The market fell after a strong start on Tuesday due to several global market issues. First, the IMF reduced expectations on China's growth from 8%+ in 2013 and 2014 to 7.75% for both years. China, while still strongly growing, has been a bit weaker to start the year. The IMF highlighted issues with currency from Japan's easing as well as continued inflation issues. On top of that, the OECD noted that global markets could see a decline when easing finishes, and that news brought attention back to the Fed's plans to taper QE at some point later this year or in 2014. The US markets had no economic data and could not continue to see upside after Tuesday's solid day.
Stocks To Trade:
Trina Solar announced their earnings Wednesday. We want to take a look at whether or not the stock is a buy after that report. Important things for us to consider when looking at earnings are value, future outlook, and how key sectors are developing for TSL. TSL reported negative earnings with an EPS of -0.90. Analysts had expected earnings to be at -0.72. Additionally, the company reported revenues at $260M versus expectations for $296M. The company, additionally, reported shipping 393MW of solar modules. The company forecasted that they will ship 500MW-530MW PV in Q2. Finally, the company backed its FY13 shipment outlook for 2GW. Based on the given results from Q1 and Q2 expectations, the company will have shipped at most 920MW by the end of Q2, meaning that they will need to see a lot of demand increase in the 2H OF 2013 in order to meet their FY expectations. With this given information, we want to look at whether or not the company can see a rebound in the 2H of 2013, what the key growth sectors are for the company moving forward, how they are performing, and what the current value makeup is of TSL.
For the FY, analysts are expecting an EPS of just over -2.0, improving from the -3.0+ EPS in 2012. With Q1 at -0.9, this is further proof that the company needs a comeback in 2H of 2013. Where does growth come from? Europe is out of the picture currently as they continue to be mired in an economic recession and have lost interest in solar subsidies. China, the USA, and Japan are the three largest growth markets for solar energy moving forward. The company is expected to see 40% growth in China in 2013 and 30% to the USA in 2013. Those growth markets are the main reason the company is expected to see 15%+ growth in revenue this year. How did they perform in those markets? The company commented that they saw a seasonal slowdown in China year/year, but they did not give specifics on North America. Given that shipments declined 5% year/year and revenues declined 14%, even if China and USA demand was better, it did not offset loss of demand in Europe and is likely that growth in those two markets did not improve. Other concerning parts of their report was a 20%+ decline in gross margins and the price of global PV continues to drop.
Moving forward, can TSL recover? Right now, shares are priced with a 0.4 price/sales and do not have any P/E or future P/E due to operating losses in 2013 and 2014 expected. Their price/sales ratio is very low, but the company has very few catalysts and has not provided investors with much confidence. The company, though, has reiterated their expected shipments, but we would like to see a positive result in the coming quarter before we can trust that they will hit their 2013 number especially since Q1 was a disappointment. Right now, we recommend clients stay away from TSL. Long-term investors should be inclined to stick with the stock at least to see if the Q2 bounce back does occur. Interested parties, though, should wait for more organic growth to present itself. We do not recommend shorting as well, though, due to the high volatility of solar stocks and a current 21% short float in the stock.
Position: Stay away but keep an eye on Q2 results.
Over the past month, FB has declined over 10%. The stock has only closed higher than it opened in five trading days in the month of May. What is the reason for such a lack of success in shares as of late? The key for FB stock right now and moving forward is its adoption of mobile users and advertising as well as continued success of advertising on its online portal. Technology users continue to move to their phones and tablets at a fast rate and are moving more away from desktops and laptops, especially for personal use. Therefore, it is imperative that FB continues to see positive momentum in their mobile advertising space moving forward. Earlier, Financial Times reported that FB was seeing a decline in advertisers due to concerns over offensive posts on FB:
Major advertisers including Nissan and Nationwide have suspended Facebook marketing campaigns after their ads appeared alongside offensive posts, highlighting the risks of a new form of "targeted" advertising. The cancellations follow complaints on Twitter and from women's rights organisations over the publication of misogynistic content, including images of abused women, on the social networking site.
