When analysts issue flash research notes after earnings or other key news events, it is no unheard of that their initial stance gets muted or reversed. After all, analysts are people and sometimes they change their minds like the rest of us. That being said, in the case of General Electric Co. (NYSE: GE) there was a major analyst reversal in a very short period, which might throw many GE investors off on first look.
GE’s earnings report came out on Friday morning and the flash call from Andrew Obin was still a Buy rating and a $35 price objective. Then on Tuesday, Obin’s call sounded drastically different — and now Merrill Lynch is a far cry from being among the most bullish on GE.
Merrill Lynch has now downgraded GE shares to Neutral from Buy, and Obin’s price objective was cut to $31 in the call. The main concern here is that Obin now feels investors should move to the sideline until earnings expectations are brought down.
GE had originally targeted $2.00 in earnings per share in fiscal year 2018. At $1.72 in earnings per share for 2018, Merrill Lynch is now under the consensus estimate that is closer to $1.90 per share. Obin does note that investors were already discounting that $2.00 per share target, but not by enough.Tuesday’s call views GE’s free cash flow conversion disconnect as reflective of the reinvestment cycle. The firm sees fair valuation at a trough of the free cash flow cycle. Tuesday’s investment rationale looks quite different from the flash note issued a couple of days before:
NEW RATIONALE — We think GE is well positioned in the long-run as reinvestment cycle and strategic acquisitions (Alstom, BHI) should pay off in the form of outgrowth vs peers and runway on margin expansion. However, we do not see the stock outperforming in the face of negative earnings revisions and an expected larger cut to 2018 expectations yet to come.
LAST WEEK’s RATIONALE — We forecast GE to post double-digit EPS growth in its Industrial business, which puts it as one of the highest growth large-cap Industrial names. The April 10 announcement of a staged exit of most GECC businesses may translate to more regulatory visibility at GECC, allowing it to upstream more capital to the parent and GE utilizing its industrial balance sheet more efficiently.
As far as earnings drivers, Obin warned:
There are a number of drivers for the earnings reset over the past two years, including Oil & Gas downturn (GE tends to be a later-cycle exposed business in the space), peak of US gas-fired power gen cycle and impact of energy slowdown on power orders in emerging markets, delayed recovery in mining and downturn in US rail capex, and negative FX. We note that Oil & Gas higher estimates for 2018 in our model reflect the BHI acquisition, which is expected to close in mid-2017.The bottom-up utilities capex analysis indicates that 2016 likely marked the peak of US power gen capex, which will likely weigh on GE’s growth in the Power end market over the coming years. The BofAML forecast calls for a 5% capex decline in 2017 with another 3% decline in 2018.
GE shares have not exactly participated in the big recovery. GE’s pre-earnings closing price last Thursday was $30.27, and GE shares closed at $29.55 on Friday and again on Monday. Tuesday’s initial reaction had GE shares trading down another 0.3% at $29.45 right after the opening bell.GE’s 52-week trading range is $28.19 to $33.00.
BlackBerry Ltd. (NASDAQ: BBRY) reported its fiscal fourth-quarter financial results before the markets opened on Friday. The company posted $0.02 in earnings per share (EPS) and $286 million in revenue. The consensus estimates from Thomson Reuters had called for a net loss of $0.01 per share and revenue of $289.34 million. In the same period of last year, the company posted a net loss of $0.03 per share and $464 million in revenue.During the latest quarter, the company entered into a long-term, software licensing agreement with Optiemus Infracom to design, manufacture, sell and support BlackBerry-branded mobile devices in India, Sri Lanka, Nepal and Bangladesh.Another highlight during this quarter came from the Mobile World Congress, where TCL launched the BlackBerry KEYone, the most secure Android phone in the world, featuring a smart QWERTY keyboard. The KEYone is the first device launched under the company’s licensing agreement with TCL.
In terms of guidance, BlackBerry said that it expects to grow at or above the overall market in its software business. The firm also expects to be profitable on a non-GAAP basis and to generate positive free cash flow for the full year. The consensus estimates are $0.01 in EPS and $978.95 million in revenue for this fiscal year.Total cash, cash equivalents, short-term and long-term investments increased by $89 million to approximately $1.7 billion, reflecting free cash flow of $16 million.
