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Marty Chilberg
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I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.
  • Analyst Notes May 22, 2015: $HPQ, $INTU, $ROST, $GPS, $CPB, $EXPE, $MRVL

    Morningstar Analyst recap notes. Full report available with subscription.

    Fiscal second-quarter results for Hewlett-Packard HPQ came in slightly ahead of our expectations, and the company is still on track to achieve our full-year revenue, profitability, and earnings per share estimates, but it hasn't been a smooth ride. Revenue remains challenged, profitability is improving (slowly), and restructuring is ongoing. We assume a continuation of these factors in our base case, and though we will update our financial model following the quarter, we expect to maintain our $37 fair value estimate and no-moat rating (and negative trend). We continue to view HP as a turnaround story that has several moving parts, and even with shares trading at a modest discount to our fair value estimate, we would seek a wider margin of safety before committing capital to this name. Revenue for the fiscal second quarter fell 6.8% year over year (down 2% in constant currency) to $25.4 billion, but once again, performance was uneven across the business lines. In enterprise, while it was encouraging to see the 17% constant currency gain in industry standard servers, this was offset by weakness in enterprise services (down 14% in constant currency). Three large contract roll-offs were in part to blame, but this is obviously a disheartening overall decline, and one that prompted management to announce that it will need to take up to $2 billion of gross annualized costs out over the next three years in order to make this division more competitive. For the entire note, click here.

    Peter Wahlstrom, CFA

    Intuit INTU reported a good fiscal 2015 third-quarter result and slightly raised its full-year outlook, given a better-than-expected performance from both the small-business group and consumer tax business. With the third quarter being so pivotal for Intuit and its tax business, it was good to see the firm's long-term tax strategy coming to fruition. Importantly, all four tax growth drivers (federal return growth, software category expansion, market share, and revenue per return) spurred total TurboTax unit growth of 13%. As a result, management increased its previous consumer tax revenue growth guidance to 9% from 5%-7%. We think the company's tax position remains very strong and foresee good growth for the software category, leading us to forecast approximately 7% growth for the business over the midterm. Additionally, we think Intuit's leadership in the small-business segment remains strong, and we are encouraged by the firm's continued subscriber outperformance for QuickBooks Online and associated products such as payroll and payments. We maintain our $85 fair value estimate and wide economic moat rating. For the quarter, revenue dipped 8% to $2.19 billion year over year. This was expected due to Intuit's new recognition of revenue on a ratable basis, rather than up front. In small business, online ecosystem revenue rose 20% to $744 million and represents a healthy level of customer acquisition. Total paying QuickBooks customers also grew 20% year over year to 1.58 million. For the entire note, click here.
    Andrew Lange

    Ross Stores' ROST first-quarter results of mid-single-digit comparable sales growth and 16% adjusted earnings per share growth tracked ahead of our full-year estimates calling for 3% comparable sales growth and 9% earnings per share growth. However, investments in the buying organization and announced entry-level wage increases to $9 per hour will offset some full-year upside. Although a headwind to near-term expense leverage, we see these investments as sound for the long term, given our belief that Ross's buying organization is a key component of its narrow moat. Guidance for the full year was increased to $4.72-$4.87 from $4.60-$4.80 to reflect the first quarter's upside to management expectations. Overall, we think the first quarter demonstrated capitalization on buying opportunities given the West Coast port delays, market-share gains of value-oriented shoppers, and careful expense control. We see little change to our $109 fair value estimate (based on 6% average annual top-line growth and 11% average annual earnings per share growth over the next five years) and view Ross as fairly valued at current trading levels. First-quarter revenue grew 10% on comparable-store sales growth of 5%, driven by a combination of higher transactions and average basket size increases. Gross margin benefited with a 60-basis-point improvement in merchandise margins and 5 basis points of leverage on occupancy. For the entire note, click here.
    Bridget Weishaar

    We continue to believe that Gap GPS is on track to show signs of sales and margin recovery in the back half of the year, driven by improved product from the new Gap designer and investments in a responsive supply chain. However, we have also noted that first-half performance would probably be very weak, and first-quarter results certainly supported that belief. Although we expect second-quarter performance to show little improvement, we think the current risk/reward proposition is very attractive to investors with a longer investment horizon. With management standing by its full-year earnings per share guidance of $2.75-$2.80 and our belief that growth catalysts are back-loaded, we see little change to our $49 fair value estimate. In our opinion, 3% comparable sales growth at Old Navy (the fifth consecutive quarter of positive comparable sales growth) and continued strong merchandise margins demonstrate the strength of a more responsive supply chain and innovative way to bring products to market. Merchandise margins were about flat in the first quarter, despite a consolidated comparable sales decline of 4%. We think supply chain responsiveness will be the largest driver of consolidated company margin expansion as it is rolled out across Gap and Old Navy. In our opinion, the ability to better match supply to demand addresses what we view to be the largest overhang to average unit retail, which is promotions. For the entire note, click here.
    Bridget Weishaar

