Monthly Archives: December 2016

FedEx: A Top Idea…Ready For Pullback?

Baird’s Benjamin Hartford and Zax Rosenberg write that FedEx (FDX) remains their “top large-cap idea” even if the stock could be headed for a fall in the near future. They explain why:

Photo: Patrick T. Fallon/Bloomberg

We see slight EPS risk to F2Q17 (RWB of $2.86 versus recent $2.90 consensus). We expect solid peak season execution (FedEx previously announced estimated +10% yoy volume growth during 2016′s peak), but ongoing Ground infrastructure investments create EBIT margin risk in Ground. As reference, our F2Q17E Ground EBIT margin of 12.0% is -100 bps yoy and -220 bps sequentially (in line with its four-year average, which we view to be representative). Year-over-year Ground margin erosion despite +10% estimated volume growth could also introduce investor concerns surrounding future returns on incremental investments in the segment…

FDX remains our top large-cap idea. We would use any pullbacks in the stock attributed to the near-term setup issue as an entry point for investors. We believe demonstrating sustained improvement in capital returns and 10-15% EPS growth (driven by Express profit improvement, TNT accretion, Ground share gains) in upcoming years warrants a higher relative valuation multiple (above current 0.9x relative NTM P/E versus S&P 500), creating the basis for sustained outperformance despite its strong 2016 YTD performance (+20% relative to the S&P 500).

Shares of FedEx have dropped 1.5% to $197.92 at 3:12 p.m. today.

Tilly’s Is Priced Like It’s Special, But It Isn’t

Click to enlarge

Photo credit

Tilly’s (NYSE:TLYS) is hitting new highs off of its Q3 earnings report but to my eye it looks like a stock that has reached euphoric sentiment. That signals to me that the rally doesn’t have long to go and given the valuation, that certainly appears to be the case. I intend to show that the quarter Tilly’s produced for Q3 wasn’t as good as investors seem to think and that at current prices, there is enormous risk to longs.

Click to enlarge

Total sales were up better than 7% as Tilly’s opened a handful of stores but also – more importantly – produced a sizable gain in comp sales. That number was up 4.4% against expectations of a negative comp and in today’s environment for apparel retailing, that is a huge bump. Tilly’s really shocked us all with that kind of showing and that is a big reason why the stock price soared the way it did. In addition, Tilly’s added that 4.4% on top of a 3.9% gain in last year’s Q3 so to be perfectly fair Tilly’s really did crush it from a comp basis in Q3.

That sort of revenue growth is nice but what about margins? This is where I think investors are ignoring a bit of a warning sign from Tilly’s as gross margins were flat at 31.5% in Q3. The fact that they were flat isn’t concerning by itself but we know that comp sales afforded 110bps’ worth of leverage via lower buying and distribution costs but also that the 110bps was completely offset by a similarl y sized loss from more markdowns and promotions. In other words, Tilly’s would have produced a very strong gross margin gain in Q3 except that it discounted and promoted in order to achieve its huge comp sales gain. I can’t say for sure how much of the 4.4% was due to lower pricing but it is very clear by the 110bp loss in gross margins from markdowns that at least some of it was. I’m not sure investors are seeing this for what it is and are instead just bidding the stock up because the headline comp number came in hot.

SG&A costs were also much lower in Q3, falling by 320bps against last year. Much of the gains were recurring due to legitimate expense reductions in payroll costs and the like but again there are some nuances here that are important to point out. Lower non-cash store impairment charges contributed to the better SG&A number this time around and a full 80bps of the gain was from a lack of severance obligations. Those things aren’t recurring and a s they make up a sizable portion of the SG&A gain in Q3, we must discount them heading into next year. Again, Tilly’s did some good work here but not as good as the headline number would make it seem.

As a result of these cost savings, operating margins flew 320bps to 7% in Q3. The gains were attributable entirely to the SG&A savings I already mentioned and while that’s great – and some of it is recurring – some of it isn’t and we must make that clear when generating earnings estimates.

And speaking of estimates, this is where the story gets really juicy. The moonshot rally has taken Tilly’s to an eye-popping 31.3 times 2017 earnings and that is simply a figure I don’t understand. Keep in mind that guidance for Q4 was basically at consensus, with tepid comp sales and EPS right at the 18 cents analysts are looking for. In other words, my thesis that Q3’s huge gains in virtually everything were largely non-recurring seems to be holding water.

