Target misses earnings with trouble from Canada

Target released its third quarter earnings Thursday November 21st which missed estimates. They reported U.S. and Canadian net earnings at $341 million, 54 cents a share which is down from 96 cents y-o-y. Sales rose 4% y-o-y and total revenue grew 1.9% y-o-y but still fell short of consensus. Gross margins in Canadian operations came in low at 14.8% due to their efforts to clear excess inventory. Target shares closed Thursday at $64.19, down $2.30 or 3.5 percent. Canadian operations reduced Target’s earnings by 29 cents per share due to challenges that are arising from its new stores. Canadians have complained that Targets prices are higher in Canada then they are in the U.S . On top of that Walmart dropped thousands of prices before some of Targets new stores even opened up in Canada. Target still plans on finishing opening a total of 124 stores by the end of 2013 with hope that in the long-term they will be successful. Gregg Steinhafel, CEO, said "As we gain experience in operating Canadian stores and accumulate sales histories by item by location, inventory flow and allocation will become much more reliable and accurate, setting the stage for improved sales and operating efficiency in 2014.” In fourth quarter the Company expects adjusted EPS of $1.50 to $1.60, with the Canadian Segment loss of 22 to 32 cents. For full-year, Target now expects adjusted EPS of $4.59 to $4.69, with the Canadian Segment loss of $0.95 to $1.05. Target is facing many challenges assimilating into Canada culture and in the U.S. where income is stagnates and growth is slow. The reasons that I purposed we should buy into Target are no longer true, therefore, I believe we should sell it. -Kristen Pfaffe

Qualcomm 4Q13 Earnings: Light Guidance, Looking for Exit Point

Qualcomm Inc. reported 4Q13 and yearly earnings on November 6 and held a corresponding conference call at 4:30 E.S.T.  Yearly revenue came in at $24.87BB which is slightly above our estimate of $24.6BB and street consensus of $24.7BB up 30% versus last year.  Quarterly revenue came in at $6.48BB verse our expectation of $6.21BB and street consensus of $6.34BB up 33% yoy while Non-GAAP EPS was reported at $1.05 up 18% yoy, slightly lower than our $1.08 estimate and street consensus of $1.08 as well.  If not for legal charges stemming from the patent case with Parkervision, Non-GAAP EPS would have been $1.15 up 29% yoy.  Revenue was driven by strength in Qualcomm’s licensing and semiconductor business as well as strong 3G/4G device growth.  Dividends were increased for the 11^th consecutive year and approximately $3.9B was returned to stockholders between buybacks and cash dividends during the fourth fiscal quarter. 

Not only did Qualcomm deliver its industry leading third generation 3G/LTE multi-mode modem, but they were successful in growing their share of semiconductor content in multiple devices and expanding their licensing program.  Numerous products based on Qualcomm products were also launched taking advantage of new capabilities including HD video and LTE carrier aggregation.  The growth of tablets has also contributed to Qualcomm’s success.  Popular devices including the Google Nexus 7, Kindle HDX, LG G Pad, and the Sony Xperia Z all contain Qualcomm processors.  In addition to these new devices, new plans forcing people to upgrade to 4G LTE have sparked growth in Qualcomm.  With a monopoly in processors across the largest manufacturers in the phone and tablet market, Qualcomm is poised to continue with great success.

Looking ahead a plethora of new innovations combined with an emerging smartphone/tablet market and focus on cost cutting poise Qualcomm for another successful year.  Qualcomm expects solid growth but at a lower rate based on the exceptionally strong numbers in 2013.  Approximated 225M smartphones were shipped in Q2 of 2013 representing a 47% yoy increase.  It is expected that 1.8B smartphones will be shipped in 2017, representing a substantial growth in the smartphone market.  Another catalyst is the expansion of LTE.  Approximately 100M new LTE connections are expected by the end of calendar year 2013.  Expansion of LTE into China is a huge opportunity that Qualcomm plans to take advantage of in 2014.  Qualcomm anticipates strong growth in low and mid-tiers driven by the launch of LTE in China.  Growth is seen in China across all smartphone tiers, leading to Qualcomm’s Emerging Accounts to exceed $1B in revenue in 2013.  To complement the expansion into flagship smartphones and tablets, Qualcomm is slowing the growth rate of their spending.  They have projects underway to improve product costs within QCT including driving supply-chain efficiencies and designing cost optimized solutions.

