1. Yahoo (NASDAQ:YHOO): Marissa Mayer has started turning the ship
2. NXP Semiconductor (NASDAQ:NXPI): broad-based strength continues
3. EMC (NYSE:EMC): “Change is the law of life. And those who look only to the past or present are certain to miss the future.” – JKF
4. Earnings season triangulation (cont)
5. SAP (NYSE:SAP): remains a tough environment
6. Financial engineers are so “last Thursday”
8. Trader watch
1. Yahoo: Marissa Mayer has started turning the ship
Last night, Marissa Mayer used YHOO’s earnings as an opportunity to go on the offensive with respect to her strategy for YHOO going forward. She defended her acquisition strategy for growth and reiterated her commitment to shareholders and maximizing value. “Today was really a good opportunity for us to show the progress we’ve made. We were able to reap the fruits of some of what we’ve been sowing over the past few years.”
However, Mayer did note that she is aligned with a number of Starboard’s proposals such as tax efficiency and capital allocation. She noted how “we will meet with them and engage with them.” She went on to say “we take all our investor inputs seriously.”
While not stellar, YHOO did experience 1% growth in revenues ex-TAC, which to us demonstrates the stabilization of the business. YHOO went on to guide Q4 revenues in the range of $1.14B-$1.18B (ex-TAC) versus street consensus of $1.17B. The stabilization and eventual growth will continue to be driven by YHOO’s initiatives in the mobile, social, native and video businesses. Third quarter display ad revenue (ex-TAC) was -6% Y/Y, better than Q2’s -7% drop. Display ads sold were up 24%, however, price per ad declined 24% as the transition to native ads from traditional banner ads continues. During the call, Mayer noted “we’ve affected this transformation remarkably quickly with 44% of our display ads now being native and our mobile revenue now being material.”
As for Alibaba, YHOO noted how they sold approximately 140M shares in the IPO that netted the company around $9.5B and the company expects to pay cash taxes on the gain of around $3.3B, which equates to about a 35% tax rate. Keeping their promise of returning at least half of the BABA windfall to shareholders, YHOO purchased $282M worth of shares in the third quarter in addition to an accelerated $1.1B share repurchase program in which YHOO “prepaid $1.1 billion and received an initial delivery of approximately 15 million shares on September 30, 2014.”
We continue to believe that shares of YHOO are worth close to $50/share under conservative assumptions (higher tax rates for BABA) and shares could have further material upside should many of Starboard’s value creation suggestions be implemented. Mayer noted that Tumblr will generate positive EBITDA and still remains a positive platform for growth going forward, helping reinforce her strategy. In addition, the remaining company’s value in BABA remains around $34B+, which equates to about 85% of YHOO’s market cap pre-tax. We continue to believe with such a war chest, YHOO and Marissa Mayer can continue looking for transformative acquisitions that will be rewarded by the Street coupled with continued shareholder-friendly capital distributions. We remain positive on shares of YHOO over the medium and long terms.
2. NXP Semiconductor: broad-based strength continues
We think NXPI is seeing solid trends across all of its business segments, and expect a strong earnings print tonight (after 8PM EST).
Our research shows that NXPI’s Identification business (credit card security, etc.) is seeing very strong trends not only in China, but in the U.S. as well.
Our work also shows that their Portable and Computing business (driven by the iPhone 6) is seeing very strong demand, and that this will continue for several quarters.
Finally, we think that NXPI’s Infrastructure Industrial and Auto businesses are doing well. Note that Texas Instruments (NASDAQ:TXN) on Monday night described their Industrial, Auto and Communications (Infrastructure) businesses as “strong”, and that this matches with our very recent research.
Another anecdotal piece of evidence that semi demand trends are sound came from Broadcom (NASDAQ:BRCM) last night when they stated that they are not seeing anything unusual in their end markets.
NXPI trades at 12.1Xs F2015 (December) consensus EPS, which equates to a PEG Ratio of 0.80. We think 2015 consensus EPS has at least 20% upside, which will become evident over the next 1-2 quarters. Net debt is $11.67/share and TBV is -$6.96/share.
