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Seagate Expects A Double-Digit Surprise

The surprise

Seagate – the second largest Hard Disk Drive (HDD) manufacturer in the world – surprised the market by announcing that it’s expecting $2.65 billion in revenues for the fourth quarter of fiscal year ended June 2016. Shares jumped over 12% in the after-hours trading yesterday, a typical knee-jerk reaction from investors to a positive surprise from an underperformer.

The figure is nearly 14% higher than the company’s prior forecast of $2.3 billion. Seagate cited stronger demand for its HDD product portfolio behind the surge in revenues. With a long history of sliding revenues – $11.4 billion for 12 months ended April 2016 compared to $14.9 billion during the fiscal year 2012 – the news came as a breath of fresh air for investors.

Additionally, Seagate expects gross margin (non-GAAP) of 25.8% compared to earlier forecast of 23%, driven by increase of higher-margin enterprise HDD portfolio in the product mix and its cost reduction efforts. The company also laid down another restructuring plan to consolidate its global operations along with laying off 6,500 employees.

Prior to this, the company had announced a restructuring plan late-last-month, which involved laying off 1,600 employees to save nearly $100 million on an annual basis. Through the combined restructuring efforts, Seagate expects to achieve a gross margin of 27-32% by the end of 2016.

CEO-speak

CEO Steve Luczo expects robust demand for the “foreseeable future”. About the growth going forward, he commented, “the evolution of mobile and cloud data driven environments continues to define itself as requiring significant amounts of mass storage. HDD devices are where most data bits ultimately reside and our record HDD exabyte shipments in the June quarter, particularly due to enterprise demand, continue to support this thesis”.

Well, while it can’t be denied that it was an exceptional quarter for the company, but thinking far ahead for a company with its market capitalization cut in half in less than a year, apart from four years of sliding sales, is a highly optimistic prospect. 

The dividend yield of nearly 10% appears attractive, more so after the revenue surprise, but with a continued fall in free cash flows and dividends at 225% of earnings, it doesn’t seem to last long even if Seagate sustains at the current level of revenues. However, the continued efforts to improve profit margins is a positive step towards increasing the sustainability of dividends.

Seagate, along with other HDD manufacturers, faced two primary headwinds over the last few years. First is the reduction in demand of HDD from retail customers as cloud-storage became popular and second is the continued cost reduction achieved in manufacturing of ‘Solid State Drives’ (SSD) or ‘NAND based flash storage’, a faster but still expensive replacement of HDD.

As per storageresearch.com, Seagate was the third largest player in the SSD market; however, there is no certainty that growth in SSD, which is also becoming a highly competitive industry, and enterprise-demand for HDD will be able to make up for the systemic decline in the retail HDD market.

[simplywallst]

Burberry: Shares Surge On Decision to Replace CEO

Boardroom shake-up

Following the strategic review initiated in January this year, Burberry seems committed to go to the next level with some bold decisions amid struggling sales and sliding share prices. 

The company announced that its chief executive officer, Christopher Bailey, will be replaced by French luxury-brand Celine’s Marco Gobbetti – expected to come on board in 2017. Company shares closed 4.32% higher for the day as investors appreciated the decision.

Christopher Bailey will continue to be chief creative officer and will also be designated as president following the arrival of the new CEO. While the company wants a new leadership, it plans to hold on to Mr Bailey for his prowess as a creative head. 

However, not the same can be said in the case of the company’s chief financial officer, Carol Fairweather, who will be making way for Julie Brown—currently CFO at London-headquartered medical-equipment company Smith & Nephew.

Reasons behind the leadership-change

Company revenues contracted, by 0.3%, during the latest fiscal year (FY’16) ended March 2016, first time since a 1.4% drop in FY’10. While earnings dropped 7.9%, prior to that, during FY’15, the earnings growth stood at a meager 4.2% despite revenues increasing by 8.3%. 

Currently, shares trade nearly 20% lower since the company reported full-year earnings in May last year – first annual results after Mr. Bailey became the CEO in May 2014.

Broadly, sales-growth was anemic in most regions except the UK. While factors affecting sales in China – VIP-crackdowns – and Hong Kong – slump in Chinese tourists – have affected most luxury brands, Mr Bailey’s inability to improve sales in European cities receiving a large number of Chinese tourists has been highly criticized by investors and analysts alike. 

His latest efforts related to cost reduction and the company’s decision of up to £150 million in share buybacks weren’t enough to regain investors’ confidence as shares continued falling in the wake of a weak outlook provided by the company.

Burberry is set to announce a trading update tomorrow, followed by its Annual General Meeting on Thursday. While the company has decided to keep this year’s dividend in line with the prior year, its sales along with the impact of the cost-cutting initiative on profit margins will be the key numbers to watch for.

