Portfolio Update

In this post, I will be giving an update on the investment ideas I wrote about.

Note: “Average price” includes Dividend Reinvestment Plan (DRIP) – the dividends I received were used to buy additional shares in the company.


On February 16, 2015, I wrote about Microsoft (NASDAQ: MSFT) and believed it was a strong buy. Ever since then, MSFT is up 19.07%, from $43.95 to $52.33 (dividends not calculated). On December 29, 2015, MSFT reached $56.85, the highest since 2000. I do not own the shares of MSFT. Yes, I did miss the opportunity. At the time, I couldn’t afford it to buy enough shares and cover the commission fees.

Microsoft Corporation (MSFT) – Daily

On April 12, 2015, I wrote about General Electric (NYSE: GE) and believed GE was also a strong buy (it still is). Ever since then, GE is up only 1.39%, from $28.06 to $28.45 (dividends not calculated). On December 28, 2015, GE reached $31.49, the highest since May 2008. I do own the shares of GE. I bought it in August 2014. The average price I own at is $25.87. I’m currently up 9.97%.

Cisco Systems, Inc. (CSCO) – Daily

Last summer, I wrote about Cisco Systems (NASDAQ: CSCO) (article part 1 and part 2) and believed it was undervalued (it still is). Ever since then, CSCO is down 11.47%, from $27.99 to $24.78 (dividends not calculated). I do own the shares of CSCO. I bought it in August 2014. The average price I own at is $24.73. I’m currently up mere 0.2%. I will take advantage (buy more shares) of lower prices.

Cisco Systems, Inc. (CSCO) – Daily

On November 21, 2015, I wrote about Eli Lilly (NYSE: LLY) and believed it was overvalued (it still is). Since then, LLY is down 3.85% from $85.50 to $81.25 (dividends not calculated). I’m not short on LLY. I cannot afford to short it, due to my capital.

Eli Lilly (LLY) - January 2016
Eli Lilly and Company (LLY) – Daily

On December 26, 2015, I wrote about GoPro (NASDAQ: GPRO) and believed it is a buy (it still is). Since then, GPRO is down 12.10% from $18.34 to $16.12.

GoPro (GPRO) – Hourly

GoPro: Speculative Buy, But Huge Rewards

Ahh! GoPro (NASDAQ: GPRO). A stock that gravity took over. It crushed from $98.47 (early October 2014) all the way down to $15.90 (mid December 2015). Boy, was Citron Research right, when they predicted share-price would drop to $30 within a year, in November of the last year.

And what now? Is this end of GoPro or is there more?

As for me, I’m very skeptical of the market. I’m someone who loves to go against the investments of the crowd.

For example, when the Alibaba (NYSE: BABA) was launched, I was convinced that the market was hyped about it and I didn’t find any intrinsic value in BABA’s share price. Recent market sentiment about GoPro is SELL SELL SELL!!! Me being the skeptic, I say BUY BUY BUY!!!

And it’s not just because of my skepticism of the market, but because of Karma and more.


Karma is coming in 2016 for the short-sellers of GPRO. So take your profit while you can. GoPro has planned to launch its first drone, Karma in 2016. The introduction of a drone will expand camera maker’s product line, beyond making action cameras.

The release of Karma is released, will launch GoPro into Unmanned Aircraft Vehicle (UAV) market. The Smart Commercial Drones Market is expected to reach $27.1 billion by 2021 from $3.4 billion in 2014, according to Wintergreen Research, Inc’s report, “Smart Commercial Drones: Market Shares, Market Strategies, and Market Forecasts, 2015 to 2021.” According to the report, “The commercial grade consumer video drone segment is the largest one in terms of revenue in 2015, and it is expected to lead over the forecast period.”

GoPro founder and CEO Nick Woodman said at the TechCrunch conference in September that the company is planning to launch a drone in the first half of 2016, “development is on track for the first half of 2016. We have some differentiations that are right in the GoPro alley.” Karma is finally coming.

Hollywood is eager to change the way they take aerial shots. Not long ago, they used helicopters (some still do) to shoot from bird’s point-of-view and it costs a lot. Drone makes it all cheaper. Not only cheaper, but also safer and opens more creative ways of shooting a video. In other words, drones can do what helicopters cannot do.

On May 28, GoPro announced at Google’s I/O conference that it will build a 360-degree camera array for stereoscopic spherical videos. With the help of Google Jump, Google’s virtual reality system,  GoPro’s camera array, Odyssey can make videos like this. I believe the Odyssey can be very useful for real estate market. “360-Degree Real Estate Tour – Brought to you by GoPro.”

Oh, did I mention Odyssey has 16 cameras that work together as one? I repeat, 16. Hey GoPro, why don’t you knock out your useless and wasteful $300 million buyback program out of the park? According to its third-quarter SEC filing (10-Q), GoPro stated,

“To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.”

They spend 345x more on buybacks than they do on research and development. So GoPro, eliminate your worthless buyback program. “Customize” the money into research and development, and acquisitions. Customize the Odyssey. 16 cameras? Really? Reduce the size and improve the quality.

I strongly believe GoPro should acquire a small thermal imaging company. Thermal imaging can be a perfect fit for drones. I suggest GoPro acquires Seek Thermal, designer and manufacturer of high quality thermal imaging products. If GoPro acquires Seek Thermal or a different thermal imaging tech company, they will be able to reach sectors such as firefighting and agriculture. Diversified!

Partnership with Rollei – a German manufacturer of optical instruments and a seller of GoPro compatible accessories – might be helpful.

