My Own Analyst

RAVN Follow-Up

I was premature to be nervous on this one (selling in Top 20 to add SCVL and trimming in CG/B).  As I feared, Energy was a big drag in Q4 (on their Engineered Films), but the Ag biz was smoking.  Q1 will be a dud, but I think that is why the stock has been weak. As a close follower for years, I was struck by the number of new people asking questions of management as well as the constructive longer-term discussion.  I see 30.50 as resistance in the short-term, but I am hopeful that I will be able to raise my 36 one-year target within the next 1-2 quarters and see this as a good core holding for "conservative growth".

MIDD - Yummy Q3!

MIDD had a decent not great report.  I say that because they didn't repeat the huge blowout from Q2 (when they beat by $10mm or 4% above the consensus).  This quarter should cement those gains and perhaps drive a slightly higher all-time high.  They posted a $2mm beat (1%) that led to a .07 EPS beat (5%).  The report was very balanced in all regards - I saw no flaws whatsoever.

ISRG Rumor

I read a piece from Dougherty & Company suggesting that ISRG will be announcing a new platform.  This could be very positive - the last new model was 2009.  Not only is the rumored Da Vinci much more expensive (reflecting higher capabilities that integrate many new technologies), but it could lead to a huge upgrade cycle and spur international growth.  My 600 target is likely too conservative if this is the case.  The company reports tonight...

CLH: The Ultimate "Trash" or "Treasure"

Baird downgraded Clean Harbors today.  Long-story short, they think that the shift towards energy hurts fundamentally as well as in valuation.  I disagree on both fronts.  This is a very "special" company in my view.  The CEO and founder owns 9% and runs it exceptionally well.  He could prop up his stock with dividends and buy backs - never done either.  He is growth-focused, in a smart way, including acquisitions but also high-return internal investments.  The stock should trade at a big premium to WM (which I like by the way, but for income/conservative investors).  Right now, WM trades at 7.7X EV/EBITDA and CLH at just 8.7X.  

Technically, this falls into my "1/3" rule:  When a great company drops 1/3, you just buy it.  OK, it's not my rule (it's my client's), it doesn't work all the time, and there's more to it, but you get the point.  I don't detect any changes at all.  The challenges have been temporary - weather and the transition from natural gas to oil.  The earnings reductions have been modest (analysts cut a little, company maintained guidance - perhaps a mistake).  Another technical, at least for now - the stock didn't make a new low.  Plus, 48 was a bounce spot - support and almost exactly 1/3.  

My target here was 75.50, but I am lowering it to 72 (coincidentally, near the old high).  This is based on 10X EV/EBITDA a year out, so you can see why I am typing away here (47% upside).  I think that this is an options-expiration gift potentially.  I have been waiting patiently on this one, and now may be the time to pull the trigger.

SHFL Misses

SHFL had a good quarter if you ask me, but it was a miss.  They don't provide any sort of guidance, so what they missed was the street and not their own forecast.  Listening to the call, you wouldn't have known it was a miss- they sounded quite excited.  Underneath the sales growth of "only" 9% (12% ex-currency), there was a lot of progress.  They sold some slots in the Phillipines - their first major sale outside of Australia.  They saw some stabilization and maybe improvement in their weaker area, e-Tables.  Lots of new products will be announced next month at an industry trade show in Europe.

I think that this story remains quite solid - they are well positioned and their new CEO is still making a lot of improvements.  The problem has been that the stock has been somewhat expensive.  I think that this has been due to prospects for legalized online poker in the U.S.  My target is 18.5 based on 18PE a year from now.  Technically, the stock has support near 13.50 - I would see 13 as a pretty good entry.

Let's Talk Turkey

HRL reported in line today.  I continue to like this company a lot - great culture, good balance in their model between packaged foods and meat, nice ownership structure, fantastic balance sheet, decent valuation.  The big question surrounds the potential for a near-term squeeze as rising corn prices could hurt their Turkey biz.  The company didn't really address the issue.  I think it's a headwind that is priced into the stock - this is why it has pulled back 10%.  My target is based on 16PE plus cash, and it suggests a decent return for conservative investors.  36 suggests more than 20% upside from <29 price currently.

I want to point out how rare it is to see a company like this with net cash - the rest of the industry is leveraged on the balance sheet.  I asked on the call about a special dividend, but I don't think it's happening.  They continue to look for acquisitions, but these tend to be small.  We can count on a big dividend boost later this year.  Probably 20% from .60 to .72...

