EnPro: No Change in Thesis
A San-Francisco-based presenter has not made any changes to his thesis for EnPro (NYSE: NPO, $40.82). The stock was presented at $37 back in February. This leading manufacturer of industrial sealing products, metal polymer bearings, compressor systems and diesel engines has a well-diversified diversified revenue base with repeatable business making up 55% of total sales. The company has leading shares in almost all of its markets and enjoys significant pricing power. Management was upbeat about the prospects for the rest of the year, essentially raising guidance. The presenter believes the stock is worth $55+ and he would add more to his position if it dips below $40.
RIM has had a tough couple years falling from the dominant market leader to a cast off in the industry. According to NPD’s latest Mobile Phone Track data, the company was only responsible for just 5 % of handset sales in Q1 of 2012. Many have drawn comparisons for the company to Palm but it has striking similarities to Apple’s turnaround story. RIM is simplifying their product line and focusing on their core audience similar to how Apple did with the release of the iMac. They are also building a new platform designed to not only get it through the next product, but the next generation of products. In addition, RIM is diversifying beyond their core strengths by its acquisition of QNX giving it an entry into the automotive systems industry. They also have simplified their marketing strategy with the campaign “Blackberry People” which is a similar tactic used successfully by Lenovo in the PC space. While this is not to say that RIM is destined to be the next Apple, their new operating system appears thoughtfully designed for the tasks at hand and the company has several avenues to establish sustained profitable growth. To read the full article please visit http://www.npdgroupblog.com/2012/05/early-shades-of-an-apple-like-comeback/.
The NPD Group, founded in 1967, is the leading global provider of consumer and retail market research information for a wide range of industries. We provide critical consumer behavior and point-of-sale (POS) information and industry expertise across more industries than any other market research company. Through our consumer panel, retail sales tracking services, special reports, and custom research, we help our clients understand and profit from consumer and retail trends. Our data tells them who is buying, what, where, and why in local, national, and international markets. For more insights from The NPD Group, please call 1.866.444.1411 or email at contactnpd@npd.com.
Amerigroup: Growth Potential Underestimated
Amerigroup (NYSE: AGP, $64.14) was another name presented at our mid-large cap idea lunch in New York last week. The company is one of three pure plays in managed Medicaid administration and is in a great position to benefit from the states looking for higher efficiency in care delivery at the time of tight budgetary constraints. Amerigroup is bidding on a portion of $50 billion in RFP’s this year alone from a number of states. The company just won additional $1 billion in annualized revenue in Texas, where it’s already the leading managed care vendor. It has also registered important wins in Louisiana and Washington, two new markets and is in a good position to gain reprocurements or new business in Florida, New Mexico, Georgia and New York. There is a bigger opportunity in front of the company in serving the dual eligibles population, with $300 billion+ allocated through Medicare and Medicaid annually to provide care for 9 million people qualified for both programs. CMS has invited states to design managed care programs to serve dual eligibles. The rollouts will start next year. Texas has already announced that only the incumbent companies will gain this business, a big plus for AGP.
Net income margins are at the bottom now for the company, but are recovering as the new business gets absorbed and utilization rates drop, the best time in the presenter’s view to take a closer look at the company. AGP guided for 40% revenue growth this year. The presenter belives the company is not getting credit for all the new business it will gain in 2013 and beyond. He models 32% top line growth in 2013 versus the Street’s 12% estimate. The upside is 50%, based on 14x 2013 earnings of $6.97/share. Takeover within a couple years is a distinct possibility considering all the new business that will be hard for a smaller company like Amerigroup to manage.
Our latest retail roundtable on April 26th featured Dick Seesel and Maggie Gilliam. The hot topic was JC Penney and the future of department stores and e-commerce. Dick and Maggie both agreed that Penney’s faces several major challenges. It is difficult to go from a store with high promotion and everyday high cost to a store with low promotion and everyday low cost. Penney’s is essentially abandoning their customer and is now focused on a different customer at a higher price point by bringing in new brands and ditching some of their old ones. Tom Roulston argues that they have no intention of everyday low pricing. The ultimate question becomes, “Do they have a way to attract customers and make money on it, or will they continue to bleed sales?”
JC Penney’s new model will surely bring about changes in employment. Due to everyday low prices and the technological advancement of electronic signing, workers will not be spend so much time changing signage and price tags, meaning less workers are needed. Therefore, employment within the stores will decrease which, as Maggie pointed out, will no doubt help supply chain management.
Dick, however, is skeptical about the branding. While it is a good thing that Penney’s is ditching some of its brands since they were so over-branded, the visible brands that they are bringing in makes Penney’s an easy target. Anytime you have a visible brand it is easy for competitors to fend off the everyday low pricing, since it is essentially fixed. Maggie focuses on the vendor’s perspective; vendors who have been selective with their brands are optimistic that Penney’s new model will work while others, however, have no faith in the new model.