If we just look at what is being priced into those estimates, I become even more concerned. Sales growth seems reasonable enough at under 4% but EPS is expected to grow by 15%. Tilly’s doesn’t buy back stock so that is not where the gains are coming from – all 11% or so will have to come from margin expansion. We saw some margin expansion in Q3 – some of it repeatable, some of it not – but to build that kind of growth in for another year on top of what has already been a fairly good year is a lot to ask. I’m not saying Tilly’s can’t get to 15% EPS growth but I’m saying it will take a gargantuan effort. In addition, that growth and more is already priced into the stock, so where is the upside going to come from?

Tilly’s is already trading at more than 2X its prodigious earnings growth rate for next year, making it a very expensive stock indeed. I think there is some risk to lofty EPS targets for next year and given the stratospheric valuation, I’m inclined to look for a cha nce to short it here. There is nothing special about Tilly’s but it is certainly priced like it is and that gives the bears an opportunity. Tilly’s has come too far, too fast and has lots of risk in my view.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TLYS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Top 5 Warren Buffett Stocks For 2017

Bloomberg once called it the richest town in America.

But its not Miami, or even mansion-filled Palm Beach. Dozens of farmers in this town did the remarkable, turning every $40 into more than $10 million and on their way to becoming self-made millionaires.

Good luck finding this town Quincy, Florida on a map. This oasis of millionaires is in the middle of nowhere. The millionaires of Quincy prefer keeping to themselves these days

But a little digging into the secret how they became so rich might be the smartest money move you ever made.

Because in the know investors have copied Quincys success across time and created their own fortunes. Even Warren Buffett took advantage of the same strategy, netting a profit of $15.89 billion in one of his most profitable trades ever.

Top 5 Warren Buffett Stocks For 2017: Whiting Petroleum Corporation(WLL)

Advisors’ Opinion:

  • [By Ben Levisohn]

    Stifel’s Michael Scialla and Daniel Guffey warn investors not to chase the biggest gainers among the exploration & production stocks, including Denbury Resources (DNR) and Whiting Petroleum (WLL), and instead stick with more stable fare such as Anadarko Petroleum (APC), Rice Energy (RICE), and Continental Resources (CLR). They explain:

  • [By Lisa Levin]

    Energy shares surged around 1.85 percent in trading on Monday. Top gainers in the sector included Legacy Reserves LP (NASDAQ: LGCY), Whiting Petroleum Corp (NYSE: WLL), and Atwood Oceanics, Inc. (NYSE: ATW).

  • [By Robert Rapier]

    Whiting Petroleum (WLL) is one of Continental’s biggest competitors in the Bakken. Whiting is the second-largest oil producer in North Dakota, averaging 82,500 barrels of oil equivalent (BOE) of production in 2012, across more than 700,000 acres of leased land.

Top 5 Warren Buffett Stocks For 2017: Newfield Exploration Company(NFX)

Advisors’ Opinion:

  • [By Ben Levisohn]

    Large Caps. Our E&P coverage is pricing in $61/bbl WTI and $3.30 gas, and with a lower crude forecast the group is looking less compelling. We argue names that continue to demonstrate resource improvement at the low-end of the cost curve, namely in the Permian and STACK remain attractive, such as Concho Resources (CXO), Devon Energy (DVN), Newfield Exploration (NFX) and Pioneer Natural Resources (PXD). Noble (NBL) remains a compelling value, though has yet to commit to an accelerated US onshore drilling program.

  • [By Ben Levisohn]

    The large cap E&Ps we cover raised ~ $6.5 billion of equity in 2015 and are likely to consider additional issuance in 2016. Pioneer Natural Resources (PXD) raised $1.3 billion on January 5th and Hess Corp. (HES) raised $1.5 billion of equity/equity-linked earlier this month. We think highly leveraged companies such as Devon Energy,Encana andRange Resources (RRC) and companies with a large deficit (before asset sales), such asAnadarko Petroleum and Devon Energy, are most likely to consider raising equity. Additionally, we believe companies such as WPX Energy (WPX), Southwestern Energy (SWN), Marathon Oil, Continental Resources (CLR),Noble Energy and Newfield Exploration (NFX) could issue equity while several levered companies may be unwilling or unable to access equity markets. We do not think Apache, Canadian Natural Resource, EOG Resources (EOG), Occidental Petroleum orPioneer Natural Resources are likely to issue equity this year.

