Cerner Announces Intermountain Partnership, Shares up ~8%

Cerner Corporation traded up today ~8% after announcing a multi-year strategic partnership with Intermountain Healthcare. The partnership will implement Cerner’s electronic medical record and revenue cycle solutions across all of the Utah-based firm’s 22 hospital and 185 clinics. The collaboration will utilize Intermountain’s industry leading clinical processes and data warehouse. In addition, the team seeks to build a new set of tools for a post-fee-for-service world in areas such as activity-based costing. As part of the Intermountain agreement Cerner intends to relocated a couple key executives to Salt Lake City to help implement the new collaboration. The deal comes as a victory amongst Epic who was beat out for the contract “up for grabs.” The deal is estimated to be worth in the range of $75-$100MM of revenue opportunity beginning in 2014. We have increased both our FY 14 and FY15 EPS estimates $.04 to reflect the revenue opportunity. Our price target increase to $58.92  from $57.55 represents a 32.6x multiple to our FY14 EPS estimate of $1.81 up from $1.77. Currently the stock is valued at 43.6x ttm earnings around $53.71 and ~10% away from our updated price target.

Verizon and Vodafone Buyout Agreement

Verizon announced Monday that it will pay $130 billion for the remaining 45% stake in Verizon Wireless owned by Vodafone. This is the second-largest acquisition deal on record. 

Vodafone PLC will get additional cash to expand in Europe and buy other cellphone providers. Verizon Communications Inc. can boost its quarterly earnings, as it would no longer have to share a portion of proceeds. Once the deal closes, Verizon expects EPS to rise by 10%. This deal is expected to close in the 1Q of 2014. 

Under deal terms, Verizon will pay $58.9 million in cash and $60.2 billion in stock, and issue $5 billion in senior notes payable to Vodafone and sell its 23.1% minority stake in Vodafone Omnitel NV to Vodafone for $3.5 billion. The remaining $2.5 billion will be paid in other ways.

Verizon wanted the profits from Vodafone's 45% stake in Verizon Wireless. Verizon feared that fears of pressure on interest rates inspired by U.S. economic recovery could make a purchase more expensive, so it acted quickly.

In the April-to-June quarter, Verizon Wireless added 940k+ devices to its contract-based plans, exceeding analyst estimates and continuing a strong run. It boosted service revenue by 8.3% from a year ago.

Separately, Verizon raised its quarterly dividend by a penny and a half to $.53. That makes its annual dividend $2.12 from $2.06.

JOY Reports Q2 Earnings

Joy Global reported earnings today, beating the general consensus. Joy reported an EPS of of $1.70, beating estimates of $1.36, and reported revenue of $1.32 billion, beating estimates of $1.18 billion. Bookings fell 36% to $695.4 million amid lower commodity prices. There was an 87% decrease in the order of original mining equipment, part of a 27% decrease of surface mining equipment. Underground mining machinery bookings also decreased 43%, and net sales fell 5% to $1.3 billion. Joy also intends to buyback $1 billion in stock.

            Joy fell 4.72% today at close, driven by consumer being skeptic on the future of the company. Joy is maintain their fiscal year revenue guidance of $4.9-5 billion, despite them coming out and stating that the market would have a difficult time sustaining anything about $4 billion. Joy’s 2014/2015 EPS guidance is way above where it should be, and should be getting corrected in the coming weeks.

For the future, Joy is expected a less than stellar fourth quarter, as they have depleted $1 billion of their backlog. While Joy is stating that the coal market is beginning to recover, the numbers for that market continue to decline. I see Joy as more of a value trap right now as they have projections that won’t be met and are preparing for a subpar quarter; we should evaluate our options of bringing it into the portfolio going forward. 

