Saturday, November 26, 2016

Earnings Analysis: Home Depot (HD)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Home Depot announced third quarter earnings results for 2016 on November 15.  Sales came in at $23.3B, resulting in earnings of $1.60.  This beat the consensus of $23.09 in sales and earnings of $1.58.  Comparable sales were up 5.5% overall and 5.9% in the US.  Finally, they also delivered forward guidance which kept sales growth targets in line with previous communications and raised earnings per share estimates for 2016 to $6.33 which would be a 15.9% growth from 2016.  Keep in mind that this means the dividend is likely increasing as well, since Home Depot usually returns half of the earnings in dividends the next year (3.16 for 2016 should be the guideline now).  It's important to recognize that earnings growth is being impacted by share repurchases, but guidance of 6.3% sales growth is nothing to slouch at.

Transactions increased 2.4% while average ticket increased 3.1%, this is an indication to just how strong Home Depot's strength is still, while you saw all departments showing positive comps.  Finally, big ticket sales (over $900) were up 11.3%.  This represented 20% of US sales.  Home building and remodeling appear to continue to be strong, despite what we saw from suppliers Masco, Whirlpool, and Sherwin Williams within the last 6 weeks.  Another announcement that was made was the acquisition of long term debt that they will use to repurchase shares, totaling up to $7B in share buybacks for 2016.  There has been $4.6B in repurchases to date, meaning we could see around 17.5M more shares repurchased by the end of the year.  

In short, it's hard to understand why this was seen as anything but a dynamite quarter - especially after hearing how competitor Lowe's didn't do so well.  The company has an incredible pulse on the customer and I trust their management team in both their ability to provide customers with what they want - executed in a manner that's exceptionally well performed - and be able to adjust and be up front when things change.  They see a strong 2017 in front of them and I don't see why I should doubt it at this time - even with rising interest rates.  The stock has just recently gotten back above where it was when it announced the results and these results give me little choice but to increase my targets across the board.  2016 earnings will be $6.34, Conservative 2017 earnings will be $7.10.  Given current views, I think the consumer will feel stronger and I think the markets will respond favorably to retail stocks despite some interest rate hikes, so I'll give a 22 multiple on the stock that is going to grow over 15% this year and I provided a 12% EPS growth guidance for next year.  This leaves a 2017 price target of $156.  I see down side risk to $124 at this time.  Given the risk/reward ratio, I believe it's proper to upgrade the stock to a 1 at these prices.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.

Sunday, November 20, 2016

Earning Analysis: Ionis Pharmaceuticals (IONS)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

On November 9, Ionis Pharmaceuticals announced the results for their third quarter, 2016 results.  For the quarter, they posted earnings of $0.06 on earnings of $110.9M.  These results are mixed with analyst expectations with earnings expected to be a loss of $0.02 on earnings of $112.67M.  While the results were mixed, the stock soared off of the earnings announcement and call.  I'll get into that shortly, however I also want to note that cash equivalents were higher than I expected, with $687.8M in reserves, which is down from the $779.2M they had a year ago.  Reserves were expected to go down due to extra expenses in getting their phase 3 drugs ready to go to market.

As I noted, the stock didn't just rise after this announcement, but it's launched itself!  The stock is now into the mid-40s when it was under $30 just 10 days ago.  So while earnings were a healthy beat over expectations, revenues were light.  This is not the a situation that can launch a stock over 50%, so what got us into this situation?  Well, in all truth it's not any one thing.  It's a few thing that culminated over the course of a few days.  We start with November 7.  On this day, Ionis did, what seems to be a classic move by them, by announcing an update on their partnership with Biogen and the SMA therapy which was getting fast-tracked due to such strong results.  Biogen has now provided the name Spinraza for the drug and they're getting closer to market release.  This positive, though not exactly surprising news popped the stock over 10%, pushing it past the $30 mark.  Next comes the double-whammy we got on November 9.  First, we learned that Donald J. Trump became America's president-elect in what was essentially a large surprise.  Markets were prepared for a Clinton administration that would continue to be hard on drug companies for the inflating costs to consumers, as has been reported and rallied against during the campaign.  Without that in the way, drug companies, overall, surged on the news.  Add on top of that strong results in their own quarter, this only helped accentuate the rise, but I don't think it was enough to make it shoot up over 23%.  There was one additional - much more important piece, and this occurred during the company's conference call.  

Early in the year, the company reported some complications with platelet counts in a couple patients for their tests for a different form of SMA and for Volanasoressen - their lipid control therapy.  The concerns for why the platelet issue occurred and what does it mean for the RNA technology left a steep overhang on the stock.  There was too much speculation that there were issues, despite what the company had stated.  On the call, the company started outlining the causes of the platelet issues, and while they continue to research and figure out how to identify/prevent these issues, they've been found to be one-off and based upon the disease's traits they're treating.  This removed doubt on the RNA technology and helps set the company up for a more prosperous 2017 when they are expecting to start going to market for 3 phase 3 studies - resulting in a company that's likely to become profitable over the next 18 months.  All of this takes the stock well back up to where it was before the technology concerns existed and sets things up for a strong future.