While we applaud a solid FY13 and quarter end excluding the Parkervision patent case we are displeased with the light guidance provided juxtaposed against a slight decrease in average selling prices.  Historically the stock has sold at a 5 year average of 24.9x ttm earnings.  Currently the stock is valued 13.3x our FY14 EPS of $5.18 well ahead street consensus at $4.93.  While we remain constructive on the name we are looking for an exit point upon the sale of the North and Latin American operations of Omnitracs scheduled to close in 1Q14.

Atwood Oceanics Q4 2013 Earnings

On November 7 after the market close, Atwood Oceanics Inc. (ATW) released its Quarter 4 earnings to the public.  The company reported Diluted EPS of $1.57 on revenues of almost $293 million.  Their EPS beat consensus estimates by $0.06.  Shares jumped 3.32% during trading on Friday, November 8.

Atwood’s is executing is goal perfectly to employ a high-specification fleet.  Revenues have risen 65% over 2011 levels and 35% over 2012.  This number should continue to rise as a result of higher day rates and a drilling fleet with increasingly high specifications.  In 2014, the company is set to add an additional two ultra-deewpater drillships to its fleet.  These are the rigs that result in the highest contract day rates.  Management is observing increasingly high demand, leading to increasing day rates, for the high specification jackup rig segment.  Concerning ultra-deepwater drillships, management has seen some cooling off of demand.  This, however, should not negatively affect the company’s day rates secured on its rigs coming due.

In the past quarter, Atwood finalized contracts for the sale of the Atwood Vicksburg and the Seahawk.  These were two of the company’s oldest rigs, and these actions are consistent with the plan to have newer and more improved rigs ready to be leased to customers. 

Management is expecting another strong year for FY 2015.  Not much has significantly changed from the past quarters and year with regards to the offshore drilling market.  Also, the company believes its marketing team can continue to pursue and secure new contracts and contract extensions for its rigs.

I would like to reiterate a BUY rating on this stock.  

-Nick Randone

Masimo Corporation Report 3Q2013 Earnings

Masimo Corporation (MASI) reported 3Q13 earnings after market close on October 30^th 2013, posting great results from the perspective of both the financial end and the health of their product line.

From an operational and client standpoint, MASI has gained quite the traction in the past three months. New implementations of technologies into their operational business model is giving MASI a more effective and efficient workplace. In conjunction with new operational capabilities, MASI has also added new customers with major clinics and hospital, including U.S-based hospital St Joseph Health, a large hospital system with 14 major hospitals, and over 4,000 patient beds. But what is more impressive: their ability to retain clients, resulting in a recurring stream of revenue. As new clinical studies post more and more positive results, practical product use, and cost efficiency, MASI retention of clientele is improving.

Positive clinical value from their Signal Extraction Technology (SET) and rainbow SET products proved that the product was a good addition to their portfolio and it continues to strengthen their potential for future revenue generation. Market share gains are driven by the innovation for a company, which is something MASI does not lack. Driver, including rainbow product sales and new shipments of products, are rising substantially. Compared to the same quarter last year, they posted a 33% y-o-y drive growth, attributed mostly to new pulse oximetry contracts, and installation of products in general wards.

On a segmented basis, product revenue was up 11.1% to $124.5MM, weakened by nearly 2% due to a weakened yen, reducing product revenue by $1.8MM. Rainbow product saw another quarter of growing figures, posting a 9.0% growth in 3Q to $12MM, due to “higher instrument and board” revenues, and increased acceptance of original equipment manufacturers (OEM). Direct business, which comprises of 85% of total product revenue and OEM sales, which comprises of 15% of total product revenue, both grew by 12% and 7%, respectively.

