Today - Saturday, December 20, 2014
- These five oil and gas producers have among the highest net debt-to-capital ratios in the industry, writes Avi Salzman, which could be an issue if oil prices stay at these levels:
- Ultra Petroleum (NYSE:UPL) at 115%, EXCO Resources (NYSE:XCO) at 90.3%, Halcon Resources (NYSE:HK) at 68.7%, W&T Offshore (NYSE:WTI) at 68.1%, Energy XXI (NASDAQ:EXXI) at 65.2%.
- Previously: Barron's: Five oils to buy now (Dec. 20, 2014)
- The super majors are probably the first place to look when oil prices fall, writes Avi Salzman, as their stocks tend to slide less drastically than smaller players, and maintenance of dividends is a priority for management. Favorites: Shell (RDS.A, RDS.B) and Chevron (NYSE:CVX).
- While smaller producers appear risky, Occidental (NYSE:OXY) came into the price plunge well-positioned with one of the industry's cleanest balance sheets.
- EOG Resources (NYSE:EOG) could be the pick among shale drillers, says Salzman, as it's chosen drilling spots carefully and its break-even price is among the lowest in the industry. "[The] best management team in Houston," says one fund manager.
- Oil service stocks look especially vulnerable with capex budgets being cut, but Schlumberger (NYSE:SLB) "should have protection in the downturn," writes Salzman, noting the company repurchased 1% of the float in Q3 and at 1.8% yields more than (soon to-be-merged) Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).
- See also: Barron's: Five oils to be wary of (Dec. 20, 2014)
- Fast-casual restaurants grew comparable-store sales 8% in Q3, a pace of restaurant industry out-performance forecast to have continued into Q4.
- Panera Bread (NASDAQ:PNRA) and Noodles (NASDAQ:NDLS) have both gone through some growing pains, but are hitting the innovation lever (Panera 2.0, catering, mobile).
- While Chipotle (NYSE:CMG) remains the major success story in the segment with a string of double-digit comp quarters, new concepts are drawing interest.
- IPO-launched Habit Restaurants (NASDAQ:HABT) has the type of on-trend concept (low average check, quick service) and projected growth track (104 units to 2K) that could bring in momentum investors.
- In the fast-casual pizza sub-segment it's wide open. Project Pie, RedBrick Pizza, PizzaRev (NASDAQ:BWLD), Blaze, Pieology, and Pie Five Pizza all have an innovative approach. Expect a fast-casual pizza IPO from at least one of the players in 2015.
- Automobile recalls in the U.S. now number over 60M this year to set a new record, according to a tally from Bloomberg.
- The mind-numbing total is over double the prior annual recall record with Japanese automakers (OTCPK:NSANY, TM, HMC, OTCPK:MZDAY, OTCPK:SZKMY, OTCPK:FUJHY, OTCPK:MMTOF) taking the hardest hits due to exposure to Takata.
- Though automakers see legal and operational costs increase when recalls soar, the impact on the brand in many cases is short-lived.
- Despite having a year to forget amid a public relations headache, General Motors (NYSE:GM) is a top pick in the sector for many analysts.
- The title of SA contributor Alpha Hungry's recent piece indicates where the investor stands: My Best Idea For 2015: General Motors.
- Related: U.S. auto sales forecast to end the year strong (Dec. 19, 2014)
- With crude oil prices near five-year lows, some analysts say gas stations may be the best way to play the energy sector right now, with CST Brands (NYSE:CST), Murphy USA (NYSE:MUSA) and Marathon Petroleum (NYSE:MPC) as pure plays worth watching.
- Gasoline retailers enjoy their largest profit margins in falling price environments such as today, says Again Capital's John Kilduff.
- The gas station trend is clearly seen with refinery Valero's (NYSE:VLO) 2013 spinoff of its retail CST Brands, which operates 1,900 gas stations in North America and whose stock has easily outperformed VLO in recent months; Gabelli last week increased its 2014 EPS estimate on CST because of lower oil prices.
- MUSA and MPC, also created as gas station spinoffs from refineries, have outperformed their parent companies as well.
- Tesoro (NYSE:TSO) said its retail segment enjoyed record performance in the most recent quarter, while big box stores such as Costco (NASDAQ:COST) that have gas stations connected to their stores also noted the benefit of lower oil prices in their earnings reports.
- The S&P Retail ETF (NYSEARCA:XRT) is up 3.4% over the last month to outpace the S&P 500 Index as consumer spending trends improve. Analysts have honed in on some categories which show some promise for growth.
