Wednesday, 22 June 2016

Tesla Plans to Acquire SolarCity: Time to Short the Stock

Tesla Motors (NASDAQ: TSLA) recently announced to acquire Solar City (NASDAQ: SCTY), a provider of renewable solar energy for residential and commercial customers. On the surface, the rational is the vertical integration related to the combination of two businesses, which could prove beneficial for Solar City in the competitive solar market. But, there are many caveats that come with the deal, if it goes through.

Tuesday, 27 October 2015

It's Time to Short Ultimate Software

The Ultimate Software Group. (NASDAQ: ULTI)
Technology; Internet Software and Services; 30%-50% Downside

The HCM industry is set to grow in the coming years. But the market has very high expectations, which can't be met by single-digit growth of the industry. Hyper-optimism around the industry will come to an end once the companies deliver less rosy results in the coming years. Ultimate Software is the most expensive company in the space with the highest PE, but it lags in revenue growth compared to some of its counterparts. The company isn't a clear leader, as Workday and SuccessFactors lead the pack on several instances. Insiders and institutional investors are reluctant to buy, which is an indication of imminent reversal. Not a single valuation scenario reveals any upside; average of all price targets reveals 39% downside.

Thursday, 22 October 2015

Momentum Alert – VeriSign Is Heading South

VeriSign, Inc. (NASDAQ: VRSN)
Technology; Internet Information Provider; Sell

The company's stock is trading at its two year high. Standard moving averages are demonstrating a bullish momentum. But, SMAs, as an indicator, fail to indicate reversal. That's where RSI comes in. VeriSign touched an RSI of 70 a few days back, which is an indication that the stock is over-bought. But, more importantly, the chart is demonstrating bearish divergence. See the chart below:

The chart clearly depicts a bearish divergence, which is a strong reversal indicator. We think that it's time to take profits and stay at the sidelines. VRSN is also announcing, today, its earnings for the quarter ended September, 2015. It's wise to stay on the sidelines as soft guidance can hurt the stock price given the technical position of the chart.

Monday, 19 October 2015

Valuation – Time to Sell Facebook

Facebook, Inc. (NASDAQ: FB)
Technology; Internet Information Providers; Sell

It's time. Facebook is trading around an all time high of $98. The stock is getting ahead of the fundamentals now. Forward earnings of $2.75 translate into a PE of 35.8, which is above the consensus five year earnings growth of 28%. 

Our EVA model reveals a price target of $96.5 given earnings growth of 28% during the next five year. DCF valuation indicates a price of $83. Based on our valuation, we think that the stock is priced for perfection. Unless, there's some major progress related to virtual reality or Whatsapp monetization, investors should cash out and stay on the sidelines.

  • EPS is assumed to grow at CAGR of 25% during 2016-2020 in line with the consensus estimates. 1% growth is assumed in perpetuity
  • Earnings are assumed to increase  the total cost of equity.
  • CAPM is used to calculate the cost of equity. S&P 500 is used as a proxy for the return on market.


Observation: The stock gained 25% during the trailing twelve months. Now, the EVA based valuation indicates that Facebook has reached its fair price. As Facebook is trading ahead of its fair value, investors should channel their funds somewhere else.

Momentum Alert – Level 3 is Heading Higher

Level 3 Communications, Inc. (NYSE: LVLT)
Technology; Diversified Communication Services; BUY

The company's stock price has moved above the 25-day SMA and 50-day SMA in the past few weeks, indicating bullish momentum. Not only this, LVLT's chart also demonstrates a bullish divergence, which is a strong indication that the stock will head higher. With RSI standing below 70, there's room for a strong rally in coming weeks.

Based on fundamental, we rate Level 3 a strong buy. The company is exposed to the double digit growth prospects of IP traffic. Increasing bandwidth requirements enabled through high quality video content consumption bodes well for LVLT. Further, the growth is quite reasonably priced. Earnings are expected to grow at 65% p.a. during the next five while the stock trades around a forward PE of just 20. All in all, LVLT is a good pick in growth at a reasonable price arena. 

Saturday, 10 October 2015

Texas Instruments: Differentiation, Apple Content Concentration And Cost Savings

Texas Instruments (NASDAQ: TXN)
Technology; Semiconductors; BUY

Analog ICs will witness the fastest semiconductor growth rate in coming years. TXN is a major provider of analog ICs. Product analysis reveals differentiation; IC count increased in iPhone 6s. Transition to 300mm will bring cost savings; valuation reveals 25% asymmetric upside.

TXN generates majority of its revenue from the sale of its analog ICs. For the past couple of years the company has been producing more than 50% of company’s total revenue from this particular segment. This indicates that the company relies significantly on its Analog operations for the majority of its sales. In 2014, TXN was the leading supplier of Analog ICs with a market share of 18%. Analog operations contributed 62% towards total revenue while embedded processors and other products contributed 21% and 17% respectively.

