by Todd Shaver | Aug 23, 2016 | 7am News Flash
Mylan: (MYL: $46, down 4%) Scrutiny over the price of Mylan’s allergy treatment drug, EpiPen, is weighing on the stock.
Senator Amy Klobuchar, a Democrat from Minnesota, said a few days ago that a Senate panel should investigate the steep price increase for this drug. She went on to describe how a pack of two EpiPens used to cost $100 in 2009, but are now being sold for $600. Moreover, Senator Charles Grassley, a Republican from Iowa, sent a request Monday to Mylan for information on the pricing of EpiPen.
Why does this political rhetoric matter? The pricing of drugs is a hot topic in Washington right now. Awareness of the issue amongst investors intensified over the past year due in large part to the public scrutiny of pricing practices at Valeant Pharmaceuticals (VRX: $31). Even Hillary Clinton and Donald Trump have been debating the merits of drug pricing controls. Additionally, it did not help when it recently came to light how last summer Turing Pharmaceuticals purchased a drug called Daraprim and immediately raised its price more than 5,000%.
The controversy probably won’t hurt Mylan’s earnings. There is currently no regulatory authority that can be leveraged to mandate that Mylan lower the price. Instead, the current investigation is only a matter of information gathering at this time. But the investigation could ultimately lead to regulatory reforms or some form of self-regulation on pricing, which indeed would ultimately impose real earnings risk for the company.
The controversy very well may impact the price investors are willing to pay for the stock, however. The increased public scrutiny is likely to persist. In particular, we are most concerned that Mylan may have to appear before a Senate Judiciary Committee. The likely near term situation is producing weak sentiment driving multiple compression, in other words a lower valuation placed on the earnings of the company by investors. For instance, Valeant experienced PE multiple compression from over 20x to under 5x in the midst of pricing uncertainty and general controversy. Consider that 5x Mylan’s 2016 consensus EPS outlook of $5.00 implies a share price of $25, which frames the material downside risk we see. Not to mention that currently there are 13 buys and 9 holds out of 22 Wall Street analyst ratings. Could a wave of downgrades could be coming? We simply think it best to step out of the way.
BMR Take: Our concern is that the overhang of the investigation will weigh on sentiment and valuation. We are particularly concerned about the potential for a wave of Wall Street analyst downgrades. We are removing Mylan from our portfolio and booking our slight gain since initiation.
Remember Warren Buffett’s two rules of investing: 1) Don’t lose your capital, and 2) Refer to Rule #1. One of our strong beliefs at The Bull Market Report is that we believe in protecting your capital.
by Todd Shaver | Aug 17, 2016 | 7am News Flash
Netflix: (NFLX, $96, up 1% yesterday)
Netflix announced a new agreement with Enseo, which will spread the Netflix service to more hotel rooms around the world. Enseo runs entertainment platforms in hotel rooms through their Entertainment Experience or E3. E3 allows hotel guests to log into their streaming media accounts on their rooms’ televisions, letting them access their favorite online shows, playlists, and other personalized streaming content. The platform currently lets users log into their Netflix, YouTube, Pandora, HuluPlus, and Crackle accounts.
E3 is currently available at more than 300 hotels across the US. E3 has already been installed in properties owned by Marriott, Hilton, and La Quinta. Even though E3 does not directly generate cash flow for the hotels, it is very smart new way of doing business because of the indirect savings derived from guests not streaming their shows over hotel Wi-Fi. Additionally, the licensing fees hotels pay Enseo in some cases might be cheaper than the costs the hotels are paying to other vendors. In other words, hotels are now cutting the chord too!
The reception by hotel guests regarding E3 has been fantastic considering the lower cost relative to higher priced HBO pay per view services, among other factors. For example, five properties with 8,300 rooms have the service at Gaylord Hotels, where guests are streaming more than 1,400 hours of video per day. “Enseo has shown they work hard to meet and exceed our guests’ needs and expectations,” says Mike Stengel, Gaylord Hotels’ senior vice president of operations.
