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Marty Chilberg's  Instablog

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.
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  • Earnings Season Q3-2014

    The earnings season window is just about over and, all things considered, it was a pretty solid quarter of continued modest top line growth and better earnings through productivity gains and buybacks. This formula has been a solid elixir for the market, balancing earnings growth with minimal inflation.

    FactSet data summary for quarter

    • 462 companies (92%) of S&P 500 have reported results.
    • EPS earnings reported above consensus 77% (above average).
    • Revenue reported above consensus 59% (at historical average).
    • Q3-14 earnings growth for group at 7.9% (expectation was 4.4%).
    • Q3-14 group revenue growth 4.0% YY (expectation 3.8%).
    • Forward guidance lowered for 62 companies.
    • Forward guidance raised for 19 companies.
    Nov 17 12:09 PM | Link | Comment!
  • Microsoft: The Valuation Gurus Still Have It Wrong

    I've been amazed how many bloggers and analysts weigh in on the valuation metrics for Microsoft (NASDAQ:MSFT) from a perspective that seems to be dated. MSFT has not been a growth company for about 20 years, yet back in the bubble years, it had a growth multiple of over 60x forward earnings. (2000) For the ensuing decade, everyone wanted to blame management for price declines which were inevitable as it transitioned to a value investment. The market adjusted to more correctly value the company yet the vast majority of those that weighed in on the decline continued to point to price declines rather than multiple contraction in their assessments.

    Now MSFT has rallied to a multiple that is well above value range and the resulting consensus appears to be that they are now overvalued. In my opinion the opinion is again missing the boat. MSFT has morphed yet again into a yield play that should be more appropriately valued relative to a dividend growth company. Consider the universe of Dividend Champions, Challengers and Contenders when evaluating MSFT. The company has a forward multiple (F16) of 15.6x and a PEG ratio of 2.8. With a yield of 2.5% and a FCF payout ratio of about 33%, MSFT is well positioned in this space. A couple of random comps:

    • JNJ PE 17.4, PEG 2.8x, Yld 2.9%, FCF payout 55%
    • SO PE 16.3, PEG 5x, Yld 4.5%, FCF payout over 100%
    • MCD PE 17.2, PEG 3.6x, Yld 3.6%, FCF payout 75%

    I'll take my chances on MSFT for long term dividend safety and growth over any of these names. My fair value for MSFT as a dividend growth name is $50-$55 per share. The company has a momentum feel to it today so I'm going to be selling covered calls against my position in this range. If it stays below that level, I'm getting a bit of extra income. If it gets assigned, I'll let it go and wait for a re-entry opportunity.

    Disclosure: The author is long MSFT.

    Nov 17 11:37 AM | Link | Comment!
  • TeleCommunication Systems, Inc-Taking A Flyer Into Earnings

    TCS (NASDAQ:TSYS) appears ready for a rebound. I'm taking a position leading into earnings given the number of signs I'm seeing that their business metrics have indeed bottomed and the business is rebounding. This may be a little early but given the current valuation, I'm happy to be early and add on any weakness if I hear some confirmation of the trends on the conference call on Thursday.

    My bullish thesis is based upon the following:

    • TCS reliance on government systems revenues has declined significantly. There is no evidence that they will show improvement in Q3, but the downside risk has been mitigated. Govt systems represented only 16% of 1H-14 revenues as compared to 32% for C12.
    • Commercial revenues improved to over 50% of company revenues for the 1H-14. The commercial segment is made of up of E/NG911 business (48%), LB Apps (28%) and LB Platforms/SMS/IP/secure mobility (24%).
    • E/NG911 business appears to be taking off, based upon company presentations to various state agencies this year. As new PSAPs are implemented, commercial system revenues are recorded. As implementations go on-line, service revenues improve through annual maintenance agreements, subscriptions and call handling services. To put the recent improving business in perspective, in Mar-14 the company disclosed that they had 72 PSAPs live and 26 in progress with a population served of 9.0m. In Sep-14 the company disclosed that they had 146 PSAPs live and 333 in progress with 18m population served. Clearly a very significant jump to date. This should equate to a nice step up in commercial system revenues in Q3 and more importantly much better expectations for Q4 and C15 in both systems revenues and service.
    • Commercial gross margins have improved from 52% for C13 to 60% for the 1H-14. This improvement was helped by the elimination of amortization (written off) but primarily it appears the improvement is a better margin for the commercial lines of business that are growing.
    • The Intrado 911 debacle can only help TCS to maintain or increase their 58% market share.
    • The announced purchase by Planet Labs of the antenna system to track satellites and the Kimball partnership to provide cyber security for state and local networks appear to be evidence that the company is making progress taking the government sector expertise and leveraging it into commercial wins.
    • The Cellcrypt partnership announced earlier combined with the TCS IRIS added substance to their attempts to sell Virtual Private Network capability that is compliant with NSA Mobility Program-Capability Package 3.0.
    • The AT&T Drive Studio announcement is evidence that the LBS telematic SDK toolkit is of interest in the market place and added to the QNX relationship could be poised to provide traction in C15-16.

    There is still downside risk but the risk/reward seems beneficially tilted to a long position at present. Having so little analyst coverage and institutional ownership could also benefit shareholders if these potential upside trends continue and awareness increases.

    Disclosure: The author is long TSYS.

    Oct 27 7:23 PM | Link | Comment!
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