Diving into Seaworld? $SEAS

aside: I'm on holidays for the next 10 days, so apologies for my absence! Defeats the stockaday tag, I know.

please comment at the r/investing post, thanks.


It doesn't feel like the stormy times are over at Seaworld, with more job losses announced yesterday. 😦

But is there deep value in the stock?

Key Stats

Ticker SEAS
Sector Amusement Parks and Zoos
Latest price $12.48
Value $1,130M
Daily vol $56M
Date 18 October 2017
Financials SEC Filings
Website http://ift.tt/1e0xQZf

1. Let's visit!

SeaWorld Entertainment, Inc. is a theme park and entertainment company. The Company owns or licenses a portfolio of brands, including SeaWorld, Sea Rescue and Busch Gardens. As of December 31, 2016, the Company had a diversified portfolio of 12 destination and regional theme parks that are located across the United States.

Locations include: Orlando & Tampa in Florida; San Antonio, Texas; San Diego, California; and Williamsburg, Virginia. The Company operates water park attractions in Orlando, Florida (Aquatica); San Diego, California (Aquatica); Tampa, Florida (Adventure Island); Williamsburg, Virginia; and Langhorne, Pennsylvania.

You may have missed the controversy but there have been a lot of environmentalists take issue with dolphins and orcas being in captivity… but it feels like this has really hurt the brand.

2. No splash Capt'n

Despite the negativity, visitor numbers look like they've stabilized at 22m visitors a year. And the average revenue per visitor is stable at $61. Admissions make up 60% of revenues, food & merchanizing the other 40%.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Visitors 24m 23m 22m 22m 22m N/A N/A
Revenue $1.4bn $1.5bn $1.4bn $1.4bn $1.3bn $1.3bn $1.3bn
EPS $0.89 $0.59 $0.57 $0.57 $-0.15 $-2.07 $0.45
DPS $6.07 $0.60 $0.62 $0.84 $0.73 $0.00 N/A

But stabilized revenues came at a cost, and the business has started to lose money. Worse, in a classic warning EPS was less than dividends from 2013… which is something that's hard to maintain. Only some miracles lets you pay out more than you earn over an extended period. So, it's no surprise to see the dividends been suspended

A sinkhole…

And as earnings have come under pressure, even though they have seen debt's fall, they still has $1.5bn of net debt versus a market cap of $1.1.bn. That's 5.5x it's latest operating profit. Scary!

Though on the latest call they reminded listeners

As a reminder, we recently refinanced approximately $1 billion of debt earlier this year and do not have any maturities prior to May of 2020.

So there's no immediate issue… though I don't know what the debt covenants say!

2. Better excitement elsewhere?

When they talk about competition it's pretty obvious

Principal direct competitors of our theme parks include theme parks operated by The Walt Disney Company, Universal Studios, Six Flags, Cedar Fair, Merlin Entertainments and Hershey Entertainment and Resorts Company.

But sadly there are only 2 of these that are quoted in the US, Six Flag and Cedar Fair. The two big daddies are hidden inside DIS and CMCSA. Regardless, the margins don't look good. Though it's not a surprise. The business has been understress for a number of years.

And we really shouldn't be surprised by the recent redundancies.

Companies Latest Sales Operating Profit Return on Equity
SeaWorld Entertainment Inc $1,313M 21% -ve
Six Flags Entertainment Corp $1,319M 33% N/A
Cedar Fair, L.P. $1,283M 35% N/A
Merlin Entertainments PLC £1,457M 31% 16%
Vail Resorts, Inc. $1,907M 30% 17%
Walt Disney Co $55,500M 30% 21%
Comcast Corporation $83,972M 33% 18%

tricky price

With losses in 2017, I've jumped to 2018 for a PE ratio. The business isn't trading at a meaningful discount. On price-to-sales it's trading at 2.0x versus $SIX on 5.4x and $FUN on 4.0x. So a dramatic discount. But that does give a some comfort.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
SEAS.K $1,130M 28x 13% 0% -ve
SIX $5,126M 33x 8% 4% 9%
FUN $3,554M 22x N/A 5% 13%
MERL.L $3,854M 18x 11% 2% 11%
MTN $8,764M 35x 18% 2% 6%
DIS $151,817M 17x 7% 2% 9%
CMCSA.O $171,897M 18x 9% 2% 13%

3. Wall Street still cares

It's amazing, on the last earnings call, 10 brokers dialed in to question management, inc. Goldmans, Citi, Barclays and wells Fargo. Imagine these firms still care about a $1bn market cap stock like $SEAS.

These Wall Street professionals have a $13.86 for Seaworld and their recommendation to clients is Buy. That implies an upside of 11% to their target.

But that target price has been a real rollercoaster, as high as $22 back in Oct 2015, dipping to $14 this time last year, ramping again to $20 until June this year.

And the back drop is missing earnings 7 out of the last 8 quarters 😦

4. Diving in?

I just can't work out the fair value of this stock. There doesn't seem to be a compelling reason for a turn around, even if they are working hard on their 5-point efficiency plan. Plus the debt levels are a no-no for me. Even if they aren't an issue.

So sorry, Seaworld, I'm not visiting.


View the archive of Stock a Day posts at it's subreddit stockaday. Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.


Submitted October 19, 2017 at 08:17AM by shane_stockflare
via http://ift.tt/2xQhyDO

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Is 2U Inc for you? $TWOU

aside: please comment at the r/investing post, thanks.

Everything's online nowadays, even all university courses! And $TWOU is helping the best educational institutions be tech savvy and online.

So what did we learn about 2U?

Key Stats

Ticker TWOU
Sector Other IT Services & Consulting
Latest price $59.32
Value $3,051M
Daily vol $22M
Date 17 October 2017
Financials SEC Financials
Website 2u.com

1. What's 2U do?

2U, Inc. is a provider of an integrated solution consisting of cloud-based software-as-a-service (SaaS) combined with technology-enabled services (together, the Platform) that allows colleges and universities to deliver online degree programs.

The Company's SaaS technology consists of a learning environment (Online Campus), which acts as the hub for all student and faculty academic and social interaction, and a suite of integrated applications, which the Company uses to launch, operate and support the Company's clients' programs.

Northwestern, Yale, Berkeley, Georgetown, Vanderbilt, etc etc. There are a lot of impressive brands in their network!

2. Looking thro' the numbers

So for as long as I've seen, the business has been growing nicely, but losing money. In fact, I'm delighted to see that Wall Street expects the sales to acelerate, but it doesn't feel like it's on the way to the moon.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $56m $83m $110m $150m $206m $285m $390m
EPS $-3.33 $-3.81 $-0.91 $-0.63 $-0.44 $-0.12 $-0.07

And if I look at the bottom line, the management team is delighted to talk about EBITDA, banker speak for operational cashflow… but if you look at that, you'll miss that they capitalized technology and content development costs. i.e. they don't put some of their cash costs through the P&L, including salaries. 😦

What's the background?

