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  • Adobe's (ADBE) Strategic Shift Will Lead To Growth In The Long-Term

    Adobe Systems Inc. (NASDAQ:ADBE)

    Headquartered in San Jose, CA, Adobe Systems, Inc. delivers powerful graphic design, publishing and imaging software for print, web and video production to help professionals express, share, and manage their ideas. Founded in 1982, Adobe created printing technology that inspired the desktop publishing revolution. Since then, Adobe has assembled the premier portfolio of graphic design, imaging and publishing software on the market. In 2005, the company acquired one of its closest competitors, Macromedia, bringing together Adobe's content creation and collaboration products with Macromedia's web design and animation tools. Market-leading, Adobe, creative products in include Creative Suite, Photoshop, Acrobat, Illustrator, Flash and Dreamweaver. Adobe entered the digital marketing market with its acquisition of Omniture in 2009, and has since made several investments in this business, which is the fastest growing revenue segment today. The company's five-year price to volume performance can be seen below.

    (click to enlarge)

    (Yahoo Finance)

    Fundamentals (Financial year end Nov)

    The company's recent fundamental highlights are shown:

    • Adobe reiterated FY2015 EPS guidance of $2.00, which is below consensus of $2.07. The company also reiterated FY2016 EPS guidance of $3.00, which is below consensus of $3.26.
    • Adobe's guidance looks conservative, especially since the company set these goals several years ago. The company also increased its estimate of Media total addressable market (NYSE:TAM) to $14 bn from $10 bn, increasing overall TAM to $35 bn from $31 bn in March.
    • Adobe continues to see the Media business growing through continued migration to Creative Cloud, increased ARPU, and ongoing market expansion, as evident through the expanding TAM.
    • Adobe Creative Cloud (NYSE:CC) adoption has grown rapidly over the past two years, with total subscriber count hitting 2.8mn at the end of 3Q2014, up 171% y/y, while the pace of new subscriber adds has accelerated every quarter since CC was released.

    For investors, the investment rationale for the company should be derived from the analysis of four key factors: Financial strength, management, economic moat, and dividends.

    Financial Strength

    The company's consolidated balance sheet can be seen below, it has not been updated to reflect 2014 as of yet, but some key trends do emerge. Firstly, the company has been able to increase its cash on hand 67% since 2009 and this should remain positive in 2014. Secondly, the company's current ratio has always remained above 2.5. This means the company is always able to cover its liabilities without any risk of default to its creditors. Lastly, the company's "total liabilities to total assets" has remained steady between 0.14 and 0.36 for the past 10 years. This means the company has been using a proportionate amount of debt to fund its growth.

    (click to enlarge)


    The key focus of management should always be on the creation of free cash flow for the company. As you can see below the company has remained strong in this aspect.

    (click to enlarge)

    Economic Moat

    The key focuses of a company's economic moat have to do with competitive advantage and pricing power. A company's competitive advantage allows the company to earn higher profit per unit sold than competitors and creates barriers to entry into the market. Gross margins have stayed strong over the past 10 years, while net margins have come down in recent years. Expect this to be a key focus for management as they head into the future.

    (click to enlarge)

    (click to enlarge)

    Dividends and Buybacks

    The focus of many investors investment decisions is on the basis of income streams and buybacks to warrant the risk of holding a company while waiting for capital appreciation. ADBE has not paid a dividend since 2005 and looks unlikely to do so in the coming years. The focus of the company instead has been the issuance and buyback of shares. The trend is unclear and the company fluctuates between issuances and buybacks as it sees fit. The 10-year trend can be seen below.

    (click to enlarge)

    Investment Rationale

    Adobe is making several major strategic changes in the company's business model, which are intended to raise the company's long-term revenue growth potential and increase recurring revenue. The company's creative cloud offering which includes all creative desktop products, is priced at a compelling monthly subscription price and is expected to provide consistent long-term benefits.

    Adobe currently trades at $73.47 (closing price as of Dec 2nd ) with its 52 week range of $53.93-$74.69 and provides potential in the long-term as long as three things occur. One, the move to cloud revenue increases top line growth. Two, creative cloud offering is increasing the number of new users because of a lower entry price. Three, marketing cloud is well suited for growing demands of CMOs.

    All information and data was taken from For further insights into the company or any of the 5000+ companies listed, visited the page.

    Tags: ADBE, long-ideas
    Dec 02 11:36 PM | Link | Comment!
  • Bed Bath & Beyond's (BBBY) E-Commerce Shift Will Create Growth

    Bed Bath & Beyond (NASDAQ:BBBY)

    Bed Bath and Beyond is a leading retailer of domestic and home furnishings as well as food, giftware, health and beauty care items and infant/toddler merchandise. BBBY operates over 1500 stores in the US and Canada under various subsidiaries brands and also has a joint venture with a similar company in Mexico. The value proposition for Bed Bath and Beyond is a focus on everyday low prices, a differentiated merchandise assortment, excellent customer service and a unique, decentralized operating culture.

    The company has changed its supply chain strategy to help make the company more profitable in the near future. This strategy shift will require increased company investment as the company looks to make its pricing more competitive, develop more targeted and dynamic marketing and invest in a state-of-the-art multi-channel supply chain e-commerce distribution strategy.

    These investments for the company should be off in the long-term and this is reflected in the Vuru grade as well as growth and stability metrics.

    BBBY currently trades at $66.43 (price as on 07-Oct, P/E ttm of 13.78) with its 52 week range of $54.96 - $80.82 and looks fairly valued at current levels with high upside potential in the long-term. The growth price sees the stock undervalued by 16.46% as of October 7th.