Another great acquisition can be Vuzix (NASDAQ: VUZI), a Google Glass rival, and a leading developer and supplier of smart glasses and video eyewear products in the consumer enterprise and industrial markets. Vuzix holds over 41 patents and 10 additional patents pending. Market cap. is currently $104.39 million. With $513 million cash on hand, GoPro can afford the acquisition. In January, Vuzix received a $24.8 million investment from Intel (NASDAQ: INTC). Intel bought preferred stock that is convertible into common shares equivalent to 30% of Vuzix.

In the third-quarter, GoPro’s revenue increased 43% year-over-year (Y/Y) to $400.3 million. On non-GAAP basis, its net income, operating income, and operating expenses increased 103.9% Y/Y, 71.7% Y/Y, and 44.3% Y/Y, respectively. On GAAP basis, it increased 28.58%, 105.36%, and 43.78%, respectively. The growth isn’t bad for a company with a market cap. of $2.49 billion. However, its inventory days increased 80.6% Y/Y from 67.7 to 122.3.

There are buyout rumors and one of the potential suitors being Apple (NASDAQ: AAPL). While this is a great news, it is not likely to happen in the first half of 2016. I believe the management of GoPro would not want to sell the company until they see the outcome of Karma. If the outcome is positive, the company will not be sold next year. If it is negative, the company will be sold unless they have something up in their sleeves. Management’s actions should a sign of what’s to come.

I’m confident the founder of GoPro will turn things around next year. GoPro can be a leader in its field if it eliminates the buyback program and invests into the future. According to Futuresource Consulting, the global action camera market grew by 44% Y/Y in 2014. It is expected to grow at a compound annual growth rate (CAGR) of 22.2% between 2014 and 2019. GoPro should target not only sport enthusiasts, but the film and television industry, real estate, and other sectors such as, firefighting and agriculture. In order to do that, GoPro should first create a product that suits the sector’s needs. First impressions are important.


Disclosure: I’m currently long on the stock, GPRO, at this time (December 26, 2015).

Note: All information I used here such as revenue, net income, etc are found from GoPro’s official investor relations site and its SEC filings.

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

Eli Lilly (LLY) Is Overvalued – Too Costly To Buy (UPDATED)

UPDATE: This article is also posted on Seeking Alpha. For the first time, my article was accepted to be on Seeking Alpha. The link to the article on Seeking Alpha can be found here, or http://seekingalpha.com/article/3707566-eli-lilly-is-overvalued-too-costly-to-buy.

 

Eli Lilly (LLY) - Past 5-Years
Eli Lilly (LLY) – Past 5-Years

On October 22, Eli Lilly (LLY) reported an increase in the third-quarter profit, as sales in its animal health segment and new drug launches offset the effect of unfavorable foreign exchange rates and patent expirations. Indianapolis-based drug maker posted a net income increase of 60% to $799.7 million, or to $0.75 per share, as its revenue increased 33% in animal health segment. In January 2015, Eli Lilly acquired Norvartis’s animal health unit for $5.29 billion in an all-cash transaction. The increase in the animal-health revenue helped offset sharp revenue decreases in osteoporosis treatment Evista and antidepressant Cymbalta, whose revenue fell 35% and 34% year-over-year, respectively. Eli Lilly lost U.S. patent protection for both drugs last year, causing patent cliffs. Lower price for the Evista reduced sales by about 2%.

Total revenue increased 2% to $4.96 billion even as currency headwinds, including strong U.S. dollar, shaved 8% off of the top line in revenue. Recently launched diabetes drug Trulicity and bladder-cancer treatment Cyramza helped increase profits, bringing a total of $270.6 billion in the third-quarter. Eli Lilly lifted its guidance for full-year 2015. They expect earnings per share in the range of $2.40 and $2.45, from prior guidance of $2.20 to $2.30.

Despite the stronger third-quarter financial results, I believe Eli Lilly is overvalued.  Eli Lilly discovers, develops, manufactures, and sells pharmaceutical products for humans and animals worldwide. The drug maker recently stopped development of the cholesterol treatment evacetrapib because the drug wasn’t effective. Eli Lilly deployed a substantial amount of capital to fund Evacetrapib, which was in Phase 3 research, until they decided to pull the plug on it. The suspension to the development of Evacetrapib is expected to result in a fourth-quarter charge to research and development expense of up to $90 million pre-tax, or about $0.05 per share after-tax. Eli Lilly’s third-quarter operating expense declined 7% year-over-year, mainly due to spending on experimental drugs that failed in late-stage testing trials.

Eli Lilly’s market capitalization skyrocketed over the past five years by 122.76% to $90 billion, but their revenue, gross profit, net-income, operating income, as well as EBITDA, declined significantly. Over the past five years, its revenue decreased 14.61% from $23.08 billion to $19.70 billion (LTM), largely due to patent expirations. Gross profit and net-income declined 26.06% and 53.48%, respectively. Its operating income fell 59.18% over the past five years.

Eli Lilly - Revenue/Gross Profit
Eli Lilly – Revenue/Gross Profit

 

Eli Lilly - Key Financials
Eli Lilly – Key Financials

Its operating margin fell a halfway over the past five years from 28.30% to 13.53% (LTM). EBITDA margin, on the other hand, fell all the way to 18.73% (LTM) from 34.05%.

