Throughout the past week or so we have seen soft earnings from many of the large casino companies that have severally pulled down the whole sector. Wynn down ~16%, BYD ~33%, and LVS ~24% this past week. Even though LVS hasn't reported earnings yet for this quarter, the stock is still down 24% this week. Their earnings will be reported Thursday after the market closes. Analysts are expecting LVS to lose one penny per share, which shouldn't be too hard for them to beat.
"Analysts polled by Thomson Reuters expect Las Vegas Sands to lose one penny per share on $1.17 billion in revenue, compared with profit of 2 cents on revenue of $1.11 billion in the same period a year earlier."
It also seems that analysts are actually confident in this company, since it seems to have better management than other casino companies.
"ANALYST TAKE: Jeffrey Logsdon of BMO Capital Markets, who lifted his earnings expectations for Sands this month, told investors Sands would likely see strong performance in Macau.
Logsdon reaffirmed his "outperform" rating and said an improving economy and easing visa restrictions will likely bring even better results later."
I also think that it is worthy to note that most scared investors have already pulled out of this stock during the weak when other casino stocks have provided poor earnings. This has pulled LVS down 25% before any news of earnings have been presented. To me this means that investors are expecting poor earnings and have already brought down the stock price to show that. I think that there is huge potential upside if LVS presents positive earnings tomorrow and a smaller downside if earnings are week b/c this is already reflected in the stock price.
In order to hedge your risk you could buy put options in other casino stocks while buying calls in LVS since bad earnings from LVS will drag down the rest of the sector as well.
Let me know what you think.
Wednesday, October 28, 2009
Tuesday, October 27, 2009
What Happened to the Armour?
I will be very straight forward. This morning, Under Armour had reported its 2009 third quarter financial status, and quite frankly, I thought it was a great quarter. From Under Armour’s website came the following facts:
• Net Revenues Increased 16.2% to $269.5 Million
• Net Income Increased to $26.2 Million; Diluted EPS of $0.52
• Cash & Cash Equivalents Increased $53.2 Million Year-Over-Year to $93.4 Million at Quarter-End; No Borrowings Outstanding Under $200 Million Revolving Credit Facility
• Inventory Decreased 6.6% to $152.8 Million at Quarter-End
• Company Raises 2009 Net Revenues Outlook to $830 Million to $835 Million (+14% to +15% over 2008) from $810 Million
• Company Raises 2009 EPS Outlook to $0.85 to $0.87 (+10% to +13% over 2008) from $0.80 to $0.82
- http://investor.underarmour.com/releasedetail.cfm?ReleaseID=418803
This entire quarter, the street and other financial sources only talk about ‘top line growth’ – it is all about top line growth to see if the economy is healing, consumers are spending, and companies are doing better from not just slashing costs in whatever ways possible. Last quarter, cost cutting is what led many stocks to beat expectations and thus create an earnings rally. Under Armour’s top line growth of 16% was very interesting and bullish to me. Being a holder of call options in UA, I was not just very disappointed to see the stock sell off as much as 12% today, but puzzled as to how such downside could occur.
In several articles that I read today, reporters kept saying that Under Armour posted quarterly earnings that well beat Wall Street estimates and the company raised its full-year outlook, but the forecast implies a weaker-than-expected fourth quarter. How contradicting is that? They raised their outlook, but the forecast is expected to be weak? If I am missing something, I hope someone explains.
Taking this a step further, what I believe drove the stock price down was how Under Armour said that its personnel costs and selling, general, and administrative expenses would increase for 2009. However, the increase in expenses would be only from the low-teens, which was the previous outlook, to the mid-teens. Not to mention, the expenses are associated with an increase in funding for Under Armour’s performance incentive plan and for the continued expansion of their factory house outlet stores. How is that bad? To me, it signals growth.
