Monday, November 30, 2015
HZNP: Purchase @ $21.24
Common Cents added to its HZNP position, bringing it to 2/3 of the target allocation, after reviewing HZNP's recent earnings conference call. Common Cents feels that the drastic decrease in share price over the past 2+ months is related to conjecture that has been dispelled by HZNP's management. Going forward, Common Cents will look to add to its position if the share price decreases near 10% from current levels. A post reviewing HZNP's recent conference call is pending.
Wednesday, November 25, 2015
RH: Sale @ "95"
Yesterday, Common Cents sold its December 18 $85 call option for $10 as RH's share price increased to the upper 93's. Common Cents earned a return of nearly 20% on an increase of nearly 4% in RH's share price.
Tuesday, November 24, 2015
AAPL: Buy; PT $135; 4Q15 Update
AAPL: 11/23/15; $117.75
From Thomson Reuters I/B/E/S Estimates:
S&P EGR: 5.67%
Apple reported its quarterly earnings for the fourth quarter on October 27, 2015. Headline numbers included a 38% year-over-year (y-o-y) increase in quarterly earnings-per-share (EPS) and a 22% y-o-y increase in quarterly revenue. For the full year, Apple grew earnings by 43% y-o-y and grew revenue by 28% y-o-y. Those numbers are pretty astronomical for a large company facing "the law of large numbers." However, it does appear that Apple will face slower growth going forward until one or more of its other products/services takes off in a major way (we're looking at you, Apple Watch).
Apple's revenue guidance for the upcoming quarter, which includes all of Apple's holiday season sales, indicates that Apple expects to grow the "top line" (jargon for revenue) by 2.5%. Analysts expect Apple to grow revenues by approximately 3.5%. Apple has traditionally exceeded analyst's estimates; however, even when exceeding an estimated 3.5% growth, that is still a significant reduction in the growth rate.
During the same quarter a year ago, Apple drastically exceeded estimates due to manufacturing more iPhones than anticipated and increasing the operating margin more than expected. It does not seem reasonable to expect a similar outperformance this quarter; however, unexpected outperformance is not exactly something we can expect.
Thus far, iPhone sales have represented the majority of Apple's revenues and, therefore, get the majority of analyst's attention. Apple sold 22% more iPhones overall this quarter than last and 120% more in China. Take that China doubters. However, minimal iPhone sales growth is expected this quarter relative to the year ago quarter. This has been the primary driver of Apple's decrease in share price over the past few quarters and will remain a significant challenge to share price appreciation going forward.
The next quarter will be particularly important, given that it could be the first quarter that Apple posts subpar growth. Or more dramatically, this could be the "beginning of the end" for Apple's rapid growth period. It does seem that growth will be subdued over the near future, and potentially afterward, but Apple is by no means on the verge of becoming extinct. There are multiple avenues to accelerate future growth, including app sales, the Apple Watch, Apple TV, and Apple in the automobile. None of these options are credible as a significant growth driver immediately; however, time will tell.
Phew. That was a lot of "negative" commentary. Heres the bright side: If Apple in fact does slow its growth to the point that its shares do not continue to appreciate, then Apple can tap into its $40 billion cash on its balance sheet and $70 billion cash it generates each year. Assuming that all of the $70 billion was returned to shareholders in the form of a dividend, each shareholder would receive $12.5 per share each year, or a dividend yield of 10.6%. Who needs capital appreciation at that point. That is not a realistic expectation, but it is indicative of the massive ability of Apple to return value to shareholders even without the rapid growth that Apple has enjoyed for so long.
Common Cents views Apple shares as fairly valued at $135. This valuation assumes a forward PE of nearly 14, which is 20% below the forward PE of the S&P. However, given Apple's slowing growth and the potential for the S&P to decrease as the fed raises interest rates, Common Cents views this valuation as appropriately conservative. At a valuation equivalent to the S&P's current PE, Apple share prices would reach $170 [17.48 (S&P forward PE) x 9.85 (AAPL EPS estimate)]. Due to Apple's current share price being significantly below the conservative valuation of $135, Common Cents views Apple as an attractive Buy.
