CMI Sell Thesis

     On April 29th, Cummins reported earnings that saw them beat on both revenue and earnings. In the aftermath of the earnings report, we saw Cummins surpass our price target of $151. While our investment thesis still holds true for the company, it is trading at a valuation that is proving to be unfavorable after modeling in recent segmented data into our projections. The company will be monitored closely in the near future to see if the valuation turns to something where an appropriate upside could warrant us to buy back in.

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Integra LifeSciences Holdings Corporation 2014 First Quarter Results

Integra LifeSciences Holdings Corporation (IART) reported earnings for the quarter ending March 31, 2014.  Revenues increased $18.4 million over the quarter which reflects an increase of 3%.  GAAP net income was $2.2 million compared to a net loss of $6 million this quarter a year ago.  Integra continues to expand and grow as they invested $11.3 million in capital expenditures over the quarter. 

This quarter Integra practiced a new accounting policy to adjust for the new medical device tax and an updated 2013 financial results using this policy is now on their website.  This new policy has no impact on cash flow, but is expected to reduce GAAP net income by approximately $.05 per share for 2014.  In addition, their estimated tax rate is to reach 32% for 2014 due to the new tax.

Going forward, Integra’s management estimates 2014 full year revenues to be between $920 and $940 million and a decrease in their earnings guidance due to an increase in amortization expense following the close of the DuraSeal acquisition and an expected spike of the tax rate due to the medical device tax.

Solarwinds Inc. 1Q14 Earnings: Strong Quarter, Reiterate PT Despite Market Tantrum

Solarwinds Inc. reported 1Q14 earnings yesterday April 29^th and held a corresponding conference call market close at 5:00pm EST. Revenue came in at $95.PMM besting our estimate and street consensus of $93.7MM. Non-GAAP EPS came in at $0.41 vs street estimates of $0.36.

Solarwinds kicked the year off with a strong start sighting improvements in the EMEA and Asia-Pacific regions, which were detractors last quarter growing 35% and 41% respectively. The investments the company has been making translated into exceeding its revenue and profitability outlook for the first quarter and put it in a good position to deliver on its full year goals. License revenue was up 18% yoy despite a strong increase in license growth last quarter and a tough comparable yoy. Reoccurring revenue now accounts for 62% of total revenue, which is forecasted to continue growing as the company will likely add to its subscription based portfolio of products.

The company has consistently driven customer retention rates, which are best-in-class across all of their core product areas and geographies. Strengthened by the management adjustments made last year sales team count will continue to increase over 2014 consistent with the pace of their revenue growth. Total employees added over the quarter were 45 in major functions bringing total global headcount to 1,357.

The company reiterated guidance of $409.0MM-428.0 sales and $1.60-1.70 EPS for FY14. Analyst expect EPS of $ 1.61 on revenue of $415.6MM. It should be noted that capex increased to $6.0MM attributable to the build out of their new headquarters in Austin. This will increase operating expenses for the remainder of the year, which is factored into their guidance. Until the company sees positive effects from the initiates that kicked off in late 2013 it will not include the effects in their guidance. Their cautious outlook recognizes that the company has yet to begin to realize impact from a meaningful portion of the incremental investment in their business initiated during the second half of 2013.

To our dismay the stock reacted negatively down ~6.0%. Largely we view the selloff due to the cloudiness sounding the 2013 investment realization akin to a solid quarter by any metric. We are maintaining our PT of $52.00 last raised from $46.00 on 3/3/14. We entered this position at $32.95. Despite the recent sell off we are still up ~20% on the name. Currently the stock sells for 36x earnings compared to 38x historically. Our half position will be monitored carefully as the stock is close to our sweeping stop loss.

