Angie’s List, Inc. (ANGI:NA) Our SELL thesis as outlined in our August 20, 2013 Initiation report has played out with the stock declining approximately 50% from that date.

Angie’s List, Inc. (ANGI:NA) Our SELL thesis as outlined in our August 20, 2013 Initiation report has played out with the stock declining approximately 50% from that date.

29-APR-14- Angie’s List, Inc. (ANGI:NA) Our SELL thesis as outlined in our August 20, 2013 Initiation report has played out with the stock declining approximately 50% from that date. Our price target of $11.00 was achieved on April 28, 2014. We drop coverage to focus on names with greater visibility and more immediate investment potential.

DROP COVERAGE

  • We include the points of our initiation thesis along with most recent financials and estimates for reference purposes only.
  • At the time of initiation, ANGI’s high valuation was excessive considering the low barriers to entry, legacy competition, and limited advertising spends from local businesses.
  • The company’s revenue growth depends on advertising from its participating local service providers which is dependent on a rapidly growing paid membership base. The high member churn rate continues to raise growth concerns.
  • We expect ANGI will not generate positive operating or net profits during FY:14. If ANGI becomes profitable in FY:15 as expected, investor focus will shift to margins and levels of profitability, which may not be good for valuations.
  • Although still showing very strong growth rates across most metrics, many of those growth rates have been decelerating recently.
  • Gross membership adds during Q1:14 were 286.6k, a increase of 4.3% from 274.9k in Q1:13. Net adds were only 143.8k implying the member churn rate remains high.
  • Cash levels at the end of Q1:14 were $64.6 million which increased from $55.9 million in Q3:13 due to positive working capital management.
  • We drop coverage to focus our resources on actionable names with greater certainty of positive returns.

Aviat Networks, Inc. (AVNW:BUY) Telecom equipment company expected to return to profitability on strong demand for microwave transmission products in emerging markets.

Aviat Networks, Inc. (AVNW:BUY) Telecom equipment company expected to return to profitability on strong demand for microwave transmission products in emerging markets.

29-APR-14- Aviat Networks, Inc. (AVNW:BUY) Telecom equipment company expected to return to profitability on strong demand for microwave transmission products in emerging markets. Growth expectations reset, compelling valuation and strong cash position. Initiating coverage with a BUY rating and $2.80 price target.

INVESTMENT SUMMARY

  • 4G LTE spending in emerging markets is still in its early stages, offering a significant opportunity for Aviat over the next 2-3 years.
  • We view Aviat as having the right technology offerings to benefit from an increasing preference for microwave-based backhaul.
  • We also believe Aviat’s restructuring efforts should result in significant operating leverage, which will lead to sharply improved profitability.
  • Aviat’s growth expectations have been reset and the stock has capitulated; the Company is now a compelling value play given its attractive valuation and strong cash levels.
  • We initiate coverage of Aviat with a BUY rating and a target price of $2.80.

RISKS

  • US business with Verizon could decline at a faster rate if capacity enhancement related deployments are de-prioritized.
  • MTN Group, Aviat’s largest customer, may further lower their order rate.
  • Competition from Alcatel-Lucent and Ericsson in small cell and microwave backhaul.

Pandora Media (P:SELL) Slowing user growth and increased Pandora One churn will make future revenue growth more challenging.

Pandora Media (P:SELL) Slowing user growth and increased Pandora One churn will make future revenue growth more challenging.

28-APR-14- Pandora Media (P:SELL) Slowing user growth and increased Pandora One churn will make future revenue growth more challenging. High content acquisition costs and investment in the business continue to weigh on margins. We maintain our $17 price target and reiterate our SELL rating.

Q1:14 HIGHLIGHTS

  • Revenues were slightly ahead of our forecast and up more than 56.5% YOY on a non-GAAP basis due to a 94% increase in non-GAAP subscription revenues.
  • Gross margin of 36.6% was below our estimate of 38.0% as a result of higher content licensing costs, offset by improved mobile monetization from increased ad loads and higher pricing.
  • GAAP EPS was two cents below our estimate, while pro-forma EPS of $(0.13) was below consensus of $(0.08), but a penny ahead of our estimate thanks to higher than projected stock-based compensation.
  • Listener hours increased almost 13% YOY in the quarter, and active users of 75.3 million were up more than 8%.
  • We expect a premium valuation will be difficult to maintain in the face of continued losses and increased competition.
  • We reiterate our SELL rating and maintain our $17 price target.

RISKS

  • Pandora may improve its mobile monetization faster than anticipated, in particular by gaining share in the market for radio advertising.
  • The company may successfully penetrate the automobile market where almost 50% of radio listing in the U.S. takes place.

Viad Corporation (VVI:BUY) Revenue beat driven by positive show rotation and base same-show growth in U.S. Marketing & Events group.