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Sirtex Medical: Shares Rally On Another Year Of Strong Growth

As per the latest media release from Sirtex Medical, sales of SIR-Spheres microspheres – small particle technology to treat inoperable liver tumours and also the only revenue generator for the company – rose 16.4% for the fiscal year ended June 2016, compared to the previous fiscal year.

Sirtex’s revenues are geographically diversified, with Asia-Pacific (APAC) and the Americas contributing almost equally while a considerably small but fast-growing contribution from Europe, Middle East and Africa (EMEA) regions.

CEO Mr. Gilman Wong said “the strong double digit growth in global dose sales reflects the continued momentum we have achieved in this large, underpenetrated market opportunity for SIR-Spheres microspheres”.

While sustaining double digit revenue growth over the last five years is remarkable, the aspect of the results which might concern investors is the growth in APAC and EMEA segments – APAC grew by a meager 8.9%, EMEA by an acceptable, although low considering its size, 11.2% and the Americas by an impressive 19% on an annual basis.

However, the results are in line with the guidance – 15-17% revenue growth – provided by the company earlier this year. In addition to that, strong growth in the Americas while AUD remains weak against the USD, resulted in quite a positive response from the market – shares closed 6.49% higher for the day.  

Sirtex has been facing troubles in the APAC region – the departure of its Asia Pacific Head, Dr. Burwood Chew, and issues with a South Korean distributor caused a temporary halt in sales there. 

Although, the company appears confident of overcoming such setbacks which is evidenced by its strong results in the Americas despite losing Mr. Mike Mangano – Head of the Americas region – in March this year.

Additionally, it is yet to enter the second and third largest economies of the world – China and Japan – which might just bring its APAC segment up to speed.  

While average annual earnings growth over the last five years stood at 20.4%, going forward, three-year earnings growth, based on analysts’ consensus estimate, is pegged at an even stronger 80.4%. 

It doesn’t come as a surprise that the insiders had been quite bullish while the stock was down-trending before the rebound, which kicked-off last week – net insider buying by corporate insiders stood at almost 3.6 million shares over the last three months 

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Mega M&A Deals To Watch Out For

Mondelez and Hershey – That’s way too low

That’s what Hershey’s board of directors meant when they unanimously rejected Mondelez’s $23 billion or $107 per share takeover bid. The merger between the second largest confectionery company in the world – Oreo maker Mondelez – and the fifth largest – Reeses Peanut Butter maker Hershey – will form the largest confectionery company in the world.

While the merger makes sense as Mondelez’s global footprint is complementary to the Hershey’s stronghold in the US. The most evident of those synergies include Mondelez gaining control of Cadbury brand in the US, while it already controls the international market and is paid a royalty by Hershey for the license in the US.

The stock is trading above the takeover offer of $107 per share – the market is clearly expecting a better offer from Mondelez. Or even a competing bid from Nestle, which controls the global market of Kit Kat, a household name, and receives royalties from the US-license of the same, owned by Hershey. So far, the possibility of a better offer is not out of the window as industry insiders indicate the deal is still alive.

The deal-breakers: the biggest hurdle despite a sweetened offer would be getting a nod from the Hershey Trust – which controls over 80% voting rights and is known to be averse of merger deals on the grounds of protecting jobs in the local community; thus, keeping the company independent.

However, this time, unlike several attempts in the past from the likes of Wrigley, Mondelez has already provided an assurance of no job cuts and proposed the name of the merged entity to be Hershey which increases the likelihood of a deal.

Aetna and Humana – Antitrust hurdles

If it materialized, Aetna’s $37 billion takeover bid for Humana would be the largest deal in the history of the US insurance industry. However, getting approvals from state regulators is not the run of the mill paperwork of a usual merger – Aetna has got approvals from 17 states so far, out of the 20 it needs.

So much so that in an another mega merger between healthcare insurance providers, Anthem, which proposed a $48 billion bid to acquire rival Cigna, has found the regulatory headaches burdensome to an extent that the company is ready to back out.

On the other hand, Aetna appears committed, the company recently announced it would be selling billions of assets to get approvals from the anti-trust regulators. The market seems to have severely underestimated the company’s efforts – shares of Humana closed at $179.98, well below the takeover price of approximately $230.

KKR and Harley-Davidson – Just rumors so far

In 1903, when Bill Harley and Arthur Walter Davidson came up with a single cylinder motorcycle using the latest innovation of that time – the gasoline engine, they would have hardly thought about what would, or could, become of it – the two-wheeled gas guzzlers remain to be a status symbol even in 2016.

Last week, on buyout rumors based on a report from financial news provider TheFly.com, company shares jumped nearly 20%. In the absence of any official announcement from either Harley-Davidson or the supposed acquirer – private equity and real estate investment firm KKR – the shares crashed over 12% in two trading sessions following the rumors hit the wire.