Best I copy the language from the 10-K

We develop content on a course-by-course basis in conjunction with the faculty for each client program. The clients and their faculty generally provide course outlines in the form of the curriculum, required textbooks, case studies and other reading materials, as well as presentations that are typically used in the on-campus setting. We are then responsible for, and incur all of the expenses related to, the conversion of the materials provided by each client into a format suitable for delivery through our cloud-based technology.

And they say the useful life of these courses is circa 5 years. What? University courses will only be updated every 5 years? I'd have thought they require constant updating.

Any cash or dividends?

Yes, there's a cash balance, $22M at the end of the last quarter, that is the equivalent of 1% of the market value. Though a recent share sale will have swelled their coffers. And no, there is no sign of a dividend.

3. Any competition

They highlight two competitors, both of which got bought by some of the sector's behemoths.

Several competitors provide solutions that compete with some of the capabilities of our solutions. Two such competitors, EmbanetCompass and Deltak, were acquired in 2012 by Pearson and John Wiley & Sons, respectively, both of which are large education and publishing companies. There are also several private companies, including HotChalk and Everspring Partners, providing some or all of the services we provide, and these companies may choose to pursue some of the institutions we target. In addition, nonprofit colleges and universities may elect to continue using or develop their own online learning solutions in-house.

Net net, it's hard to find a good peer list. So I'm adding the publishers and the colleges to the roll.

Companies Latest Sales Operating Profit Return on Equity
2U Inc $239M -5% -13%
Publishers
John Wiley & Sons Inc $1,726M 20% 9%
Pearson PLC (ADR) $6,270M 12% -41%
Houghton Mifflin Harcourt Co $1,390M 12% -31%
K12 Inc. $889M 10% 0%
Colleges
American Public Education, Inc. $300M 19% 6%
Capella Education Company $439M 20% 20%
Adtalem Global Education Inc $1,810M 20% 8%
Bridgepoint Education Inc $510M 6% -3%
Career Education Corp. $631M -3% -6%
Grand Canyon Education Inc $922M 34% 22%
Strayer Education Inc $449M 17% 19%
Laureate Education Inc $4,239M 15% N/A

So when I get to valuation, I find myself struggling. How can this business have the same market cap as JWiley, more than K12 & HMH together, or half the value of Pearson.

It's even worth more than what Appollo paid to take McGraw Hill private. The folks that bought the University of Phoenix!

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
TWOU.O $3,051M -509x N/A 0% N/A
Publishers
JWA $3,011M 17x 15% 2% 9%
PSO $6,777M 12x -7% 7% N/A
HMHC.O $1,406M -7x 5% 0% 1%
LRN $713M 36x 15% 0% 11%
Colleges
APEI.O $335M 20x -15% 0% 10%
CPLA.O $810M 20x 9% 2% 10%
ATGE.K $2,215M 13x N/A 1% 10%
BPI $281M 15x N/A 0% 1%
CECO.O $753M 61x N/A 0% N/A
LOPE.O $4,295M 23x 16% 0% 5%
STRA.O $994M 27x 1% 1% 6%
LAUR.O $2,665M -16x -25% 0% 10%

I've not the energy to do an net present value guestimate. It just seems bonkers. Sure if it's a software "SaaS" play, it's worth a big multiple as it'll have leverage and a moat… but if they are writing courses univerity by university, then isn't it really a consulting business? With little operational leverage?

And one last thing…they recently paid $103m for GetSmarter, which does short online courses, a biz that did $17m sales in 2016. If I apply that to 2016 figures…I get $1.2bn of value versus the current $3bn.

4. Wall Street thinks it's a Buy!

Even if I don't get it, the professionals on Wall Street do. They say Buy and have a $63.56 target for the stock, thouh implies a rather unexciting upside of 7%.

Now, they've beaten earnings for the last 10 quarters which is great, but given the multi-year contracts… surely they have a really good visibility on their numbers?

5. I've learnt nothing 😦

I don't get it. Suggest you look at the Analyst Day Presentation too. Love to know if you are a buyer after those 129 pages!

I took particular issue with the idea of Cohort Margin. So they are EBITDA break-even on a a course in year 3. Does that mean before the capitalized costs of writing the courses?

I can't square the circle. Sorry.


View the archive of Stock a Day posts at it's subreddit stockaday. Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 17, 2017 at 04:13PM by shane_stockflare
via http://ift.tt/2ghbNIO

Has Versum Materials turned? $VSM

aside: please comment at the r/investing post, thanks.

I've always have a sneaking suspicion that spin-offs are better investments than rumps! So what's happened since Air Products split off $VSM? +72% versus +4% in one year. Wow.

Is the trend done? Or more to come?

Key Stats

Ticker VSM
Sector Specialty Chemicals
Latest price $40.20
Value $4,374M
Daily vol $22M
Date 16 October 2017
Financials SEC Financials Investor Deck
Website versummaterials.com

1. What's this got to do with Semis?

Okay, $VSM is a specialty chemical business, but it's top clients are Intel, Samsumg and TSMC. So it's really a play on the semiconductor market!

Versum has two business lines:

  • The Materials segment is an integrated provider of specialty materials for the electronics industry, focusing on the integrated circuit and flat-panel display markets.
  • The DS&S segment designs, manufactures, installs, operates, and maintains chemical and gas delivery and distribution systems for specialty gases and chemicals delivered directly to its customers' manufacturing tools.

Now this sort of business has gotta make engineers excited! It's all about "molecular design and synthesis, purification, advanced analytics, formulation development and containers and delivery systems for the handling of high purity materials.

They note in their annual report, they've 200 scientists helping them invite new products for the semi-industry. In fact, some of VSM's inventions are key to helping with miniaturization. i.e. allowing smaller / lighter devices.

Though given the Materials division is 78% of sales and 85% of profits, it seems like there's really only one key driver of VSM. And separately, the top 3 clients are nearly 50% of sales. So there's a really concentration risk.

Margins getting good!

So the business didn't grow in the year before it was spun out. But the margin's been getting better and better, with the earnings nearly doubling in 2 years.

Sept year end 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $951m $853m $943m $1,009m $970m $1,114m $1,188m
EPS $-0.18 $-0.74 $1.14 $1.69 $1.95 $1.91 $2.12

And looking to the balance sheet, VSM does have debt, $700m or so, equal to a "reasonable" 2x profits. Good to see that Air Products didn't saddle it with a burden when it set Versum free. Phew. And none of us will be surprise to see a dividend. Though it's rather small at just 5% of earnings being paid out each year.