We also expect NXPI to talk about their continued strong buyback program on their 8AM EST earnings call tomorrow.
We remain BUYERS of NXPI.
Call for more.
3. EMC: “Change is the law of life. And those who look only to the past or present are certain to miss the future.” – JKF
We’re starting to think EMC’s management is going the way of eBay (NASDAQ:EBAY) (in our minds) where it will be too little too late in monetizing on coveted assets when the moves finally come.
Last night’s extended hours trading saw shares of EMC rise when news emerged that the company plans to disclose a “new business development.” That fueled hopes a full VMware (NYSE:VMW) spin-off will be announced. Sadly, that was not it, and it was EMC acquiring a majority stake in VCE, which is a joint venture with Cisco (NASDAQ:CSCO).
When openly asked about unlocking shareholder value, EMC management once again failed to give what we were looking for, a clear answer. CEO Joe Tucci stated:
”I am not aware of any statements that HP made, but, you know, we have been very clear that we don’t comment on speculation, rumors, so I’m not going to do that today. You know, and talking about the business, you know, it’s kind of baffling in a way because if you look at counting this year, assuming we make the forecast, and we believe we will, if you looked at our top line over the last three years, we’ve grown at 7%. If you look at our pre-cash flow, we’ve grown at 9%, and if you look at our EPS, or 8%, and if you look at our EPS, it is also about 8%. So — and that’s CAGR. So obviously stock price has not moved a lot. But so it is not reflecting our performance. So, you know, as I said before, our management Board, our management and Board is very focused on enhancing shareholder value but we also believe, and, again, this is what we do believe with Elliot, that we are in good businesses and we have a strong position in those good businesses. We do have great technology assets. We have a very talented leadership team. And a great workforce. And yep, we’re undervalued.
He went on to say that “buybacks and dividends are not a strategy, they’re a tactic.”
Despite the sum of the parts offering what we believe to be a mid-$30s stock price, a SOTP valuation is not an appropriate measure when management is not willing to explore alternatives. Besides the SOTP, as EMC themselves have noted there are secular shifts occurring in technology (just ask IBM (NYSE:IBM) and SAP) that are not favorable to EM. To us, EMC is set in their ways and their “federation model” and thus it becomes difficult to get cooperation to extract that hidden value outlined by us and the likes of Elliot.
As such, we are no longer favorable on shares of EMC and believe investors looking for exposure to virtualization and software defined data centers should look to shares of VMW given all the bad news now seems to be baked in and offers a better long-term opportunity than EMC.
4. Earnings season triangulation (cont)
Emerson Electric (NYSE:EMR) released their September order numbers and we believe they offer a good read-through as to the state of many geographies and industries worldwide similar to our read-through’s from many steel makers that made constructive comments yesterday.
Trailing three-month orders grew moderately, as mixed trends across markets and heightenedcurrency volatility continued.
Strength in North America continued, supported by favorable energy market conditions and inventory growth in the HVAC industry ahead of upcoming regulatory changes.
Appreciation in the U.S. dollar drove the substantial impact from currency translation, which will reduce reported sales growth by 2 percentage points in 2015 if exchange rates remain unchanged.
Process Management orders growth moderated, as currency translation deducted 9 percentage points, including backlog revaluation. Underlying orders growth remained robust, led by continued momentum in North America oil and gas markets. Demand was also strong in Europe, driven byNorth Sea projects, and growth improved in the Middle East/Africa, although mixed across the region. Asia and Latin America increased modestly, led by strength in India and Mexico.
Industrial Automation order trends slowed, as weakness in Europe offset better market conditions in North America and Asia. Orders in the electrical distribution, power generating alternators, and materials joining businesses increased, while demand for motors and drives and in renewable energy markets was down.