This is a major issue for FB moving forward. The company derives 80% of their revenue from advertising, and any snags in the company's ability to continue to grow their advertising revenue are a serious issue. This issue, though, came out Wednesday, and the stock has been declining for several weeks. The company has been declining since its last earnings report. That report showed advertising revenue jumping 43%, but the results also showed weakness in margins as the company missed expectations. Further, with the stock overvalued with a future P/E at 31, any slight issues at all will mean that the stock sees correcting. The miss in earnings caused weakness, despite the fact that ad revenue was so solid. When a company's valuations are that high, the company needs to report strong developments and continue to beat expectations. For now, we believe that FB has some definite issues to address with their advertising issues despite the strength of their results in the latest quarter. Investors will be concerned about FB's ability to meet lofty expectations (36% revenue growth and 15% earnings growth) for the coming quarter. When there is concern in growth stocks, they will always go through strong periods of correction.
So the question now is whether or not we are nearing a bottom in FB's pullback or are shares still too highly priced? The development of a new issue does concern us, but the 10% correction after another very solid quarter of advertising revenue seems to suggest that a bottom is nearing in this decline. One issue that we have not mentioned that we believe is also a problem for FB is that they have not seen solid results with their new "Home" application. The company announced it was nearing 1M downloads after the beginning of May, but that number was seen as very low. With that concern, earnings miss, and the recent ad debacle, we believe that it's still not yet time to dive into FB shares. With that being said, the decline has been quite strong and should temper soon. We believe shares are a great buy at $22 when future P/E will have declined to a respectable 28 future P/E. We do believe, though, that FB needs to have a swift and effective reaction to current issues with advertisers beyond its current plan to review its moderation procedures. Real changes need to be made or the company will suffer from a continued lack of support from advertisers.
Position: FB, Long
Entry: $22 or below
Targets: $26, $30
Finally, we are going to take a deeper look at Freeport-McMoRan today to see what a proper 12-month price target for the stock should be. After
Here is how to calculate price targets using discounted cash flow analysis:
(all figures in millions)
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Income from Operations
Net Op. Profit After Taxes
Less: Increase in W/C
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012).
WACC for FCX: 11.2%
PV Factor @ WACC:
PV of Available Cash Flow:
* For 2017, we are going to calculate a residual calculation, as we believe that the market tends to value companies with around a five-year projection of where business will be. This is the common projection for discounted cash flow analyses.
For the fifth year, we calculate a residual calculation. This number is calculated by taking the fifth year available cash flow and dividing by the cap rate, which is calculated by taking WACC and subtracting out residual growth rate. Residual growth rate is typically between 2-6%. 4% is average growth for industry. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. This is why higher growth companies tend to have higher P/E ratios. We will give you cap rate.
Cap Rate for FCX: 6.67%
Residual Cash Flow
Divided By: Cap Rate (r-g)
Equal: Residual Value
Multiplied by: PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of PV of Available CF During Projection Period ('08 - '11)
Plus: Present Value of Residual Available Cash Flow Value
Fair Market Value of Enterprise
Less: Interest Bearing Debt
Plus: Excess Cash
We have added in current cash/cash equivalents as of the latest fiscal quarter along with debt levels.
Divide equity value by shares outstanding:
Implied Equity Value
# of Outstanding Shares
Implied Price Per Share
With FCX, as we can see, the shares are currently worth about $40 per share over the next twelve months. For a solid return, we recommend buying shares at $32 or below. With shares currently below that level, we believe FCX is a buy. For the valuation, we believe that FCX will see solid earnings expansion moving forward, but we also believe capex will remain high. Capex is likely as high as it can go, while earnings could be slightly lower. We believe this is a safe valuation. Shares are heavily tied to shifts in pricing with copper and gold, though, so these valuations are a model.
Position: FCX, Long
Entry: $32 or below
Exit: $35, $40
Thursday, the market will get back into the data with Jobless Claims, GDP - Second Estimate for Q1, Crude Inventories, and Pending Home Sales. The jobless claims number is important. A better employment picture is important for the market health, but better employment also means less QE in the future. We will see what that means for investors - do they want an unemployment decline or QE? Further, GDP should be a non-issue as long as it does not decline past 2.5%. A beat there would be very solid for the market as well. Overall, though, we should expect a potential consolidation day after an up and down day to start the week.
Charts courtesy of finviz.com.