That kind of quick profit feels great in the short run, but more importantly from a long term perspective is that the encouraging news from Western Digital casts it in a new light after being lumped in with a lot of other legacy hardware companies as being a proxy for PC sales, which are back on the decline after posting a mild recover in 2014. In large part that is due to a slowdown in China’s still growing economy, which is one of the world’s largest consumers of computer hardware as it continues to build out its ecosystem of commercial infrastructure.
But Western Digital has proven that it is much more than just a hard disk drive manufacturer, and we suspect its future quarterly earnings reports will continue to surprise to the upside. Likewise, we think Investments Portfolio holding Micron Technology (MU) is back on the upswing after seeing its stock price swoon earlier this year. In the following article, Linda McDonough (who wrote about WDC last week) takes a closer look at Micron and its prospects for future growth; and let’s hope its stock price does as well in the week to come as Western Digital’s did last week!
Investments Portfolio update – A Revolution Around the Bend
by Linda McDonough
Micron hasn’t been an easy stock to own this year. The memory chip maker has been battered by a string of earnings disappointments. Although the company’s third quarter earnings, reported in late June, were only a hair below expectations, a surprise announcement that fourth quarter earnings would be worse due to a difficult manufacturing transition sent the stock down almost 30% to a 52-week low of $17.
A low-ball take out bid of $21 by China’s largest chip design company in mid-July was followed by Micron and Intel’s unveiling of a revolutionary chip developed by the pair. The combination of these events has likely put a floor beneath the price of the stock.
The lower stock price combined with Micron’s ability to continually generate significant cash flow while investing in exciting new products has boosted its STR (Smart Tech Rating) to 9.8, one of the highest ratings in our portfolio.
While Micron’s earnings will likely be stuck in a rut as it works through a manufacturing transition and a cycle of slow PC sales, expectations have been reset to a reasonable level due to draconian cuts in estimates.
We are impressed by Micron’s commitment to innogration, working alongside industry partner Intel and inside its own R&D labs to continually improve the functionality and cost structure of its memory chips.
Global Slowdown is Old News…
It is no surprise to investors that worldwide tech spending is slowing down. Industry-wide estimates for global PC sales have been continually cut during the first half of this year. In fact Micron’s revenue for the third quarter was pretty much what analysts had expected. The surprise in the quarter that sent the stock spinning was that fourth quarter earnings would suffer badly due to increased production costs.
Hatchets were put to earnings estimates and currently stand at $2.70 for 2015 (ending in August 2015) down 14% from previous levels. More importantly, expectations now incorporate lower earnings in 2016 instead of a prior estimate of a 27% increase. While lower estimates are never what investors hope for, the fact that the bar has been set so low should clear the way for Micron to succeed going forward.
In fact, much of the higher cost base expected in Micron’s fourth quarter appears to be due to transitional issues. Micron specifically called out transitions in shifting the mix of DRAM chips manufactured would result in less chips being produced per die. This result, called lower yield, increases the production cost per chip. As Micron smoothes out this transition and increases volumes, cost per chip will come back down.
And New Products are Rolling on the Horizon…
Micron has already begun production of its new 3D NAND chips. CEO D. Mark Duncan was quite optimistic regarding demand for these chips, “We expect the market will demand all of the 3D NAND output we can produce given the attractive cost and performance of our technology”. He goes on to note that developing and producing new technologies drive future growth despite the short term bumps to profitability caused by these investments.
Production of 3D NAND chips will be low at first but will ramp up throughout calendar 2016 eventually composing a significant percentage of the company’s NAND supply by the end of next year. 3D chips are able to pack in more power by layering on and building up to make a thicker chip. To date, chips have been wafer thin 2 dimensional objects. The surface area of our gadgets is already crammed with every necessary component leaving little available real estate for larger chips despite the extra power they might add. Micron wisely chose to “build up” and pack more punch into its chips by developing 3D chips.