Key Margins
Eli Lilly – Key Margins

Meanwhile, shares of Eli Lilly gained 144.49% over the past five years. Its price-to-sales ratio too high compared to its history and to S&P 500. Its Price/Sales ratio currently stands at 4.6, vs. at 1.7 in 2010, while S&P 500 currently stays at 1.8 and industry average at 3.9. In addition to the falling revenue, gross profit, net-income, and EBITDA, its free cash flow fell significantly over the past five years by 72.24%, or fell 22.61% on a compounded annual basis.

Not only did their cash flow fall, but their net-debt increased significantly. Its net-debt increased by a whopping 1789.87% over the past five years from $199.5 million to $3.85 billion. They now have almost twice as much of total debt than they do in cash and equivalents. I believe Eli Lilly is at a risk for poor future ratings by rating agencies, which will increase their borrowing costs.

Eli Lilly – Total Cash/Total Cash/Net-Debt
Eli Lilly – Total Cash/Total Cash/Net-Debt

Strong U.S. dollar is an issue for Eli Lilly. Over the past five years, the dollar index increased 26.75%. Last quarter, its 49.2% of revenue came from foreign countries. Its revenue in the U.S. increased 14% to $2.54 billion, while revenue outside the U.S. decreased 9% to $2.42.

Eli Lilly - 2014 Geography Revenue
Eli Lilly – 2014 Geography Revenue

Eli Lilly’s dividend yield of 2.55% or 0.50 cents per share quarterly can be attractive, but it is undesirable. From 1995 through 2009 (expectation of 2003-2004), Eli Lilly raised its dividend. Payouts of $0.26 quarterly in 2000 almost doubled to $0.49 in 2009. Then, the company kept its dividend payment unchanged in 2010, the same year when its net-income, EBITDA and earnings per share (EPS) reached an all-time high. About four years later (December 2014), Eli Lilly increased the dividend to $0.50 quarterly. I still don’t see a reason to buy shares of Eli Lilly. The frozen divided before the recent increase was a signal that the management did not see earnings growing. With expected patent expiration of Cymbalta, their top selling drug in 2010, it is no wonder Eli Lilly’s key financials declined and dividends stayed the same. Cymbalta sales were $5.1 billion in 2013, the year its patent expired. In 2014, its sales shrank all the way down to $1.6 billion. Loss of exclusivity for Evista in March 2014 immensely reduced Eli Lilly’s revenue rapidly. Sales decreased to $420 million in 2014, followed by $1.1 billion in 2013. Pharmaceuticals industry continues to lose exclusivities, including Eli Lilly.

In December 2015, Eli Lilly will lose a patent exclusivity for antipsychotic drug Zyprexa in Japan and for lung cancer drug Alimta in European countries and Japan. Both of the drugs combined accounted for revenue of $866.4 million in the third-quarter, or 17.5% of the total revenue. They will also lose a patent protection for the erectile dysfunction drug Cialis in 2017, which accounted for $2.29 billion of sales in 2014, or 11.68% of the total revenue.

Besides the pressure from patent expirations, there is also regulatory pressures on drug pricing. According to second-quarter 10Q filing, Eli Lilly believes “State and federal health care proposals, including price controls, continue to be debated, and if implemented could negatively affect future consolidated results of operations.” During the third-quarter earnings call, CEO of Eli Lilly, John C. Lechleiter, said that price increases reflects many of medicines going generic and “deep discounts” government mandates for large purchasers.

As of October 16, Eli Lilly had two drugs under regulatory review, nine drugs in Phase 3 testing, and 18 drugs in Phase 2 testing. Since the end of July, the drug maker terminated the development of few drugs, including evacetrapib in Phase 3, two drugs in Phase 2, and five in Phase 1. Out of total eight drug termination, only five drugs moved to the next stage of testing. I view the recent termination of evacetrapib as a major setback.

Eli Lilly Pipeline
Eli Lilly Pipeline – Third Quarter Earnings Presentation – Page 16

Compared to its peers, LLY’s Price-to-Earnings ratio is too high. Its P/E ratio (on GAAP basis) stands at 38.22 while industry average stands at 17.7. Four of its main peers, Pfizer (PFE), Johnson & Johnson (JNJ), Merck (MRK), and Sanofi (SNY) P/E ratio stands at 24.08, 19.63, 14.41, and 22.38, respectively.

Negative trends, tighter regulations, increasing competition and slowing growth makes Eli Lilly’s current valuation unjustified. I believe it will reach an average P/E ratio of its four main competitors, at 20.12, in the next three years. I expect EPS (GAAP) to contract. With current EPS of $2.21 (LTM, GAAP) and P/E ratio of 20.12, share price would be worth $44.46, down 47.37% from current share-price of $84.47. As EPS contracts, the share price of Eli Lilly will be much further down from $44.46 in the next three years.


Disclosure: I’m not currently short on the stock, LLY, at this time (October 21, 2015).

Note: All information I used here such as revenue, margins, EBITDA, etc are found from Eli Lilly and Company’s official investor relations site, Bloomberg terminal and morningstar. The pictures you see here are my own, except “Eli Lilly Pipeline – Third Quarter Earnings Presentation – Page 16”

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

Global Markets Crash + Asian Crisis Part 2

Global markets crash. Currency wars. What’s next? Good buying opportunity?

US markets: Markets plunged dramatically on Friday. The Dow Jones Industrial Average fell 530.94 points (3.12%), the worst one-day loss since November 2011 (on a % basis). The index is now down 10.2% (correction territory) below the May 19 closing and all-time high of 18,312, for the first time since 2011. For the week, the index is down 5.8%, the steepest decline since September 2011.

S&P 500 fell 64.84 points (3.19%), the worst one-day loss since November 2011 (on a % basis) and falling below 2,000 level for the first time since February. For the week, the index is also down 5.8%, the steepest decline since September 2011.