Based on the current price, we believe that TXN adds considerable value to investors’ portfolio given the introduction of new differentiated products, 200 mm to 300 mm wafer fabrication transition plan, improving CSR position, re-allocation of resources and increased chip count in Apple’s products. Our valuation model also demonstrates significant upside potential. Overall, Texas Instruments is a decent buy. 

Thursday, 10 September 2015

Downturn Fears: Should You Own Wal-Mart Or Dollar General?

Discount retail stores perform well during low times. Consider Wal-Mart for its strong cash flow, dividend and neighborhood stores. Avoid Dollar General amid increasing competition. The market has been in a bearish mode for some time now. Volatility has been favoring the downside for the past few weeks. The bearish trend is justified on some level given the lofty valuation of the technology sector, but it's not fair to blame it on technology alone. Oil prices have been hurting the energy sector while materials are being affected by fears related to a global economic slowdown. However, retail can be a good place to be in during an economic downturn. Discount retailers are a good place to start. 

Dollar General can grow its sales given the unique nature of its business model. The company is mostly witnessing growth through the opening of more locations. Eventually, the growth will halt as cannibalization comes into play. Wal-Mart, Target, Amazon and Dollar Tree will put pressure on the top-line growth of Dollar General as switching costs are zero. Brand recognition will be key for sales growth, and we believe Wal-Mart will outperform Dollar General in a heartbeat in a given neighborhood. Yes, Wal-Mart is lagging in terms of small-box footprint but it has the resources to materially hurt the sales of Dollar General's stores. In the past, hyper retailers were focused on supermarkets but the shift in strategy is getting clearer, which is the biggest threat to Dollar General. Given the stock is fairly priced, we think investors should not take the risk of confronting the competition. All in all, we favor Wal-Mart over Dollar General in discount retail.

Wednesday, 9 September 2015

Valuation - Buy Micron Now

Micron Technology, Inc. (NASDAQ: MU)
Technology; Memory Chips; 75%-100% Upside

  • EPS is assumed to grow at CAGR of 10% during 2016-2020 despite a consensus of 15%. Zero growth is assumed in perpetuity
  • Earnings are assumed to increase total cost of equity.
  • CAPM is used to calculate the cost of equity. S&P 500 is used as a proxy for the return on market.

Observation: The stock lost around 32% of its value  during the last three month. However, the EVA based valuation  indicates that the market may be over reacting. The stock has the ability to touch $40, translating into more than 100% upside. 

Monday, 24 August 2015

Will This Sell-Off Continue?

The U.S. stock market is plummeting on China’s growth concerns. There are factors in play other than China also, think overpriced earnings. S&P 500 seems overpriced, and technical indicators show no sign of reversal just yet. The stock market has been in a rut for past few weeks now; it's getting a harder hit today as NASDAQ composite is down 2.5% and S&P 500 is down around 2.3%. The blame of the recent bearish market fell on China's slowing growth, crowded emerging markets and FED's plan to raise interest rates. However, interest rates are on their historical lows; unemployment stays at the ground and corporate profit margin are touching the roof. China, alone, can't be blamed for the sell-off. Sure, the slump in the Chinese market acted as a trigger for the global downward trend. But, this is not the only reason for the current market decline.

Friday, 21 August 2015

Valuation – HCA is Underpriced

HCA Holdings. (NASDAQ: HCA)
Healthcare; Hospitals; 10%-15% Upside


  • EPS is expected to grow at CAGR of 11% during 2015-2019. 0% growth is assumed in perpetuity.
  • Retained earnings are projected to turn positive during 2018
  • CAPM is used to calculate the cost of equity. NASDAQ composite is assumed to reflect the return on market.

Observation: The stock lost around 6% of its value  during the last month. However, the EVA based valuation  indicates that the market may be over reacting. The stock has the ability to touch $100, translating into a 15% upside.

Detailed thesis and Monte Carlo simulation is available on Prudena. 

Wednesday, 12 August 2015

AT&T Will Benefit from DirecTV Acquistion

AT&T, Inc. (NYSE: T)
Technology; Telecom Services; BUY
Due to the increase demand for smart phones and tablets, wireless communication industry is expected to grow. This growth will spur many opportunities for wireless communication players especially through data consumption. AT&T has positioned itself well amid DirecTV acquisition. It will bring-in tremendous benefits in terms of lower costs and increased market share. The main challenge for the company will be the falling demand for its wired communication services. AT&T will need to divert its resources from the legacy voice services to other profitable sections in order to keep its competitive position intact. Overall, strong financial position and a dominating share in the U.S. wireless communication market along with the recent acquisition makes AT&T a value adding investment.
Demand for telecommunication will be driven by the market for cellular products including smart-phones and tablets. IDC predicts that the market for U.S. smart-phones will grow in the future but at a slower rate. The firm predicts a CAGR of 5.3% between 2013-2018. Reuters predicts a rising trend for U.S mobile data traffic by 2018 as more people shifts from laptops and PCs to smart-phones and tablets.

