II-VI Incorporated (IIVI) | Daily Alert May 27
IIVI reported a solid beat and raise in its first full quarter of Finisar, driven by record bookings and backlog of $840M and $893M, respectively.
Specifically, revenue of $627M was above consensus of $576M and our $584M estimate. Gross margin in the quarter reached a high-water mark of 39.2, driven by a relentless focus on cost reduction and integration. This led to adjusted EPS of $0.47, above consensus of $0.14 and our $0.11 estimate.
We are raising our estimates to reflect the early success integrating Finisar (largest investor concern) and broad end market demand across most segments, as well as the ramp and qualification at the Sherman facility.
IIVI has a long history of successful M&A integration. Specifically, the Street bet against IIVI with the Oclaro deal in 2013 and lost, in our opinion. While Finisar is of much greater size and
scale, it would seem IIVI’s cost discipline is paying off.
On the demand side, IIVI is largely exposed to the Asian supply chain without getting tangled in trade through Asian partners. As such, we anticipate IIVI will be able to benefit from the spate of recent data points that suggest a rebounding post-COVID market in this geography. This supports the FQ4 outlook for revenue of $650M-$700M and non-GAAP EPS in the range of $0.50-$0.70, compared to consensus of $648M and $0.53.
IIVI’s cash and cash equivalents as of March 31 were at $388M. In connection with the latest acquisitions, the company entered into senior credit facilities totaling of $2.43B. As of March 31, the total debt was $2.28B. The covenants require the company to maintain net leverage ratio of no greater than 5x; as of FQ3, the net leverage ratio was at 3.8x.
We are reiterating our BUY rating and adjusting our price target to $52, which is based on applying a 22x multiple to our FY21 EPS estimate of $2.38.
Jed Dorsheimer, Canaccord Genuity Research, canaccordgenuity.com, May 12, 2020
Cloudflare, Inc. (NET) | Daily Alert June 2
Cloudflare (NET) shares began the week strong, hitting 30 before coming back with the market to 27 and change. Looks like there may be some resistance at 30.
Recently, NET reported strong first-quarter numbers.
Sales in the U.S. region climbed 44% year over year and represent 40% of total revenue and 62% year-over-year surge in its international business. Total revenue was $91.3 million, increasing 48% year over year and its gross margin was 77%. The company’s loss from operations due to higher development spending was $36.1 million, compared to $17.1 million in the first quarter of 2019.
The company’s net loss per share was $0.11 as it reported a cash and equivalent position of $588 million. In addition, during the first quarter, the company added 250,000 new customers representing a year-over-year jump of 40%.
This aggressive cybersecurity recommendation went public last year. The company is growing fast and appears to be gaining market share and some analysts expect its revenue to double by 2022.
If you have not yet invested in NET, I suggest you do so and consider pairing it with the below more conservative cybersecurity play, an ETF called BUG. BUY A HALF.
Carl Delfeld, Cabot Global Stocks Explorer, cabotwealth.com, 978-745-5532, May 21, 2020
Baidu, Inc. (BIDU) | Daily Alert June 4
Artificial intelligence is bound to change the future of the world. By fiscal year 2025, the artificial intelligence market size is expected to be $390.9 billion. However, this number does not tell the whole story. By FY2030, the projected growth of global GDP as a result of artificial intelligence is expected to be $15.7 trillion. This projection bodes well for AI stocks.
Clearly, this is a game changing technology for the world. The impact of AI will be felt across industries. As an example, AI-powered autonomous vehicles have the potential to reduce road accidents. Similarly, AI can prevent 86% of cyber-attacks.
Further, as research article from Harvard Business Review suggests, AI-driven companies can outstrip traditional firms in the long-term. This makes the adoption of AI a necessity across industries.
Considering the potential for growth, there are several companies in the race to grab market share.
My focus is on a few AI stocks that can make significant inroads in AI in the coming years. These companies are likely to be long-term value creators as business from AI grows. Furthermore, these companies will shape a better and safer world through their AI-driven innovation.
The Senate passed a bill that could delist Chinese companies from the U.S. stock exchange. This created some jitters for Chinese-listed stocks. However, I believe that Baidu is among the quality AI stocks from China and can pass the stringent compliance.