Dick says that America is not over-stored it’s under-retailed. The success or failure of a company relies on how they are merchandising—in the store and out. With that being said, the success of the internet business is still up in the air, but Penney’s does have a long history of catalog success to their advantage. During times of recession, one used to see innovation in the form of construction of new stores, now the innovation is on the internet. E-commerce must be nimble on its feet and not be the demise of the brick and mortar business.
Corning: Short with 30% Upside
A New York-based portfolio manager recommends shorting Corning (NYSE: GLW, $14.36). He presented the name at our mid-large cap idea forum on April 26th. Corning will continue to be pressured by the slowdown in global TV sales. The company generates 40% of its total revenue and 90% of its pretax income from sales of glass to LCD TV manufacturers, a mature market. Growth going forward will be heavily dependent on the replacement cycle, which will revert to the historical 8-10 years versus the company’s expectation of 6.5 years. Overcapacity and flat demand have led to back to back 10% declines in pricing in the last two quarters. The LCD glass market is an oligopoly with three competitors, Corning, Asahi, and Nippon. Up until recently, all three had behaved rationally and generated roughly equal margins, but in November Corning lost its LG contract to Nippon purely on pricing.
The company’s Gorilla Glass product has generated a lot of excitement, but after almost tripling in sales last year, growth in Gorilla Glass revenue is projected to slow down to a 25% increase in 2012. Crucially, this segment is not profitable yet. Furthermore, management, despite the company’s dominant share of the LCD glass market, has had a poor track record recently predicting demand and sales volumes.
The presenter expects flat revenuse this year and a 5% decrease in 2013, with operating margins falling to 17%, significantly below the consensus. His target for the short is $10, based on 9x 2013 EPS of $1.10.
A San Francisco-based presenter continues to recommend Meridian Bioscience (NASDAQ: VIVO, $20.51). VIVO was presented at our idea forum in December at $18.41. The company new molecular diagnostic platform has changed VIVO’s focus from a seller of one-off products to a razor/razorblade model. The fiscal 2012 Q2 reported yesterday saw the company beat on both top and bottom line.
The presenter notes that despite issues that Europe is having, the numbers that VIVO generated out of Europe were actually OK. He’s made no change to his original thesis and forward estimates.
NPD Group on Best Buy’s Market Position and Future Outlook
Best Buy has been in the news quite a bit recently with their CEO Brian Dunn stepping down after an investigation into his personal conduct along with questions about the long-term viability of the company. The problems in the consumer technology industry are structural hitting all retailers, suppliers, and brands equally. Retailers were the first to see declining growth with Best Buy being the primary example since they are the biggest and most successful retailer in the industry. Its not that the company didn’t see these changes coming but how dramatically and swiftly they happened over the past year caught them off guard. Despite the problems in the consumer technology industry, Best Buy has done a good job coping with the changes to its business and preserving its legacy strengths.
In 2011, Best Buy’s share of consumer technology revenue stood at 19 percent of hardware sales, according to NPD’s Consumer Tracking Service, exactly what it was in 2010 and what made it the leader in sales by a substantial margin. Best Buy also was the number one brick-and-mortar retailer online and gained almost one point in revenue share, now 22.4 percent, among retailers on the Web. In computers Best Buy’s market share is 10 points higher than any other outlet that sells Windows notebooks and generates 2X more revenue from those sales than any other retailer. They are the largest retailer of Apple notebooks, selling one in every four notebooks in theUS, a number that is 6X larger than any other Apple reseller.
In the fast-growing TV segment of 50” and above, Best Buy’s market share was 31 percent and more than 3X higher than any other retailer. They also sold more tablets than any other retail store or Web site in 2011. In addition, Best Buy saw its unit share of the cell phone sales grow by 25 percent in 2011 and its share of smartphone sales increase by 50 percent. They were the single largest non-carrier outlet for smartphone sales. In all of the most important product categories, ones which represent more than 50 percent of U.S.consumer technology revenue, Best Buy by any objective measure is either gaining share rapidly or maintaining its industry leading position. While there are challenges ahead, Best Buy remains the dominant retailer and in the best position to succeed in the coming years. To read the full article please visit http://www.npdgroupblog.com/2012/04/best-buy-reconstructed/.
The NPD Group, founded in 1967, is the leading global provider of consumer and retail market research information for a wide range of industries. We provide critical consumer behavior and point-of-sale (POS) information and industry expertise across more industries than any other market research company. Through our consumer panel, retail sales tracking services, special reports, and custom research, we help our clients understand and profit from consumer and retail trends. Our data tells them who is buying, what, where, and why in local, national, and international markets. For more insights from The NPD Group, please call 1.866.444.1411 or email at contactnpd@npd.com.