2. Bigger / Better Elsewhere?

In their 10-K they highlight a long list of competitors, though many are inside mega conglomerate chemical businesses.

Adeka, Air Liquide, Cabot Microelectronics, Dow Chemical, Entegris, FujiFilm, Hyosung, JSR Microelectronics, Merck EM, and SK Materials.

So it's not really that fair to sign VSM's praises, though it's margins and returns are delightful.

Companies Latest Sales Operating Profit Return on Equity
Versum Materials Inc $1.1bn 33% 56%
Cabot Microelectronics Corporation $0.5bn 27% 16%
Entegris Inc $1.3bn 23% 13%
FUJIFILM Holdings Corp. (ADR) $21bn 13% 8%
Air Liquide SA €18bn 25% 13%
DowDuPont Inc $75bn 20% N/A

Perhaps their specialization pays off. They note

The semiconductor market is global in scope with nearly all major semiconductor manufacturers having operations in multiple countries. We serve our customers across three continents and participate in the specialty gases and materials space spanning six of the seven critical processes steps required for semiconductor manufacturing. Because of our breadth, we believe that there are no global competitors that compete with us across the full range of our product offerings.

So maybe they do have a meaningful competitive advantage. If so, it's not showing in a valuation premium. The stock doesn't look expensive relative to either the US listed small caps, or the big mega-cap conglomerates.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
VSM $4,374M 21x N/A 0% 6%
CCMP.O $2,103M 25x 14% 1% 6%
ENTG.O $4,204M 23x 15% 0% 5%
FUJIY.PK $20,458M 15x 8% 2% 15%
AIRP.PA $44,689M 22x 5% 2% 11%
DWDP.K $167,423M 22x 8% 2% N/A

Suppose we shouldn't have been surprised that the PE ratio would rise from 14x at the time of the de-merger to today's 21x. Now that's a nice re-rating!

3. Wall Street's positive thinking

Ever since the de-merger, the professionals on Wall Street have said Buy! They've ramped their target price every quarter too. Though with a current target of $40, they really aren't suggesting any short-term upside.

Now, the management team has beaten estimates every quarter since IPO, there doesn't look like there is a competitive or industry headwind, so it sure feels like they are being cautious. Reasonably so?

4. Looking to 2018?

So the August earnings call led to an upgrade. And a jump in the stock price. So, isn't it time to look to 2018?

The markets' expecting 11% EPS growth. The end market is growing nicely, they are making productivity improvements, and as an independent company they are doing small bolt on purchases. All in all, it's a nice story.

I can't see a reason to go wild about Versum, but in the same way, there's no reason to avoid it. I like it, even if it's more likely to be a long-term winner. Quality stuff 🙂


View the archive of Stock a Day posts at it's subreddit stockaday. Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.


Submitted October 16, 2017 at 10:09AM by shane_stockflare
via http://ift.tt/2hJM8ZH

How about the home of the FAANGs? Yes, Nasdaq Inc. $NDAQ

aside: please comment at the r/investing post, thanks.

It's a bull market in everything, so how about a little bit of Nasdaq. All the FAANGs are listed there!

The stock tripled from 2012 to 2017 versus the S&P500 doubling. Nice. Can the good times continue?

Here are the key stats

Ticker NDAQ
Sector Financial & Commodity Market Operators
Latest price $75.63
Value $12,615M
Daily vol $87M
Date 12 October 2017
Financials SEC Financials, Investor Deck
Website nasdaq.com

1. What's a stock exchange these days?

Nasdaq, Inc. is a provider of trading, clearing, exchange technology, regulatory, securities listing, information and public company services. It has four segments:

  • Market Services (36% sales / 43% profits);
  • Corporate Services (28% sales / 16% profits);
  • Information Services (24% sales / 34% profits), and;
  • Market Technology (12% sales / 7% profits).

But let's dig a little, Market Services is pure trading. Corporate is IPOs and investor relations tools for companies. Nasdaq is particularly good at that. Info is both selling data on trades / etc and Indices , and Technology sells it's tech expertise to 85 other stock exchanges inc. Japan, Singapore, Hong Kong, Egypt, Turkey, Malaysia, Dubai, Switzerland, etc, etc.

So as you'd expect the core stock exchange business, has helped Nasdaq build strong franchises across the entire trading value chain.

2. And a Bull Market = $$$

The company and analysts tend to look at the net revenues, i.e. after any transaction expenses from running the stock exchange, and this has grown by $100 to $200m a year recently.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Total Revenue $3.1bn $3.2bn $3.5bn $3.4bn $3.7bn N/A N/A
Net Revenues $1.7bn $1.9bn $2.1bn $2.1bn $2.3bn $2.4bn $2.5bn
EPS $2.04 $2.25 $2.39 $2.50 $0.64 $4.17 $4.55
DPS $0.39 $0.52 $0.58 $0.90 $1.21 $1.45 N/A

However, what I find a little odd, is they did 3 big acquisitions in 2016 (ISE, Boardvantage and Marketwired), spending $1.5bn, but there is little to show for it, at the top line. Go figure! And I suspect the forecasts have not yet been updated for the announcement in September of the $700m deal to buy eVestment (which does circa $100m of sales).

Also, we need to note: that they love talking about Adjusted Earnings, reversing restructuring charges, impairments etc, to get to a rosier EPS. Gawd, I hate those shenanigans!

What's with the debt levels?

$NDAQ has $2,896M of net debt. That is 2.5x it's latest operating profit. Okay, part of it's value is an oligopoly business along side ICE/NYSE but I'm starting getting uncomfortable, given that it's debt should rise further, after the eVestment deal.

Who know when the next bear market is. But after the heady days of 2001, Nasdaq saw sales decline 3 years in a row. Though post 2008, the dip was more muted. In fact, they talk about 75% of sales now being recurring / subscriptions. So, perhaps they've diversified the business sufficiently to weather a storm?

And they think they get back to a reasonable level of debt by 1H 2019.

Rewarding shareholders?

$NDAQ pays about 30% of earnings out as dividends, which gives shareholders a 2% yield. They do repurchase stock, a bit, but it's mainly to reward employees. And with the current debt levels, I find it hard to believe there's a substantial buyback round the corner.

2. How's it look versus it's peers?

Although it's got the bulk, it's not standing out on margins or returns.