Disappointingly, I waited too long to buy my remaining position in the stock.  It's important to note that I'm still below my cost basis and can still get more of a position, but I can't get the sizeable position I was once looking to get.  This stock has been downgraded to a 2, mainly do to the fast price appreciation.  I expect some profits will be taken and I'll have a chance to buy lower.  I hope I can get more around or under $40, but may settle for something closer to current prices.  Looking forward, it's still hard to predict what earnings will look like when a company like this is going from negative to positive earnings over the next 18 months.  That said, this company and stock have a bright future in front of it under the changes we've seen over the last 2 weeks.  I believe we'll see the stock get into the $57 - $64 range in the course of 2017 as we start to see earnings take shape and watch as more of their 24 drugs in the pipeline advance and hopefully new potential therapies take shape.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.

Sunday, November 13, 2016

Earnings Analysis: On Semiconductor (ON)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

On Semi held their 2016 third quarter results back on November 6.  Results were earnings of $0.24 on $950.9M.  These results were mixed with expectations of earnings of $0.24 on revenue of $955.5M.  During the quarter, they completed their acquisition of Fairchild semiconductor and are seeing larger synergies develop faster than expected, while at the same time seeing increased complimentary products than originally expected.  It's also important to note that the miss on revenues is the $5M not realized due to divestitures the company made over the third quarter.  

The quarter, as a whole, wasn't really a lot to write home about.  While things don't seem to be going terribly poorly, you don't see signs of new or accelerating growth, either.  As management described their forecase, "flat" was used a lot.  For a stock speculated on for growth and under value, propositions.  That said, I do expect the synergies to help provide some earnings and margin growth.  The fourth quarter tends to be exceptionally weak, seasonally, for Fairchild and is one of On's weakest quarters as well.  This results in earnings expectations around $0.22 and full year earnings only around $0.85.  They do expect a much larger increase in earnings in 2017, though I believe most of it to be simply the addition of Fairchild's earnings.  

In regards to the stock, it's trading at just over 13 times this year's expected earnings of $0.85.  Analysts have a much higher expectations for 2017 earnings, but I'm going to be conservative and set my earnings expectations of $1.05.  There are some stock risks with rising rates and the new presidency that is coming into place poses risk from trade perspectives as well.  I'm lowering my multiple for the stock to the 13 times earnings we're currently at and setting my price target around $13.50.  That said, I don't see the stock getting that high until the back half of next year.  As such, I'm lowering my ranking of this stock to a 3.  I think there's room for some upside yet, but as the stock does rise, it's feeling advisable to lighten up on the stock.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.

Saturday, November 12, 2016

Earnings Analysis: Cedar Fair (FUN)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

On November 2, Cedar Fair announced their third quarter results for fiscal year 2016. Net revenues came in at $650M, resulting in earnings of $3.10.  Both of these numbers missed the estimates of $3.54 earnings on $656M in revenues.  Despite those misses, the stock has risen over 4% since the announcement, regardless of the political landscape we've faced with the US Elections taking place.  Despite missing expectations, the company announced that their revenues through the end of October (Q3 was through the end of September) hit record levels of $1.1B, a 3% increase over the same time period last year.  The board also approved a 4% increase to their quarterly distribution, effective in December.  This raises their annual distribution $3.42 or about 6% at the time of the announcement (5.6% now).  

I want to be cautious with the "missed expectations" portion of this as a large part of the miss was due to weather, which actually affects the performance of the parks.  That said, it's important to note that growth is slowing.  We're starting to see the company transform into a slow, but steady growth entity.  This would compare well with consumer package companies, except that Cedar Fair's dividend is much larger than most CPGs out there right now.  As a MLP, some of the company's growth is seen through the distribution as well.  Costs increased as anticipated by management, mostly due to higher minimum wage and merit increases.  I don't exactly want to poo-poo the quarter.  The company is doing well, is executing against their strategy, will hit their target $500M Adjusted EBITDA next year (they targeted 2018), and continue to see increased attendance and spend.  They're doing a good job of taking advantage of a general theme we're seeing among consumers to spend for experience.

As I look at the stock and its potential, I adjust for slowing growth along with a market that is preparing for higher interest rates.  Cedar Fair's 5.6% yield helps keep a strong floor under the stock, though it's not to say there isn't downside risk.  A stock price of $57 has the stock yielding 6%, so I think that's around the downside range.  Likewise, these stocks typically yield around 5% because of the MLP structure.  That limits the upside price to around $68.  From an earnings perspective, analysts are expecting about 4% growth next year.  They anticipate earnings of $3.46 this year and $3.59 next year.  I'm going to be a little more cautious and estimate earnings of $3.57, which is a little better than 3% growth.  With rates more likely to rise, I'm also going to be a little more cautious with the multiple people are willing to pay for this stock, placing it at 17.  This leaves me with a price target of $64.25.  This leaves the stock at a status of a 2, where you could consider buying some more, but I'd wait until around that 6% yield before buying any.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.