3D NAND chips which hit the market soon should not be confused with the similarly named 3D XPoint technology unveiled by Intel and Micron on July 28th. This technology promises to be be 1,000 times faster than current NAND memory. It allows for incredibly fast retrieval of large data sets and would be originally be used primarily for large data intensive projects like genetic analysis on supercomputers. It will take some time for this technology to mature and most consumer and corporate computers which utilize a mix of NAND chips would not enjoy those super fast speeds.
Micron has been focusing so much on NAND chips because demand for these chips is growing faster than that for standard DRAM chips. NAND is primarily used in smartphones, tablets and media devices. DRAM chips are used more in standard desktop and laptop computers, where demand has fallen off precipitously.
The surprise bid by China’s Tsinghua Unigroup lifted Micron’s stock to its current level yet it is unlikely that U.S. regulators would allow one of the few memory manufacturers in the world to be acquired by a Chinese counterpart. The recent Intel-Micron announcement of their revolutionary technology adds another level of doubt that the deal would be allowed to transpire.
As Micron’s mix of products shifts towards NAND, volumes will increase, resulting in higher revenue and improved profitability. We think that current estimates reasonably reflect the bumps that Micron may encounter on this transitory road. The stock currently trades at 7 times a conservative estimate of $2.58 for 2016. Cash flow was over $4 billion for the 9 months ending in April and provides a buffer for future R&D investments.
Our STR rating implies the stock is oversold. An analyst day scheduled for August 14th should give investors a glimpse inside of Micron’s tool shed and the revolutionary products it has in store for future growth.
Emerging Biotech Investment System (EBIS) Update
by J. Duarte, MD
In this issue:
- The Big Picture: Is Biotech the New Safe Sector?
- In Depth: Latest EBIS Pick Masimo Corp. (MASI) set to report earnings
- Portfolio Alerts: Five of our portfolio picks report earnings this week.
- News Update: Amgen buoys sector with results beat and raises expectations
The Big Picture: Is Biotech the New Safe Sector?
As the Dog Days of August approach, it’s never a bad idea to keep an eye not just on biotech, but also on the market. And we found that there is an interesting undercurrent out there with regard to biotech that is, well, a bit surprising to say the least. The Nasdaq Biotech Index (NBI) rebounded this past week despite some negative surprises and intra-week price volatility, closing above 4000. That means our scenario that the index could head to 4500 as long as it holds above 3900 is still alive. The second part of the scenario is that the 3900 support level for NBI has to hold for us to remain bullish.
There are some commentators out there suggesting that biotech is the new “flight to safety sector of the market.” Yes; you read that correctly. Where U.S. treasuries and the U.S. Dollar are the traditional places where investors run and hide when the going gets rough, this market is so upside-down and inside-out that you can actually make a case for what a few years ago would get anyone laughed out of an investment discussion. Get the details on this interesting new line of thought at zerohedge.com, if you dare (humor).
O.K. so we’re not sure about this safety thing. Biotech is, by design, a nerve-wracking sector to invest in; period. Yet, if you take a step back, and you allow for the inherent volatility of the sector, you can see that investors are still putting money into this area of the market, even as they may be taking money out of other areas. This week’s charts feature the Nasdaq Biotech Index (NBI) and the New York Stock Exchange Advance Decline line (NYAD), a traditional but very useful indicator of the market’s internal health.
What the charts are saying is obvious upon a simple inspection. While biotech may or may not be a “flight to safety” area of the market, it is still a relative money magnet compared to the New York Stock Exchange where there are clearly more stocks declining than advancing. From a very big picture standpoint, it’s useful to consider the fact that down trends in the whole market are usually preceded by periods in which more stocks advance than decline on the NYSE. That’s a negative for the overall market, including biotech. The flip side is that biotech stocks are clearly much less affected by the negative bias of the market, at least for now, which should not make investors too comfortable since, if and when, a big selling period truly arrives, biotech will most likely join the rest of the market. It is also important to note that there are some prior periods, such as portions of the 1980s and the 1990s, where biotech still rose while the rest of the market fell or moved sideways.
