Wednesday, December 13, 2017

A current AIM Program Small Cap Equity Holding:PGT Innovations, Inc. (PGTI) by: Jordan Luczaj. "Closing a Window"

PGT Innovations, Inc. (PGTI, $15.35): “Closing a Window”

By: Jordan Luczaj, AIM Student at Marquette University




Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

·         PGT Innovations, Inc. (NYSE:PGTI) manufactures and sells both impact resistant and non-impact resistant windows and doors. They have three brands that they use to sell their impact resistant products: WinGuard, PremierVue, and PGT Architectural Systems. PGT has a vast product line and assembles products using both aluminum and vinyl frames.

·         On September 22nd, 2017, PGTI sold $28 million in assets to Cardinal Glass Industries. This was a strategic sale, given that PGTI also signed a seven year supply agreement with the same company shortly after. Cardinal Glass will continue supplying the glass components for doors at PGT’s current cost to produce. This allows PGT to pay down debt and focus more on their core business, which is window and door manufacturing.

·         Reconstruction and remodeling make up the other 60% of PGTI’s business. Considering that Florida represents around 90% of their market, the recent impact of Hurricane Irma is significant. Management does expect R&R to be up next quarter and possibly into next year based off of rises in demand due to damages and people’s desire to refortify their residences.

·         In the first half of 2018, PGT Innovations will be moving into a new facility in the Miami area. They are planning on increasing ad expense to possibly gain exposure here, as this is their first facility. Ideally, they want to capitalize on the strong labor market in Miami, and be closer to large customers in both Fort Lauderdale and Miami.

Key points: PGT Innovations has been a steady gainer, and stands to see a pop in sales due to the increased reconstruction efforts in much of Florida, especially the Gulf Coast. Their expanding market presence is moving them closer to Miami-Dade County, which controls a lot of the impact resistant glass/window regulations. PGTI sees large potential in the Florida market, and hope to hit 20% EBITDA margins within two years. This is a realistic goal, since they have attained 19% EBITDA margins, and will add depreciation upon buying the building in Miami and increasing equipment in the facility they retained after the sale to Cardinal Glass Industries.

Even though PGTI is focused on Florida, they have not been shy about making acquisitions and growing in other markets. In the past, they have made multiple acquisitions that have helped move them into Canada, where 2.5% of sales now come from. There best opportunity for growth prospects could be in interstate expansion, especially up the coasts and along the Gulf where states are affected by hurricanes and natural disasters. They also could see expansion in tornado alley where there is a need for impact resistant products. During this year, sales outside of Florida have grown between 25 and 30%.

Reconstruction efforts are going to be heavy over the next few years, which should boost sales above expected levels. PGTI will also continue their vertical integration to gain more control on lead times and manufacturing processes, which should increase margins. PGTI is built on a foundation of efficiency and market demand created by regulation and consumer demand for safety.

Their management team has been strong, but the CEO is stepping down after 2017. Even though he will continue to act as Chairman of the Board, this is not ideal given his knowledge of the industry, relationships with regulators and suppliers, and long-term planning ability.

What has the stock done lately?

On November 2nd, PGTI missed earnings and saw about a dollar dip in their share price. The miss was largely driven by lack of demand given the hurricane filled quarter. Management projected that there was a $13 million negative impact on sales due to Hurricane Irma and a few million dollar escalation in expenses related to complications. The stock did bounce back quickly after earnings, and is now trading near a 52 week high.

Past Year Performance:

Over the last 12 months, PGTI has been on the up and up, returning 37% during that period. Since PGTI was added to the AIM Small Cap Equity Fund on April 25th, it has returned 37.44%. There has been some volatility over the last year around earnings dates and a large increase in share price correlated with timing of the recent hurricanes.