Companies Latest Sales Operating Profit Return on Equity
Nasdaq Inc $3,873M 30% 4%
US players
Intercontinental Exchange Inc $4,558M 63% 10%
CME Group Inc $3,609M 69% 8%
CBOE Holdings, Inc $1,328M 34% 11%
MarketAxess Holdings Inc. $386M 57% 31%
OTC Markets Group Inc $53M 38% 64%
Others
London Stock Exchange Group Plc £1,657M 46% 8%
Deutsche Boerse AG €2,674M 52% 18%
TMX Group Ltd C$ 804M 47% 7%

And if I look at the commentary in the Investor Deck, they talk of mid-single digit organic growth, with a target of double digit shareholder returns. i.e. they'll need to increase margins and do some accretive M&A.

And the price?

But all this translates into a rather unaggressive valuation, at least versus the behemoths at ICE/NYSE or the CME Group. Are those folks really in a better place strategically?

I have to look at the Toronto Stock Exchange to find a cheaper exchange!

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
NDAQ.O $12,615M 18x 10% 2% 5%
US players
ICE $41,247M 24x 12% 1% 6%
CME.O $46,632M 29x 9% 4% 6%
CBOE.O $12,304M 32x N/A 1% 4%
MKTX.O $7,196M 48x 20% 1% 3%
OTCM.PK $343M 29x N/A 4% 0%
Others
LSE.L £13,593M 26x 18% 1% 5%
DB1GN.DE €18,239M 20x 10% 3% 7%
X.TO C$ 3,806M 14x N/A 3% 9%

3. Wall Street isn't convinced

Well I suppose the professionals on Wall Street are the ultimate insiders in the case of stock exchanges! So it's not encouraging to see a Hold recommendation and a consensus target of $80, i.e. just 5% above the current price.

That dis-interest is despite the company meeting or beating expectations every quarter for the last 3 years.

4. Trading

The stock's traded between 16 and 19 times earnings the last 2 years. Seen a steady rise of all it's metrics and been focused on sensible M&A. Yes, it's a quality stock, good value relative to the other players, with a sensible strategy to create value.

But, exchanges are one of the ultimate beta plays. And we are closer to the end of the cycle that the start. Of course it can move higher from here, but I don't see how it's valuation gets re-rated or it accelerates earnings.

So I think I'll place my trade elsewhere, ignoring the home of the FAANGs.


View the archive of Stock a Day posts at it's subreddit stockaday.

Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 13, 2017 at 05:19AM by shane_stockflare
via http://ift.tt/2wTCwC9

I won’t ‘av’ a go at Broadcom. $AVGO

aside: please comment at the r/investing post, thanks.

Broadcom's a regular request at stockAday, and since we've not written on it since December, let's do a recap!

Back then we suggested we should all be Rolling up with Broadcom $AVGO. Concluding:

So given the potential revenues and cost synergies, still to gain from the original merger and now Brocade…I have to admit to be tempted…especially since it's traded between 12 and 16x and today it's in the middle of the range.

1. So what's changed?

The fundamentals have ramped, as we move forward a year, the stock and target have jumped, and despite all that, the increase in the valuation has been modest. Nice.

$AVGO December today change
Price $163 $246 +50%
Target price $205 $283 +40%
Sales forecast $13.3bn $17.6bn +30%
EPS forecast $11.25 $15.91 +40%
PE ratio 14x 16x +15%

A quick aside

Though before we move on let's not forget the basic stats and links.

Ticker AVGO
Sector Semiconductors
Latest price $245.99
Value $100,359M
Daily vol $507M
Date 11 October 2017
Financials SEC Financials
Website broadcom.com

2. What's this star?

It's one of the largest semi-conductor companies out there, and it's really a roll-up of Avago, Broadcom and soon, Brocade.

It's got 4 divisions, though as you'll see the first three are the bulk of the value.

  • Wired Infrastructure (50% of sales);
  • Wireless Communications (28%);
  • Enterprise Storage (17%), and;
  • Industrial & Other (5%).

And if you are wondering what all that means, their chips end up in data center networking, set-top boxes, broadband & telecommunication equipment, smartphones, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Yeah, you're very likely to be using Broadcom kit.

A year ago, when they were talking about the Brocade deal they talked about adding $1.4bn of sales with the revenues of $AVGO growing 5% per annum with a little margin upside. The product mix is expected to change a little, with Brocade adding to the Enterprise Storage unit.

Shooting higher?

These figures are including the big M&A deals, so it's not organic growth, sadly…

Oct year-end 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $2.3bn $2.5bn $4.3bn $6.8bn $13.2bn $17.6bn $19.2bn
EPS $2.25 $2.19 $0.99 $4.85 $-4.86 $15.91 $17.61
DPS $0.56 $0.80 $1.13 $1.55 $1.96 $4.06 N/A

In fact, it's hard to judge the historical figures at all, especially the year to Oct-2016, as there were considerable non-cash and restructuring charges that hit the bottom line. In fact, the adjusted earnings that year were: $11.30 a share, and everyone seems to ignore the reported EPS. One of those things that annoys me!

Deal junkies?

Although $AVGO looks like a deal junkie, with $8bn of net debt, that is just 1.2x it's latest operating profit. So it doesn't look like the dividend faces any threat. in fact the forecast dividend of $4.06 compares to a forecast Adjusted EPS of $15.91, so a 25% payout ratio, with the divie doubling year-on-year.

2. Looking good or not?

It's now one of the largest players in the industry and it's got some of the best margins. Okay, this is an industry with lots of consolidation (e.g. QCOM buying NXP) so they need to watch out, but it's not like they don't have scale.

Companies Latest Sales Operating Profit Return on Equity
Broadcom Ltd $16,928M 40% 3%
Intel Corporation $61,711M 40% 20%
QUALCOMM, Inc. $22,570M 30% 13%
Texas Instruments Incorporated $14,184M 47% 40%
STMicroelectronics NV (ADR) $7,401M 17% 9%
Qorvo Inc $2,975M 26% -1%
Marvell Technology Group Ltd. $2,384M 21% 6%
Skyworks Solutions Inc $3,502M 41% 26%

When we look at the valuation it's currently 16x which admittedly is at the top of it's 2 year range of 12 to 16x. Compare that to the other giants? INTC is on 13 versus a range of 12 to 16x. And QCOM is on 13x versus a 2 year range of 10 to 16x.

Sure the growth looks a little better at AVGO. But is it sufficiently better to merit a 20% premium in valuation.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
AVGO.O $100,359M 16x 18% 2% 6%
INTC.O $186,315M 13x 9% 3% 13%
QCOM.O $79,516M 13x 11% 4% 11%
TXN.O $91,460M 22x 10% 2% 7%
STM $17,808M 24x 5% 1% 7%
QRVO.O $9,143M 13x 14% 0% 7%
MRVL.O $9,177M 16x 16% 1% 5%
SWKS.O $19,173M 16x 15% 1% 7%

Is this a sector that's underpriced versus the rest of tech? Hard to tell. Looking at the other mega-cap tech stocks, Cisco, Apple, Microsoft, Oracle, IBM, TSMC, well it's a stretch to find anyone or sector consistently over 20x.

