies continue to generate strong revenues. 

Leading the rise in EPS, although there was a slight decrease in net income, is the company’s share repurchase program:  the company bought back about 8 million shares in the first quarter.  FITB also increased its quarterly dividend to $0.11 per quarter from $0.10, as it reported one of its highest levels of net income ever.  

YUM! Brands Inc.

Yum! Brands Inc. (YUM) reported earnings on Tuesday, April 23^rd after market hours. The company revealed that it earned $0.70 per share in the period on revenue of $2.53 billion. Analysts were expecting earnings of $0.60 per share on revenue of $2.56 billion. Earnings for 1Q2012 were $0.76, denoting an EPS drop of 8% year over year. Operating profit increased 5% in the US and 19% at Yum! Restaurants International. 

China does not seem to have reacted as badly to the stories surrounding the company’s ingredient use as had been feared according to these earnings results. Yum! Brands should be able to continue to consolidate its growth in the country, having restored confidence in its business practices.

Moving forward, Yum! Brands expects some continued volatility in sales in China with news of Avian flu emerging, though the majority of fear surrounding their poultry has subsided. Historically, the sales impact of Avian flu publicity has initially been dramatic at KFC but relatively short-lived. 88% of new restaurants opened were in emerging markets like China and India. The company has been aggressively following a marketing campaign assuring consumers of the quality of Yum! Brands’ food. The company will continue its plan to open around 700 new restaurants in China this year. 

With concern over food quality subsiding in China and the continued international growth and expansion into emerging markets, we reiterate our BUY rating for Yum! Brands Inc.