ATVI Q1 2016 Earnings

On May 5, Activision Blizzard reported Q1 2016 GAAP Earnings per share of $0.45 and Revenue of $1.46 billion. They reported non-GAAP EPS of $0.23 and Revenue of $812.1 million, exceeding analyst’s expectations of $0.12 and $812.12 million, respectively. The company reported strong Monthly average users (MAUs), totaling 544 million. Total MAUs can be broken down as follows: Activision- 55 million, up 10% from last year, Blizzard- 26 million, up 23%, and King- 463 million, up 3% from the previous quarter. Activision also continues to have four of the top 10 games on next-gen consoles, and King had three of the top 15 grossing titles in U.S. mobile app stores for the ninth consecutive quarter. Activision Blizzard didn’t have any major new releases during the first quarter, but did issue a second expansion pack for its highly popular “Call of Duty: Black Ops III”. ATVI shares were up 4.1% at $36.35 in after-hours trading, up from its closing price of $34.85. The stock ended the week strong, closing the post earnings trading session at $37.45.

AT&T (T) Q1 2016 Earnings

Post market close on April 26^th, AT&T reported first quarter adjusted earnings per share of $0.72. This represents a year over year increase of 10.8%, and exceeded analyst estimates of $0.69. They reported Revenue of $40.54 billion, up 24% year over year- largely attributed to the acquisition of DIRECTV in July of 2015. They continue to show margin growth, reporting an operating margin of 17.6%, up from 17.1%, with margin expansion in every domestic business segment. Operating cash flows were up more than $1 billion from Q1 2015, reporting free cash flow of $3.2 billion, representing a year over year increase of 17%. They reported operating expenses of $33.4 billion, up from $27 billion in the same quarter last year. Operating income was reported at $7.1 billion, up 28% from Q1 2015. Despite an otherwise successful quarter, the wireless business lost 363,000 mainstream phone connections, exceeding the 200,000 mainstream phone loss that had been expected. They also lost 54,000 video subscribers, even with gains at DIRECTV. The stock opened the following day slightly lower at $37.95, but hit an intra-day high at $38.89, and then ended the day at $38.73.

PNC Closes 2015 Out Strong; China & Oil Weight on Markets

PNC posted diluted earnings per share of $1.87 which surpassed Street estimates of $1.80. This represents an earnings surprise of 3.9% and growth of 1.6% from the same quarter in the prior year. Results were mainly driven by lower expenses, which unfortunately were offset by lower revenues and higher provisions for credit losses and net charge offs. Despite the positive report, the results were masked by worries in China and oil with each of the main indices down at least 3% in intraday trading. PNC closed the week at $86.36.

Revenue for the quarter came in at $3.85 billion which was down 2.4% from the prior year. The decline was mostly due to a fall in non-interest income but the figure still beat on consensus revenue estimates. Net income in the Retail Banking, Asset Management Group and Non-Strategic Assets Portfolio increased 23.8%, 13.3%, and 23.3%, respectively, from the prior year’s quarter. Net income in the Corporate & Institutional Banking and Other segments declined 4.4% and 33%, respectively.

Net interest income for the quarter was down 0.2% year over year due to lower purchase accounting accretion, despite an increase in core net interest income. PNC’s net interest margin decreased 19 bps to 2.70%. Net charge offs increased 2% year over year to $120 million and provision for credit losses rose 42% to $74 million.

In the quarter, PNC repurchased 5.8 million common shares for $0.5 billion. As of December 31^st Basel III common equity tier 1 ratio was 10.7%. Total assets were $358.5 billion, up 3.9% year over year. Total loans and total deposits increased 0.9% and 7.2%, respectively.

