Monday, August 19, 2013

TJX is a good buy ahead of earnings

People are still spending money, but with Obamacare and relatively high gas prices, how much does the ordinary consumer have left to put toward higher end items?

Today, I am going to highlight the biggest off-price apparel and home fashions retailer in the United States. 

They operate in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense).

Highlighting some bits from their latest conference call:

-Strongest year-over-year comparisons for quarterly comp and EPS growth

-EPS grew 13% from the previous year, consolidated comps up 2% from previous year

-Net sales $6.2 Billion, a 7% increase over last year.

- Consolidated inventories on a per store basis including warehouses but excluding e-commerce were down 3%.

-(From CEO) Very few apparel retailers out there that would deliver a 20 basis point gross margin increase in a quarter with one of the coldest winters on record (2012-2013).

They are in a good position moving into the second half of the year and the rest of 2013, seeing enormous near and long term opportunities in their brick and mortar business, supply chain, e-commerce and market share growth potential.

In the first quarter, they bought back $300 million in common stock, amounting to 6.5 million shares. They continue to anticipate to buy back $1.3-$1.4 billion in stock throughout the rest of 2013. The board of directors also approved a 26% increase in the per share dividend in April, making the 17th consecutive year of dividend increases.

They have raised growth potential for Marmaxx, expecting to increase their store count from 2,400 to 2,600. Store growth estimates for HomeGoods have been increased from 750 to 825 in the long term.

Quarter 2 results, which will be released on Tuesday, August 20th, expect to be in the range of $0.61 to $0.63, a 9-13% increase from last year's results of $0.56. Top line growth is expected $6.3 to $6.4 billion on expected comp sales growth of 2-3%.

They are forecasting full year 2014 earnings per share to be $2.70-$2.78 from a full year earnings per share of $2.55 in 2013. Fiscal year 2013 included approximately $0.08 benefit from the 53rd week. Excluding the extra week, fiscal '14 full year expected EPS would be 9-13% increase over the prior year. They also expect comp sales growth of 1-2%.

EPS and revenue growth compared to their peers (Mainly Ross Stores) shows higher EPS growth but slightly lower revenue growth (10.52% v 11.4%). Overall, they are in a pretty good place.

Above, another breakdown of comparisons of TJX to its peers and the S&P.

I arrived at a price target of $53.56 which is 6.10% above Friday, August 16th's close. Most of the data was from Yahoo, but I did use Bloomberg to piece in the rest of the data for items that were not readily available.

Feel free to leave any comments or questions here or tweet me @Peter_Eller10 and I will get back to you as soon as possible.  

Thursday, August 15, 2013

Why I think Deere is a good investment at these levels

After looking through the financial statements and conference call from Deere's quarterly earnings report, I have concluded that the market price of the stock is trading at a discount and is poised to go higher in the long run. I will state my rationale below and present a Discounted Cash Flow analysis to back up my opinion.

Deere & Company (John Deere) operates in three segments: agriculture and turf, construction and forestry and financial services.

-The John Deere agriculture and turf segment manufactures and distributes a line of agricultural and turf equipment and related service parts.

-John Deere construction, earthmoving, material handling and forestry equipment includes a broad range of backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, log skidders, log feller bunchers, log loaders, log forwarders, log harvesters and a range of attachments.

-The financial services segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment.

They are globally diversified having two-thirds of their revenue come from the US and Canada while the other third is from outside of North America. Of their three segments, agricultural equipment makes up 75% of their revenue, while construction and forestry make up 20%; the other 5% comes from financial services.

In Q2 2013, they reported Earnings per share of $2.56 versus estimates of $2.17. Revenue also beat, they reported $9.31 Billion in sales versus estimates of $9.26 Billion. Both earnings and sales were the highest of any third quarter in the company's history, marking their 13th quarter in a row of record profits.

Their Agricultural and Turf segment revenue was up 8% in the quarter, they noted continued strength in North America and South America. Outlook for the European Union remains positive, where production is expected to increase about 7%, citing favorable pork and milk prices from farmers. They expect farm machinery to be lower in 2013 as the after effects of the financial crisis continue to weigh on farmers in the northern part of the EU. Import duties are affecting combine demand in Russia and the surrounding areas.

Their outlook on Brazil remains bullish. They expect a strong soybean crop, with more acres being planted, higher yields, and sustained high crop prices 2013 value of agricultural production in Brazil is expected to increase about 6% over the 2012 level.

