Global equities scorecard: Part 1

We take a look at how four of our international stocks have performed in the latest reporting period.

It’s earnings season again as companies report financial results for the fourth quarter of 2014.

While some 77% of S&P500 companies reporting so far have beaten estimates, there have been  a few high profile disappointments with McDonald’s, IBM, Microsoft, and Caterpillar reporting lower than expected numbers.

These poor results are very industry and company specific, however. On the other hand Apple, to use baseball terminology, “hit the cover off the ball” and produced significantly better than expected results, driven in part by very strong Chinese iPhone 6 sales.

Four of our Eureka Global Portfolio stocks have also reported, as discussed individually below.

Intuitive Surgical (NASDAQ: ISRG)

Intuitive Surgical preannounced fourth quarter revenues on January 14, which were nicely above consensus expectations, driven primarily by better than expected system placements (97 Xi systems) and double-digit procedure growth.

Along with the revenue pre-announcement, the company also guided for procedure growth of 7-10% for 2015, which is in line with expectations. I believe that the company is prudently being conservative here, particularly following a challenging 2014 in which it had to significantly lower procedure growth guidance in the first quarter.

I am viewing the results positively, as the Xi rollout continues to exceed expectations and procedure growth has clearly stabilized.

ISRG reported non-GAAP (generally accepted accounting principles) fourth quarter revenue of $US601 million, which came in above the consensus number of $US583 million. By segment, Instruments and Accessories revenues of $US281 million were essentially in line. Systems revenues of $US214 million were significantly above consensus at $US184M. Service revenues of $US110 million were in line.

Procedure growth of 9% for 2014 also came at the high end of guidance (8-9%), while fourth-quarter procedure growth of 10% was basically in line and flat sequentially.

The primary driver of procedure growth in the US for the year was general surgery, which increased from 81,000 procedures in 2013 to 107,000 in 2014 ( 32%). International procedures, also a growth driver, increased from 101,000 in 2013 to 121,000 in 2014 ( 20%).

In the quarter, the company sold 137 systems, coming in significantly above an estimated 125 with a strong sequential uptick from the 111 systems in the third quarter. The company sold 71 systems into the US with the beat primarily driven by the 39 systems placed in Europe. The company sold 97 da Vinci Xi systems in the fourth quarter, significantly above consensus expectations of 75, and a sharp uptick from 59 Xi systems placed in the previous period.

All in all, it was a very solid result. I’m not making any changes to my earnings and revenues assumptions for 2015. However, if placements of new Xi systems continue to surprise, numbers will be going up. The target price remains at $US600.

Schlumberger (NYSE: SLB)

Schlumberger delivered solid results despite headwinds in most markets. Earnings were US5 cents ahead of consensus, aided by a modestly lower than expected tax rate. That the company raised the dividend 25% is a positive aimed at shoring up confidence in the company’s cash flow prospects, while also offsetting what’s likely to be negative commentary on end market demand for 2015.

Schlumberger recorded $12.6 billion of sales during the fourth quarter, in-line with consensus. On the positive side, revenues were above estimates by 2% in Middle East and Asia.  However, revenues were below estimates by 4% in Latin America due to reduced activity in Mexico. Revenues in North America and Europe/Africa/CIS were in-line. Not bad considering the volatility in the oil price and overall industry uncertainty.

There was a positive margin surprise in all geomarkets — Schlumberger’s efforts to enhance profitability continue to bear fruit. Margins compressed 20 basis points sequentially but exceeded consensus estimates in all regions.

Amongst Schlumberger’s product segments, Production led the way with 5% growth on the heels of strong gains in the US. The Drilling and Reservoir characterization groups both witnessed a 3% sequential decline in sales. Drilling margins slipped due to currency and activity in Russia while Reservoir Characterization margins expanded on higher margin software sales. Remember, Schlumberger is a “technology” company.

On the earnings call, management provided limited guidance regarding end market outlooks other than to say that sharp capital expenditure cuts are unfolding and the decline in North America should outpace International – no surprise.

The key message is that the company is controlling what is can control, cutting costs to align with activity levels on a quarterly basis, accelerating internal improvement initiatives, pushing the conversation with customers toward changing workflows, and applying technology to improve economics.

For 2015 I am lowering my earnings and revenue assumptions as well as the target price. I am not, however, recommending selling the stock.

