Friday, December 14, 2012

Ind. Production & Capacity Utilization Beat Estimates

Both industrial production and capacity utilization for Nov. came in above consensus and certainly above our projections. This could be due to a dead-cat bounce in production after a slight downturn in Oct. caused by Sandy. We note that the Oct. m/m production change was revised down by 30bps. Higher capacity util. along with some improvement in initial jobless claims could be indicating a slightly better Dec. jobs report. However, we do not anticipate an upturn significant enough to satisfy the Fed's 6.5% unemployment rate anytime soon.

Thursday, December 13, 2012

Mixed Economic News ...

Some mixed economic news this morning:
  • The good news was that initial jobless claims came in at 343K, significantly below the 370K consensus.  Of course, the previous week's figure was revised higher by 2K.  Overall, news of initial claims below 350K is a bit encouraging.  The last time that the seasonally adjusted initial claims were below 350K was in early Oct.  We note that such good news could ease the excitement over another Fed QE.
  • The less encouraging news consisted of Nov. PPI falling 0.8%, more than the economists' 0.5% decline estimate.  Core PPI, which excludes food & energy, increased 0.1%, but still below the 0.2% consensus.  But do not be fooled.  While energy costs declined 4.6%, food costs increased 1.3% in Nov.  We do not consider this good news.  Although volatility is expected in food & energy PPI, we note that Nov.'s 1.3% increase in food inflation followed a 0.4% increase in Oct.  By the way, food is a necessity.
  • Nov. retail sales numbers were mixed.  Overall, they increased by 0.3%, below the 0.6% consensus.  However, excluding auto and gas, retail sales went up 0.7%, beating the 0.5% estimates.  This was driven mainly by a 2.5% increase in sales at electronics & appliance stores, which we think is partially due to the upcoming Christmas Holidays and to the rebuilding going on post-Sandy.  By the way, speaking of electronic stores, BBY (Best Buy Co.) is up nearly 18% in pre-market.  It appears that auto sales did not recover as quickly as economists thought.  Excluding only autos, Nov. retail sales were flat, meeting expectations.  Total motor vehicles & parts dealers' sales went up 1.4% in Nov., not nearly as healthy of a gain as Oct.'s 5.4%. 
CPI and industrial production & capacity utilization will be reported tomorrow morning.  We posted our projections of the last two earlier this week.  S&P 500 futures are pretty much flat, while gold has dipped below $1700 and front month oil futures are down slightly, trading at $86.6. 

Director Purchases 20K AVID Shares

According to two SEC Form 4 filings yesterday, Robert M. Bakish (President & CEO of Viacom's Viacom International Media Networks, and currently sitting on AVID's board) purchased 10K shares of AVID on 11/28 at an average price of $6.28/sh.  He purchased another 10K this week, Monday (12/10), at an average price of $6.82/sh.  With these latest transactions, Mr. Bakish more than doubled the number of AVID common stock that he owns.  He now owns 36K AVID shares according to the last filing.  As a reminder, we posted our thoughts on AVID on 12/10. 

Wednesday, December 12, 2012

Biggest Issue: Wage & Income Growth Stagnation for Most Americans

We've pointed out many times that stagnation of growth in wages for most Americans is one of the biggest issues facing this consumer driven economy. This morning, Wednesday 12/12/12, at 10:10AM (ET), The Atlantic posted a much simpler way of saying the same thing on its site. Enjoy ...

A Giant Statistical Round-up of the Income Inequality Crisis in 16 Charts.

Monday, December 10, 2012

Avid Technology, Inc. (AVID)

We believe we have come across a value play.  Although the stock has moved up 10%+ during the last 2-3 weeks, we believe there is still some attractive upside to this turnaround.

Avid Technology (AVID) makes software and hardware that ad agencies, news organizations, music producers, and other marketing and entertainment companies use to create, edit, and add effects to film, video, and audio.  After a Q3 earnings warning in October, the stock tanked from nearly $9/sh to $5.87/sh.  Since then the stock has formed a base or support at around $6/sh and has slowly climbed back up to $6.83/sh.We note that trading volume of this stock has tapered off since the downturn in Oct.  Based on this, we do not anticipate too much further selling during the short to medium-term.

AVID is a very well-known and respected technology company in the media sector.  It has a very large installed base along with many loyal users.  Businesses utilize AVID's technology to create, edit and distribute content to audiences of all sizes on a variety of platforms.  The Company conducts business globally.  Its revenues are 40%/60% US/international.

Again, we think this is a turnaround story.  One of the mistakes that AVID made a few years back was that it tapped into the consumer side of this business by making a few acquisitions.  Although the results were impressive initially, they led to a consistent decline in the Company's margins given the increasing pricing pressure the Company faced in its consumer business segment.  Given declining margins and increasing operating losses, AVID took steps to make itself a more efficient and profitable company.

AVID divested its consumer business earlier this year, which we believe will help expand gross margins, although it will have a negative impact on the Company's top-line.