3. Wall Street's still in love

The professionals on Wall Street have a $282.88 for Broadcom, that 15% above the current price. So it's no surprise their recommendation to clients is Buy.

It's been a relentless upgrade cycle, every quarter, with the company beating estimates the last 8 quarters straight.

4. It's a keeper

The deal to acquire Brocade still hasn't closed, but will do soon, possibly by the end of the month. It's going to grow the business by circa 10% in size, and it's got higher margins than the existing business lines.

But on the 3Q call there were a few things that migh trouble you. For example:

We operate in a relatively matured end markets that we assume likely to grow over the long-term close to GDP rates or in the low single-digits. Given our strong position for our product franchises, we do not assume market share changes to contribute to our long-term revenue growth.

On top of that they referred to 4Q as a transitional quarter and that they will change the way they give guidence. Change = given less information.

Now, the forecasts for 2018 don't look agressive, I'll admit. But the mood music is muted. So, I'm not buying the stocks today. I fear there's more chance of being disappointed in the next couple months. The downside isn't huge, fine. But I'm going to look elsewhere for now.


View the archive of Stock a Day posts at it's subreddit stockaday.

Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 11, 2017 at 09:12AM by shane_stockflare
via http://ift.tt/2xxz2JQ

How’s stockAday done this year? Looking back to early 2017

It's been a while since we did a Mea Culpa for r/stockaday so let's look at the posts from January and February this year.

In summary:

  • We wrote 18 post
  • We liked 8 stocks
  • Of the 8 we liked, 5 did well, 3 went nowhere or down
  • We ignored 10 stocks
  • Of the 10 we ignored, 2 did brilliantly, and 8 went nowhere or down

Here's the analysis, and links to posts.

Name Ticker Date Points % Upvoted We said? Then Now Up/Down Win / Miss / Fail?
Int. Paper $IP 5th Jan 20 91% Ignore 54.05 57.03 6% Probably right to have ignored it
Visa $V 9th Jan 154 92% Boring but Good 82.21 107.04 30% A good win
Aflac $AFL 10th Jan 32 82% Cheap, good cashflows 69.52 82.6 19% A nice win
Delta $DAL 11th Jan 16 78% Good for the long term 50.93 51.73 2% Fail, it's gone nowhere
Twitter $TWTR 13th Jan 5 65% We concluded 😦 17.38 17.66 2% ignore it, phew!
Skyworks $SWKS 16th Jan 15 73% Delightfully boring 78.33 104.75 34% A good win
Molson $TAP 17th Jan 16 80% I'm tempted 97.62 82.25 -16% Fail with a lotta red ink
ConEd $ED 19th Jan 20 74% Doesn't give me a spark 74.43 81.48 9% Missed a modest gain
Chevron $CVX 20th Jan 53 87% The future's stable, maybe bright! 115.58 117.7 2% Fail, been ugly most of the year
Sonic $SONC 30th Jan 11 76% Fairly priced, but a tough market 25.49 24.04 -6% Right to ignore
Univar $UNVR 3rd Feb 5 77% Can't see it 28.73 29.57 3% Right to ignore
Vail $MTN 4th Feb 13 81% We are too late 174.2 216.6 24% Fail, momentum's been good
Novo NVO 6th Feb 22 86% Ignore 34.08 49.21 44% Fail, the valuation's ramped
Hanesbrands HBI 7th Feb 16 69% Good value 19.32 23.54 22% A nice win
Adobe ADBE 9th Feb 40 86% Strong moat with pricing power 116.13 151.5 30% A good win
ServiceMaster SERV 10th Feb 5 67% Pass 37.84 47.24 25% Fail, business is performing well
WellsFargo $WFC 17th Feb 25 79% Ain't buying 58.12 55.17 -5% Right to ignore
HP Enterprise $HPE 21st Feb 35 81% Hardly attractive 14.33 14.8 3% Right to ignore

And for anyone into data analytics, I've included the Reddit Points and % upvoted figures. I was hoping to see if stocks that got a lot of feedback or were upvoted did better or worse…

… but sadly I don't see a pattern.


Author:

Submitted October 10, 2017 at 05:48AM by shane_stockflare
via http://ift.tt/2g8sXMb

A taste for Denny’s? $DENN

aside: please comment at the r/investing post, thanks.

I don't live near a Denny's so can't speak from experience, but the Google Reviews are mixed to say the least.

Is the stock any tastier?

Key Stats

Ticker DENN
Sector Restaurants & Bars
Latest price $13.05
Value $877M
Daily vol $4M
Date 09 October 2017
Financials SEC Filings
Website http://www.dennys.com

1. How hungry are you?

Denny's Corporation operates a franchised full-service restaurant chain. The Denny's brand consisted of 1,733 franchised, licensed and Company-operated restaurants around the world, including 1,610 restaurants in the United States and 123 international locations.

1,564 of its restaurants were franchised or licensed and 169 were Company-operated. Franchisees pay circa 4% of sales to Denny's as a fee, and about 300 of the 1500 franchisees let / sublet from Denny's. Also, they've been locating new restaurants at Pilot J and Kwik "travel centers". trivia: Buffett's BRKA just agreed to acquire Pilot J.

Recent financials

Given the mix of owned / franchised restaurants the top line can be a little lumpy, as each time they buy a franchisee the top line jumps. Why? They get 100% of the revenue (and costs) instead of just 4% of the revenue. For a "better" metric, we need to look at "same-stores sales" to see what the core business is doing. In 2016 it grew 1%. Not great, eh?

The bottom line is a more useful metric. 2016A took a hit with a pension settlement eating into profits, and on an adjusted basis the company did circa $0.55 in earnings.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $488m $463m $472m $491m $507m $530m $546m
EPS $0.23 $0.26 $0.37 $0.42 $0.25 $0.56 $0.62

So the outlook for 2017 is almost no growth in cash flow. And at the recent results they talked about generating approximately $55m of free cashflow this year.

Strangely, Denny's doesn't pay a dividend. They've been around for over 60 years, and profitable a long time. But no dividends. Instead they've ramped debt in recent years by doing share buybacks. And now the company has $263m of net debt equal to 2.7x operating profit. So it's approaching a level that makes me uncomfortable. Plus their debt agreement restrict them from going much higher, so exception cash returns look like they may be a thing of the past.

2. Prefer to eat elsewhere?

The stock market menu is as diverse as the food, and Denny's looks like one of the smaller offerings… though if it owned all it's restaurants it would be $2.8bn of sales, not $0.5bn. Similarly, the mix of owned / franchised restaurants inflates the margin, as their gross margin on owned is 18% and on franchises is 71%.

