We are now just three weeks away from the end of 2012. Time flies, doesn't it? As we end this year, it's time to start looking forward to 2013. Today, I'm looking at five companies that have something to prove next year. Now, you can say that every company has something to prove, but I think these five are especially interesting cases. For some of these names, they are industry giants who are looking to retain their prominence. For others, they are looking for a rebound after a bad 2012. Here are five names with something to prove in 2013.
Research in Motion (RIMM):
The Blackberry maker might have the most to prove of any name out there, and it all comes down to Blackberry 10. A successful launch of the new phones could make this the stock of the year in 2013. But if things don't go so well, this company could be gone within a year or two. The time is now for RIMM.
The Blackberry 10 launch date is scheduled for January 30th, and expectations call for the first phones to sold within 30 days. However, some analysts are not convinced that the first half of 2013 will be great for the company. Analysts at Detwiler Fenton believe that the QWERTY keyboard version phone won't release until June, and certain carriers such as Verizon (VZ) and Sprint (S) may not get phones until May. If that is true, RIMM investors may need to wait a while to see how the BB10 launch goes. But one thing is certain, they've waited long enough, and further delays will be seen as a huge negative.
Don't forget, this company is scheduled to report fiscal Q3 results late next week, about a week earlier that originally planned. For the quarter, analysts are looking for a 49.4% plunge in revenues to $2.65 billion, and a $0.35 loss per share compared to a $1.27 profit in the prior year period. You can bet that while those numbers might grab the initial headlines, investors will be looking for other information. First, they want to know how the company's cash position is doing. But they also will be looking to hear more information on the BB10 launch.
Analysts are looking for roughly $11.2 billion in revenues this fiscal year and $11.6 billion in the following fiscal year. Both are way down from the $19.9 billion just two fiscal years ago. For Research in Motion to prove itself, I think the company needs to do at least $12 billion in revenues, which would indicate decent sales of the new phones. This company needs to get back on track, and a revenue number above $12 billion would certainly help.
The biotech name behind the prostate cancer treatment Provenge definitely is looking to 2013 as a rebound year. Provenge sales have disappointed so far this year, sending shares lower and lower. Recently, shares closed above $5 for the first time in about three months, but that's a far cry from the $16-plus we saw early in 2012, and the $40-plus we saw in 2011.
The last few quarters, Provenge sales have missed analyst estimates, which is why Dendreon just isn't there yet. The company is closing one of its facilities, and looking to reduce the cost of goods sold to below 50%. If Dendreon can do that, losses should improve. That will help with cash flow, but until then, the balance sheet will get worse by the quarter. Until Dendreon proves itself, I've continued to state that it could need to raise additional capital.
Dendreon stated that it would be cash flow positive from U.S. operations when revenues are above $100 million per quarter. When that will be is the key question. A number of months ago, analysts were looking for about $365 million in revenues in 2012, and $507 million in 2013. At $507 million in 2013, a $100 million quarter was going to happen. But now, estimates for those two years stand at just $322.6 million and $369.9 million, respectively. With sales numbers at those levels, it is possible that Dendreon might not have a $100 million revenue quarter until 2014. Right now, analysts are looking at Dendreon potentially hitting the $100 million mark in Q3 or Q4 next year, but if revenues continue to fall short of expectations, it may not happen. Dendreon won't truly prove itself until it hits that revenue mark.
When a company becomes the biggest name out there, it is going to be discussed more than any other. That is certainly true for Apple. In 2013, I believe that Apple will be held to a higher standard, and we are starting to see some of that process already. Investors are starting to bail on Apple, whether it be a fear of margins, that it's too big to grow, or that the loss of Steve Jobs will hurt going forward.
I'm a bit troubled by recent rumblings that Apple will launch a new iPhone in June 2013. Is it trying to compensate in earnings per share because margins are a bit lower? Is it trying to spread out revenues better? It's unclear at this point. But if it releases a new iPhone in June, is another one coming in December? Apple's holiday sales of iPhones will be much lower next year, meaning it will have to launch something else. Maybe that gets you the TV.
