Archive for 2014

  • It’s Official: Oracle to Buy Micros for $5.3 Billion
    , June 23rd, 2014 at 9:42 am

    The news from this weekend is now official — Oracle ($ORCL) is buying Micros Systems ($MCRS) for $5.3 billion. Net of cash, the deal comes to $4.6 billion.

    The buyout price is $68 per share which is a modest premium over MCRS’s share price from Friday. However, the stock got a big move last week after the rumors came out. This is Oracle’s biggest deal since Sun Microsystems in 2010. In the past 10 years, Oracle has shelled out $50 billion to buy about 100 companies.

    In early 1988, shares of MCRS were worth 12.5 cents per share. This deal represents a gain of 544-fold in 26 years.

    Let me add a quick note about insider trading. It’s often hard to spot it, but here’s a good example. Check out the minute-by-minute chart below of MCRS for the last week.

    big.chart06232014

    You can see when the news broke last Tuesday. But also, look at how the stock crept higher just before that — on Friday and Monday. Is that proof? I don’t know but it’s awfully suspicious.

  • Morning News: June 23, 2014
    , June 23rd, 2014 at 6:46 am

    Draghi Says Unlimited Cash Through 2016 Is Rate Signal

    China’s Factories Lift Australian Shares

    BNP Said Close to $9 Billion Sanctions Accord With U.S.

    GE Deal ‘Victory’ for Role of the French State in Economy

    Banco Santander to Buy Nordic Units of GE Money

    Rising Oil Prices Can Pull Down Markets: Fact or Myth?

    In Yellen We Trust Is Bond Mantra as Inflation Threats Dismissed

    Ex-Im Bank Hits Hurdle in New GOP Leadership

    SEC Files Lawsuit to Enforce Subpoenas Issued to Congress

    Oracle Nears $5 Billion Deal for Micros Systems

    RadioShack is Now a Penny Stock

    An Employee Dies, and the Company Collects the Insurance

    American Apparel’s Charney Fighting Board

    Sober Look: Betting Against the FOMC Could End Badly

    Jeff Miller: Weighing the Week Ahead: Is the Fed Behind the Curve?

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  • Oracle to Buy Micros for $5 Billion
    , June 23rd, 2014 at 12:14 am

    The deals have been heating up lately. The WSJ is reporting that Oracle ($ORCL) is prepared to buy Micros Systems ($MCRS) for about $5 billion. Expect an official announcement tomorrow.

    Micros sells Internet-connected cash registers, and the software and technical services to power them, to restaurants, retail shops, casinos and other companies.

    Analysts have said a purchase of Micros, which long has been a rumored acquisition target for Oracle, would be a sign the database giant is interested in grabbing a bigger foothold in the retail and hospitality industries. FBR Capital Markets said in a recent research note that Oracle, which has $39 billion in cash and marketable securities and a $190 billion market capitalization, needs to “go on the deal warpath” to expand into emerging areas of corporate technology where the company doesn’t currently generate much revenue.

  • Barron’s on Express Scripts
    , June 22nd, 2014 at 11:22 pm

    Vito J. Racanelli at Barron’s has good things to say about Express Scripts ($ESRX):

    Express Scripts will continue to benefit from all the long-term tail winds we’ve noted in previous items about the company: good growth in generic drugs in response to brand drug inflation; an aging U.S. population; health-care reform, expanding health coverage, and ongoing drives to reduce drug costs.

    In particular, its mail and specialty pharma business is high margin and keeps growing well, adds Retzler. The firm has one of the best pharmacy-benefit management systems around, with all clients on a single information platform, making it easier to, for example, update for new rules, regulations, and formulas, he adds.

    It doesn’t hurt that Express Scripps happens to be a well-managed company with a good balance sheet, too, with $9.3 billion in net debt, and a debt to equity ratio of about 40%.

    Here’s a company getting good growth at a time when it seems only Internet stocks are showing that, Retzler notes. Mr. Market’s sell-off has rendered Express Scripts valuation reasonable again, he says. By various metrics, the stock is significantly cheaper than its long-term history. The price/earnings ratio of 16 is below the median of 22, and attractive given the company’s 2014 EPS guidance.

    Express Scripts is a solid business that should recover if the bull market continues and should also prove defensive should a bear market unexpectedly appear. The new worries should recede over the next two to four quarters. As that happens, a 10% rise from here over the next 12 months seems, well, fair.