Specific to AI, Baidu has been increasing investments in the segment, which promises to be a potential value creator for the company. Talking about the focus on AI, Baidu has filed 5,712 AI-related patents as of October 2019.
In the autonomous vehicle segment, the company has already deployed more than 100 vehicles in 17 cities in China. Baidu has also been using AI to help health organizations cope with the novel coronavirus pandemic.
From a financial perspective, Baidu reported cash and equivalents of $20.7 billion as of March 2020. This gives the company ample financial flexibility to pursue investments and innovation related to AI. I believe that the company is well positioned to accelerate top-line growth in the coming years. This makes BIDU stock attractive, coupled with the fact that the stock currently trades at a P/E ratio of just 15.3.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, firstname.lastname@example.org, May 22, 2020
Cohu, Inc. (COHU) | Daily Alert June 9
Cohu is a global leader in test and handling equipment, thermal subsystems, interface solutions, vision inspection and MEMS test solutions supplying the semiconductor industry and its test subcontractors, and a leader in printed circuit board test.
In the first quarter, COHU reported supply chain impacts in some regions due to the coronavirus pandemic, yet the company’s broader 5G-related business continued to see strong bookings as manufacturing ramps up in advance of big infrastructure upgrades. Cohu expects to see growth from the build out of global 5G networks, while consumer and automotive spending may drop in the near-term due to the pandemic.
While the P/E ratio is unusually high (83 times 2020 earnings estimates) the semiconductor space is notoriously cyclical, and earnings are expected to rebound strongly in 2021 and 2022. Management has for the time being discontinued the dividend to prioritize debt repayment, but we think capital gain potential is high.
John Buckingham, The Prudent Speculator, www.theprudentspeculator.com, 877-817-4394, June 2020
Applied Materials, Inc. (AMAT) | Daily Alert June 17
The semiconductor sector has a number of attractive players. One of my favorites is Applied Materials. The company is a leading provider of semiconductor manufacturing equipment. With technology invading virtually every part of our life, the demand for semiconductors to drive that technology will increase.
Applied Materials is coming off a decent first quarter. And while the coronavirus will impact results in the near term, the company should still post decent growth in 2020—something that will likely be a rare occurrence for many companies.
The stock is down 21% from its 52-week high and offers a buying opportunity for investors wanting to add to their technology holdings.
Applied Materials calls itself “the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world.” While that seems like a bold statement, the company backs it up with numbers that are fairly impressive. The firm will likely do more than $16.5 billion in revenue this year, up from $14.6 billion in 2019. Per-share profits should grow sharply to $3.78. The fi rm started the year out in fairly strong fashion. First-quarter revenues rose 12% to nearly $4 billion. Per share profits of $0.89 were up 27% and matched analysts’ estimates. Semiconductor Systems revenue rose more than 17% in the quarter. Applied Global Services saw revenue gains of 3%, while Display and Adjacent Markets posted a revenue increase of nearly 5%. During the quarter, the company returned $392 million to shareholders, including $199 million in share repurchases and $193 million in dividends.
In the near term, Covid-19 will have some impact on results. Stay-at-home policies in some states could impact supplier operations, and the economic downturn may affect investment decisions in certain -industries. Still, Applied Materials pointed out that despite a fluid situation, demand for the company’s semiconductor equipment and services “remains robust.”
Applied Materials trades at less than 15 times 2020 earnings estimates. That seems like a reasonable multiple to pay for a company at the heart of the cutting edge of semiconductor technology. That is also a very reasonable P-E ratio relative to other technology stocks.
The company’s dividend has more than doubled since 2017 and was recently raised nearly 5% to a quarterly rate of $0.22 per share. While that may not seem especially high, keep in mind that the dividend yield exceeds the interest rate on a 30-year Treasury note. Applied Materials has traded in the $60s in each of the last four years and should return to that level before year-end.
Please note Applied Materials is part of Computershare’s online-only DirectStock program. Minimum initial investment is $25, though the minimum is reduced to $10 if an individual sets up automatic investments via monthly debit of a bank account. For more information on the plan, visit Computershare at www.computershare.com. And of course, the stock is available for purchase via any brokerage firm.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, June 2020