AT&T is a market leader along with Verizon in the wireless communications market. Currently, the company has captured 31.2% while Verizon controls 33.7% of the total wireless subscribers base. A combined market share of nearly 65% leaves the two company in a duopoly position which enable them to control prices and margins. Due to AT&T’s significant position in the market, we believe the company is in a great strategic position to turn future opportunities from growth in smart-phone shipments and mobile data traffic, into profits.

AT&T recently completed its acquisition of DIRECTV, a multinational pay TV provider. Through this combination, the company intends to capture the video entertainment market by providing efficient video delivery platform to millions of additional households through its mobile and high speed internet service. Management expects cost synergies will exceed $1.6 billion by end of the third year of closing the deal. The acquisition will also allows the company to penetrate into Latin America since DIRECTV has a leading presence their. The acquisition of Nextel Mexico and GSF Telecom further allows AT&T to extend its subscriber base, regionally, by capturing more Latin America consumers and businesses. AT&T’s recent acquisitive strategy focuses on spreading its coverage to more than 400 million consumers and business in Mexico and the United States.

The demand in the wire-line telecommunication sector is dropping, especially on the consumer side, due to the shift of consumers to wireless communication. A report by Ibisworld states that with increasing number of households using wireless phones, revenue from fixed local and long distance services is expected to decline over the next 5 years. IDC believes VoIP and broadband services will stay in demand but these gains will not be enough to overcome revenue losses from fixed voice services. Considering wireline products and services form 45% of the company’s revenue, falling trends in the wireline products, especially from fixed voice services, will have a negative effect on AT&T’s future earnings. The popularity of 3G and 4G can cannibalize the company's wire-line internet business.

AT&T faces stiff competition from its competitors Verizon and T-Mobile. T-Mobile's un-carrier strategy is leading to prices wars which will put pressure on industry profits. The recent launch of T-Mobile’s simple choice plan with mobiles without border will provide more cost efficiency for consumers compared to options from AT&T, Sprint and Verzion. Furthermore, T-Mobile’s Jump on demand phone leasing plan for Apple users bodes ill for competition as t-Mobile tends to attract maximum iPhone users for the next iteration of the iPhone. Further, AT&T is trading at a premium to its larger counter part, Verizon.

A slightly different version with a valuation focus appeared on Prudena.

Tuesday, 4 August 2015

3M Seems Fairly Priced

3M Company (NYSE: MMM)
Industrial Goods; Diversified Machinery; HOLD

3M’s diversification, scale, cost control and execution is decent. The company also supports a decent dividend and is consistently repurchasing its common stock. It is also investing in R&D to maintain the differentiation factor of its products. But, the stock is already trading at a premium compared to its peers. We don’t think that 3M has much to offer as far as value investors are concerned. However, for a low-risk dormant investment, 3M may be the pick of the pack. Overall, we rate MMM a hold at its current price.

3M is a well-developed and diversified company, which makes it a safe investment for a longer term. The company offers products for wide range of industries and, hence, is shielded from industry specific declines. The key to 3M’s success is its investment in technology. The company is planning to increase its R&D to 6% of the revenue by 2017 compared to 5.7% in 2014. The company has $1.4 billion as intangibles on balance sheet, which is impressive for a company selling mostly consumables.

On the flip side, the company generates most of its sales from international markets, top line is taking a hit from FX fluctuations especially U.S. dollar. Despite organic growth in several segments, 3M recorded a decline is revenue after accounting for currency fluctuations. Dollar is on a longer-term trend higher, according to some analysts. Rising interest rates and European QE is helping the case for a higher dollar.

Complete Story with a Valuation Focus is available on Prudena

Thursday, 23 July 2015

MSCI Pakistan – Add a Little Green to Your Portfolio

MSCI Pakistan (NYSEArca: PAK)
Global X Funds; Pakistan; 25%-30% Upside

Developed and current emerging markets are not offerings returns as high as frontier markets. Pakistan’s economic outlook is improving, thanks to China’s investment, low oil prices and rate cuts. MSCI Pakistan is a decent bet for a frontier market exposure; it’s cheap on relative valuation. 