    Q2 earnings are due out in another month. They had lowered full-year guidance, but as Racanelli notes, it’s still for EPS growth of 12%.

  • The Economist: Medtronic’s deal with Covidien makes sense
    , June 20th, 2014 at 11:51 am

    From The Economist:

    As American hospital operators consolidate, medical-device companies can no longer woo individual doctors over filet mignon, but must present their wares to sceptical, centralised hospital bureaucracies.

    Medtronic, like many other device firms, is trying to respond to these changes. Last year it announced a new business to help hospitals become more efficient—it wants them to start seeing it as an ally, not an adversary. Its collaborations include running two catheter labs for Britain’s National Health Service. Medtronic is also seeking to develop not just slightly improved products, but much better ones. Its new implanted heart monitor, about the size of a paper clip, sends a patient’s data to his doctor and nurses, so they can immediately spot problems. And Medtronic has enthusiastically chased growth in emerging markets. In 2012 it spent more than $800 million buying Kanghui, a Chinese maker of replacement hips and knees.

    Covidien will help it do more. As in any merger between similar firms, there will be scope for cutting overlapping costs. Their product ranges are complementary: Medtronic excels at specialist gear for cardiology, neurology and diabetes; Covidien’s strengths include tools for general surgery. In rich countries, being able to offer bundles of kit will give the group a better negotiating position with governments and hospitals. And in emerging markets, Medtronic will be able to reach a broader set of patients, notes Matthew Dodds, an analyst at Citigroup. Medtronic’s sophisticated implants are well suited to upmarket urban hospitals in China, for example. But even less advanced hospitals are likely to buy Covidien’s sutures and staples, used in all kinds of surgery.

  • Oracle’s Q1 Guidance
    , June 20th, 2014 at 10:51 am

    Here’s Safra Catz, Oracle’s President and CFO, on yesterday’s conference call:

    Now, let’s move to the guidance. Software and cloud revenue on a GAAP and non-GAAP basis which includes new software license, software support, SaaS and PaaS and IaaS is expected to grow 6% to 8% in U.S. dollars, 5% to 7% in constant currency.

    SaaS and PaaS, one of the line items on a non-GAAP basis is expected to grow 25% to 35% in U.S. dollars, 24% to 34% in constant currency. SaaS and PaaS on a GAAP basis is expected to grow 27% to 37% in U.S. dollars, 26% to 36% in constant currency.

    Next, another one at the line, cloud IaaS on a GAAP and non-GAAP basis is expected to grow 10% to 20% in U.S. dollars and 9% to 19% in constant currency. Hardware system revenues on a GAAP and non-GAAP basis, which includes hardware systems products and hardware system support is expected to be between negative one and positive three or negative two to positive two in constant currency.

    Total revenue on a GAAP and non-GAAP basis is expected to range from 4% to 6% in U.S. dollars and 3% to 5% in constant currency.

    Non-GAAP EPS is expected to be somewhere between $0.62 and $0.66 in U.S. dollars, $0.61 and $0.65 in constant currency. GAAP EPS is expected to be somewhere between $0.49 and $0.53 in U.S. dollars and $0.48 to $0.52 in constant currency. Now, this guidance assumes a GAAP tax rate of 22% and a non-GAAP tax rate of 23.5%. Of course it may end up being different and with that I’ll turn it over to Larry.

  • CWS Market Review – June 20, 2014
    , June 20th, 2014 at 7:06 am

    “In this game, the market has to keep pitching, but you don’t have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch.” – Warren Buffett

    The news got a lot more interesting this week. First, Medtronic ($MDT) announced a mega-merger deal with Ireland’s Covidien. The shares celebrated by jumping to an all-time high. MDT is a 13% winner on the year for us.

    Also this week, the Federal Reserve decided on another taper, their fifth in a row. Investors liked what they saw, and the S&P 500 has now rallied for five days in a row. That’s our longest winning streak since April. The index just notched its 21st record high this year. The Nasdaq touched a 14-year high (see below), and the Volatility Index plunged to an 88-month low.

    big.chart06202014

    In this issue of CWS Market Review, I’ll walk you through the Medtronic-Covidien deal. Frankly, it’s not ideal, but I recognize that Medtronic had to make a move, and it’s probably the best deal they could get. I’ll also take a look at the recent earnings report from Oracle, and we’ll preview next week’s earnings report from Bed Bath & Beyond. BBBY has gotten beaten down this year, and I think it’s going for a very good price here. I’ll also discuss the Fed’s latest taper move and why the economy is finally looking better (no, really). But first, let’s take a closer look at the $42.9-billion deal Medtronic did with Covidien.