So, it's hard to say if one biz is better than the other on an operational basis.

Companies Latest Sales Operating Profit Return on Equity
Denny's Corporation $519M 18% N/A
BJ's Restaurants, Inc. $1,023M 12% 13%
Bob Evans Farms Inc $418M 16% 10%
Buffalo Wild Wings $2,023M 13% 16%
Cheesecake Factory Inc $2,296M 12% 23%
Cracker Barrel Old Country Store, Inc. $2,926M 14% 38%
DineEquity Inc $622M 36% 32%
Brinker International, Inc. $3,151M 14% N/A
Jack in the Box Inc. $1,614M 22% N/A
Red Robin Gourmet Burgers, Inc. $1,323M 10% 2%
Sonic Corporation $516M 30% N/A
Texas Roadhouse Inc $2,100M 12% 16%
Shake Shack Inc $316M 16% 10%

And if we turn to valuation, I'm struck by the bunching in the 20s for most of the stocks. Though there are some outliers, Shake Shake on the high side $DIN and $EAT on the low side.

Net net, 23x earnings and a 6% free cash flow yield for a business that's seeing no growth at the bottom line and no growth at the top line, seems generous.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
DENN.O $877M 23x N/A 0% 6%
BJRI.O $657M 19x 12% 0% 15%
BOBE.O $1,543M 36x 13% 5% 4%
BWLD.O $1,588M 23x 13% 0% 12%
CAKE.O $1,943M 16x 11% 2% 14%
CBRL.O $3,710M 17x 4% 4% 11%
DIN $811M 10x 4% 9% 11%
EAT $1,556M 10x 9% 5% 23%
JACK.O $3,002M 25x 14% 2% 9%
RRGB.O $856M 24x 10% 0% 12%
SONC.O $1,025M 20x 15% 2% 12%
TXRH.O $3,559M 26x 18% 2% 8%
SHAK.K $1,240M 66x 23% 0% 5%

Though here's a different way to look at it. They bought 10 of their high performing franchisee's in 2016 for $13m. So that is less an 1x sales. If we value their 170 owned restaurants at 1x sales, the 300 leased at 0.5x sales and the remaining 1300 at 0.25x sales then take away the debt, we'd get to $800m of value. That's not far from the current $877m value of the business, and that's before we talk about control premiums.

3. Wall Street re(starant)view

The Wall Street consensus view is Buy, from the 4 brokers that cover the stock, they put a target price of just $14 on the stock. That's just 6% up on today's price.

In fact the stocks up 14% in the last three months, even though the earnings forecasts are down slightly. So the valuation's up substantially, despite no significant driver, and the stock missing earnings forecasts in both 1st and 2nd quarter.

Sure they have a hilarious Twitter campaign underway. But there's been a brutal hurricane season, if you'd not noticed, and that may impact the overall restaurant market.

And if you are technically minded…that ramp is on low volumes, with the RSI & BB Bands indicating that it's over bought. Though no doubt there are other technicals that say it's about to ramp higher (e.g. 50 day MA v 200)!

4. A taste for Denny's

Whether I like the food and format, is irrelevant. There's little growth, no sign of margin improvement, and they've ramped the buybacks so far. On top of that, I'm hardly happy to see the CEO say on the recent 2Q earnings call:

As we noted during our last earnings call, we expect the challenges currently facing the restaurant industry to persist for the foreseeable future.

And from the 1st quarter earnings call:

Following a challenging wrap up to 2016, the first quarter of 2017 proved to be another volatile one for the restaurant industry. We believe this reflected a number of forces at play, including intense promotional activity within the industry, as commodity deflation persisted, the continued gap between grocery and restaurant pricing, the influence of a retail slowdown on dining out occasions, and federal income tax refund delays among others.

So, no, I don't have a taste for $DENN. You?


View the archive of Stock a Day posts at it's subreddit stockaday.

Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Author: /u/shane_stockflare, Shane Leonard, CFA. CEO @ Stockflare

Submitted October 09, 2017 at 08:47AM by shane_stockflare
via http://ift.tt/2zawa2P

$EXEL to the moon? Exelixis

please comment at the r/investing post, thanks.

Time to look for a moonshot, in biotech rather than tech!

Is Exelixis evolving into something big?

Key Stats

Ticker EXEL
Sector Bio Therapeutic Drugs
Latest price $25.26
Value $7,424M
Daily vol $103M
Date 06 October 2017
Financials SEC Filings
Website http://www.exelixis.com

1. So what's $EXEL invented?

Exelixis is a biopharmaceutical company that's focused on cancer. Products it's developing include:

  • CABOMETYX tablets are approved for previously treated advanced kidney cancer
  • COMETRIQ capsules are approved for progressive, metastatic medullary thyroid cancer
  • Cotellic, is a formulation of their product cobimetinib, a selective inhibitor of MEK is approved as part of a combination regimen to treat advanced melanoma.

So, kidney, thyroid and skin cancers drugs. But it's been a long journey. The business was founded in 1994. The USA's FDA approved their first product in late 2012, the second in early 2016. The EU and Japan are following and they've now got partners in place including the Japanese giant Takeda and Europe's Roche.

2. Are their alternatives?

Of course! When it comes to Cabometyx they have BMS, PfizerNovartis, Bayer, Onyx/Angem, Genentech/Roche and Eisai. In particular they see BMS' nivolumab as the biggest threat. Many of the same names appear at competitors to Cometriq, though Genzyme sounds the biggest concern. And Merck also appears in the list of competitors for Cotellic.

I'm struggling to see a pharmacological moat or blockbuster potential at $EXEL, so maybe this isn't a moonshot.

Though that doesn't mean they aren't a good business or investment! Which makes me wonder… how do I identify the next $KITE which Gilead just threw $12 billion at? A whole other topic, I know.

3. And cash has started to flow!

With the approvals coming through in the US, then Europe, and Japan looking probable, it's no wonder the sales are rocketing and the earnings are coming through. Though, don't expect buybacks or dividends anytime soon. This is tech… biotech.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $47m $31m $25m $37m $191m $397m $573m
EPS $-0.91 $-1.29 $-1.34 $-0.77 $-0.28 $+0.27 $+0.64

Similarly, it's no surprise to see $349M of net cash on the books. It's 5% of the market value of $EXEL and just prudent management in a business like this.

4. How's it looking versus the peers?

If we look at biotech's with a valuation between $5 and $10bn, it's got strong evidence of commercializing. It shouldn't be a surprise that there are losses and negative margins for the peers.