Union Pacific Earnings Preview

Stock of Union Pacific edged down to $92.94 this week after an encouraging, month-long climb back to $97, peaking last week.  Curiously, this rebound, beginning on September 28^th, does not seem to be tied to a specific piece of news.  More likely, it is a correction to its valuation, which was thought by many analysts to be far below its intrinsic value.  We entered this position over a year ago, and at a price of $92.  To recount since then, UNP equity is down 22% YTD, so despite a slight positive return ITD, we missed perhaps the best time to exit the position.  Union Pacific is scheduled to release earnings before the trading day of 10/22.

The current macroeconomic climate challenges us to make a decision about exiting this position in advance.  Protracted low oil prices has ushered, as some economists earlier predicted, a structural shift to petroleum and out of coal.  In dollar terms, coal encompasses nearly one fifth of Union Pacific’s revenue.  The U.S. Coal Index, once at 120 nearly a year ago, now rests at 27, having decreased every month in between.  Agricultural price indices have edged slightly lower.  Weakening Chinese demand, evident in revisions to its GDP forecast, has driven commodity prices into the ground.  Commodities represent another key freight item—both directly and indirectly—to Union Pacific.  To make things worse, China in specific is a key endpoint for UNP’s cross-country freight.  This, however, represents a global trend; economists at the UN have already revised estimated global growth down 0.2%.  Though Union Pacific has cut capital spending goals to $4.2 billion from $5 billion, cash flows will be impacted by hits to top-line, trickling down to bottom-line.   

The price target of the revised model, dependent on favorable long-term and perpetual growth rates, can no longer be justified.  As such, cash flow valuations now hover in the low $100s.  This is in line with the average analyst prediction of $104.  The only mixed piece of news is that this analyst consensus has barely flinched over the last three months (during which much news has taken place.)  Only two of the twenty-two analysts assigning a ‘buy’ rating three months ago, have downgraded.  The aggregate rating, though slightly lower, is still in strong overweight territory.  Nevertheless, it is unlikely UNP will reach the consensus $1.43 earnings per share this quarter; surges in the later part of the year rest on seasonal coal and foodstuffs—both of which are doomed by weak global demand.  

U.S. Ecology Earnings Preview

U.S. Ecology closed this week at $46.39.  This price represents a 4% decrease over the last month, a 2.9% increase QTD, and a 15.6% increase YTD.  We entered this position at a price of $44.13 nearly one year ago, a 5% gain ITD.  ECOL is scheduled to report earnings on November 4^th, the latest such date in our sector.  To recap the previous earnings release, UNP surprised the markets by posting revenue that more than doubled its previous quarter; the same held for operating income.  However, EPS only arrived at a disappointing $0.10, due entirely to a one-time good-will impairment.

 

There is no reason U.S Ecology shouldn’t repeat this performance.  It is currently in the midst of numerous long-term contracts, and its backlog is strong and growing.  Its environmental service divisions are slated by management to have an unprecedented year.  In fact, management expects that, even despite the downward adjustment of Q2 EPS, ECOL will finish 2015 at the upper-end of its previously forecasted $1.76-1.92 EPS range.  Wall Street shares this opinion, predicting a consensus EPS of $0.66 this quarter.  Based on the contributions of six analysts, it has assigned an “overweight” rating to the equity—this matches the ratings from three months ago.  U.S. Ecology will pay its $0.18 dividend, as announced, on 10/19. 

U.S. Ecology still expresses confidence in the immediate benefits of its August divestiture of All-State Power Vac, completed in the hopes of streamlining operations.  In addition, just this past month, ECOL has been in the middle of a battle with Detroit taxpayers.  It had begun to expand operations at one of its waste treatment plants in the city, one that specializes in the detoxification of naturally-occurring radiation from fracking.  This plant even gained necessary state approval to begin treating greater quantities of waste from neighboring states.  However, in response to due diligence from a few journalists and the public, this will be halted.  This was a major project, but bearing in mind the history of safety at this plant, management expects the expansion to resume in the near future.  Little else has happened this quarter in the way of company news.  

