Neustar Beats 2Q12 Estimates - Raises Full-year Revenue Guidance

Neustar, Inc. (NSR), reported 2Q12 results on Thursday, July 26^th, 2012. Shares of Neustar were up ~8% Friday after the company reported Q2 profit that beat estimates and raised full-year revenue guidance. Second quarter revenues increased 40% to $206.5MM. The outperformance of newly acquired Targus Information drove much of the sales growth for the quarter and carried forth support to our thesis on Targus and the benefits it offers Neustar - revenue diversification and robust revenue growth. Income from continuing operations increased 15% to $38.6MM. Income per diluted share increased 27% to $.057.Cash, cash equivalents and investments totaled $235MM, a sequential quarter-to-quarter increase of $45.4MM. During the second quarter the company repurchased approximately 742,000 shares of common stock at an average price of $33.67 per share, for a total purchase price of $25.0MM.


Neustar increased full-year guidance for revenue and net income. Revenue is now expected to range from $825 to $835MM, prior guidance was between $810 and $820MM, and net income was revised up from $178 to $190MM to $189-$197MM. Adjusted EPS was also revised up from $2.66-$2.84 to $2.78-$2.90.

Going forward we expect Neustar’s highly reoccurring revenue base to continue to drive strong financial performance. The next leg for shares of Neustar will come from a successful re-compete of the federally mandated program, called the NPAC, or National Portability Administration Center. Neustar operates the NPAC database and is paid by domestic carriers through North American Portability Management LLC. NPAC accounts for about half of Neustar's revenue. Neustar has held a monopoly on the NPAC contract since it was first signed in 1996. Neustar was founded that year to help meet the technical and operational challenges the U.S, government was facing when it mandated local number portability, which is simply the ability to transfer phone numbers from one carrier to another competing carrier. Neither of Neustar’s main competitors, privately held Syniverse Holdings and Ericsson unit Telcordia, are expected to take much interest in competing for the contract when it expires. This is due to the high cost of building computer systems to manage the large telecom databases, entrenching Neustar into the contract. The question is how much the new contract will be worth. Neustar will most likely have to charge a lower price for its services, some estimate 15% to 25%, however Neustar will look to offer enhanced feature functionality to carriers as a means of limiting revenue declines, a tactic they have been successful with in the past.

Apple 3QF2012 Earnings

3QF2012 Results

            Apple’s shares gapped down about 5% on Wednesday, after its third quarter conference call on Tuesday afternoon. To broad stroke the results, earnings missed analysts estimates by $1.06 & came in at $9.32 per share. This was the second earnings miss in the past 39 quarters. Management suggested that weaker sales were a result of customers waiting for the long-awaited iPhone 5 release, which is expected to be on sale this fall.

The company sold 26 million iPhones in its third fiscal quarter, a 29% increase y/y, but down from 35 million during the second quarter. Weakness in gross margins can be explained by a mix of lower priced iPhones ahead of the iPhone 5, greater contribution of the iPad to sales v. iPhones, & foreign exchange. CFO Peter Oppenheimer: “Our weekly iPhone sales continue to be impacted by rumors and speculation regarding new products.”

Deskop sales decreased 19%, notebook sales increased 3%, iPod sales decreased 20%, iPhone sales increased 22%, & iPad sales increased 52%. The iPhone 5 is rumored to have LTE connectivity with new physical features (e.g. thinner, new casing). Management estimates fourth quarter revenue of roughly $34 billion, gross margins of 38.5%, & EPS of $7.65.

All in all, an EPS/sales miss was bound to happen for a company that consistently beat The Street’s expectations. Although Apple may have missed consensus growth estimates for this quarter, it is still has a fantastic story & room to run. A strong product line, among other catalysts, should drive the stock price in the coming months if not before the holiday season.  

Catalysts

-New iPad, cheaper iPad 2, iPad Mini

-iPhone 5 with LTE capability drives strong upgrade cycle

-Mix shift from iPad to iPhone drives margins higher

-Expanding distribution in emerging markets (China, Brazil, ect.)

