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April 22, 2017

Earnings/Potential Value

NCR Corporation (NCR), the ATM and point-of-sale manufacturer, reported strong results on Thursday with FX neutral revenue growth of 9% and adjusted EPS growth of 47%.  POS sales were strong enough to more than offset a small decline in ATM sales.  However the company has moved on from being just a hardware manufacturer with accounting software and services now accounting for 28% of revenue and a remarkable 78% of operating income.   Importantly, this segment saw 8% growth with gross margins of 51.3%.

Despite the strong results, the stock fell by 8.3% on Friday as the market was disappointed by lower guidance on a GAAP basis which was caused by the repurchase of preferred shares in March in excess of the carrying value.  The preferred stocks formed part of a 2015 Blackstone investment that with hindsight looks like a bad deal for NCR.  However with $776 million of preferred stock still outstanding compared to cash of $400 million and annual operating cash flow of $850 million it does not change the overall dynamics of the investment thesis.

The company has raised non-GAAP guidance by $0.05 to a range of $3.32 to $3.42  which would represent a 12% YOY increase at the mid-point.  This looks conservative given 8% growth in its software segment and 50% operating margins.  That alone should drive earnings growth closer to 20%.  However the stock looks cheap even using the more conservative guidance and Friday’s drop provides an excellent entry point, priced on $40.94 with a TTM PE of 13.6 and forward multiple of 12.1.  Read Fool article on NCR

Growth at a reasonable price

Tucows Inc (TCX), the second-largest domain registry in the world, has seen its stock rise by 160% over the past year but still has a market cap of only $600 million.  Additionally, given annual EPS growth of 37%, the current PE of 38.6 still looks pretty reasonable.

Domain services remains Tucows’ largest segment but the company also benefits from a fast growing and highly profitable mobile business which now accounts for about $70 million or 40% of revenues.  With a high level of customer satisfaction, gross margins of 50% and mobile subscribers increasing by 60% from 94,000 in 2014 to 151,000 in 2016, mobile seems to be a highly profitable segment with the potential for plenty of future growth.  Furthermore the company has announced plans to roll out fiber to the home services which offers a huge opportunity to add another $50 or $60 million to revenues also at healthy margins of 35% to 45%.

The stock is up significantly this year but given the numerous growth drivers it still looks cheap.  Read Fool article on TCX

April 21, 2017

Growth at a reasonable price

Forget about Elon Musk, Jirka Rysavy has a history of over delivering.  He grew Corporate Express revenues from $621 million in 1991 to $3.75 billion in 1999 when it merged with BT Office Products and has realised huge profits on selling ventures Crystal Market and Natural Habitat.  Now he is focused on Gaia Inc (GAIA) a video streaming company with a focus on alternative health and spiritual growth.   I have no insight into this sector other than it is a brave person who bets against Mr Rysavy and he owns 38% of Gaia stock.  The company has achieved subscriber growth rates of 58% and 52% in the past two years and expects this rate to increase to 80% in 2017.  The company has no debt and expects to be self financing.  Company forecasts put pre-tax profits at $60 million in 2021 compared to current market cap of $175 million.

Please be aware of the additional risk this carries as a highly speculative microcap at an early stage of development.  Nevertheless I thought it was an interesting story.  Read SA article on GAIA


CSX Corp (CSX) reported strong earnings on Wednesday with revenue growth across the board and EPS growth of c.30%.  Results were boosted by coal and fuel charges and comfortably beat expectations.  On Thursday the company increased guidance for 2017 EPS with a 25% increase to $2.26 surpassing estimates for $2.09.  Read CNBC article on CSX

April 20, 2017


eBay Inc (EBAY) reported strong Q1 results yesterday with a 4% rise in both revenues and adjusted EPS (to 49 cents) that was marginally ahead of consensus forecasts.  Guidance was unchanged with FX neutral growth of 6%-8% and adjusted EPS up 7% in the range $1.98-$2.03.  During the quarter, eBay added two million active buyers across its platforms, for a total of 169 million global active buyers.  The company began the roll out of a new, personalized homepage and announced a new guaranteed delivery program on millions of eligible items that arrive in three days or less, and an authentication program to boost consumer confidence when purchasing high-end merchandise.  The stock closed down 2.5% off last week’s all time high at $33.85.  With an adjusted trailing PE of 18 and a forward PE of less than 17 it still looks good value.  Read Fool article on EBAY

United Rentals Inc (URI) fell by over 6% after the bell yesterday as investors were spooked by a reported 1.4% drop in rates and overlooked a record breaking 1.90% increase in Q1 utilisation to 66%.  However, overall the results were a top and bottom line beat with revenue growth of 3.5% and adjusted EPS of $1.63 comparing favorably to $1.40 last year and consensus estimates of $1.55.

Michael Kneeland, chief executive officer, said that the growth was driven by strength in the core construction markets and added that positive trends in upstream oil and gas and that “the tone of conversations with our customers” were encouraging.

The company raised guidance to include the acquisition of NES Rentals earlier this month.  Analysts expect EPS of $9.35 for the current year which would be a multiple of 12 times yesterday’s aftermarket price of $111.90.