John Chen, executive chairman and CEO of BlackBerry, commented:
I am pleased to report that our Q4 results came in at or above expectations in all major metrics. In the quarter, we continued to grow our mix of software and services revenue across the company. In turn, this allowed us to expand our operating margin and report positive free cash flow. In addition, our balance sheet continues to strengthen and benefit from reduced capital requirements with our focus on software and licensing.
Shares of BlackBerry closed Thursday down 0.9% at $6.95, with a consensus analyst price target of $7.92 and a 52-week trading range of $6.23 to $8.46. Following the announcement, the stock was up 8.5% at $7.54 in early trading indications Thursday
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Unemployment has steadily declined and remains close to a 10-year low. And with investors confident about the economy, the Dow Jones Industrial Average broke through the 20,000 mark early this year. By these and other key measures, business in the United States appears to be booming.
This period of economic growth — much of it as a recovery from the Great Recession — has by no means been even across the country. A number of factors can explain the regional differences in economic growth, including the varying business climates across states.
To determine which states have the best and worst business climates, 24/7 Wall St. identified and reviewed nearly 50 measures of doing business. And the analysis showed that, edging out the likes of Massachusetts and Colorado, Utah was the best state for business:
> 1-yr. real GDP change: 3.4% (6th highest)
> Avg. salary: $45,204 (18th lowest)
> Adults w/ bachelor’s degree: 31.8% (16th highest)
> Patents issued: 1,404 (23rd highest)
> Working-age population chg. 2010-2020: +20.5% (2nd highest)
Utah is this year’s best state for business. The state’s labor market and regulatory climate are particularly business friendly compared to other states. Utah’s working-age population is projected to grow by more than 20% between 2010 and 2020, far greater than the comparable projected growth nationwide of less than 5%. Businesses are constantly looking for cost-cutting opportunities. Therefore, a state’s regulatory climate, including its tax policy and the power unions have in the state, can be a major factor when a company is considering where to locate and conduct business. Utah is among the top states in the Mercatus Center’s Regulatory Freedom Index, a ranking of state tax policy. Also, just 3.9% of Utah’s workers are union members, the third lowest share of all states. While this is perhaps less friendly to workers, it is a good sign for most businesses.
That is a far cry from Louisiana, which placed as the worst state to do business, in part due to the dwindling working-age population.
Under Armour Inc. (NYSE: UAA) reported its first-quarter financial results before the markets opened on Thursday. Although the company posted its first loss since going public, it was barely a loss, and it seems that investors were more thrilled about the top-line growth that they missed last quarter.The apparel giant said that it had a net loss of $0.01 per share and $1.1 billion in revenue, versus consensus estimates from Thomson Reuters that called for a net loss of $0.04 per share and revenue of $1.11 billion. The same period of last year reportedly had earnings per share (EPS) of $0.04 and $1.05 billion in revenue.North American revenue dropped 1% as new distribution was more than offset by the absence of business lost to bankruptcies in 2016. International revenue, represented 20% of total revenue in the quarter and was up 52% (up 57% currency neutral).
The company reported its segment revenues for the quarter as follows:
Apparel revenues increased 7.3% from last year to $715.4 million.
Footwear revenue grew 2.0% year over year to $269.7 million.
Accessories revenue jumped 11.8% to $89.1 million.
In terms of outlook for the 2017 fiscal year, the company expects net revenues to grow 11% to 12%, as well as up to 12% to 13% on a currency-neutral basis. Under Armour also expects operating income to reach $320 million in this time.The consensus estimates for the full year are $0.42 in EPS and $5.36 billion in revenue.
On the books, Under Armour cash and cash equivalents totaled $172.13 million at the end of the quarter, up from $157.0 million in the same period from last year.Kevin Plank, Under Armour’s board chair and chief executive, commented:Our first quarter results were in line with our expectations and we’re off to a solid start in 2017. By proactively managing our growth to deliver superior innovative product, continuing to strengthen our connection with consumers and increasing our focus on operational excellence – we have great confidence in our ability to drive toward our full year targets.
Shares of Under Armour closed up 0.9% at $19.71 on Wednesday, with a consensus analyst price target of $22.35 and a 52-week trading range of $18.40 to $45.99. Following the release of the earnings report, the stock was up nearly 10% at $21.58 in early trading indications Thursday.