- Drugstores: The transition by the sector into more health/wellness services sets it up for new growth channels. CVS Health (NYSE:CVS) reported strong comparable-store sales despite the full tobacco exit, while Rite Aid (NYSE:RAD) is prepping for a roll-out of RediClinics and HealthSpot kiosks. The visibility on Walgreen (NYSE:WAG) is somewhat clouded by the giant Alliance Boots integration, although it's ahead of rivals on the tech front with its rewards program, pharmacy app and developing online doctor concept.
- Athleisure: There's some gender initiatives going on in the athletic apparel sector with Under Armour (NYSE:UA) and Nike (NYSE:NKE) growing their women's business and Lululemon (NASDAQ:LULU) expanding on the men's side. All three companies have been closely on-trend with their assortment in a category with explosive demand. Importantly, pricing has held up this holiday season in the U.S., note retail watchers.
- Online replenishing: Fresh research into shopping trends indicates certain categories see continued buying through the online channel as consumers become attuned to a brand. Retailers positioned well to see more gains from the trend include Williams-Sonoma (NYSE:WSM), Ulta Beauty (NASDAQ:ULTA), Staples (NASDAQ:SPLS), Office Depot (NASDAQ:ODP), Sephora (OTCPK:LVMHF), Dick's Sporting Goods (NYSE:DKS), and of course Amazon (NASDAQ:AMZN).
- P-E buyouts: There are plenty of candidates in the retail sector for a leveraged buyout similar to the action that helped propel shares of PetSmart (NASDAQ:PETM) +40% from their lows. Keep an eye on Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO), and Ann (NYSE:ANN).
- Safeway (NYSE:SWY) and Albertsons have agreed to sell 168 stores across eight states, mostly in the western U.S., in a bid to gain merger approval from U.S. antitrust regulators.
- The companies, which together own ~2,400 stores, say they expect the buyers to hire most, if not all existing store workers.
- The biggest beneficiary of the deal appears to be the Haggen chain, which is purchasing 146 stores and adding ~$750M in sales.
- The mothballed refinery on St. Croix will remain closed after the Virgin Islands legislature yesterday rejected a proposed agreement to sell and reopen the Hovensa refinery.
- A local company reached an agreement earlier this fall to buy Hovensa, a joint venture between Hess (NYSE:HES) and Venezuela's PdVSA, but closing the deal hinged on winning government approval.
- Legislators worried about the agreement's provisions releasing Hovensa from all liability upon the sale, and that the purchaser would be able to raise the $1B-plus needed to restart the refinery.
Friday, December 19, 2014
- While Red Hat's (NYSE:RHT) revenue rose 15% Y/Y in FQ3 and its deferred revenue balance 16%, its billings proxy (based on cash flow) was up 19%, notes Barclays (Overweight). "Underlying momentum in the core business, emerging product groups, and better large deal activity reinforce our positive view on the stock."
- BofA/Merrill (Buy) observes billings growth doesn't fully reflect Red Hat's public cloud growth (+50% Y/Y), given public cloud solutions (offered via partners) are billed "one month in arrears instead of one or more years in advance." It also likes the fact over half of all public cloud clients are SMBs, many of whom weren't prior Red Hat customers, and believes interest in version 7 of Red Hat Enterprise Linux (RHEL) is stronger than for prior versions due to a bevy of new features.
- Citi (Neutral) is more cautious on account of valuation. "Upside beyond $70 (20x+ FCF) likely requires sustained high teens billings growth which looks like a stretch. We continue to like VMW best in infrastructure software due to discount versus peers and 2015 catalysts (notably vSphere 6).”
- On the CC (transcript), Red Hat stated app development and emerging technologies revenue (covers middleware, cloud, and storage software) rose 45% Y/Y, and was 14% of total revenue. 62% of bookings came from the Americas, limiting forex pressures a bit.
- Shares rose 10.6% in regular trading, easily taking out their post-Dot.com bubble highs.
- Prior Red Hat earnings coverage
- The FDA has approved the use of Cubist's (NASDAQ:CBST) Zerbaxa (ceftolozane/tazobactam) for "the treatment of adults with complicated urinary tract infections (cUTI) and complicated intra-abdominal infections (cIAI) caused by designated susceptible Gram-negative bacteria."
- Cubist adds the FDA's decision was "supported by positive data from two pivotal Phase 3 clinical trials - one in patients with cUTI and the other in patients with cIAI."
- Cubist, still set to be acquired by Merck (NYSE:MRK) for $9.5B, is up 2% AH.
- Previous: PDUFA date approaches for Zerbaxa
- The EPA released new rules for the disposal of coal ash in the first U.S. guidelines for dealing with the waste generated by burning coal, but the rules are not as stringent as environmentalists had wanted.