    Tepid soup sales continued to plague Campbell Soup CPB in the third quarter, but the profit improvement posted, with adjusted gross margins up 70 basis points to 35.9% and adjusted operating margins up 40 basis points to 16.1%, was a bright spot. We're maintaining our $47 fair value estimate and wide moat, negative trend rating based on the firm's expansive distribution network but deteriorating brand intangible asset. With the shares trading in line with our valuation, we suggest investors await a more attractive entry point. For those looking to gain exposure to the packaged food landscape, we recommend Mondelez, which trades 10% below to our fair value estimate in an industry where discounts are few and far between. Organic sales in the quarter slipped 1% versus the year-ago period, primarily driven by deteriorating volume, which retreated 3%. The degradation in volume, which we suspect will persist into 2016, was particularly pronounced in the soup segment. Campbell attributed a portion of this decline to retailers that are scaling back the amount of inventory stocked, most likely a reflection of the sluggish performance of center-of-the-store grocery categories in the aggregate that are losing out to consumers' desire to shop the perimeter of the store in search of healthier fare. For the entire note, click here.
    Erin Lash, CFA

    Deal activity in the online travel industry continues with the latest announcement coming Friday morning that Expedia EXPE is selling its majority owned stake in Chinese online travel agency (OTA) eLong to CTrip (Priceline partner). Our view has been that eLong was positioned to lose share in China to CTrip (a source of our negative moat trend rating on Expedia), and we believe that Friday's transaction helps confirm that view. Details are limited, but initially we view this as a positive for CTrip, as its dominance in China is strengthened with eLong's high-single-digit China OTA share, and the purchase price of 6 times 2014 sales is reasonable, in our opinion. A stronger CTrip presence should in turn aid Priceline given its partnership with t he firm; however, Expedia is now in cooperation with CTrip on certain regions and products. If outbound and inbound China travel services are part of this cooperation at reasonable terms that would present some competition to Priceline, resulting in an offset to Priceline from the strengthening CTrip position, and a potential improvement in Expedia's position in China. We await details, but at this time we are maintaining our narrow moat ratings and $104 and $1,835 fair value estimates on Expedia and Priceline. For Expedia, removing the loss assumptions we modeled for eLong the next few years, and assuming that the CTrip cooperation can replace the 2%-3% of total sales lost through the eLong sale than the fair value increase is marginal. For the entire note, click here.
    Dan Wasiolek

    Marvell Technology MRVL reported predictably soft fiscal first-quarter results, in line with the company's earnings warning from late April, but the company's second-quarter forecast was also a disappointment, calling for flattish revenue despite normal seasonal strength in storage, the firm's largest end market. We don't like much out of Marvell's near-term results, but a positive catalyst remains if and when the firm throws in the towel on its money-losing wireless chip business. We will incorporate Marvell's results into our valuation model, but we do not anticipate a material change to our $14 fair value estimate at this time and we view shares as fully valued. We'll maintain our no moat rating for the firm. Marvell's revenue in the April quarter was $72 4 million, about at the midpoint of the firm's revised forecast of $710 million-$740 million as discussed in late April, but still down a dismal 24% from the year-ago quarter. Marvell saw weakness in all key markets. Storage chip sales were down 20% sequentially, consistent with ongoing weakness in PC demand and, in turn, demand for hard-disk drives that rely on Marvell's storage solutions. Wireless chip sales were down 13% sequentially due to disappointing demand for domestic smartphones in China, including 4G LTE models. Even the firm's relatively stable networking business was down 11% from the year-ago quarter, due to soft enterprise spending. For the entire note, click here.

    May 22 12:58 PM | Link | Comment!
  • Analyst Notes May 21, 2015: $CRM, $BBY, $NTAP, $AAP, $WSM

    Morningstar analyst morning recap. Full reports available with subscription.