North American outlook for tractors and combines continues to be bullish, projecting 5% above 2012, whereas the EU is down 5%, unchanged from 2012. Supportive financing programs and positive farm fundamentals in South America have pushed industry sales of tractors and combines to be up 20%  from 2012 to 2013.  Their tractor market share has grown considerably, along with other heavy farm equipment in the geographical region. 

In looking at a chart of EPS and Revenue growth compared to their peers, Deere is the blue circle. Ideally, any company would want to be in the upper right hand corner at all times (higher EPS and Revenue growth) and as show above, Deere is the closest out of all of its peers.

Above, abother breakdown of comparisons of Deere to its peers and the S&P.

I arrived at a price target of $88.74 which is 7.77% above Wednesday's close. Most of my data was from Yahoo, but I did use Bloomberg to piece in the rest of the data for current assets and liabilities going back farther than three years to get a better average. 

Feel free to leave any comments or questions here or tweet me @Peter_Eller10 and I will get back to you as soon as possible.  

Sunday, July 21, 2013

Why Capital One Financial is a strong buy

One of the best performing parts of the financial sector since the economic recovery began over four years ago are credit card companies. It is not hard to see why, since just about every factor one can think of that leads to more people using credit cards is at or near all-time highs. Let's first take a look at E-Commerce spending. As shown below, online spending has nearly doubled since the recovery began and is at all-time highs. People use their credit cards to make purchases, mainly to Amazon or EBay, then they receive their product. The online merchants that sell the goods end up paying a small percentage to the credit card companies as a fee when that person buys from them using a card. The fee is generally 1.5 percent to 3 percent of the transaction. Surcharges can’t exceed 4 percent of the purchase price.

Credit cards are mostly used on retail and discretionary items. Looking at XRT the retail sector SPRR ETF, it is up nearly 30% this year along with XLY the consumer discretionary sector SPDR ETF up 25.5%, both outperforming the overall market, up 18.6%. Consumers spending on mid to high in items in both sectors proves that the economy is strengthening.

In the US, there are 4 major credit card companies: Discover, American Express, Visa, MasterCard. They have thrived and are all trading at all-time highs, with forecasts out to next year reaping in more and more profits from fees as consumers spend more. Below is a YTD chart of the four companies

Today we are going to look at one of the largest credit card issuers in the US, Capital One Finanical. Recently in seeing how the Federal Reserve is becoming more hawkish on the possibility to increase rates due to the thriving economy, the main companies who will directly benefit are financial services.

Capital One Financial (via Google Finance) is a diversified financial services holding company with banking and non-banking subsidiaries which offer an array of financial products and services to consumers, small businesses and commercial clients through branches, the Internet and other distribution channels. As of December 31, 2012, the Company's principal subsidiaries included Capital One Bank (USA), National Association (COBN), which offers credit and debit card products, other lending products and deposit products, and Capital One, National Association (CONA), which offers a spectrum of banking products and financial services to consumers, small businesses and commercial clients. On February 17, 2012, the Company acquired ING Direct business in the United States (ING Direct) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp.

On Thursday, July 18th, they released their second quarter 2013 earnings report. Net profit rose to $1.1 billion or $1.87 per share from $92 million or $0.16 a share a year earlier. Analysts expected $1.72 a share. This is the second quarter in a row they have beat earnings estimates.  Main takeaways from the report:

-Net interest income from credit cards up 19% to $2.8 billion

-Provision for credit losses were $762 million, down 55% from a year earlier

-Net interest income (non-credit cards) up 14% to $4.55 billion

-Net interest margin rose to 6.83% in the second quarter from 6.04% a year earlier

-Net charge off rate, percentage of loans written off as unrecoverable, fell to 2.03% from 2.2% in the previous quarter.

-Purchase volume was up 12% year-over-year. Ex-acquired card loans up 9%, which is above industry average.

-Passed the Federal Reserve's stress test in March, said this month they plan they plan to buy back up to $1 billion in shares after completing the sale of its best Buy Co, Inc portfolio in Q3.

-One of the top 10 US banks by deposits with over 1,000 branches.

-Stock is up 27% since their last quarterly report in April.

In 2013, they expect $11.5 billion in runoff (reduction in loan portfolio), $9.5 billion for mortgages, $2 billion in domestic card; in 2014 they expect $8 billion in runoff with $7 billion from mortgage and $1 billion in domestic card.