Why WSM and CHS are Rocking - Not So Obvious

There is method to my madness.  I most likely mentioned this factor when I added these names to the model, but it's worth repeating:  Direct-to-Consumer.  Both of these companies EXCEL at balancing online and bricks-and-mortar approaches.  WSM is almost 50% DTC now, which is unparalleled.  By the way, the call was excellent.  I will struggle for the next 14 hours with whether I should trim.  I am thinking it could be a good short-term sale near 42 maybe, but longer term, the upside is huge.  They have been fighting some nasty trends (people moving in with Mom and Dad after college!) for quite some time, and, while the PE multiple may be full, earnings growth could be a lot more robust than analysts expect.  As the company said on the call, when you have a huge online operation, sales drop to the bottom-line rapidly.  The company now will be viewed as a "international expansion" story, plus they are doing some neat things with their kind-of-stale William-Sonoma brand.  Meanwhile, West Elm is growing explosively.  Last point:  They will be launching a new brand in November, with details to be shared in three months.  Bottom-line:  Strong management, great brands, impressive balance sheet, compelling DTC business all lead to a likely nice run ahead after consolidating for quite some time.  45 is a lock in my view.  My target is going to 54 by the way - 17 PE on slightly higher earnings...

On CHS, recall that they bought another DTC brand an now have four different concepts.  They will likely take their new brand (the name escapes me) and develop stores to enhance it.  Recall that the CEO ran Lands End before the sale to Sears - he understands "multi-channel". In fact, he must have spoken for five minutes on the call last quarter.  We'll see how things play out when we get the report tomorrow, but I think CHS too is primed to benefit from its expertise in DTC combined with stores.

Take a Flyer on This One

Raven Industries is a company I know well and really like, especially after visiting two summers ago in South Dakota.  My client has a reasonable position in the name. The call starts in a few minutes, and I will be back, but the report showed an earnings miss that was due to the Aerostar division.  The press release alluded to a relatively large order, so it sounds like this division is likely bottoming.  It's really the least interesting part of the company and the smallest as well.  30 is a great entry in my view for this very high quality company.  My one-year target is 37 roughly, so it's not necessarily a compelling investment entry from the way I look at things, but the stock traded at 37 not too long ago and I am likely underestimating the potential.

Never Fall in Love with a Stock - Part 12

This one is for Carlos, as I am anticipating the question:  What should I do with CHS before the report next week (8/22)?

I have been following CHS very closely for a couple of years now and first put it in Top 20 and also CG/B I believe two summers ago.  We did well and exited but got back involved after a snafu a year ago. I sold it out of Top 20 (my bad not getting back in after a good sale), but it remains a position in the CG/B based on valuation, dividend and balance sheet issues.  I always tag posts "great management" when I write, because the CEO is excellent.  Few people in retail are as good at him at BOTH fixing and growing.  Dyer has a great history of success.  He is not going to stick around forever, but he has been building a good team in my view.

So, I have a 22 target on CHS, based on 15PE and adding the cash of $2.  The stock offers 31% to that target over the next year at 16.70, plus the dividend.  We added to CHS in CG/B in the low 15s a month ago.  The stock just broke to a multi-year high on the postive ANN report today - this is getting priced in.  Plus, there seems to be a love-fest out there for the story.  

I won't be selling the position, but there are a few reasons to lean into it perhaps.  I will need to do something Monday or Tuesday to do it in advance, and I am not sure I will.  First, selling breakouts isn't a good strategy unless you really think you know more than the market.  I don't see chart resistance until 20.  I will be changing my support/resist levels from 15-16.50 to 16-20.  Second, the valuation isn't too bad.  CHS is more expensive than a lot of retailers, but the valuation is consistent with the growth in my view.  Next year, analysts forecast almost 10% sales growth (new stores helping) as well as 18% EPS growth.  Selling means you have to disagree - and I don't.  Finally, is it overbought?  Let's just plug in 18.  Would it be overbought there?  No!  It would be 0.8 today if it were at that price.  20 would be 1.4. It would also offer just 10% return to my target, though I would expect that any sort of move there would be because the numbers are going up.  The trend has been very friendly over the past year (for FY14):  1.10 at year end and now 1.22.  

Bottom-line:  We need to resist the temptation to sell in front of the number - hopefully that doesn't bite us in the ass next week!

CHS Peer Reports

ANN is out strong this morning.  Chart already implies CHS is doing well, but this is confirmation, with the company beating on the top-line and raising guidance for the year.  ANN isn't growing as fast because it's not opening stores - same-store-sales were a decent 4.7%.  CHS sales are supposed to rise by 16%, but a lot is coming from the addition of new stores (and the acquisition last year).