-iTV

Risks

            The major risk to Apple’s performance & stock price is the success of new tablets, especially from Microsoft & Google. In my opinion, the Surface (Microsoft) poses the most threat. Although it is unlikely that a software company can successfully produce a physical product (like a tablet) without complications, strong execution could pose a threat to Apple’s corporate market. Many of these companies that are focused on productivity still run on Office to utilize programs like Excel & Word (Apple’s “Pages & Numbers” haven’t posed much of a threat to this market). Whether from the companies themselves or their employees, the Surface could be popular among those that want to get some work done in transit or at home, with the Surface’s keyboard feature. In addition, Microsoft 8 will offer a variety of features that should strengthen its hold on the corporate market.

Dan Hurley’s Comments (Original Analyst)

-Bad headlines did not help the stock price. Customers waiting for iPhone 5

-“A material chunk of the blowout iPhone/iPad sales from the March quarter will pull forward from this quarter rather than sales to end users”

- “The beat in iPads is extremely positive given the fact that new iPad sales in mainland China, which makes up ~70% of Asian sales, were not included. Sales of the iPad 2 at its newly lowered price point were driven by success in the education unit. Both of these bode extremely well for iPad sales in September.”

-Lowered margin guidance for the next quarter could meant Apple is introducing a smaller iPad (mini) at a competitive price point (to compete with tablets like the Kindle Fire).

Other

Relative Performance (compared to the S&P 500) 3 Months Ahead of an iPhone Announcement

Original iPhone           22%

iPhone 3G                   40%

iPhone 3GS                 32%

iPhone 4                      20%

iPhone 4S                    22%

Apple will buy AuthenTec Inc for $355 million, which could provide a security feature on an advanced version of the iPhone (fingerprint technology).

David Einhorn: “Not only do we believe the skeptics are misguided, we believe the shares remain cheap.”

Ford 2QF2012 Performance

Quarterly Performance

Second quarter profit fell y/y 57% to $1 billion, largely influenced by operations in Europe. EPS was $0.26, down from $0.59 a year earlier. This was expected, after Ford increased its 2011 estimated losses (to $1 billion, up from roughly $500 million) for Europe in June. Management cited that sales are at a 20 year low due to economic uncertainty in the Eurozone. Europe accounts for 25% of Ford’s total sales & European automotive market share fell to 7.7% from 8.3% a year earlier, driven by losses in the southern European markets. Shares fell 1% at the close to $8.97 to their lowest since December 9^th, 2009. Investors aren’t willing to bet on the turnaround story that many analysts are betting on, with price targets in the $10-16 range.

            To offset the losses, Ford is decreasing production, cutting advertising budgets, and laying off workers in Europe. Management failed to provide a long term restructuring plan for the area, which weighed on shares. Ford currently uses 63% of its production capacity in Europe, so factory closings in Europe are expected—similar to downsizing in North America in the past decade.

            CFO Bob Shanks: “In North America, we had to shrink in order to grow, but if we think about Europe, I don’t think that’s where our business is. Our intent is not to shrink, our intent is to grow our business in Europe.”

            Ford’s U.S. car and light-truck sales rose 6.6% in the first half of the year, trailing the industry by roughly 900 bps. Commercial and passenger vehicles rose 18% in China last month. Ford is still expanding into China & will open nine new factories by 2015. Sales seem to be strong, even though Ford was a late mover in this market.

Forward Looking

            We continue to hold onto the Ford shares because we believe the stock is oversold on Eurozone & China GDP concerns. These negatives should continue to be offset by strong performance in North America—record 1^st half profits in 2012, driven by strategic pricing and cost savings. U.S. Sales of pickup trucks (F-series) in the U.S. have rebounded in the past two years, in lieu of a housing recovery. Pickup truck sales should bounce back as new housing starts shows consistent improvement. Guidance (ex-Europe) was in line for the second quarter, with slightly better revised 2012 outlook. The Escape Fusion is set to launch in the second half of 2012, which could be a catalyst as well.