  • [By Ben Levisohn]

    Lear also sees strong “upside potential” forConcho Resources (CXO), Pioneer Natural Resources (PXD) and Newfield Exploration (NFX) as well performance improves in the Permian/STACK, and also writes positively on Devon Energy (DVN).

Top 5 Warren Buffett Stocks For 2017: Medidata Solutions, Inc.(MDSO)

Advisors’ Opinion:

  • [By Lisa Levin]

    On Wednesday, technology shares climbed by 0.94 percent. Top gainers in the sector included Marvell Technology Group Ltd. (NASDAQ: MRVL) and Medidata Solutions Inc (NASDAQ: MDSO).

Top 5 Warren Buffett Stocks For 2017: Avid Technology Inc.(AVID)

Advisors’ Opinion:

  • [By Monica Gerson]

    Avid Technology, Inc. (NASDAQ: AVID) is estimated to post its quarterly earnings at $0.36 per share on revenue of $144.02 million.

    Consolidated Water Co. Ltd. (NASDAQ: CWCO) is expected to post its quarterly earnings at $0.11 per share on revenue of $15.15 million.

Top 5 Warren Buffett Stocks For 2017: Potash Corporation of Saskatchewan Inc.(POT)

Advisors’ Opinion:

  • [By Chad Fraser]

    The agriculture ETF is heavily weighted toward the U.S., with 45.8% of its assets there, but it is geographically diverse, with exposure to countries such as Canada (9.9%), Switzerland (8.5%), Japan (6.7%) and Singapore (5.1%).

    Potash Cartel Breakup Has Weighed on This Agriculture ETF

    The ETF’s unit price declined in the first half of 2013, partly because of the breakup of the Belarusian Potash Company (BPC), through which Russia’s Uralkali, the world’s No. 1 potash producer, and Belaruskali of Belarus distribute their potash. The market is dominated by BPC and Canpotex, owned by Potash Corp. of Saskatchewan (NYSE: POT), Mosaic and Agrium Inc. (NYSE: AGU).

    Together, the two cartels control 70% of global potash exports, so the breakup of BPC will result in a more fractured market, which seems likely to push potash prices lower. Shares of major potash producers fell sharply on the news, as did Market Vectors Agribusiness ETF due to its potash stock holdings, which include Agrium, Potash Corp. and Mosaic.

  • [By Gavin Graham, President, Graham Investment Strategy, Ltd.]

    Potash Corporation of Saskatchewan (POT) has seen its share price fall by half over the last three years and almost 20% in the last month. That’s due to the decrease in the price of potash and the collapse of the Belarus Potash joint venture.

  • [By Jon C. Ogg]

    Potash Corp. of Saskatchewan Inc. (NYSE: POT) was up 25 at $33.12 in Monday afternoon trading. Monday’s gain puts shares up within striking distance of its breakout point from the aftermath this summer that took shares from $38 to $31 and ultimately back under $30 before recovering.

What The iPhone Gives, The iPhone Can Take Away

Click to enlarge

source: 9to5Mac

Now that the future of Apple (NASDAQ:AAPL) is increasingly dependent upon the success or failure of the iPhone, it has put itself at enormous risk if the smartphone starts to falter by failing to gain market share in new markets. In the current environment, as most know, that is China.

It is obvious that Apple has a couple of options going forward. It can either try to duplicate its past success of developing and releasing innovative products that create new markets, or it can focus more on its existing products and services to generate more sales per customer. Since it hasn’t had a new, meaningful product hit since 2010, it suggests the company needs to focus on getting more of its current customer base than try to develop products without a proven market.

The question is this: how can Apple make the transition to a more balanced portfolio of products and services without losing its former innovative edge? The answ er to that is in the eyes of investors and to many shareholders it has already lost that edge, and it’s time to take a different route to generate growth.

That said, there is also risk associated going with what appears to be the safer and more predictable route as well.

Apple must do something to address its iPhone exposure

You know a company is in trouble when it has a plethora of products it offers to the market, and only one of them is relevant to the bulk of its performance. That’s obviously the iPhone with Apple, and with the North American market having little more in the way of growth left in it, and the company struggling to brand itself in China, it underscores its risk in association with its heavy dependence on the iPhone to grow the company.