Developed equity markets continue to trend higher. It is hard to predict the end of the current bull market, but the returns would be limited going forward. S&P trades at a PE of 21.24 while NASDAQ composite is trading around 23 times the trailing earnings. European markets are also rising but the upside seems limited given high multiples. Emerging markets are witnessing a slowdown in growth. High return investments are not easily found in the above mentioned markets under current circumstances. However, there are alternatives for investors with a high risk-appetite: the frontier markets. Frontier markets are small to be classified under emerging markets but they often entail a higher return at a higher risk. One such frontier market is Pakistan, which has started to look attractive. Equity market of Pakistan is trading at a substantial discount and can bring considerable gains to investors. Detailed thesis follows:

Status of Pakistan might be upgraded to an emerging market. Pakistan is up for consideration to be included in emerging markets. MSCI will review for a potential upgrade in June 2016. According to WSJ, Pakistan is liquid and deep enough to be considered as an emerging market. KSE 100 index is one of the best performing equity markets since the financial crisis of 2008. Note that Pakistan meets most of MSCI's emerging market requirements. It is highly likely that Pakistan will be upgraded to the emerging market status. If that happens, the PE multiple of Pakistan's equities will expand resulting in substantial gains for investors.

Tuesday, 21 July 2015

Lattice Semiconductor - A Value Play

Lattice Semiconductor (NASDAQ: LSCC)
Technology; Specialized Semiconductors; 25%-30% Upside

FPGAs and ASSPs are expected to lead growth for Lattice Semiconductor. The Silicon Image acquisition exposes the company to MHL prospects in emerging markets. Several valuation approaches reveal an upside of ~30%. Acquisition potential makes LSCC even more attractive.

Recent design wins indicate growth ahead for LSCC. The company recently revealed its design wins with Huawei and ZTE Corp. Huawei is using Lattice’s iCE40 FGPA in its P8 flagship for smart antenna switching functionality.  ZTE is also using this family of FGPAs in its Star 2 flagship for sensor hub function. As iCE40 is the world’s smallest FGPA, more flagship design wins are expected going forward. Now, Huawei and ZTE win is an indicator of growth because both the companies are rising in the smartphone arena. Huawei is currently the fourth largest smartphone maker by market share, which is growing at a faster pace as compared to other makers. Huawei increased its share from 3.4% in Q1 2012 to 5.2% in Q1 2015. Big players like Apple and Samsung have shed market share since 2012. This is indicative of Huawei’s success in emerging markets, which, in fact, will benefit Lattice going forward. ZTE is also aiming to double its smartphone market share during the next few years. As far as topline growth is concerned, recent design wins with ZTE and Huawei bodes well for Lattice. Note that Lattice customers also include Apple, Samsung, Lenovo and HTC etc.

Monday, 20 July 2015

Knoll Seems Fairly Valued

Knoll, Inc. (NYSE: KNL)
Consumer Goods; Business EquipmentHOLD

Limited production, shrinking office vacancy and growing construction bodes well for Knoll Inc. Exposure to luxury residential markets will boost the margin of the company. Recent results are indicative of market share gain, which can lead to further earnings beat going forward. However, competition, rising interest environment, difficult comps and a rich valuation diminishes the attractiveness of the company’s stock. With Knoll trading at a life time high, we believe that the stock is a hold for now.

Trends in office and home furnishing markets are positive; consumption will be ahead of production and office vacancy rates are expected to shrink, see the past issue on SCS. Regarding home furnishings, vacancy rates decreased from 4.2% to 4.1% during Q1 2015 indicating furnishing growth. Going forward, increase in construction is expected to boost the sales of furnishing players. According to Barrons, the American Institute of Architects forecasts 10.2% growth in commercial and industrial construction next year, up from 5.7% in 2012. Office-building construction is poised to expand 8.7%, versus 4.7% this year. A research report forecasts better results in home furnishing during the next five years amid continued economic growth and consumer spending habits. All in all, these positive trends will benefit Knoll and its peers.

While most of the trends in the industry are positive, there are some negative ones too. Apartment vacancy rates are expected to rise in 2016, according to Statista. National vacancy rate in the U.S. is projected to rise 0.7% to 0.8% during 2015. Further, as a part of cost cutting measures, corporations are shrinking offices space affecting furnishing players in the process. Overall, these trends neutralize the positive industry trends to a certain extent.

Stellar 2014 and Q1 2015 create difficult comp for KNL. It will be challenging for the company to meet the recent double digit growth in upcoming quarters. In a rising interest environment, spending habits of consumers and corporations will remain under check making it even more difficult for KNL to beat the past performance. 

Complete Story

About Knoll
Knoll, Inc. is a furnishing company that designs and manufactures furniture, accessories, textiles and leathers for work and home. The company’s operations are spread across North America, Canada and Europe. Knoll expanded into residential furnishings through acquisition of Holly Hunt Enterprises during 2014. Reportable segments of the company include Office, Studio and Coverings. Knoll primarily offers office furniture including systems, seating, storage, tables and desks etc. Studio segment’s portfolio contains lounge seating, indoor and outdoor furniture, lighting, textiles and leathers etc. Coverings segment include Knoll textile and branded leather products. The company sells its products through direct sales force, showrooms and network of dealers. Knoll held ~10.7% of the U.S. office furniture market during 2014.