Source: FactSet

My Takeaway:
 
PGTI has sped past its target price of $13.80 in a little less than seven months. The stock was a sound play given Florida’s housing demand and strong economy, high margins that are increasing with efficiency, and a more than competent management team. However, the stock has far exceeded my expectations mainly due to the effect that hurricanes had on a majority of PGTI’s market space. I imagine that sales will grow in 2018 above expected levels, but I wonder if PGTI is prepared for this uptick and how it will affect their margins and long term plan going forward. They will also be going through this during a major management transition. For these reasons, I am skeptical and recommended that PGTI be sold from the AIM Small Cap Equity Fund. There may be more potential left in this stock, but we are happy taking a 37.44% return given the opaque future and current valuation.


Source: FactSet

A current AIM International Fund Holding: Caesarstone Ltd. (CSTE) by Andrew Crossman. "Cut Caesarstone"


Caesarstone Ltd. (CSTE, $24.20): “Cut Caesarstone”

By: Andrew Crossman, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Caesarstone Ltd. (NYSE:CSTE) manufactures and sells quartz surface slabs used for countertops and other interior surfaces, and they derive revenue from the United States, Austrailia, and Canada.

• The introduction of producing premium quartz products at Richmond Hill manufacturing site is a potential recovery driver, but is currently a drain on gross margin.

• Growth in sales revenue fails to pass through to bottom line due to raw material prices, negative weather impact, and operating inefficiencies.

• Increased competition drives Caesarstone’s production focus to the high-end quartz products.  

• Lower guidance for Q4 signals continued downward trends.

Key points: Caesarstone has been recovering from a 2015 price drop on the heels of missed earnings, lower guidance, and a report published by Spruce Point Capital Management accusing the company of selling low quality products at premium prices. Despite having a short position in the firm, subsequent management actions confirmed accusations.

In 2015, the firm opened a production facility in Richmond Hill, Georgia to produce higher quality quartz in response to investor worries. Currently, management attributes a decrease of 3% to Caesarstone’s gross margin as a result of increase production costs at this facility. Sales revenue growth has not covered increased costs, but is a potential driver of net income growth as operations improve in efficiency, increasing quantity and decreasing costs.

Sales growth has increased at a 5yr CAGR of 15.7%, but management has failed to maintain margins. In the latest earnings call, negative impact on gross margin were attributed to increases in the price of polyester (1.5%), losses from Hurricane Irma (0.5%), and changes in operations at their Israel production facility (3%). Management expects the price of polyester to decrease and losses from Hurricane Irma are expected to have short term effects on gross income. A shift to differentiate product output from the Israel increased production cycle and set up time, and could have a long-term effect on margin.

Caesarstone has faced increased competition in the medium quality countertop segment, which previously composed a high percentage of sales revenue. Management has cited increased competition as a driver behind the product shift to higher quality goods, stating that they will continue to compete on a lower level for medium quality market cap.

Guidance on EBITDA and sales were revised to the lower end of previous estimates, signaling little to no expected increases in operational efficiencies in Q4.

What has the stock done lately?

The stock has traded lower off of disappointing Q3 earnings results. Increased competition has been pointed to as a driver of margin compression and lower free cash flow. Active managers decreased position size in the stock of nearly 1M shares during the Q3, continuing a sell-off trend which has been present for the past year.

Past Year Performance: The stock is trading at a near 52-week low off of disappointing operating results as Caesarstone fails to break the operating structure that was previously in place. Investor confidence in management’s ability to overhaul has decreased shown through expectations for FY17 EBITDA at 19% lower than FY16. The stock is currently trading at a discount to P/E (ntm), EV/EBITDA, and P/sales historical averages.

Source: FactSet

My Takeaway

There could still be value in Caesarstone if management is able to successfully transition to serve higher end consumers at reasonable margins. Signals of a return to increasing EBITDA margins have been far and few between as management has shown the ability to grow sales, but has a poor track record for carrying those increases through to the bottom line. Exacerbated by decreased pricing power due to increased competition, Caesarstone’s share price will struggle to climb back up to levels of CY15. This position should be considered to be sold out of the AIM international equity portfolio.