Harley-Davidson is facing headwind in the form of growing competition, which is exacerbated due to a stronger dollar. As a result, company shares trade at an attractive valuation – trailing PE ratio of 12.7 and a nearly 30% discount from its free-cash-flow-value based on analysts’ consensus cash flow estimates, making it a potential buyout target.

[simplywallst]

3 Bargain Stocks You Can Consider Buying

JD Sports Fashion [LSE:JD.]

While the FTSE-100 index wiped post Brexit losses completely, even gained further ground during the rebound, JD remains beaten down, trading near lows made in the aftermath of the UK’s vote to leave the EU. 

While its price-to-earnings ratio of 21.4 is slightly higher than the specialty retail industry’s 16.9, JD is one of the fastest growing company and a leader in the sports fashion category. Analysts have an optimistic 68% three-year earnings growth estimate; however, it seems quite reasonable when we look at the earnings growth of 42.6% last year. 

The company delivered an ROE of 28.3%, while the figure stood at 20.3% for the specialty retail industry in the UK. Thus, with a free-cash-flow-value which is nearly 20% higher than current share prices, the company appears to be more of a bargain instead a value trap.

S&U [LSE:SUS]

S&U is another company which has not been able to track the FTSE-100 recovery post Brexit, which, to a great extent, implies that the discount hunters primarily focus on blue-chips. While small-caps may remain unloved for a long time, it presents an opportunity to find steady performers such as S&U at bargain prices.

The £271 million consumer and motor finance company consistently raised dividend over the last five years from £0.34 to £0.76. Its last ten years of dividend history have been pretty stable. The current dividend payout ratio stands at a meager 12% and is expected to be 46% in three years, offering significant dividend growth potential.

BTG [LSE:BTG]

The London-headquartered pharmaceutical company with a £2.6 billion market capitalization is among the stocks which pushed higher since the referendum – most of the defensive stocks experience buying during heightened uncertainty in markets. 

However, BTG is different from a typical big-pharma offering protection in a volatile market, it offers substantial growth potential. Despite recent gains, the company shares trade well below the analysts’ median price target of £8.00, and slightly above the lowest estimate of £6.54. 

In May this year, BTG reported full year revenues at £447.5 million, 22% higher than last year, while pre-tax income nearly doubled to £57.5 million. Going forward, the company expects sustained growth through “geographic expansion” and “indication expansion” of existing drugs.

[simplywallst]

3 Stocks Rebounding After Insiders Bought With Both Hands

MACA [ASX:MLD]

Shares of the Welshpool-based mining services provider with operations in Australia and Brazil have been up-trending throughout 2016, after two years of sustained weakness. Company insiders seem to have got it right so far – insiders bought nearly 19.3 million shares in the company over the last three months while only 9.1 million shares were sold by them.

MACA generates most of its revenues from clients in the mining and resources industry. The historic drop in commodity prices, with supply far exceeding the demand, reflected in the company revenues falling to $490.2 million for 12 months through December 2015 compared to $601.4 million for the fiscal year 2015. Going forward, revenues are expected to stabilize slightly above the $450-million-mark.

With no debt on its balance sheet, the 12% dividend yield appears to be a good reason for buying shares. At the current number of outstanding shares, the dividend payout amounted to $33.7 million for 12 months to December 2015, which far exceeds projected income of nearly $25 million in fiscal years 2017 and 2018; however, the company can maintain the dividend payout for a while with $109 million cash in hand.

Primary Health Care [ASX:PRY]

Apart from a wide network of medical and pathology centres, the company also provides healthcare technology solutions to health professionals. PRY has been a consistent performer in terms of revenue growth and steady profit margins. One of the top performers this year, PRY had its market capitalization cut to less than half between May 2015 and February 2016.

In that epic fall, much to blame was the substantially high value of goodwill on its balance sheet which investors did not find reasonable amid profit warnings, a reduction in tax rebate and risks of stagnant growth in revenues related to Medicare rebates.

However, when a steady performer is beaten down to that extent, it’s not surprising that the insiders, all corporate, were buying with both hands over the last six months – net buying of nearly 180 million shares, which is nearly 34% of the total outstanding shares. Insiders have done really well so far – the stock is up nearly 80% from its 52-week low, made in February this year.

Super Retail Group [ASX:SUL]

Formerly known as Super Cheap Auto Group Limited, the company retails auto, leisure and sports products in Australia and New Zealand. Recently, several corporate insiders, including Goldman Sachs and UBS Asset management, made substantial purchases, which ended up in net buying of nearly 128 million shares. To put it in perspective, as per the latest data, the count for total outstanding shares stood at 197.2 million.

SUL has delivered a consistent revenue growth over the last five years while maintaining a healthy gross profit margin between 43% and 45%. Despite weakness in household goods sales as first-home buyers’ demand fades, the fact that retail spending was 3.7% higher year-over-year – as per the latest Mastercard SpendingPulse Report – for the month of May is a positive indication for the company’s leisure and sports segments.