Yet, while biotech is still acting better than the market on a relative strength basis, there are still plenty of worries out there. Greece could still turn ugly. No one really knows what’s going on in China. Commodity prices are still falling. The U.S. economy looks sluggish. And the wild and woolly machinations of the upcoming presidential election have yet to get out of warm-up mode. What it adds up to is the fact that it’s all good until it’s not. But there is no reason to be foolish or foolhardy.
A final word: risk management is more important over the long term than huge profits. Last week we suggested using the ProShares Ultrashort Biotech ETF (BIS) for portfolio protection. If you missed that article it’s worth your time to have a look in case things get crazy in the next few weeks. See below for pricing update on BIS.
For further reading on portfolio protection techniques and risk management consider a copy of Dr. Duarte’s “Trading Options for Dummies.”
In Depth: Updated EBIS (Emerging Biotech Investment System) Pick: Masimo Corporation (MASI)
New Pick: Masimo Corporation (MASI) – Buy at 40-44. Sell Stop 34.
Alert – Correction: MASI will reports earnings on August 4, 2015 at 4:00 P.M. Estimates are for $147.93 Million in revenues and 30 cents in earnings per share.
Market volatility could provide a nice entry point into this stock, which remains well within its buying range of 40-44. Masimo Corporation could move decidedly higher as it approaches its earnings release on August 4 at 4 P.M. It could also fall in price, given the current circumstances in the market. Yet, this small company is similar to our other biotech portfolio picks. MASI is a well run company with plenty of cash on its balance sheet and a growth agenda. We like Masimo because it has innovative products, an excellent growth rate, and a nice stash of cash on its balance sheet which it could use to make acquisitions or to plow into research and development. What that means is that the company’s got time to deliver on its products and get it right.
Masimo manufactures equipment modules that monitor vital signs during difficult clinical and logistical circumstances. Thus, it provides solutions that could make the difference in life or death decisions. Masimo pioneered Signal Extraction Technology (SET), a process that lets the pulse oximeter measure the oxygen content of blood without punctures of arteries at states of low blood pressure, where it become a most critical piece of data. Pulse oximeters are non-invasive, clip-on devices, usually placed on fingers, toes, or ear lobes and are used to measure the amount of oxygen in the blood during anesthesia and during patient stays in the intensive care unit. They are increasingly being used in non-invasive care units as well in order to measure the oxygen concentration of patient’s blood when they are under the influence of opioid painkillers. The company also has other product lines aimed at the operating room and intensive care arenas that involve monitoring of gases, such as oxygen and carbon dioxide as patients breathe. Masimo is starting to make headways into the length of stay and complication rates of patients during surgeries because its equipment is more accurate in measuring key data than its competition. This puts it in a good position, given the global push, but also the ACA related push in the U.S. toward lower costs in hospital stays. Here are the EBIS details:
The EBIS Score for MASI is 9.5 based on April 4, 2015 data.
Cash on hand: (+1) MASI reported some $135, 720 million in cash compared to $97 million in the June quarter of 2014.
- Cash on Hand growth (year over year) (+1): The year over year cash grew by 39%.
- Revenues (present or not): (+1): The company delivered a 9.7% revenue growth rate in its April quarter compared to the year earlier.
- Revenue growth (10% or greater): MASI gets a 0.5 on its revenue growth rate of 9.70%, just missing our target of 10%.
- Trailing Total Liabilities/Current Assets (<1=+1 , >1=0): (+1)MASI has a 80% worst case scenario ratio. That means it
- Earnings (Present or Not Present): (+1): MASI had a 48% year over year growth rate on earnings as of April 2014.
- Net Income Growth (Year over Year): (+1): The company has delivered sequential earnings growth for three of its last quarters.