    Medtronic Buys Covidien for $42.9 Billion

    Two weeks ago, I told you that Medtronic ($MDT) was seriously considering a merger with Smith & Nephew ($SNN). This past weekend, however, the company announced that it’s buying Ireland’s Covidien ($COV) for $42.9 billion. In 2007, Covidien was spun off from Tyco International ($TYC).

    What makes this deal interesting is that it’s an “inversion,” which means that Medtronic’s HQ will move from Minneapolis to Ireland, where corporate taxes are much lower. Americans are often surprised to learn that our corporate tax rate is higher than many European countries’ rates. The main corporate rate in Ireland is 12.5%, compared with 35% in the U.S. I think we can expect to see more of these inversion deals in the future. In Medtronic’s case, the tax savings won’t be that dramatic since they already have a modest tax bill thanks to R&D tax breaks.

    The deal calls for Medtronic to pay $93.22 per share for Covidien ($35.19 in cash and 0.956 shares of MDT). That was a 29% premium to Covidien’s share price. As an interesting footnote, to qualify as an inversion, the deal has to be at least 20% in stock. With acquisitions, the rule of thumb is that the acquirer’s stock falls. Not this time. Shares of Medtronic initially stumbled, but then a rash of upgrades caused traders to push MDT as high as $65.50 per share on Thursday. That’s an all-time high.

    Is this a good deal for Medtronic? It’s complicated. I’m not a fan of mega-mergers. Small rollups are fine, but trying to merge two large enterprises is often more difficult than the planners realize. Having said that, I realize that Medtronic had to make a move. All medical device companies need to. After all, their customers (hospitals and physician groups) have been merging for the last few years, and the device makers are facing those same economic pressures. You can be sure that many of these upcoming deals will be inversions, so expect to hear more talk about Stryker ($SYK) and Britain’s Smith & Nephew.

    Ironically, by setting up in Ireland, Medtronic will be able to free up more cash, which they can reinvest in the United States. Medtronic said they plan to invest $10 billion in the U.S. over the next ten years. A lot of these inversions will be between companies that make strange bedfellows, but Medtronic and Covidien are a natural fit. For all the options Medtronic faced, this was the best deal for them to make, so I cautiously support this deal.

    As if there’s not enough Medtronic news this week, the company also announced an 8.9% increase to its dividend. I love me a good dividend increase. The quarterly dividend will rise from 28 cents per share to 30.5 cents per share. For the year, that’s $1.22 per share. This is the 37th year in a row that Medtronic has increased its dividend. Going by Thursday’s close, Medtronic yields 1.9%. This week, I’m raising my Buy Below on Medtronic to $67 per share.

    The Fed Tapers Again

    The Federal Reserve held a two-day meeting this week, and as everyone expected, the central bank tapered its bond purchases again. Starting in July, the Fed will purchase $20 billion in Treasuries each month, plus $15 billion per month in mortgage-backed securities. This is the fifth-straight meeting in which the Fed has tapered.

    Tapering by $10 billion at each meeting ($5 billion in Treasuries and $5 billion in MBS) has been the Fed’s game plan all year, and they’ve stuck to it, even when the economy got polar-vortexed earlier this year. In their post-meeting statement, the Fed said that the economy is slowly improving, although housing remains weak.

    The Fed has four more meetings left this year. So if we assume they stay on course, they’ll be done with Quantitative Easing (QE) by the end of the year. (I’m assuming the final $5 billion in Treasuries will be tapered in December, but there could be a clear-the-decks move in October.) Janet Yellen has said to expect a rate increase about six months after the end of QE.