With record utilization rates, top and bottom line beats and positive news regarding the economy, construction and oil and gas the current valuation looks too cheap.  Read SN article on URI

April 19, 2017

Growth at a reasonable price

Constellation Brands’ (STZ) stock price is up 20% this year and trading on a PE of 23.0 but with average annual growth of over 30% for the past 5 years it’s apparent that the stock deserves a premium.  The company has promoted its major brands so that its Corona and Modelo Especial are now the No.1 and No.2 imported beers.  Over the past few years the company has been buying up premium wine, spirits and craft beers. Fears about a border tax are subsiding while earnings keep growing.  Q4 sales were up 5%, while adjusted earnings of $1.48 were up 24% and beat forecasts of $1.36.  Guidance was also better than expected with a 16.8% increase to $7.90 (at the mid-point) predicted. Read Fool article on STZ

On a TTM PE of 15.69 after a 20% fall, Thor Industries (THO) valuation looks very appealing.  The recreational vehicle and towable trailer manufacturer has seen huge growth and in the past year has seen sales boosted by the acquisition of Jayco.  Revenue growth of 60% plus is not going to last forever but prior to the acquisition Thor was growing at a healthy double digit rate and Jayco, which will now account for about 30% of revenues, was reporting huge organic growth of over 20% in its towable division and 40% in its motorized division.  With a huge backlog of $2bn and a growing demographic of retirees, the recent drop in the stock price looks like an opportunity.  Read SA article on THO


Johnson & Johnson (JNJ) beat on earnings and raised guidance after missing on revenues yesterday.  However the market was unimpressed and the SP closed down 3.1% as the market read between the lines and saw earnings boosted by a lower tax rate and guidance raised by the inclusion of the forthcoming acquisition of Achtelion.  Read 247 article on JNJ

April 18, 2017

Potential value

Storebrand Group (SREDY) is a leading Norwegian insurer that is priced on a hefty discount to peers due to recent difficulties. However the company has taken significant steps to address its weaknesses and should now be in a good position to catch its peers.  The company has refocused its offerings toward unit linked products and away from guaranteed income products that have been less profitable in the current low interest environment.  It has met its Solvency II regulatory requirements without requiring a capital increase and is now in a position to resume dividend payments.  With an ageing Scandinavian population, a market share of 34% and a heritage going back to 1767, Storebrand now looks set for a recovery.  Its current valuation also looks appealing with a price to book ratio of 0.92 compared to a European insurance sector average of 1.7 and a PE of 12 compared to Norwegian peers average of 15.  Read SA article on SREDY

Market intelligence firm International Data Corp says that HP Inc (HPQ) has regained its throne as the top PC company as total industry PC shipments gained 0.6% over Q1 2016.  Gartner, the other major analysis firm, said that Lenovo maintained a narrow lead but that HP had the best gains among the PC giants, increasing sales by an incredible 6.5%.  HP has  been investing heavily to provide innovation and upgrades to improve its top line while slashing costs to boost profitability.  The industry has been hit as consumers switch to tablets and phones but for those manufacturers, such as HPQ, that have been winning business and corporate customers there has been a revival.  PCs will never regain the highest peaks of their popularity but with a PE of 11.96, price to sales of 65% and dividend yield of 2.92%, HP looks cheap.  Read SA article on HPQ

Growth at a reasonable price

Amazon (AMZN) is not cheap but with trailing twelve month earnings per share rising from $1.25 a year ago to $4.90 today it is at least growing into its valuation. PE has fallen from around 500 to 185.  Consensus forecasts expect $7.24 in EPS this year, and $12.44 next year. That is 59% of compounded earnings growth over the next two years and would put the P/E at 72.4. The most bullish forecast is for $17.43 or a PE of 52.  Read IP article on AMZN

April 17, 2017

Potential value

Kroger Co (KR) looks like a bargain with a PE of 14.6 and dividend yield of 1.6%.  The company has grown earnings annually by 15% over the past 5 years and gained market share in each of the past 12 years.  With a proven track record of successfully integrating acquisitions, continued growth can be expected.  The current 44% discount to the market looks harsh.  Read Fool article on KR

With a stock price of $8.64 Blackberry Ltd (BBRY) is well off 2007 highs which were in excess of $200.  But things are beginning to go Blackberry’s way as it attempts to transform itself into a software company.  Blackberry has partnered Ford in developing autonomous cars and BlackBerry QNX was approved by the Ministry of Transportation of Ontario in November to test autonomous vehicles on Ontario roads. Last month Blackberry reported better than expected adjusted earnings for the sixth straight quarter and said that it expects to be profitable on an adjusted basis for the second year in a row. Finally, last Wednesday BlackBerry reported that it had won an $815 million award in arbitration with Qualcomm.  With BlackBerry aiming to grow its software businesses, the award is just what Blackberry needed to bolster its balance sheet and increase the likelihood of acquisitions to enhance growth.  The stock is currently only up $0.95 on Tuesdays close ($7.70) even though the award is equivalent to cash of $1.35 per share and the ruling is binding and cannot be appealed.  Read SA article on BBRY