- Products on the market: (+1): MASI is growing its market share with its wireless systems.
- Pipeline Strength: (+1): MASI is tight lipped about its pipeline but continues to launch new products as well as continuing to look for acquisitions.
- Late Stage Clinical Trials and Product Launches: (+1): Recent product launches include herpes virus detection and its Para Pak single vial sample transport kit.
The EBIS system consists of eleven fundamental criteria that are updated every quarter after the earnings results for each company are published. Each criterion gets a value of +1 or zero. A total of 8 or more points earn a Buy rating. A total of 5-7 points earn a Hold rating. Less than 5 points delivers a Sell or Avoid rating. EBIS was introduced in the June 15, 2015 issue of the Biotech Report.
Update: Meridian Biosciences (VIVO) Buy 18- 21 – 7/31/15 closing price 18.09. EBIS Score 9.5.
Earnings/Dividend update: VIVO met its earnings expectations on 7/23 but fell short on its revenues estimates. The company delivered net income of $9.1 million, 22 cents per share on revenues of 48.2 million vs. expectations of 48.9 million. Management reaffirmed expectations for the full year of revenues of $193 to $200 million. The stock remains near the lower part of its trading range. Vivo paid dividend of 0.2 per share on July 20th. The dividend yield is a nifty 4.4%, while the stock price is not particularly volatile. This is a combination which makes having a long term perspective worthwhile.
VIVO has a market cap of $767 million but is a consistent money maker. The company develops, manufactures, and markets diagnostic testing kits focused on gastrointestinal infections, virus detection, and parasitic illnesses. It also produces reagents and key testing and DNA amplification and enzyme related materials used in research. It has recently released a new product, the Para Pak single vial transport system for parasite testing which simplifies the transport of samples to the lab by using one vial instead of the more complicated multiple package systems that are currently on the market.
We expect VIVO to benefit from the global immigration trend and the potential for infectious diseases to expand their territory via travel related transmission channels. The company has a well established global platform including a recently opened office in Beijing (January 2015). Dr. Duarte owns shares in VIVO.
Neurocrine Biosciences (NBIX) (BUY 6/16/16 at 46 – 7/31/15 closing price 50.12 – Sell Stop 40) Neurocrine Biosciences held up much better than the biotech sector on the week ending on 7/24. The sell stop has been raised to 40. The stock has the potential to move to the 55-58 area over the next few weeks. We originally highlighted NBIX in our 5/29/15 update. We like the stock based on the prospects of its Elagolix drug for treating endometriosis a condition of pre-menopausal women linked to the menstrual cycle and pelvic pain. Dr. Duarte owns shares in NBIX.
- Neurocrine Biosciences will report earnings for its most recent quarter on August 6, 2015 at 8:30 A.M. Estimates are for revenues of $650,000 and a loss of 29 cents per share.
Repligen (RGEN) Buy until 44. Sell Stop 32.
Repligen (RGEN) (Trading Buy 4/20/15 – MPP 33.23. Buy 5/11/15 MPP Price 38.45 – 7/31/15 Closing Price 35.01) – Repligen will be reporting earnings on August 4th. The stock broke below support at 37.50 on 7/24 as the news of Biogen’s problems hit the wires. RGEN is the world’s leading producer of Protein A, the basic component of monoclonal antibodies used for research and biopharmaceuticals manufacturing. Biogen and other major drugs are based on monoclonal antibodies (MAB). If the number of new MAB drug candidates decreases it could affect RGEN’s earnings for the future.
The earnings estimates for the most recent quarter are fairly modest, so it is plausible to expect a beat, although no one ever knows. It will be interesting to see what the company says about its future growth expectations given the MAB situation. In a recent presentation, spring 2015, the company reiterated its expectations for rising organic growth rates in the 25-29% range due to recent and scheduled product launches. The company also noted that they have 350 potential molecules in their pipeline. Dr. Duarte owns shares in RGEN.
