Member Articles

IBM’s Third-Quarter Results Fail to Impress, Though Earnings Growth Remains Solid

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IBM reported mixed third-quarter results Monday that showed strong earnings expansion but relatively weak top line growth. We had been expecting such performance and are maintaining our fair value estimate. IBM’s revenue nudged up 3% (8% including currency) thanks to growth in cloud-revenue (which has doubled year-to-date from last year’s levels), software (up 8% constant currency), and in regions it considers to be growth markets (up 13% constant currency). Software revenue was aided by strength in the firm’s middleware products—WebSphere (up over 50%), Information Management (up 12%), and Tivoli (up 8%). Sales in BRIC countries—Brazil, Russia, India, China—increased 13%, matching aggregrate growth-market expansion. Services revenue, adjusted for currency, nudged higher 2%, and backlog related to the segment improved $2.4 billion, … Read more

Sprint’s Changes Are a Step in the Right Direction, But They Don’t Change our Fair Value

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As you may already know, Apple (AAPL) recently released the new iPhone 4S, and Sprint (S) is now available as a carrier. Thanks to a combination of Steve Jobs’ passing and a 4S instead of a 5, many investors wrote off the new iPhone as a bust. Given that Sprint had just signed an enormous $20 billion deal with Apple to buy 30.5 million units, several analysts downgraded Sprint and the stock immediately sold off, almost down to $2 per share. Management admitted the deal may eat up around $1 billion in free cash flow, but they, as do we, think the investment is worthwhile. We think it’s time for naysayers to stop doubting the iPhone and accept that it is the premier … Read more

Google Blows By Expectations; Android, Google Plus Firing on All Cylinders

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On Thursday, Google announced fantastic third-quarter results. We had been expecting a strong showing and are maintaining our $700+ per share fair value estimate on the company. Google is trading up nearly 7% after hours. Our detailed financial report on Google can be found here. Revenue growth accelerated to a whopping 33% thanks to nearly a 40% increase in Sites revenue, which represents 69% of the business. Network revenue (AdSense) – or revenue generated by Google’s partner sites – jumped 18% and represented roughly 27% of consolidated revenue in the quarter. Aggregate paid clicks increased 28% over the third quarter of 2010 and 13% sequentially – solid performance. We were also pleased with the firm’s mobile business (Android), which now … Read more

Alcoa’s Results Disappoint; We’d Remain on the Sidelines

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Alcoa’s third-quarter earnings missed expectations horribly Tuesday, or by over 30%. Income from continuing operations came in at about $0.15 per share, while the Street was looking for $0.22 — and this estimate had come down significantly in recent weeks. We are maintaining our $11 fair value estimate for Alcoa and still believe that a good entry point is below $6 per share for the company, as we outline in our equity research report. Though this means Alcoa has to drop significantly from today’s levels, we think the application of a sufficient margin of safety and patience are two reasons for the meaningful outperformance of our Best Ideas Newsletter. Alcoa’s revenue jumped over 20% on a year-over-year basis in the quarter, but fell 3% sequentially … Read more

Preorders for Apple’s New iPhone 4S Top One Million in Just One Day

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With concerns regarding a slowdown in orders for components related to the iPad, the release of Amazon’s (AMZN) Kindle Fire tablet, the passing of legendary Apple (AAPL) icon Steve Jobs, and general market malaise, Apple’s stock has come under pressure as of late. Though we note that these headline items have raised some concerns among the investment community, we maintain that Apple represents one of the most compelling valuation plays. Today’s news regarding preorders for the firm’s new iPhone 4S reinforce our valuation thesis on the company and have sent the shares soaring again. According to the Wall Street Journal, Apple witnessed roughly a 67% increase in pre-orders from the release of the now-legacy iPhone 4, assuaging concerns that the consumer is less than impressed with the … Read more

Yum Brands’ Results in China Superb; Performance in the US Needs Improvement

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Yum Brands (YUM) reported third-quarter results Wednesday that showed strong international expansion, especially within China, but very poor results in the US. We are maintaining our $44 fair value estimate. Total revenues jumped 14% on a similar growth rate of sales in company stores and licensing fees, though higher food and paper costs drove operating profit lower from the same period a year ago. Same-store-sales jumped nearly 20% in China (and about 3% across Yum’s international portfolio), but fell about 3% in the US (Taco Bell, KFC, and Pizza Hut each declined more than 2% domestically). Operating profit was particularly weak in the US and suffered a 16% decline. However, we’re big fans of Yum’s expansion in China, which saw … Read more

Best Idea Ford Looks Set to Sign a Win-Win Labor Deal, Shares Rally 8%

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One our best ideas, Ford Motor (F), rallied nearly 8% as investors poured into a late market rally. Ultimately we think the price spike can be attributed to a few different factors, but most importantly, it looks like Ford and the UAW has struck up a deal that should be beneficial to both employees and shareholders. Although the UAW still must ratify the deal, initial terms of the deal indicate a fair agreement for employees, and a tremendous sign of confidence for the United States economy in the mid-term. Lower entry-level pay, more variable pay As expected with the precedent set with the GM deal a few weeks earlier, the new labor contract creates an entry level wage of $15.78, … Read more

5 Significantly Undervalued Stocks

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We reveal below five significantly undervalued stocks based on our DCF process, ranked by Price to Fair Value (current stock price divided by the firm’s intrinsic worth). 5 Undervalued Stocks Ancestry.com (ACOM)Ancestry.com is debt-free (read negligible financial bankruptcy risk), and as of the end of its second-quarter, held over $70 million in cash on its balance sheet. At 19x next year’s consensus earnings estimates of about $1.50, it’s trading just north of a market multiple on 30%-40% top-line growth and earnings that are doubling (look at the chart above — we’re not kidding). And with the release of the 1940 census in April 2012 — the biggest catalyst genealogical research has seen in a decade, we fully expect consensus numbers to … Read more

Micron Posts Weak Fourth-Quarter Results; We Think Intel is a Better Play

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Micron (MU), a maker of memory chips, reported weak fourth-quarter results (ending Sept 1) and rounded out a difficult fiscal 2011. The company put up a $0.14 net loss in the fourth quarter and posted significantly lower earnings from the prior year in this fiscal 2011 ($0.17 per share versus $$1.85 per share). Most of the weakness was driven by poor pricing from DRAM (dynamic random access memory), which pushed gross margins down to 15% in its fiscal fourth quarter from 22% in the previous sequential period. Though the firm noted a modest improvement in DRAM pricing the past few weeks, management did state that issues are demand-related versus a “rising oversupply scenario.” Revenue from sales of DRAM fell 12% … Read more