Cerner Corporation (CERN), a supplier of health care information technology solutions, is differentiating itself in the industry and from its largest competitor, Epic, with its population health management efforts, and with strong bookings and earnings growth is a promising play, says David H. Windley, Managing Director at Jefferies & Company, Inc.
“We really like Cerner. I think Cerner is in step with demand, and with their efforts around population health management functionality, Cerner seems to be stepping ahead of the demand curve in a way that is differentiating them from its largest competitor, Epic, which has been the dominant player in the space for quite a long time,” Windley said.
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In addition to encouraging developments at Cerner in regard to competition with the top player in the space, the company also has strong fundamentals that support the stock, Windley says.
“Cerner’s bookings momentum has continued to be strong. Its balance sheet is ironclad, and its earnings growth is solid. The valuation is high, and if there’s an element of pushback from investors, it is a desire to see that bookings performance translate into faster earnings growth as well,” Windley said.
Invacare Corporation (IVC), the largest home health care supplier in the industry, has the potential to boost its earnings power from $1.60 to $2.50 a share after working through a near-term FDA issue, says Arnold Ursaner, President of CJS Securities, Inc.
“We try to identify companies where a short-term event can distort the long-term outlook on a company, particularly if we think that that may change in the near term,” Ursaner said. “Invacare is the largest home health care hardware or durable goods supplier in the industry. It’s four times larger than its next competitor. Several years ago, the company had an FDA issue with one of its plants that has distorted the financials for the last year. We are approaching a point where they will submit the Phase III plan with the FDA in November to hopefully resolve this issue, with a conclusion sometime in 2014.”
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Due to the FDA event, Invacare has not screened well with analysts, Ursaner says. However, he believes the FDA issue is fixable problem that will open up an opportunity, and IVC has the potential to see its earnings power move above $2.50 a share over the next few years.
“At this point in time the base earnings power of Invacare is $1.60, and over the next two to three years we think earnings power above $2.50 a share is possible. Even applying a modest multiple to the $2.50 in earnings would lead to a doubling in the stock over the next 18 to 24 months. Because of this issue, IVC doesn’t screen well, and most of the analysts have given up on the company. That’s exactly what we try to do at our firm, find those opportunities where an identifiable problem can be fixed and restore the company to its position within the market,” Ursaner said.
Apple Inc. (AAPL) is still exhibiting the characteristics of a true growth company and is expected to se a reacceleration in its growth rate in fiscal 2014 after significant investment in innovation and the release of new products, says David A. Rolfe, Chief Investment Officer at Wedgewood Partners.
“We still think Apple is a true growth company. It has no doubt been a very difficult year for shareholders. On the other hand, it has been a year of significant investment in innovation, and we see that on display now with their underappreciated iOS 7 software as well as their new iPhones. The current meme is that Apple can’t innovate anymore. We think that’s been laid to rest now with these new products,” Rolfe said.
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Despite Apple‘s challenging year in 2013, when growth rates came to a halt, Rolfe expects a reacceleration in 2014 due to Apple‘s continued innovation and new product releases.
“The company was blooming in terms of their growth rates, and that growth rate hit a brick wall in fiscal 2013. It went from 50% to 70% to zero. On the way up, the stock actually was underperforming its prodigious growth rates. The corollary, unfortunately, is that while we had this year of zero growth, we believe the shares have significantly underperformed what has happened at the company level. Given how sharp the valuation has compressed, the market implied growth of revenues is essentially negative. We expect a reaccelerating in the company’s growth rate in fiscal 2014 on the heels of new products, plus accretive share buybacks,” Rolfe said.
CenturyLink, Inc. (CTL), an integrated communications company, has support for a 7% dividend due to the company’s strong cash flow and debt refinancing, and is looking at up to 30% upside from current levels, says Andrew Tuttle, Senior Analyst at Crow Point Partners.
“CenturyLink is a residential and business player, nearly nationwide, but it’s characterized by very strong cash flow, and over the last 12 months it’s refinanced maybe half of its debt, so there’s support for about a 7% yield comfortably right now,” Tuttle said.
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As Tuttle’s firm screens balance sheet quality, CTL comes to the forefront, with significant free cash flow after dividends and nearly 30% upside from where the stock is currently priced.
“The screens that we do will run through the quality of the balance sheet. And for dividend purposes, you can’t pay a dividend unless you have cash flow, so we need companies with strong cash flow and sustainable business models,” Tuttle said. “[CTL] is throwing off about $1 billion in free cash flow after dividends, which is committed to repurchasing shares in the open marketplace. In addition to the 7% yield, I’d say there’s a good 25% to 30% upside in the stock from current levels.”
Towers Watson & Co (TW) is on track to be the leader in providing health care exchanges to private companies as the industry projects a major shift that could see up to 40 million individuals on exchanges by 2018, says Mark S. Marcon, Senior Analyst at Robert W. Baird & Co.
“Towers Watson is the largest pure play HR consulting firm in the world, and what is really intriguing about them is that they have a leading position in providing health care exchanges to private companies for providing health care benefits both to retirees, which is the more mature part of their business, and to active employees. This is a relatively new offering, but it’s taking off very quickly, where companies are basically shifting from providing a defined benefit in terms of the health care coverage that they provide and instead offering to provide health care services through exchanges, which enables an employer to basically have a better level of control in terms of the rise in their health care costs,” Marcon said.
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While Towers Watson has been the leading solution as it relates to the retiree market, the company is now rapidly positioning itself as the leader in the active employee market, Marcon says. He expects a massive shift on the health care side to exchanges, with TW being a major beneficiary.
