Thoratic Corporation (THOR) has seen promising data from its left-ventricular devices, and participation in this nascent market means THOR is set to benefit in the long term, says Steven M. Lichtman, Managing Director and Senior Analyst at Oppenheimer & Co. Inc.
“[Thoratic is] a pure play in the market to treat severe heart failure with left ventricular-assist devices, or LVAD. This is a market that is still early in its penetration,” Lichtman said. “The data for these devices have been very good in terms of demonstrating improved survival for patients.”
Lichtman sees this market having a long runway for the next five-plus years. This expectation, coupled with the unique pressure that’s currently on the more mature medical device market, makes Thoratic a promising play, Lichtman says.
“We think it’s a good market…over the long term, but in the near term, we think expectations have come down for Thoratec and we recommend investors buy shares at current levels,” Lichtman said.
Zimmer Holdings (ZMH) has an exposure of about 75% to the hip and knee market in orthopedics, one of the core medical device markets that has been edging higher, and the company’s manufacturing capacity and its expansion plans in emerging markets make the company one of the favorites of Matt Miksic, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“As I mentioned, they are one of the companies that has tightened down the screws and taken a lot of cost out of their fixed assets and manufacturing processes over the past four years as volumes have slowed. I think as volumes increase, we’re going to see a continued benefit there, maybe 8% or 9% free cash flow yield and total return of over 11% against comparables of maybe 8% to 10%. We think it’s got a long way to go. We also think we’re still in the early stages of this orthopedic return to growth,” Miksic said.
Miksic says Zimmer has been making investments in emerging markets, and ZMH‘s hip and knee products are expected to continue being increasingly adopted in geographies such as China and India.
“I think Zimmer, for example, will develop a model where they may market NexGen, their current knee system, more heavily into emerging markets, whereas they’ll continue to try to penetrate developed markets with their forthcoming launch, Persona. That may be their strategy,” Miksic said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Chuy’s Holdings (CHUY) expectations for growth may be higher than warranted for Q1, and longer term the new units opened farther away from its Texas home may underperform its Lone Star State locations as the newer consumer population is less familiar with its Mexican food offerings, says Nick Setyan, Senior Equity Analyst at Wedbush Securities.
“I have an ‘underperform’ rating on Chuy’s,” Setyan said. “On Chuy’s, near term I believe the same-store sales growth expectations are still not low enough in Q1. They just reported Q4 results. They talked about Q1 trends that were below expectations in terms of the comp trends. I don’t know if consensus will actually go low enough at this point.”
Setyan says CHUY will suffer from tough comps, as they will go against their honeymoon periods. Moreover, he says, $700,000 to $800,000 have been shifted from Q1 to Q4. The Mexican food restaurant also faces difficulties in the longer term with cash-on-cash returns, which could put the unit growth rate at risk.
“Even in the best of times, their transaction growth is flat to slightly positive. They only take about 1.5 percentage points of price increases every year; longer term, I don’t expect commodity inflation to be less than 2%, I don’t expect labor inflation to be less than 2% — in fact, I think the health care legislation that’s going to start impacting restaurants across the board in 2014 may even result in an acceleration of that inflation rate on the labor side — and with flat to slightly positive transaction trends, I don’t expect there to be much leverage on some of the other unit-level expenses such as occupancy and other operating costs,” Setyan said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Darden Restaurants (DRI), a conglomerate company that operates restaurants under the Red Lobster and Olive Garden names, has implemented changes in its restaurants that may present long-term value and benefit the business model, says Will Slabaugh, Vice President and Equity Research Analyst at Stephens Inc.
“I think it’s a universal call to be cautious on Darden (DRI) right now, and that’s simply because they have had a lot of changes within Red Lobster and within Olive Garden over the past few quarters, and those results have been fairly mixed,” Slabaugh said.
Slabaugh says that it may take time for these changes to benefit the model, and that even a small amount of positive news may be enough to turn DRI‘s stock around.
“When I take a look at the valuation, when I take a look at the dividend yield that the company is providing, I think that it won’t take much positive news to be able to turn the stock around, so in the near term, operationally I think there are some issues they have to work through, but I think longer term it probably does present a fairly compelling value here,” Slabaugh said.
Apple (AAPL) has become one of the leaders in the smartphone industry and currently has a market value about $440 billion and cash flow generation of up to $50 a year, and sustainment of this cash flow could raise dividends and increase stock buybacks, says Bobby Edgerton, Co-Founder, Executive Officer and Principal of Capital Investment Companies.
“Apple has a market value of about $430 billion, $440 billion; if you back out the cash, the stock market says Apple’s worth $300 billion. They’re generating between $40 and $50 billion in cash a year, so depending on which figure you take, that stock is selling at about six times cash flow,” Edgerton said.
If Apple continues to generate the same cash flow, for example $50 billion in the next six years, they will be generating enough cash to buy back the whole company, Edgerton says. The question that remains, according to Edgerton, is how AAPL will manage the cash.
“Now, how does Tim Cook manage a business with Steve Jobs no longer behind the scenes, what they do with their cash? Do they raise the dividend? Do they buy back more stock?” Edgerton said. “What is probably predictable is Apple is going to be a prodigious generator of cash over the years.”
McDonald’s Corporation’s (MCD) chicken-wing offering for the summer of 2013 is expected to last about six weeks, quelling some analysts’ fears that the price of wings may rise permanently and crush the bottom line of specialty restaurants such as Buffalo Wild Wings (BWLD), says Nick Setyan, Senior Equity Analyst at Wedbush Securities.