Growth at a reasonable price

Paypal’s (PYPL) stock is trading on a lowly forward multiple of 24.7 times current year estimates despite the company being one of the great success stories of FinTech.  Last year the company grew constant currency revenues by 21% and earnings by 17%.  The company is forecasting FX neutral revenue growth of 17-19%.  That looks conservative with the company’s moves to monetize mobile payments providing significant opportunities.  FinTech is one of the most profitable technology applications and mobile payments are one of greatest opportunities within FinTech.  The beauty of it is that Paypal dominates this area with a market share of 40%.  The company seems remarkably cheap given the opportunities.  However Q1 earnings due on April 26th could provide the catalyst to move the stock higher.  Read SA article on PYPL


Watch out for eBay’s (EBAY) Q1 results on Wednesday.  The company is an often overlook financial success story trading on a PE of 18.3.  Last year the company sold merchandise worth $84 billion yielding more than $9 billion in revenues, net income of $7.3 billion and a 25% operating margin.

Also due on Wednesday is Qualcomm (QCOM) with analysts expecting a 15% jump in EPS to $1.20.  The company is trading on only 11.3 times full year forecast of $4.66.  There may be some news on the planned merger with Dutch chip manufacturer NXP.  This is a highly complimentary deal that would create the third largest chip manufacturer in the world and give Qualcomm a significant position in automotive chips as well as IoT.  Some commentators say the deal would add 30% to EPS.

April 15, 2017

Potential Value

STAG Industrial (STAG) is an industrial REIT that since going public in 2011 has grown from 105 buildings to 314 buildings across 37 states. The stock is up 32.3% over the past year but still trades on a discount to peers with a P/FFO of 15.3 compared to industry average of 18.9.   Growth has been slower than peers in recent years as the company deleveraged its balance sheet.  However, with a BBB credit rating recently affirmed by Fitch in October the company is now able to achieve faster leverage neutral growth and refinance some of its more expensive debt at lower rates which should boost FFO. The company has a diversified portfolio of tenants across industries.  Its biggest concentration is to automotives which accounts for 13% of annual base rents.  However this is viewed as a positive given President Trump’s pro-growth policies.  Conclusion, good value compared to peers.  Read SA article on STAG

Helmerich & Payne (HP), the oil and gas drilling company, has seen profits fall to losses as revenues collapsed 45% after the oil price crash.  However there are reasons to believe an inflexion point has been reached as utilization ratios increased from a low of 24% to 31% at the end of last year.  Reports are that fracking supply companies are seeing surging demand for sand proppant and oil giants are returning as the oil price recovers.  Recovery may take a while but HP is a market leader and has a strong balance sheet.  With the stock down over 40% it looks attractive.  Read Fool article on HP

Growth at a reasonable price

Priced at 35 times this years EPS forecasts having grown earnings by 33% annually for the past 5 years, Tencent’s (TCEHY) stock has an appealing valuation albeit one that already discounts significant future growth.  However the company is a Chinese internet giant.  It is the world’s leading online games developer and owns the world’s third largest social platform (WeChat) with 90% penetration in China.  The company has two major growth drivers, mobile ads and social media ads.  Both sectors offer significant growth opportunities.  Firstly, online mobile games grew by 77% in 2016 and Tencent held a market share of 37%.  Secondly, Tencent has been very conservative in monetizing its platforms in order to grow and provide the best user experience.  Now that it has achieved 90% penetration the rationale to increase monetization has increased.  UBS estimate WeChat’s adload is only 1% compared to Facebook’s 7-10%.  With a considerable runway of growth remaining, consensus EPS growth forecasts of 33% look reasonable.  Read SA article on Tencent

April 14, 2017

Keep it in the family

80% owned by the Sonnenberg family, Hunter Douglas (HDUGF) receives little attention from analysts.  It’s a fast growing window coverings company that grew earnings by 30% last year and paid a dividend of 2.7%.  With housing markets recovering and the acquisition of Levelor in July still feeding through, revenues are expected to grow further.  With a decent dividend, growth and possible future margin expansion the current valuation with a PE of 11.8 looks very appealing.  Read SA article on HDUGF

Value stocks

Trading on only 11 times current year forecasts Whirlpool (WHR) is a bargain.  It has grown EPS annually by 19% over the past 5 years and annual growth forecasts of 13.3% look very achievable.  As the biggest manufacturer of appliances in the US, WHR is well placed to benefit from a booming housing market and March figures, just released, show house sales up 9%.   A multiple of 15 times current earnings at $233 would provide upside of over 37% to Thursdays close.  Read SA article on WHR

Risk Disclaimer: This article does not constitute a recommendation to buy or sell. Investing in stocks or other securities and derivatives is a high-risk activity and not suitable for everyone. It is strongly recommended that individuals should consult with a SEC-registered investment adviser prior to making any investment decisions.

Disclosure: The author holds no positions in any of the stocks mentioned nor has any intentions to initiate any in the next 72 hours.