Companies Latest Sales Operating Profit Return on Equity
Exelixis, Inc. $320M 29% N/A
Seattle Genetics, Inc. $429M -44% -33%
TESARO Inc $40M -1217% -185%
bluebird bio Inc $27M -1026% -29%
EXACT Sciences Corporation $169M -77% -36%
Juno Therapeutics Inc $83M -345% -28%

And given they've got cashflow, it's the only one with a PE ratio. If we look to next year, it's trading on 39x earnings. Hardly a nutty price, with sales coming on line in the different geographies.

Peers Valuation Forecast PE Long-term Growth Dividend Yield Price to Sales
EXEL.O $7,424M 94x 46% 0% 23x
SGEN.O $8,330M -35x N/A 0% 18x
TSRO.O $6,600M -14x N/A 0% 153x
BLUE.O $5,899M -19x -65% 0% 178x
EXAS.O $5,715M -41x 23% 0% 31x
JUNO.O $5,014M -15x N/A 0% 52x

5. Wall Street sees potential

The consensus from the 10 brokers covering EXEL is Buy and they've an average target price of $30 a share. So 20% up from here.

The broker's have called this one right the last 2 years, continually pounding the table with a Buy or Strong Buy. Upgrading their target price, sales forecasts, and earnings outlook.

6. Playing the transition

EXEL is now a "commercial stage oncology biotech company" as the CEO said at a recent conference. And the transition has seen the stock raise from $4 a share to $24 a share.

From here, the playbook is pretty standard. Get the right partners in all the key geographies, ramp sales, watch the cashflows come it. Of course, there's no certainty in this world, less so in biotech. But if management follows the playbook, there is a good chance the stock could double in the next 5 years. Though it'll be a rollercoaster, with competitive news whacking the stock, and approvals/partnerships ramping it.

It's no moonshot. But if you are looking for a small-cap biotech with potential, it's hard to fault $EXEL.


View the archive of Stock a Day posts at it's subreddit stockaday.

Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 06, 2017 at 04:52AM by shane_stockflare
via http://ift.tt/2ggN6wF

How about a voyage of Discovery? $DISCK

aside: please comment at the r/investing post, thanks.

It's 10 weeks since Discovery announced it's buying Scripps. Bringing the Discover family and food networks together.

As the dust settles, does the new biz look tasty?

Key Stats

Ticker DISCA
Sector Television Broadcasting
Latest price $21.72
Date 05 October 2017
Financials Merger Document
Presentation Announcement
Website http://ift.tt/107ZkLk

1. How's the merged biz going to look?

Here are the highlights:

  • Combined company will have nearly 20% of ad-supported pay-TV viewership in the U.S.
  • Becomes home to five of the top female networks in ad-supported pay-TV with over 20% share of women watching primetime in the U.S.
  • 8,000 hours of original programming annually
  • Over 7 billion monthly streams creates leading short-form, mobile-first digital player

So it's going to be a broadcasting powerhouse in the US, with the Discovery Channel, TLC, Animal Planet, HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel. And Internationally with Eurosport, TVN in Poland and their JV with the UK's BBC called UK TV.

They've provided some pro-forma financials in the merger document and here's what the figures look like. Though it's a little fishy as 1+1 equals less than 2. Why's the margin get trashed? Weird!

Proforma DISCA 2016 SNI 2016 Combined DISCA 1H 17 SNI 1H 17 Combined
Revenues $6.5bn $3.4bn $9.9bn $3.4bn $1.8bn $5.1bn
Operating Profit $2.1bn $1.1bn $2.2bn $1.1bn $0.7bn $1.6bn
Margin 32% 32% 22% 32% 39% 31%
EPS $1.96 N/A $1.09 $1.01 N/A $1.09

Though broadly speaking, we can think of a $10bn of revenue business generating over $2 a share in earnings.

2. How'd they do apart?

If we look at the forecasts for the two businesses on their own, they've grown steadily, generating good earnings and have been forecast to continue doing so, on a stand alone basis.

Revenues 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Discovery $4.5bn $5.5bn $6.2bn $6.4bn $6.5bn $6.8bn $7.2bn
Scripps $2.3bn $2.5bn $2.6bn $2.7bn $2.9bn $3.5bn $3.7bn
EPS 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Discovery $1.24 $1.49 $1.66 $1.58 $1.96 $2.23 $2.50
Scripps $4.44 $3.40 $3.83 $4.66 $5.18 $5.51 $5.49

With that in mind, I can only assume the brokers on Wall Street will be equally happy when the two companies become one. On top of that the manage has said:

Significant cost synergies estimated at approximately $350 million (i.e. less than 10% of costs) Expected to be accretive to Adjusted Earnings per Share and Free Cash Flow in first year after close 50% of synergies achievable by end 2018, 100% by end of 2019

So perhaps there will be some merger costs that eat into earnings in 2018, but it sounds like it's back to business ASAP! And we could see margins jump from 31-32% to as high as 35%. Nice.

3. Should we worry about the debt?

Given there is a big cash payment to SNI shareholders, the debt levels are going to rocket 😦 Discovery is forecasting Total debt to profit of 4.8x on closing, and that it'll take 2 years to get to a more manageable 3.5x.

They don't pay dividends, and they won't do any buybacks in the near term, until the debt level is lower. So yes, it's higher than I'd like, but they've got a plan to get it to a reasonable level.

4. Still a minnow in media?

Okay, it's big talk saying they'll be the biggest "ad-supported" broadcaster in the US. In reality there are a lot of mega firms above them. Perhaps CBS and AMC are the closest in profile?

Companies Latest Sales Operating Profit Return on Equity
Discovery Communications Inc. $6,586M 63% 14%
Scripps Networks Interactive, Inc. $3,472M 41% 29%
Comcast Corporation $83,972M 33% 18%
Walt Disney Co $55,500M 30% 21%
Charter Communications Inc $40,833M 37% 2%
Time Warner Inc $30,123M 28% 17%
DISH Network Corp $14,794M 21% 24%
CBS Corporation $12,630M 23% 38%
Viacom, Inc. $13,170M 21% 31%
AMC Networks Inc $2,795M 63% 555%

When it comes to valuation, we can probably assume the figures of New Discovery aren't going to be far off the figures of old Discovery. So 10 times earnings feels about right.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
DISCA.O $7,979M 10x 12% 0% 11%
SNI.O $11,200M 16x 7% 1% 10%
CMCSA.O $181,889M 19x 9% 2% 12%
DIS $155,197M 17x 7% 2% 9%
CHTR.O $110,553M 94x 15% 0% 11%
TWX $80,502M 17x 10% 2% 8%
DISH.O $25,212M 24x -1% 0% 7%
CBS $24,104M 13x 16% 1% 8%
VIAB.O $11,732M 7x 6% 3% 18%
AMCX.O $3,821M 9x 11% 0% 32%

That's not far off AMC and a nice discount to CBS. Though clearly these folks are a poor also ran to the big boys.

