Member Articles

Under Armour Performing Well But Still Significantly Overvalued

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Over the last several weeks, we’ve seen stronger than expected sales in athletic apparel at Dick’s Sportin Goods (DKS), Footlocker (FL), and The Sports Authority. Additionally, we’ve noticed strength at Under Armour (UA) in both indirect and direct retailing channels. Furthermore, we think some of the footwear, particularly the bright colored running and training is resonating slightly better than expected with consumers.  As a result, we are raising our fair value of Under Armour to just under $50 per share. This price implies a 2011 price to earnings ratio of 26 times our forecast and remains significantly below where it is currently trading.  Footwear isn’t good, but it’s getting better Some of the recent footwear releases in Under Armour’s running have … Read more

Red Hat Reports Fiscal Third-Quarter Results; Best Billings Growth in Years

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Linux software maker Red Hat (RHT) reported strong fiscal third-quarter results that showed excellent growth across the board, but the company’s deferred revenue growth and revenue outlook failed to impress some of the most bullish investors. Sales advanced 23% from last year’s quarter led by subscription revenue, while non-GAAP operating income and non-GAAP EPS increased 36% and 40%, respectively, from the same period a year ago. Non-GAAP EPS came in at $0.28 per share in the quarter (topping consensus estimates of $0.26), thanks to non-GAAP operating margin improvement of 260 basis points. Third-quarter operating cash flow also had a nice showing in the period, up an impressive 36%. Deferred revenue, however, advanced 20% from last year’s quarter, signaling the potential … Read more

Honeywell, United Tech See Strength in Emerging Markets; No Global Recession in 2012

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This week we received some encouraging comments out of two bellwethers on the global industrial economy. As we outlined in our Best Ideas Newsletter, we continue to believe that the US will avoid a double-dip recession, and the results from FedEx (FDX) coupled with recently-issued 2012 outlooks from Honeywell (HON) and United Tech (UTX) reinforce this thesis. Honeywell issued its 2012 financial outlook this week indicating that sales will expand 4% to 7% (4% to 6% organic) despite some weakness in Europe and China and overall defense spending. Earnings-per-share from continuing operations is expected to jump as much as 19% over the prior year on margin expansion of 40 to 70 basis points. This is on the back of expectations … Read more

Adobe Posts Excellent Fourth-Quarter Results; Focus Remains on Cloud

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Software-maker Adobe (ADBE) reported fiscal fourth-quarter results after the close Thursday that showed strong revenue and earnings expansion driven by its digital media and marketing businesses. We are maintaining our above-market fair value estimate for Adobe. Revenue jumped 14% in the period, to $1.152 billion, exceeding the high end of the company’s guided range. The company generated some nice growth (record volume licensing with enterprise customers) in its flagship desktop product, CS5.5, and received some traction from new applications like Edge and Muse, which are levered to advances in HTML5. Management noted that recurring revenue now represents roughly 20% of total revenue and that it experienced strong demand in all major geographies, including Europe. Non-GAAP operating income increased nearly 16%, while … Read more

FedEx Reports Strong Fiscal Second-Quarter Results; Reaffirms Fiscal 2012 Earnings Outlook

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FedEx (FDX) reported strong fiscal second-quarter results Thursday and reconfirmed its fiscal 2012 earnings outlook. The report came as welcome news following a number of weak chipmaker earnings and warnings from DuPont (DD) and Joy Global (JOY) in past weeks. We are maintaining our $82 fair value estimate for FedEx. FedEx’s revenue advanced 10% from the same period a year ago, while operating income surged 66%. The firm’s operating margin expanded 3.5 percentage points, and net income advanced 76% from last year’s quarter. FedEx noted that it experienced particular strength from FedEx Ground, where revenue advanced 13%, and FedEx Freight and Express, where revenue increased 9% and 10%, respectively. The company’s FedEx SmartPost average daily volume increased a whopping 17% thanks … Read more

First Solar Falls Again

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First Solar (FSLR), a company we have been bearish on, came out with downwardly revised fourth quarter and 2012 guidance this week, sending shares down nearly 20%. Things have been a mess at First Solar. Solar overcapacity is still tremendous, and thanks to government subsidies, it’s nearly impossible for any US company to be the low-cost provider. Our previous fair value on the stock was $31 per share, assuming inflation-like growth in 2012 and earnings of $4.76 per share, far lower than $7.42 Street consensus. It’s been very clear to us that the solar industry is going through an almost textbook economic cycle, and not the part that’s good for generating excess returns on invested capital. At first, a few big … Read more

Valuentum’s December Edition of Its Best Ideas Newsletter

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Recent data points from earnings releases in the past couple weeks have created a cloud of uncertainty over our outlook on fourth-quarter earnings season. But we believe our portfolio is well-positioned within pockets of strength in the global economy and littered with paid-to-wait dividend-yield opportunities that will benefit once short-term, temporary issues inevitably pass.   First, let’s talk about trends impacting our aerospace exposure, which remains our largest industry weighting in the portfolio by far. Just this week, Southwest Airlines (LUV) announced one of the largest orders for planes in aerospace history, tying up a $19 billion deal (at list prices) with Boeing (BA) for delivery of over 208 narrowbody aircraft, including 200 of Boeing’s upgraded 737, the MAX. This … Read more

Joy Global Issues Fourth-Quarter Results; Warns of Slower Growth in Demand for Mining Equipment

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Mining-equipment maker Joy Global (JOY) reported mixed fourth-quarter results Wednesday, and its outlook for mining equipment demand and commodity prices, in general, left investors in a selling mood. We are sticking with our fair value estimate for Joy Global, however. Fourth-quarter organic revenue jumped about 18%, core operating income increased about 24%, and organic bookings advanced 22% from the same period a year ago. Adjusted income from continuing operations per diluted share came in at $1.82, below consensus expectations of $1.86 per share but up about 32% from last year’s quarter. Orders for surface mining equipment jumped nearly 50% from the same period a year ago, while purchases of underground mining machinery advanced 2.5% from the year-ago quarter. Strength was evident both for original equipment … Read more

Best Buy’s Fiscal Third-Quarter Results Disappoint; Excessive Promotions and Weakness in Europe to Blame

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On Tuesday, Best Buy (BBY) reported poor fiscal third-quarter results that showed modest comparable store sales growth but material operating-income deterioration. Though results of the world’s largest electronics chain came in lower than our expectations during the quarter, Best Buy reaffirmed its adjusted diluted earnings per share guidance range of $3.35 to $3.65 for the year. Nevertheless, we are placing our fair value estimate for Best Buy under review while we re-evaluate the implications of its aggressive pricing actions on long-term profitability. We expect to lower our fair value estimate for the retailer materially. Best Buy’s total revenue increased 1.7% during the period thanks to modest domestic same store sales expansion led by its online channel, offset by international performance … Read more