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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.
  • Investment Portfolio: Internet Of Everything #IoE

    The Internet of Everything is a macro-trend that has been dubbed Internet 2.0. This article will review this investable opportunity, note some DotCom bubble implications, layout a targeting roapmap and provide a sample portfolio of companies that are likely beneficiaries.

    What is the IoE?

    The IoE describes a future where devices, people and infrastructure will have continuous network connectivity. Cisco (CSCO), the most outspoken advocate of the IoE, estimates the economic benefit of connecting 50 billion devices by 2020 at $19 trillion ($14 trillion private sector, $5 trillion government sector). The IoE is a superset of:

    • Connected Cars (previously know as telematics, smart cars)
    • Connected Homes (smart homes)
    • Connected Cities (smart cities)
    • Connected Health (mHealth, telehealth, wearables)
    • Industrial Internet
    • Internet of Things "IoT"

    What was learned from the DotCom bubble (Internet 1.0)?

    Invest selectively. Target the pipeline or enabler companies. Google (NASDAQ:GOOG) created long term success because they enabled the navigation of the massive amount of information on the net. Compare them to the dozens of companies that saw short term valuation spikes just because they added ".com" to their corporate name.

    How to invest in the IoE today?

    The two long term benefits for companies embracing the IoE are:

    1. Improve revenue generation-Examples in the connected car segment include $10 monthly subscription revenue (Audi, GM, Tesla, Volvo), accelerated service revenues from alert notification and expected fees for location-enabled search ("where is the nearest Shell station with lowest price per gallon?")
    2. Reduce cost while improving productivity-Verizon is saving over 55 million kWh annually in their data centers by deploying wireless sensors and control points . This is anticipated to result in a reduction of 66 million pounds of greenhouse gases per year.

    Identify those companies in markets that are early adopters and you will likely also identify companies that will see increased market share and improved operating margins. Note however that this is primarily a deferred benefit that will bear less fruit in the short term. I'm currently more focused on infrastructure related opportunities. As one analyst remarked: Before car companies could sell millions of vehicles we needed a system of roads, bridges and tunnels.

    The Internet of Everything will drive some serious investment outlays before the payback. Companies providing those products and services will be the early beneficiaries. Here are some infrastructure categories and my picks for an IoE portfolio:

    Sensors and microprocessors

    Top picks: NSP Semiconductors (NXPI), Skyworks (SWKS) and Freescale Semiconductors (FSL). NXPI announced they were acquiring FSL which leaves two picks in this category. All these semis have a strong presence in smart phones. NXPI and FSL combined are the market leader in connected cars and are well situated in the overall IoE market. NXPI and SWKS are both a little pricey for semis but are not that expensive based upon their growth prospects. Both have a track record of beating expectations and estimates have been increasing over the past thirty days. The analyst community is bullish on both names with projected secular growth rates of 25%. With a combined market cap under $50 billion their upside relative to larger players such as Qualcomm (QCOM) or Intel (INTC) is significant.

    Data and data visualization

    Top picks: Tableau (DATA) and Splunk (SPLK). These companies are 2014 new issues with market caps in the $8-$10 billion range. Valuations are rich with trailing price/sales multiples between 15-20x. Both have compelling growth prospects given the critical need for Big Data and Data Visualization in a connected future. DATA has a more mature business model reporting revenue growth of 75% and operating cash flow growth of 130% in the March 2015 quarter. SPLK grew C14 revenues and operating cash flow by 50% and 40%, respectively and is scheduled to report Q1 2015 earnings on May 28th.

    Smartphones

    Top pick: Apple (AAPL). The smartphone is the ultimate connectivity device. APPL has done an admirable job of growing share and maintaining price points in the high-end of the market. This market segment should increase as the smartphone is used as the front end for connected health (mobile diagnostics), fitness, connected cars (Apple Play integration replacing embedded systems), etc. Apple Pay is a likely disruptive capability for mobile payments as the IoE evolves. Watch Google as well. Android Auto is gaining traction in connected cars and their Nest acquisition and robotics research could situate them as a compelling play.