As a reminder, Netflix announced its global expansion in January, bringing 130 new countries on board. The company now has 83 million total subscribers. However, its international subscriber base only grew by 1.5 million in the last quarter, which was a disappointment driven partly by China’s regulatory climate.
BMR Take: The Enseo deal is yet another sign of Netflix continuing to take over the movie and TV markets on a global scale. We see favorable long term prospects pushing the stock higher over the coming months and years.
by Todd Shaver | Aug 15, 2016 | 7am News Flash
Under Armour: (UA, $42, up 2% Monday)
We at The Bull Market Report don’t think many people caught this development. MINDBODY (MB, $17.63, up 1% Monday) recently announced details of a new Under Armour partnership.
On MINDBODY’s last earnings call, management said: “We recently entered into an exciting platform agreement with Under Armour, whose consumer apps power the world's largest digital health and fitness community. We deeply admire the Under Armour team and will be working closely with this outstanding company to help ever greater numbers of people improve their health and wellness. You are going to be hearing more about this soon, very soon. We expect to have some joint press releases.”
Under Armour has a huge audience of 150 million users on its Connected Fitness platform. In addition, Under Armour CEO Kevin Plank stated in March that the number of subscribers is growing by roughly 1 million every eight days. If Under Armour were to begin allowing its users to book appointments and classes through the MINDBODY marketplace, that could drive a re-acceleration in revenue from MINDBODY’s API partners.
We admit that the new agreement is not likely a meaningful near term EPS boost for Under Armour. However, we believe that focusing on the near term EPS outlook misses the bigger picture of what is happening. In the past, CEO and Founder Kevin Plank has said that ultimately Under Armour could be a technology company. This new agreement is perhaps the initial step of many more to come down this path. Analysts are already looking down the road and asking questions like: (i) What if Under Armour buys MINDBODY and becomes the leader in technology for booking yoga and spa appointments? (ii) What if Under Armour starts to leverage its brand through other technology platforms in other verticals? And (iii) What is the right valuation on earnings if Plank does build the company into a technology business?
BMR Take: Under Armour’s CEO is arguably one of the best business leaders in America - based on performance. We think this agreement is a reminder of how great leadership continuously finds ways to build value for shareholders. We believe Under Armour to be very much underappreciated and undervalued.
by Todd Shaver | Aug 8, 2016 | 7am News Flash
Eye On Oil; Devon Energy & Kinder Morgan Are Our Top Picks
Devon Energy and Kinder Morgan started the week off on the right foot yesterday, trading up 2% and 1%, respectively. Our favorite idea is Devon Energy and we felt compelled to provide you with an update about why. We also really like Kinder Morgan and couldn’t see putting together this report without at least a brief mention.
Devon Energy (DVN: $40)
The company is currently under-earning relative to its asset quality in light of the dramatic reduction in drilling activity. The stock is up 115% since we added it at $19 in February. It seems to go up regardless of the weak state of crude these past two weeks.
Devon has significant operating leverage in 2017 from core franchise assets in the Delaware Basin in West Texas and the emerging Oklahoma STACK play. (STACK is short for the Sooner Trend, Anadarko Basin, Canadian and Kingfisher counties. The STACK is an area northwest of Oklahoma City that contains several layers of rock each containing large amounts of oil and natural gas.) Following the company’s successful $3.2 billion asset sales program, there is $4.6 billion of cash on the balance sheet, providing the means to begin to increase activity.
Analysts are also talking EPS upside because of the asset sales and generation of cash. The company will utilize two-thirds of its asset sales proceeds to retire debt, while the balance will be reinvested in its core onshore plays here in the United States.
The most recent quarter results delivered the operational “beat and raise” proving that execution is happening. Better yet, the outlook for planned activity now calls for an increase to up to nine rigs by 4Q16, which provides an attractive setup in 2017 relative to consensus expectations.
Analysts are talking about a potential catalyst lurking in the STACK play for Devon Energy. The company suggested that there is potential to increase its STACK inventory count post success from the recent test. It appears that there is a potential for even tighter spacing in the STACK.