Viad Corporation (VVI:BUY) Revenue beat driven by positive show rotation and base same-show growth in U.S. Marketing & Events group.

25-APR-14 Viad Corporation (VVI:BUY) Revenue beat driven by positive show rotation and base same-show growth in U.S. Marketing & Events group. EPS in-line with our estimate due to modestly higher corporate expense. Trimming Q2:14 EPS estimate. Maintaining FY:14 and FY:15 EPS estimates, price target, and BUY rating.

Q1:14 HIGHLIGHTS

  • Revenue increased 0.2% year-over-year to $285.6 million in Q1:14 and was above our forecast of $279.3 million primarily due to higher than expected revenue in the U.S. Marketing & Events business.
  • EPS of $0.36 was in-line with our estimate as the revenue beat was offset by higher than expected corporate activities expense.
  • The soft opening of the Glacier Skywalk in Jasper National Park has received positive feedback and is on schedule to open next week (May 2014).
  • Management announced the completion of the company’s strategic review process and has determined it would not be in the best interest of shareholders to separate the M&E and T&R businesses at this point in time. The company will continue its focus on improving operating efficiencies and pursuing organic and external growth opportunities.
  • In light of management guidance, we lower our Q2:14 revenue estimate to $243.9 million from $250.8 million and lower our EPS estimate to $0.40 from $0.50. Our FY:14 EPS estimate of $1.60 remains unchanged as we raise our Q3:14 and Q4:14 estimates by $0.05 each.
  • We maintain our BUY rating and $34 price target for the shares. We will revisit our forecast and provide more discussion after the release of the company’s 10-Q filing.

Reed’s, Inc. (REED:BUY) Q4 was disappointing as results slipped back to a loss due to continued high marketing and promotional expenses.

Reed’s, Inc. (REED:BUY) Q4 was disappointing as results slipped back to a loss due to continued high marketing and promotional expenses.

25-APR-14- Reed’s, Inc. (REED:BUY) Q4 was disappointing as results slipped back to a loss due to continued high marketing and promotional expenses. While reducing our estimates and price target, we believe our long-term thesis of continued strong sales growth and rising earnings as the operating model is leveraged, remains intact.

Q4 HIGHLIGHTS

  • Q4 EPS was a loss of $(0.05) per share vs. $(0.07) in Q4:12 and our estimate of $0.00. Q4 net revenues grew 23% to $9.6 million from $7.8 million LY but were shy of our $9.9 million estimate.
  • Q4 gross margin rose 160 bps to 27.5% (vs. our 32.4% est.) but would have been 29.2% had promotional spending & discounts been kept to Q4:12 levels.
  • Q4 SG&A expenses grew 11.5% to $3.1 million but fell 250 bps to 32.4% of revenues as net revenues increased 23%.
  • A key focus in 2014 will be reducing the amount of promotions & discounts which reduce gross margins. Such costs ballooned to 12% of gross revenue in 2013. Over time, the goal is to reduce them back to the 9%-10% level.
  • Reflecting reductions to our sales and gross margins estimates and less expense leverage than previously forecast, we are reducing our 2014-15 EPS estimates. Our FY:14 estimate is reduced to $0.01 from 0.08 per share, while FY:15 is trimmed to $0.12 per share from $0.18.
  • Our $8.50 price target (previously $9.50) is based on an EV/Revenue multiple of 2.5x applied to a revised FY:14 revenue estimate of $46.9 million.
  • Despite Q4 results and reductions to our estimates and price target, we believe our thesis remains intact and that REED can deliver annual revenue growth of 15%-20% with improving profitability as the company begins to leverage its operating model. Accordingly, we maintain our BUY rating.

RISKS 

  • Failure to successfully grow the kombucha probiotic tea product line.
  • Failure to generate consistent and improving profits on strongly rising sales.
  • Quality and depth of management team and recent management turnover.

Innovative Solutions and Support, Inc. (ISSC:BUY) Revenue beat largely due to record Engineering sales.

Innovative Solutions and Support, Inc. (ISSC:BUY) Revenue beat largely due to record Engineering sales.

24-APR-14 – Innovative Solutions and Support, Inc. (ISSC:BUY) Revenue beat largely due to record Engineering sales. EPS shortfall reflects greater contribution from lower-margin Engineering sales versus higher-margin Production sales. Trimming FY:14 EPS estimate. Maintain price target and BUY rating.