5. Failing to excite Wall Street!

So despite good logic to the deal, nice growth both revenues and earnings, and an unaggressive valuation, the boys and girls on Wall Street just don't care.

They say Hold, even though they see 20% upside to their price target of $25.55. It really seems unfair. Okay, DISCA has disappointed on earnings multiple times the last 2 years, but Scripps has managed expectations well. But with the valuation anything but aggressive and a nice plan in place… is the lack of enthusiasm justified?

6. A tedious formula to the merger

Perhaps the problem is the complex structure of the deal? An SNI shareholder is supposed to get $63 in cash and $27 in stock. Though if the Discovery price falls a lot, the Scripps shareholders may be a little more cash / a little less shares. The details are in the merger document but clearly create some uncertainty.

And if you are worried the deal might not happen, the merger document has a curious discussion about other companies both telecoms and media approaching Scripps. 🙂 I wonder who there were… and now that they didn't get it, what they are sniffing around!

7. Are there enough catalysts?

I'm tempted to say yes!

  • Their content strategy looks good: Ad funded; Subscriptions; Short Form. Ensuring they generate value regardless of the screen size.
  • They still have room to grow internationally
  • Margins can grow
  • The media business is still a cash machine, in a good economy

Though we need to remember, all the benefits of the merger can't start until the deal is done! And that's not expected until early next year.

Okay, they don't make hits like Frozen or Game of Thrones but who cares, I don't want my stocks to entertain me. 😉

Sure, the stock may be stuck at the $22 level for the next 2 quarters, as the deal closing approached. But if I'm a fan, maybe it's time to buy a little Discovery. Or go crazy, and split the funds between the two stocks.

Though please remember there are 3 types of stock Discovery stock… with the most liquid one having no voting right. 😦 Gawd I hate that sort of tomfoolery.


View the archive of Stock a Day posts at it's subreddit stockaday.

Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 05, 2017 at 08:24AM by shane_stockflare
via http://ift.tt/2fTrbi5

Can AMD overcome the apathy? $AMD

aside: please comment at the r/investing post, thanks.

Today we are looking back at $AMD, a stock we totally missed in June 2016. Sorry.

When the stock was at $5 we asked: Is there hope for AMD, long-term? Clearly, yes, with the stock at $13 today.

Back then we concluded:

In the last 3 months the stock price has moved by 88%. That's despite revenues in the March quarter off 19% to $832M. Personally I am at a loss as to why the strong performance.

What happened next? At the June quarter AMD stopped going backwards, sales rose single digits. In Sept quarter it was double digit growth. And the stock rose steadily as high as $15 in Feb.

So what next?

First the basics

Ticker AMD
Sector Semiconductors
Latest price $13.42
Value $12,706M
Daily vol $969M
Date 04 October 2017
Financials SEC Filings
Website http://www.amd.com

How's the story changed the last 12 months?

From declining sales and losses to double digit growth and profits, there's hardly a nicer turn around!

$AMD a year ago today change
Price $6.50 $13.40 +115%
Target price $6.25 $14.20 +130%
Sales forecast $4.4bn $5.0bn +14%
EPS forecast $-0.03 $0.10 N/A
PE ratio -ve 130x n/a

And as with many tech stories, when the top line starts growing at double digit rates, the near term PE valuation looks ludicrous. We'll have to think long term!

What's so exciting about AMD?

Well, they used to be the also ran in the microprocessor industry. Always chasing Intel. And when it comes to graphics processing units, they were always chasing Nvidia. But substantial R&D over many many years has finally paid off… with a set of products that are starting to gain traction!

Though let's not get too excited, Intel and Nvidia are the behemoths in those two markets. And then there is ARM, now owned by Softbank.

Companies Latest Sales Operating Profit Return on Equity
Advanced Micro Devices, Inc. $4,619M -ve -ve
Intel Corporation $61,711M 40% 20%
NVIDIA Corporation $8,344M 34% 44%

So they are still the challenger even though the stock price has surged!

How are the numbers looking?

As I said above, it's a turnaround story.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $5.4bn $5.3bn $5.5bn $4.0bn $4.3bn $5.0bn $5.7bn
EPS $-1.60 $-0.11 $-0.53 $-0.84 $-0.60 $0.10 $0.31

The expectation is they can add $700m a year to the topline with some nice operational leverage.

And just in case you are wondering about their ability to generate cashflow, well, there is over $500m of net debt on the books, so we shouldn't expect any cashflow to come back to us as dividends in the near future.

Cheap, no.

Let's look at the figures for 2018, when AMD is expected to earn over 30 cents a share. At 40x earnings it's not a bargin, but if the moment is there, with market share gains and margin gains, it's not a shocking price.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
AMD.O $12,706M 40x N/A 0% N/A
Peers
INTC.O $185,047M 13x 9% 3% 13%
NVDA.O $107,622M 45x 12% 0% 2%
Other Semis
TSM $189,812M 18x 15% 3% 13%
AVGO.O $97,711M 15x 18% 2% 6%
TXN.O $89,044M 22x 10% 2% 8%
MU.O $44,975M 5x N/A 0% 0%

If we do our standard back-of-the-envelope, assuming earnings go up 20 cents a year, i.e. $0.10 ,$0.30, $0.50… for 30 years and discount it as 8% then the net present value is worth over $20 a share.

And if we look at sales multiples it's trading on 3x in line with Intel and a substantial discount to NVDA at 13x.

So, the valuation doesn't look expensive, given the turn-around. Though clearly it is not a bargain.

Watch out for dilution

Back in 2016 they issued a convertible. It's way in the money, with owners able to convert their debt at $8 a shares. The further the stock rises the bigger the next dilution to common stock holders.

And on top of this they've a strategic investor who dumped stock in August still has a substantial stake. So there is a headwind here, as these folks sell down.

Wall Street doesn't care

The professionals on Wall Street have a $14.23 for AMD, i.e. a paltry 6% upside. Despite 4 quarters of double digit growth, their recommendation to clients is Hold.

Though we have to remember that Wall Street has been in catch up mode for over 2 years, with a target price below the share price and a hold recommendation all the time.

Seems that they, like me, missed the inflection point.

Are we too late?

Fortune favors the brave. A year ago, you'd have been brave.

Today, not so. I can see the potential to double my money within 5 years. If the current trends are sustainable. Though it's no longer a moonshot.

If you are a believer in their market position vs Intel and Nvidia, then I can see why you'd be willing to buy. But if you think they are still a me-too chip maker, then best you stay away.

Like a year ago, I'm stuck on the fence. I just don't understand the tech well enough to make that call. Sorry.


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Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 04, 2017 at 09:29AM by shane_stockflare
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