- The rules require power companies to close ponds containing ash slurry if they are structurally unsound or have contaminated groundwater and are not lined with materials that prevent leaks; some of the 150-plus coal ash disposal sites that have contaminated nearby groundwater may be forced to shut down.
- However, the rules do not classify coal ash as a hazardous waste, which would have added tougher handling requirements and higher costs; the EPA will leave it up to state regulators to ensure that companies meet the new requirements.
- ETFs: XLU, IDU, VPU, RYU, FUTY, UPW, PUI, FXU, SDP, PSCU
- NQ closed slightly above $4 a day after finally releasing its Q1-Q3 results, providing cautious Q4 guidance, and announcing it has signed an MOU to do a reverse merger for its FL Mobile unit with apparel retailer Tack Fiori.
- During the CC (transcript), long-time nemesis Carson Block (the founder of Muddy Waters) managed to jump in by telling the operator he was NQ investor Jim Oberweis, Jr. Block was cut off while asking whether recently-departed co-CEO Henry Lin is in jail, given media speculation to the effect due to Lin's ties to ex-CCTV anchor Rui Chenggang (detained on corruption charges).
- Omar Khan, still a co-CEO, would only reiterate Lin's departure was for "personal reasons," and not due to "anything related to the company."
- Khan also mentioned the NQSky enterprise mobility management (EMM) unit is now targeting larger customers, and that his shift is affecting near-term sales due to longer deployment times. He reiterated NQ's long-term revenue targets, but added the company isn't providing 2015 guidance for now.
- In response to a question about the proposed FL Mobile deal, VP Matt Mathison suggested NQ isn't too interested in Tack Fiori's existing businesses. "This has to do with FL Mobile ... This is the greatest way for us, for experiencing certainty and the most cost effective approach to achieve our objectives of one, unlocking value and two, enabling FL Mobile to continue to expand and grow and benefit from having their own public currency."
- Consumer spending in several areas is likely to benefit from lower pump prices, but J.P. Morgan's Ryan Brinkman thinks the auto industry may benefit more than most from consumers having more money to spend on all things apart from fuel.
- The analyst sees Goodyear Tire (NASDAQ:GT), American Axle (NYSE:AXL), GM and Ford (NYSE:F) - in that order - as best positioned to benefit, followed by suppliers with material exposure to full-size trucks and SUVs that is not as great as AXL, including Tenneco (NYSE:TEN), Lear (NYSE:LEA) and Tower International (NYSE:TOWR).
- Tesla (NASDAQ:TSLA) is an exception, however, as Brinkman sees a potential reduction in the terminal value of cash flows on his reduced outlook for Model 3 vehicles if fuel prices remain low longer-term.
- Bloomberg reports Fitbit, the unquestioned leader in the growing health/fitness tracker market, has hired Morgan Stanley to take it public next year. A source says an IPO could raise $150M.
- NPD estimates Fitbit accounted for 67% of all "activity tracking devices" sold in the U.S. last year, and 77% of all "full body activity trackers." Canalys estimates Fitbit was responsible for 50% of the global Q1 market for smart wearable bands (pegged at 2.7M units).
- While rival Jawbone remains a threat, smartwatches are naturally viewed as the big one long-term. The Apple Watch, packed with health/fitness-related sensors, is set to begin shipping in early 2015. Meanwhile, a slew of OEMs have announced and/or launched smartwatches running Google's Android Wear platform. For now, Fitbit/Jawbone maintain a pricing edge.
- More on today's Goldman Sachs downgrade of Seadrill (NYSE:SDRL) to Sell: The firm believes SDRL still faces significant balance sheet risk - even after cutting its dividend - due to high financing requirements for 2015-16 and beyond, as well as limited refinancing channels with the possibility of a higher cost of debt.
- Goldman says Brent oil at US$70/bbl could leave SDRL in breach of its debt covenant in 2016, which could trigger an equity issue.
- SDRL recovered from a big early deficit to finish +1.9%, although most other offshore drilling contractors enjoyed much bigger gains.
- Transocean (NYSE:RIG) shares finished sharply higher today (+7.9%), but it’s hard to ignore the largely negative December fleet status report that came out late yesterday.
- In lowering his stock price target to $17 from $20, Cowen analyst J.B. Lowe said RIG secured one attractive contract this month, not enough to fill much needed ultra-deepwater floater availability; while RIG was able to put two idle floaters back to work, it had four additional rigs go idle, including one where the customer canceled the contract.
- Lowe believes falling oil prices will put increased strain on dayrates and utilization during 2015.
- Most offshore drilling service contractors racked up strong gains today as crude oil prices rebounded: NE +9.5%, ESV +9.5%, RDC +5.9%, DO +0.5%, ATW +7.1%, PACD +14%.