Spirit Airlines 1Q14 Results

Q1 Earnings      
   Spirit Airlines reported 1Q14 earnings today with revenues of 438 million up 18.2 % year over year in line with estimates of 437.91 million.  Earnings per share were reported as 52 cents per share beating estimates by 1 cent.  Profit increased 15.4 % year over year to 37.8 million as well as operating income was up 13% year over year to 60.1 million.  Operating margin was up 13.7% year over year and revenue per available seat mile was down 2.4 % year over year.  Spirit ended the quarter with 544 million dollars in unrestricted cash as well as no debt on their balance sheet.  Staggering data shows that 256 cancellations occurred in the first quarter compared to 59 cancellations last year.  With revenue still growing 18% year over year this data represents Spirits ability to continue to increase revenue growth with their attractively low ticket fares and new destinations.  One last fact to mention is that Spirit reported a 99.8% controllable completion factor which is significant for customer satisfaction.

Outlook
   Spirit Airline was down about 3.13% to a price of 56.60; which represents the market selling off the facts.  Spirit plans to add Kansas City International in August as well as full year capacity guidance is increased to 17.8% from 17%.  From the beginning of the year we knew that this was going to be a year with increasing costs for Spirit due to new expenditures in adding aircraft as well as pilot costs.  However the investment thesis is still well in tact with Spirit having 40% lower ticket fares than other competitors which has been and will continue to be their main driver.  The aircraft fleet is now at 56 from 2 previously added aircraft's in the first quarter and 9 more are scheduled by the end of the year. Since I do believe the investment thesis is still intact I am remaining my price target of 64$, however it will be important to see how the market reacts over the next week.  If the company hits 52$ a share I will recommend a strong sell which will still give us over a 30% upside from our buying point.

Guillermo Dilone

CMI Q1 2014 Earnings

     Cummins (CMI) reported earnings on April 29th for Q1 of fiscal year 2014. Revenue's totaled $4.4 billion, a 12% increase year-over-year from 2013, beating consensus by $230 million. Earnings were reported as $1.87, beating consensus that had expected $1.67. The company closed at $150.81 on Tuesday after reporting earnings, up 3.86%.
     A strong quarter was driven by multiple segments on the company. The engine business increased year-over-year by 11%, with the components division delivering record quarterly revenues and earnings as sales were boosted 21%. Revenue in the distribution increased 22% in the first quarter, but had negative earnings due to increased expenses attributed to acquisitions. The Power Generation segment took a loss of 14%, being attributed to negative currency movements, particularly how the US dollar is being depreciated.
     North America, which holds nearly 47% of the revenue stream for CMI, had revenues grow by 25% in the first quarter, being attributed to the heavy-duty truck market exceeding predicated sales. Due to new EPA emissions regulations, the medium-duty truck market was up 74% over a weak quarter from 2013. Power Generation was weak in North America for Q1 2014, stemming from an unusually strong demand during Q1 2013.
     The engine segment's growth was driven by the North American demand for on-highway trucks, but was slightly offset as the industry is transitioning to Tier 4 Final standards. Revenue is expected to be up 6-8%, up from the original guidance of 4-6%. The components segment is expecting growth going forward from the stronger demand in North America, with margins now expected to be flat for the year instead a loss being expected from China. The Power Generation segment is expected more loses throughout the year, with foreign currency movements being seen as unfavorable for the segment. The distribution segment had most of its gains come from the acquisitions that were made just this past year. The segment is expected to strong for the year, with growth between 22-30%, with an additional $400 million to still be added to revenue in 2014 from the North American acquisitions.
     Revenues are expected to continue to be flat year-over-year, between 6-10% for the full year, with EBIT being slightly lowered due to the strengthening of the UK pound versus the US dollar. The revenue percentage is stemming from a perceived stronger demand in North America and, to a much smaller degree, internationally. Driving the company going forward will be their continued excellence in the engine and components business, and the benefits associated with their distributor acquisitions in North America. As we are approaching our price target, we need to reevaluate the company going forward to see if there is still growth to be found or if should sell out of it, but the company should remain a HOLD until that decision is made.

