Value Portfolio

Brocade Communications Systems reported a solid fiscal third-quarter that saw revenues rise 2% to $545 million. Management attributed the growth to its SAN (storage area networking) business which rose 3% year over year to $380 million. The company noted that, “the revenue performance was better than expected in typically a soft demand quarter.”

Along with better gross margin (67.2% in Q3 FY14 vs. 65.6% in Q3 FY13) and lower total operating expenses, non-GAAP diluted EPS improved to $0.23 from $0.19 a year earlier. Following the company’s earnings announcement, shares rose 3.5% and are up about 14% for the month of August.

The company continues to expand its operations into Europe with a recently announced deal with BNP Paribas to offer its products in EU countries such as the UK, France, and Germany.

Charles Payne sees the stock breaking out to a price target of $14. Other analysts also are bullish, citing its recent cloud-networking partnership with Ciena. If Brocade CEO Lloyd Carney achieves his goal of growing faster in emerging markets than networking market leader Cisco Systems, the stock has much further to run.

Buckle reported second-quarter revenues for the 13-week quarter rose 1.4% to $235.7 million, beating analyst consensus estimates of $234 million. Revenue growth was driven by men’s and online sales, but partially offset by a decline in women’s sales, which are more vulnerable to changes in fickle fashion trends.

Second-quarter earnings came in at $24.5 million, or $0.51 per share, slightly missing analyst estimates of $0.525 per share. Despite the mediocre quarterly report, Buckle stock actually rose on the announcement and was up 10% in August.

This positive price action suggests that investors are looking long term, appreciating management’s shareholder-friendly return of cash, recognizing that the company keeps chugging along, continues to expand its geographic footprint (four new store opening over the past year) and women’s sales (57.5% of the company’s total revenue) should re-accelerate in upcoming quarters.  

Although Sanderson missed earnings estimates, the miss was mainly due to lower production volumes caused by reduced egg hatch rates. A new breed of male chicken (i.e., rooster) will be used in the fourth quarter to increase successful fertilization and hatch rates. Furthermore, a new Texas processing plant will open in the first quarter of 2015, which will significantly increase production volume.

Profit margins were hurt by higher soybean meal feed prices, not lower chicken prices (whole chickens are actually priced 5.3% higher than last year), so with news that soybean futures are plunging, profit margins are looking up for Sanderson in the upcoming fourth quarter.

Sanderson is reportedly also looking to expand its operations by building a second plant in North Carolina. The new plant, which may cost $110 million, will allow Sanderson Farms to easier delivery to its customers in the Northeast U.S. According to Chairman and CEO Joe Sanderson Jr., “the balance sheet has plenty of room to build this plant.”

I also liked seeing that super-smart hedge fund manager Joel Greenblatt has been buying the stock.

United Therapeutics scored a huge patent victory in federal district court against generic drug maker Sandoz, a subsidiary of Novartis. The court’s decision granting rock-solid patent protection on subcutaneous Remodulin until October 2017 is better than most analysts were expecting, as the 28.5 percent price jump on Friday August 29^th indicated.

As I wrote in last month’s issue, the company’s second-quarter financials beat analyst estimates substantially and the launch of Orenitram (oral Remodulin) was a huge success.

Keep in mind that the October 2017 patent expiration on Remodulin applies only to the subcutaneous (i.e., injectable) form of the drug and doesn’t apply to either the implantable-pump form or the oral form. In fact, the patent on oral Orenitram doesn’t run out until the late 2020′s. Even after October 2017, CEO Martine Rothblatt made a persuasive case that Sandoz would only be able to steal 2-3 percent market share. I suggest that you read Rothblatt’s comments in the second-quarter conference call.

A stock hitting a new all-time high is bullish. According to my trusty Bloomberg terminal, the two top-ranked analysts on United Therapeutics are both doctors — Dr. Liana Moussatos of Wedbush and Dr. Philip Nadeau of Cowen — and they have price targets on the stock of $141 and $140, respectively.

In contrast, the bearish analysis in a recent Barron’s article was from a non-doctor analyst at Leerink (Joseph Schwartz) who is not even ranked by Bloomberg on UTHR, so his opinion doesn’t hold much weight. In fact, his analysis doesn’t even make sense. He’s neutral to bearish on UTHR because of the October 2017 patent expiration on subcutaneous Remodulin, as if this is new information. The best-case scenario was always patent protection until October 2017, so for Schwartz to characterize realization of the best-case scenario as a negative outcome is ridiculous. Granted, UTHR had made a secondary argument during the trial that subcutaneous Remodulin’s patent shouldn’t expire until 2029, but no analyst agreed with that argument, so the failure to receive patent protection until 2029 is not a surprise and should not have any effect on analyst’s valuation of the subcutaneous Remodulin franchise.

All this said, the 28.5 percent price jump on Friday makes UTHR less undervalued and its current EV-to-EBITDA ratio of 10.8 is above my 9.5-threshold level for a new recommendation. But the stock’s valuation is still reasonable and worthy of continued investment.

Momentum Portfolio

G-III Apparel reported stellar second-quarter financials, with both revenues and earnings beating analyst estimates. Even better, the company raised its full-year sales guidance to $2.11 billion from the previous $2.06 billion. According to CEO Morris Goldfarb:

We are pleased to report a strong second quarter. In spite of losses related to the transition and repositioning of our recently acquired G.H. Bass business, we were able to show higher overall profits due to strong shipments in our licensed and non-licensed businesses. There were strong performances by a number of Calvin Klein divisions and several of our outerwear and dress businesses, all of which enabled us to exceed our forecast for the second quarter.

The fabulous quarterly report impressed Wunderlich Securities so much, that its analyst raised his price target on the stock to $100, only a couple of weeks after initiating a buy rating and stating “G-III is among the best positioned players in the apparel industry.”

Even after its huge price-momentum rally of the past year, the stock is still reasonably valued at only a 12.1 EV-to-EBITDA ratio (one commentator calls the cheap valuation despite momentum “extraordinary”) and the company could potentially be a takeover target.