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4:31 pm Looking Ahead: August 5, 2015

There won't be any shortage of items Wednesday on which to focus. We're turning our sights to the importance of two items before the open: the Trade Balance report and Priceline's (PCLN) earnings report.

(1) June Trade Balance Report (before the open)

  • Why it's important
    • The report provides a comprehensive snapshot of U.S. imports and exports of goods and services
    • The level of imports will help shed light on demand patterns from consumers and businesses in the U.S.
    • The level of exports will help shed light on demand for U.S. goods and services from consumers and businesses abroad
    • Changes in currency play an important role in trading relationships, and with the dollar's strength, this report is apt to demonstrate what type of impact the dollar's strength has had on global trade
      • A stronger dollar makes imports more affordable for U.S. consumers and businesses while at the same time raising the cost of U.S. goods sold in foreign markets
    • The report carries implications for GDP computations, which are centered on the differences between imports (originating from foreign countries) and exports (produced in the U.S.)
      • This report will factor directly into the second estimate for Q2 GDP
      • The advance estimate for Q2 GDP showed net exports contributed 0.13 percentage points (0.67 percentage points from exports and -0.54 percentage points from imports) to annualized Q2 GDP growth of 2.3%
         
  • What's expected
    • Briefing.com consensus: -$42.7 billion (prior -$41.9 billion)
    • Briefing.com forecast (our own): -$44.0 billion

  • What's in play?
    • Treasuries
    • Currencies
    • S&P futures
    • Fed funds futures 

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(2) Priceline Earnings Report (before the open)
  • Why it's important
    • Priceline is viewed as a growth company and a momentum stock, so fortunes will literally rise and/or fall based on the company's report and outlook
      • PCLN shares will be a standard barer for other momentum names, which will ride PCLN's coattails for better or worse
    • Investors are anxious to see if there has been any encroachment on company's business from new competitors like Airbnb, Uber, and Lyft
    • Priceline derived only about 21% of 2014 revenue from the U.S., so it will provide a good tell on the impact of foreign exchange and the stronger dollar in particular
      • Company's international business accounted for 87% of gross bookings and approximately 94% of consolidated operating income in 2014

  • What Priceline said in May it was targeting for second quarter of 2015
    • Year-over-year increase in total gross travel bookings of approximately 0% - 7% (an increase of approximately 15% - 22% on a constant currency basis).
    • Year-over-year increase in international gross travel bookings of approximately 0% - 7% (an increase of approximately 17% - 24% on a constant currency basis).
    • Year-over-year increase in U.S. gross travel bookings of approximately 0% - 5%. 
    • Year-over-year increase in revenue of approximately 0% - 7% (Approx $2.123-2.271 bln). 
    • Year-over-year increase in gross profit of approximately 1% - 8% (an increase of approximately 17% - 24% on a constant currency basis).
    • Adjusted EBITDA of approximately $715 million to $765 million.

  • What's in play
    • PCLN
    • PowerShares QQQ Trust (QQQ)
    • Other travel site competitors
      • Expedia (EXPE)
      • Orbitz Worldwide (OWW) [note: has agreed to be acquired by Expedia]
      • Sabre Corporation (SABR)
      • Ctrip.com Intl. (CTRP) [note: Priceline made $500 million investment in Ctrip last August and has right to hold up to 10% of Ctrip's outstanding equity]
      • eLong (LONG)
      • TripAdvisor (TRIP)
    • Online accommodation services
    • Search, social networking, and marketplace companies
      • Google (GOOG/GOOGL)
      • Amazon.com (AMZN)
      • Facebook (FB)
      • Alibaba (BABA)
      • Groupon (GRPN)
    • Online restaurant reservation services (Priceline owns OpenTable)
      • Yelp (YELP
      • TripAdvisor (TRIP) [note: owns LaFourchette, a European restaurant reservation business]

1:05 pm High Growth Snack Food Maker To Go Public Tomorrow

Before the open tomorrow, Amplify Snack Brand's (BETR) 15.0 million share IPO is expected to price within a range of $14-$16. The lead underwriters on the deal are Goldman Sachs, Jefferies, Credit Suisse, and SunTrust Robinson Humphrey.

