• Morningstar

    Siemens AG (ADR) (OTC MKTS:SIEGY) delivered mixed second-quarter results as profit of industrial business declined 5% year on year in light of flat organic revenue, but strong, 16% order growth offers some promise. Revenue moved higher in all divisions, driven by favorable currency translation effects. Quarterly net income made a robust advance, mainly on gains on assets sales but operational industrial business, or IB, margin declined to 9%, from 10.3% in 2014’s second quarter, as declining oil price hits profitability of Power and Gas and Process Industries and Drives businesses. Management confirmed 2015 outlook of IB profit margin of 10%-11%. Despite a difficult environment, we believe management cost focus will lead to profit of 10.4% for 2015. This quarter’s performance does not alter our narrow moat rating or our fair value estimate for Siemens. PG’s revenues declined 6% year on year organically as low oil price effects industrial activity in this sector. Lower margins at the large gas turbine and steam business, higher selling and R&D expenses caused the consolidated profit margin to decline strongly from 20.3% to 12.9%. We expect pricing pressure due to overcapacity and low activity levels to continue for the rest of 2015. In order to improve profitability Siemens will cut another 4,500 jobs. In February, Siemens announced the reduction of 7,800 worldwide as part of its program to streamline administrative functions. For the entire note, click here.
    Jeffrey Vonk, CEFA

    Twenty-First Century Fox Inc (NASDAQ:FOX) posted a mixed fiscal third quarter, with revenue slightly above our expectations but EBITDA below our projections. Management reiterated its fiscal 2015 guidance but pushed updating its fiscal 2016 guidance to next quarter. We are maintaining our wide economic moat rating and our $38 fair value estimate. The shares are trading below our fair value estimate, but we would require a larger margin of safety before investing. Similar to Disney, management spent time on the call discussing the changing media landscape and its impact on the company’s channels. Fox president Chase Carey’s remarks concerning Verizon’s skinny bundles mirrored those made by his counterpart at Disney, in that Fox believes the current carriage agreement precludes a skinny bundle without its channels. Carey noted that a change in method of packaging or bundling would require a significantly different pricing structure in terms of affiliate fees. Management also addressed the position of regional sports networks in a potential over-the-top/skinny bundle situation. While Fox remains positive on RSNs, we believe RSNs may suffer much more than national sports networks in an OTT/skinny bundle world as they typically appeal to a much narrower slice of the market and charge relatively high affiliate fees. Excluding the sold DBS business, quarterly revenue grew 2% versus the year-ago period, driven by increases in cable programming (up 14%) and filmed entertainment (up 5%). For the entire note, click here.
    Neil Macker, CFA

    BT Group plc (ADR) (NYSE:BT) reported fiscal 2015 results roughly in line with our expectations, and we are maintaining our fair value estimate and moat rating. Revenue declined 2% year over year, spot on with our projection. The consumer division continues to perform well, with its BT Sports programming helping to drive additional broadband customers. Its broadband base increased 5.9% to 7.7 million. This base is also benefiting from the company’s fibre buildout, which now reaches about 75% of the population. BT now has 3 million subscribers taking its fibre service, or roughly 39% of its broadband base. We think it is important to realize that at least some of the fibre growth is related to customers’ desire for faster speeds, which has nothing to do with the sports package. Thus, the consumer division growth can’t all be attributed to sports, which makes it a the more difficult to see how BT generates the needed return on capital to justify the billions of pounds it has spent on content if it continues to give the service away. However, without this growth, BT’s revenue would have been much worse, as all other divisions saw revenue declines. We think fibre take-up and consumer broadband growth will remain the firm’s key driver. The global services division, the largest division by external revenue, saw revenue decline 7%, though Asia Pacific continues to grow nicely, up 9%. Its backlog fell 6%, though, which implies another poor year coming up. For the entire note, click here.
    Allan C. Nichols, CFA

