I am a very enthusiastic reader of Ken Fisher’s Portfolio Strategy column. Fisher's investment strategy focuses on knowing information that other market participants do not know, while prioritizing his analysis first with the macro level, then countries and sectors, and then in the end individual stock selection. In his recent blog, he wrote something that caught my attention. Here is an excerpt:
“Last Feb. 27 I purposefully and explicitly rolled all my 2011 picks — every one — into 2012, telling you to double down on them all precisely because I had faith in them even though 2011 was one of those four years where I underperformed. That worked. My recycled 2011 picks added return, helping out. This year I’m going the other way — starting from scratch. I’m recommending you sell my 2012 picks, or at least don’t put any new money in them.”
I was inquisitive to figure out the exits in his recent 13F filing. Out of the 27 exits that Fisher Asset management made, three major ones were Cymer , Warnaco Group and PSS World Medical . Two common factors among these is that they came out with mixed earnings in 3Q12 and had lower 4Q12 estimates. And, these three companies were further acquired by other companies. Let's analyze these stocks in detail.
Cymer's 3Q12 results came out mixed as the company reported an EPS of $0.31 beating the consensus estimate of ~$0.07. Revenue came at ~$131 million, which was ~2.2% up from last year, but didn't meet the consensus estimate of ~$151 million as the company faced low demand of deep ultraviolet (DUV) light source throughout the quarter.
The world leading supplier of light sources, Cymer received an offer to be acquired by ASML Holdings, which is Europe's largest semiconductor equipment supplier for ~1.95 billion euros. As Cymer is known for developing new ways to pattern semiconductor chips, it will help ASML in developing Extreme Ultraviolet (EUV) lithography, enabling more transistors to be etched on each microchip thus increasing power.
EUV provides support to the semiconductor industry's transition and is seeing increasing demand. This should create a significant revenue opportunity for Cymer as well as ASML. However, the semiconductor equipment industry is seeing soft demand in 2013, thus bringing sales estimates down ~10% from flat. The consensus revenue estimate for the company is down to ~$126 million from $155 million, which makes the near-term future of this stock gloomy.
Warnaco reported its third quarter results and posted EPS of ~$1.15, which was in line with the consensus estimate. But the company's revenue declined ~5% to ~$611.54 million as compared to the last year.
Warnaco is the largest licensee of Calvin Klein products in the world. It operates in both wholesale and retail with retail accounting for ~20% of the sales. Last year, PVH announced that it will be acquiring Warnaco for ~$2.9 billion in a cash and stock deal bringing all Calvin Klein brands under one corporate umbrella. PVH will be offering ~$51.75 in cash and 0.18 of a share in PVH for each share in Warnaco. Also, Warnaco shareholders will be receiving a joint 10% stake in the enlarged company.
This deal will combine Warnaco's presence in Asia and Latin America with PVH's North America and European operations, thus expanding Calvin Klein sales in Europe with the use of PVH's established position in the continent. However, I stay neutral on the company as its revenue is expected to decline ~2% in Fiscal 2012 as compared to 2011 and the benefits from the acquisition will take time to show up on financials.
PSS World Medical
The company posted weaker F2Q13 results with EPS of ~$0.26, which was below the consensus estimate of ~$0.29. Profit was up ~2.4% to ~$240 million as compared to ~$19.6 million a year ago, while revenue grew ~5.2% to ~$521.8 million as compared to ~$496.2 million.
PSSI announced that it will be selling the company to McKesson, a leading healthcare and information company for ~$29 per share, or ~$2.1 billion. Since August, PSSI was seeking the buyout and finally chose McKesson as a potential buyer. This deal will enable these companies to enhance the value that they deliver to their physicians and extended customer care. Further, on an individual basis this transaction shall help PSSI to get the financial resources of a larger company, as McKesson has more cash than PSSI's revenue. Although the new plan of PSSI looks very encouraging, I am doubtful it will help the company overcome the serious headwinds (i.e. physical and hospital consolidation).
To end, I am neutral on all the above discussed three stocks. Although these companies still hold a great deal of promise in highly competitive but profitable healthcare, retail and semiconductor equipment markets, the recent buyouts remain a concern whether they will really help them to grow in future and generate increased earnings and put them back in shape.
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