NASDAQ fell 171.45 (3.52%). For the week, the index is down 6.8%, the biggest weekly decline since August 2011.

European Markets: European stocks fell into correction territory on Friday. The Stoxx European 600 1.3% to 368.59. The index is down 11% from April 15 closing and all-time high of 414.06. For the week, the index is down 4.6%, the worst weekly performance since December. Other indexes fell into correction territory also. Germany’s DAX Index is down 18% from its highs. So far, 13 out of 18 western-European markets have lost 10% or more from their highs.

US oil prices fell just below $40 for the first time since February 2009, due to demand concerns and increasing supplies. US oil prices fell for their 8th consecutive week, the longest losing streak since 1986.

The CBOE Market Volatility Index (VIX) (also known as “Fear Index”) jumped 46.45% to $28.03 on Friday. For the week, the index rose 118.47% (from $12.83 to $28.03), largest % move ever in a week.


Three factors driving the free-fall of the global markets:

  • Growing concerns (or uncertainty) about China’s economy
  • US rate-hike uncertainty. Uncertainty is the market’s worst foe
  • Plunging oil prices

There are concerns about slowing growth in emerging economies, particularly China. Economic data from China showed manufacturing PMI in China fell to a 77-month low of 47.1 in August, down from July’s final reading of 47.8. A reading below 50 represent a contraction. About two weeks ago, China’s trade data showed that July exports declined by 8.3% year-over-year (Y/Y) due to a strong yuan and lower demand from its trading partners. Exports to the Japan, European Union, and United States fell 13%, 12.3%, and 1.3%, respectively. Exports are China’s strongest growth machine. The weakness in the fundamentals started (still is) putting pressures on policymakers. Then, a surprise move came.

On August 11 (days after the exports data), the People’s Bank of China (PBOC) made a surprising move to devalue its currency (so called “one-time” move), the renminbi (RMB) (or yuan), against the US dollar (greenback) by 1.9%, the biggest devaluation since 1994 and first devaluation since the yuan was de-pegged from the dollar in 2005. PBOC decided to lower daily reference rate – which sets the value of yuan against the greenback – to make yuan more market-oriented exchange rate.

Three reasons behind China’s move:

  • Weak fundamentals, including exports
  • Desire to be included in IMF SDR basket
  • Impending US rate-hike

China’s move increased concerns over the health of its economy (second largest economy in the world) and shocked the global markets which continues today. China’s devaluation signaled that the economy there must be worse than what everybody believes. Continuous slowdown as it shifts from an export-led economy to a consumer-led economy has led Chinese government (or PBOC) to help stimulate economic activity. Over the past year, they cut interest rates four times and cut RRR (Reserve Requirement Ratio) several times. The goal is to combat slowing growth by strengthening liquidity and boosting lending (so far, unsuccessful). The recent devaluation will make imports expensive and help boost exports (reminder: exports fell 8.3% Y/Y in July).

Another reason behind China’s recent move is its desire for the yuan to be included in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR), a basket of reserve currencies, in which the US Dollar, Euro, Japanese Yen, and British Pound are part of. Earlier this week, IMF decided to extend its scheduled revision of SDR basket (revision takes place every five years) by nine months (to September 30, 2016), giving China more time to make yuan (or Renminbi ) “freely usable”, a key requirement join the SDR basket.

Last reason behind China’s recent move is impending rate-hike in the US, which would support the greenback and would have consequences for China. The recent devaluation ended the era of Yuan appreciation which began in 2005 (reminder: yuan was de-pegged from the dollar in 2005). Ever since “Strong Yuan” policy began in 2005, Yuan (CNY) appreciated 28% against the US Dollar (USD), 30% against the Euro (EUR), and 65% against the Japanese Yen (JPY)

Rise of Yuan against most of its trading partners’ currencies has made its trading partners exports attractive. US rate-hike would have made China’s export rivals even more attractive. Now that China devalued its currency in the wake of falling exports (reminder: exports fell 8.3% Y/Y in July), its trading partners would want to protect their exports share. Therefore, China has fired the first shot to start currency wars.

Consequences of China’s actions:

Countries like Australia, Thailand, New Zealand, Malaysia and Canada are likely to suffer from China’s devaluation. These countries are largest exporter to China. Don’t also forget that these countries can affect other countries. Basically, it is “Domino Effect” economically.

Earlier this week, Kazakhstan – whose top trading partners are China and Russia – switch to a free float (which means that the central bank stopped managing the exchange rate), causing its currency, the tenge (KZT), to fall 25%. The move comes due to three reasons; crude prices (Kazakhstan is central Asia’s biggest crude exporter) fell 55% in the past year, Russian has allowed its currency (ruble) to depreciate significantly as commodity prices plummeted, and due to the yuan devaluation. The motivation for the move is to preserve its export competitiveness.

Vietnam has also allowed its currency, the dong, to weaken further due to the recent devaluation by its biggest trading partner, China. Who will be next to devalue their currency in this crisis; Asian Crisis Part 2.

Commodities denominated in US dollars will become more expensive to buyers in China, the world’s largest consumer of raw materials. When China’s economy slows, demand for raw materials, such as copper, Iron-ore, etc decreases and the lower demand puts downward pressure on commodity prices.

China, second-largest oil consumer, is causing oil prices to drop non-stop, which will hurt oil exporters, such as Canada (possibly leading to another rate-cut).

Falling commodity prices mean one other thing; deflationary pressures.

