Tag Archives: Holiday

Roku forecasts surprise loss for holiday quarter, shares fall
November 8, 2018 12:01 am|Comments (0)

(Reuters) – Roku Inc forecast a surprise holiday-quarter loss and missed third-quarter revenue estimates for its high margin video streaming platform, sending its shares down nearly 13 percent in after-market trading on Wednesday.

FILE PHOTO A video sign displays the logo for Roku Inc, a Fox-backed video streaming firm, in Times Square after the company’s IPO at the Nasdaq Market in New York, U.S., September 28, 2017. REUTERS/Brendan McDermid/File Photo

The outlook overshadowed third-quarter revenue, which beat analysts’ estimates, and a loss that was smaller than expected.

Revenue from Roku’s streaming platform is a closely watched metric and the company has pinned hopes on the segment, which generates profit margins well above 70 percent.

Roku reported revenue of $ 100.1 million from the streaming platform unit, missing estimates of $ 103.2 million, according to FactSet data.

DA Davidson analyst Tom Forte said the pullback in shares was also a reflection of expectations being “too high” for the company’s third-quarter results.

STRATEGY CHANGE

Roku’s streaming devices have been facing intense competition from the likes of Apple TV and Google Chromecast.

This led the company to tap other revenue sources, including licensing its technology to television makers and earning a share of the advertising revenue from media companies on its platform.

The company is investing more on content for its recently launched Roku channel and is expanding it to more geographies, Chief Executive Officer Anthony Wood told Reuters.

“We added several news providers in anticipation of the mid-term elections and it was one of our best news days ever.”

Net loss attributable to shareholders narrowed to $ 9.5 million, or 9 cents per share, in the third quarter ended Sept. 30, from $ 46.2 million, or $ 8.79 per share, a year earlier. (bit.ly/2qz97eX)

On an adjusted basis, the company lost 9 cents per share. Revenue rose 39 percent to $ 173.4 million.

Analysts on average had expected a loss of 12 cents per share on revenue of $ 169.1 million, according to IBES data from Refinitiv.

The company’s shares were down 12.6 percent at $ 51.41 after the bell.

Reporting by Munsif Vengattil in Bengaluru and Ken Li in New York; Editing by Maju Samuel and Shounak Dasgupta

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How to Fix America's Holiday Travel Mess—And Why Doing It Would Ruin America
December 23, 2017 12:58 pm|Comments (0)

Holiday travel sucks, and probably has ever since a bunch of shepherds, wise men, and angels converged on a stable in Bethlehem 2,000 years ago. Every November, every December, every year, America’s highways and airports runneth over, and not in the good way.

Thus, a question: What would it take to make the US a transcontinental Whoville, where the only thing louder than the roar of efficient travel is the constant caroling? And would it be worth the price?

The Fix

“Well, for starters I would design a system where the power didn’t go out in the world’s busiest airport for 50 hours,” says Sean Young, a civil engineer at Ohio University’s Center for Aviation Studies. (It was 11 hours, but still, ouch Atlanta.)

More seriously, Young says the problems with holiday travel begin because most people are moving through major airline hubs. The best ways to alleviate that strain? Build more runways at smaller, regional airports, and route more flights through them. This would free up the larger hubs to handle the bulk of long distance holiday travel, all those people choosing Florida and Mexico over winter and extended family.

For those big city airports, Young recommends investing in frequent, reliable public transportation linkages. “People leave for the airport much earlier than they need to, which creates additional volumes of traffic,” Young says. If they know they can make their flight with time to spare, they’re less likely to show up mega early and spend six hours taking up space.

As for ground travel, adding lanes and freeways seems like the straightforward fix, unless you’ve completed your Armchair Associate’s Degree in Transportation Theory. “In any situation where you expand the infrastructure, you will encourage travel on that infrastructure,” says Megan Ryerson, a transportation engineer at the University of Pennsylvania. This is the rule of induced demand: If you build it, they will crowd. The real answer, then, is more investment in things like Amtrak, high speed rail, or, because we’re fantasizing anyway, hyperloop. Basically anything that spreads demand over multiple modes.