Common Cents Take: It looks like the Apple growth engine may be slowing over the near future. However, if that is the case, great! Time to rake in high dividends. Realistically, Apple has multiple mechanisms to ignite future growth through the Apple Watch, Apple TV, and Apple in the automobile, not to mention products we aren't aware of yet. The situation is still a win-win.
From Thomson Reuters I/B/E/S Estimates:
Forward Earnings: 9.85
Forward PE: 11.95
Earnings Growth Rate (EGR): ~8%
PEG Ratio: 1.49S&P Forward PE: 17.48
S&P EGR: 5.67%
Apple reported its quarterly earnings for the fourth quarter on October 27, 2015. Headline numbers included a 38% year-over-year (y-o-y) increase in quarterly earnings-per-share (EPS) and a 22% y-o-y increase in quarterly revenue. For the full year, Apple grew earnings by 43% y-o-y and grew revenue by 28% y-o-y. Those numbers are pretty astronomical for a large company facing "the law of large numbers." However, it does appear that Apple will face slower growth going forward until one or more of its other products/services takes off in a major way (we're looking at you, Apple Watch).
Apple's revenue guidance for the upcoming quarter, which includes all of Apple's holiday season sales, indicates that Apple expects to grow the "top line" (jargon for revenue) by 2.5%. Analysts expect Apple to grow revenues by approximately 3.5%. Apple has traditionally exceeded analyst's estimates; however, even when exceeding an estimated 3.5% growth, that is still a significant reduction in the growth rate.
During the same quarter a year ago, Apple drastically exceeded estimates due to manufacturing more iPhones than anticipated and increasing the operating margin more than expected. It does not seem reasonable to expect a similar outperformance this quarter; however, unexpected outperformance is not exactly something we can expect.
Thus far, iPhone sales have represented the majority of Apple's revenues and, therefore, get the majority of analyst's attention. Apple sold 22% more iPhones overall this quarter than last and 120% more in China. Take that China doubters. However, minimal iPhone sales growth is expected this quarter relative to the year ago quarter. This has been the primary driver of Apple's decrease in share price over the past few quarters and will remain a significant challenge to share price appreciation going forward.
The next quarter will be particularly important, given that it could be the first quarter that Apple posts subpar growth. Or more dramatically, this could be the "beginning of the end" for Apple's rapid growth period. It does seem that growth will be subdued over the near future, and potentially afterward, but Apple is by no means on the verge of becoming extinct. There are multiple avenues to accelerate future growth, including app sales, the Apple Watch, Apple TV, and Apple in the automobile. None of these options are credible as a significant growth driver immediately; however, time will tell.
Phew. That was a lot of "negative" commentary. Heres the bright side: If Apple in fact does slow its growth to the point that its shares do not continue to appreciate, then Apple can tap into its $40 billion cash on its balance sheet and $70 billion cash it generates each year. Assuming that all of the $70 billion was returned to shareholders in the form of a dividend, each shareholder would receive $12.5 per share each year, or a dividend yield of 10.6%. Who needs capital appreciation at that point. That is not a realistic expectation, but it is indicative of the massive ability of Apple to return value to shareholders even without the rapid growth that Apple has enjoyed for so long.
Common Cents views Apple shares as fairly valued at $135. This valuation assumes a forward PE of nearly 14, which is 20% below the forward PE of the S&P. However, given Apple's slowing growth and the potential for the S&P to decrease as the fed raises interest rates, Common Cents views this valuation as appropriately conservative. At a valuation equivalent to the S&P's current PE, Apple share prices would reach $170 [17.48 (S&P forward PE) x 9.85 (AAPL EPS estimate)]. Due to Apple's current share price being significantly below the conservative valuation of $135, Common Cents views Apple as an attractive Buy.
Common Cents Take: It looks like the Apple growth engine may be slowing over the near future. However, if that is the case, great! Time to rake in high dividends. Realistically, Apple has multiple mechanisms to ignite future growth through the Apple Watch, Apple TV, and Apple in the automobile, not to mention products we aren't aware of yet. The situation is still a win-win.
Thursday, November 19, 2015
YTD Performance Update: November 2015
YTD performance (as of 10/31/15): -0.67%
S&P performance (as of 10/31/15): +2.70%
Common Cents Portfolio is down by 2.37%!!
Portfolio Composition by Position:
S&P performance (as of 10/31/15): +2.70%
Common Cents Portfolio is down by 2.37%!!