“On the first one, McDonald’s was testing wings in a couple of their markets for quite some time. The worry was that if McDonald’s rolls that out to their permanent menu, wing costs will take another big step up. And wings, to give you some context there, about every $0.10 per pound move in wing costs equates to about $0.18 in EPS in both directions, so if they were to go up, it would be a big headwind [for Buffalo Wild Wings],” Setyan said.
Setyan says the chicken wings offering at McDonald’s is planned to last six weeks this summer. He says MCD is using the wings offering to drive traffic into its stores, and as such the profitability of this particular product is not the end goal of the QSR restaurant.
“The market reacted negatively to that, but actually I think that’s a positive because that indicates to me that that’s going to be transient in nature, and from the commentary that we’ve heard, they’re not going to be making very much money on it. It’s more of a strategy to drive transactions to the stores, and so, because there is not much of a profit attached to it, I’m less concerned that they may eventually roll it out to the permanent menu, particularly with wing costs so high,” Setyan said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
Panera Bread Co. (PNRA) continues catering and benefiting from recovering confidence by their business customers, and the fast casual restaurant has now introduced a pasta product that can help gain more dinner customers, says Stephen Anderson, Analyst at Miller Tabak + Co., LLC.
“We just added Panera to our ‘buy’ list several weeks ago. I think they continue to do the right things. Catering continues to be a driver for them, and also I think this is a macro story; as more businesses start to get a little more confidence, they’ll do more catering in house,” Anderson said.
Anderson says fast casual restaurants such as Panera will continue to be a winning category. He says that, in addition to having the ability to offer higher-quality food at a lower price, customers perceive these restaurants as having a halo effect with higher healthiness standards than peers. Moreover, PNRA is expanding and growing its customer base with new products.
“In recent years, I think Panera has almost become synonymous with catering with its sandwiches and soups; I think the introduction of pasta is going to help out in that regard as well. It’s a product that carries well on a catering basis and also provides an opportunity potentially to gain a couple more dinner customers on the margin,”Anderson said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
DineEquity (DIN), owner and operator of restaurant concepts Applebee’s and IHOP, is a special situation company that, through a leveraged buyout of Applebee’s which resulted in refranchising and selling assets to pay down debt, is set to return capital from its large free cash flow to shareholders via dividends and share repurchases, says Bryan C. Elliott, Senior Equity Analyst with Raymond James & Associates, Inc.
“It was a rare opportunity for public investors to invest in an LBO structure. IHOP, which had very nice high free cash flow and modestly growing business…essentially did a leveraged buyout of Applebee’s, a company substantially larger. It borrowed $2.2 billion to buy Applebee’s. It then refranchised a number of markets, did asset sales to help pay down debt. Free cash flow is now running in the $5 to $6 per share range and should be pushing the $7 level soon,” Elliott said.
DineEquity is now in an end state where it’s employing a 99% franchise business model of both IHOP and Applebee’s brands, and with this asset-light business model, DIN is primed to return cash to shareholders, says Elliott.
“There are no capital expenditure claims of any magnitude on the cash flow of the business; if they can maintain the health of the brands, that’s a very solid business model. We think in 2013, the company will begin to return some free cash flow to shareholders, probably in the form of a steady cash dividend and some share repurchases,” Elliott said.
NCR Corporation (NCR) will move into the final phase to shed its legacy pension expenses this year, allowing its non-GAAP earnings to become GAAP earnings and making NCR a more straightforward technology play, says Arne Alsin, Lead Portfolio Manager at Alsin Capital Management.
“They hit a big pension, a legacy pension, that overwhelmed the company and they are involved in a three-step plan to get rid of the pension, which has been depressing earnings. And they’ll be moving into phase three, the final phase, this year. Once that happens, all of a sudden their non-GAAP earnings become GAAP earnings, and their GAAP earnings are quite substantial,” Alsin said.
Alsin says that at the base level, he uses the simple comparison of earnings with and without the pension expenses to gauge NCR‘s value, and with NCR‘s earnings and their number one standing in numerous verticals, he says the company is going to be a solid play.
“NCR is number one in three different verticals: in banking, in financials and in restaurants. They are also number one in hospitality, but it’s not big enough for it to call yet; it’s still an emerging vertical for them. NCR is involved in a lot of areas that are at the forefront of change, and I think they’re going to do quite well,” Alsin said.
Norfolk Southern Corp. (NSC) benefits from a secular shift toward using railroads instead of other transportation methods, with the overall cargo moving by rail expected to increase over time despite the cyclical changes in the amount of coal that is transported in North America, says Ronald L. Altman, SVP and Senior Portfolio Manager at Anchor Capital Advisors LLC.
“After some deep fundamental and industry research, and talking in detail with company management, I concluded that coal is basically in an inventory adjustment more than it is in a secular decline. Inventories are coming down, export coal is slowing, and China’s demand is slowing and what have you. So to me, coal volume is a cyclical thing, and it will continue to come and go. However, secularly, the railroads are taking market share from the trucks in terms of carrying ‘stuff,’ so there is a secular growth aspect to them,” Altman said.
Altman bought NSC when it was under $60, when many in the investor community were concerned about the future of coal. Altman says his “alpha engine” consists of companies that are historically cheap based on cash flow, based upon enterprise value to EBITDA and based on current yield.
“When I can buy a company like NSC at the bottom-end of its valuation band, and I think there is a compelling secular story, a cyclical concern and a 3%-plus yield at the time, I’m very happy to buy the stock and be paid to wait. That’s basically how I look at everything. There are five analysts here at Anchor Capital who I work with closely, and we run screens all the time looking for attractive companies, and then either the analyst or the analyst and I will go out and visit the companies,” Altman said.
FOR MORE INFORMATION ABOUT THIS INTERVIEW CLICK HERE.
