#snowflakeoftheweek

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Seagate Expects A Double-Digit Surprise

The surprise

Seagate – the second largest Hard Disk Drive (HDD) manufacturer in the world – surprised the market by announcing that it’s expecting $2.65 billion in revenues for the fourth quarter of fiscal year ended June 2016. Shares jumped over 12% in the after-hours trading yesterday, a typical knee-jerk reaction from investors to a positive surprise from an underperformer.

The figure is nearly 14% higher than the company’s prior forecast of $2.3 billion. Seagate cited stronger demand for its HDD product portfolio behind the surge in revenues. With a long history of sliding revenues – $11.4 billion for 12 months ended April 2016 compared to $14.9 billion during the fiscal year 2012 – the news came as a breath of fresh air for investors.

Additionally, Seagate expects gross margin (non-GAAP) of 25.8% compared to earlier forecast of 23%, driven by increase of higher-margin enterprise HDD portfolio in the product mix and its cost reduction efforts. The company also laid down another restructuring plan to consolidate its global operations along with laying off 6,500 employees.

Prior to this, the company had announced a restructuring plan late-last-month, which involved laying off 1,600 employees to save nearly $100 million on an annual basis. Through the combined restructuring efforts, Seagate expects to achieve a gross margin of 27-32% by the end of 2016.

CEO-speak

CEO Steve Luczo expects robust demand for the “foreseeable future”. About the growth going forward, he commented, “the evolution of mobile and cloud data driven environments continues to define itself as requiring significant amounts of mass storage. HDD devices are where most data bits ultimately reside and our record HDD exabyte shipments in the June quarter, particularly due to enterprise demand, continue to support this thesis”.

Well, while it can’t be denied that it was an exceptional quarter for the company, but thinking far ahead for a company with its market capitalization cut in half in less than a year, apart from four years of sliding sales, is a highly optimistic prospect. 

The dividend yield of nearly 10% appears attractive, more so after the revenue surprise, but with a continued fall in free cash flows and dividends at 225% of earnings, it doesn’t seem to last long even if Seagate sustains at the current level of revenues. However, the continued efforts to improve profit margins is a positive step towards increasing the sustainability of dividends.

Seagate, along with other HDD manufacturers, faced two primary headwinds over the last few years. First is the reduction in demand of HDD from retail customers as cloud-storage became popular and second is the continued cost reduction achieved in manufacturing of ‘Solid State Drives’ (SSD) or ‘NAND based flash storage’, a faster but still expensive replacement of HDD.

As per storageresearch.com, Seagate was the third largest player in the SSD market; however, there is no certainty that growth in SSD, which is also becoming a highly competitive industry, and enterprise-demand for HDD will be able to make up for the systemic decline in the retail HDD market.

[simplywallst]

Burberry: Shares Surge On Decision to Replace CEO

Boardroom shake-up

Following the strategic review initiated in January this year, Burberry seems committed to go to the next level with some bold decisions amid struggling sales and sliding share prices. 

The company announced that its chief executive officer, Christopher Bailey, will be replaced by French luxury-brand Celine’s Marco Gobbetti – expected to come on board in 2017. Company shares closed 4.32% higher for the day as investors appreciated the decision.

Christopher Bailey will continue to be chief creative officer and will also be designated as president following the arrival of the new CEO. While the company wants a new leadership, it plans to hold on to Mr Bailey for his prowess as a creative head. 

However, not the same can be said in the case of the company’s chief financial officer, Carol Fairweather, who will be making way for Julie Brown—currently CFO at London-headquartered medical-equipment company Smith & Nephew.

Reasons behind the leadership-change

Company revenues contracted, by 0.3%, during the latest fiscal year (FY’16) ended March 2016, first time since a 1.4% drop in FY’10. While earnings dropped 7.9%, prior to that, during FY’15, the earnings growth stood at a meager 4.2% despite revenues increasing by 8.3%. 

Currently, shares trade nearly 20% lower since the company reported full-year earnings in May last year – first annual results after Mr. Bailey became the CEO in May 2014.

Broadly, sales-growth was anemic in most regions except the UK. While factors affecting sales in China – VIP-crackdowns – and Hong Kong – slump in Chinese tourists – have affected most luxury brands, Mr Bailey’s inability to improve sales in European cities receiving a large number of Chinese tourists has been highly criticized by investors and analysts alike. 