    Recent earnings for the company have exceeded analyst estimates and will help the company continue to fund its growth plans


    - EPS of $1.17 exceeded consensus EPS of $1.14


    - Ecommerce/mcommerce sales grew 50% and drove the bulk of BBBY's revenues growth for 2Q2014


    - 3Q/4Q EPS plan of $1.17-$1.21/$1.78-$1.83 incorporates consensus

    The economic moat trend of the company is another catalyst for the strong grade on Vuru. Bed Bath and Beyond remains a strong retail operator, in terms of in-store merchandising, and more entrepreneurial store-level culture than the average retailer and still above average margins and ROIC. The company has had very consistent margins over the past 10 years averaging very close to 40%.

    The aggressive investments over the past 18 months to enhance multi-channel capabilities, including a new website for the company, should keep customers coming back for core home goods and drive margins positively.

    Risks for the company in the near future include a highly competitive industry saturated from other competitors and retailers as well as possible changes in the growth of the housing market.

    Investment Rationale

    BBBY is tackling online competition head-on, with substantial investments in its omni-channel infrastructure that should help it to become the market leader.

    These changes should also help improve trends in the long-term and if the housing market growth stays stable the outlook for the company is positive.

    If BBBY proves that its strategic moves and investments will grow sales and margins as consumer shopping behavior shifts and competition remains intense, look for investors to see strong returns on the company.

    Tags: BBBY, long-ideas
    Oct 08 3:31 PM | Link | Comment!
  • UnitedHealth Group Is Entering 2015 Positioned For Success

    UnitedHealth Group (NYSE:UNH)

    Business Profile

    UnitedHealth Group (UNH), a U.S. leader in health care management, provides a broad range of health care products and services, including health maintenance organizations (HMOs), point of service (POS) plans, preferred provider organizations (PPOs), and managed fee for service programs. They have the broadest umbrella of offerings, but continue to derive nearly 83% from underwriting at-risk health insurance with 49% in the government and 38% in commercial sectors. UNH business segments include UnitedHealthcare (UHC), UnitedHealthcare Medicare & Retirement and Optum (OptumHealth, OptumInsight and OptumRx).

    Financial highlights (FYE end Dec)

    ü UnitedHealth 2Q14 results were better than analyst consensus. EPS came in at $1.42 versus consensus of $1.26. Revenue was $32.6 bn versus consensus of $32.2 bn

    ü Total membership was about flat year over year - Commercial risk-based membership declined but Medicaid was particularly strong, growing about 19% y/y and 9% q/q. International grew sequentially after losing membership in 1Q14 versus 4Q13 and UNH continues to focus on margin rather than membership growth

    ü Medical care ratio was 81.6% a strong performance, especially relative to 1Q14 results. UHC segment operating profit declined by 2.2% y/y, a smaller decrease than that in 1Q14.UHC is expecting an expanded presence in individual exchange markets and perhaps some better trends with large employers

    ü Optum continues to post strong growth -

    o Revenue grew 29% after adjusting for certain revenue reclassifications (similar to 1Q14), which primarily affect OptumInsight

    o OptumRX grew revenue 42% as it benefits from in-sourcing its PBM (Pharmacy Benefit Management) and sequentially, OptumRX revenue grew about 7.3%

    ü In 1H2014, UNH added 635,000 new Medicaid members and expects to add in excess of 800,000 for the full year 2014

    ü Guidance - Regarding 2015, the company reiterated its view that it expects accelerating earnings growth but not back to its longer-term expectation of mid-teens annual earnings. It fully expects to reach this growth rate in 2016 and 2017

    Moat Trend

    ü UNH pricing expected trend of 10.9% in 2015, 40 bps above 2014. In its justification for rate increases, UNH factored in a 10.9% trend increase for 2015, which consists of 4.1% for unit cost, 5.5% for utilization, and 1.0% for trend

    ü The overall 10.9% trend rate is 40 bps ahead of the company's forecast for 2014 (10.5%), but favorable to 2013's 12.5% trend

    ü Narrow network pharmacy plans are generating double digit savings and OptumRx is gaining share in external business and are expected for mid-to-high single digits for narrow network savings

    ü United reported closing more external sales than their current market share, with 2/3 of the wins being driven by convincing employers where United has slice business to carve out pharmacy from all insurers and award the PBM contract to Optum

    Few Risks

    ü Healthcare reform represents a pivot point for Managed Care and considerable uncertainty remains around the 2014 healthcare reform implementation given the multiple moving parts such as exchanges, guaranteed issue, employer dumping, etc.

    ü UNH faces pressures around medical cost trend acceleration, the potential for increased commercial pricing aggression, and multiple uncertainties in the Medicare Advantage market

    Investment Rationale

    ü UnitedHealth Group Incorporated is in an ideal position to transform itself from a traditional health insurer to a company focused on "managing care." UNH operates in an increasingly difficult regulatory environment but gradual development of new business models (e.g., Optum) and the acquisition of Amil in Brazil should allow the company to at least sustain or even enhance its growth rate over time

    ü While retrenching of Med Adv margins has slowed overall earnings momentum in 2014, analysts estimates that by 2015 more than two-thirds of earnings will be in higher growth businesses of Optum, Medicaid and Med Adv

    ü UNH currently trades at $88.21 (price as on 25-sep, P/E ttm of 15.76) and is trading at high end of its 52 week range of $66.72 - $88.85 and looks attractive at current levels with decent upside potential over medium-term as

    o The challenging Medicare margin environment is improving and management is optimistic about enrollment growth, despite a change in pricing strategy for select markets

    o UNH is entering 2015 positioned strongly and see ample room for growth over next few quarters and hence its stock has potential to outperform over the medium-term

    Tags: UNH
    Oct 08 10:37 AM | Link | Comment!
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