I understand that the market and shareholders will quickly forget all this if the next iPhone release does well, but it doesn’t take away the fact Apple can no longer rely on the iPhone to underwrite the weaker products and services doing little to add to company growth.

It seems to me the company will either have to lower expectations on new product releases and look to a portfolio of smaller, but profitable products to complement the iPhone. Either that, or as mentioned, it will have to target its exciting customer base and generate more sales per customer in order to generate sustainable growth.

Where Apple could really shine would be if it could do all of the above, including able to better penetrate and grow its brand in China. That would result in the company moving forward on all cylinders, exceeding the expectations of even its most ardent supporters.

The risk factor

It’s obvious the risk Apple now faces because of it becoming an ongoin g one-hit wonder, as measured by producing new hits on a consistent basis. It’s now clear it is either trying to change its strategy in that regard, based upon its ongoing focus on enhancing and building off of existing products and services having a proven track record.

Most businesses know it’s easier and less expensive to generate sales from existing customers, but Apple, in the past, has been so successful at rolling out a series of hit products, it has been able to somewhat ignore that rationale and practice, building the company off its growing product line. Those days appear to be over now, as it’s been almost 7 years since it has released a hit product.

The challenge for Apple is how it can convince its base customer and shareholders it has a strong future, even as it relinquishes its perception of being an innovative company that can consistently produce products that can move the needle of the company’s top and bottom lines.

This has already pr oved to be difficult, as evidenced by how hard the company is hit when iPhone sales underperform expectations, even when the company points out the growing success of its add-on products and services.

Included in that is its Services unit, which generated $6.3 billion last quarter. The problem is Apple used that to headline it earnings report. The idea shareholders would be swayed by those growth numbers and ignore the disappointing iPhone sales is silly.

Even so, it does point to the possibilities concerning focusing on other areas of the company, which when added together, could represent formidable growth potential.

Where the risk is in this area is if some of the areas it focuses on for add-on sales is disrupted by new products and services which results in customers moving onto other gadgets, potentially losing some of those sales as well.

Potentially losing its innovative leadership position

For many years Apple has been considered one of the most innovative companies on planet earth. Now that it has failed to produce another solid product hit since 2010, it has been losing a lot of its appeal in that regard, and while it retains most of its original customer base, it isn’t appealing to younger customers in important markets like China, at near the levels it has in North America.

This, more than anything, is the major risk to Apple in my view. Branding has a lot to do with perceptions and emotional connections to the company, and if it fails to be viewed as the future of tech as it has in the past by a new generation, it could easily suffer the consequence of serving its existing customer base as they age and buy less in the way of new gadgets.

With little in the way of significant new customers in North America to generate significant and sustainable growth, the failure to project its innovative advantage because of its inability to, well, innovate, it faces the challenge of having to grow by targeting its existing customer base and providing add-on products and services to current offerings, while at the same time trying to find a product that can inspire new markets to embrace its brand.< /p>

Apple has always been about the brand, and since it has lost a lot of its innovative edge over the last six to seven years, it hasn’t been able to gain the foothold it had hoped to in China with its iPhone. A lot of its competitors there offer features close enough to Apple’s to cause consumers to think the extra cost of an iPhone isn’t worth it.

A lot of this, from my point of view, comes from its lack of innovation, especially on the design side of the iPhone, which doesn’t pop when you look at it.

Conclusion

Competitors have been quickly catching up with Apple on a number of fronts, and that is largely from declining innovation and lack of a significant product pipeline that will generate future growth at a meaningful pace.

So while the company can employ the other strategies for growth, and it should, the additional risk is it’s considered simply another competitor among many for the new markets it’s competing in. That’s another way of saying it risks sliding into being another commodity company. In turn, that would take away the reason customers would pay more for its products.

Apple has been failing with product releases over the last six or seven years (at least in accordance with Apple standards), and that has brought about a sense of losing its edge in relationship to its compe titors. That in turn has hurt its brand in emerging markets, which are the future growth markets of the company.

I know this would all change if Apple is able to develop a winning strategy in China for its iPhone. But that’s not a guarantee, and it once again underscores its vulnerability to being a company exposed to the performance of one product.