MERRIL LYNCH DOWNGRADES GE
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A new report out from McAfee Labs and Intel reveals a quarter-over-quarter increase of 247% in the volume of fourth-quarter malware attacks catalogued against Apple Inc.’s (NASDAQ: AAPL) desktop operating system, Mac OS. The researchers report that the massive increase is the result of adware bundling.McAfee catalogued more than 450,000 malware incidents in the fourth-quarter of 2016 compared with just over 50,000 in the same quarter of 2015.
Vincent Weafer, a McAfee Labs vice-president, told Dark Reading that the main driver of the increase was OSX/Bundlore, an installer program that combines legitimate apps with offers from third-party apps that users may not want but that are installed by default and may be difficult to find and remove.While the volume of malware found on Mac OS shot higher in the fourth quarter, the volume is minuscule compared to the “tens of millions” of attacks launched against PCs running Microsoft Windows.
Weafer expects the number of attacks against Mac OS to drop, but overall the attacks continue to grow against Macs, PCs, Android devices and iOS devices. The growth of Internet of Things (IoT) devices takes the security threats to even higher levels.In connection with the additional threat from the explosive growth of IoT devices, McAfee Labs noted that there were more than 15 billion internet-connected devices in operation at the end of last year and that the number will rise to 200 billion by 2020. The report also contains a detailed history and examination of the Mirai botnet that caused the largest-ever distributed denial of service attack ever last October.
Some of the biggest companies in the tech sector are making major bets on artificial intelligence (AI), also often called deep learning. Alphabet Inc. (NASDAQ: GOOGL) and Apple Inc. (NASDAQ: AAPL) lead in acquiring smaller companies, but there are plenty of big players.
Why the gold rush? According to a report out Wednesday morning from IDC, worldwide revenues for cognitive and AI systems will rise 59.3% this year to $12.5 billion and global spending on AI will explode at a compound annual growth rate (CAGR) of 54.4% through 2020 when revenues will top $46 billion. That’s enough to get anyone’s attention.
Of this year’s total spending, some $4.5 billion is targeted at cognitive applications that automatically learn, discover and make recommendations or predictions. Cognitive applications are expected to see a CAGR of 69.6% over a five-year period.
IDC research director David Schubmehl noted:
Intelligent applications based on cognitive computing, artificial intelligence, and deep learning are the next wave of technology transforming how consumers and enterprises work, learn, and play. These applications are being developed and implemented on cognitive/AI software platforms that offer the tools and capabilities to provide predictions, recommendations, and intelligent assistance through the use of cognitive systems, machine learning, and artificial intelligence. Cognitive/AI systems are quickly becoming a key part of IT infrastructure and all enterprises need to understand and plan for the adoption and use of these technologies in their organizations.
In addition to Google, which paid $600 million for U.K.-based DeepMind Technologies in 2014 and has made 11 acquisitions since 2013, and Apple, which has made a total of 7 acquisitions of AI-related firms, Intel Corp. (NASDAQ: INTC), Microsoft Corp. (NASDAQ: MSFT) and Facebook Inc. (NASDAQ: FB) have also made multiple acquisitions of AI technology firms. International Business Machines Corp. (NYSE: IBM) has made three acquisitions and has been pushing its Watson technology hard for some time now.
Non-tech firms are also making acquisitions. Ford Motor Co. (NYSE: F) recently paid $1 billion for a one-third stake in Argo AI and General Electric Co. (NYSE: GE) acquired Bit Stew and Wise.io last November.
IDC research manager Marianne Daquila noted which sectors are most likely to spend the most on AI:
Heavily regulated markets such as banking and securities investment services are among the early growth drivers. Collectively, these two financial industries will represent a quarter of worldwide spending on cognitive/AI solutions. Stringent compliance requirements are key drivers for these industries as they seek new innovations in fraud and risk detection. Additionally, companies in this sector are adopting cognitive-based program advisors and recommendations to better match products with clients. Elsewhere, manufacturing, retail, and healthcare are also expected to see very strong spending growth over the forecast period.
Of the projected $12.5 billion in 2017 spending, U.S. firms are expected to spend nearly $9.7 billion.
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ARMOUR REPORTS 1ST Q LOSS