Slow growth and lower commodity prices most likely will lead other central banks, especially large commodity exporters to maintain their easy monetary policies for longer. Countries with large current account deficits and/or corporations with large amount of debt denominated in US dollars could see their economic/financial conditions worsen, causing them to further increase/expand their easy monetary policy (rate-cuts, for example). Not only commodity exporters and emerging countries will suffer, but also US companies.

US companies with significant exposure to China will suffer from China’s devaluation. Such companies are Wynn Resorts, Micron Technology, Yum Brands, and Apple, accounting for China sales exposure of 70%, 55%, 52% and 30%, respectively.


When I noticed China economic getting worse earlier this year, I knew Apple depended on China a lot, so I said that Apple was overvalued as more competitors were emerging and China’s economy was about to get worse. Even though Apple’s earnings came out better than expected, I went ahead on twitter and responded to Carl Icahn’s comments on the Apple and the market. He expected (maybe still expects) Apple’s stock price to double, which I did not (and I still don’t). More competitors are starting to emerge and China’s economic conditions are getting worse (debt bubble coming).

Mr. Icahn believed the market was extremely overheated and expected market bubble. I have to agree with him. I preferred (still prefer) to use the term “correction”. At this time, I believe current market sell-off is temporary and the dust will be settled in a month (good-buying opportunity). I expect “market bubble” after the Fed raises interest rates to the range of 0.70% and 0.80% (early 2017?). That’s when market sell-off will be much worse than the current situation.

I’m calling Mr. Icahn to respond to my questions; how do you think China’s action will affect global economies (or markets)? Do you still think Apple could double in price?


Now, let’s get back to how else China can affect global economies (deflationary pressures). I expect Europe’s economy and Japan’s economy to slow down.

Europe’s economy will slow down due to export demand decreasing and the uncertainty created by Greece (Yes, they did get a bailout deal, but it’s not over). That’s why I believe European Central Bank (ECB) will either lower interest rates even further or they will increase current Quantitative Easing (QE) program, pushing Euro currency lower. Current falling prices in the European markets are a golden opportunity. Lower interest rates and/or increased QE program will send European equity prices higher>>>all-time highs will be made.

Japan, China’s largest trading partner, will also suffer due to export demand decreasing. The devaluation of yuan (or, Renminbi) will make Japanese exports less competitive. Japan’s economy is still suffering despite Abenomics (similar to QE). Recent data showed GDP (Gross Domestic Product) falling at annual pace of 1.6% in 2nd quarter, due to slowing exports and lack of consumer spending. Abenomics has failed. Additional monetary easing coming? If the economy does not get any better in the next several months, I expect additional monetary easing by the Bank of Japan (BoJ).

I don’t believe the Federal Reserve will stop its plan to hike the rates, but it will slow the pace of it. On Wednesday (August 19), Fed minutes of July meeting (leaked earlier) showed that Federal Open Market Committee (FOMC) members “…judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” They also said that “…the recent decreases in oil prices and the possibility of adverse spillovers from slower economic growth in China raised some concerns.” US dollar has been falling ever since the release of fed minutes, as expectations for September rate-hike decreased.

Now more troubles emerged, I wonder what the Fed will say or do. There are many US economic reports that will come until the Fed’s September meeting. The reports will decide the fate of rate-hike for September. At this time, I expect the Fed to hike the rates in September by 10 basis points (or 0.10%).

If the current China situation (or Asian Crisis Part 2) gets out of control, there will be no rate-hike for the rest of year even if there’s strong US economic reports.

All comments welcomed. Thank you.


Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

Cisco’s Impressive 4th Quarter Earnings Report

This is a follow up post to the previous post (Cisco Systems Inc. (NASDAQ: CSCO) Undervalued). Before continuing to read this post, I suggest reading the previous post if you haven’t already. The previous post includes some important facts that are not included in this post. If you have any questions/comments, feel free to leave a comment below or contact me. Thank you.


On Wednesday (August 12, 2015), Cisco (NASDAQ: CSCO) reported its first earnings report with Chuck Robbins (CEO of Cisco) at the helm and it was very impressive. For 4th Quarter Fiscal Year 2015 (Q4 FY’15), revenue was $12.8 billion, up 3.9% year-over-year (Y/Y) from $12.4 billion and EPS (GAAP) was $0.45 per share, up 4.7% Y/Y from $0.43. Net income (GAAP) was $2.3 billion, up 3.2% Y/Y from $2.2 billion.

This earnings report concludes Fiscal Year (FY) 2015. Let’s take a look at FY GAAP results. FY’15 revenue grew 4.3% year-over-year to $49.2 billion from $47.1 billion. Net income grew 14.4% to $9 billion from $7.9 billion and EPS grew 17.4% to $1.75 from $1.49.

During FY’15, Cisco continued its commitment to shareholder return – returning $8.3 billion through share buybacks and dividends – 73% of free cash flow. Yet, Cisco has total cash, cash equivalents, and investments of $60.4 billion, up 16.02% Y/Y from $52 billion in Q4 FY’14.

Key Financial Measures
Key Financial Measures – Cash, Debt, OCF

The company has $25.4 billion in debt, 21.26% increase Y/Y. Their operating cash flow increased 14.56% Y/Y to $4.1 billion. I don’t see the current debt as a problem since the company has a strong balance sheet.