    Note: Both NXPI and SWKS should benefit from high-end smartphone market growth.

    Cloud, Networking and Server Infrastructure

    Top picks: Microsoft (MSFT), Cisco (CSCO) and Salesforce.com (CRM). I have three companies here to help provide stability given some higher-multiple, more-volatile selections in other categories. MSFT and CSCO are reasonably priced with dividend yields around 3%. If I had to pick two, I prefer MSFT with their strong cloud adoption trends, data and data visualization capabilities and aggressive mobile device pricing for Windows. Also CRM whose products and services are best situated to help companies connect with customers monetizing the data resulting from IoE penetration. CRM currently has a little too much acquisition premium included in the price so I'm looking for a pull back before entry. Note that with this much noise about suitors, it appears more probable than not that CRM will be acquired in the next year. If so, I believe MSFT would be the best fit for both companies.

    Cyber Security

    Top picks: Palo Alto Networks (PANW) and FireEye (FEYE). PANW is a solid franchise and my preferred cyber security platform pick. FEYE is more volatile but has the added benefit of being a strong M&A candidate. CSCO has stated that they expect an acquisition this year to increase their cyber security capabilities for the IoE and separately has commented about their current business relationship with FEYE. Revenue growth for both is in the 35-45% range currently with analyst secular growth of 50% (NYSE:PANW) and 35% (NASDAQ:FEYE). I currently own PANW and am looking for an entry point for FEYE.

    Wildcards

    Top picks: Mobileye (MBLY) and TeleCommunication Systems, Inc (TSYS). These are not pure IoE plays which is why I consider them wild cards. MBLY is the market leader in automotive sensors which is a segment that should continue to experience strong growth from safe driving and autonomous driving trends. I do not currently have a long position in MBLY but have been actively selling naked puts to generate option income. TSYS has a long history as a government contractor which has contributed to a low valuation. They are active in the connected car and connected health markets but neither of them are strong enough reasons to put the company in an IoE portfolio. The two primary reasons why they should be considered are:

    1. Location platforms are the cornerstone to connectivity (per Cisco). TSYS is one of the top 2 companies in location platforms and the market leader domestically.
    2. Cyber security is growing rapidly as our world connects and hackers disrupt. TSYS has cyber security training and threat monitoring which is a derivative play on this trend.

    The market opportunity for Internet of Everything is expected to be massive. Invest in companies providing infrastructure (enablers) and you are aided by tailwinds that provide the opportunity for outperformance. The following research materials include source materials used for data cited in this article. Please leave a comment with your targeted IoE investments.

    Research materials

    Gartner: Hype Cycle for the IoT, 2014

    Goldman Sachs: The IoT: Making sense of the next mega-trend

    McKinsey & Co: How digital is changing strategy Check out additional content on their pull down menus on top of page.

    Frost & Sullivan download link: Global connected car outlook to 2020

    Visual Capitalist: The History of Wearable Technology infographic among other content.

    Industrial Internet Consortium: Member Directory

    Postscapes: Tracking the Internet of Things. Several large companies are recommended. Check out the links for information.

    rti: 5 Ways the Industrial Internet is Changing the Oil and Gas Industry

    RCRWireless: Internet of Things and Driving connected car profits are just two of many articles or white papers that are worth reading. Starting point to research important trends to offload stress on wireless network using software defined networks and network function virtualization. See also presentation at Slideshare and at sdxcentral

    CTIA Wireless Association: How Wireless Works Various other articles on wireless, antennas, etc.

    Cisco: #internetofeverything White paper IoE capture your share

    Here are a few of my articles and blogs on IoE:

    Connected Car Market with research links from Frost & Sullivan

    MegaTrends to Invest: IoT

    Infrequently Asked Questions: TeleCommunication Systems, Inc

    DSRC: The Future of Safer Driving

    A Dialogue with Industry, A Conversation between cars

    CLSA Research: MSFT and CRM Are the Emerging Leaders Across IoT Spectrum

    May 22 1:50 PM | Link | 5 Comments
  • 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!
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