Alexion beats Q2 Expectations with Continued Double-digit Growth

Alexion Pharmaceuticals (ALXN) reported 2Q12 result today, July 25, 2012. Alexion continues to “beat and raise” earnings and estimates alike. Second quarter revenues increased 48% to $274.7MM, compared to $185.7 year-over-year, also exceeding Street Consensus of $263.04MM. Sales growth was attributable to steady additions of new patients in the paroxysmal nocturnal hemoglobinuria (PNH) in their core territories of the United States, Western Europe and Japan. Revenues also experienced increasing sales from new patients focused in the atypical hemolytic syndrome (aHUS) indication. Moreover, EPS beat analyst estimates by $0.10 coming in at $0.47 per share, compared to $0.29 year-over-year. Notably, the company’s cash holdings increased to $806MM from the Q1 balance of $359MM. The company raised net proceeds of $462MM from the sales of 5,000,000 shares, announced on May 23, 2012, in connection with its inclusion in the S&P 500 index. Alexion also reduced total debt from levels of $355MM in Q1 to $228MM. 

Alexion announced that it is raising its 2012 revenue guidance from the previous range of $1.065 – 1.085BN to $1.11BN - $1.125BN. The upward revision is largely due to continued global growth of Soliris in PNH and aHUS. With continued investment in growth in global operations, the company also revised its SG&A from $345 – 355MM to $360MM – 370MM. Consequently, as higher volume sales flows through the PNL, management also raised EPS guidance to $1.78 – 1.88 per share from $1.65 – 1.75. All other 2012 guidance was held the same. 

Finally, CEO Leonard Bell stated that the company has advanced 8 lead development programs which include 5 highly innovative biologics. 

- Shawn Laljit, Healthcare Sector Head

HAL SELL Thesis

We have recently sold Halliburton from our portfolio. One of the major reasons in doing so had to do mostly with a pending lawsuit with BP. As everyone knows, HAL was listed as a 3rd  party defendant in the BP federal lawsuit. In February, it was ruled that HAL was not responsible for the spill as a third party and that pollution and contamination did originate from HAL property above the land or water. This was a big step for them because it is what could have cost them the most money. But, HAL could still be responsible for punitive damages and civil suits due to possible fraud and breach of contract on their part. If HAL did commit fraud, it is said that BP's indemnity (the money they owe from the spill), could be ruled void. Other sources think that the two companies will just settle because BP has bigger problems to worry about. Regardless of what happens, HAL will definitely have to dip into their own pockets due to countless civil suits from fishing organizations, environmental and wildlife groups, and any other group affected by the spill. These organizations are mainly targeting BP, but BP can get money from HAL for the punitive damages. As a result of this and much more research, we have decided to sell HAL because of the potential downside risk. Although it may not be large, there is definitely a chance that it could be and if it does, it will come without much warning and would have a huge negative effect on the stock price. We feel as if the economic environment is already insecure and we don't need any other downside pressure on this stock.

-John Astarita

CSX Q2 2012 Earnings

CSX Corporation announced second quarter net earnings of $512 million, or $0.49 per share, versus $506 million, or $0.46 per share, in the same period last year. This represents a 7 percent year-over-year improvement in earnings per share. "CSX delivered its 10th straight quarter of year-over-year earnings growth despite significant headwinds in its utility coal business," said Michael J. Ward, chairman, president and chief executive officer. "The company continues to perform well across a wide range of economic and market conditions." Total revenue and volume were essentially flat when compared to the same period last year, as increased shipments of export coal, intermodal and automotive products helped offset declines in utility coal. CSX's train crews are operating more efficiently and the company's strong service product is translating into better asset utilization. These productivity gains, along with resource alignments made in response to changes in the mix of the business, drove an increase in operating income to $943 million. Additionally, the operating ratio improved to 68.7 percent for the quarter, a 60 basis point improvement year-over-year. Looking forward, even with the continued headwinds in the utility coal market, CSX remains on track for earnings growth for the full-year 2012.  In addition, while more challenging, the company continues to have line of sight to a 65 percent operating ratio by 2015.

-John Astarita




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Baxter Pharmaceuticals Q2 Earnings Release

Baxter Pharmaceuticals:

Baxter Pharmaceuticals released moderately positive Q2 earnings today.

Adjusted EPS Came in at 1.12, in line with management’s range of 1.10 to 1.12

Q2 revenue increased by 4% on a constant currency basis*, in line with management’s sales growth forecasts. This growth was boosted by a net benefit from recent acquisitions and divestitures of 130 basis points.

On a segment basis:

Bioscience sales of $1.6 B increased by 1% in Q2, on a constant currency basis, 4%. Continued growth on top of last year's 10% growth shows that Bioscience is still a strong segment.