Q2:14 HIGHLIGHTS

  • Revenue increased 52.1% year-over-year to $12.5 million in Q2:14 and was above our forecast of $10.9 million, largely attributable to higher-than-expected Engineering sales.
  • EPS of $0.05 was below our $0.06 estimate primarily due to a combination of the larger than expected contribution from low-margin Engineering sales and modestly higher SG&A expense.
  • Backlog as of March 31, 2014 stood at $80.9 million versus $87 million at December 31, 2013 with net orders of $6.7 million for the quarter.
  • Initial production deliveries related to the Delta Airlines contract are expected to begin later this fiscal year and are expected to result in increasing Production revenue.
  • Geoffrey Hendricks, Founder, Chairman and CEO, announced he will be retiring at the end of calendar year 2014. Shahram Askarpour, President, will become the company’s new CEO.
  • We are trimming our FY14 estimate to $0.22 from $0.25 to account for (1) the Q2:14 EPS shortfall versus our estimate and (2) the higher than previously expected contribution from Engineering sales for the year which will result in lower relative margins. We maintain our FY:15 EPS estimate of $0.43 at this time but will revisit our forecasts after release of the company’s 10-Q. We maintain our Buy rating and $10 price target for the shares.

Arabian American Dev. Co. (ARSD:BUY) Record Q4 petrochemical revenues (+33%) driven by 40% rise in volumes.

Arabian American Dev. Co. (ARSD:BUY) Record Q4 petrochemical revenues (+33%) driven by 40% rise in volumes.

25-APR-14 – Arabian American Dev. Co. (ARSD:BUY) Record Q4 petrochemical revenues (+33%) driven by 40% rise in volumes. 2013 saw records for revenues, EBITDA, net income, and EPS. We maintain our BUY rating and raise our price target, as we believe ARSD remains substantially undervalued with continued opportunities in petrochemicals and equity income from its AMAK investment.

Q4:13 HIGHLIGHTS

  • ARSD reported Q4:13 diluted EPS of $0.13 vs. $0.08 LY (restated), consensus of $0.15, and our $0.16 estimate. The performance was driven by a 40% rise in petrochemical volumes, partially offset by lower petrochemical margins coupled with lower AMAK equity income of $1.1 million.
  • Q4 revenues rose 33% to $66.6 million vs. $49.9 million (restated) in Q4:12 and were above our $55.7 million estimate due principally to higher sales volumes and toll processing fees, partially offset by lower product prices.
  • Volumes rose 40% to 19.7 million gallons from 14.1 million in Q4:12, well above our 15.5 million gallon estimate. North American volumes rose 35% to 15.7 million gallons due to the increased deliveries to a Canadian tar sands customer and a 60% increase in international sales to 4.0 million gallons.
  • Gross margins (excl. D&A) were 16.3% vs. 15.5% LY but below our 17.8% estimate. The shortfall vs. our estimate was due to larger than expected sales volumes of by-products at lower margins. The by-product volumes arose from higher sales of prime products to the Canadian tar sands customer.
  • We previously revised our FY:14 estimate to $1.03 from $0.86 and our FY:15 estimate to $1.23 from $1.02 to reflect higher petrochemical volumes partially offset by lower margins, as well a reduction in estimated AMAK earnings. We maintain our BUY rating and raise our price target to $19.50 from $18.50.

RISKS

  • Continued volatility in the company’s product selling prices and feedstock (natural gasoline) could pressure margins and profitability.
  • Delays in signing new customers could restrict revenue and earnings growth.

Syntel (SYNT:SELL) Quarter beats consensus but FY:14 EPS guidance lowered.

Syntel (SYNT:SELL) Quarter beats consensus but FY:14 EPS guidance lowered.

22-APR-14- Syntel (SYNT:SELL) Quarter beats consensus but FY:14 EPS guidance lowered. We are lowering our FY:14 EPS estimate while maintaining our price target of $76.00 and SELL rating.

Q1:14 HIGHLIGHTS

  • Revenues and EPS beat consensus. Revenues came in at $219.5 million versus our estimate of $208.0 million and slightly ahead of consensus at $218.4 million. EPS came in at $1.39, beating our estimate of $1.25 and consensus at $1.32.
  • Revenue guidance was provided at $915-940 million (mid-point of $927.5 million), raised slightly versus previous guidance of $910-940 million (mid-point of $925 million), but still below consensus of $932.1 million and our estimate of $915.67 million. EPS guidance was lowered to $5.10-5.28 (mid-point $5.19) versus prior guidance of $5.10-5.35 (mid-point $5.22), well below consensus of $5.36 and our estimate of $5.29.
  • We lower our FY:14 EPS estimate to $5.20 from $5.29 and maintain our SELL rating and a target price of $76.00

RISKS

  • BPO and IT Spending could strengthen further as the US economy continues to strengthen, and/or firms look to outsource to save costs.
  • SYNT and other IT firms could successfully lobby Congress to exclude the outplacement provision (15% visa cap) in the next version of the Immigration Reform Bill, removing the overhang.
  • Rupee appreciation gets fully priced into consensus and the currency does not appreciate further.