    As part of this Fed meeting, they also updated their economic projections. You can see them here. Let me caution you that the Fed isn’t exactly known for its accuracy, but it’s interesting to see what its assumptions are. Here’s where it gets interesting. Check out Figure 2 on the PDF. The broad consensus is that the first rate hike will come next year. Twelve of the 16 members agree on that, and I think they’re right. But the consensus falls apart for year-end 2015. There’s a small clustering around 1% to 1.25%, which means that real rates are projected to be negative for at least another 18 months. As long as the lid stays on inflation, that’s very good for the stock market and our Buy List. One of the basic rules about finance is that the stock market loves cheap money.

    This week’s inflation report shows that inflation continues to trend upward. Of course, we’re still far from it being a problem, but the rate of inflation is no longer falling. That’s key. The Bureau of Labor Statistics reported on Tuesday that core inflation rose at its fastest rate since October 2009, which is still quite modest. Only now is inflation finally moving into the Fed’s target area.

    The Fed’s consensus for year-end 2016 is even more scattered. Their range for short-term interest rates goes from 0.5% to 4.25%, and there are never more than two members that agree on any one rate. I don’t expect a consensus, but I’m shocked to see so little agreement on where the economy will be in 30 months. In short, they see rates going up, but there’s no agreement on how high.

    I should point out that two Fed regional surveys this week were quite optimistic. The Philly Fed Manufacturing Survey noticed a big increase in activity this month. Also, the Empire State survey showed that activity in New York is quite good. On Monday, the Fed reported that Industrial Production rose a healthy 0.6% last month. For the first time in a long time, we can say that things are looking up for the economy. Expect to see the economy average over 3% annualized growth for the next few quarters. After five years, the recovery is beginning to be felt on Main Street.

    Oracle Misses Earnings by Three Cents per Share

    After the closing bell on Thursday, Oracle ($ORCL) reported fiscal Q4 earnings of 92 cents per share. Frankly, that’s disappointing; it’s three cents below Wall Street’s consensus. Oracle said they lost two cents per share due to the currency loss in Venezuela. Shares of ORCL, which had rallied to a 14-year high during the day on Thursday, got smacked around for a 6% loss in the after-hours market.

    Three months ago, Oracle said to expect Q4 earnings to range between 92 and 99 cents per share. As it turns out, they hit the low end of their guidance, and business was pretty sluggish in Q4. Quarterly revenue rose 3.4% to $11.32 billion, which was $160 million below expectations.

    One of the keys for Oracle‘s business is sales of new software licenses. For Q4, that came in at $3.77 billion, which is flat. Their hardware revenue, now finally growing, rose only 2% to $1.5 billion. One bright spot is that Oracle’s cloud revenue jumped 23% to $327 million. There have also been rumors that Oracle is considering buying Micros Systems ($MCRS) for $5 billion, which would be their largest deal since they bought Sun Microsystems four years ago. Micros makes software for hotels, restaurants and retailers.

    Now for guidance. On the earnings call, Oracle said they see Q1 earnings ranging between 62 and 66 cents per share. That’s not so bad. Wall Street had been expecting 64 cents per share. Oracle sees quarterly revenue growth between 4% and 6%. Breaking that down, they expect new software-license revenue to be up by 6% to 8%. Hardware will be between -1% and 3%, but cloud revenue is expected to be up by 25% to 35%. If this guidance is accurate, that tells us that last quarter’s weakness won’t last. Oracle remains a good buy up to $44 per share.

    Stay Tuned for Bed Bath & Beyond’s Earnings Report

    Our biggest dud this year, by far, has been Bed Bath & Beyond ($BBBY). The stock is off more than 24% YTD. Last week, the shares traded below $60 for the first time in 15 months.

    I apologize for the rough ride with this one, but make no mistake, I haven’t given up on BBBY. In the CWS Market Review from May 9, I announced that I was ready to pound the tables for BBBY. This coming Wednesday, June 25, is our first big test. That’s when BBBY will report their fiscal Q1 earnings.

    Let’s review where we stand. Three months ago, Bed Bath & Beyond reported terrible results for Q4 (December, January, February). The home-furnishings store earned $1.60 per share. That was eight cents lower than the year before. That was quite a shock, because BBBY delivered earnings increases like clockwork. They estimated that poor weather knocked six to seven cents off their bottom line.

    For their Q1 outlook, BBBY had more bad news. They said to expect earnings to range between 92 and 97 cents per share. The consensus on Wall Street had been for $1.03 per share. They made $4.79 all of last year, and for this fiscal year, they expect earnings to rise by “mid-single digits.” If we take that to mean 4% to 6%, their guidance works out to a range of $4.98 to $5.08 per share. Wall Street had been expecting $5.27 per share.