Source: FactSet

A current AIM International Fund Holding: Iberdrola SA (IBDRY) by Thomas Dietz. "No More Wind in These Sails"

Iberdrola SA (IBDRY, $31.05): “No More Wind in These Sails”

By: Thomas Dietz, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article. 

 Summary  

Iberdrola SA (NYSE:IBDRY) is a globally diversified utility company headquartered in Spain, providing power and gas to over 31 million people worldwide.

IBDRY focuses primarily on wind and natural gas, with some nuclear and thermal plants still in use. IBDRY is the number one producer of wind energy in the world.

IBDRY is one of the largest utility companies on the planet, with most of the growth over its 70-year history coming from M&A activity.

IBDRY has a complex internal structure, with subsidiaries Scottish Power and Iberdrola USA operating semi-independently. 

Key points 

Iberdrola is a stable company that provides good global exposure and a healthy dividend, but valuations suggest that IBDRY is trading at or very near its intrinsic value.  Two of the main drivers that recently increased the stock price appear to now be priced into the stock.  UBS reported strong future cost cutting potential in their Scottish wind farms; they can accomplish this by implementing floating wind turbines that are less expensive to produce and can placed in further offshore in deeper waters where winds are stronger.  IBDRY stated that they will have an IPO for their Brazilian subsidiary’s assets to raise capital for increased infrastructure investment.  The market’s recognition of these catalysts leaves very little to spark new price movement.

Looking at the street’s top line and EPS projections reveals a company that is projected to grow 10% per year for the next three years and pay dividends at or above 4.5%.  Unfortunately, an average of the street’s forward EPS numbers times the forward P/E reveals a stock that sees little to no room for upside.  Furthermore, an analysis of their individual segments sees weak to no growth in their high margin UK and continental Europe businesses.  This puts additional strain to perform on their American segments.  This is worrisome because the US business sees tough profitability controls by the regulating bodies, and the Brazilian growth story is contingent upon the timely success of the IPO. 

What has the stock done lately? 

The past 6 months have seen no real direction, with the price oscillating between $30.50 and $33.  I take this as yet another indication that we are at or near the intrinsic value.

Past Year Performance: After a poor 2016, IBDRY started off the year quite well. IBDRY rocketed from a two year low of $23.75 to a five year high of $33.34.  Unfortunately, the back end of 2017 has been far less stellar, and $33 seems to be as high as the stock can climb.

1-Year Stock Chart vs. S&P ADR
Source: FactSet

My Takeaway 

IBDRY has run its course.  The stock lacks new drivers, and further problems in the European businesses could deflate the double-digit growth numbers that current valuations rely upon.  The current makeup of the international utility portfolio already has a strong South American presence between SBS and BIP, and BIP is more successful and profitable in European business lines.  I recommend replacement with an Asian utility, either in India or Southeast Asia. This will better serve for portfolio diversification and recognize the high growth opportunities to be found in India and Southeast Asia.  

A current AIM International Fund Holding: Delphi Automotive PLC (DLPH) by: Grant Runnoe "The Position Accelerates Forward"

Delphi Automotive PLC (DLPH, $100.86): “The Position Accelerates Forward”

By: Grant Runnoe, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary
  • Delphi Automotive PLC (NYSE: DLPH) is one of the world’s largest automotive part manufacturers running through four segments: Electrical/Electronic Architecture, Powertrain Systems, Product & Service Solutions and Electronics & Safety.
  • The company’s plan to spin off the Powertrain System segment has accelerated into 1Q18.
  • As of December 5th, Delphi Automotive will trade under a new name Aptiv (NYSE: APTV) leaving its spin-off, Delphi Technologies trading under ticker DLPH
    • For every three shares of Delphi Automotive owed as of the close on 11.22.17 shareholders received one share of Delphi Technology.
  • Delphi Automotive is well positioned to lead the trends towards autonomous and electric vehicle which is expected to reach incremental content per vehicle of $5,000 by 2020.
Third Quarter Highlights
  • Announced acquisition of nuTonomy specialized in advanced automated driving technology.
  • Repurchased shares and paid dividends of $172 million.
  • Revenue increase 6% YoY to $4.3 billion.
  • +6% Europe, +19% Asia, +25% South America, -8% North America
  • GAAP operating margins of 11.3%.
  • Record bookings of $2 billion in 2017 YTD.
  • Operating margins +30 bps YoY, operating cash flow +16% YoY.
  • Active safety revenues +70% during 3Q17.
  • Raised guidance for 4Q17 and FY17.