Of course, no transportation dreamscape would be complete without autonomous vehicles. Instead of a carpool lane, think of a dedicated roadway for robocars, shuttling people to the airport in orderly, automated fashion, no long term parking fees required.

Finally, infrastructure dollars could stretch a long way when applied to little technological fixes, like simply giving people accurate, real time information about their travel. Think Waze, but for everything: traffic, train times, whether the TSA security checkpoint has only one lane open (seriously, why do they do this?). The more information people have, the more rational their travel decisions become, and the less likely they are to trigger gridlock.

Crisis Reverted

Say we did it all: enough runways, planes, and lanes to handle humanity at its most itinerant and quiet the grumblers. Now we’ve got another question: What happens to to all that infrastructure during the 50 weeks a year Americans aren’t trading gifts and political opinions with their weirdest blood relations? Our best guess: disaster.

“If you force Delta to buy an extra 300 jets to satisfy demand for Thanksgiving and Christmas, they would then have to cover the cost of those extra jets,” says (Paul Lewis)[https://www.enotrans.org/profiles/paul-lewis/], the vice president of finance and policy at the Eno Center for Transportation. “They would do that by increasing prices on all flyers through the rest of the year.”

Then there’s the cost of maintaining all the additional runways. Airports, which are usually owned by their host cities, make money by charging airlines a landing fee to use their facilities.

Think of this like a fraction, where each airfield’s numerator is the cost of maintaining those facilities. This stays fairly static. The denominator is the number of flights that use those facilities. “When an airport has relatively robust levels of service, it is able to offer more competitive landing fees to airlines,” says Ryerson. Less traffic means higher fees, and in turn, more expensive flights.

That’s why, if you’re going from Allentown, Pennsylvania, to Los Angeles, it may well be cheaper to Uber to the Philadelphia airport and go direct than to make a connecting flight from Allentown’s regional airport. (Factor in layovers, and the Uber might be quicker too.)

Even if built-up regional airports did well during the holiday crush, they’d likely become prohibitively expensive to travel through the rest of the year. And the cost of maintaining the airfields would probably be passed along to local taxpayers.

So once again, air travel would consolidate at large airports, triggering congestion. In a recent study, Ryerson and some coauthors looked at car traffic within a 300 mile radius of large airports in cities like Atlanta, Dallas–Fort Worth, and Phoenix. On roads leading from smaller cities nearby—think Oklahoma City for Dallas, or Tucson for Phoenix—about 1 to 3 percent of the traffic could be attributed to people driving to access these larger airports. “The rural highways had an even higher amount, between 5 and 10 percent of traffic, from people driving to or from the airport,” she says.

Which brings us to the other problems surface transportation would face in this holiday travel utopia. Remember our old pal induced demand? Well, if historical trends and hard data still mean anything to anyone, those bigger roads would entice people to move farther from urban centers, where land is cheaper. More sprawl leads to more traffic, and brings you back to the search for meaning in a world where your commute never stops sucking.

Meanwhile, taxpayers would be stuck with a huge bill for maintaining all that extra capacity. American infrastructure is already more than $ 4 trillion short of adequate, and the federal gas tax hasn’t budged since 1993. More roads to maintain would make the problem even worse.

“The way I explain this to undergrads is that you wouldn’t buy six fridges for your dorm room just because you have one big party a year,” Ryerson says.

Learn From Experience

We’ve never had a transportation wonderland, but we have tried it in bits and pieces. During the late 1990s, the economy was so flush that WIRED ran a 42,000-word article about undersea fiber optic cablesin print—good reading material for all the people traveling like crazy. Airports across the country paved dozens of new runways, and airlines beefed up their fleets to meet the demand. Then the dot com bubble burst. The industry contracted; airlines went out of business or were swallowed up by their competitors. Less than a decade later, the same thing happened: More planes, more runways, more jetsetting, until the financial crisis hit, and the industry consolidated again. “The top four airlines now control 75 percent of all passenger traffic,” Lewis says.

And so this transportation utopia remains a dream, and not the kind you actually want to come true. In that case, the best advice may come from Mary and Joseph: Host the party, and make everyone come to you.