Kinder Morgan (KMI: $21)
Kinder Morgan is very well-positioned competitively as one of the largest domestic energy companies, with scale, diversification, and industry leading platforms. Kinder Morgan possesses significant cash flow stability. Moreover, after Kinder Morgan’s difficult decision to reduce the dividend, the company is now on a clear path to self-funding capital expenditures and improving the balance sheet over time, a position that not all peers share. The latest batch of 13F filings revealed a few large institutional buyers leaning in, namely the State Board Administration of Florida Retirement System and Hennessy Advisors.
by Todd Shaver | Aug 5, 2016 | 7am News Flash
First Solar (FSLR: $44, down 11% today) saw shares plummet after reporting earnings and guidance. The company earnings 87 cents per share, much higher than the estimate of $0.54. Second-quarter sales were up 4% to $935 million. But, the company lowered its EPS outlook for the year, and 2017 remains problematic.
Revenue was noticeably higher than the $860 million that Wall Street analysts predicted. During the second quarter, analysts anticipated that the company would earn 58 cents. They took an $86 million restructuring charge due to its decision to stop making solar panels using TetraSun’s experimental technology. The net result was income of just 13 cents. Not good.
The company retained its 2016 outlook for sales of $3.8-$4 billion, but cut its EPS guidance to $3.70-$3.90 from an average of $4.30. They raised their estimate for operating expenses to $500 million from $390 million.
Janney Montgomery Scott maintained its Buy rating but lowered its target to $68 from $89.
Credit Suisse cut its target to $50 from $65. Merrill Lynch? $61 target. JP Morgan - $65.
Oppenheimer is still bullish and kept their Outperform rating and a $56 price target. So Wall Street is sticking with the company.
First Solar’s management team has some doubts regarding how strong a year 2017 is expected to be. It’s been anticipated that it will be a good year for new projects but there has been some concern regarding project demand. The projects that First Solar has invested in seem likely to be successful, but it could take at least two years for the market to see any results. Many investors today aren’t thinking that far ahead. This is why the stock was hammered today.
BMR Take: First Solar is going through some restructuring changes, and we have a choice. Stay with the company as it works through these things or punt. The stock hit our Sell Price of $44, but First Solar is the largest market cap solar company in the US and with earnings of $3.80 this year (if they perform) the stock is trading at just 12 times earnings. We admit that this is one of our worst performers, but we believe they will win in the end. We’ll probably see $40 or slightly below in the near future, so if you’ve had it with the company, then it is time to get out. We are going to stay with the company and look for a brighter second half and 2017. We are lowering our Sell Price to $38 and our Target to $65.
by Todd Shaver | Jun 22, 2016 | 7am News Flash
June 22, 2016
Tesla (TSLA: $220) announced a buyout offer for Solar City (SCTY: $21). Tesla is down to $193 in afterhours trading and Solar City is up to $24, after hitting $25. For what it’s worth, Elon Musk, who is the chairman of SolarCity, CEO of Tesla and the largest shareholder of both companies, described the deal as a "no brainer." He said that the company could sell customers an electric car, a home battery and a solar system all at once.
We are not here to comment on done deals. Solar City is done. We’ve said many times we think Solar City is worth more than $50 a share. Now we will never know if it would have gotten there. We’ll have to look through the windshield wipers of Tesla now. However we will comment on what Tesla will look like after the buyout. We think Tesla got a good deal on price and value. We just aren’t convinced Tesla needs a solar panel company. They need to concentrate on electric AUTOMOBILES.
BMR Take: Sell Solar City, as the deal may fall apart for any variety of reasons. Buy Tesla for the fabulous company it is, with its 400,000 pre-orders for the Model 3; the $400,000 million in the bank from the $1,000 deposits the buyers all made; its great leader; its future as the first successful new car company in decades. We will bring you more information in the weeks ahead. For the time being, we would hold Tesla here and would add to our position if we had the funds. In a few weeks and months we expect Tesla to be significantly north of $200 a share again.