Regional Performance:

Americas revenue increased 6.63% Y/Y to $7.8 billion. EMEA (Europe, the Middle East and Africa) was slightly flat at $3.1 billion. APJC (Asia-Pacific, Japan and China) was flat at $1.9 -billion. Both EMEA and APJC revenue was affected by forex (currency) headwinds. With strengthening dollar – which hurts sales revenue aboard – Cisco should be able to offset the headwinds from it because of a strong domestic market. Stronger dollar makes American goods expensive and less competitive overseas, hurting earnings for U.S. companies. Cisco has a very strong domestic market and continues to increase its footsteps.

Geographic Revenue
Geographic Revenue

Guidance: (Not a big fan of guidance)

Cisco expects 2%-4% Y/Y revenue growth and EPS of $0.55-$0.57 for Q1 FY’16, in-line with a consensus for 2.5% growth and EPS of $0.56. While company’s guidance is important, I believe your own guidance for the company is more important.

Segment Performance:

Cisco Segment Performance - Q4 F'15
Cisco Segment Performance – Q4 F’15 – Source: Slide 7

Product revenue grew 4% Y/Y. Out of nine segments, two segments (“Service Provider Video” and “Other Products”) declined Y/Y, but remaining seven segments grew.

Today, Cisco is looking to acquire businesses focusing on wireless software, video delivery, cloud-based security technologies and investments in cyber-security. They are more likely to acquire smaller companies with strong presence in areas (product and geography) that Cisco itself does not have. The company plans to invest $1 billion into the United Kingdom over the next 3-5 years to boost the country’s technology sector, especially Internet of Things (IoT). During the Q4 FY’15 Conference call, Kelly Kramer, Chief Financial Officer (CFO) stated that Cisco was “…committed to looking at the right acquisitions at the right price to drive our growth strategy.” I’m currently looking into companies that I believe Cisco should acquire (post to come regarding it, if I find a suitable company).

Key Financials:

Key Financials (Q4 FY'10 - Q4 FY'15)
Key Financials (Q4 FY’10 – Q4 FY’15)

In the “Key Financials” chart above, you see “EBITDA” and “EBIT”. Let me take a moment to explain what they are and why they are important.

EBITDA: An acronym for “Earnings Before Interest, Taxes, and DD&A (Depreciation, Depletion and Amortization)”. It’s an income statement metric which represents earnings prior to the payment of interest expense, taxes, depreciation, depletion and amortization. EBITDA is a proxy for (but not a substitute for) cash flow generated by the assets of a company (In this case, Cisco) before debt holders and tax authorities are paid. A good EBITDA growth rate can show investors that the company has a future for potential growth.

EBIT: An acronym for “Earnings Before Interest and Taxes”. EBIT is similar to EBITDA, but It’s an income statement metric which represents earnings prior to the payment of interest expense and taxes.


5-Year CAGR (Compounded Annual Growth Rate):

  • Total Revenue: 4.19%
  • Gross Profit: 2.86%
  • EBITDA: 4.14%
  • EBIT: 3.57%
  • Net Income: 2.95%

While 5-Year CAGR numbers may look small, it’s very reasonable for a company of Cisco’s size.

I love the valuation at current levels. My target price is $32, unchanged from previous post. I’m taking “Warren Buffett” style approach on Cisco. I’m in this for a longer-term and my target price will change as time goes on. Strategic acquisitions, for example, will increase my target price because in the longer-term, the acquired company (depending on the company) will bring in more income although there will be costs in a short-term. After all, it’s the opportunity cost.

Any pullbacks in the stock price will be taken as an opportunity to buy more shares. The only con are the brokerage fees that comes as a disadvantage to small investors like myself.

If you have been wondering why non-GAAP numbers are not listed here, it’s because I don’t look at them much. Companies can do whatever they want to do with it and it’s hard to trust the non-GAAP numbers. On Cisco’s financial reports, they state “These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.”

Non-GAAP is a propaganda tool to raise capital and/or stock price (AKA equity compensation).

I’m not saying I don’t look at non-GAAP numbers, but GAAP is much more important to look at. Exceptions to look at non-GAAP are when there are such reasonable large write-downs and/or restructuring charges (one-time, non-recurring” expenses). Reasonable.

All comments welcomed.


Disclosure: I’m currently long on the stock, CSCO. I went long last year at price just below $25. I will continue to be long.

Note: All information I used here such as revenue, income, etc are found from Cisco’s official investor relations site, Bloomberg terminal, FactSet, and S&P Capital IQ. The pictures you see here are my own (except “Cisco Segment Performance – Q4 F’15”).

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

Liar’s Poker Player, Greece, Loses: Falling Further Through The Wreckage In Greece

Greece had a close call to exit from the 19-member euro-zone (Grexit) following months of uncertainty. Alex Tsipras and Yanis Varoufakis were playing creditors for fools and bluffed too much. Now, they have lost “Liar’s Poker”.

Two weeks ago, more than 61% of Greeks rejected a deal in a referendum that included pensions overhauls and sales taxes. Then on Monday morning, Greece finance minister, Yanis Varoufakis, resigned after Eurogroup participants called for his resign because his absence from its meetings. Before the vote, he said he would resign if Greeks voted “Yes”. He is replaced by Euclid Tsakalotos, who has been involved in talks with European and International Monetary Fund (IMF) creditors.

Then, Euro leaders said that July 12 (Sunday) would be “deal or no deal”.  Several days before July 12, Greece Prime Minister Alex Tsipras provided the same type of deal that Greek people voted “No” for, but with little bit tougher austerity. He broke his promise to Greek people.

Over the weekend (July 11-July 12), Euro leaders clashed over the deal. On July 13 morning (Monday), deal was reached. Euro-zone leaders agreed to give Greece three-year bailout up to EUR 86 billion ($93 billion) of aid which Tsipras accepted. This time, he absolutely broke his promise to Greek people.

