Singular Research Q2:19 Earnings Season Review
The second quarter of 2019 was just as wild as the first quarter with threats of trade war, falling interest rates, and global economic slowdown. At Singular Research, we focus on small and micro-cap stocks that are undercovered on Wall Street. These stocks have a niche business model and have yet to be widely discovered. Many of the global threats in the stock market today do not affect these stocks. Below, we show the individual EPS outcomes for our coverage, then discuss the top and worstperformers for the quarter, and finish with our hidden gem for the third quarter.
Top Five Earnings Surprises
For Q2:19, the top five earnings surprises were Trecora Resources, Luna Innovations, Anika Therapeutics, L.B. Foster, and Roku. Of these five, Luna, Anika, and Roku beat expectations and had resulting extraordinary stock price appreciation. Below we discuss each of the five companies’ Q2 performance:
- Trecora Resources had a 49% improvement in adjusted EBITDA YoY, resulting from cost cutting improvements and stronger profit margins. The company is on a path of solid operational reliability and cost cutting measures that appears to be working; however, investors have yet to be thrilled.
- Luna Innovations had total revenues of $17.8 million for the three months ended June 30, 2019, up 80% compared to the three months ended June 30, 2018. Products and licensing revenues were $11.4 million for the three months ended June 30, 2019, up 155% compared to the three months ended June 30, 2018. With strong and growing demand for their fiber optics testing products, Luna Innovations continues to exceed expectations and owners of the stock have been rewarded.
- Anika Therapuetics’ International Viscosupplement revenue increased 28% year-over-year for the quarter, primarily due to international CINGAL revenue growth of 125%. Anika announced they will be creating a pilot study for CINGAL in the U.S. which will start in early 2020.
- L.B. Foster had net sales of $200.9 million, an increase of 16.2% over the prior year quarter. Gross profit was $37.1 million, an increase of 12.3% from the prior year quarter. New orders and backlog decreased by 12.4% and 9.5%, respectively, from the prior year quarter. Although L.B. Foster had an earnings surprise of 73%, investors have not been enthusiastic as the stock price has decreased seven percent since their earnings release. We believe this selloff may have provided a good buying opportunity. Singular Research believes L.B. Foster has an upside of 54% as of August 30, 2019.
- Roku had total net revenue of $250.1 million, up 59% YoY; Platform revenue of $167.7 million, up 86% YoY; Active Accounts of 30.5 million, a net addition of 1.4 million from last quarter; Streaming Hours increased 0.5 billion hours vs. Q1 to 9.4 billion, up 72% YoY; Average Revenue Per User (ARPU) of $21.06 (TTM), up $2.00 vs. Q1 2019. Roku has been on fire for us as the company continues to exceed growth expectations. We initiated coverage on Roku at $40.44 on January 23, 2019.Q2:19 revenues were $37.9 million, up 32% from Q2:18, on account of stabilization in CPM trends, greater-than-expected strength in audio and video, and favorable year-over-year take-rate comparables.
Bottom Three Disappointments
At the end of Q2:19, our worst three performers were Salem Media Group, REX American Resources, and the JMP Group. All three of these companies had EPS that did not meet expectations; however, investors have not punished their stock. A description of their quarter results is as follows:
- Salem Media’s total revenue decreased 2.4% to $64.7 million from $66.3 million; Total operating expenses decreased 9.0% to $59.1 million from $64.9 million; Operating income increased to $5.6 million from $1.3 million; The company’s net loss increased to $3.6 million, or $0.14 net loss per share compared to $2.2 million, or $0.08 net loss per share; EBITDA increased 59.9% to $9.6 million from $6.0 million. The company had $7.8 million of positive cash flow from operating activities. At $1.46 per share (on 8/30/2019), we believe there may be room for huge upside potential. This stock is one of our top contrarian plays.
- REX’s Q2:19 net sales and revenue were $105.9 million compared with $128.8 million in Q2:18. While ethanol and corn oil pricing remained stable on a year-to-year basis, lower Q2:19 ethanol production and lower distiller grain pricing led to the decline in year-over-year net sales and revenue. Primarily reflecting these factors and higher corn prices, the Company’s Q2:19 gross profit for its ethanol and by-products segment was $6.2 million, compared with $13.7 million in Q2:18. The company is sitting on $212 million of cash that we believe should be enough to help REX weather the storm. Once the trade wars with China subside, REX should have plenty of catalysts to the upside. We believe this stock to be another top contrarian play.
- The JMP Group had net income of (0.05) per share compared to net income of (0.09) per share in the year ago period. We remain cautiously optimistic that the JMP Group can positively turn performance around in the second half of the year.
Singular Research’s Hidden Gem
The Rubicon Project (RUBI), Price Target: $12.00, EPS Beat: 54%, Upside: 17% (as of 8/30/19)
RUBI provides a technology solution to automate the purchase and sale of digital advertising inventory. Sellers (which include websites or mobile apps) provide digital advertising inventory to RUBI’s platform in the form of advertising requests. These ad requests from sellers are sent to buyers, which can then place bids on them. The company co-created Prebid which is an open-source platform that links multiple ad exchanges that were once fragmented. As more and more users adopt RUBI’s Demand Manager (software that simplifies the use of Prebid), RUBI should benefit immensely.
Second quarter highlights:
- Q2:19 revenues were $37.9 million, up 32% from Q2:18, on account of stabilization in CPM trends, greater-than-expected strength in audio and video, and favorable year-over-year take-rate comparables.
- Mobile and desktop revenues grew 42% and ~21% YOY to ~$21.2 million and $16.5 million, respectively. These segments represent ~56% and ~44% of overall sales.
- Adjusted EBITDA was $4.4 million in Q2:19 vs. a loss of ~$5.4 million in Q2:18, driven by higher revenues and lower operating expenses.
- Net loss was $2.2 million in Q2:19 versus a loss of $13.3 million in Q2:18. Adjusted EPS in Q2:19 was $(0.06) compared to $(0.27) reported in Q2:18.
- Management now expects sales growth to be well above its long-term guidance of ~20% growth.