Most other segments experienced an increase of approximately 4% on a constant currency basis with the outlier being regenerative medicine which saw an increase of 18% or 21% on a CCB. This was predominately from a double digit growth of FLOSEAL (a drug that helps to stop hemophilia related bleeding) and Synovis (soft tissue repair products).

Margins:

Gross margin increased to 51.8%, an improvement of 100 bps from last quarter, but moderately lower than same quarter last year due to foreign currency resulting in a loss of 50 bps

SG&A Totaled $789 Million and increased 3% as a result of recent acquisitions, pension expense, and marketing

R&D spending advanced 15% to 276 Million in order to fund a series of projects including investments in their hemophilia franchise, Alzheimers’s program, and phase III adult stem cell trial. In addition it reflects continued focus on a variety of early-stage initiatives.

Operating margin was 21.9%, 160 Bps below last year due to ramped up R&D and FX exposure

Interest expense was $22 Million, up from $15 million due to incremental expense of a $500 Million debt issuance in Dec. of last year and lower interest income

Forward projections:

Full year growth is expected to be approximately 2% after the impact of foreign currency.  EPS is on track to meet guidance of between 4.50 and 4.56. Third quarter EPS is within an expected range of 1.12 to 1.15

*Constant Currency basis: An exchange rate that eliminates the effects of exchange rate fluctuations and that is used when calculating financial performance numbers. Companies with major foreign operations often use constant currencies when calculating their yearly performance measures

BlackRock Reports Q2 Earnings

BlackRock Reported Diluted EPS of $3.10 for Q2 2012, this beat analysts’ estimates of $3.01. On a diluted basis our EPS estimate was $3.31 for Q2 2012, compared to $3.08 a 7% miss. BlackRock reported Q2 2012 revenue of $2,229 Million, 8% below our estimates. This was driven by weaker assets under management in both equities and alternatives; this was partially off-set by better performance in fixed income and alternatives. ETF’s gained revenue share since the previous quarter and now make up 20% of AUM, a 3% increase since the quarter prior. Assets under management had slight out flows and ended the quarter at $3.560 Trillion, a 3% decline since the end of the first quarter. BlackRock’s ETF units had a positive quarter of inflows, but were these gains were offset by valuation declines.
Overall BlackRock had a quarter that beat estimates because this quarter’s fees were based strong first quarter results. Going forward BlackRock’s results will be highly dependent on market conditions. Fees for Q3 could be weaker due to a slimmer quarter of performance during Q2. For this reason our expectations for Q3 are slightly lower, but we expect improved operating margin driven by sustained lower compensation. BlackRock kept compensation and cost basis low as costs declined year over year Compensation was for Q2 2012 this was 35.3% of revenues, improves from last quarter’s 36.7%. 
Slightly declining assets under management caused a 5% year over year decline in revenues and were the main driver for lower EPS than our expectations. Specifically better Fixed Income inflows drove results to beat analyst’s estimates, a trend that we expect to continue to drive strong performance and inflows over the next two quarters. The quarter was neutral overall as management looked to next quarter they hope to continue performance by feeling the full benefits of recent acquisitions and an improved institutional investment outlook.  

OZRK Q2 Earnings

OZRK announced 2^nd Quarter Earnings 7/12/12 of 19.1M, up from 18.01 in Q1 and EPS of $0.55 compared to $0.52. While Q2 2012 is generally significantly lower than Q2 2011, Q2 2011 was bolstered greatly by gains from FDIC assisted transactions. Guidance given in the Q1 2012 Earnings Report Conference Call was that each subsequent quarter would see gains greater than the one before, and that has proven to be the case with Q2. Legacy loans and leases (excluding covered loans) increase from 1.8B on 6/30/11 to 1.98B on 6/30/12.For Q2 2012, the efficiency ration was 45.4, down slightly from Q1's 47.7, but up fromQ1&Q2 of 2011's 35.9 and net interest margin was 5.84%. Stock price jumped $2.62 on the day in response. I have a projected price target of 37.26, which still seems appropriate if the bank continues to not have additional FDIC assisted transactions, but should any acquisitions occur (FDIC or otherwise), that number will be adjusted.