Brunswick:  A Screaming Buy

Cautious noises from fellow consumer product and recreation companies Harley-Davidson and Polaris, in combination with a soupy market, sent the stock down 10%. Yet the rationale for our recommendation is that Brunswick’s increasing investments in fitness products will continue to insulate profits from the cyclical waves of consumer sentiment.Brunswick (NYSE: BC) reported its fourth quarter on Jan. 28, just one day after our recommendation. It earned 52 cents per share in the quarter and $2.93 for the year, up 58% and 21%, respectively.

Brunswick has proven itself to run a steady ship. High-teens earnings growth will be buoyed by its recent purchase of fitness equipment maker Cybex.

The company is expected to earn $3.45 this year and then grow earnings another 15% in 2017. With the inclusion of Cybex, fitness will account for more than 22% of total revenue. This mix will help to ensure continued steady growth.

The company has $2.60 per share in net cash (cash after subtracting total debt) and a squeaky clean balance sheet.

Free cash flow, which measures cash from operations less capital expenditures, grew 65% in 2015 and should exceed $200 million in 2016. This cash can be used to continue share repurchases and to fund the company’s 60 cent dividend.

Brunswick looks strong and steady to us. The stock could rise to the high $50s as the company continues to hit its conservative targets. So although investor apprehension over consumer demand for discretionary items may cause some rough currents for the stock, short term, we see the Brunswick as a screaming buy.

Photronics: Profitable, Cheap, But …

(NSDQ: PLAB) did announce that it would miss its earnings estimates slightly. And while it is always disappointing when this happens, it is important to put these numbers in context.  Even these less-than-hoped-for earnings are up 100%.My heart always skips a beat when I see the headline: “Company Reports Preliminary Results.” Ninety percent of the time these “pre-announcements” are earnings “misses” camouflaged as a news update.

After the stock’s 15% drubbing, it is trading at 10 times 2017 estimates, which reflect conservative growth of 16%. In addition, management noted that despite the earnings shortfall, net cash exploded to more than $100 million at quarter’s end, up from $73 million the previous quarter.

Photronics announced that revenue for the first quarter would be $129 million versus the expected $138 million and that earnings per share would equal 16 cents (actual EPS will be 27 cents due to an 11 cent one-time gain related to a gain on the sale of investments). This is 3 cents less than expectations.

Management noted that demand in the quarter was strong for high-end memory and FPD (flat panel display) photomasks, but soft from companies that make high-end and mainstream logic chips,

The fact that Photronics updated estimates on Feb. 11, less than one month after a bullish presentation on Jan. 14, tells me that management was likely surprised by a delay for an order it thought was a slam dunk. Most of the foundries that Photronics sells to are in Asia, a corner of the world where worried factories may be temporarily pulling back. I am eager to hear management’s update on the pace of orders when they release formal numbers on Feb. 24.

My basis for recommendation is that sales of more profitable high-end photomasks would continue to grow faster than the base business. Management noted that sales for high-end logic chips are often lumpy. One big order dropping from one quarter into another can make or break a quarter.

This makes sense as newly designed logic chips typically are used in next-generation products. These rollouts do not occur linearly—instead they often jump and then slow for a bit. Despite the choppy demand, new product innovation is the lifeblood of technology companies and should continue to roll forward.

The revenue miss is not overly concerning to me. Photronics’ growth in earnings is more tightly correlated to the mix between high- and low-end photomask sales than the growth rate of revenue. Obviously even low-end chips help to fill factory capacity and produce margin so a marked drop-off in these sales would be concerning. I don’t see evidence of this.

Unfortunately, there will be a void of new information until Photronics’ official news release on the 24th. I still like the stock but want to hear more detail from management before pounding the table. Photronics is still incredibly profitable and quite cheap. The jury is out but so far this looks like a one-time blip in a spectacular climb.

SolarEdge: Incredibly Bullish

Whenever a stock doesn’t trade as I expect it to, I sharpen my shovel and dig deeper.SolarEdge (NSDQ: SEDG) has been one busy stock. As we noted early last week, the company reported stunning numbers on Feb 3. Yet despite those numbers the stock dropped as low as $23 per share.  A rebound late last week brought it up to $26, still below where it was before the sparkling report.

I immediately called the company and was able to connect with Mike Funari, who leads investor relations.

SolarEdge’s decline was coincident with a poor report from SolarCity, one of its largest customers. It seemed that investors were worried that SolarEdge would be at risk due to SolarCity’s shrinking cash balance.

Funari assured me that none of SolarEdge’s receivables are overdue and that the company sees “no need for reserves against any of its receivables.”

A reserve is a charge in the current quarter if a company is worried a customer will not pay its bill. Even more comforting: All of SolarEdge’s receivables have been backed by insurance company AIG so that even in the unlikely case of a customer default, AIG picks up 90% of the tab.

SolarCity represent a smaller portion of SolarEdge’s total revenue than it did before. As revenue from new customers explodes, SolarEdge depends less on growth from SolarCity for its success.

SolarEdge’s new commercial-grade products and battery storage products help to diversify its revenue base from residential solar, the market investors are most concerned about.

I remain incredibly bullish on this stock. Earnings are on track to more than double this year and then grow at least 35% in 2017. A stock trading with an 11 P/E that is expected to grow an average 67% in the next two years is as rare as the sun on a snowy winter’s day.

Vera Bradley: Trends Are Up

This is important because the new styles that have been pumping up Vera’s profits are quite similar to the sleek sophisticated bags selling well at Michael Kors and Coach. Both companies in particular noted cross-body bags, a style Vera’s been focusing on, as popular sellers.Although we don’t have specific news for Vera Bradley (NYSE: VRA), positive commentary from handbag gurus Coach and Michael Kors point to improving consumer trends. Both companies reported earnings recently and specifically noted better handbag sales in U.S. stores.

We won’t see Vera Bradley’s year-end results until March 6, but will keep you posted of any new developments.


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