Jet Blue Earnings Preview

Stock of Jet Blue finished the week at $24.10.  We were disappointed to see JBLU drop from its high on Monday of $26.82, a 10% drop.  The decline, taking place almost entirely on Monday, occurred after JP Morgan downgraded the stock.  Despite this volatile reaction, the market has a positive opinion on JBLU: there are nearly as many ‘buys’ as ‘holds,’ leading to a strong rating of ‘overweight.’  Investors have received a very good return on stock of JBLU over the past year.  Indeed, it has returned 5% QTD, 52% YTD, and 35% ITD, as we entered this position at $17.84 this past spring. 

There is reason to believe Jet Blue will perform well when it reports earnings on October 27^th.  Wall Street EPS estimates have been periodically revised upward, currently standing at $0.57.  Revenue is expected to increase 10.2% YOY, in part driven by a 13.1% increase in available seat miles to 3.8 billion in the month of September.  In the airline industry, this variable is a crucial determinant of revenue estimates.  Moreover, industry earnings estimates represent a 137% increase from the previous quarter. 

Jet Blue is positioned well in the current economic climate.  The continued appreciation of the USD has enabled domestic flyers to command more buyer power when flying.  On the hand, international flyers will find the rates of the U.S. airlines considerably more expensive in their home currency.  This adversely impacts such airlines like Delta, wielding a large international presence, but for Jet Blue, operating almost entirely within domestic borders, currency values have driven top-line growth.  This will certainly continue, and a decision to raise interest rates will only accelerate this trend. 

Finally, Jet Blue has made a few headlines.  It is currently in talks with Bombardier, a Canadian aircraft manufacturer, over potential acquisition of some of its CSeries models—the largest of its models, all of which are acclaimed for niche quality.  In addition, it announced this month that it will offer Wi-Fi on all of its flights—a move that was well-received by consumers.  Both of these could serve to elevate Jet-Blue’s quality factor without sacrificing too much its competitive pricing.  

Union Pacific - 9/15/15 Update

Stock of Union Pacific has stabilized near $87.  The current price stood at $87.98 as the markets closed today.  Share prices have changed very little during the past week.  However, the past month marks a 5% decline in share prices, almost certainly due to panic in the Chinese economy, a significant end-point for the goods shipped by Union Pacific.  

With nearly two months passed since third quarter earnings,--one in which EPS, but not revenue, beat analyst estimates--some of the factors that beleaguered top-line numbers still stand.  Foremost, the declining demand for coal continues.  Coal accounts for 18% of Union Pacific's revenue, and declined by 18% year-over-year this past quarter.  The White House aims to cut carbon emissions in the power generation, the primary coal market, by 32% within 15 years.  Management expects coal revenue, as a percent of total revenue, to decline from its previous 18%.  Stronger automotive and general freight has improved the shortfall.  

Expectations for Union Pacific remain positive.  A few major institutions, including Bank of America, Cowen and Company, and Topeka Capital Markets, have upgraded stock of UNP.  Price targets are lower than in the past, but all exceed $100.  In addition, Morningstar recently upgraded Union Pacific debt to a ranking of 'A,' citing reliable cash flows and return on equity.  Accordingly, we remain convicted in this position.  

Spectrum Brand Holdings (SPB)

At the end of May, Spectrum Brand Holdings closed at $96.65. Since then they have decreased $0.37 leaving them at a price of $96.28, demonstrating a relative stability in the stock. Given the current volatility of our markets and the diversified nature of this stock, this minimal decrease in stock price is to be expected and doesn’t in itself hold any indicative any negative signs for this company. Since our purchase of the stock on March 3^rd, it has increased in value by $2.30.

SPB is diversified across various products and brand names allowing a lot of their unsystematic risk to be diversified away. Recently SPB has increased their consumer diversity by adding Armored AutoGroup Parent Inc. to their product line. Spectrum Brand Holdings still holds true to our thesis of them having a great reputation, loyal customers and diversified product line. This assures investors like us they are a safe company that will flourish with a good economy.