The objections to this are obvious, but the truth is investors don’t take a position in Apple to experience incremental growth, they do so to enjoy above-market returns, and returns that exceed the returns of their competitors. If the company isn’t able to generate those types of returns, it’ll struggle to maintain its share price and market leader position.

From some of the comments coming out of Apple, it appears its attempt to reduce its exposure to the iPhone could make it a company that can continue to do grow, but not at nowhere near the pace it has in the past.

Since it has become so large, even taking the needed steps to diversify its revenue streams in order to spread the risk among all its products and services, gives the impression its best days are behind it. That doesn’t make Apple a bad company; it makes it ordinary. For Apple, that’s a disaster.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Don’t Be Short Sighted About Nike

Fears surrounding sales of its famed basketball sneakers has weighed in Nike (NKE) in 2016. Next week, the iconic sports apparel company willunveil fiscal second quarter financial results, and analysts will be looking closely for signs that Nike continued to lose share to rivalsUnder Armour(UA) andAdidas(ADDYY).

Jonathan Bachman/Getty Images

Last week, Barrons cautioned investors against buying the stock on the heels of a downgrade by Cowens John Kernan. But today, a string of analysts have argued that recent pressures facing Nike are temporary and the stock offers an attractive opportunity.

Granted, Addidas has upped it game. But Susquehanna Financial Group analyst Sam Poser says concerns are overdone

While we acknowledge some of the market’s concerns, we also recognize how short-sighted they are. The core underpinnings that make Nike a premier global athletic brand are still well in place. NKE is actively protecting its brand, managing inventories via its outlet network and optimizing sales via its unmatched segmentation strategy. NKE’s innovation pipeline is decidedly stronger today than six months ago. The point is, NKE doesn’t remain complacent for very long and the stock chart reflects this. Historically, shares rallied 20%+ following other periods of investor angst (Mar-Sep 2002, Jan-Aug 2006, May-July 2012). We believe the recent pullback is a buying opportunity.

Looking to next week’s 2Q17 print, we believe fears of the North America (NA) backlog turning negative are unfounded. Nike’s reported 2Q17 backlog number will include orders for the Dec-April period including orders for ~2 months of 4Q17 (May). We expect that NA revenue growth will accelerate into 4Q17 and expect NA futures to increase LSD. NKE will no longer disclose future orders growth in its earnings press release, but rather on the earnings conference call, where the number can be put in proper context. DTC growth and mix shift to more at-once business is likely to distort the usefulness of this closely watched metric. We are forecasting 2Q17 NA futures growth of 3.7%, and total FX neutral futures growth of 7.1%. NKE reports 2Q17 results on 12/20 AMC.

We believe that the market is under-appreciating how diversified NKE’s business truly is. To extrapolate pockets of weakness in Nike Basketball to softness in NKE’s entire NA footwear business is a mistake

And at Stifel, Jim Duffy and his team regard any weakness in the stock heading into the Nov. 20 earnings report e as a buying opportunity.

Bearish sentiment stemming from prevailing athletic footwear fashion preferences towards lifestyle oriented products has weighed on the stock creating a favorable risk/reward for investors with a 12 mos. time horizon. We remain confident in long-term growth drivers and would view weakness around the quarter related to current sentiment and any FX pressure to guidance as a buying opportunity. Given secular trends and brand strength supportive of sustained global success, we reaffirm our Buy rating, and $68 12-month target price, reflecting 25.5X on our updated $2.67 FY18 EPS estimate. Following underperformance in 2016, we see shares as positioned for outperformance in 2017.

Yet at UBS, analyst Michael Binetti cut his price target on Nikes stock from $67 to $61 and lowered his full-year earnings forecast, citing heavy mark downs and a belief that 2Q revenue and margins are below plan.

We believe NKE’s current headwinds are temporary, but a re-acceleration will likely require reinvestment in more impactful innovation, a price/value equation reset, new pinnacle brand expressions (like the new Soho store) and more marketing. These changes have already begun, but we believe a more realistic scenario is for rev growth & profit growth below Nike’s LT targets in FY17 & FY18. Trimming our F2QE EPS to $0.42 (Street: $0.43) from $0.44 and FY17E EPS to $2.36 (+9.5% YOY; Street: $2.37) from $2.42. We’re forecasting +5% global futures growth in F2Q (ex-FX), but expect N. America futures to decline -1% YOY.