So again, why would I hear “raised outlook, forecast implies weaker-than-expected outlook?” It makes absolutely no sense! One analyst said how revenue growth would slow in Q4 yet I cannot jump on that when every one of UA’s segments did well. What about the football season underway? That is worth estimating as Steven Louis told me. How could Nike soar on their quarter and Under Armour not? Nike’s first fiscal quarter of 2010 gross margins were 46.2% compared to 47.2% the same period one year ago. Under Armour, on the other hand, had gross margins for their third quarter for 2009 of 49.7% compared to 51% for the same quarter a year earlier. This decline in UA’s gross margins also seemed like a reason to bash the stock today. However, I do not see why considering that UA’s gross margins are more attractive than Nike’s. I think that is worth pointing out. And the last point I will make: the growth in the athletic apparel industry is in Under Armour. Consider the following results that derived from the Nike and Under Armour website, respectively:
- Revenue for Greater China during the first quarter was down 16 percent to $416 million compared to $496 million last year. Footwear revenue was down 17 percent to $218 million, apparel revenue declined 16 percent to $168 million, and equipment revenue decreased 16 percent to $29 million.
- Kevin Plank, Chairman and CEO of Under Armour, Inc., stated, "The strength and diversity of our growth platform enabled us to deliver meaningful top line growth during the quarter with all product categories up for the period.
Excuse the outrage, but I still believe there is much more upside in Under Armour opposed to Nike. Maybe, Nike should think about buying Under Armour? It is just a matter of time for UA to start crushing Nike’s toes.
• Net Revenues Increased 16.2% to $269.5 Million
• Net Income Increased to $26.2 Million; Diluted EPS of $0.52
• Cash & Cash Equivalents Increased $53.2 Million Year-Over-Year to $93.4 Million at Quarter-End; No Borrowings Outstanding Under $200 Million Revolving Credit Facility
• Inventory Decreased 6.6% to $152.8 Million at Quarter-End
• Company Raises 2009 Net Revenues Outlook to $830 Million to $835 Million (+14% to +15% over 2008) from $810 Million
• Company Raises 2009 EPS Outlook to $0.85 to $0.87 (+10% to +13% over 2008) from $0.80 to $0.82
- http://investor.underarmour.com/releasedetail.cfm?ReleaseID=418803
This entire quarter, the street and other financial sources only talk about ‘top line growth’ – it is all about top line growth to see if the economy is healing, consumers are spending, and companies are doing better from not just slashing costs in whatever ways possible. Last quarter, cost cutting is what led many stocks to beat expectations and thus create an earnings rally. Under Armour’s top line growth of 16% was very interesting and bullish to me. Being a holder of call options in UA, I was not just very disappointed to see the stock sell off as much as 12% today, but puzzled as to how such downside could occur.
In several articles that I read today, reporters kept saying that Under Armour posted quarterly earnings that well beat Wall Street estimates and the company raised its full-year outlook, but the forecast implies a weaker-than-expected fourth quarter. How contradicting is that? They raised their outlook, but the forecast is expected to be weak? If I am missing something, I hope someone explains.
Taking this a step further, what I believe drove the stock price down was how Under Armour said that its personnel costs and selling, general, and administrative expenses would increase for 2009. However, the increase in expenses would be only from the low-teens, which was the previous outlook, to the mid-teens. Not to mention, the expenses are associated with an increase in funding for Under Armour’s performance incentive plan and for the continued expansion of their factory house outlet stores. How is that bad? To me, it signals growth.
So again, why would I hear “raised outlook, forecast implies weaker-than-expected outlook?” It makes absolutely no sense! One analyst said how revenue growth would slow in Q4 yet I cannot jump on that when every one of UA’s segments did well. What about the football season underway? That is worth estimating as Steven Louis told me. How could Nike soar on their quarter and Under Armour not? Nike’s first fiscal quarter of 2010 gross margins were 46.2% compared to 47.2% the same period one year ago. Under Armour, on the other hand, had gross margins for their third quarter for 2009 of 49.7% compared to 51% for the same quarter a year earlier. This decline in UA’s gross margins also seemed like a reason to bash the stock today. However, I do not see why considering that UA’s gross margins are more attractive than Nike’s. I think that is worth pointing out. And the last point I will make: the growth in the athletic apparel industry is in Under Armour. Consider the following results that derived from the Nike and Under Armour website, respectively:
- Revenue for Greater China during the first quarter was down 16 percent to $416 million compared to $496 million last year. Footwear revenue was down 17 percent to $218 million, apparel revenue declined 16 percent to $168 million, and equipment revenue decreased 16 percent to $29 million.