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Oracle Fined $3 Billion In A Lawsuit Filed By HP

Source: simplywall.st

The case

This was the second lawsuit filed by HPE – or HP, before it separated the consumer (HPQ) and enterprise (HPE) businesses – against Oracle related to the contract between the two involving software support for server systems using Itanium chip – originated from a partnership between HPE and Intel. 

In this ongoing saga, HPE’s earlier lawsuit against Oracle in 2012 involved calling the withdrawal a breach of contract. The court ruled in favor of HP, directing Oracle to support HP’s server systems using Itanium technology as per the mandate in the initial contract.

Now, HPE claimed it suffered severe damages from Oracle’s decision to back out from the contract as the news was not well taken by its customers using the technology. 

So, while Oracle continued to provide support as per the verdict to a now discontinued technology by the makers, HPE came up with a new lawsuit claiming damages of nearly $3 billion in the form of lost business due to Oracle’s actions back then, and it won again.

Down, but not out

On the other side, Oracle pledged to appeal against the ruling on the grounds that HPE knew about the limited viability of Itanium technology going forward. In fact, the company’s general counsel went ahead by saying that “HP was actively hiding that fact from its customers”. 

Oracle also cited Intel’s backing out of the partnership with HPE related to the support for the technology behind its earlier decision in 2011 to stop providing support; however, Intel has denied such claims.

And the impact, if any

Oracle investors shrugged off the news as the stock gained most of the lost ground during market hours, closing slightly higher than the previous close from its gap-down opening. 

Investors reaction suggests that either they believe the final decision will be in favor of Oracle or that the loss doesn’t change the future outlook of the $169 billion company. 

As per the latest data from S&P Capital IQ, Oracle has a $43.85 billion debt on its balance sheet while its liquid assets – cash and investments – amount to $56.12 billion. 

The company has delivered an average annual earnings growth of 9.6% over the past five years while its expected three-year earnings growth is pegged at 35.3%, based on analysts’ consensus estimate.

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Standard Life Stops Investors From Pulling Out Of Its UK Property Fund

Source: simplywall.st

Delay the pain

In a move which is not supposed to bring any comfort to panicking retail investors of property funds in the UK, Standard Life Investments – fund management business of the company – restricted further outflows from its UK Property Fund – one of the leading open-ended property fund.

While such funds hold a certain amount of cash and liquid investments to meet withdrawal demands from investors, it boils down to selling assets when all of a sudden a lot of people start demanding their money back.

The fund owns commercial properties – primarily office blocks and retail complexes – which are difficult to liquidate quickly at reasonable prices due to tough market conditions on account of heightened uncertainty related to the value of commercial properties following the UK’s decision to exit the EU.

So, while on the surface the decision may appear outrageous, it’s not a bad idea to avoid fire-sale of properties in order to return cash which would definitely be painful for all investors. However, the fund will have to resume trading in the near future, it decided to review the conditions every 28 days.

With all the top-three property funds by size, including Standard Life Investments’ UK property Fund, marking down the value of assets by nearly 5% last week, and before the dust settles, a fairly long divorce process from the EU ahead provides very few reasons to stop investors from cashing out as fast as they can, if they can.

More signs of weakness

Standard Life’s decision may not surprise most investment experts in the property market as substantial withdrawals were requested during the months of May and June—prior to the referendum—as risk-averse investors decided to avoid the Brexit-uncertainty. 

Finally, the Markit/CIPS construction purchasing managers’ index, which came in at a historic low of 46.0 in June, compared to 51.1 during May, appears to only bring more pain for the investors stuck in the property fund.  

While it’s one of the lowest figures in the last seven years, it includes a limited post-referendum data, which only implies that a very few new projects were initiated in the run up to the referendum. 

It may turn out to just be a precautionary measure from builders, waiting for the markets to stabilize. However, a clearer picture on anticipation of demand by the builders would emerge when the purchasing managers’ index comes out next month.

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Treasury Cuts Down Its Struggling Mass-Market Wines Portfolio in the US

Source: simplywall.st

Treasury Wine Estates, the Australia-based winemaker and one of the largest in the world, distributes wines across the globe. The lion’s share of revenues is generated in Australia and New Zealand, where it also distributes beer and cider, followed by a slightly smaller share from the Americas and considerably small contributions, although growing, from Asia, Europe, Middle East and Africa.

Rationale and impact

Prior to acquiring Diageo’s US and UK wine operations through a US$552 million deal last year in a drive to scale up operations and diversify its product line of high-end wines, Treasury had been struggling with its portfolio of mass-market wines as reflected in its falling revenues in the Americas – $726 million during FY’14 from $941 million in FY’10.

The acquisition has allowed it to get rid of the underperforming mass-market brands, which it has been trying to “manage-down” over the last two years. As a result, Treasury sold twelve brands from its non-core commercial brand portfolio, or mass-market wines, without losing much of the market share in terms of dollar-value in a key market such as the US.