I see a 10% year-on-year decline (instead of an 8% gain) for FY15 revenues with reported earnings down 40% to $US4.10 per share (mainly on impairments).

My target price is now $US90 (20 times 2016 EPS of $US4.50). I expect some recovery in the oil price this year as supply is adjusted for the “new paradigm” and demand (in the US anyway) expands with a growing economy.

Xilinx (XLNX)

The Xilinx report was disappointing. The company reported mixed December quarter 2014 results and guided for March quarter 2015 revenue below consensus estimates.

Revenue weakness in December was driven by broadcast and communications segments, with flat wireline sales and an unexpected decline in wireless sales. While the 28-nm business continues to show strength (up 20% on the previous period) and industrial/consumer/automotive segments are expected to grow, weaknesses and uncertainties in wireline/wireless communications are a concern. This bears watching.

Xilinx reported third quarter fiscal revenue of $593.5 million, down 1.8% on the previous quarter, which were lower than consensus forecasts of $616.5 million primarily due to weakness in the broadcast and communications segments.

Gross margins of 69.7% were 70 basis points higher than expected due to product and customer mix. EPS of $US0.62 beat consensus estimates by US3 cents mainly on reinstatement of the R&D tax credit.

For FY16, management expects revenue to be down 2-6% and the gross margin to stay at 68-69% – lower than consensus expectations. Aerospace & Defense (A&D) will face headwinds due to expected program timing, but should be offset partially by continued growth in 28-nm products and the 20-nm ramp up.

Opportunities in wireline are taking longer to develop. Some cutbacks at carrier Sprint impacts wireless in North America, and FDD license delays continue to affect wireless in China. Management forecasts a flat-to-low growth environment for Xilinx in FY16, driven by weakness in communications and program transitions in A&D.

 28-nm and new end-markets do provide growth ahead, however. 28-nm delivered 20% quarter-on-quarter growth and should reach 160 million next quarter, while 20-nm has moved into volume production.

Management described 28-nm to be stronger than previous nodes and that it should peak later than originally expected. That’s a positive. Meanwhile management is exploring new markets such as automotive by making additional investments, as customers transition away from ASICs and ASSP chips into FPGAs, which is a Xilinx specialty.

I am reducing my revenue assumptions slightly for CY15 (-6%) and FY16 (-2%). My target price is now 18 times FY16 EPS of $US2.60 or US$47 (down from $US51).

Facebook (NASDAQ: FB)

Facebook reported earnings and revenues well above consensus expectations, citing strong advertising demand particularly in its mobile ads.

For the fourth quarter, advertising revenue rose 53% year-on-year to $US3.85 billion. Mobile was 69% of ad revenue versus 66% in the third quarter and 62% in the second – a huge positive.

Monthly active users (MAUs) rose 3% quarter-on-quarter and 13% year-on-year to 1.39 billion (that’s more people than the population of any country on earth!), and mobile MAUs 6% quarter-on-quarter and 26% year-on-year to 1.19 billion. Daily active users (890 million) were 64% of MAUs.

Non-GAAP costs/expenses rose 50% year-on-year to $US1.63 billion, nearly even with revenue growth of 49%. The non-GAAP operating margin was a solid 58%. On a GAAP basis (which includes stock based compensation), costs/expenses were up 87% to $2.72 billion. R&D expenses doubled.

Full-year free cash flow was $3.63 billion, soundly exceeding net income of $2.94 billion. Facebook ended the period with $11.2 billion in cash/marketable securities, and no debt.

Facebook reported GAAP net income of $US701 million compared to a year earlier profit of $US523 million – a 34 % increase. Excluding one-time items, Facebook said it earned US54 cents per share, topping the 48 cents per share analysts on average were forecasting. Revenue for the period was up 49% year-over-year to $US3.85 billion, surpassing the consensus view of $US3.78 billion.

While there was a bit of concern regarding the cost/expenses blowout (in GAAP), during the conference call chief financial officer Dave Wehner guided to 2015 expense growth of 50-70% in GAAP and non GAAP 50-55%. If Facebook was an industrial company you would be worried but, given the nature of its business, it’s necessary.

Overall the results were well received with a number of positive analyst comments, some raising price targets and revenue estimates. Analysts particularly liked the comment on video usage growth from one billion in September 2014 to three billion per day at year end. Advertising budgets are increasingly targeting this medium.

My target price is unchanged at $US95.


*We will run the second part of our reporting season review for global equities next week (February 9, 2014).