- Kevin Plank, Chairman and CEO of Under Armour, Inc., stated, "The strength and diversity of our growth platform enabled us to deliver meaningful top line growth during the quarter with all product categories up for the period.
Excuse the outrage, but I still believe there is much more upside in Under Armour opposed to Nike. Maybe, Nike should think about buying Under Armour? It is just a matter of time for UA to start crushing Nike’s toes.
Sunday, October 25, 2009
Take-Two, Action!
In a more recent post, I briefly discussed why M&A activity could pick up. Towards the end, I outlined some thoughts without going very in depth. One of those thoughts was regarding Take-Two Interactive, a multimedia/graphics software company that is most known for their Grand Theft Auto and NBA 2K franchises along with many other unique video games. I thought that the company was affordable (I still do) for larger companies such as Microsoft to pick up, especially considering that the Operating Income for Microsoft’s Entertainment and Devices Division grew by roughly 96% this quarter from the same quarter in 2008. Some sources have commented on how Electronic Arts or Activision Blizzard could be potential targets for a Microsoft, yet I feel that those companies have much larger enterprise values relative to Take-Two or THQ thus indicating it is very much possible to see ATVI or ERTS acquire Take-Two or THQ.
On Friday, out of the ordinary, I saw Take-Two Interactive surge 6.56% with an additional 1% or so in after hours trading. What fascinates me most is how there were more than 8 million shares traded, the most within one year (at the end of May and middle of July, about 6 million shares were traded on two separate days) and no new information seemed to have supported that move. This price action for Take-Two is not necessarily prevalent but most certainly unusual. Even if there were rumors of Take-Two putting itself up for sale or someone possibly attempting to acquire the firm, such rumors are still published. This reminds me of what recently happened with a Perot Systems employee who was charged by the SEC for buying more than 9,000 call options between the 4th and 18th of September, right before Dell announced that it was going to buy Perot. With Take-Two currently at $11.86 per share, the volume for the November $12.50 and $15.00 call options this last Friday of October 23 was more than 4,000 and 3,400 contracts, respectively. At the end of the day, I am just trying to understand where such unforeseen movement derives from.
Just last week, the NPD Group, a market research firm that gives information on consumer trends said that video game software sales grew by 5% in September. After six straight months of declines, this was the first positive reading. The sector was not too fond of this data point because analysts were expecting 15% growth but potential still exists. For the same month, video game console sales did very well. Sony PlayStation 3 sales were up 134% from the previous month, Wii sales were up 67% for the same period, and Xbox 360 sales grew by roughly 63.7% again for the same period. Even though these sales stemmed from lower costs, if one buys a system, that person will buy some games. In conclusion, what attracts my attention was this movement in Take-Two. So starting this week, I will continue to follow the sector, just with a closer eye on it and we will see where it takes us.
On Friday, out of the ordinary, I saw Take-Two Interactive surge 6.56% with an additional 1% or so in after hours trading. What fascinates me most is how there were more than 8 million shares traded, the most within one year (at the end of May and middle of July, about 6 million shares were traded on two separate days) and no new information seemed to have supported that move. This price action for Take-Two is not necessarily prevalent but most certainly unusual. Even if there were rumors of Take-Two putting itself up for sale or someone possibly attempting to acquire the firm, such rumors are still published. This reminds me of what recently happened with a Perot Systems employee who was charged by the SEC for buying more than 9,000 call options between the 4th and 18th of September, right before Dell announced that it was going to buy Perot. With Take-Two currently at $11.86 per share, the volume for the November $12.50 and $15.00 call options this last Friday of October 23 was more than 4,000 and 3,400 contracts, respectively. At the end of the day, I am just trying to understand where such unforeseen movement derives from.
