Friday, May 10, 2013

This Week's Key Earnings

Earnings season is starting to wind down this week and most of the really big names have already reported. Nevertheless there are still plenty of interesting companies giving results this week and there is no excuse for not trying to unearth value when you see an opportunity.


There is a health care theme to today’s results as surgical knife company Accuray gave results. Medical distributor McKesson also reported but I think the most interesting stock to report today was health care distributor (medical, dental and veterinary) Henry Schein of which there is an article linked here.  Infection prevention company Steris also gave numbers.


Today was probably the most interesting day of the week for me. Israeli company Nice Systems (NASDAQ: NICE) specializes in systems that monitor and analyze customer interactions. If you buy the whole big data analytics story (I do) then you must also buy the idea that data capture is going to grow too. The last earnings were confusing because bookings growth was stronger than revenues. This is mainly because its cloud based and analytics solutions grew faster than product sales. These results confirmed these trends and its clear that the second half will be stronger. Although the results were only in line they were pretty good in the context of a weak market for tech in Q1.

The second tech company reporting was Rackspace Hosting (NYSE: RAX). I confess I’m not the biggest fan of this company’s business model. Essentially the concern is that by effectively offering its customers the opportunity to outsource their IT expenditures, it is committing itself to capital spending on customer gear. This is okay when markets are trending upwards but it is problematic when they move down because cash flow generation would take a hit. The relationship is best represented in this graph.

Unfortunately it missed estimates and the stock is being severely punished for it. Going forward it needs to demonstrate that it can generate leverage from its capital expenditures rather than have to keep spending in  sync with revenue growth. This is is obviously harder to do if sales are weakening and it is going to be a lot harder to ascertain whether it really does have the kind of scalability to justify its lofty rating.


Thursday sees an interesting bunch of companies reporting. You don’t have to be Charles Murray in order to be aware that Western society is shifting in terms of family relationships and a child care ad early education company like Bright Horizons Family Solutions is likely to see increasing demand in future years.

NVIDIA and are today’s tech highlights. Precision Castparts (NYSE: PCP) gives numbers and it will be another chapter in the fascinating story of the industrial sector this year. So far the real strength in the sector has come from the automotive and aerospace sectors. The latter makes up 57% of its customers, with power 22% and general industrials at 21%. Looking forward to the results, investors can be confident of the aerospace sector but power has been weaker with some companies and there has been a slowdown outside of the best performing sectors.

Another interesting company to give results will be Treehouse Foods (NYSE: THS). I’ve never held this stock but should imagine it’s a nerve racking experience to hold it over results.  Theoretically the private label food manufacturers should have done very well out of the weaker consumer spending environment. Indeed ConAgra’s purchase of Ralcorp is a sign of the sector’s attraction. On the other hand, the changing environment has also meant that sales channels have changed and this has sometimes caused problems for Treehouse. It’s customers have seen their volumes and sales channels changing and this has had effects on Treehouse in the past.


Today’s highlight will be Beacon Roofing Supply (NASDAQ: BECN). I like this company and think it has a lot of long term upside drivers. It can benefit from consolidating a fragmented industry and if the housing market continues to recover then we can expect some upside from new build and consequently from commercial and industrial build going forward. The key thing to look out for in this set of results is the pricing outlook. Pricing was down at the last set of results but this was due to some tough comparisons caused by strong demand from Katrina last year. On a sequential basis, pricing was up at the last results (for the third quarter in a row) and the key will be to see if it forecasts further improvements for 2013. We shall see.

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