Travel Dreams

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Teva Pharmaceutical: A Holiday Season Sale
December 5, 2017 12:26 pm|Comments (0)

We bought Teva Pharmaceutical (TEVA) stock recently close to $ 10-$ 11/share earlier this month. Shares are up >20% since we bought them but could have more upside.

Chart

TEVA data by YCharts

Why shares are in decline since 2015:

Investors who have been following the generics drug industry in general, and this company specifically, must be aware of the various issues summarized below.

  • The blockbuster drug for multiple sclerosis Copaxone represents about 45% of Teva’s EBITDA and bears are betting that the approval of its generic version by Mylan (MYL) would result in the loss of this revenue stream. Copaxone had $ 1B sales in Q3 2017 and accounts for 25% of the company’s $ 20B in annual sales.
  • The generic drug industry overall has been under regulatory scrutiny like the DOJ investigation of drug pricing. Teva is one of the drug makers under investigation. The investigation is for charges like 8 of the 10 drugs with the biggest price hikes in 2014 were generic drugs (Medicare data).
  • Some of the other brand names of Teva like Azilect and ProAir are also facing patent cliffs.
  • Teva has $ 35B of debt on its balance sheet after a $ 40B acquisition of Allergan’s (NYSE:AGN) generics business. The acquisition has been widely criticized with respect to the price paid and the timing when the regulatory pressures on the generics industry are tightening.
  • On November 7, Fitch downgraded Teva’s credit rating to junk, resulting in a big decline in the stock. Bears are betting that Teva will have troubles paying off its debt obligations if the interest rate on its debt increases due to credit rating downgrade (when combined with a decline in future revenue).

Turnaround efforts: a new CEO with a successful track record

Teva appointed Kare Schultz as the new CEO in September. The new CEO Kare Schultz announced plans for reorganizing the company as part of the restructuring efforts. Rather than having two separate divisions for generics and specialty medicines, there will be a single organization, which will be divided into geographical divisions: North America, Europe and Growth Markets. Each of these geographical regions will manage generics, specialty, and OTC products. The company also announced plans for laying off 25% of its workforce in Israel.

The separate R&D divisions for generic and specialty organizations have been combined into a single global R&D division, which will focus on specialty and generic divisions. A new Marketing and Portfolio Division will work across different geographical regions. We expect cost synergies and reduced operating expenses as a result of these reorganization efforts.

(Teva’s new organizational structure)

A more detailed restructuring plan will be announced in mid-December (something to watch out for since it could be a stock price catalyst).

Notably, Mr. Schultz has a history of a successful turnaround at Lundbeck, which he returned to profitability.

New management changes are bullish

Dr. Hafrun Fridriksdottir was newly appointed as Executive Vice President, Global R&D. She served as Senior VP and President of Global Generics R&D at Allergan. She also served as Senior Vice President, R&D for Actavis (bought by Teva).

Michael McClellan was newly appointed as Executive VP and CFO of Teva and importantly, will oversee Business Development efforts (and future acquisitions). He also served as the U.S. CFO for Sanofi (SNY).

Details of more management changes can be read here.

What are the company’s strengths?

The generics business acquired from Allergan has some of the best products in the space. Through this acquisition, Teva acquired Actavis U.S. and international generic commercial units, third-party supplier Medis, global generic manufacturing operations, the global generic R&D unit, Allergan’s international OTC commercial unit (excluding OTC eye care products), etc.

(Contingent obligations due to Actavis acquisition)

While the price paid for this acquisition has been criticized, Teva’s former CEO Erez Vigodman’s intentions seem right. While Teva was originally a generics company, the success of Copaxone made it a combined generics+specialty drugs company. With Copaxone’s patent cliff looming, Mr. Vigodman intended to return Teva to its generics roots through this large acquisition whose true worth would only be apparent in few years. As this article rightfully points out, the margins have been shrinking in the generics industry and profitability is only possible through economies of scale (through consolidation and acquisitions).

Teva had either the option of making a large acquisition or getting itself acquired. Moreover, the deal was the only way for Teva to fight the growing dominance of its rival Mylan in the generics business. Teva’s management estimate for cost savings was $ 1.5 billion per year. The deal was also expected to have less antitrust issues compared to a similar deal between Allergan and Mylan.