    Salesforce CRM reported solid results for the first quarter of its fiscal 2016 reporting year, demonstrating strong revenue growth and operating leverage, even in the face of currency headwinds. We reiterate our wide moat rating (which we recently upgraded from narrow) and are sticking with our $66 fair value estimate. The company's success beyond its core Sales Cloud (which grew 9% versus last year) came into focus this quarter, as the Service Cloud, Marketing Cloud, and Platform segments each grew more than 25% versus the prior year, bringing total revenue growth to 22%. The growth rate is impressive, particularly give n the size of Salesforce revenues, which we expect to exceed $6.5 billion this fiscal year. Salesforce is the fastest-growing wide-moat firm in our technology universe, and we would enthusiastically recommend investment at a discount to our $66 fair value estimate. In spite of spending on aggressive customer acquisition and investment in new products, operating margins expanded by more than 600 basis points, reaching a positive number (2.1%) for the first time in four years. According to our analysis, the cost of new customer acquisition is likely increasing--still, we believe the lifetime value of the customers is also increasing, and the improving operating leverage is a positive data point for our model. Marketing cloud and analytics products face longer sales cycles, in our view, and high levels of sales and marketing expense should continue. For the entire note, click here.

    Rick Summer, CFA, CPA

    Best Buy BBY got off to a strong start to fiscal 2016, riding favorable TV and mobile product cycles, reduced industry competition in appliances, and improved multichannel capabilities to better-than-expected domestic top-line results (comps improved 0.6% including the impact of installment billing plans versus mid-single-digit declines across much of the industry) and adjusted operating margins (coming in flat at 2.6%). We still believe management deserves a great deal of credit for making its model more viable in the evolving world of consumer electronics retail, undergoing one of the retail industry's more impressive cost reduction plans in recent memory, and exiting unprofitable international operations. That said, there was little in the quarter to quell concerns about longer-term profitability, and we're planning to maintain our $36 fair value estimate, which balances operational and cost improvements with industry and competitive headwinds. Management's second-quarter outlook strikes us as appropriate, calling for flat-to-slightly positive domestic revenue growth, SG&A investments for expanded home, appliance, and service offerings, and some disruption for the brand consolidation in Canada. For the entire note, click here.
    R.J. Hottovy, CFA

    NetApp's NTAP fiscal fourth-quarter results missed our expectations and the company's guidance because of unexpected customer behavior. Management expects the disruption in its order pipeline to continue into the next two quarters before business normalizes in fiscal 2016's second half. Shares traded down roughly 8% in after-hours and were at a discount to our current fair value estimate of $39 per share. We will roll our model forward but expect that a downward revision to our fiscal 2016 forecasts will result in a net reduction in our fair value estimate. At this time, we continue to believe that NetApp's installed base is sticky, and we are maintaining our narrow moat rating. Beyond currency headwinds, the quarter suffered from a larger-than-anticipate d disruption in customers transitioning to Clustered ONTAP. Clustered ONTAP is a new version of ONTAP (industry-leading operating software for storage arrays) and has been gaining momentum with new customers and new workloads of existing customers. But existing customers resisted the upgrade as it involved a complex process for migrating workloads and minimizing downtime. NetApp is now investing in technical resources to help its customers plan and implement their transition. Quarterly revenues declined 7% year over year to $1.5 billion, as weakness in U.S. commercial business reflected in a 12% decline in product revenue (60% of total). For the entire note, click here.
    Simran Kaur

    Advance Auto Parts AAP reported continued integration challenges from its recent General Parts acquisition in the first quarter and reduced its full-year outlook again. Nonetheless, we plan to maintain our $145 fair value estimate and our narrow moat and positive trend ratings, since we still believe that the acquisition will meaningfully strengthen Advance's long-term cost advantages and should help the firm benefit from the commercial industry's consolidation. Advance's quarterly performance was notably soft: Comparable-store sales growth slowed to the lowest level in over a year, up only 0.7% compared with 1.1% in the fourth quarter and 2.4% a year ago, driven by aforementioned integration challenges and unfavorable weather conditions. With the continue d merger-related headwinds, management now expects 2015's same-store sales performance to be at the low end of its previous low-single-digit guidance and earnings per share of $8.10 to $8.30 compared with $8.35 to $8.55 previously. While these expectations trail our own near-term EPS forecast of $8.47, we're encouraged that the firm continues to target synergies of $45 million to $55 million and that comparable operating margins ticked up to 10.1% from 9.6% in the same period last year. Ultimately, we think that the potential productivity improvement from the combined entity remains large, and we project full-year operating margins topping 12% within the next five years.
    Adam Fleck, CFA

    We are reaffirming our GBX 850 per share fair value estimate ($27 per ADR share), narrow economic moat, and stable moat trend ratings after United Utilities Group UUGRY reported fiscal year 2015 operating profit of GBP 653.3 million, compared with GBP 630.2 million last fiscal year. In the fiscal year, the company paid an GBX 37.70 per share dividend, in line with management's annual dividend growth target of at least retail price index. The company successfully completed the 2010-15 regulatory period, investing nearly GBP 3.8 billion and ending the period in the top quartile of utility performance. Management now turns its attention to the upcoming 2015-20 regulatory price control, which sets higher targets for operational efficiencies and more challenging financial targets. During the next five years, the company plans to spend more than GBP 3.5 billion on capital investments, supporting regulatory rate base and modest earnings growth. During the year, revenue was up 1.9%, lower than the 3.8% nominal allowed increase (1.2% real, plus 2.6% RPI change) as management implemented a previously announced special customer discount, which was applied in the current fiscal year. Operating costs were kept in check, with lower operating expenses offsetting higher depreciation from asset additions and increased bad debt expense. Management continues to outperform regulatory targets, which allows United Utilities to earn higher rates of return. For the entire note, click here.
    Andrew Bischof, CFA