They expect to raise their payout ratio next year largely from stock repurchases, they believe that their shares are attractive and flexibility in repurchases is consistent with regulatory push for higher capital.
Comparing Capital One's Price to Earnings ratio with others in their industry, it is well below its competitors and below the industry average of 15.98

 I performed a discounted cash flow analysis and came up with a price target of $74.27, which is 7.42% above Friday, July 19th's close.

Please reply for any comments, questions, concerns or send them to my Twitter @Peter_Eller10

Thursday, June 13, 2013

Why I think Heartland Express can rally

In looking at an overall grasp on the turnaround in the US economy, one of the first places one wants to look is the consumer. Below, we can see that retail sales have been trending up since 2008; a short time ago eclipsing the highs seen in 2005-2006.

We consumers wonder, how do these products get to the store shelves? The companies manufacture the goods, then trucks transport the goods to the retail locations. Investors have caught eye of this, and transportation stocks, as well as the Dow Jones Transportation Index. Here is a YTD comparison of the trucking sector.

Today I want to take a look at the underperformer on that YTD chart from above, Heartland Express. Via Google Finance, they are a short-to-medium haul truckload carrier that provides regional dry van truckload services through their regional terminals as well as its corporate headquarters. It transports freight for shippers and generally earns revenue based on the number of miles per load delivered. Its primary traffic lanes are between customer locations east of the Rocky Mountains.

Heartland operates nine specialized regional distribution operations in Atlanta, Georgia; Carlisle, Pennsylvania; Chester, Virginia; Columbus, Ohio; Jacksonville, Florida; Kingsport, Tennessee; Olive Branch, Mississippi; Phoenix, Arizona, and Seagoville, Texas. The Company operates maintenance facilities at all regional distribution operating centers along with shop only locations in Fort Smith, Arkansas and O’Fallon, Missouri.

Back in mid January of this year, I highlighted this name when they were due to report Q4 2012 earnings. I liked them then, and said that they had room to run 10% or more this year. After observing their Q4 2012 and Q1 2013 results, I believe they are prepared to go even higher.

From their Q1 2013 quarterly report, they ended the first quarter with gross revenues of $134.3 million, net income of $19.7 million, and $0.23 earnings per share. Freight demand was comparable to the first quarter of 2012 and was hindered by a harsher winter, one less work day due to leap year in 2012, and the Easter holiday falling in the first quarter this year. Net income increased 19.0% from $16.6 million in the first quarter of 2012 while earnings per share increased 21.0% from $0.19 in the first quarter of 2012.

Operating income for the first quarter was positively impacted by a $7.0 million increase in gains on disposal of property and equipment in comparison to the first quarter of 2012 as they continue to benefit from a good market from their well-maintained tractors and trailers. They continue to grow in the Western United States. Their western division, based in Phoenix, Arizona, has grown at the rate of 10% since the 3rd quarter of 2005, its first full quarter of operation.

Net margins for the first quarter of 2012 was 14.7% compared to 12.3% in the 2012 period. Over the past four quarters they have achieved an operating ratio of 81.4% and an 11.9% net margin on gross revenues of $545.2 million. They ended the past four quarters with a return on assets of 12.4% and a 19.3% return on equity.

Fuel expense is the biggest concern to look at when evaluating a transportation company. Their fuel cost per mile increased for the third consecutive quarter and was the highest since the third quarter of 2008. Their net fuel cost per mile increased 3.9% during the first quarter compared to the first quarter of 2012. The U.S. average cost of fuel was $4.03 per gallon in the first quarter. They continue to focus on fuel economy and efficiency through the management of idle hours, investment in fuel efficient new tractors, trailer skirts, fuel surcharge billings, and strategic fuel purchasing decisions. These efforts lessen the impact of the volatile fuel prices.

Fuel prices will continue to go up as the economy improves, so Heartland has to do the best it can to combat high diesel prices long-term, which I believe is possible. With other alternatives coming to light as we advance with better technology, it would not surprise me if they became involved in natural gas trucks or other cheaper resources such as renewable energy, which would be costly initially, but more profitable for them in the long run.

Profitability for them looking through 2014 looks positive. Revenue looks to grow 7% and EPS 5%. 

I ran a Discounted Cash Flows (DCF) model and came up with a target price of $15.03 for a return of +8.93% with a current market price of $13.80.

Feel free to respond or send any questions to @Peter_Eller10 on Twitter

Monday, May 20, 2013

Is this Warren Buffet's next acquisition target?