Treasury indicated that the sales-growth in its Luxury and Masstige—wines with a price-point between Luxury and mass-market brands—portfolios in addition to savings from the company’s supply chain optimization initiative would be enough to neutralize the impact of the sale.

The company assured no effect on earnings while reaffirming FY’16 earnings – $330–$340 million – to be in line with market expectations – $325 million. Treasury also toned down the concerns related to the impact of Brexit, citing its effective hedging strategy and also the fact that the region’s contribution in overall sales is considerably small to have any significant impact.

Recent performance and outlook

Source: simplywall.st

EBIT grew by nearly 12% to $56.2 million in the Americas for the first-half of FY’16, ended December 2015. However, the star performer, among the geographic segments, was Asia – EBIT grew to $46.5 million compared to $19.1 million in the previous corresponding period, while the company-EBIT jumped by 37% to $146.7 million.

Based on consensus analysts’ estimates, Treasury is expected to deliver a 28% jump in revenues to $2.5 billion in FY’16, followed by an increase of 19.8% in FY’17. While the $475 million equity funding for the Diageo-deal did bring down the ROE for the past 12 months to an anemic 2.9%, the figure is expected to be over 8.5% in three years.

[simplywallst]

Most Bought And Sold Stocks By Top Hedge Funds

Facebook – Most Bought By New Buyers

Well, any investor would want to own equity in a company which is expected to deliver an earnings growth of 70% next year and north of 200% in three years; however, when the biggest hedge funds start investing aggressively, it’s all the more the reason to believe that Facebook is doing most things right.

During the first quarter of 2016, among the top 10 pure play hedge funds, active stock pickers with less than 100 positions, holdings in Facebook rose by $2.30 billion, making it the most bought stock.

In the light of the fact that nearly $2.13 billion came from new buyers, it appears that most of this buying occurred after an 18% earnings surprise reported by the company for the last quarter of 2015 – EPS stood at 59 cents per share versus 50 cents expected by the market.

To its credit, FB came with a bigger surprise in the following quarter, reporting an EPS of 57 cents per share, compared to market consensus of 44 cents, a nearly 30% positive surprise. Watch out for the next quarterly earnings report, expected in the first week of August.

Baker Hughes Inc. – Most Bought By Existing Holders

BHI stood as the most bought stock in terms of increases in existing positions among the top 10 hedge funds, holdings in the company increased by $566 million during the first quarter. However, last twelve months were not easy for one of the leading oilfield services provider in the wake of the energy industry experiencing a historic weakness.

On the surface, Baker Hughes’s pristine balance sheet with a level of debt compared to equity at a meager 26%, compared to Haliburton’s 118% and Schlumberger’s 60%, appeared to be a good enough reason to bet on the company as the oil market was expected to stage a rebound.

However, bulls had more reasons to go all in. The company had a troubled merger deal with Haliburton – several anti-trust issues, regulatory delays, and board approvals. Although, if it went through, investors were set to gain substantially. 

In case the deal did not materialize, Baker Hughes was set to get $3.5 billion in termination fee from Haliburton, adding almost $6 per share to the existing value of its shares after adjusting for tax.

Now, when the merger bid has been rejected by the Department of Justice after nearly two years of regulatory conundrum, hedge funds reaction to the decision would be interesting to watch out for in their next quarterly filings.

Apple – Most Sold Out

The net reduction in the top hedge-funds’ holdings stood at $5.38 billion, out of which $4.89 billion was the amount attributed to the sold out positions, while the rest came from a reduction in existing positions.

Not just retail investors are divided about the fate of the largest company in the world by market capitalization. While billionaire-investor Carl Icahn liquidated his position, citing issues in China, Warren Buffet initiated a $1.1 billion position at $109 per share in the stock, finding it substantially undervalued. 

Apple shares are down more than 10% since then, currently its trailing PE stands at 10.6 compared to the industry’s average at 18.2. Apple naysayers are citing weakness in iPhone sales and the reducing craze for Apple’s upcoming devices in addition to growing competition as the reasons for the weakness in share prices to continue

On the other side, bulls find Apple’s huge ecosystem with multiple fronts to generate recurring revenues, and an unmatchable cash pile to continue huge buybacks, to be good enough reasons for the company to be a winner in the long-term.

With this kind of selling, it’s pretty clear that the top hedge funds don’t have a positive outlook on Apple in the near future, we will be watching out for their next move on Apple for either a change in perception or further liquidation.

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Defensive Dividend-Aristocrats To Stabilize Your Portfolio

British American Tobacco [LSE:BATS]

While revenues contracted nearly 14% over the last two years on account of struggling low margin businesses in the Middle East, the company’s realigned product line is expected to deliver 7% sales-growth during 2016 followed by 4.5% in 2017. Any revenue growth will directly reflect in higher dividends as despite a stagnant gross margin, the company has tremendously improved the net profit margin to 32.7% compared to just 20.1% five years ago.  