Just last week, the NPD Group, a market research firm that gives information on consumer trends said that video game software sales grew by 5% in September. After six straight months of declines, this was the first positive reading. The sector was not too fond of this data point because analysts were expecting 15% growth but potential still exists. For the same month, video game console sales did very well. Sony PlayStation 3 sales were up 134% from the previous month, Wii sales were up 67% for the same period, and Xbox 360 sales grew by roughly 63.7% again for the same period. Even though these sales stemmed from lower costs, if one buys a system, that person will buy some games. In conclusion, what attracts my attention was this movement in Take-Two. So starting this week, I will continue to follow the sector, just with a closer eye on it and we will see where it takes us.
Friday, October 23, 2009
Going With Dell over Hewlett-Packard
For sometime, I have been holding on to Hewlett-Packard January 55 calls hoping that as the economy turns around and PC sales begin to pick up, HPQ would make its move towards that 55 strike (currently trading at $48.30). However, I decided to swipe out of my position in HPQ call contracts for Dell, despite the financial media just bashing on this company. Here is why:
After analyzing HPQ, IBM, DELL, and AAPL, I found some interesting results. Right off the bat, Apple does not amuse me. Allow me to take the contrarian approach on this one: AAPL is extremely overbought and to add, most analysts and individual investors are just TOO optimistic with Apple. The option contracts I was looking at were extremely over valued relative to its peers. Don’t get me wrong, Apple has great ‘innovative’ products, but they can only go for so long. What about Buffet’s ‘economic moat’ theory on this one? I still consider it, do others?
Ok, so now that Apple is gone, let us compare HPQ, IBM, and DELL. Looking at January calls that are roughly out of the money by 13%, 15%, and 12%, respectively, HPQ calls have the lowest premium demanded, followed by Dell, then IBM. With IBM also having the lowest probability of outperforming the S&P 500 index relative to HPQ and DELL not to mention the lowest 1 year volatility average (meaning the equity is less likely to move a lot thus leaving the option contracts less appealing), I will forget IBM.
Here we have it, HPQ or DELL? Personally, I have a Dell laptop and just love the computers, but that is beyond the point. DELL has a higher probability of outperforming the market by roughly 2%. The volatility is much higher than HPQ suggesting that Dell will more likely reach its strike faster than HPQ will. Year to Date, Dell has been outperforming HPQ by a near 2000 basis points. So with this all said, with the option contracts that are both out of the money by almost the same amount (considering intraday movements) with the same expiration, the premium for Dell is only $.07 more, or $7.00 per contract. I believe that is well worth it. By January, I look forward to discussing the movements both HPQ and Dell will have, going on the assumption that Dell will continue to outperform HPQ. Earlier this morning, Microsoft acknowledged strength in its Windows 7 product and PC demand is believed to have stabilized and expected to grow as businesses and people upgrade to newer computers. Of course there are other macro issues that could be figured into these assumptions but in the end, I believe Dell will flourish in terms of share price movement relative to Hewlett.
Thoughts and criticism are always appreciated.
After analyzing HPQ, IBM, DELL, and AAPL, I found some interesting results. Right off the bat, Apple does not amuse me. Allow me to take the contrarian approach on this one: AAPL is extremely overbought and to add, most analysts and individual investors are just TOO optimistic with Apple. The option contracts I was looking at were extremely over valued relative to its peers. Don’t get me wrong, Apple has great ‘innovative’ products, but they can only go for so long. What about Buffet’s ‘economic moat’ theory on this one? I still consider it, do others?
Ok, so now that Apple is gone, let us compare HPQ, IBM, and DELL. Looking at January calls that are roughly out of the money by 13%, 15%, and 12%, respectively, HPQ calls have the lowest premium demanded, followed by Dell, then IBM. With IBM also having the lowest probability of outperforming the S&P 500 index relative to HPQ and DELL not to mention the lowest 1 year volatility average (meaning the equity is less likely to move a lot thus leaving the option contracts less appealing), I will forget IBM.