The deal is much tougher and harsh, for Greece and its people, than the deals in the past few weeks. The deal also includes 30-year, euro-50-billion state privatisation programme. Half of the fund will be used to recapitalise Greek banks, while the remainder will used for debt servicing and other economic needs.

On late July 15 (Wednesday), the Greek parliament approved the deal. In 300-seat chamber, 229 voted to approve the deal and 64 were against it. There was 6 abstentions and 1 absent.

On the morning of July 16 (Thursday), after leaving rates unchanged, European Central Bank (ECB) President, Mario Draghi stated in the press conference that Emergency Liquidity Assistance (ELA) would be increased by 900 million euros ($979 million) over a week. There were reports that Greece asked for $1.5 billion ELA assistance.

On the same day, the Eurogroup finance ministers agreed to the launch of bailout talks and approved 7.2 billion euros ($7.6 billion) in bridge loans for three months. It will allow the Greek government to pay off upcoming payments. On July 20 (Monday), Greece is due to pay 3.5 billion euros ($3.8 billion) to ECB. Greece also has to pay about 2 billion euros ($2.2 billion) of arrears to the IMF. This bridge loan will “buy” time until the bailout is finalized.

Greek banks are scheduled to open on July 20 (Monday) after a 3-week closure. However, capital controls, or restrictions on cash withdrawals will remain in place.  Daily cash withdrawal is limited at 60 euros.

Despite more aid being given to Greece, the country’s debt level is still a major problem. The country has about EUR 320 billion debt ($345 billion), close to 200% of Gross Domestic Product (GDP).

Source can be found here 

There are many calls for a debt haircut (not what you’re thinking). Debt haircut is reducing the amount of money owned. For example, if  someone owns about $10,000, but cannot pay it all. Creditor can try to accept to get paid a fraction of $10,000, say $4,000. After all something is better than nothing.

Some people including Christine Lagarde, managing director of IMF, disagreed on debt haircut. She said debt relief was needed. Extension of Greek debt maturities, extension of grade periods, and reduction of interest rates would be enough, she said.

Even though the deal gets finalized or not, Greece loses. With the deal, life gets harder. Without the deal and exit from euro-zone, life gets much harder.

I learned one important lesson over the past few months. Anything can change anytime. Greece’s current deal might fall through any moment. So much uncertainty has caused EUR (Euro) currency to move around in different directions.

Ever since the deal was announced, EUR/USD has been falling.

EUR/USD - Hourly
EUR/USD – Hourly

I have been short on Euro for some time now and I will continue to be short. Even with deal close, tough challenges remain ahead. ECB might increase or even extend its Quantitative Easing (QE) program, giving support to the European stocks and causing Euro to weaken further. I believe EUR/USD will reach parity level in the next 6 months.

Once the Greece drama settles, more focus will be on the fundamentals in the euro-zone outside of Greece, which accounts for more than 98% of the region’s GDP.

No clear road ahead, still. What’s next?

Expectations for the Fed to raise rates ticked higher

Last Friday (May 22, 2015), U.S Consumer Price Index (CPI) report for April was released and it was in line with expectations. CPI increased a seasonally adjusted 0.1% in April and core-CPI (excludes food and energy) increased 0.3%, largest since January 2013. CPI reflects what people pay for goods and services. It’s an important indicator for inflation. The Federal Reserve watches inflation numbers closely, to determine the health of the US economy and whenever to raise interest rates.

CPI and Core-CPI (Jan 2014 - April 2015)
CPI and Core-CPI (Jan 2014 – April 2015)

Over the past 12-months, CPI declined 0.2% (biggest year-to-year drop since October 2009), largely due to the plunge in energy prices (energy index), which fell 19.4% over the last 12-months. However, core-CPI (which excludes food and energy, the violent categories) increased 1.8% over the last 12-months.

The positive inflation report may suggest that the Fed may not be that far away from raising interest rates. Stronger numbers gives a sense of relief that the US economy is pulling itself out of a slump that dragged growth down to 0.2% (GDP report previous post) in the first quarter of 2015. However, the inflation is far below the Fed’s 2% target.

The positive change in core prices was driven by rising costs for housing, medical care, furniture, and vehicles, while clothing and airfare prices declined. Fall in the oil prices led airplane companies to lower their airfares, to complete with competitors. I believe clothing and airfare prices will start to rise soon because summer is here. In the summer, people tend to travel more often (demand increases), pushing prices up. Oil has rebounded to the range of $60, as oil inventory decreases.

The dollar rose after the CPI report. The greenback (the dollar) gained almost 1%, rising to a highest price level since late-April. US markets were flat on Friday after both the Dow and the S&P 500 hit new records this week.

Dollar Index (/DX) - Hourly
Dollar Index (/DX) – Hourly

According to Federal Open Market Committee (FOMC) meeting minutes released last Wednesday (May 20, 2015), FOMC expects inflation to gradually rise as the labor market improves and transitory effects such as low oil prices fade away. They believed that there would not be enough information of overall health of US economy to start raising rates at their next meeting in June. The next policy meeting takes place on June 16 and June 17.

Chances of rate hike in June are very low, but the door is not closed. If the next non-farm payroll and Prelim GDP (Gross Domestic Product) (Friday, May 29, 2015) comes out very positive, the Fed will likely raise the rates. Prelim GDP is the second estimate of the last quarter. If you want to know more about the first GDP estimate of the last quarter, click here.