    Tesla Motors Inc (NASDAQ:TSLA) reported first-quarter results that continued to show the company burning cash and losing money as it invests for future growth. Management maintained its expectation of 2015 deliveries of about 55,000 vehicles and we see nothing in the results to merit a change to our fair value estimate or moat rating. Tesla’s adjusted EPS of a loss of $0.36 beat consensus of negative $0.50, while adjusted revenue increased by 55% from the prior year’s quarter to $1.1 billion, which slightly exceeded consensus. Free cash flow was a negative $557.9 million compared with a negative $455.1 million in the fourth quarter and a negative $82.6 million in first-quarter 2014. Higher capital expenditures in the first quarter of 2015 of $426.1 million compared with $141.4 mill ion in first-quarter 2014 and negative operating cash flow were the main drivers of this extra cash burn despite record deliveries of 10,045. Capital expenditure guidance for this year remains at $1.5 billion. Management still expects positive free cash flow in the fourth quarter, aided by a full quarter’s deliveries of the Model X. Tesla finished the first quarter with $1.5 billion cash. We continue to expect more losses in the second quarter as the company keeps investing in its supercharger network, increasing capacity, energy storage, and incurs Model X launch costs without any revenue because Model X deliveries are not expected to start until late in the third quarter. For the entire note, click here.
    David Whiston, CFA, CPA, CFE

    We reaffirm our $36 per share fair value estimate, narrow economic moat rating, and stable moat trend rating following PPL Corporation (NYSE:PPL)’s report of first-year ongoing operating earnings of $0.77 per share, up sharply from $0.66 in the same year-ago period. Management reaffirmed its 2015 EPS guidance range of $2.05-$2.25 and its 4%-6% three-year earnings growth target. PPL is set to complete the spinoff of the company’s supply business with Riverstone Holdings assets on June 1. We applaud management’s decision to divest the no moat division, allowing management to focus on driving returns on its regulated utilities. We believe the newly created Talent Energy is well positioned in the near-term to benefit from widening near-term spark spreads as significant coal generation is retires. The company’s natural gas fleet enjoys advantageous access to cheap natural gas allowing for further margin opportunities. As new natural gas generation comes online, we think new supply will begin to depress margins, particularly at the company’s coal and nuclear fleet. PPL continues to navigate an important regulatory calendar. In Kentucky, management reached a settlement agreement, subject to public commission approval, allowing $132 million in annual revenue increases, including a return on the company’s new Cane Run gas plant to be completed this summer. It also maintains the unit’s constructive 10% environmental cost recovery tracker. New rates are effective July 1. For the entire note, click here.
    Andrew Bischof, CFA

    Whole Foods, Inc. (NASDAQ:WFM) shares dropped more than 10% after the company reported a slowdown in same-store sales growth for the second quarter. Same-store sales increased 3.6%, driven by 5.1% growth in the first three weeks and 2.4% growth in the last nine weeks. Transactions increased 0.8% and average basket size increased 2.8%, although management could not single out any one factor as driving the growth slowdown; increasing competition, cannibalization, and weather all contributed. We may lower our $46 fair value estimate slightly, but we still remain optimistic about long-term growth trends in organic and natural foods. We think Whole Foods will remain a leader in the space, and as such, we think investors should keep this name on their radars; we would recommend purchasing the shares if they fell to the mid- to high $30s, at which 3% comp growth and minimal margin expansion would be priced in. We believe Whole Foods’ narrow economic moat is intact, as returns on invested capital continue to increase and new-store returns on capital are higher than in the past. However, while we think Whole Foods maintains a competitive advantage, it is being forced to evolve as competition increases. For example, the firm announced that it will create a new store concept that is complementary to Whole Foods. For the entire note, click here.
    Ken Perkins