Key points: The Powertrain spin off will be complete in 1Q18 leaving two companies, Delphi Automotive and Delphi Technology. Liam Butterworth has been named CEO and President of Delphi Technologies PLC. He currently holds the position of SVP of Delphi and president of the Powertrain system segment. Mr. Butterworth has been with the company since 2012, joining with the acquisition of FCI Holding SAS’s motorized vehicles division where he held the president and general manager role. Vivid Sehgal has been named CFO. Prior to joining the firm he worked as the CFO at LivaNova PLC. Delphi Technologies will focus on electrification (mild hybrid to full electronic vehicles), software and control and internal combustion.

Delphi deepens its pipeline with the acquisition of nuTonomy, a provider of autonomous driving software and technology. Delphi’s goal of accelerating their global fleet expansion will be greatly accelerated as a result of the acquisition of nuTonomy. Delphi reportedly will place 60 autonomous vehicles on the road across 3 continents by year-end as well as gain 70 experienced engineers and scientist, 25 PhDs and commercial relationships such as Lyft, Grab and PSA. This acquisition is another example of Delphi’s initiative to remain the global leader in autonomous software and technology capabilities as they previously acquired Ottomatika, an autonomous driving software developer and Control-Tec and Movimento which are data service companies.

Delphi is well positioned to capture future industry growth. Internal combustion engines, which currently dominate the market, are expected to continue to grow at a CAGR of 1% from 2017-2025, whereas electrification penetration is forecasted to increase at a 32% CAGR. Catalyst for expansion is that of regulation. China has implemented its New Energy Vehicle (NEV) program that incentivizes plug-in hybrid electric vehicles (PHEV) and battery electric vehicles (BEV). Europe’s regulation regarding CO2 demands the need for electrification as well as consumer trends toward eco-friendly alternatives is also expected to increase electric vehicle production. Delphi holds a $4B lifetime backlog in this space.

Internal combustion engines will continue to grow, with the requirement that they continue to find efficiency gains. Active drive assistant (ADA) systems continue to drive revenue as the demand for these technologies accelerates. Delphi indicated in their 3Q17 earnings call that they expect revenue from ADA systems to top $800 million in 2018 due to increased penetration with existing customers, and expand with new customers.

What has the stock done lately?

Delphi beat EPS estimates by $.09 and revenue estimated by 5.9% reaching roughly $230 million. The stock continues to work as they post a 3 month returns of +7%. Delphi continues to accelerate their market position gaining share and engaging in strategic acquisitions (nuTonomy) propelling themselves forward. Although the market has experienced flat growth in vehicle production Delphi posted a +4.4% organic growth for the quarter.

Past Year Performance: Delphi has steadily outperformed both the S&P and Russell Global Ex US with a year to date return of 49.76% return. Delphi was placed into the AIM International Equity Fund on 1.27.14 ($59.59) with a Price Target of $71.45. The stock currently trades at $100.86 posting a 69.3% return.



My Takeaway

Delphi has been a steady out performer in the market. The company has grown both organically and through strategic acquisitions, allowing the company to grow market share in a challenging automotive market space. With market gearing towards autonomous vehicle and electric vehicle 

A current AIM International Fund Holding: Nice Ltd. (NICE) by: Jack Gorski "Nice Owning Nice"

NICE LTD (NICE, $86.24): “Nice Owning Nice”

By: Jack Gorski, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

NICE Ltd (NASDAQ: NICE) is an application software company that provides solutions that manage and analyze transactional data and other multimedia content for third party customers.