Portfolio Composition by Position:
AAPL: 12%
RH: 15%
V: 9%
BP: 8%
LUV: 5%
T: 5%
CLNE: 4%
HD: 3%
GLD: 3%
HZNP: 2%
CASH: 35%Portfolio Composition by Sector/Industry (excluding cash):
Retail: 24%
Energy: 20%
Technology: 20%
Financial Services: 15%
Industrials: 8%
Communication Services: 8%
Healthcare: 3%
Tuesday, November 17, 2015
RH: Purchase @ "93.5"
Common Cents purchased an $85 call option with an expiration date of December 18. The option was purchased for $8.5 as the price of RH's stock decreased to approximately $90.5. The decrease in RH's share price, while a predictable pattern at this point, does not appear to be warranted given the current publicly available knowledge. RH's stock usually increases substantially after it reports earnings, so Common Cents will look to sell the option after the early December earnings release date (if not before).
RH: Purchase @ $94.9
On November 13, Common Cents added to its RH position, which increased the position above its target allocation. RH shares were purchased at $94.9 after a sharp intraday decrease. The decrease was seemingly related to weaker-than-expected retail sales numbers.
RH has recently launched several new business lines and opened several full-line design galleries. As such, its performance is not likely correlated with aggregate market retail sales. Therefore, Common Cents views the recent pullback as unwarranted and an attractive purchase point going into the earnings call in December.
RH has recently launched several new business lines and opened several full-line design galleries. As such, its performance is not likely correlated with aggregate market retail sales. Therefore, Common Cents views the recent pullback as unwarranted and an attractive purchase point going into the earnings call in December.
Tuesday, November 10, 2015
LUV: Hold; PT $53.7; Q315 Update
LUV reported its earnings for the third quarter on October 19.
LUV: 11/9/15; $46.37
From Thomson Reuters I/B/E/S Estimates:
S&P EGR: 5.90%
LUV reported its earnings for the third quarter on October 19. The reported revenues and earnings for the previous quarter exceeded analyst's estimates. LUV is benefitting from sustained lower fuel costs, as profits for the quarter increased 71% year-over-year (y-o-y) on a 10.6% increase in revenue. The increase in revenues occurred in part due to a 7.6% increase in capacity.
LUV is increasing its profitability through increased capacity, increased loading of flights, and lower costs. This has resulted in LUV converting $0.07 more of each revenue dollar into profit. The lower fuel costs is providing a cushion for Southwest to invest in cost-saving measures; however, the increase in y-o-y profit is substantially attributable to lower fuel costs. As such, Common Cents feels it necessary to temper our enthusiasm on this position.
According to Thomson Reuters I/B/E/S estimates, the y-o-y growth rate in profits is estimated at 75.6%, 14.3%, and 6.1% for 2015, 2016, and 2017, respectively. While the growth rates, particularly for the near future, are impressive, it is likely that investors will sour on Southwest when oil prices start to creep up. The 5-year estimated earnings growth rate is heavily weighted to the early years. As such, the PEG ratio of .4 will increase dramatically once 2015 has past due to its significantly higher y-o-y growth rate. Therefore, the current PEG ratio is not a reliable value to estimate LUV's fair valuation.
LUV is generating substantial cash to fund share repurchases, dividend payouts, and repayment of debt. The $1.5 billion of planned share repurchases in 2015 amounts to roughly 6% of LUV's shares outstanding; however, this level of share buybacks may not be sustainable in a rising oil price environment.
All of the previous factors make establishing a fair valuation for LUV difficult. In the previous quarterly update for Southwest, Common Cents conservatively estimated a 5-yr growth rate of 6.65% for LUV. While the calculation was a very crude, back-of-the-envelope estimate, Common Cents estimates that LUV would be fairly valued at a PE ratio of 13.3. This value was reached by multiplying the growth rate by an assumed PEG ratio of 2. Based on the forward earnings estimate of 4.04, LUV would be fairly valued at $53.7. However, due to the arbitrary assumptions used to calculate this value, Common Cents feels that caution is warranted with this position and that LUV is not an attractive buy at these levels. Going forward, Common Cents will look to trim its position at a 5% - 10% increase in share price and add to its position at a 5% - 10% decrease.
