Tuesday, February 19, 2013

This Week's Key Earnings

A very interesting collection of companies will be reporting this week (the week of Feb. 18). Sometimes, constructing a portfolio ends up in actually creating a de-facto an ETF that apes the market or a sector in terms of performance and risk. On the other hand, if you take a sniper-like approach to finding a collection of companies, each with their own profit driver, you can achieve good diversified returns. There are quite a few of these sorts of companies giving earnings this week, so keep an eye out.


Express Scripts gives numbers, and investors in CVS and Walgreen will have an obvious interest in its commentary.


There is no doubt that the Herbalife (NYSE: HLF) conference call will attract the most media attention today. By now, everyone will have seen the infamous Ackman/Icahn public dust up. I found it somewhat irritating that the CNBC journalists insisted on desperately trying to turn it into a Icahn/Long vs. Ackman/Short event. Yes it is great television (and Icahn has subsequently disclosed that he has taken a large position,) but there is  danger that private investors can find themselves seduced into getting involved in a bitter game of poker between these two investors. A game in which you would be betting but you can't even see the cards. Make no mistake, these guys go on television in order to influence you to play.

From my point of view, Herbalife has questions to answer over its distributor model, but Ackman is taking a significant amount of risk (as Icahn correctly pointed out) with this position. I happen to think there is a lot of merit in what Ackman says about Herbalife, but I wouldn’t invest a cent in any manager willing to take a "conviction" position like this.

It now looks like Icahn is testing the resolve of Ackman (or rather his investors,) and what happens next will be fascinating. The key point here is the relationship between Ackman and his investors and Icahn must surely know this.  If they start threatening redemptions than a short squeeze could ensue and Icahn makes a lot of money. In my humble opinon, private investors should stay well clear of all of this. There are thousands of other instruments to invest in rather than getting involved in this game.

If there is one good thing about this episode it is this: Call your money manager or broker or whatever, and ask him his opinion on Herbalife. If he tells you to take a position either long/short in tones that suggest it's the one thing he's been thinking about all week, hang up the phone and start looking for a new manager.

When the Herbalife fun and games are over, I would suggest taking a look at the earnings from Genuine Parts Co. and Wabtec. The latter has strong growth prospects and is a rare way to play the growth in rail infrastructural spending. A SWOT analysis can be found here. A couple of health care stocks, Medtronic and Bruker, will also give results.


On Wednesday, I want to highlight three highly diverse companies that are "recovery" plays for vastly different reasons:  Curtiss-Wright has had its exposure to military hardware spending hanging over it, while Crocs is a stock that suffered from ridiculous over-evaluation in previous years as investors bought into the fad even though the barriers to entry for others producing these type of "shoes" is non-existent. Nevertheless, the stock does look cheap now.  Sodastream will also report numbers


This will be a busy day for me.  Nordstrom (NYSE: JWN) has been one of the best run retail companies in the US, and I think it is a nice way to play higher end retail spending, while avoiding the exposure to China that you get with, say Burberry's, Coach or LVMH. Nordstrom has been reporting good sales growth at the Rack, and investors should look out for how it is integrating the acquired online businesses, as well as its own online activities. There are a lot of moving parts to Nordstrom (not least its credit facility,) and most of them are going in the right direction. There is some concern that its online and Rack stores may erode the value of its core stores, but there is no sign of this yet.

Hewlett-Packard will try and convince investors that a turnaround is in the prospects, but I’m not expecting anything here. Treehouse Foods is an exasperating stock.  Theoretically it should be a great play on ‘trading down’ but in reality it has faced many structural challenges this year as its sales channels have changed.

The three really interesting companies reporting today are Aruba Networks (NASDAQ: ARUN), Intuit (NASDAQ: INTU) and Patterson Companies (NASDAQ: PDCO).

Aruba is a play on the growth of Wi-Fi networking and Bring Your Own Device, or BYOD, in the workplace.  Its main rival is Cisco, who just reported strong growth in this segment while other anecdotal evidence also suggests that the BYOD market is in good health. I covered Aruba in an article linked here. The key questions for Aruba are related to encroaching competition within its key verticals: government, health care and education.

I think Intuit is an undervalued cloud play. While its DIY consumer tax offering, Turbotax, is well known and capable of achieving single digit growth rates, I also like the prospects at its small business group. Its employee management, financial management and payment solutions business are all growing in the mid teens, and the opportunity to cross sell these solutions is significant. Indeed, Intuit knows how to scale up synergy benefits from growing SaaS solutions, because it has already done it with Consumer Tax. Moreover, the increasing diversification should lead to a re-rating for this highly cash generative company.

Patterson Companies is attractively evaluated, but it has reported disappointing results in its dental equipment sales for a few quarters now. I originally covered the stock in an article linked here. However, I really like the expansion of its distribution activities with Sirona Dental Systems, and provided it can sort out the core dental equipment business then it has good prospects.

Patterson also has a fast growing veterinary supplies business, and with companies like MWI Veterinary Supply reporting strong numbers recently, I would expect good numbers here. Patterson is one of the few defensive plays that is still at a cheap valuation, and I plan to take a closer look.


A couple of aerospace companies give numbers on Friday. Barnes Group and Heico are relatively unknown companies, but I like their prospects. In particular Heico has some good secular growth prospects as airlines continue to try and cut costs via outsourcing services and buying replacement parts from sources other than the OEM.

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