Often, there are times where you need to prove yourself. Sports teams are the best example of this, as their fan bases demand only the best year in and year out. When it comes to the market, you could make the same argument with stocks and their fan bases (investors). There are times when a company needs to prove itself, be it for one quarter, a year, etc. Today, I'm here with 8 names that each have something to prove, whether over the short term (like an earnings report) or long term (current business plan).
The global retailing giant needs to prove it can become profitable, and as an associated item, have positive cash flow. Amazon did actually lose money for the full year in 2012 on a GAAP basis, and although a profit is forecasted this year, estimates continue to come down. In the past 90 days, estimates have been reduced from $1.30 to $0.87, so a bad Q3 or poor Q4 could easily push Amazon to a very small profit or even a loss for the year.
It's not just the profitability that's a concern. Amazon's cash flow has been very poor as well. In the first half of this year, Amazon's cash from operating activities was a negative $1.49 billion. While that's actually an improvement over last year's period, and not uncommon for this time period, Amazon spent over $1.52 billion on capital expenditures and another $251 million on acquisitions. Over the past 12 months, they've had operating cash flow of $4.53 billion, but had capex and acquisitions of $4.59 billion. Basically, they are spending everything that they bring in and then some.
Just read this part of a Seeking Alpha Market Current in regards to a recent Barron's piece on Amazon:
Analysts willing to venture a guess see earnings of $10.61 per share in 2016. To hit it, Amazon would need to continue to grow revenues at more than a 20% annual pace while expanding operating margins to 4% from 1% now. Plausible? Sure. But if the stock were to climb 10% per year over the next three, shares for the far more mature company would still trade at 40x those hopeful earnings.
Even if Amazon were to hit that $10.61 in 2016 earnings, at current prices that would still imply a valuation of 30 times that year's earnings, and that is still an expensive valuation. I'd venture a guess that Amazon's 2016 profit won't be half of that, at best. Now I've been arguing that Amazon should trade on price to sales, but even then, I still say the stock is a bit overvalued. For Amazon to prove that it deserves its current valuation, some profits and positive cash flow would certainly help.
Deckers Outdoor (DECK):
The footwear retailer known best for the UGG line of boots needs to prove its brands are not a fad. What is the best way to do that? Well, taking advantage of a forecasted bitterly cold winter would do the trick. With Farmers' Almanac calling for a very cold winter, Deckers would seem to be in line for a great sales opportunity. Can they take advantage of it?
In the past two winters, Deckers has had some troubles. A warm winter in 2011-2012 and rising sheepskin prices (one of their biggest expenses) sent the stock from more than $115 to $28 in about a year. The company did not adjust well, leading to excess inventory that was sold at a discount. Additionally, they were not able to control expenses to coincide with poor sales, and profits fell off a cliff. Deckers has worked hard to readjust their planning, but the process has taken time. The stock has rebounded as the 2013 fall/winter selling season is expected to be a good one for them, but they said the same thing last year and it didn't happen.
Deckers is a decently profitable name, and their strong cash flow is allowing them to buy back a solid amount of stock. However, even after Monday's fall, the stock still trades at more than 14 times next year's expected earnings. That's a premium valuation for a company growing revenues in the high single digits, and posting an earnings number well below their recent record high. There had been a couple of recent analyst upgrades from Wedbush and Cannacord, which had propelled this name nicely higher before the negative note mentioned above. Now it is time for Deckers to take advantage of their prime selling period, and if they do, this name could continue to recover some of its share price losses from 2012.
Of all the names discussed in this article, Dendreon may be the one that has the most to prove. It's probably because the company is struggling to generate revenues, while losing large sums of money and burning through tons of cash. If Dendreon does not improve things rather quickly, the word "bankruptcy" will be discussed. I'm not that negative yet, but Dendreon is going the wrong way. The company has failed to meet cost cutting objectives so far this year, and revenues have been well below expectations.