Business Review

Amplify Snack Brands is a high growth, snack food company focused on consumers' growing preference for Better-For-You (BFY) snacks. Its anchor brand, SkinnyPop, is a rapidly growing, highly profitable and market leading BFY ready-to-eat (:RTE) popcorn brand. It's made with major allergen-free and non-GMO ingredients. It has amassed a loyal and growing customer base across a wide range of food distribution channels.

While SkinnyPop is BETR's core brand, it also recently acquired another snack food brand: In April 2015, BETR acquired Paqui, an emerging BFY tortilla chip brand that has many of the same key taste and BFY attributes as SkinnyPop. Paqui allows BETR to leverage its infrastructure to help it grow into an adjacent snacking sub-segment with a second innovative BFY brand.

BETR believes that its focus on building a portfolio of exclusively BFY snack brands differentiates the company. It allows the company to leverage its platform to realize synergies across its family of BFY brands, as well as allow retail customers to consolidate their vendor relationships in this large and growing category.

Its two largest customers are Costco (35% of total revenue) and Sam's Club (21%). Also, its SkinnyPop brand has relatively new relationships with some of the largest US retail chains such as Walmart, Target and CVS Pharmacy. The goal is to increase its presence at these retailers.

Financials

Taking a quick look at the financials, the first thing that stands out is that the company is profitable and it looks surprisingly attractive, at least the income statement does. The company has been posting impressive top line growth. In 2014, revenue rose 138% to $132.4 mln on a pro forma basis. In 1Q15, it increased 72% YoY to $44.3 mln.

Its operating margins in the mid-20% range are quite impressive. Same came be said about its adjusted EBITDA (proxy for operating cash flow) margins in the mid-40% range. That shows BETR generates a good amount of cash.

While the revenue growth, profitability and strong margins are all very good, a strike against BETR is that it has a lot of LT debt. On a pro forma basis, as of March 31, BETR had long term debt of $210 mln vs shareholders equity of $104 mln for a LT Debt-to-Cap of 67%, which is very high.

12:03 pm Coach trades higher following better than expected Q4 results

Coach (COH 31.20, +0.77) is trading about 2.5% higher this afternoon following the company's better than expected fourth quarter results. In the period, COH saw earnings per share (EPS) of $0.31 on revenues which fell 12.3% year-over-year but were better than expected at $1.0 billion, including a $43 million contribution from the May acquisition of Stuart Weitzman. The Weitzman acquisition contributed about $2 million to net income and $0.01 to EPS.

The company also updated progress on the transformation which was laid out a year ago in regards to product, stores and marketing transformation. The company noted the Stuart Vever's product distribution, the modern luxury store concept change, positive reception of the Stuart Weitzman acquisition.

Sales across the board were lower compared to last year. North American sales were by far the worst performer, ending Q4 down 20% year-over-year to $556 million. At point-of-sale, sales in North American department stores declined mid-20s versus prior year results, as the company expected, reflecting promotional events from the prior year.

International sales were somewhat less of a disappointment, as sales for the period were down just 5%, ending Q4 with $392 million. As a result of the strengthening dollar, though, in a constant currency basis, sales rose 3% in Q4. Sales in China were specifically strong, as a slight decline in comparable sales was offset by a 5% rise in total sales and a 4% rise in constant currency sales. Sales in Mainland China were strong, while results in Hong Kong and Macau were notably weak as a result of lower tourist trends from the Mainland. Sales in Japan were up 2% on a constant currency basis, but dollar sales were down 15% reflecting a weaker yen.

In terms of guidance, COH expects stand-alone brand revenues for Fiscal 2016 to increase by low-single digits in constant currency, consistent with prior guidance. The company sees current foreign currency exchange rates impacting Fiscal 2016 revenue growth to the tune of 200 negative basis points. The company sees gross margins for the Coach brand of 70% on a constant currency basis, while negative foreign currency effects may impact gross margins by about 80 to 100 basis points.

In sum, while sales might have slowed slightly compared to last year, the promotional environment and transformation initiatives are different from last year. New brands like Stuart Weitzman are taking hold, and it seems that investors are willing to take the results at face value, as COH provided better than expected top and bottom line results for Q4. The retail sector (XRT 98.00, +0.78) is also trading higher today by about 0.8%.