Network Power orders were unchanged overall, with varied market conditions across geographies and businesses. Excluding currency translation, which deducted 2 percentage points, underlying order trends improved modestly, as growth in the data center business benefited from improvement in Europe and North America. Demand in telecommunications infrastructure markets was weak globally.
Climate Technologies orders grew at a robust rate, led by U.S. residential air conditioning markets that benefited from demand acceleration related to regulatory changes effective January 1, 2015.Strength in China drove improvement in Asia, while market conditions remained slow in Europe.
Commercial Residential Solutions orders growth was solid, as favorable momentum continued in North America.
Stanley Black and Decker (NYSE:SWK) this morning also echoed a number of similar concerns stated by EMR.
“While it is premature to provide detail guidance for 2015 at this time, the continued strengthening of the U.S. dollar and slowing emerging market economic growth is a known headwind of approximately $50 – $75 million to 2015 operating margin growth. However, we have a demonstrated track record of responding to these types of currency and macro economic pressures with surgical cost reduction actions. In this regard, we are currently considering several initiativeswhich would largely, if not completely, offset these headwinds. Such actions, if taken, would likely require additional restructuring charges of $10 – $25 million in excess of our current 2014 estimate of $25 million.
Continuing on the aerospace front tied to our preference for shares of AA, BA this morning noted “With three solid quarters behind us and confidence in our ongoing performance, we are increasing our earnings per share outlook for 2014, as our team remains focused on providing value to our customers and shareholders, profitably ramping up airplane production, executing on our development programs, and driving productivity and affordability throughout the enterprise.”
Adding further support to our secular Aluminum theme, Norsk Hydro (OTCQX:NHYDY) saying everything you would want, and expect. Demand up, supply down, and their operating costs are lower.
“Demand for aluminum is rising, and we now see demand growth of 3-4% in the world ex-China for 2014, helped by metal substitution in the automotive market.”
With respect to our positive thoughts on Anheuser-Busch Inbev SA/NV (NYSE:BUD) post SABMiller’s (OTCPK:SBMRY) revenue update, Heineken (OTCQX:HEINY) this morning noted how they see “positive growth momentum in Asia Pacific, Africa Middle East and the Americas region, offset by lower volumes in Europe.“ We continue to believe BUD’s outsized geographic exposure to the Americas bodes well for the company based on commentary we’ve seen.
Norfolk Southern Corp. (NYSE:NSC) this morning said the intermodal, automotive, and metals/construction commodity groups all saw double-digit sales growth over the period.
GOLDMAN’S COHN SAYS COS. WITH U.S. EXPOSURE ARE OUTPERFORMING…
We’ve gotten a plethora of positive commentary supporting our view that significant North American exposure is still preferential in an uncertain market. Granted, globalization has made it difficult in the large cap space to isolate oneself from the troubles in Emerging Markets and Europe. However, we believe the impacts of the slowdown can be slightly mitigated if investors focus on areas where companies highlight continued strength such as Auto, Aerospace, Energy and Non-residential construction; particularly in North America. We continue to favor companies in our universe that have already reported earnings and reaffirmed our theses, thus removing further event risk. Investors updating their buy lists should look towards shares of Alcoa (NYSE:AA), Schlumberger (NYSE:SLB), United Rentals (NYSE:URI), Intel (NASDAQ:INTC), Micron (NASDAQ:MU), and UnitedHealth Group (NYSE:UNH) remain attractive fundamental names that have already reported earnings and illustrated to us that business remains strong and the only thing that has changed is price. Additionally, Apple (NASDAQ:AAPL) and TXN further supported our calls on NXPI, Skyworks (NASDAQ:SWKS), and InvenSense (NYSE:INVN) going into earnings.
5. SAP: remains a tough environment
SAP (sell): Big Blue down again.
“No FM lost their job for owning big blue” or so the saying goes.
A similar thing could be said for SAP.