    After reviewing TripAdvisor Inc (NASDAQ:TRIP)’s first-quarter results, we plan to increase our $81 fair value estimate modestly for the time value of money, as our revenue and sales and marketing expense assumptions remain unchanged. We see TripAdvisor shares as fairly valued, but continue to see Priceline trading at an attractive price to our fair value. TripAdvisor’s near-term focus remains on building out its network and share position versus one of maximizing profitability, which we believe makes sense in the still-evolving landscape of the online travel industry. Strong first-quarter results showcase this focus with constant currency revenue and adjusted EBITDA up 36% and 15%, respectively. Strength was broad-based across regions, with North America up 25% (50% of total revenue), Europe/Middle East/Africa up 33% (33% of total revenue), Asia-Pacific up 20% (12% of total revenue), and Latin America up 90% (5% of total revenue). It was also solid across all divisions with core hotel revenue up 20% (88% of total revenue) and other revenue up 187%, which was driven mainly by its 2014 restaurant and attraction acquisitions (we estimate this was a high-single-digit percentage of revenue), along with its vacation rental business, which we estimate was a mid-single-digit percentage of revenue. We estimate that the organic growth of the non-hotel segments will continue to grow well above the core hotel division growth for the next several years. For the entire note, click here.
    Dan Wasiolek

    We expect to maintain our $24 fair value estimate for retail landlord Kimco Realty Corp (NYSE:KIM) following the release of first-quarter results that were near our expectations. Headline results were boosted by the acquisition of joint venture partner interests that were previously reported below the line. Our reckoning of revenue and adjusted EBITDA (from which we exclude items we deem nonrecurring) increased 24% and 22%, respectively. On a per-share basis, adjusted EBITDA increased 21% to $0.40. Most of this growth was driven by external investments, with revenue-generating real estate assets increasing 23% year over year. Portfolio results continue to be good, although currency headwinds from the Canada portfolio were evident. Combined, same-store net operating income increased 3% excluding currency effects, but just 2% including currency effects. The U.S. portfolio, which is the bulk of Kimco’s portfolio, is performing a bit better than the international locations, as U.S. same-store net operating income increased 3.2%. With higher occupancy (95.7% at Kimco’s consolidated U.S. assets, up 130 basis points year over year) and higher rents (10% positive re-leasing spreads in the quarter), future cash flows from Kimco’s current portfolio look set to continue their gradual rise. For the entire note, click here.
    Todd Lukasik, CFA

    Mercadolibre Inc (NASDAQ:MELI) carried much of its 2014 momentum into the first quarter, with virtually all key operating metrics–user growth (up 22% to 127 million), units sold (up 26.4% to 27.5 million), and payment transactions (up 62%)–remaining on strong trajectories and lending additional support to the network effect moat source behind our narrow moat rating. We remain impressed by adoption of MercadoLibre’s value-added services–namely, mobile payments, consumer financing opportunities, and shipping services–in Brazil, where units sold increased 26% (with 40% of the units delivered through MercadoEnvios) and 48% of all GMV now taking place with “zero-cost” credit payment alternatives (consumers’ financing charge is covered by a higher marketplace fee paid by the seller). Collectively, these enhanced services helped to drive a 260-basis-point uptick in the consolidated take rate to 9.0%, with evidence that payment and shipping services are also attracting new users and sellers (including more than 750 branded store partnerships, up from just 85 a year ago) in other markets such as Argentina and Mexico. More important, the company’s expanded service portfolio helps to solidify its network effect across key markets, and we’ve become less concerned about potential encroachment from rivals like Amazon.com and eBay, suggesting a widening of its economic moat. For the entire note, click here.
    R.J. Hottovy, CFA

    After reviewing SNC-Lavalin Group Inc (TSE:SNC)’s first-quarter report, we do not expect to make a material change to our CAD 40 fair value estimate. SNC did increase its full-year earnings per share guidance to CAD 1.80-2.10 from CAD 1.60-1.90, but this was primarily to reflect the one-time net foreign exchange gain recorded in the first quarter of 2015. We plan to adjust our 2015 EPS forecast, but our longer-term outlook remains the same and the changes do not affect our fair value estimate. We are maintaining our economic moat rating of none. Adjusted net income from engineering and construction for the quarter was EUR 56.8 million compared with EUR 31.5 million for the firs quarter of 2014. The increase is mainly due to a higher contribution from the oil and gas, power, and mining and metallurgy segments, partially offset by a lower contribution from the operations and maintenance subsegment. The increase in oil and gas was mainly due to the incremental EBIT from the Kentz acquisition. The increase in power was mainly due to a favorable reforecast on a major project, and the increase in mining and metallurgy was mainly due to a decrease in selling, general, and administrative expense. Adjusted net income from infrastructure concession investments in the quarter was $37.4 million compared with $63.8 million in the year-ago quarter. For the entire note, click here.
    Jeffrey Vonk, CEFA