• Management is optimistic about their broad solution suite which continues to gain traction.

• The company recently released their CXone platform that is already showing signs of high success, providing potential for large revenue growth in the future.

• Transition to the cloud is becoming extremely popular for workforce optimization and NICE Ltd is positioned to capture revenues from this conversion.

Key points: NICE Ltd can expect to benefit from the release of their CXone platform which is gaining tractions with many large deals being reported this last quarter. This new cloud-based platform provides a combination of three products in one single platform. These include the Workforce Optimization, InContact cloud contact center capabilities, and customer analytics. Not many of NICE’s competitors are offering a similar product package, suggesting that this new platform could attract new customers and give them an advantage over their competitors.

NICE’s cloud business is continuing to remain strong and producing double digit growth YoY. The growth of the cloud business is partially driven by the acquisition of InContact which is also included in the CXone platform. The product portfolio provided as part of their cloud business segment is well regarded by their customers and continues to provide opportunity to grow market share in a largely unpenetrated market.

With the growth of cloud-based contact center services and recurring revenue, NICE is likely to double its sales beyond $2 billion. With the help of its outstanding sales force, the company is able to cross-sell its products between existing users and expand its reach well outside the United States which currently represents ~71% of sales.

By far the most threatening risk to be aware of when holding this stock is the impact of Amazon Connect. Amazon Connect is largely directed at smaller companies, while NICE has shown to target larger enterprise companies. The products are also quite different as Nice has more complex call routing algorithms to better optimize workflows, while Amazon’s Connect is grossly limited to voice channel. It is believed that it will take some time for Amazon to develop a cross-channel product that will be able to compete with that of NICE, yet this is a concern that is not to be taken lightly and should be monitored moving forward.

What has the stock done lately?

The stock has performed exceptionally well over the past 3 months, up about 16% to $86.24. The stock’s recent growth can be attributed to the success of the CXone platform which is capturing many deals and thus providing ample opportunity to grow revenue. NICE also had an upsetting earnings surprise in which they missed by over 50%, yet the price continued to rise. Earnings estimates were revised forecasting greater expectation in the future. The market must trust these revisions as the stock has continued to climb as is currently trading at its 52-week high.

Past Year Performance: NICE’s value has shown strong growth this year, up 30.37% YTD. Consensus estimates place the target price for NICE at $86.00, but strong growth potential in their cloud business, especially with their new CXone platform could suggest that this stock is still undervalued.


My Takeaway


NICE Ltd continues to show room for expansion as their cloud services continue to grow and capture market share. Through the offering of their CXone platform, they are better able to distinguish themselves from their competitors by offering a unique product package that their competitors are unable to match. For this reason, I believe NICE can expect to see favorable revenue growth moving forward. Their cloud services growth is also driving gross-margin expansion which is already better than many of their comps. For these reasons I suggest holding NICE as it still has potential to expand in its unpenetrated market, while it is crucial to keep an eye on the advancements of Amazon Connect.

A current AIM International Fund Holding: Control4 Corp. (CTRL) by: Alex Czachor "Leading Player Within Home Automation"

Control4 Corp. (CTRL, $33.81): “Taking Control of the Expanding Smart Home Market”

By: Alex Czachor, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Control4 Corp. (NASDAQ: CTRL) is a provider of smart home and business solutions in which provide consumers with the ability to integrate audio, video, lighting, temperature, security, communications, network management and other functionalities into a unified automation solution.   

• Currently CTRL has about 300k homes within its customer base primarily targeting the high-end housing market.  Of the 14.2 million homes with disposable incomes greater than $150k, CTRL currently holds approximately 2% of the total market.

• The company is also well positioned within a growing market.  According to Zion Market Research, the global smart home market was valued at 24.10bn in 2016 and is expected to reach 53.45bn in 2022, representing a 14.5% CAGR between 2017 and 2022.

• Strategic partnerships such as the one with Amazon could fuel huge growth for CTRL in the near term.  CTRL products are already integrated with Amazon’s Echo, Dot, and FireTV. 

