Apple AAPL reported solid fiscal third-quarter results that were modestly ahead of our expectations, but it was not a blowout quarter because of the newly launched Apple Watch. IPhone demand remains stellar, especially in China, but unit sales and revenue from the Watch were below our expectations. Supply constraints were certainly part of the Watch shortfall, but perhaps early demand for the device was tepid as well. While the Watch appears to be off to a slow start, we're far from calling the device a flop, as iPod and iPhone launches faced similar early challenges but exponential growth and mass adoption thereafter. O verall, we view the 7% after-hours decline in Apple's stock to be overdone. We expect to maintain our $140 fair value estimate and narrow moat rating, and with an after-market-close price of $122, we view the sell-off as the start of an adequate margin of safety for investors. Apple sold 47.5 million iPhones in the June quarter, slightly below expectations but still up a hearty 35% from the year-ago quarter. Unit sales in greater China remained spectacular, up 87% year over year. Yet iPhone average selling prices were surprisingly flat, which we view as a great sign for iPhone product mix as Chinese customers aren't solely buying the older, cheaper models. Apple's revenue from other products was $2.6 billion, which we think implies that the firm earned about $1.5 billion from the Watch, based on sales of 3 million units at a $500 ASP. For the entire note, click here.
Brian Colello, CPA
Microsoft's MSFT fourth-quarter results demonstrated the highs and lows of a firm in transition, with mixed hardware results (better-than-expected Surface sales, but weaker-than-expected Phone sales) and patches of decelerating software license sales as the transition to the cloud accelerated. Despite a stiff currency headwind and continuing weak PC demand, overall results were largely as expected as the firm readies to launch Windows 10 on July 29. We remain comfortable with our $46 fair value estimate and wide moat rating. Total revenue declined 2% in constant currency due to a combination of factors, including weak Phone sales, the transition from Office perpetual licenses to Office 365, original-equipment manufacturer inventory drawdown related to the upcomi ng Windows 10 launch, and last year's XP refresh cycle. Disappointing Lumia sales and surprisingly weak feature phone results validated management's previously announced write-down of the Nokia acquisition. Nevertheless, management looks to soldier on in its quixotic quest to gain meaningful share in the smartphone market, albeit with a much reduced product lineup. Should management stop investing in the margin-diluting phone hardware business, our fair value estimate would increase to $48. The core commercial business remained solid, with constant currency commercial sales up 4% due to strong Server products and services (up 9% in constant currency) and cloud results (up 96% in constant currency). For the entire note, click here.
Norman Young
Wide-moat Coca-Cola's KO second-quarter results keep the company on track to meet our full-year expectations, and we don't plan major changes to our $43 fair value estimate. Although reported revenue declined from a year ago, currency headwinds drove the entirety of this fall; the firm enjoyed continued positive contributions from both volume and price/mix. End-market shipments increased 2% year over year, accelerating from the first quarter's 1%, while price/mix was a bit slower (at 1%, versus 3%) because of poor geographic mix, as the firm enjoyed faster volume growth in lower-priced countries. Year to date, Coke has generated 1% end-market volume growth and price gains of 2%, and is tracking toward our full-year target of similar volume grow th and a slightly higher 3% price/mix contribution. We're encouraged that both carbonated and noncarbonated beverages saw positive volume gains in the quarter, with still drinks in particular enjoying a solid 5% growth rate (on top of similar gains in the same period a year ago). Coke enjoyed the strongest growth in its Eurasia and Africa segment, where sparkling beverages climbed 4% and non-carbonated leaped 7%, while still drinks climbed 5% in both Latin America and Asia Pacific. For the entire note, click here.