Here we have it, HPQ or DELL? Personally, I have a Dell laptop and just love the computers, but that is beyond the point. DELL has a higher probability of outperforming the market by roughly 2%. The volatility is much higher than HPQ suggesting that Dell will more likely reach its strike faster than HPQ will. Year to Date, Dell has been outperforming HPQ by a near 2000 basis points. So with this all said, with the option contracts that are both out of the money by almost the same amount (considering intraday movements) with the same expiration, the premium for Dell is only $.07 more, or $7.00 per contract. I believe that is well worth it. By January, I look forward to discussing the movements both HPQ and Dell will have, going on the assumption that Dell will continue to outperform HPQ. Earlier this morning, Microsoft acknowledged strength in its Windows 7 product and PC demand is believed to have stabilized and expected to grow as businesses and people upgrade to newer computers. Of course there are other macro issues that could be figured into these assumptions but in the end, I believe Dell will flourish in terms of share price movement relative to Hewlett.
Thoughts and criticism are always appreciated.
Sunday, October 11, 2009
The Wave of Mergers NOW
It is this Monday, October 12th that marks the day, or week where I believe many companies can be acquired. We have seen M&A activity pick up with Disney’s bid for Marvel, a well run company that has strong fundamentals and a nice probability of outperforming the markets. We have also witnessed Kraft bidding for Cadbury, Dell making an offer to Perot, as well as Affiliated Comp. Services becoming a target for Xerox. Keep in mind that of these four acquirers, two are components of the Dow Jones Industrial Average. Thus a key question that comes to mind after considering the recent M&A activity is what Dow Components will be the next acquirers and who will be the targets?
Over the last 12 to 15 months we have seen endless companies hoard cash as a result of the economic crisis, lacking credit, and everything else that had caused such a spooky environment. But now that the markets have been fighting back with the help of some leading economic indicators, stabilizing home prices, available credit, and companies reporting better numbers than expected, with equities on the move, rising valuations are more likely than dubious. Therefore, many companies might almost feel obligated to make acquisitions now so they could avoid paying even more of a premium at some later point in time.
This week, October 12th – 16th, we will see many companies report: Charles Schwab, CSX, Intel, Citigroup, JP Morgan, Google, and GE just to name a few. With such a key earnings week approaching and the Dow recently hitting new highs for the year, not to mention the strong momentum and millions of investors that are so eager to jump back in, we easily have the fuel to push the Dow above that psychological 10,000 mark. If that occurs, the markets can continue to rise. Clearly there are some concerns such as a weak dollar and a federal tax credit to first time home owners that is near expiration to name a few, but on the contrary, everyone expects some ‘pullback’ but that might not even be warranted! If this week gives us a great optimistic read on the consumer and the general economy, why does the market have to pull back?
At the end of the day, I believe there is still a lot of room for consolidation throughout a broad array of sectors and synergies to be created if such acquisitions occur. How about Under Armour being taken over by Nike, Activision or Microsoft bidding at Take-Two Interactive, or a Merck or Pfizer picking up a Cell Therapeutics or some other biotech? Just some thoughts…
Over the last 12 to 15 months we have seen endless companies hoard cash as a result of the economic crisis, lacking credit, and everything else that had caused such a spooky environment. But now that the markets have been fighting back with the help of some leading economic indicators, stabilizing home prices, available credit, and companies reporting better numbers than expected, with equities on the move, rising valuations are more likely than dubious. Therefore, many companies might almost feel obligated to make acquisitions now so they could avoid paying even more of a premium at some later point in time.
This week, October 12th – 16th, we will see many companies report: Charles Schwab, CSX, Intel, Citigroup, JP Morgan, Google, and GE just to name a few. With such a key earnings week approaching and the Dow recently hitting new highs for the year, not to mention the strong momentum and millions of investors that are so eager to jump back in, we easily have the fuel to push the Dow above that psychological 10,000 mark. If that occurs, the markets can continue to rise. Clearly there are some concerns such as a weak dollar and a federal tax credit to first time home owners that is near expiration to name a few, but on the contrary, everyone expects some ‘pullback’ but that might not even be warranted! If this week gives us a great optimistic read on the consumer and the general economy, why does the market have to pull back?
At the end of the day, I believe there is still a lot of room for consolidation throughout a broad array of sectors and synergies to be created if such acquisitions occur. How about Under Armour being taken over by Nike, Activision or Microsoft bidding at Take-Two Interactive, or a Merck or Pfizer picking up a Cell Therapeutics or some other biotech? Just some thoughts…
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