    Now let’s look at the items in BBBY’s favor. First is the low share price. The stock is going for about 12 times forward earnings. If we look at one of my favorite valuation metrics, Enterprise Value/EBITDA, BBBY’s is down to 6.15, which is quite low. The company also has a very clean balance sheet: no debt and lots of cash. Let’s remember that the store is well managed, and they’ve ridden through storms such as this before. As the Fed indicated this week, the housing market is still weak, but that won’t last, and stronger housing helps BBBY. You need to be patient with this one, but Bed Bath & Beyond remains a very good buy up to $66 per share.

    That’s all for now. Next week is the last full week of Q2. On Wednesday, the government will revise its Q1 report for the second time. The initial report showed growth of 0.1%, but last month it was revised down to -1%. I’m curious to see what happens this time. Also on Wednesday, we’ll get a key report on orders for durable goods. On Thursday, we’ll get the report on personal income. Also on Wednesday, we’ll get the earnings report from Bed Bath & Beyond. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: June 20, 2014
    , June 20th, 2014 at 6:55 am

    International Monetary Fund Says Europe Should Weigh Bond-Buying

    What Will Argentina Do With Its Vultures?

    Treasury Inflation Linked Auction Tail Dims Sale for Dealers

    The Social Security Administration’s Diminishing Footprint

    Shire Rejects AbbVie’s $46.5 Billion Takeover Bid

    Siemens-Mitsubishi Raise Alstom Offer as End-Game Nears

    Oracle Earnings, Revenue Miss Estimates; Shares Plunge

    BlackBerry Results Top Forecasts, Fueling Recovery Hopes

    Strong TSB Debut Lifts Prospects for Future Share Sales

    I.P.O. Values Euronext Exchange Operator at $1.9 Billion

    Latvian Rating Raised by Fitch on Positive Debt Dynamics

    BofA Must Face U.S. Suit Over Mortgage-Securities Fraud

    Ousted American Apparel CEO Undone by Controversial Past

    Cullen Roche: 5 Investment Lessons We Can Learn From Futbol (Err, Soccer)

    Joshua Brown: “Hedge Funds Set the Price of Stocks”

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  • Unemployment and Future Stock Returns
    , June 19th, 2014 at 11:29 am

    “Be greedy when others are fearful” is one the old adages of investing, and the numbers appear to back that up, at least going by the unemployment rate. I went through the historical data and took the current employment rate going back to 1956 (black line, left scale) and compared with the future 10-year real returns of the stock market (blue line, right scale). So that includes both dividends and inflation.

    image1410

    The lines seem to line up fairly well. Let me caution you that it’s dangerous to read too much into charts like this. Instead, investors should understand the broad lesson that it’s usually a good time to invest when the economy is flat on its back. Conversely, when the economy is roaring along, that’s often a sign of trouble for stocks. In fact, one of the better estimates of the real cost of equity capital just might be the current employment rate.

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  • Morning News: June 19, 2014
    , June 19th, 2014 at 6:44 am

    China Shares Post Biggest Loss Since Late April as IPOs Divert Funds

    Japan Business Mood Defies Economic Headwinds, Backs BOJ Optimism

    Argentina Says Next Bond Payment ‘Impossible’, Default Looms

    Beware the Hype Over the Shale Boom

    Post FOMC: What Strategists Read in Yellen’s Words

    Currency Probe Widens as U.S. Said to Target Markups

    Wheat Extends Gains as Rain Threatens to Thwart U.S. Harvest

    Siemens Joins Mitsubishi to Pledge Guarantees for Alstom

    Adobe Brings Lightroom To iPhone, Adds Photoshop Tablet App

    FedEx Delivers A 33% Dividend Increase And Stronger Than Expected Earnings

    Rolls Royce to Return 1 Billion Pounds to Investors, Shares Jump

    Why Elon Musk Is Doubling Down on Solar Power

    Are The Two Most Notorious Men in Fashion Finally Getting Their Comeuppance?

    Jeff Carter: Defending the For Profit Exchange

    Howard Lindzon: Adobe – Reviewing A Great Trend Investment …and Why You Should Watch/Listen to Momentum Mondays

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