His latest efforts related to cost reduction and the company’s decision of up to £150 million in share buybacks weren’t enough to regain investors’ confidence as shares continued falling in the wake of a weak outlook provided by the company.

Burberry is set to announce a trading update tomorrow, followed by its Annual General Meeting on Thursday. While the company has decided to keep this year’s dividend in line with the prior year, its sales along with the impact of the cost-cutting initiative on profit margins will be the key numbers to watch for.

[simplywallst]

Sirtex Medical: Shares Rally On Another Year Of Strong Growth

As per the latest media release from Sirtex Medical, sales of SIR-Spheres microspheres – small particle technology to treat inoperable liver tumours and also the only revenue generator for the company – rose 16.4% for the fiscal year ended June 2016, compared to the previous fiscal year.

Sirtex’s revenues are geographically diversified, with Asia-Pacific (APAC) and the Americas contributing almost equally while a considerably small but fast-growing contribution from Europe, Middle East and Africa (EMEA) regions.

CEO Mr. Gilman Wong said “the strong double digit growth in global dose sales reflects the continued momentum we have achieved in this large, underpenetrated market opportunity for SIR-Spheres microspheres”.

While sustaining double digit revenue growth over the last five years is remarkable, the aspect of the results which might concern investors is the growth in APAC and EMEA segments – APAC grew by a meager 8.9%, EMEA by an acceptable, although low considering its size, 11.2% and the Americas by an impressive 19% on an annual basis.

However, the results are in line with the guidance – 15-17% revenue growth – provided by the company earlier this year. In addition to that, strong growth in the Americas while AUD remains weak against the USD, resulted in quite a positive response from the market – shares closed 6.49% higher for the day.  

Sirtex has been facing troubles in the APAC region – the departure of its Asia Pacific Head, Dr. Burwood Chew, and issues with a South Korean distributor caused a temporary halt in sales there. 

Although, the company appears confident of overcoming such setbacks which is evidenced by its strong results in the Americas despite losing Mr. Mike Mangano – Head of the Americas region – in March this year.

Additionally, it is yet to enter the second and third largest economies of the world – China and Japan – which might just bring its APAC segment up to speed.  

While average annual earnings growth over the last five years stood at 20.4%, going forward, three-year earnings growth, based on analysts’ consensus estimate, is pegged at an even stronger 80.4%. 

It doesn’t come as a surprise that the insiders had been quite bullish while the stock was down-trending before the rebound, which kicked-off last week – net insider buying by corporate insiders stood at almost 3.6 million shares over the last three months 

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Oracle Fined $3 Billion In A Lawsuit Filed By HP

Source: simplywall.st

The case

This was the second lawsuit filed by HPE – or HP, before it separated the consumer (HPQ) and enterprise (HPE) businesses – against Oracle related to the contract between the two involving software support for server systems using Itanium chip – originated from a partnership between HPE and Intel. 

In this ongoing saga, HPE’s earlier lawsuit against Oracle in 2012 involved calling the withdrawal a breach of contract. The court ruled in favor of HP, directing Oracle to support HP’s server systems using Itanium technology as per the mandate in the initial contract.

Now, HPE claimed it suffered severe damages from Oracle’s decision to back out from the contract as the news was not well taken by its customers using the technology. 

So, while Oracle continued to provide support as per the verdict to a now discontinued technology by the makers, HPE came up with a new lawsuit claiming damages of nearly $3 billion in the form of lost business due to Oracle’s actions back then, and it won again.

Down, but not out

On the other side, Oracle pledged to appeal against the ruling on the grounds that HPE knew about the limited viability of Itanium technology going forward. In fact, the company’s general counsel went ahead by saying that “HP was actively hiding that fact from its customers”. 

Oracle also cited Intel’s backing out of the partnership with HPE related to the support for the technology behind its earlier decision in 2011 to stop providing support; however, Intel has denied such claims.

And the impact, if any

Oracle investors shrugged off the news as the stock gained most of the lost ground during market hours, closing slightly higher than the previous close from its gap-down opening. 

Investors reaction suggests that either they believe the final decision will be in favor of Oracle or that the loss doesn’t change the future outlook of the $169 billion company. 