    Consumer spending has remained strong at home-improvement and -furnishing retailers during the first quarter, and no-moat Williams-Sonoma WSM was able to benefit from the willingness-to-spend tailwind that the wealth effect and housing turnover has created. We plan to update our $76 fair value estimate in response to the results and to incorporate further upside from Morningstar's repair and remodeling outlook for spending, which incorporated mid-single-digit growth over the next five years. As millennials help boost household formations, we think a brand like West Elm could benefit disproportionately, continuing to offer reasonably priced high-quality products that are easily accessible via the e-commerce platform, which that particular demo graphic cohort has a particular bent to use. Despite a performance that was better than expectations, management has guided for full-year results that are unchanged, forecasting revenues of $4.95 billion-$5.02 billion, brand comps of 4%-6%, and earnings per share of $3.35-$3.45. However, we note that management has generally been conservative, outperforming guidance in nearly all quarters since the United States has come out of the economic downturn. For the entire note, click here.

    May 22 11:27 AM | Link | Comment!
  • The Eurozone Economy Picks Up Speed, Though Greece Remains Parked

    FactSet

    Preliminary data released by the European Commission last week shows that the Eurozone grew by 0.4% in the first quarter of 2015 as compared to the fourth quarter of 2014. This is the fastest quarterly growth rate in four years and marks the eighth consecutive quarter of expansion. The region is benefiting from low oil prices and improved credit conditions in the wake of the European Central Bank's (ECB) quantitative easing (QE) program. However, there is a wide discrepancy in performance across the member countries, and some significant risks to the overall outlook remain.

    In early 2015, with the ECB's main monetary policy rate sitting at just above 0%, the central bank finally followed in the footsteps of the Bank of Japan and the U.S. Federal Reserve and started buying up financial assets. It's still a bit soon to tell from the numbers, but the move appears to be buoying business and consumer confidence; the economic sentiment indicator for the Eurozone is currently at its highest level in nearly four years. We'll have to wait a bit longer to see if this improved sentiment translates into higher business investments across the region.

    Which countries are the strongest right now? Surprisingly, the countries which suffered the most during the European debt crisis are doing quite well, with the notable exception of Greece. Ireland was the superstar in 2014, with real GDP growth of 4.8%. The economies of Spain and Portugal both expanded last year and growth continues to accelerate, while Italy appears to have just emerged from recession. Looking ahead, the outlook is positive. Analysts surveyed by FactSet expect Ireland to grow by 3.5% in 2015, Spain by 2.5%, Portugal by 1.5%, and Italy by 0.5%, (the country's first annual expansion since 2011).

    Nevertheless, problems remain for Greece. After 18 consecutive quarterly contractions, the economy finally seemed to be turning around in 2014 when it expanded in the first three quarters of the year. Late in the year, however, the Greek president's call for an election rattled financial markets and created a fresh wave of political and economic uncertainty. The parliament's failure to elect a new president by the end of 2014 forced a national election in late January, and with the anti-austerity Syriza political party poised to win big in the tough economic climate, anxiety about the future of the Greek bailout arrangement continued to build.

    In January, Greek voters gave a decisive victory to Alexis Tsipras's tough-talking left-wing Syriza party. Tsipras, who became prime minister with his party's victory, had campaigned on a promise to renegotiate the terms of the bailout and to reverse many of the unpopular tax laws enacted as part of the deal with the ECB, European Union, and IMF. The often contentious meetings between the Greek government and its creditors that followed the election have finally given way to more productive discussions in recent weeks, but time is running out for Greece to figure out how to meet its upcoming debt obligations.

    The country is not out of the woods just yet, although speculation that Greece will be forced to leave the Euro area (often referred to as Grexit) has abated for now. The economy has shrunk by 25% since 2007 and the unemployment rate sits just below 26%, depressing both consumer and business sentiment. The outlook for the Greek economy depends on what happens in the ongoing debt talks. Until economic growth takes hold, Greece will remain in a downward spiral, which will either drag down the entire Euro area or lead to a Euro without Greece.

    Tags: Macro Trends
    May 19 5:46 PM | Link | Comment!
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