The multinational tobacco company has been among investors’ favourite stocks following the decision of the EU-referendum. There is a lot to like apart from its defensive nature – BATS pays 3.57% dividends with a 65% payout ratio apart from a history of consistently raising the dividends over the last 10 years from £0.47 to £1.54 per share.

Diageo [LSE:DGE]

What makes Diageo a dividend aristocrat is a history of consistently growing dividends – from £0.30 to £0.56 over the last 10 years. Apart from a well cushioned payout ratio of just 57%, the company’s ironclad balance sheet further improves the dividend growth potential in future.

The defensive nature of companies retailing alcoholic beverages, consumed during both joy and sorrow, and otherwise, offers stability in turbulent market conditions, more so when it’s the largest producer of spirits in the world.

BT Group [LSE:BT.A]

Looking beyond tobacco and beverage, other industries which offer a natural hedge against market volatility include utilities – due to several large players controlling the market and the inelastic nature of demand – and telecommunications – again the barriers to entry due to capital-intensive nature of the business result in few players controlling the entire market.

BT Group, the UK’s leading telecommunications service provider, pays a 3.4% dividend at current prices. While it doesn’t fall under the dividend aristocrats-category due to a steep drop in dividend payout during 2009, the company stands apart from the other two on account of its considerably low payout-ratio at just 42%, an important catalyst for dividend growth in future.

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Stocks To Watch Out For As Brexit-Volatility Settles

Caltex Australia [ASX:CTX]

Weakness in crude continues to weigh on Caltex’s revenues; which also reflected in the recently issued profit outlook of $245-$260 million for the first half, tracking well below the analysts’ expectations of $558.3 million in profits for the full-year.  

However, the profit figure is in line with the previous year’s performance, primarily driven by growth in sales of premium fuels while the average margin per barrel fell by nearly 40%.

Going forward, analysts expect the company to maintain current profit levels while revenue growth is expected to kick-in post-2018.

The investors’ reaction was positive to the announcement as shares closed 3% higher yesterday.

Looking at the valuation, the company appears slightly expensive based on free-cash-value-flow, while its PE and PB ratios lie well below the Energy-industry’s average of 20.5 and 3.1, respectively.

Vocus Communications [ASX:VOC]

Vocus’s acceptable level of debt compared to equity, which it has reduced to 26% from 92% over the last five years, allows the company to make strategic purchases without putting much pressure on its balance sheet.

The fast-growing integrated communications company recently announced the purchase of Nextgen Networks – one of Australia’s leading network connectivity and data centre facilities supplier.

Vocus will be shelling out nearly $800 million apart from a $54 million payment as deferred consideration—part of payment made by the acquirer from the sales generated after the acquisition. 

The deal also includes Nextgen’s two subsea development projects – North West Cable System and Australia Singapore Cable project.

Analysts expect Vocus to generate $892.5 million in revenues for the financial year ending June 2016 followed by $1.9 billion next year.

To put it in perspective, the company delivered $263.3 million in sales during calendar year 2015.

Orion Health Group [ASX:OHE]

While Orion is yet to register a profitable year, analysts expect the company to be profitable by 2019 with an impressive expected ROE of 33%. 

Orion has an experienced management team with average tenure of 6.5 years and a debt-free balance sheet, which may remain so for a while as the company is well funded with $59 million in cash and investments.

The demand for healthcare systems – still a fledgling industry, but expected to gross over $50 billion in two years – is growing and Orion has the first mover advantage.  

In addition to offering software solutions to the healthcare industry at enterprise-level, the Auckland-based company also offers IT solutions for real-time insights and assistance to professionals.

Orion’s information solutions are gaining traction in Australia and New Zealand, and also internationally as evidenced by continued strong revenue growth. 

The latest addition to the list of its foreign clients was the UAE-based Oasis Hospital. 

[simplywallst]

Legg Mason: The Brexit Impact

Legg mason [NYSE:LM], the Baltimore-based asset management company, is one of the several organizations in the US which are substantially affected by the turmoil caused by the UK’s decision to exit the European Union (EU). Shares are down nearly 15% since Friday, the company was also included in the list of 22-companies, issued by JP Morgan, set to gain the most if the UK stayed in the EU.

Double whammy

The markets across the globe have turned red due to the increased uncertainty on all fronts following the result of the UK’s historic EU-referendum. Companies such as LM, which generate the lion’s share of revenues from managing investment in equity, and other liquid assets, turn out be one of the worst affected due to an economic event like ‘Brexit’. 

Learn more about Legg Mason

During such an economic conundrum, the flight of capital from risky assets and also fixed income products such as sovereign and corporate bonds – due to the unclarity on the economic repercussions in the long-term – result in substantial losses for asset managers on two fronts. 