Last Friday (May 22, 2015), Federal Reserve Chairwoman Janet Yellen spoke about the US economic outlook at the Greater Providence Chamber of Commerce Economic Outlook in Rhode Island. She said that the Federal Reserve is on track to raise short-term interest rates this year, but will likely proceed slowly and cautiously.

As to trading, I would go long on the dollar and short EUR/USD. Why would I short EUR/USD? Recently, EUR/USD rebounded all the way to above 1.1450. As of right now, it’s around 1.1000. The recent rise in EUR/USD is an opportunity to go short.

News: First, I believe the U.S economy will rebound and future US economic reports will be positive, sending USD higher. Second, I believe Greece will default and eventually leave euro-zone (Greece exiting euro-zone is also known as “Grexit”), which will plunge Euro. Current Greece headlines are just background noises, until we know for sure that Greece will be staying or not.

Technical: If you look at 1-HOUR chart of EUR/USD, you can see that EUR/USD broke a strong support level that used to be resistance. If you look at WEEKLY chart of EUR/USD, you can see that there is a Bearish Engulfing Pattern. Technical seems to be bearish.

EUR/USD - Hourly
EUR/USD – Hourly
EUR/USD - Weekly
EUR/USD – Weekly

 

If you have any questions/comments, feel free to leave comments below and/or contact me by going to “Contact Me” box above. I can also be reached on twitter (@Khojinur30). Thank you.

No Clear Direction Signs For US Economy…….Yet

Last Friday (May 8, 2015), non-farm payrolls report was released and it was in-line with expectations. 223,000 new jobs were added in April, and the unemployment rate fell by 0.1% to 5.4%, the lowest level since May 2008. While, this is a good news. March gains was revised down to 85,000 from the prior estimate of 126,000 (-41,000), lowest since 2012. I believe the April number (223,000) will also be revised lower.

Wage growth remained modest. Over the past 12 months, average hourly earnings have increased by 2.2%. As unemployment rate falls, wages should start to pick up speed, which also will push up inflation.

Fed officials are closely watching the labor market and other key economic reports, as they are in a tough spot on raising short-term rates, which have been held near zero since December 2008.

There is a very little chance of rate hike in June. I believe the Fed won’t hike the interest rates, unless over 350,000 jobs are added in May and unemployment rate goes down by 0.2% to 5.2% (which certainly will not happen).

First quarter was very weak due to; strong U.S. dollar, low energy prices, West Coast port strike, and the bad weather. When these four are combined together, it creates a heavy roof to push down economic growth.

Hiring has been strong in many industries, except energy. About 15,000 energy jobs were lost in April, worst month since May 2009. Lower oil prices increased the pressure on the energy sector. Low energy prices has caused energy companies to lose profits. As a result, they had to cut jobs. Recently, crude oil inventories supply were declining, which caused oil prices to rise above $60.

Last Tuesday (May 5, 2015), trade balance report was released and it exploded. The US trade deficit widened by 43.1% to a seasonally adjusted $51.4 billion in March, largest monthly expansion in the trade gap since December 1996 and the largest deficit reading since October 2008. Trade balance is when you subtract imports from exports. In other words, it’s the difference between imports and exports.

Trade Balance for the past two years
Trade Balance for the past two years

A biggest reason for the weakness was the 9-month slowdown at West Coast port due to a labor contract dispute. West Coast ports is back in business. Imports arriving though the West Coast port surged. Imports increased 7.7% in March, the largest increase on record. While exports only increased 0.9% in March, reflecting strong dollar impact. In the past 12 months, the dollar has jumped almost 10%. Strong dollar had made Americans goods and services less competitive in global markets. Bigger imports and smaller exports mean a bigger deficit.

I believe it’s not to worry about in a long term. Once the backlog is cleared, imports will drop and the trade deficit will also drop.

Recently, the dollar has fallen sharply because of weak US economic reports, including Gross Domestic Product (GDP).

On April 29, 2015 (Wednesday), GDP Advance estimate increased at an annual rate of 0.2% in the first quarter of 2015, down from 2.2% in the fourth quarter of 2014 (-2.0%). This is a huge difference. Economists were anticipating growth of 1% in the first quarter.

Real GDP for the past three years
Real GDP for the past three years

Again, the weakness was due to U.S. dollar, low energy prices, West Coast port strike, and the bad weather. West Coast port strike disrupted the flow of trade, increasing imports which negatively impact GDP. In the past 12 months, the dollar has jumped almost 10%.

According to the report, Real exports of goods and services decreased 7.2% in the first quarter, from an increase of 4.5% in the fourth quarter. Real Imports of goods and services increased 1.8%, from an increase of 10.4% in the fourth quarter.

I’m afraid that Q1 GDP will be revised to negative number. Second estimate (Preliminary) of Q1 GDP will be released on Friday, May 29, 2015.

First quarter GDP was disappointing. I believe the economy should bounce back in the 3 quarters of 2015.

US markets were very happy with the jobs report, but not with other economic reports. The Dow soared more than 250 points, or 1.5% on Friday. While USD bracket currencies were mixed.

Check out the charts below; Dow Jones and US Dollar. US Dollar has fallen signification after hitting of $100.27 on mid-April. Dow Jones has been in a range. Dow Jones chart includes something “extra”, that’s not included in the post here.

US Dollar Index - Four Hourly Chart
US Dollar Index – Four Hourly Chart

 

Dow Jones ($DJI) - Hourly Chart
Dow Jones ($DJI) – Hourly Chart

 

If you have any questions, feel free to contact me anytime by going to “Contact Me” and/or leave comments below. Thank you.