It has been 3 months since Warren Buffet has bought Heinz, Inc. In looking for other potential buyout targets for Buffet in the future, I came across Campbell Soup, which is a stable consumer name with a solid dividend. This along with a market cap at $15 Billion is right in the sweet spot for Buffet to potentially make a buyout in the future. Then again, the stock has run 25% since the Heinz acquisition, and 36% this year. Is the stock still a good value play today? Let's look at the internals..

Campbell Soup is a manufacturer and marketer of branded convenience food products. The Company operates in five segments: U.S. Simple Meals; Global Baking and Snacking; International Simple Meals and Beverages; U.S. Beverages; and North America food service.

They just announced their quarterly earnings report with an EPS of .62 vs estimates of .56, revenue also beat $2.09B v $2.04B. They are boosting their forecast range and see FY sales at the upper end of the 10-12% range. They also see FY EPS $2.58-$2.62 vs $2.51-$2.57. Their acquisition of Bolthouse added 11% to revenue; US Simple Meals sales rose 11%, earnings increased 30%. US soup sales rose 14% year-over-year, condensed soup rose 11% year over year, and Global baking an snacking sales were up 5% year over year. The only component that fell was US beverages, down 5% year over year, which hurt earnings 27%. Their Bolthouse acquisition looks to add $750M in sales to FY 2013 revenue. I will be listening in on the conference call at 10:00 AM EST to see if there is any more clarification going forward. 

My current target price is $44.12, 7.3% below the closing price from Friday. Though the target price is below the market price, I would rate it as a buy, especially seeing that it is still a potential buyout target, and with a 2.5% yield, it still proves to be a good long term investment.  As of 9:00 AM, it is up 3% in the pre-market to $49.00

Follow me on Twitter @Peter_Eller10 as well as our school investment funds @Bonasimm and @Simmenergyfund

Friday, May 17, 2013

Why Teva Pharmaceuticals is a good buy

After looking through the financial statements, I have concluded that generic pharmaceutical drug maker Teva, Inc. is trading at a discount right now, and looks to go higher. I will state my rationale, then show you the DCF model.

Teva, Inc. is a global pharmaceutical and drug company that develop generic drugs in all treatment categories. Their global operations are conducted from North America to Latin America to Europe and Asia; they are headquartered in Israel. They have operations in over 60 countries including 40 dosage pharmaceutical manufacturing sites in 19 countries, 28 research and development centers and 21 active pharmaceutical ingredient manufacturing sites. Their most recent major acquisition was Cephalon, Inc in the Fall of 2011.

In their conference call two weeks ago discussing their Q1 2013 earnings, they mentioned that their generics business performed in line with expectations, particularly strong in Eastern and Western Europe. Sales of their most widely sold drug, Copaxone were up 17% year over year and continued to lead the US and global Relapse Remitting Multiple Sclerosis (RRMS) market in sales. Revenue for their other CNS drug, Azilect gained 29% year over year and continues to experience strong prescription growth.
Their Oncology business was up 13% year over year with new plans to launch tbo-filgrastim in the fourth quarter of this year.

They reported revenue 4% lover year over year, mainly due to the anticipation of Provigil going off patent in Q2 2012, along with costs in creating generics for Zyprexa and Lipitor. These expenses were offset by strong generic sales in Europe. Their OTC business this quarter brought in 306 million in revenue, up 56% year over year. They expect US generic business to materially improve in the second half of the year with launches of new generic products in parallel with solid performance of their European generic business increasing revenue by 11% year over year to 873 million.

Looking ahead, they plan to make $5.02 a share this year, which would mean they are trading at a very low P/E of around 8.00 compared to their peers (Mylan 20.8, Jazz 13, Perrigo 26.2). Revenue is expected to say right about the same as last year at $20.2 Billion.

With our population aging, more people in the US and around the world will demand prescription medication, and what better place to invest in than generic drug manufacturers, that reap the benefits after the big pharma names go off patent? Plus, they boast a 2.8% dividend yield, higher than their main competitors (Mylan no dividend, Perrigo .3%). Their shares are currently trading at around $40.00, just $1.50 off of their 2008 low, but went down further after the financial crisis to hit an at that time 4 year low of $35.46. Their all-time high occurred in March of 2010 when they hit $64.54.  

My price target on the stock is $46.89, and I think it is a definite buy for the aging population we will be experiencing in the coming years.

Follow on Twitter @Peter_Eller10 as well as our school investment funds @bonasimm + @simmenergyfund