    We are reaffirming our $31 fair value estimate and no-moat, stable moat trend rating after Dynegy Inc. (NYSE:DYN) reported first-quarter adjusted EBITDA of $85 million, a $67 million decrease from the year-ago period. Management affirmed its 2015 guidance of $825 million-$1.025 billion in EBITDA and $100 million-$300 million in cash flow. During the quarter, management closed the Duke Energy Midwest and Energy Capital Partners acquisitions, creating a PJM heavyweight and significantly diversifying earnings from the prior MISO-heavy earnings mix. Management increased targeted EBITDA synergies to $100 million from $40 million, supporting our belief that management was conservative in prior estimates. Management increased balance sheet synergies to $375 million from $200 million. We have confidence that management can hit its new synergy targets given the above-target synergies it realized following the Ameren transaction. Management continues to believe MISO capacity will become increasingly valuable, even though recent MISO capacity prices in Dynegy’s primary operating region Zone 4 cleared at $150 per megawatt-day, well above the prior year’s $16.75 per megawatt-day price. Management noted MISO’s forecast reserve margins will fall below its targeted level in 2016, suggesting capacity prices could clear at the market cap in next year’s auction. Also, additional coal retirements are expected in 2016 and beyond. For the entire note, click here.
    Andrew Bischof, CFA

    As a result of weak steel demand in its home market, Companhia Siderurgica Nacional (ADR) (NYSE:SID) followed through on management’s stated intent to increase its sales abroad. Although Brazilian steel shipment volumes increased only 2% sequentially, foreign steel sales jumped 36%. CSN’s efforts to export higher volumes of steel have been facilitated by the fact that the company’s positioning on the global cost curve for steelmaking has improved thanks to local cost deflation. The depreciation of the Brazilian real relative to the currencies employed by its key export markets allowed CSN to take market share abroad, with margins contracting only modestly on a sequential and year-over-year basis. As CSN continues to look outward from Brazil for pockets of healthy steel demand, we expect management to achieve its guidance that the company will ship 6.2 million tonnes of steel in 2015.CSN’s mining business suffered its fifth consecutive quarter of declining sales, down 21% sequentially to BRL 658 million. We remain concerned about the competitiveness of CSN’s unit costs relative to the big three miners–BHP Billiton, Rio Tinto, and Vale–and we don’t think management will achieve its lofty iron ore expansion goals. Accordingly, the company’s iron ore shipment volumes through its TECAR port terminal declined 25% sequentially. For the entire note, click here.
    Andrew Lane

    We are maintaining our $13 fair value estimate for Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) following first-quarter results that were largely consistent with our expectations. We are also maintaining our no-moat rating, since besides opportunities to expand Hetlioz’s label to pediatric patients and potentially other niche circadian-rhythm disorders, the company’s pipeline remains early stage, with limited prospects for growth. Vanda reported quarterly revenue of $22.2 million, including $7.5 million in Hetlioz sales, which increased from $6.0 million last quarter. Fanapt sales were $14.7 million following the recent deal with Novartis to return the U.S. and Canadian rights for the schizophrenia drug to Vanda. These results are trending toward guidance of Hetlioz revenue of $40 million-$45 million and Fanapt revenue of $60 million-$65 million for the year. The non-GAAP net loss was $4.1 million, or $0.10 per share, compared with a non-GAAP net loss of $32.0 million, or $0.95 per share, for the same period in 2014. In its pipeline activities, Vanda expects European approval for Hetlioz by midyear, and it has begun development activities for a pediatric formulation of the drug. The company is also undertaking an interventional study in patients with Smith-Magenis syndrome, another rare disorder in which the sleep-wake cycle is disrupted. Both studies are expected to be initiated by the end of the year. For the entire note, click here.
    Stefan Quenneville, CFA