“There are less than a million people that are currently on these private health care exchanges, and there have been projections by some health care consultants independent of Towers Watson…that would indicate that by 2018 there is a possibility that 40 million individuals could end up being on these exchanges,” Marcon said. “The valuation of Towers Watson is basically more reflective of their core recurring revenue stream business and continues to be fairly modest. We’re just in the early days of recognition of their positioning within this rapidly growing health care exchange market.”
Priceline.com Inc (PCLN) is focusing on wider geographic coverage by expanding its Booking.com business into the U.S., and is expected to see further growth in the near term and beyond, says Edward Woo, Senior Research Analyst at Ascendiant Capital Markets LLC.
“Priceline through their Booking.com, which has been a major growth engine for them and has historically been a European hotel booking company, moved into the U.S. earlier this year, and we saw a lot of TV advertisement for them,” Woo said. “If I were to only buy one it would be Priceline, because they are by far the largest and best performing online travel company right now.”
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Woo points to Priceline‘s significant growth over the past couple years, and believes the company will continue this trajectory with the extension of Booking.com into the U.S.
“They are executing tremendously, and their growth over the past several years has been spectacular. Because of that, their near-term momentum is really strong, and they still have a big runway to continue their growth. With their recent move of Booking.com into the U.S. and to other parts of the world, their near-term growth prospects remain high,” Woo said.
IPG Photonics Corporation (IPGP) is expected to see further growth as the company holds over a 60% share of the fiber laser market and eyes a future $300 million market opportunity in UV fiber lasers, says Mark Miller, Senior Research Analyst at Noble Financial Group, Inc.
[IPG has] over a 60% share of the fiber laser market. Due to lower energy costs, higher cutting speeds and other advantages, fiber lasers have been displacing conventional CO2 gas lasers for several years. As a result, IPG has shown the best top-line and bottom-line growth over the last five years of any laser firm, CAGRs of 20% or more,” Miller said.
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Miller also states that while IPG may see a slowdown as fiber lasers penetrate the market, the company has another opportunity in UV fiber lasers that are used for fine processing applications, one that could reach $300 million.
“We do see some new future opportunities for IPG, more in the second half of next year. One of which would be UV lasers, that’s a significant opportunity. UV fiber lasers can be used for PCB micro via drilling, silicon wafer scribing, cell phone glass cutting and other fine processing applications. It represents a $300 million overall market opportunity for IPG,” Miller said.
The most recent quarterly and monthly executive turnover results have been a bit confusing with regard to the American and Canadian economies. Both third quarter and September executive turnover totals for CEOs, CFOs, C-level executives (board of directors down to VP level) and board of director changes have been inconsistent when compared on a year to year, month to month and quarter to quarter basis. Liberum’s analysis is further complicated by the ongoing government closings which have forestalled the Bureau of Labor Statistics September Employment Report.
Broadcom Corporation (BRCM) is poised to fight through negative sentiment around the stock with its recent acquisition of Renesas Electronics Corporation’s (TYO:6723) modem I.P. and team, setting up BRCM as a value story with the stock expected move back into the low 30s in the next couple of quarters, says Patrick Wang, Managing Director at Evercore.
“[BRCM] has had a bit of reset over the past couple of months here, but Broadcom in the mid 20s is a tremendous value idea. It trades at nine times earnings, and there is a lot of negative sentiment on the stock. If you take a look at it, Broadcom has not traded at this valuation level for many, many years. The combo chip story is under pressure with concerns of share loss; there is concern about LTE being a nonstarter, which is the cellular technology we are all using on all the new iPhones and Samsung Galaxys,” Wang said.
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BRCM‘s recent acquisition of the Renesas modem I.P. and team for $164 million is bringing Broadcom back into the game, Wang says, and over the next couple of quarters he expects to see the stock move into the low 30s.
“When you look at risk to reward, I see minimal downside in the mid 20s, and think it is more of a show-me value story in the sense that investors have overestimated losses and have underestimated gains. Over the next couple of quarters, I think you are going to see Broadcom move back to the low 30s, which at this point is a very good return,” Wang said.
ARM Holdings plc (ADR) (ARMH), a semiconductor I.P. company, is leading in the handset and tablet space with both Apple Inc. (AAPL) and Samsung Electronics Co., Ltd. (KRX:005930) using ARM‘s I.P. in their devices, and the company is also solidly positioned to enter the communications chips market, says Patrick Wang, Managing Director at Evercore.
“ARM is a tremendous story going forward, and I think it is going to really unfold over the next couple of years. It is driven by the things we discussed earlier. They dominate the handset and tablet space today. When Apple and Samsung come out with their next phones, they are using ARM‘s I.P., intellectual property, to get there,” Wang said. “Apple and Samsung, if they want to stay at the high end, they have to keep blazing the trail and pushing the boundaries of technology. As such, if you are using ARM‘s technology, you are paying them a royalty fee, and it is in the 1.5% to 3.0% range today.”
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Additionally, ARM Holdings is entering the communications chips space, in which it will be applying its architecture to aid in the next generation of lower power consumption, Wang says. He believes ARMH‘s story has another 10 years to go due to the company’s solid technology and business model.
“As we look forward over the next three to five years, the ARM story is interesting, because they are also entering communications chips. They are taking their highly power-efficient architecture and applying it to the switches and routers out there that make up the Internet’s plumbing, and the same types of trends we see on a devices today, obviously the data centers and carriers want to be power efficient as well. So they are looking to improve performance while lowering power consumption, and so ARM has a very nice tailwind over the next few years,” Wang said. “ARM is a semiconductor I.P. company with solid technology, a great business model, gross margins in the 90s, and thus trade in the 40 to 55 times forward p/e range.”