First, underperforming assets result in lower commission on profits, and second, like a negative feedback loop, client withdraw funds due to rise in uncertainty which cuts the management fees.

In the line of fire

Apart from the spill over effect, LM has been caught in the line of fire due to its substantial asset holdings in the UK – as of March 2016, the company held almost 18% of its total assets in the UK. It remains to be seen how the UK would disentangle itself from the EU, but what also have investors worried are the possibilities of such an event in other member-countries, mainly France and Spain.

Legg mason has been a strong dividend player over the last five years, but the road ahead seems to have too many obstacles for the asset management firm with $670 billion assets under management, serving institutional and individual clients across the globe.

Take a look at LM’s 10 years Dividend-history

Potential investors considering companies such as LM—with significant exposure to the UK—need not jump the gun by investing right now. A good idea would be to wait until the terms of the UK’s EU-exit are clear. 

[simplywallst]

A Defensive Play In Turbulent Markets

Headquartered in London, AstraZeneca [LSE:AZN] is a biopharmaceutical company, with a market capitalization of over £50 billion, which markets a range of prescription medicines. Apart from a long-list of existing products, the company has an even longer pipeline of 145 projects, including collaborations with the leading ‘pharma and biotech’ companies such as Celgene Corporation and Eli Lilly.

Recession proof

The pharmaceutical industry provides a natural hedge against high market volatility caused by major political or economic events. While changing macroeconomic conditions may not impact the likes of AZN, their performance depends to a great extent on the ability to come up with new drugs.

While AZN is involved in some pathbreaking projects such as human genomes sequencing with Human Longevity Institute, it’s also partnered with promising new companies like Acerta Pharma, providing it a window to enter new disease areas such as leukemia.  

Lack of new blockbuster drugs, while AZN lost exclusivity on several existing ones, resulted in nearly 25% contraction in revenues over the last five years. 

Click to view AZN’s Revenue and Profit trends 

With a range of new products in its pipeline, the company is expected to regain growth trajectory post-2017; however, drugs generating nearly two-fifths of company revenues are at risk of patent expiry by 2018.

Growth and value

The analysts expect a 10% drop in earnings this year, while three-year earnings growth is pegged at an impressive 24.1%. The company pays 5% dividends at current prices, which have either increased or remained stable over the last 10 years.

Learn more about AZN’s Dividend payout and performance

However, there might be a dividend cut in the near future on account of dropping EPS and rising level of debt compared to equity, while the company continues to burn cash on R&D. Although, long-term investors should see it as no more than a bad-phase of a well-established company.

The valuation based on its free-cash-flow-value or relative to the ‘Pharma and Biotech’ industry appears acceptable. The average earnings contraction of over 20% over the last five years has investors worried about AZN’s ability to grow.

Take a look at AZN’s Valuation

From a long-term investor’s perspective, going forward, factors such as the aging population globally, a range of upcoming products and a well-established global distribution channel put up a favourable scenario for AZN.

Taking a cue from Pfizer’s $120 billion offer—over 60% higher than the current market capitalization—for the company last year, there seems to be a limited downside as shares are already down nearly 15% since AZN declined the offer, calling the payoff for its pipeline products unacceptable.

[simplywallst]

Being Recession-Proof Isn’t Enough

Founded in 1910, Australian Pharmaceutical Industries [ASX:API] is one of the leading wholesale pharmaceutical distributors in Australia. The company broadly operates through two segments – Pharmacy-distribution and Retailing—owns popular brands such as Priceline Pharmacy, Soul Pattinson Chemist and Pharmacist Advice.

Growth concerns

The Pharmacy-distribution division, which contributes over 65% in company revenues, has been the area of concern for shareholders – the division’s annual revenue contracted by nearly 16% since 2010, also pulling down API’s growth into negative territory during 2011-2013.

Staging a recovery, company revenues grew by 5.7% during FY’14 and 3.3% in FY’15—ended August 2015. However, since 2014, a major chunk of API’s growth came from the Retailing segment despite its considerably small size – contributes nearly 27% in company revenues.

Take a look at API’s Revenue and Profit trends

As per the latest financial results, API continued the growth trend with year-over-year revenue rising by 4.4% for the half-year ended February 2016. The Retailing segment grew by 7.1%, while Pharmacy-distribution disappointed again with a meager 1.6% increase in revenues.

The good and the bad

In addition to growing competition, the wholesale pharmacy distribution businesses in Australia have struggled on account of reforms related to Pharmaceutical Benefits Scheme (PBS) – a lower subsidy from the government on PBS medicines apart from price regulations to reduce the cost of several generic drugs, which come under the PBS.

Additional pressure on wholesalers’ margins was exerted by retail-pharmacies, as they gained buying power while growing in size. With that in mind, API’s focus on the growth of the Retailing division makes it appealing when compared to other wholesalers with a little or no presence in retailing. 