Newer drugs in the pipeline have the potential to make up for some of the revenue losses due to Copaxone. Fremanezumab, an anti-CGRP antibody, which is planned for migraines, could reach peak $ 1 billion in sales (global anti-CGRP antibody market is estimated to be $ 6-7B in size). Austedo, a new medication to treat involuntary movements called chorea in Huntington’s disease is expected to reach peak $ 1.3 billion in sales.

It is like buying Valeant below $ 9/share

I remember bears betting that Valeant (VRX) will go to zero with a similar story playing out a year ago. We all know what happened after that. Valeant changed its CEO, sold assets to pay down the debt, launched restructuring efforts and shares have almost doubled in less than a year. Investors are getting another similar opportunity to get in Teva’s stock at its current lows.

Chart

VRX data by YCharts

A Holiday season discount on Teva’s common stock

The table given below shows Teva’s forward relative valuation metrics (using Wall Street consensus: Thompson Reuters).

Metric 2018E 2019E 2020E 2021E
Forward P/E 4.92 4.89 4.59 3.2
Forward EV/EBITDA 10.33 10.3 9.79 8.96

The forward P/E ratio for Teva is very low compared to the mean for the pharmaceutical sector (21.2) as per NYU-Stern data. Teva’s 5-year mean P/E ratio is 25.

EV/EBITDA may be a better way to perform relative valuation for Teva (since it accounts for debt) and is lower than the mean for the pharmaceutical sector (13.27). Please note that the EBITDA erosion from Copaxone generics is factored in with the declining EBITDA estimates. Teva’s stock has traded at EV/EBITDA as high as 39.1 in the past 10 years. Our own EBITDA estimates are also in line with consensus.

Teva’s debt is manageable and the concerns over the debt covenant breach are overblown

(As of December 2016, source: annual report)

Short-term debt:

(Source: quarterly report)

(Long-term debt, from recent quarterly report)

From the recent quarterly report:

In September 2017, Teva amended certain terms of these loan agreements, including increasing the maximum permitted net debt to EBITDA ratio. As of September 30, 2017, Teva was in compliance with all applicable financial ratios and expects that it will continue to have sufficient cash resources to support its debt service payments and all other financial obligations for the foreseeable future. However, Teva may experience lower than required cash flows to continue to maintain compliance with its net debt to EBITDA ratio covenant within the next twelve months. Teva believes it will be able to renegotiate and amend the covenants, or refinance the debt with different repayment terms to address such situation as circumstances warrant.

The management outlined plans to tackle debt in the recent quarterly earnings call.

Conclusions

In brief, the current selloff appears an overreaction to a combination of factors like Copaxone’s patent cliff, concern over Teva’s ability pay off its debt, lowered guidance by the management, etc. On the other hand, it is a perfect setting for a large-cap, dividend-paying, diversified contrarian investment with a few years’ time frame. At the current all-time market highs, there are not many large-cap biotech/pharma investments, which I would have confidence that they could double in the next 3-4 years.

Teva, on the other hand, seems to have limited downside here and hit by investor overreaction. Such investor overreactions can provide some of the best buying opportunities as we have seen with our past experiences with Tobira Therapeutics (NASDAQ:TBRA), Juno Therapeutics (NASDAQ:JUNO), Portola Pharmaceuticals (NASDAQ:PTLA) and Alnylam Pharmaceuticals (NASDAQ:ALNY). With a new CEO in the driver’s seat, we are optimistic about the success of the turnaround efforts and expect the stock to hit $ 20-$ 25 in the next 3-4 years. As the Oracle said: ‘Buy when there is blood on the streets.’

Initiation rating: Buy, price target = $ 25.

Risks: Generic industry remains under pressure due to regulatory investigations. Teva is also facing litigation risks like anticompetitive practices. Our price targets may not be achieved. An equity raise by the company to pay off debt could put downward pressure on the stock in the near term.

Disclosure: I am/we are long TEVA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article represents my own opinion and is not investment advice.

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