Adam Fleck, CFA
While currency remained a significant headwind, Thermo Fisher TMO delivered very strong top-line growth in the second quarter. The company raised its outlook for full-year revenue, which is now in line with our forecast, as well as for earnings per share, which remains slightly below our target. We're maintaining our fair value estimate and our narrow moat rating. With the exception of its specialty diagnostic business, which grew 2% organically, all the segments posted strong currency-neutral results. Growth was particularly impressive in the LPS business (up 8%) and Life Science Solutions (7%). Results from the bioproduction and biosciences businesses within LSS were particularly strong as the company is capitalizing on strong demand from its pharmaceutical customers and leveraging its channels to gain market share. LPS' robust results were partly attributable to pharmaceutical end-market demand, which overall was up in the midteens. Academic and government markets also showed good growth, up in the low single digits, while industrial demand remained soft. Demand across geographies increased as China saw midteens growth, and the United States and Europe continued to deliver healthy mid-single-digit growth. Thermo Fisher continues to drive decent performance on margins as it integrates Life Technologies, though currency should remain a sizable drag on earnings throughout 2015 (approximately 10%). For the entire note, click here.
Alex Morozov, CFA
Yahoo YHOO continues to take steps toward reigniting its core business, but the firm's progress remains modest at best following another mixed quarter. We remain skeptical about the long-term prospects of a resurgence for Yahoo, and we are sticking with our narrow moat and negative trend ratings. Still, we continue to believe the shares offer a reasonable risk/reward trade-off at current levels, provided management can protect the platform's current value and successfully execute the plans for a tax-free spin-off of Yahoo's stake in Alibaba Group (into an entity called Aabaco Holdings). Although GAAP revenue grew 15% versus the prior-year period, revenue excluding traffic acquisition costs was essentially flat in the quarter as Yahoo continues to invest heavily in its partnership with Mozilla for preferred search placement. Management expects search and display traffic acquisition costs to remain elevated over the next several quarters as it focuses on GAAP revenue growth and improving engagement metrics for its advertisers. However, we have some concern that Yahoo is walking a fine line with this strategy, as it is investing in an advertising platform that has ceded substantial market share over the past several years. Still, there were some encouraging developments in the quarter, as Yahoo generated its best price-per-ad growth in over two years, driven by greater uptake in its native video ads and generally higher pricing for video ads overall. For the entire note, click here.
Rick Summer, CFA, CPA
VMware VMW delivered an in-line second quarter as it retained its market position in x86 virtualization and gained momentum in emerging marketplaces such as network virtualization and enterprise mobility management. We stand behind our narrow moat and negative trend ratings and are maintaining our fair value estimate of $74 per share. Adjusted revenue of $1.6 billion grew 10% year over year, as end-user computing and cloud management suites gained traction with vSphere's customer base. Notably, AirWatch license bookings were up 60% year over year and formed a part of 9 of the top 10 deals. Additionally, NSX (network virtualization) now has 700 paying customers and is part of half of the top 10 deals. We believe these strong sales numbers speak to the importance of installed base for data center vendors and underline our narrow-moat thesis for VMware. The mix of non-stand-alone vSphere bookings rose to 60% during the quarter, up 5 percentage points from the first quarter, indicating significant potential for more attached (vSphere with emerging technologies) selling. Furthermore, cloud management penetration is currently at 16% of the installed base. As a result, we believe the company has a long runway for growth, and we continue to expect sales to grow at a roughly 15% compound annual growth rate for the next five years. Overall, the mix of license revenue declined to 40% in the first six months of 2015, in line with our expectations. For the entire note, click here.