As per the latest data from S&P Capital IQ, Oracle has a $43.85 billion debt on its balance sheet while its liquid assets – cash and investments – amount to $56.12 billion. 

The company has delivered an average annual earnings growth of 9.6% over the past five years while its expected three-year earnings growth is pegged at 35.3%, based on analysts’ consensus estimate.

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Standard Life Stops Investors From Pulling Out Of Its UK Property Fund

Source: simplywall.st

Delay the pain

In a move which is not supposed to bring any comfort to panicking retail investors of property funds in the UK, Standard Life Investments – fund management business of the company – restricted further outflows from its UK Property Fund – one of the leading open-ended property fund.

While such funds hold a certain amount of cash and liquid investments to meet withdrawal demands from investors, it boils down to selling assets when all of a sudden a lot of people start demanding their money back.

The fund owns commercial properties – primarily office blocks and retail complexes – which are difficult to liquidate quickly at reasonable prices due to tough market conditions on account of heightened uncertainty related to the value of commercial properties following the UK’s decision to exit the EU.

So, while on the surface the decision may appear outrageous, it’s not a bad idea to avoid fire-sale of properties in order to return cash which would definitely be painful for all investors. However, the fund will have to resume trading in the near future, it decided to review the conditions every 28 days.

With all the top-three property funds by size, including Standard Life Investments’ UK property Fund, marking down the value of assets by nearly 5% last week, and before the dust settles, a fairly long divorce process from the EU ahead provides very few reasons to stop investors from cashing out as fast as they can, if they can.

More signs of weakness

Standard Life’s decision may not surprise most investment experts in the property market as substantial withdrawals were requested during the months of May and June—prior to the referendum—as risk-averse investors decided to avoid the Brexit-uncertainty. 

Finally, the Markit/CIPS construction purchasing managers’ index, which came in at a historic low of 46.0 in June, compared to 51.1 during May, appears to only bring more pain for the investors stuck in the property fund.  

While it’s one of the lowest figures in the last seven years, it includes a limited post-referendum data, which only implies that a very few new projects were initiated in the run up to the referendum. 

It may turn out to just be a precautionary measure from builders, waiting for the markets to stabilize. However, a clearer picture on anticipation of demand by the builders would emerge when the purchasing managers’ index comes out next month.

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Treasury Cuts Down Its Struggling Mass-Market Wines Portfolio in the US

Source: simplywall.st

Treasury Wine Estates, the Australia-based winemaker and one of the largest in the world, distributes wines across the globe. The lion’s share of revenues is generated in Australia and New Zealand, where it also distributes beer and cider, followed by a slightly smaller share from the Americas and considerably small contributions, although growing, from Asia, Europe, Middle East and Africa.

Rationale and impact

Prior to acquiring Diageo’s US and UK wine operations through a US$552 million deal last year in a drive to scale up operations and diversify its product line of high-end wines, Treasury had been struggling with its portfolio of mass-market wines as reflected in its falling revenues in the Americas – $726 million during FY’14 from $941 million in FY’10.

The acquisition has allowed it to get rid of the underperforming mass-market brands, which it has been trying to “manage-down” over the last two years. As a result, Treasury sold twelve brands from its non-core commercial brand portfolio, or mass-market wines, without losing much of the market share in terms of dollar-value in a key market such as the US.

Treasury indicated that the sales-growth in its Luxury and Masstige—wines with a price-point between Luxury and mass-market brands—portfolios in addition to savings from the company’s supply chain optimization initiative would be enough to neutralize the impact of the sale.

The company assured no effect on earnings while reaffirming FY’16 earnings – $330–$340 million – to be in line with market expectations – $325 million. Treasury also toned down the concerns related to the impact of Brexit, citing its effective hedging strategy and also the fact that the region’s contribution in overall sales is considerably small to have any significant impact.

Recent performance and outlook

Source: simplywall.st

EBIT grew by nearly 12% to $56.2 million in the Americas for the first-half of FY’16, ended December 2015. However, the star performer, among the geographic segments, was Asia – EBIT grew to $46.5 million compared to $19.1 million in the previous corresponding period, while the company-EBIT jumped by 37% to $146.7 million.