When an industry is stable and predictable, the incumbent players have unassailable structural advantages – solid revenues, top talent, access to capital, and economies of scale just to name a few. But those advantages can end up being the catalyst for their undoing during times of disruptive change, like now. What digital did to the print industry, the cloud is doing to enterprise software and while it’s unfair to suggest all the incumbents will fail to transition, it’s clearly not without risks. Change more than often depresses multiples, which is why IBM on 9x yr 2 vs. SAP on 14x leaves the latter looking most vulnerable.
We remain a seller of SAP.
6. Financial engineers are so “last Thursday”
IBM down again in a very good market is a significant tell that time may be up on financial engineers with no top-line growth. Post the IBM fiasco, we think it’s fair to say that companies that have used their cash to fund EPS growth at the expense of returns are now at risk of a material de-rating. Tesco (OTCPK:TSCDY) is the poster child in Europe, and SAP stands out (to us) on this basis as well (although they still have some growth).
SAP has moved from a approximate €3bn net cash position in 2007 to an expected €6.5bn net debt position at the end of 2014. The reason? Approximately €23bn of acquisitions over the period (including Concur), which have done little to boost returns. The FCF generated ends up in the pockets of entrepreneurs who are constantly innovating to disrupt their incumbent offerings.
Remain a seller of SAP.
Riccardo initiates on shares of Genuine Parts Company (NYSE:GPC) (please see all the positive auto market commentary we’ve highlighted) stating 5-year bullish breakout on strong volume, 12-month breakout in RS vs. SP 500. Targeting $110-$113, initial stop @ $85.44.
He reiterates his BUYS on shares of UNH (we’re fundamentally positive as well), Regeneron Pharmaceuticals (NASDAQ:REGN), Alexion Pharmaceuticals (NASDAQ:ALXN), Celgene (NASDAQ:CELG), Lowe’s Companies (NYSE:LOW) and Paychex (NASDAQ:PAYX).
He maintains his negative sentiment and short position on shares of General Motors (NYSE:GM).
Showing the pain across the street on many of the “safe” names, Riccardo gets stopped out on shares of Coca-Cola (NYSE:KO) noting STOP LOSS -7% abs -6.65% rel SP 500. Closing our October 7th long position due to gap down on strong volume below our stop level. SELL.
SP 500 Consumer Services: important breakdown below 680 (now resistance), RS vs. SP 500 challenging multi-month supports. Keep UW.
SP 500 Consumer Discretionary: the important negative divergence seen in the RS vs. SP 500remains. This s/t bounce has not improved the pattern.
Daily SP 500: NEUTRAL+. Our s/t trend model is now bearish in a l/t bullish context. Tested our1820 level however look for 1760 to be challenged.
8. Trader watch
i) DF to benefit from USDA data?
DEAN FOODS (NYSE:DF) u/g this morning by Morgan Stanley (NYSE:MS) basically furthering our thesis and calling for Class I Milk prices to correct 25% next year on the back of recent butter price declines. We get USDA Class I Milk prices at 3pm. $23 handle would be great, low $24 would be good, $25 negative (but might also call the peak). We calculate a high $23 to low $24 milk price forecast using butter prices as a tell.
ii) CAP Gemini (OTCPK:CGEMY) to benefit from SAP’s demise?
If looking for the other side of the SAP trade, remember what Infosys said last week?
“Digital transformation is reshaping the business of every one of our clients. We see this as a great opportunity to help them renew the core of their business as well as to expand into new frontiers and are seeing early positive results.”
iii) US homebuilders, “you fix housing….”
Similar trends exist in the US as the UK, which support homebuilding, improved affordability, pent-up demand and lower rates. Existing home sales were also well ahead yesterday, which is a positive sign. In non-resi, we note a better ABI print of 55.2 in Sept. vs. 53.0 a month earlier, and the Inquiry index higher at 64.8 from 62.6, suggesting things look better in the future.
iv) Templeton on China
“Although the pace of China’s growth has diminished, we believe it is actually trending toward higher-quality, more sustainable growth patterns.”
v) Baltic dry rates up 12% overnight?
vi) US Wage Growth coming?
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