Simran Kaur
We don't anticipate any changes to our $220 fair value estimate for Illumina ILMN after the company reported second-quarter earnings mostly in line with our expectations. Our forecast for near 21% revenue growth and $3.42 in non-GAAP EPS remains within range of management's year-end outlook, which we think looks achievable. Although a reduction in the HiSeq X backlog and a ramp-up in new personnel hiring slightly slowed both sequencing instrument growth and recent margin expansion, respectively, we continue to believe the company's long-term growth opportunity remains intact. Management noted most new hires will help the company address the clinical market where penetration of genome sequencing remains low and its application on routine m edical tests is just beginning. Illumina's quickly growing installed base and pull-through of associated higher margin consumables continue to support the company's narrow economic moat, in our view. Although fewer opportunities for HiSeq X placements in extremely high-throughput customers and the ongoing cannibalization of Illumina's microarray business (which reported a 11% revenue decline) may remain slight detractions from near-term growth, we still anticipate over 20% growth for the year, including a considerable currency headwind. Total sequencing segment revenue growth of 28% remained strong, in our view, thanks in large part to 36% growth in sequencing consumables helping to overcome the slower 13% growth in instruments. For the entire note, click here.
Michael Waterhouse
A merger with Chubb should support near- to medium-term earnings growth, while ACE's ACE international presence provides a longer-term tailwind. Currency changes are having a deleterious effect on ACE's international insurance business, with the overseas general segment's net written premiums decreasing 5.1% from the previous year. On a constant-currency basis, overseas general's net written premiums would have increased 7.6%. On the other hand, North American's net premiums written increased approximately 6% on an organic basis and nearly 21% after including the acquisition of the Fireman's Fund high-net-worth personal lines business that closed in the quarter. As Chubb's business is more focused on the United States, the recent currency headwind will have less of an effect on the top line. Additionally, realizing the $650 million of expected expense synergy savings will support earnings, regardless of the macro environment. In the medium to long run, ACE having exposure to higher-growth developing markets and a potential reversal of the currency headwind could lead to peer-beating growth. We are currently maintaining our fair value estimate for narrow-moat ACE.ACE's underlying business performance remained strong in the quarter. The company had a property/casualty combined ratio of 87.7%, and its operating return on equity was 11.4%. For the entire note, click here.
Michael Wong, CFA, CPA
Telenor TELNY reported solid second-quarter results in line with our expectations, and we are maintaining our fair value estimate and narrow moat rating. Reported revenue increased 18% year over year including currency gains. Importantly, organic revenue grew 6%, led by outstanding growth in Myanmar. The firm's operation in Myanmar added another 3.1 million customers and now has 9.5 million in total. Impressively for a startup operation, it already has an adjusted EBITDA margin of 36%. We expect Myanmar will remain Telenor's biggest growth driver for the next couple of years. The firm's Indian operation also performed well, with its wireless base jumping 22% from the year-ago period to 39.8 million customers. The division also reached EBITDA profitability for th e entire quarter. Increased data usage is helping to offset pricing pressures in many markets and leading Norway to 6% wireless growth. However, in Norway this was partially offset by a 4% decline in fixed-line revenue. We expect data usage to be increasingly important to Telenor's revenue growth. While 72% of its Norwegian and 76% of its Swedish wireless customers are active data users, only about one-third of its total base is active, which provides lots of upside. However, problems continue in Thailand and Pakistan, where the firm's subscriber base has declined due to government regulations requiring registration of all mobile users. For the entire note, click here.
Allan C. Nichols, CFA
The key question coming out of Chipotle's CMG second-quarter update was whether comparable transaction trends--a slightly negative contributor to the quarter's price-driven comp growth of 4.3%--was more of a function of lapping two years of industry-leading comp trends concurrent with the decision to pull carnitas from 40% of stores, or symptomatic of more significant competitive headwinds. We'll argue for the former, as comparable transactions have trended up to the low-single-digit range thus far in the third quarter and management is seeing little pushback on price increases to offset beef or labor costs, adding support to our brand intangible asset moat source. Third-quarter comps will probably come in lower than the second quarter as the c ompany laps last summer's 4% price hike, but the combination of reset market expectations coupled with other potential positive catalysts (refined mobile payment platform, reintroduction of carnitas, and expanded catering/breakfast/chorizo tests) sets the stage for upside surprises and support our longer-term comp outlook in the mid-single-digit range. Although the sales trends--which still outpace much of the restaurant industry--did drive less margin expansion than we've become accustomed to, Chipotle still increased restaurant margins by 70 basis points to 28% and operating margins by 190 basis points to 19%. For the entire note, click here.