9:54 am Murphy Oil CEO Buys Big Lot of Company Stock

Murphy Oil (MUR 33.07, +0.93) is a holding company that engages in the exploration and production of oil and gas.  Last week it delivered preliminary second quarter results, reporting a net loss from continuing operations of $89 million, or $0.51 per diluted share, versus a profit of $142.7 million, or $0.79 per diluted share, in the same period a year ago.

Times are tough in the energy sector.

Murphy Oil isn't the only company of course that has suffered a major downturn in its business.  The weakness goes right up to the top of the food chain as the market also saw last week with the latest earnings results from Royal Dutch Shell (RDS.A), ExxonMobil (XOM), and Chevron (CVX).

At Monday's closing price, Murphy Oil's stock was down 48% over the last 52 weeks and down 53% from its July 2014 peak.

That material decline has attracted the interest of bargain-hunting investors, although the ongoing slide in oil prices has gotten in the way of a strong belief that a bottom has been found. Be that as it may, Murphy Oil CEO, Roger Jenkins, made a move on Monday that is likely to help prompt some bargain-hunting interest.

Specifically, it was detailed in a Form 4 Filing with the SEC that Jenkins acquired 15,000 shares of MUR on August 3 at a price of $32.36 per share.  That translates into a substantive monetary purchase worth $485,400 and brings his direct holdings of MUR to 94,888 shares.

Mr. Jenkins's purchase follows on the heels of the company completing a $250 million share repurchase plan that was announced on May 20.

Clearly, Mr. Jenkins and the company believe there is long-term value in the stock at current prices.  Whether others share that opinion remains to be seen, but it is at tough times like this for the company and the sector that one likes to see a vote of confidence about the stock's prospects from corporate insiders.

9:53 am Kellogg (K)

Kellogg (K) is trading up slightly after reporting Q2 results this morning. Everyone knows Kellogg, but you may not be aware how many brands they actually own, they do more than cereal. Kellogg is the world's largest cereal company; second largest producer of cookies and crackers; a major producer of snacks; and a major North American frozen foods company. Its brands include Kellogg's, Keebler, Special K, Pringles, Kellogg's Frosted Flakes, Pop-Tarts, Rice Krispies, Kashi, Cheez-It, Eggo, Coco Pops, Mini-Wheats, and many more.

Turning to the Q2 results, non-GAAP EPS declined to $0.92 from $1.02 in the year ago period but this number was right in-line with expectations. Revenue fell 5.5% year/year to $3.48 bln which was also basically in-line. Keep in mind that Kellogg is a large multi-national company so they were impacted by the strong dollar. The company estimates EPS was impacted by $0.05 just for foreign currency translation issues.

Kellogg saw improvement both in terms of the total US Cereal category and in terms of Kellogg's US Cereal market share. The Asian, Latin American, and European Snack businesses posted currency-neutral comparable net sales growth and the North American business benefited from improving trends.

Management says "We were pleased that results in Q2 were as we expected. We've seen good growth in the Asian and Latin American businesses, growth in the European Snacks business, and improving trends in the North American business." After a difficult 2014, K says it's building momentum in 2015 and is on-track to achieve long-term-growth targets for currency-neutral comparable sales and operating profit in 2016.

In sum, it was a decent quarter for Kellogg, pretty uneventful overall. The company has been impacted by a stronger dollar and by changing consumer tastes, particularly in the US. Specifically, there has been less appetite for processed foods and consumers are seeking out healthier snack options. Strong sales in Latin America in Q2 helped to mitigate these issues: sales increased by 2.5% but by 14.5% on a currency-neutral basis with good rates of growth across much of the region. The stock has mostly been trending sideways over the past year as investors are waiting to see how the company will be able to return to growth mode.

9:25 am Capesize Shipping Rates Rise 10% Overnight

  • Overnight, the Baltic Dry Index (BDI.TO) rose 49 pts (or +2%) to 1,200, its highest level since November 26, 2014
    • This was purely driven by gains in capesize.