On a consolidated basis, total revenue for 3Q grew by 10.4% to $131.4MM vs. $119.0MM last year, falling short of our estimate of $133.8MM and Street estimates of $132.5MM. Gross margin expanded 80 bps to 66.6%, due mostly to a smaller portion of royalty payments attributed to total revenue. R&D expenses increased 13% y-o-y, mostly attributed to new engineering staff and product development. Net income for the quarter was $15.6MM, a growth of 13.1% vs. last year. EPS on a non-GAAP basis were posted at $0.27, a 14.6% growth, in-line with my estimates, and besting street estimates of $0.26.

Due to a positive quarter, EPS for FY13 is being restated to $1.16, from $1.14. All other estimates remain the same, including full revenue and a goal of $50MM attributed to the rainbow product line. It is important to note the new “breakthrough open architecture monitor and connectivity platform” known as Root. It is an information-hub that is integrated into all products that can easily display figures on a screen for easy reading.

Despite the positive news, MASI shares fell. Nothing struck me as “negative” news in their transcript or press release. When researching deeper, the reasoning behind the fall in share price was due to a 20% increase in short sellers. Finally, the company is beginning to rebound in price.

Anadarko Petroleum Reports Q3 Numbers

Anadarko Petroleum (APC) reported non-GAAP earnings of $1.13 per diluted share on revenues of $3.9B in quarter 3 of 2013.  Earnings were up 34.5% compared to 2012 numbers, however the company missed estimates by $.03.  The increase in revenue was driven by a 31.3% increase in natural gas sales and a 10.7% increase in liquids sales. 

We witnessed increased sales volumes amounting to 71 million barrels of equivalent, which was 3 million more than in 2012.  A staggering of production from their Wattenberg, Eagleford, and East Texas horizontal assets caused this increase.  Anadarko realized higher crude prices than anticipated as the average barrel went for $106.05, while natural gas prices were still low at $3.33 per thousand cubic feet. 

Operating costs rose substantially to $3.16 billion, which was a rise of 25.8% because of increases in oil and gas operating expenses and marketing expenses.  Due to this enormous increase in expenses, operating profit was down 15.6% to $689 million.  

Spirit Airlines (SAVE) Q3 Earnings Release and Price Target Increase

Spirit Airlines reported strong results this past Wednesday that beat consensus as well as our estimates. Revenue of 456 million was an increase of 30% year over year, a result primarily of volume growth of 28%, and 2% related to pricing. Additionally, Earnings per share was reported at $.79 a $.04 beat on consensus, and beating our estimates by $.01. The strong quarter was primarily priced in after Spirit announced in early October that revenue per available seat miles increased 10%, almost double the guidance management set of 4%-6%. As a result, Spirit saw very volatile trading throughout the day, as the stock increased as much as 6% at the open, and declined approximately 10% at the lows of the day. The stock eventually recovered and closed only .5% lower. The stock trading down was most likely a result of a mix in profit taking, and guidance that wasn't quite as optimistic as investors had hoped.

2013 traffic growth is now expected to reach approximately 25%, with full year income increasing 30%. However the 2014 guidance was a little lighter than would have hoped. Air traffic growth is expected to grow 15% for 2014, resulting in a 20%-22% increase in full year EPS. Additionally, costs per available seat mile (CASM) is expected to be a challenge in the first and second quarter, after a decreasing CASM in 2013. This is still strong growth, outpacing the industry, however it was expected that the numbers would come in slightly higher.

After the strong Q3, a projected comparable Q4, and tempering our 2014 outlook to numbers that are still strong, we have increased our price target on Spirit to $49 from $42. We believe our thesis of growing market share by having the lowest fare prices and lowest cost in the industry and expanding into newer domestic markets remains intact, and reiterate our Buy rating.