Brian Nelson

Stay the Course; This is Not Lehman II, S&P Downgrade Meaningless

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As we had indicated a few weeks ago, investors should turn off the political news related to the debt ceiling debate, and we now encourage investors to stay the course with their investment strategy, despite the media’s attempt to amplify yet another containable crisis. When we first published our report suggesting that there was no cause for worry about the debt-ceiling deadline, we received quite a number of questions about how we could be so confident. Well, first of all, there is a degree of common sense: 1) the President could take it upon himself to invoke the use of the fourteenth amendment, which indicates that the US must make good on all of its debts and 2) politicians had already lived through the mistakes … Read more

LinkedIn Posts Solid Second Quarter, Still Irrationally Overpriced

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LinkedIn (LNKD) posted solid second-quarter results Thursday, but we maintain that the price the market has put on this company makes very little sense. We’re increasing our fair value estimate to $55 per share from $45 per share primarily on the back of higher expected EBITDA for this year versus our original expectations. Revenue growth for its second quarter more than doubled, and the firm snuck in a $0.04 GAAP EPS profit in the period – not the magnitude we’d expect from a $100-plus per share stock, no matter how optimistic its growth prospects. To get such an inflated multiple, LinkedIn should have to earn it, and a quarter of outperformance is hardly enough. Member growth was over 60% in … Read more

Nike: An Attractive Candidate in a Declining Market

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Nike looks like an attractive investment candidate in a falling market Nike is one of the most recognizable brands on earth. With sales of over $20 billion in fiscal year 2011, it’s easily the largest athletic retailer on the planet. After growing revenues 9% in a tough retail environment, and on an enormous base of $19 billion, we think Nike is a best-in-class company, and we are initiating coverage with a fair value of $95. This implies a multiple of about 18x 2012 earnings, and earnings per share growth of over 18%. Fourth quarter profit reveals operational strength It’s not often we get excited when a company has its gross margin fall over 300 basis points in a single quarter, … Read more

Kraft Posts Solid Second-Quarter Results, Raises Outlook, and Breaks Up Company

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Kraft Foods (KFT) reported solid second-quarter results Thursday and indicated that it would split its high-growth global snacks business and its mature, high-margin North American grocery business. The firm also bumped up its 2011 organic net revenue growth and operating earnings per share outlook, to at least 5% (was 4%) and $2.25 (was $2.20), respectively. We were impressed with the firm’s second-quarter performance and think its move to create two independent public companies will create value for shareholders over the long haul. Kraft’s second-quarter net revenues advanced over 13% (7.1% organic) thanks to strong pricing expansion, which accounted for 5.5 percentage points of growth, while operating income jumped 6% as pricing effectively offset higher raw material costs, though its underlying … Read more

Clorox Posts Fiscal Fourth-Quarter Results, Fiscal 2012 to Disappoint

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The Clorox Company (CLX) reported fiscal fourth-quarter results Wednesday that showed modest top-line expansion and poor earnings-quality growth. The firm managed to leverage a 4% increase in revenue (2% from volume) into a 20% jump in earnings per share, but the latter was primarily bolstered by a lower tax rate (down 450 basis points) and share buybacks. Pre-tax earnings from continuing operations were weighed down by higher commodity costs and higher advertising spend (the firm’s gross margin fell 80 basis points), and they only increased 5% during the period. Clorox hopes that pricing increases through fiscal 2012 will help offset even higher expected commodity prices, helping to preserve gross margins at current levels for the fiscal year. We’re skeptical that Clorox will be able to do so … Read more

Open Table Reveals Strong Growth in its Second Quarter, Shares Slightly Expensive

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Open Table (OPEN), which provides online restaurant reservation services, reported solid second-quarter results Tuesday that showed a 50%-plus increase in revenue, installed restaurants and seated diners from the same period a year ago. North American results were solid, with adjusted EBITDA jumping nearly 70% from last year’s quarter. The firm’s international results also revealed improvement. Open Table’s installed restaurant and seated diners base outside of North America more than tripled, and the company reduced its EBITDA loss for this segment to $0.5 million from $1.2 million in the same period a year ago. Subscription, reservation, and installation (other) revenues jumped 20%, 70%, and 172% in the quarter. Consensus had been looking for better performance from subscription and international expansion, but … Read more

CBS Issues Strong Second Quarter Results, Content Licensing and Distribution a Key Driver

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CBS Corp. (CBS) reported strong second-quarter results Tuesday that showed excellent performance pretty much across the board. Revenue jumped 8% from the same quarter last year thanks to solid performance in content licensing and distribution, while operating income before depreciation and amortization (OIBDA) jumped over 50% thanks to strong growth in every segment and a seven percentage point improvement in its OIBDA margin. Net income more than doubled, and free cash flow was also strong, with the latter advancing 32% from the same period a year ago. We think increased use of CBS’ library in deals like the one inked with Netflix (which allows the company to generate revenue from old shows at little incremental cost) and Amazon (AMZN) will … Read more

Emerson: “Washington is arranging the chairs on the Titanic”

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Emerson Electric (EMR), a diversified industrial manufacturing company, posted decent fiscal third-quarter results Tuesday, but management’s comments regarding the ongoing debt problems in Europe and the US suggest the firm is less than satisfied with internal performance, and we agree. There are better plays in the industrial sector than Emerson, in our opinion. Net sales advanced 16% (10% organic) in the period thanks to solid international performance, while net earnings jumped 17% from the year-ago quarter. Emerson’s operating profit margin was essentially flat, falling 30 basis points from the same period a year ago due to acquisition-related costs. The firm noted that the pace and momentum of the industrial-led recovery has slowed, but we view this as a temporary phenomenon and … Read more

AMR’s Equity Still Practically Worthless, Merger Will Not Save Airline

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This article appeared on Seeking Alpha. Please view disclosures: https://seekingalpha.com/article/284200-amrs-equity-still-practically-worthless-merger-will-not-save-airline Since we published our bearish piece on AMR (AMR), the parent of American Airlines, titled, “Is AMR’s Equity Practically Worthless,” the stock has fallen nearly by half. At Valuentum, we place considerable emphasis on a firm’s competitive advantages, how their competitive position fits into industry structure, and a valuation assessment based on a rigorous discounted cash-flow process. Our take on AMR across all of these fronts remains decidedly negative, and due to the repeated questions we’ve received, we are reiterating our somewhat controversial call that AMR’s equity is practically worthless – only option value remains. There have been talks recently about AMR potentially merging with International Group, the owner of British … Read more

Could Lululemon Have Further Upside? We Think So

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Lululemon: we think shares still have some upside remaining Lululemon (LULU) has been one of the top performing momentum stocks of 2011, with shares already up nearly 80%. Many analysts seem to think LULU is a lemon in itself, and rightfully so. Not many can relate to paying $98 for a pair of yoga pants that look, to the untrained eye, identical to something one could pick up at Target (TGT) for $15. However, while many on the street wait for Lululemon to come crashing down, we think with continued operational excellence and carefully planned growth, shares are worth $68 on a discounted cash flow basis. Like Charlie Munger, Warren Buffett’s legendary partner in crime believes, sometimes you have to … Read more