Strong Iron Ore Supply Weighs on Rio Tinto
March 25, 2013
Over the past several weeks, the diversified mining sector has been under attack, as Vale (ticker for report: ), BHP (click ticker for report: ) and Best Ideas Newsletter holding Rio Tinto (click ticker for report: ) have seen their share prices decline considerably. Given the relative performance of the S&P 500, as well as improving macro fundamentals in the United States, the decline may seem inexplicable—until we consider the dynamics of the iron ore industry. Iron ore (one of the most important and profitable commodities in recent years) prices rose over 60% in relatively short order during the beginning of the year, suggesting robust demand from China. However, China responded aggressively to the rise in prices, accusing the big
Nike’s Fundamental Momentum Accelerates
March 22, 2013
Athletic apparel giant Nike (click ticker for report: ) announced fantastic third quarter results Thursday afternoon. Revenue from continuing operations grew 9% year-over-year to $6.2 billion, just a touch short of consensus expectations. Earnings from continuing operations jumped 20% year-over-year to $0.73 per share, easily exceeding consensus estimates as the company rid itself of the less-profitable Umbro and Cole Haan units. On the cost side, Nike’s gross margins grew 30 basis points year-over-year to 44.2%, as the firm lapped higher input costs and benefitted from higher pricing. Gross margins would have been even stronger if it weren’t for high discounting in China and continued weakness in Europe. SG&A remained relatively flat year-over-year at 30.1% of sales as increases in operating
Transparency Issues Not a Long-Term Concern for Lululemon
March 21, 2013
Shares of lululemon (click ticker for report: ) have been on a wild ride after the firm announced it had some issues with the sheerness of a batch of its black luon pants. Every possible pun regarding the situation has been made, so we’ll spare you from any comedic efforts, but the company had to recall an entire batch of pants for being “too see-through.” Regardless, lululemon reported a fantastic fourth quarter marked by strong revenue and earnings growth. Revenue exceeded consensus expectations, surging 31% year-over-year to $485 million. Earnings were a penny above consensus estimates, growing 47% year-over-year to $0.75 per share. Revenue growth is clearly slowing on a percentage basis as the company deals with the law of
Oracle’s Third Quarter Wasn’t That Bad
March 21, 2013
Enterprise software giant Oracle (click ticker for report: ) announced results for the third quarter of its 2013 fiscal year. Revenue fell 1% year-over-year to $9 billion, falling short of consensus estimates. Earnings per share rose 5% year-over-year to $0.65, just a penny shy of consensus expectations. Given the amount of noise in sales and earnings per share, our favorite metric to evaluate is free cash flow, which remained fantastic at $9.2 billion year-to-date. Oracle’s cash balance now sits at $34.2 billion, giving the company tremendous flexibility to make acquisitions or return cash shareholders. The firm’s non-GAAP operating margin totaled 47%, an increase of 17 basis points compared to the same period a year ago. On the segment side, Oracle
Adobe Kicks Off 2013 With a Solid First Quarter
March 20, 2013
Software developer Adobe (click ticker for reported: ) kicked off its 2013 fiscal year with solid first quarter results driven by strong Creative Cloud membership growth. Revenue declined 4% year-over-year to $1 billion, which was expected as the company transitions to a subscription model. Revenue marginally exceeded consensus estimates. Earnings per share fell nearly 40% to $0.35 on a non-GAAP basis, a few cents above consensus expectations. Like revenue, net income was expected to fall, but we are a bit disappointed by $0.17 per share in stock-based compensation. More important for tech companies like Adobe is free cash flow, which was strong at $261 million and essentially equal to the year-ago period. We remain impressed by the company’s ability to
The E-Commerce War Between eBay and Amazon Heats Up
March 20, 2013
In order to help drive more sellers on to its platform, Best Ideas Newsletter holding eBay (click ticker for report: ) announced new, less complicated fee structures. The firm already charged lower fees than Amazon (click ticker for report: ), but the new structure gives greater transparency to sellers. The move is very positive, in our view, as we think it can help drive a stronger network of fixed price sellers to eBay. After becoming associated with auctions since its inception, eBay is in the process of becoming a destination for buyers of everything, much like Amazon has done successfully over the past several years. While Amazon may look slightly more attractive in the near-term because more buyers are on
DSW’s Fall Doesn’t Provide an Entry Point
March 19, 2013
Footwear and accessories discounter DSW (click ticker for report: ) announced solid fourth quarter results Tuesday morning. Revenue jumped 16% year-over-year to $594 million, just a touch shy of consensus estimates. Earnings also fell short of consensus estimates, growing 35% year-over-year to $0.69 per share. Like we’ve seen from other retailers during the fourth quarter, guidance stole the show. For the first 6 weeks of its 2013 fiscal year, DSW’s same-store sales have declined 5% with weakness spread equally across geographies and categories. Naturally, weather took some of the blame, since the 2013 winter has been substantially colder than 2012. Management tried to avoid blaming the weather, but failed, saying on the conference call: “…we haven’t had enough good weather
The Quick-Serve Restaurant Space Could Be Poised for a Rebound
March 19, 2013
Wendy’s Every time we look at the restaurant space, we are surprised to see at how small Wendy’s (click ticker for report: ) market capitalization is. Shares have been stuck in neutral for the past year, even though we think the company is in a much better competitive position. Unlike McDonald’s (click ticker for report: ), which has distinctly made itself the preeminent value chain, Wendy’s has mostly held the line on pricing. Wendy’s “Right Price, Right Size” menu has helped, but overall the company has lost traffic. If economic conditions improve, we think Wendy’s could be a beneficiary versus its peers because it has maintained its quality reputation. While the levels of price differences in the burger space (Wendy’s/McDonald’s/Burger
A Dish/DirecTV Merger Would Be Golden
March 18, 2013
After a potential acquisition target of DirecTV (click ticker for report: ) was taken off the market, chatter of a DirecTV-Dish Network (click ticker for report: ) merger has escalated. The big obstacle, in our view, would be anti-trust hurdles, and given recent trends in US anti-trust regulation, that could be difficult to defeat. However, let’s take a look at what could happen if regulators allow it. Increased Leverage Over Content Creators One of the consistent themes we’ve been hitting on over the past year in the media space has been the rising cost of content. Netflix (click ticker for report: ), Coinstar (click ticker for report: ), Amazon (click ticker for report: ), Hulu, cable, and satellite are all
EDAC Tech Offered $17.75 Per Share To Go Private
March 18, 2013
Shares of Best Ideas Newsletter holding EDAC (click ticker for report: ) are hitting a new all-time high after the firm entered into a merger agreement with Greenbriar Equity Group. Details of the deal can be found here. We’re a little surprised by the deal, especially since the future outlook continues to look wonderful. However, management and the Board of Directors readily tendered its 18.2% of the company, so perhaps the $17.75 per share bid, which is in-line with the low-end of our fair value range, exceeded the level of share appreciation the firm thought possible in the near-term. The terms of this deal also beg the question of whether EDAC’s recent share price surge was composed of Greenbriar building