Anadarko sells a Natural Gas stake in Mozambique

Anadarko Petroleum (APC) sold a 10% stack of their natural gas development block offshore Mozambique for $2.64B in cash to India’s state-controlled energy company ONGC Videsh.  Anadarko now controls a 26.5% working interest in the project off the coast of the country.   This extra cash will help the company fund its’ plans to invest $5.5B in the US to boost oil production during 2013.  The news caused Anadarko to move past $93 today, touching a new 52-week high of $93.12.

Target Reports Second Quarter 2013

Target released its second-quarter earnings on Wednesday the 21^st which had net earnings coming in at $611 million, or .95 cents per share, up 6%. Target opened 44 stores in Canada during the quarter, bringing its total to 68, but diluting per-share earnings by 21 cents.  Sales increased 2.4 percent to $16.8 billion from $16.5 billion last year, EBIT increased .4 percent from $1,324 million in 2012 to $1,330 million in 2013, net interest expense decreased to $171 million from $184 million in 2012, and gross margin rate increased by .2% to 31.4 percent. In the second quarter, the Company returned more than $1.1 billion to shareholders through dividends and share repurchase. Year-to-date, the Company has repurchased approximately 21.9 million shares of its common stock at an average price of $67.41 for a total investment of $1.47 billion, and paid dividends of $463 million. Gregg Steinhafel, the CEO of the company says that "Target's second quarter financial results benefited from disciplined execution of our strategy and strong expense control, offsetting softer-than-expected sales”.

 

In third quarter 2013, the Company expects adjusted EPS of $0.80 to $0.90 and GAAP EPS of $0.55 to $0.65. The 25-cent difference between the adjusted and GAAP EPS ranges reflects expected dilution of 22  cents related to Canadian operations and 3 cents related to the expected reduction in the beneficial interest asset. For full-year 2013, Target now expects adjusted EPS will be near the low end of its previous guidance of $4.70 to $4.90.

BE Aerospace Announces Acquisition

BE Aerospace announced yesterday that it was acquiring Blue Dot Energy Services for $75 mm. Blue Dot is an energy services company that provides parts distribution, rental equipment, and on-site services to the industry. BE Aerospace is currently experiencing strong growth from its very cyclical commercial aerospace business, however the company has been looking to diversify into the oil and gas as others in the industry have done (i.e. Precision Castparts Corp.). The goal is to profit heavily from these cyclical swings in the aerospace market, however also diversify that risk to an extent during the troughs. With close to $800 billion in commercial aircraft backlog between the big 3, BE Aerospace is poised for strong growth in its aerospace business for at least the medium-term. We reiterate a HOLD rating as recently the stock has become close to fairly valued and believe now is not the time to enter new positions in the stock.

Spirit Airlines Drops Nearly 10% on the Week

Spirit Airlines has fallen close to 10% this week along with the other US airlines despite reporting air traffic that grew 25% over last year, after The Justice Department filed suit attempting to block the merger of American and US Airways. The fear is that if the merger is blocked that airlines will have to compete more competitively on price and will hurt profitability which airlines have only recently become re-accustomed to. The fear with Spirit is that they currently have the lowest total cost to fly. However depending on how competitive other airlines are with price, customers may decide that a Delta or US Airways flight at a new lower price with many more luxuries is preferable over a bare-bones Spirit flight. This seems like a stretch as the average fare price for a Spirit flight is only $77, whereas costs at a major carrier can be multiple hundreds.

Spirit should continue to reap the rewards of its low-cost business model, as proven by its traffic growth of 25%, and how it has continued to take market share in the domestic market. With over 400 markets targeted, and close to 50 Airbus A320 planes ordered, Spirit is poised to continue growing, and we feel that this merger risk is weighted more heavily towards the major carriers who offer similar prices and luxuries, and the true risk is on the higher margin international flights, which Spirit is not currently exposed to. We remain positive on Spirit and believe the low cost carrier (LCC) business model is the area of the industry that currently offers the highest growth, both through new routes, and taking market share from the over-priced large carriers. We reiterate a HOLD rating on the stock pending an updated price target.