Based on consensus analysts’ estimates, Treasury is expected to deliver a 28% jump in revenues to $2.5 billion in FY’16, followed by an increase of 19.8% in FY’17. While the $475 million equity funding for the Diageo-deal did bring down the ROE for the past 12 months to an anemic 2.9%, the figure is expected to be over 8.5% in three years.

[simplywallst]

Legg Mason: The Brexit Impact

Legg mason [NYSE:LM], the Baltimore-based asset management company, is one of the several organizations in the US which are substantially affected by the turmoil caused by the UK’s decision to exit the European Union (EU). Shares are down nearly 15% since Friday, the company was also included in the list of 22-companies, issued by JP Morgan, set to gain the most if the UK stayed in the EU.

Double whammy

The markets across the globe have turned red due to the increased uncertainty on all fronts following the result of the UK’s historic EU-referendum. Companies such as LM, which generate the lion’s share of revenues from managing investment in equity, and other liquid assets, turn out be one of the worst affected due to an economic event like ‘Brexit’. 

Learn more about Legg Mason

During such an economic conundrum, the flight of capital from risky assets and also fixed income products such as sovereign and corporate bonds – due to the unclarity on the economic repercussions in the long-term – result in substantial losses for asset managers on two fronts. 

First, underperforming assets result in lower commission on profits, and second, like a negative feedback loop, client withdraw funds due to rise in uncertainty which cuts the management fees.

In the line of fire

Apart from the spill over effect, LM has been caught in the line of fire due to its substantial asset holdings in the UK – as of March 2016, the company held almost 18% of its total assets in the UK. It remains to be seen how the UK would disentangle itself from the EU, but what also have investors worried are the possibilities of such an event in other member-countries, mainly France and Spain.

Legg mason has been a strong dividend player over the last five years, but the road ahead seems to have too many obstacles for the asset management firm with $670 billion assets under management, serving institutional and individual clients across the globe.

Take a look at LM’s 10 years Dividend-history

Potential investors considering companies such as LM—with significant exposure to the UK—need not jump the gun by investing right now. A good idea would be to wait until the terms of the UK’s EU-exit are clear. 

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A Defensive Play In Turbulent Markets

Headquartered in London, AstraZeneca [LSE:AZN] is a biopharmaceutical company, with a market capitalization of over £50 billion, which markets a range of prescription medicines. Apart from a long-list of existing products, the company has an even longer pipeline of 145 projects, including collaborations with the leading ‘pharma and biotech’ companies such as Celgene Corporation and Eli Lilly.

Recession proof

The pharmaceutical industry provides a natural hedge against high market volatility caused by major political or economic events. While changing macroeconomic conditions may not impact the likes of AZN, their performance depends to a great extent on the ability to come up with new drugs.

While AZN is involved in some pathbreaking projects such as human genomes sequencing with Human Longevity Institute, it’s also partnered with promising new companies like Acerta Pharma, providing it a window to enter new disease areas such as leukemia.  

Lack of new blockbuster drugs, while AZN lost exclusivity on several existing ones, resulted in nearly 25% contraction in revenues over the last five years. 

Click to view AZN’s Revenue and Profit trends 

With a range of new products in its pipeline, the company is expected to regain growth trajectory post-2017; however, drugs generating nearly two-fifths of company revenues are at risk of patent expiry by 2018.

Growth and value

The analysts expect a 10% drop in earnings this year, while three-year earnings growth is pegged at an impressive 24.1%. The company pays 5% dividends at current prices, which have either increased or remained stable over the last 10 years.

Learn more about AZN’s Dividend payout and performance

However, there might be a dividend cut in the near future on account of dropping EPS and rising level of debt compared to equity, while the company continues to burn cash on R&D. Although, long-term investors should see it as no more than a bad-phase of a well-established company.

The valuation based on its free-cash-flow-value or relative to the ‘Pharma and Biotech’ industry appears acceptable. The average earnings contraction of over 20% over the last five years has investors worried about AZN’s ability to grow.

Take a look at AZN’s Valuation

From a long-term investor’s perspective, going forward, factors such as the aging population globally, a range of upcoming products and a well-established global distribution channel put up a favourable scenario for AZN.

Taking a cue from Pfizer’s $120 billion offer—over 60% higher than the current market capitalization—for the company last year, there seems to be a limited downside as shares are already down nearly 15% since AZN declined the offer, calling the payoff for its pipeline products unacceptable.