      Since hitting a new all-time low on February 18, the BDI is up 136% from 509 

    • Currently, the BDI is higher than year ago levels, by 447 or +59.4% 
  • Capesize rates rose $1,814 (or +10%) overnight to $19,879/day (month-over-month +118%)
    • Capesize rates are now at a level not seen since November 25, 2014 
  • Panamax rates fell $42 (-0.5%) to $7,968/day (month-over-month +10.1%)
  • Supramax rates fell $7 to $9,405/day (month-over-month +26%) 
  • Related drybulk stocks include: DRYS, GNK, PRGN, DSX, FREE, EGLE, NM, NMM, SBLK, KEX, SB, SINO, BALT, SHIP, DCIX
  • Note: Companies with Capesize ships include VLCCF, DSX, DRYS, GNK, SBLK, NMM and NM

9:12 am Archer-Daniels Trading Lower Following Earnings

Archer-Daniels (ADM 47.72), one of the largest agricultural processors and food ingredient providers reported earnings of $0.60 per share, excluding non-recurring items, which came in worse than expectations.

Adjusted EPS of $0.60 excludes approximately $0.11 of gains on asset sales and acquisition-related revaluations, $0.06 of LIFO charges, $0.04 of charges related to asset impairments and restructurings, and a $0.01 gain related to effective tax rate adjustment.

Revenues fell 20.0% year/year to $17.19 billion, which also fell short of expectations.

In Corn, domestic and export demand for ethanol was robust, but record industry production limited margins. This was partially offset by strong results from its corn sweeteners and starches business. Corn Processing decreased $80 million on lower bioproducts results.

In Oilseeds, good meal demand supported strong North American soybean crushing results. Oilseeds Processing results were solid, as strong global soy crush and South American origination offset lower softseed and refining results.

And South American origination and export volumes were up, leading to good throughput at our expanded origination and port network. These, combined with the flexibility of its global crush plants, helped the Oilseeds team deliver another strong performance.

Ag Services earnings were impacted by lower margins and volumes of North American exports, as they were less competitive globally, and by a sharp upward move in commodity prices at the end of the quarter.

But, within its Ag Services segment, the milling business had record second-quarter results. Agricultural Services decreased $57 million as lower global merchandising results and lower earnings from reduced North American export margins and volumes were partially offset by record second-quarter profits from milling operations. Wild Flavors and Specialty Ingredients earned a strong $104 million in the second reporting period for this business unit.

 To put things into perspective a little... the company's Ag Services segment made up 41% of total company revenue in the quarter, while its Oilseed Processing segment made up 40%.

Overall processed volumes rose to 15,912,000 metric tons, up from 15,909,000.

Pre-market, the stock is trading lower and is currently  at $46.70/share.

7:41 am Cloud-based security software vendor Qualys (QLYS)

Qualys (QLYS) reported Q2 results last night, with revenues in-line with expectations and EPS exceeding expectations. The company also issued in-line Q3 guidance and reaffirmed full year guidance.

If you're not familiar with the company, QLYS is a provider of cloud-based security & compliance software. QLYS' flagship product, Vulnerability Management, has been on the market since 2000 and is a fairly mature product. In recent years, in order to accelerate growth management has focused on expanding their suite with new products, including Policy Compliance, Web Application Scanning, Web Application Firewall, Private Cloud, etc. Relative to its peers, QLYS' business model is a bit different since it is 100% recurring revenue -- i.e. no service revenue or hardware revenue.

With reports of new security breaches hitting the headlines on a weekly basis, QLYS has been a beneficiary of that strong industry tailwind. In recent quarters, not only have VM sales picked up, but the company has also been very successful upselling its various add-ons to its VM base.

At the time of its 2012 IPO, QLYS was a steady but unremarkable grower, with sales growth in the mid-teens. However, QLYS had one key advantage: it was solidly profitable and had been for years. What investors were waiting for was an acceleration in sales growth rates, and when that began to occur in 2H13 the stock really began to take off. Unfortunately, on May 5 the company's Q1 report and FY15 guidance disappointed investors, and precipitated a large drop in the shares following the report.

Turning back to last night's Q2 report, sales grew +23% to $39.9 million, while EPS rose +45% to $0.16. sales were in-line with expectations, while EPS comfortably beat. Management said that in Q2 their core Vulnerability Management product grew +19% despite some forex headwinds, while they continued to see approximately 50% growth in new services such as Web Application Scanning, Policy Compliance, Continuous Monitoring, and Web Application Firewall. Management's upselling efforts also continued to bear fruit, as 60% of QLYS' customers have now purchased more than one product.

In terms of guidance, QLYS issued mixed guidance for Q3 citing some currency headwinds, and reaffirmed FY15 guidance.


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