• Just recently the company was named for the third year in a row as the top home automation provider according to CE Pro’s Top 100 Brand Analysis report cementing them as a clear leader within the market.

Key points: As disruptive technology continues to grow and advance within the global market, CTRL is right there growing with it.  The company is working to completely change the home owning experience through connecting virtually anything home related into a central management system.  With increased convenience and simplicity smart homes will be the future of homes for builders, with the smart home market forecasted to grow at a 14.5% CAGR through 2022. 

CTRL has benefited from this strong industry trend and will continue to benefit as it is a clear leader within the home automation market.  Additionally, the company has made key strategic partnerships with companies such as Amazon, in which CTRL’s platform is already integrated in products like the Echo, Dot, and FireTV.  This helps to improve confidence that the company has a great avenue for expansion into the future. 

As mentioned before the company primarily focuses on the high-end market which can be considered homeowners with above $150k in disposable income, which makes up approximately 14 million homes.  This represents just under 2% penetration into this market, giving the company a large runway in an industry that is likely to grow rapidly over the next decade.

Another key point to bring up is in regards to the company’s financial standings.  Financially the company is debt free and recorded approximately $210 million in revenues last year.  Due to the low cost aspect of the business the company enjoys gross margins around 50% which helps benefit the bottom line.  With the excess cash being generated management has noted that they will be reinvesting aggressively into new products and potential strategic acquisitions moving forward.  The company is well positioned financially to expand and grow penetrating the large addressable market even further.      

What has the stock done lately?

Since the company’s Q3 earnings report at the beginning of November the share price has appreciated approximately ~23%.  Primarily driven by a better than expected quarter in regards to both top line and EPS performance.  Due to this strong performance management raised its FY17 guidance for both revenue and EPS.  The company now expects revenue in the range of $242.5-244.5mn up $3mn from prior guidance.  Additionally EPS guidance was increased approximately $.10 to a range of $1.13-1.16 in comparison to prior guidance.                

Past Year Performance: Year-to-date the company’s share price has appreciated ~208% with the AIM fund capitalizing on approximately 117% of this growth since its inception on February 24th 2017. During the year the company witnessed a 52 week price range between $10.08 and $34.73.   

My Takeaway:
As smart home technology continues to gain traction and grow CTRL will likely benefit as it is a leading player within the home automation market.  Additionally with strategic partnerships such as with Amazon, it is likely that the company continue to expand and see huge growth as the demand for products such as the Echo or FireTV continue to strengthen.  Since its inception into the AIM portfolio the company’s share price has appreciated approximately 117% and is currently one of the top ten performers within the AIM small cap fund.  Due to the strong likelihood that the smart home market will continue to grow coupled with CTRL’s strong position within the market as well as its commitment to innovation and its ability to expand through inorganic means it is recommended that the AIM small cap equity fund continue to hold Control4 (ticker: CTRL) as there continues to be strong opportunity for growth.  

Tuesday, December 12, 2017

A current AIM International Fund Holding: MercadoLibre, Inc. (MELI) by: Jack Gorski "Free Market Fights"


MercadoLibre, Inc. (MELI, $271.38): “Free Market Fights”

By: Jack Gorski, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

MercadoLibre, Inc. (NASDAQ:MELI) provides and online commerce platform structured around their online ecommerce marketplace and supported by their delivery and payment platform.

• The firm focuses their business in Latin American countries as they believe this to be an untapped market, separate from the two ecommerce giants, Amazon and Alibaba.

• MELI has experienced many pressures over the past year that have created concerns for shareholders, the most significant of which is Amazon’s announcement to move into South America.

• It was recognized that MELI faced several risks associated to political and currency uncertainty which it has had to overcome in the past 6 months.

• MercadoLibre has hit its price target 6 times since it was admitted into the AIM International Equity Portfolio and is showing signs of reaching a price beyond $300.