VISA Q2 2014 Earnings Release

Last Thursday, Visa, Inc. slated to report 2Q2014 earnings. Reported fiscal second quarter 2014 Net Income of $1.6 Billion, an increase of 26% over the last year. Or $2.52 per diluted share, an increase of 31% over the last year. These result a tax benefit of $218 million of which $201 million relates to prior periods. Excluding the prior periods’ impact, earnings per share was $2.20, an increase of 15% over the last year. Net operating revenue in the fiscal first quarter of 2014 was $3.2 billion, an increase of 7% nominally or 9% on a constant dollar basis over the last year, driven by solid growth in service revenues, data processing revenues and international transaction revenues. The strengthening of the U.S. dollar impacted net operating revenues by 2% points of negative growth during the quarter. And these business drivers remained strong during the Q2 with payments volume continuing to grow at solid levels. As the U.S. dollar appreciated which impacted softer net revenue growth, the company expect this impact to be slightly more pronounced next quarter before rebounding in their Q4.

Payments volume growth, on a constant dollar basis, for the three months ended March 31, 2014, was 12% over the last year at $1.1 trillion. Cross-border volume growth was 8%. And total processed transactions, which represent transactions processed by VisaNet were 15.4 billion, and 11% increase over the last year. The effective tax rate was 22.5% for the Q2. This rate was positively impacted by a $218 million tax benefit recognized. Cash, cash equivalents, and available-for-sale investment securities were $6.5 billion.

The weighted-average number of diluted shares of class A common stock outstanding was 634 million for the Q2. The company repurchased 5.1 million shares of class A common stock, at an average price of $217.61 per share, using $1.1 billion of cash on hand. At March 31, 2014, the company had $3.0 billion of remaining funds, authorized by the board of directors, available for share repurchase under the current program. And the company declared a quarterly cash dividend of $0.4 per share of class A common stock.

The stock was down 5% last Friday, because the payment technology company said economic against Russia could hurt their profits this year. I think we can still hold the company. This is based on the company’s strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, growth in Q2 earnings per share.

Cerner Corp. 1Q14 Earnings: Stop Loss Reached, Exiting Position

We have been forced to exit our full position in Cerner Corp as they have hit their stop loss following the release of their first quarter earnings.  Cerner Corp reported 1Q14 earnings April 24^th and held a corresponding conference call after market at 4:30 E.S.S.  Quarterly revenue came in at $785M, up 15% YoY, which was in-line with street estimates yet just short of our estimates of $811M.  Adjusted EPS was reported at $0.37 per diluted share, up 11% YoY, which was in-line with estimates once again but short of our bullish prediction of $0.38.  Cerner has also reiterated they have purchased 1.3 million shares and still have $142M left.

Due to a tough comparable in global hardware sales, tech resale declined in Q1, however, system sales revenue increased 4% offsetting the decline.  Total services revenue was up 25% YoY due to strong growth in managed services and solid contributions from ITWorks and RevWorks.  Although there were contributions from ITWorks and RevWorks Cerner was unable to form any new deals with clients.  A big driver of revenue in Q1 was ongoing sales of their broad suite of Revenue Cycle solutions.  A major milestone was achieved last year with the release of Healthe Intent Smart Registries solution which is a cloud-based platform that aggregates, normalizes, and standardizes clinical population data.  This quarter, Healthe Intent Smart Registries, along with Patient Portal, Enterprise Data Warehouse, and clinical process optimization, all had strong sales and these pipelines remain strong for the year.  Since January Cerner has also added 5 new CommunityWorks clients and in the process has displaced 6 significant competitors.  Cerner has also implemented automated inpatient and outpatient physician and nursing workflows in a 500-bed hospital in Saudi Arabia.  Following this implementation, Cerner has now implemented its solutions in 13 hospitals compared to the total of 1 that its competitors have combined.

For Q2, Cerner expects revenues between $790M and $830M where estimates are upwards of $815M.  Cerner also expects EPS to come in around $0.39 to $0.40 where estimates are sternly at $0.40.  Cerner’s guidance seems weak pending confidence that another wave of EMR purchases is in the near future.  According to Cerner, most of the purchases will disproportionately go to Cerner or their main competitor who they have a strong win rate against.  Following the release Cerner has been down almost 5% meeting our stop loss price.  This major decrease in stock price has mainly been attributed to their light guidance for Q2.  Although our thesis remains decently intact, we will be exiting our full position Monday.