The company has gotten marketing approval for its prostate cancer treatment Provenge in Europe, but there are a number of questions that need to be answered there. It will be up to management on the third quarter call to answer some or all of those questions (who is your partner, when will revenues start, etc.). I do believe in Dendreon's long-term future, but their weakening balance sheet has put them in a position to where they may need to raise a significant amount of capital and dilute shareholders tremendously. This company can easily turn things around in a quarter, but what quarter will that be? So far in 2013, it hasn't happened, leading many to wonder if it ever will.
Green Mountain Coffee Roasters (GMCR):
The coffee company needs to prove that its growth story is still somewhat intact. In the past two fiscal years, they've gone from a 95% revenue growth rate to the mid teens. Current analyst estimates call for just 10% revenue growth in their just started fiscal year, which ends in September 2014. It hasn't helped their case that they took down their yearly forecast and long-term business growth outlook at their third quarter report.
The funny part is that there are plenty of positives for this name. They haven't expanded outside of the US and Canada yet, so there is plenty of room for worldwide growth. Also, coffee prices continue to drop, so their margins have expanded tremendously. When you combine that with management's decision to slash capital expenditures, it's really boosted their free cash flow, allowing a stock buyback. The company is expanding into new product lines, and hopefully they will into new countries soon too. A lot of items that have produced margin gains in the past year or so won't last forever, so it would be nice if they could increase their top line when the bottom line growth starts to slow or some of those items start to reverse.
The products these names sell couldn't be any more different, so you would wonder why they are grouped together. Well, these names share a common bond. Both are looking for a new CEO, which will provide a new beginning for each company. Both names need to prove that they can find the right person for the job, which will take several years to properly evaluate.
For lululemon, it still seems that the company is trying to overcome its pants problem from earlier this year. Guidance at the last report was a bit light, causing many to wonder if competition is eating away. The Canadian apparel name needs to find a strong candidate, one who can help transition this name into a more global brand. A new CEO will help to put the pants problem in the rear view mirror and restart the company's growth plan that was slowed this year. Shares are towards the upper end of their $60 to $80 range currently, which usually is a sign to step to the sidelines.
For Microsoft, it's been a long time since a new leader was needed. There have been many candidates rumored, from Stephen Elop at Nokia (which makes sense given Microsoft's deal to acquire Nokia's devices and services business) to Alan Mulally at Ford (F). While Microsoft shares are at the upper end of their 52-week range, the company has had its troubles in the past year with Windows 8 and the Surface line of tablets. Also, Microsoft should get rid of its "Siri" commercial. If the Surface is so much better than the iPad, why is Apple (AAPL) selling tens of millions of units each year? It would be nice if Microsoft's new CEO has some sort of mobile experience, to combat the competition from Apple and Google (GOOG).
Now that the Softbank purchase and Clearwire acquisition are behind us, it is time for the telecom name to start improving. Sprint needed the capital to reduce its large debt load and upgrade its network, and it's now time to get that new network going. There recently was a management shake-up as some worry that Sprint's turnaround efforts will take longer than expected, pressuring margins.
Sprint may have the best unlimited plan, but it needs to turn that into subscribers. Reports show that the new iPhone 5s/5c line was off to a very slow start at Sprint, but that could be due to a lack of supply. Sprint may be selling everything it is getting from Apple, but if they aren't getting enough, it will keep them in a distant third place for the foreseeable future. Sprint needs to prove it can grow subscribers and increase revenues, something that analysts don't see this year, and are skeptical of next year.
Tesla Motors (TSLA):
This one is a pure valuation call. Tesla needs to prove it is worth more than $22 billion in market cap and more than $1 million per US car sale. This name has gone from $35 to $183 in a couple of months and now the results need to justify the rally. The company's growth story is there and they have a very promising future, but the stock's valuation makes the cost of that story extremely expensive.
Tesla's bull case is definitely cracking, as you don't have the short squeeze potential that was there earlier this year. Also, the extreme valuation makes this stock vulnerable to any small piece of negative news, as we recently saw a $20 plus descent after a Tesla car fire. The stock has recovered most of those losses, but it shows how a name like this is vulnerable. Tesla got another upgrade on Monday, thanks to the possibility of stronger-than-expected vehicle sales. Now the company need to show those sales have materialized.
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.