Key points: Drivers for MercadoLibre are still showing potential for strong cash flows moving forward. Mobile usage growth has been strong as mobile phone usage and internet access continue to grow, allowing for the number of new mobile registrations to triple over the past few years. Roughly two-thirds of all new users register on mobile devices and as mobile phone penetration continues to increase, MercadoLibre can expect to grow their customer segment even faster than their 2016 YoY growth rate of 98.7%.

The stock is showing to put up a fight against all of its risks, proving its commitment to becoming a strong player in the ecommerce industry. The major concerns pointed out when purchasing this stock was that the Latin American market they operate in has been known to hold significant signs of instability, and that Amazon could potentially move into the same geographic region, disrupt the market and steal their market share. Both of these concerns have materialized over the past year, yet MELI has continued to rebound, showing its sturdiness as a strong ecommerce competitor committed to the region it is established in.

During this past summer of 2017, Brazil, the largest revenue source for MercadoLibre underwent a political scandal that devastated the Brazilian Economy and contributed to spillover effects on other neighboring countries. The stock experienced some difficulty in the following month and half as it struggled to react. After providing some valuable incentives to their customers, MELI was able to offset the economic impact and return grow their share price beyond $290.00. Of course while all of this was going on, Venezuela was also showing signs of complete political collapse. Yet despite this political chaos, MELI held strong and fought back against the risks that could ruin the company.

After receiving the damaging news that Amazon would be expanding its ecommerce reach in Brazil, MercadoLibre stock price fell quickly, scaring many shareholders that MELI would be the next company to fall at the hand of Amazon. Since the news, MercadoLibre’s stock price has rebounded to over $270.00 and management has upgraded their earnings estimates as well, thus showing confidence in the firm’s position and potential. I attribute the strong position to their MercadoPago payment application, which gives them an advantage over their competitors by allowing them to target non-banked individuals. If MELI continues to put up its fight it can expect to keep growing or possible become and acquisition target for the other two ecommerce giants.

What has the stock done lately?

Since Amazon announced that they would be expanding more into Brazil, MELI quickly dropped by ~20%. Despite this news, MELI quickly rebounded, beating earnings by 10% for Q3 and management upgraded their FY guidance. The stock is now up about 23% since its low point post Amazon news. This is good news for the firm after it missed earnings in August by more than 40% and had to downgrade its earnings estimates.

Past Year Performance: MELI has increased 66.30% in value of the past year and still has room to grow. The stock has reached prices beyond $290.00 four times over the past year and despite the several headwinds they have had to face, the stock continues to fight back. A revaluation of the stock led me to adjust my price target to $310.00 a share. This means that the stock is currently trading at a 14.23% discount.

Source: FactSet

My Takeaway


MELI has shown that it can overcome some of the harshest struggles and is continuing to show strong earnings growth. Whether it be political instability and chaos or their largest competitor entering their market, MercadoLibre continues to fight to remain the dominant Latin American Ecommerce platform. After hitting its 52-week high of $297.22 in May, MELI has repeatedly rebounded in price, climbing above $290.00 four times despite all the upsetting news. If the company can continue to hold it positions, it will either successfully defend itself against Amazon, or become an acquisition target for them to successfully move into Latin America. Whichever the outcome, MELI has proven to be a fighter in the industry, overcoming some of the hardest odds and is now on track to be a $300.00 stock. 

A current AIM International Fund Holding: Check Point Software Technologies Ltd. (CHKP) by: Tim Milani "A Good Time to Check Out"


Check Point Software Technologies Ltd. (NASDAQ: CHKP, $105.36): “A Good Time to Check out?”

By: Tim Milani, AIM Student at Marquette University




Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Check Point Software Technologies Ltd. (NASDAQ: CHKP) is the largest pure play security vendor globally that offers a complete security architecture of industry leading solutions to protect their customers from cyberattacks.  Their products include threat prevention, next generation firewalls, mobile security and security management.  The company is headquartered in Tel Aviv, Israel and was founded in 1993.