R.J. Hottovy, CFA
Intuitive Surgical's ISRG second-quarter results showed continuing stabilization in core procedures, growing adoption in general surgery and a pick-up in new systems sales. Two steady quarters allowed the company to take a more optimistic look toward full-year procedure growth, raising it slightly relative to previous guidance. We maintain our $500 per share fair value estimate; however, if the firm does deliver on its procedure target, there might be minor upside to our valuation. Our wide moat rating is unchanged.The total number of systems placed in the quarter (118) was notably above the second quarter of last year. The company is still well below the numbers achieved in the heydays of its systems expansion, and we aren't expecting systems growth to accelera te meaningfully from current levels, as the recovery in this quarter is attributable mainly to substantial pull-back in system sales in 2013-2014. This is particularly true for the U.S. market; while 72 systems installed in the quarter is the highest number since the fourth quarter of 2013, sustainable expansion in U.S. procedures is needed for further greenfield installs. Intuitive saw solid 14% procedure growth in the quarter. There was a steady ramp-up in prostatectomies overseas and even a slight improvement in U.S. trends; as observed in the first quarter, some patients appear to be coming back to the surgical option after several years in "watchful waiting," which has provided a small boost to domestic growth. For the entire note, click here.
Alex Morozov, CFA
Hub Group's HUBG second-quarter top line grew 1%, slightly above our anticipated run rate for the year thanks to better-than-expected improvement in Hub-segment intermodal volume. Improving sales execution in the Hub brokerage unit was also a factor. Operating profitability was generally in line with our expectations. Since our longer-term model assumptions remain intact, we do not expect to make material changes to our fair value estimate or economic moat rating (narrow). In the legacy Hub business, core intermodal sales expanded 2%, with help from recovering volume trends and underlying rate gains, partly offset by lower fuel surcharges. Recall that West Coast port disruption, Class I rail-service issues, and drayage inefficiencies were a persistent headwind i n previous quarters. While not completely back to normal, rail service appears to be on the mend and the firm is starting to make sequential progress optimizing its drayage activities and network utilization. Overall, Hub-segment intermodal volume was up 6%--ahead of the 1% gain posted last quarter. Mode segment intermodal volume was up 9%, likely driven by new business wins. Total gross profit margin was up 30 basis points to 11.3%, as overall pricing gains more than offset lingering weakness in Hub-segment intermodal utilization. We estimate adjusted operating margin fell 20 basis points to 3.3%, in part because of higher headcount, compensation-structure changes, and elevated IT outlays.
Matthew Young, CFA
We don't plan to alter our long-term projections or narrow-moat rating for iRobot IRBT following second-quarter results, though the time value of money will likely drive up our $32 fair value estimate by roughly $1 per share. Despite strong top- and bottom-line growth in the quarter, the company maintained its full-year EPS outlook of $1.25 to $1.35, which is in line with our own $1.28. Management still expects double-digit top-line growth and improved profitability in its core home robot division, driven by further U.S. and China growth (up 24% and 60% in the quarter, respectively) given a new product launch slated for the second half and further share gains in China. Moreover, while continued challenges in Europe and Japan weighed on result s in the quarter (international home robot revenue declined 7% despite the strong results in China; EMEA fell 5% and APAC 9%), iRobot reported that overseas sell-through increased, propelled by the firm's incremental marketing efforts earlier in the year. As such, the firm expects full-year growth in all three major reported regions, largely due to distributors' replenishment orders. In all, we project the firm's home robot segment will grow sales roughly 13% for the full year, versus 3% gains in the first half.We also note that two negative datapoints from the first quarter were rectified, as we had expected. For the entire note, click here.
Adam Fleck, CFA