During FY’15, the gross margin for API’s Retailing business stood north of 23% compared to just 8.5% of the Pharmacy-distribution segment, as a result, the dollar amount in gross profits generated by the former was higher. Going forward, reducing impact of its struggling wholesale business on profits is a good sign for shareholders.

Value

The company appears undervalued when compared to its free-cash-flow-value or the PE and PB ratios in the Healthcare industry. Investing in undervalued companies, particularly in defensive industries, is a good idea during an unstable macroeconomic environment. 

Learn more about API’s Valuation

However, there are other factors than economic growth, which can impact a company or industry substantially. With uncertainty related to future cash flows of API’s wholesale business due to the likelihood of government further bringing down the PBS budget, potential investors are set to get more discount.

[simplywallst]

New Investment Ideas: Top Dividend Payers

Dividends provide investors a compounding return when reinvested. A simple back of the hand calculation allows you to put the compounding growth in perspective.

It’s Rule of 70 – divide the percentage return or, in this case, the dividend yield by 70 to roughly calculate the number of years it would take for your initial investment to double.

What is also important, is the ‘Reinvestment Yield’ which can vary based on the change in share prices, resulting in reinvestment risk – inability to reinvest at the same yield.

Companies offer Dividend Reinvestment Plans (DRIP) through which your dividends automatically get reinvested.

But if the shares rise consistently, while you get the capital appreciation, the dividends are reinvested at a lower yield if the dividend growth isn’t same as share price appreciation.

In that case, you can always achieve a higher reinvestment yield by investing part of the dividends earned in other stocks offering high dividend yields.

The key factors which affect the sustainability and growth of dividends are Payout Ratio, Cash Flow Outlook, and Interest Coverage.

Follow the view – Top Dividend Payers – to keep track of companies with high dividend yields

Below are a few such companies:

Royal Dutch Shell

With a 7.39% dividend yield, the independent oil and gas producer is one of highest dividend payers.

Despite a solid track record of dividend growth and consistency, nearly 40% drop in revenues last year, as oil prices collapsed, has investors worried over the sustainability.

However, the yield is hard to resist in the wake of recent strength demonstrated by oil in addition to management’s efforts in reducing capital and operating costs.

Click to view the full report on Royal Dutch Shell

Procter & Gamble

With its ever growing dividends, currently $2.68 per share at a 3.2% yield, P&G has been a great income-stock for long-term investors apart from substantial capital appreciation.

The company offers a diversified revenue base due to its global presence along with substantial growth opportunities in the emerging markets driven by the expanding middle-class households.

Click to view the full report on Procter & Gamble

National Health Investors

The diversified healthcare REIT pays a 5.04% dividend with a great track record over the last 10 years.

The management has a knack for consistently picking high-income generating properties as evident from the average annual earnings growth of 9% over the last five years.

Click to view the full report on National Health Investors

Find out more such companies here: Top Dividend Payers

[simplywallst]

New UK Investment Ideas: All Weather Stocks

The view includes only defensive industries which are least affected by ups and downs of the economy:

Food and Staples Retailing

Food, Beverage, and Tobacco

Household and Personal Products

Health Care Equipment and Services

Pharmaceuticals

Utilities

Additional criteria used include:

A minimum market capitalization of £1.4 billion

Fairly valued or at a discount to free cash flow value

A minimum dividend yield of 2%

Arranged in descending order of expected ROE in three years

Follow the view – All Weather Stocks – to keep an eye on companies meeting the criteria

Below are a few such companies:

GlaxoSmithKline

The big-pharma and consumer health products supplier has a stunning consistency in raising dividends – £0.80 per share now from £0.44 per share 10 years ago.

While GSK confirmed that it would continue to pay £0.80 per share dividend up until 2017, the company can grow only if its new vaccines fill up the void created by weakening sales of Advair – its largest revenue generator.  

The performance of big-pharma, which are not in the generic business, depends on the exclusivity of its drugs before they become generic – the problem GSK is facing right now.

Thus, while its consumer health products division remains robust, the future of the company lies in the success of high-margin pharmaceutical business coming up with new blockbuster drugs.

Click to view the full report on GSK

Britvic

With expected three-year earnings growth of 29% and the soft-drinks seller lying well below or in-line with the industry average across several valuation metrics, it appears reasonably priced.

The company, like GSK, also has an exceptional track record of dividends. It pays 3.6% dividends with an acceptable payout ratio of 55%.

Click to view the full report on Britvic

SSE

The company has a history of consistent dividend growth to £0.89 per share now from £0.47 10 years ago.

However, revenues are facing pressure across the electric utility industry as several new smaller players sprang up recently, causing loss of accounts for big electricity-suppliers such as SSE.

Despite that, the 5.9% dividend yield seems hard to resist as EPS is expected to rise and stay higher while pressure from capital expenditures reduces in the near future.

Click to view the full report on SSE

Find out more such companies here: All Weather Stocks