One thing is certain, and that is the fact that some are definitely worried. That fear has pushed Apple down from a high of $705 to $539. Apple spoiled investors with huge fiscal Q1 and Q2 reports. The company then created a perception that it was indestructible for many investors, and it caused an eventual bubble. Going into 2012, Apple wasn't paying a dividend or buying back stock. It is now, and that's two additional things for the company to manage. Can this new Apple navigate the ship to those lofty price targets of $750 to $1,100, or will this stock be back in the $400s before long? Well, we're probably about a month away from finding out. The Q1 report is going to have a huge impact on the next 12-18 months for Apple, in my opinion anyway. Apple has gotten some passes when it comes to disappointing earnings reports in recent quarters. If we get another bad one, it won't get a pass. When you're the biggest, you're held to a higher standard. Right now, Apple is finding that out the hard way.
Deckers Outdoor (DECK):
The UGG maker will be looking for a rebound in 2013, and that starts with this year's Q4. Shares have rallied strongly in recent weeks on short covering and buyout rumors. The battle over Q4 is also heating up. While online searches for UGGs have been very popular, especially around Black Friday, there still have been some above average temperature days and not much real winter weather throughout the U.S. so far. Deckers got back above $44 recently, but lost about $6 as one firm stated that a disappointing winter so far could have the company discounting UGGs by 20% to 50% in December.
Last year's warm winter led to poor sales growth and inventory issues, which is why shares are down 65% over the past year. I recently outlined Deckers' potential headwinds and opportunities. The weather is always a key, and Deckers needs to clear its inventory. The company has also been burdened by high operating expenses, which it needs to control a bit. Given the latest bounce, the company probably will have done well with the stock buyback this quarter, but overall, the buyback has been a disappointment. Deckers probably won't be able to prove that it is an $80 or $100 stock in 2013, but it could prove that it is worth $60 again. For now though, it has to prove that it's worth $40, and the short sellers are waiting to pounce should Deckers disappoint again.
Currently, Deckers analysts are looking for just 3.5% revenue growth this year and 4.8% next year. Earnings per share are expected to come in at $3.36 and $3.77 for those two years, respectively. But that's down from $5.07 last year. For Deckers to prove itself, I'd like to see 2013 revenue growth in the high single digits, and earnings above $4.00. However, I don't want earnings above $4 just because Deckers has bought back a ton of shares. There has to be some improvement in net income as well.
The Internet search giant needs to prove two things. One, that the Motorola Mobility acquisition was warranted. Second, that the company deserves to trade at an elevated valuation.
Let's start with the Motorola Mobility acquisition. The acquisition has certainly pushed up Google's revenues, which is why 2012 revenues are forecast to rise by 42.6% currently. Take away the acquisition, and the revenue growth rate is much lower. But the other issue here is the added costs that the new segment has added. The Motorola Mobility segment seemed to lose Google money on an operations level last quarter. Google's margins have crumbled post-acquisition, which is why the company is currently looking for a margin rebound. From Q3 in 2011 to Q3 in 2012, Google's GAAP net profit margin dropped from 28.08% to 15.43%. For Google to prove itself, it needs net profit margins back in those 20%-30% range over the long run, and not falling to 10% or lower.
Google needs to see a margin rebound, because otherwise, the valuation just doesn't fit. Currently, Google is trading at 15.08 times expected 2013 earnings. That's roughly a 37.5% premium to where Apple is trading at when looking at Apple's expected fiscal year (ending in September 2013) earnings. Does Google deserve that kind of premium over Apple? Considering that Apple is more profitable, has a better balance sheet, is paying a dividend, and is buying back stock, I would say no. If Google's profit margins fall further, the stock won't be trading at $700 for long.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.