Alphabet ($GOOG) announced on Tuesday that Sundar Pichai will take over as CEO as Larry Page and Sergey Brin both stepped down from their roles as CEO and President. It was a popular choice with Mr Pichai being seen as a safe pair of hands with a collaborative style.
Expedia ($EXPE) announced a C-Suite transition that was altogether less smooth with the resignation of both the CEO and CFO after a disagreement on strategy and disappointing Q3 results. The company's now ex-CEO Okerstrom had begun a push for Expedia to integrate its brands and technology earlier in the year. It appears he has been ditched due to a subsequent lack of focus on Expedia's core business that resulted from this push.
However pressure from Google suggests Okerstrom' strategy may have been the right one. Competitors Airbnb, TripAdvisor and Booking have all been implementing a similar strategy of integrating their brands and technology. Expedia’s very real problems remain, namely it needs to wean itself off of Google SEO as a source of traffic or face getting further squeezed as Google continues to convert more traffic from free to paid.
There were also a couple of interesting articles in Barron's saying Amazon ($AMZN) “cannot be beaten” and that Nike ($NKE) “is in the early innings of transition from a traditional wholesale business”
In summary, Citi analyst Jason Bazinet said other traditional retailers and e-commerce firms are unable to replicate Amazon's scale and capabilities. That means that Amazon can continue to grow by selling goods at a loss while offsetting losses with the profitable selling of services to enterprises. If he is right then Amazon looks cheap with annual forecast growth of 72% compared to a TTM PE 78.
However it seems there is one very specific exception to Mr Bazinet’s assertion with Nike’s decision to no longer sell merchandise through Amazon showing that strong brands are realizing that traffic driven to their own site is self-sustaining, more profitable, and actually brand enhancing. Morgan Stanley’s Kimberly Greenberger’s has a TP 22% above current level and says, “We continue to believe NKE is in the early innings of transition from a traditional wholesale business to a digitally-driven, direct-to-consumer brand,”
Elsewhere Johnson & Johnson ($JNJ) said on Tuesday that more tests showed that Johnson’s Baby Powder was free of asbestos and Peloton ($PTON) had a bad week with their Christmas advert branded “dystopian” and “sexist”. I am going to take this opportunity to say nothing.
Value stocks (Signet and At Home Group)
Signet Jewelers Limited ($SIG) reported Q3 results with same store sales up 2.1%. CEO Virginia Drosos says the company’s “transformation journey” is starting to pay off with recent initiatives beginning to take hold. “Starting with customer first, much better product marketing, and a transformed media plan for this holiday season, better omni channel, iPads in the hands of every jewelry consultant, and better websites,” Drosos said “And we're driving out costs in the business that we've been able to reinvest to drive growth.”
The company guided to full year non-GAAP diluted EPS of between $3.11 – $3.29 which looks attractive compared to the stock price of $20.58.
Encouragingly Drosos said “In the jewelry category, the consumer market is healthy,” and continued, “We've seen over the last number of years low single digit growth in the category, and we expect that to continue.”
At Home Group Inc ($HOME) beat top and bottom line third-quarter estimates but disappointed analysts with a guidance cut. After a difficult Thanksgiving, At Home sees fourth-quarter adjusted earnings of 31-36 cents per share, significantly below the 49 cent per share consensus estimate. That reflects 25% off discounting on seasonal items at an earlier time than At Home has ever implemented.
However the stock looks cheap following its 33% drop with a valuation of less than 10x current year estimates.
KeyBanc Capital Markets Bradley Thomas maintained an Overweight rating but cut its price target from $14 to $10 (Friday’s closing price was $5.67) and said “Ultimately, recent trends are undeniably frustrating, but we believe the Company is taking its medicine on markdowns and has mostly de-risked 4Q,” Thomas wrote, “New store performance remains strong and HOME continues to take share from competitors.”
Wells Fargo maintained a Market Weight rating and $7 target with Zachary Fadem saying encouragingly, “Looking ahead to next year, we believe the roll outs of EDLP+ [Everyday Low Prices] and BOPIS [Buy Online Pickup Instore] can drive incremental sales and improve HOME’s value perception with consumers”.
Growth stocks (Duluth Holdings Inc, The Trade Desk and Ulta Beauty)
Duluth Holdings Inc ($DLTH) is up 20% after reporting strong Q3 results on Thursday that beat expectations with healthy top-line growth of 12% and improved third-quarter operating margin and earnings growth on a year-over-year basis. Revenue of $119.90 million thrashed analysts’ estimates of $114.97 million and full year EPS guidance of 60 cents to 66 cents compared to consensus forecasts for 60 cents.
That’s good news for the rapidly growing lifestyle brand with well-established direct business. The company opened 3 new stores during the quarter, taking the total to 58, but has identified markets with 100 potential store locations meaning there is still plenty of potential for growth.
At $247.35 (market cap of $11.2bn) The Trade Desk's ($TTD) stock price has recovered some of Monday’s correction but is still significantly down from recent highs of $290. On Friday, Needham analyst Laura Martin upgraded the stock from Hold to Buy with a new $325 price target.
That’s in line with the CEO who maintains the view that most of the $700 billion plus pie of advertising will end up programmatic – that's a huge opportunity for the $11 billion market leader.
Global markets in particular have huge potential but account for just 14% of The Trade Desk’s current business. That figure should grow to two-thirds, reflecting the global break down. The Trade Desk is the only mainstream DSP with a strong play in China and that could drive huge returns.