Common Cents Take: LUV is performing very well operationally; however, the majority of its drastic earnings improvement is related to the persistence of low oil prices. In the low oil price environment, Common Cents expects LUV to generate significant levels of cash to return to investors through dividends and share buybacks, in addition to reducing debt. While LUV is performing well operationally, the future performance of its stock price is heavily related to the future of oil prices. A conservative, defensive mindset for this position is warranted until further clarity is obtained on the future of oil prices and LUV's growth after 2015.
LUV: 11/9/15; $46.37
From Thomson Reuters I/B/E/S Estimates:
Forward Earnings: 4.04
Forward PE: 11.48
5-yr Estimated Earnings Growth Rate (EGR): 28.9%
PEG Ratio: .40S&P Forward PE: 17.65
S&P EGR: 5.90%
LUV reported its earnings for the third quarter on October 19. The reported revenues and earnings for the previous quarter exceeded analyst's estimates. LUV is benefitting from sustained lower fuel costs, as profits for the quarter increased 71% year-over-year (y-o-y) on a 10.6% increase in revenue. The increase in revenues occurred in part due to a 7.6% increase in capacity.
LUV is increasing its profitability through increased capacity, increased loading of flights, and lower costs. This has resulted in LUV converting $0.07 more of each revenue dollar into profit. The lower fuel costs is providing a cushion for Southwest to invest in cost-saving measures; however, the increase in y-o-y profit is substantially attributable to lower fuel costs. As such, Common Cents feels it necessary to temper our enthusiasm on this position.
According to Thomson Reuters I/B/E/S estimates, the y-o-y growth rate in profits is estimated at 75.6%, 14.3%, and 6.1% for 2015, 2016, and 2017, respectively. While the growth rates, particularly for the near future, are impressive, it is likely that investors will sour on Southwest when oil prices start to creep up. The 5-year estimated earnings growth rate is heavily weighted to the early years. As such, the PEG ratio of .4 will increase dramatically once 2015 has past due to its significantly higher y-o-y growth rate. Therefore, the current PEG ratio is not a reliable value to estimate LUV's fair valuation.
LUV is generating substantial cash to fund share repurchases, dividend payouts, and repayment of debt. The $1.5 billion of planned share repurchases in 2015 amounts to roughly 6% of LUV's shares outstanding; however, this level of share buybacks may not be sustainable in a rising oil price environment.
All of the previous factors make establishing a fair valuation for LUV difficult. In the previous quarterly update for Southwest, Common Cents conservatively estimated a 5-yr growth rate of 6.65% for LUV. While the calculation was a very crude, back-of-the-envelope estimate, Common Cents estimates that LUV would be fairly valued at a PE ratio of 13.3. This value was reached by multiplying the growth rate by an assumed PEG ratio of 2. Based on the forward earnings estimate of 4.04, LUV would be fairly valued at $53.7. However, due to the arbitrary assumptions used to calculate this value, Common Cents feels that caution is warranted with this position and that LUV is not an attractive buy at these levels. Going forward, Common Cents will look to trim its position at a 5% - 10% increase in share price and add to its position at a 5% - 10% decrease.
Common Cents Take: LUV is performing very well operationally; however, the majority of its drastic earnings improvement is related to the persistence of low oil prices. In the low oil price environment, Common Cents expects LUV to generate significant levels of cash to return to investors through dividends and share buybacks, in addition to reducing debt. While LUV is performing well operationally, the future performance of its stock price is heavily related to the future of oil prices. A conservative, defensive mindset for this position is warranted until further clarity is obtained on the future of oil prices and LUV's growth after 2015.
Wednesday, November 4, 2015
AAPL: Sale @ "123"
Common Cents sold its December 15 $115 call option on November 3, after an increase in share price occurring over several days after AAPL's earnings release. The call option was purchased for $5 and was sold for $8. This represents an approximate 60% increase in value of the option relative to an approximate 11.5% increase in the share price of the common stock over the same period.
A preliminary review of AAPL's earnings release appears to be favorable, especially in regards to concerns over AAPL sales in China. An in-depth review of the earnings release is forthcoming.
A preliminary review of AAPL's earnings release appears to be favorable, especially in regards to concerns over AAPL sales in China. An in-depth review of the earnings release is forthcoming.
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