• Regions outside the US experienced a nice acceleration in sales growth with Europe and Asia-Pacific leading the charge with revenue up by 12% and 19.5% YoY, respectively.  CHKP derives 45% of revenue from the Americas and 37% from Europe.

• Operating margin in Q3 2017 grew 1.3% YoY with Operating expenses growing at a faster rate of 3.6% YoY but these expenses were also down by $5 million QoQ.

• The Yom Kippur holiday, occurring on the last day of the previous quarter, was projected to potentially have an impact upon $30 million in product revenue but was seemingly overestimated as CHKP was able to pull through a greater amount than expected.

• CHKP hired a new head of worldwide sales in Q2 2017 who came in with the goal to implement a set of changes including the hiring of new people to focus on channel support and it is likely these new hires have caused a weakness in sales especially in the US.

Key points: CHKP has a great track record of stable, consistent execution and performance across its nearly 25 year history with over 100,000 businesses and millions of users utilizing CHKP’s products and services worldwide.  The company has also been internationally recognized for its performance winning numerous awards including an ICSA Labs 20 year excellence award in 2015.

Several people in top management or director roles have had a long tenure at the company of near 15 or 20 years. One of these is co-founder and current CEO Gil Shwed who is also considered to be the creator of the modern firewall.  Additionally, Chairman of the board of directors and other co-founder Marius Nacht remains with CHKP.  Both own substantial portions of the outstanding shares of the company with Shwed owning 15.04% and Nacht owing 6.76% indicating they have great reason to continue to return value to shareholders.

While CHKP has historically been a great company and investment some cause for concern exists including likely slowdown of demand.  This originates from many companies being comfortable maintaining their current product offering and consequently, CHKP cited longer sales cycles among large enterprises being probable.

Finally, many analysts have recently revised their ratings down for the company upon poor Q3 2017 performance with Morgan Stanley stating that “the overall firewall market is slowing,” and that spending in the security industry is trending towards non-firewall technology.

What has the stock done lately?

CHKP recently experienced a significant drop in share price after a poor Q3 2017 earnings report that failed to beat estimates and predictions for this trend to continue into Q4 2017 as well as 2018.  Upon this news the stock on November 1, dropped nearly 15% from ~$118 to ~$103 with most analyst reports following including those from Morgan Stanley, Deutsche Bank and Barclays indicating that they think the stock is currently fairly valued near a price of $105.  Predictions for an increasingly competitive environment and slowing growth for CHKP will likely keep the stock near its current price for the foreseeable future.

Past Year Performance: CHKP has had a good run this year with a 52 week range for the stock price being between $80.78 on 12/01/2016 and $119.20 on 10/13/2017. Until recently the stock had been performing well with billing growth rates peaking at 13% YoY in Q1 2017. Subscriptions also began the year with fantastic growth up to 27% YoY in Q2 2017. YTD FCF of $4.89 is up 18% YoY and the company has plans to continue its share repurchase program with $250 Billion in Q3 and plans of an additional $1 billion in repurchases over the next year.

However, CHKP’s growth has slowed down in the most recent quarter across the majority of its segments including a deceleration of subscription revenues to a growth rate of 22% YoY suggesting that the company is having trouble renewing them.  Revenue also decreased by 6% YoY, a trend projected to increase to 8-10% in the next quarter.

 
Source: FactSet

My Takeaway

CHKP has been a great performer in the past and this year as even after its price drop it still has returned 23.73%.  However, as the latest trend seemingly results from worry over long term indicators as opposed to temporary inconveniences for the business regarding its growth, competitive environment and new management it is cause for further concern.  Moreover, it appears as though the company is not as committed as its competitors to investment in key areas of its business including R&D which was 15% lower than competitor Palo Alto’s contributions.

Taking all of the above into consideration these trends suggest it is likely a good time to capture the historically great return from this stock and cash out before a potential further drop in price.  Therefore it is recommended that CHKP be sold from the AIM International Equity Fund due to its weakened performance, projections and fair valuation.

 

Source: FactSet