Ulta Beauty’s ($ULTA) stock jumped 11% on Friday after reporting a strong Q3. Comps rose 3.2%, driving overall revenue growth of 7.9% and gross margin improved 40 basis points to 37.1%. Full-year guidance was raised to EPS of $11.93 to $12.03, up from a previous range of $11.86 to $12.06 and up from $10.94 last year.
That will suit CEO Mary Dillon who bought $308,000 of stock in September. The prestige cosmetics industry has seen growth slow from its frenetic pace of recent years but (on a PE of 22x current year estimates) Ulta doesn’t look expensive.
Speculative and high risk (electroCore)
This week, the UK’s Depart of Health agency NICE (National Institute for Health and Care Excellence) published its guidance recommending the use of electroCore’s ($ECORE) gammaCore treatment for the acute and preventive treatment of cluster headache in adults.
Even though treatment costs about £3,000 ($4,000) per year, the NICE guidance states that gammaCore, when added to standard of care, can save an average of £450 ($590) per patient in the first year of treatment. Additionally, among the comments received by NICE in their review of gammaCore are endorsements from UK neurologists expressing strong support for patient access to gammaCore in the NHS, such as “This device has changed the way we practice – it has huge implications beyond the results of headache diaries,” and “[I have] had a lot of experience with seeing clinical responses and the meaningful and significant impact this treatment can commonly have on people's lives.”
That’s pretty encouraging.
Iain Strickland, Managing Director of electroCore UK, said “approximately 66,000 people in the UK suffer from this devastating headache disorder, and experts have reported that 25-50% of the most severely affected will benefit from our therapy,”
Back of the envelope that suggests (66,000 x 37.5% x 4,000) $92.4 million of revenues from the UK alone which would go along way to offsetting electroCore’s $50 million annual cash burn and set up the company for profitability.
Additionally, in the US back in April 2017, the FDA cleared electroCore’s gammaCore therapy for the acute treatment of cluster headache, or CH. CH is an extremely painful form of headache affecting approximately 350,000 people in the United States with an estimated total addressable U.S. market of approximately $400 million. Additionally, according to a 2016 market research survey, 87% of respondents reported dissatisfaction with the then-available treatment options for managing CH.
Further, in January 2018, the FDA cleared electroCore gammaCore therapy for electroCore’s lead indication: the acute treatment of migraine in adults. Reports suggest an even greater total addressable market of approximately $4 billion and some reports suggest that up to 60% of migraine sufferers are dissatisfied with, or have contraindications to, the current standard of care treatments.
Unfortunately the UK news probably comes too late to save existing shareholders from significant dilution. With an annual cash burn of c.$50 million and cash of just $33.5 million as of September 30th. We could easily be looking at 30 million new shares at $1, diluting exiting shareholders 1:1 (or worse).
It is probably wise to wait to see the terms of that issuance before entering into a position. However, the guidance and comments from the UK are extremely positive. If electroCore can execute in the UK and bring some of that success back to the US then, even with dilution, it could yet be a multibagger.
Insider buying (Evolent Health and Kodak)
Insider buying at Evolent Health ($EVH) Inc this week with the CEO purchasing $228,000 of stock on Tuesday followed by a $100,000 purchase by the President on Thursday. It comes after a 75% drop in the stock in just over a year. Last week the stock dropped almost 40% after reporting that it’s largest customer, Passport Health, had lost the contract to manage the $8B per year Kentucky Medicaid business which it had maintained for 20 years.
It’s a terrible blow that could put Passport out of business and bad news for Evolent who derive 12% of their revenues from Passport and had recently agreed to purchase a 70% ownership for $70 million (expected to close by the end of this year). However I think the 40% drop looks overdone and insider buying sends a signal that management think so too.
CEO Frank Williams noted that there was a possibility that Passport would not be awarded the Kentucky contract in the Q3 conference call last month and said, “If Passport's contract is not renewed beyond June, 2020 than we anticipate services growth in 2020 of at least 10%.” That is a lot lower than the 20% expected if it had won the contract but still suggests a very healthy level of growth. Additionally Passport Health Plan has confirmed that they intend to appeal Kentucky's decision meaning they could well win some of the business.
However, even when assuming the worst case scenario of 10% growth, the valuation of Evolent (trading at just 0.77x sales) looks cheap.
Insider buying at Kodak ($KODK) after two directors made purchases of $5.5 million and $11.1 million this week. They follow Executive Chairman James Continenza who increased his holding last week by 50% with a $103,000 purchase.
The once iconic film manufacturer has struggled since it emerged from bankruptcy proceedings in 2015. It does have a number of growth engines that account for about 25% of revenues, including its SONORA Process Free Plates which grew by 22% in Q3 and the PROSPER Inkjet Platform which grew by 5 percent, but these as yet have not been enough to offset the decline and overall revenues fell by 4.3%.
The company is not expensive with a market cap of $111 million compared to net cash of $75 million. It reported Operational EBITDA of $14 million in Q3 ($9 million Q3 2018). However, with the core business still facing strong headwinds, it is difficult for an outsider to see any value in the business.
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This is not a recommendation to buy or sell. Stocks are risky and not suitable for everybody. Some of the stocks mentioned are HIGH RISK AND SPECULATIVE. Please do your own research.
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