- Repligen will report earnings for its most recent quarter on August 6, 2015 at 8:30 A.M. Estimates are for revenues of $20.05 Million and earnings of 8 cents per share.
Emergent Biosolutions – Buy until 34.
Emergent Biosolutions (EBS) (Buy 5/11/15 MPP* 30.63 – 7/31/15 Closing price 32.84) – EBS shares remain in a very sustainable looking up trend. EBS announced a $19.7 million two year contract from the Biomedical Advanced Research and Development Authority (BARDA) on July 20th an agency of the U.S. Department of Health and Human Services. EBS also makes BioAnthrax, a preventive anthrax vaccine and is working on a new generation of the vaccine. Dr. Duarte owns shares in EBS.
- EBS will report earnings for its most recent quarter on August 3, 2015 at 4 P.M. Estimates are for revenues of $124.25 Million and earnings of 26 cents per share.
Bio-Rad – Buy Limit Raised: Buy until 155. Sell Stop 138.
Bio-Rad Labs (NYSE: BIO). Buy (5/18/15 – MPP) 146.25 – 7/31/15 closing price 150.74). Bio-Rad has been in a consolidation pattern in the last few weeks and is giving investors a rare second chance to enter at the original buy area near 146. Bio-Rad has its earning scheduled to be released on August 4th. The company makes testing equipment. BIO is expected to introduce a new line of diabetes testing equipment in Europe this fall and has recently received FDA approval for a high speed diabetes testing system in the U.S.
- Bio-Rad will report earnings for its most recent quarter on August 6, 2015 at 4 P.M. Estimates are for revenues of $498.85 Million and earnings of 78 cents per share.
Update: Trend Following ETF Model
- ProShares Dynamic Biotech and Genomics ETF (PBE) (Buy 5/11/15 MPP 55.80 – 7/31/15 Closing price 59.48.) Sell stop 52
- ProShares Ultrashort Biotech ETF (BIS) – Buy until 29. Stop Loss 25. (Buy 7/27/15 MPP* 27.99. 7/31/15 closing price 26.28.)
*MPP – Median Purchase Price
Dr. Duarte owns shares in PBE and BIS.
Results of trades in Trend Following Model
I-shares Nasdaq Biotech ETF (IBB) (Buy 5/11/15 MPP 352.96 – Sell stop triggered at 363 on 6/29/15 – Gain 2.84%.
I-shares Nasdaq Biotech ETF (IBB) – (Bought 7/7/15 at 375 – 7/24/15 closing price 377.78. Sell stop hit at 380. Gain 1.33%.
News Update: Amgen Hits Earnings Home Run
Seminal biotech behemoth Amgen delivered an earnings surprise and upped its guidance on July 31st. The company cited strong sales of its rheumatoid arthritis drug Enbrel and its osteoporosis drug Prolia for its results. Earnings were 14 cents ahead of analyst estimates at $2.14 per share while revenues rose to $5.37 billion ahead of the $5.32 billion expected by analysts. Amgen raised its earnings forecast to $9.55 to $9.80 per share for the year from the previous range of $9.35 to $9.65 while also raising its full year revenue expectations to $21.1 billion an $21.4 billion from the previous range of $20.9 billion and $21.3 billion.
We’ll have to see if our EBIS portfolio member Repligen,the leading manufacturer of protein A, the building block of antibody based drugs such as Amgen’s Enbrel can bounce back based on the news.
NASDAQ Composite Index:
Friday, July 31 = 5,128.28
Trailing 12 months = + 15.3%
Trailing 4 Weeks = + 2.6%
Trailing 7 Days = + 0.8%
Weekly Portfolio Performance
|INVESTMENTS||(close px)||(close px)|
|(close px)||(close px)|
|(close px)||(close px)|
|10||PowerShares Dynamic Biotech||PBE||$59.06||$59.48||0.71%|