In addition, AVID is making its products more open and less dependent on its hardware.  This will also help expand margins by making the Company more of a software company.  By focusing on maximizing the sales of its differentiating software products, AVID will be taking another step towards making higher margin recurring software and maintenance revenues a bigger chunk of its total revenues.

The Company has also taken steps to lower operating expenses going forward.  For example, its manufacturing and R&D teams are now much more closely aligned.  AVID has also reduced its headcount by 15% - 20% during the last 12 months.  Management has said it expects to save around $80MM in opex.

From a revenue standpoint, we do not expect impressive growth.  In fact, we have assumed a below 4% 5-year CAGR.  However, again, a higher percentage of AVID's revenues will be recurring.  From a high-level standpoint, AVID's revenue drivers include trends within the media and entertainment industries such as centralized media asset management systems, increase in creation and distribution of 3D content, prioritization of not only distributing but also creating and editing content on mobile platforms in real-time, and, of course, the continuing transition towards HD content. Although the HD content transition can be considered as nearly complete in the US, we believe there are opportunities for AVID within the emerging markets.

Large events also drive some top-line growth for AVID.  In fact, the Company has long been successful in selling new products or upgrading products before very widely covered US and/or international events.  The Presidential election and the Olympics this year are a couple of good examples.  Sales generated by such events usually close 2 - 3 quarters before the actual events take place.  Looking ahead, we believe US midterm elections and the World Cup in 2014 will drive more top-line growth in the second half of FY '13.  What makes the 2014 midterm elections 'special' is that they include 36 gubernatorial races.  CA, NY, and TX are just a few examples of the states having gubernatorial elections.  Those races will certainly be widely covered.  Of course, the worldwide coverage of the 2014 World Cup doesn't need any further explanation.

AVID faces many competitors such as Apple (AAPL) and Adobe (ADBE).  However, given its sizable installed base, we do not expect the Company to lose big opportunities or current clients to competitors.  In fact, AVID's divestment of its consumer business, we believe, will help it differentiate more effectively from its competitors.


From a valuation standpoint, we did a DCF on AVID and came up with a $10/sh valuation.  In our opinion, a valuation based on comps is much more realistic.  For this reason, we value AVID at $9/sh based on 7x FY '13 EBITDA plus the Company's $1.83/sh in net cash (no debt).  Other companies in the space are trading at an average EV/EBITDA multiple of 8.  At $6.83/sh, AVID is trading at only 5x forward EBITDA.  It appears the Street is not expecting any return from AVID's restructuring at least during the next 12 months.  We note the Company is also trading at only 0.75x book value.

The 32% upside that our $9/sh valuation represents is only based on valuation.  The stock could go above $10/sh during 2H of 2013 as the Street begins to recognize the benefits of the restructuring.  We believe its institutional fan base may increase further, which then will likely push up the stock a bit more.  The near-term catalyst is AVID's Q4 results, which will be announced in Feb.  We think the Company will generate positive non-GAAP EPS and may breakeven on a GAAP basis.

Nov. Industrial Production & Capacity Utilization Expectations

Industrial production and capacity utilization for November will be released this Friday (12/14) morning.  As demonstrated by the ISM and employment stats, it is very difficult to estimate the impact of Sandy on these economic figures.  We continue to believe that, at least in the short-term, the economy was impacted negatively by Sandy and we may see a sign of that in Friday's economic numbers.  We estimate the industrial production index to come in at 96.0%, a 0.6% decline from the previous month.  The consensus stands at 96.9%, an increase of 0.3%.  Given the work week figures of most regional surveys and the ISM employment sub-indexes, along with other production indicators, we also expect to see a decline in capacity utilization.  Our projection stands at 76.6%, a 1.2% sequential decline.  The Street is expecting 78.0% or a 0.2% increase.

Friday, December 7, 2012

November Employment Report Surprised to the Upside

Well, it appears that the Sandy effect was absent from the November jobs number as BLS reported a 146K gain in NFPs, significantly above the 80K consensus and certainly higher than our 70K.  However, we note that the September and October numbers were revised down by a total of 49K (16K for Sept. and 33K for Oct.)!  In addition, while the 7.7% unemployment rate might sound good, it is likely the result of the participation rate declining to 63.6% (from 63.8% in Oct.) and number of people not in the labor force increasing by 542K.  Let's put it this way, since Nov. 2011 more than 2MM people have left the labor force.
  • The private NFP count increased by 147K, indicating that there were only 1,000 jobs cut in the government sector. 
  • Retail led the way by adding more than 52K jobs as we are approaching Christmas season.  This was also evident in the 13.1K additional wholesale trade jobs and 23K in leisure and hospitality. 
  • Given Obama's victory in the prior month and the increased likelihood of Obamacare being implemented, number of jobs within the health care and social assistance industry rose by 22K. 
  • The 12K increase in jobs within the information industry may be indicating additional IT investments being made by companies to either prepare for growth or become more efficient given the likelihood of the G. W. Bush-era tax cuts coming to an end.
  • There was weakness in construction as jobs in that industry slipped by 20K.  We might see a gradual increase in this one during the Dec. - March period as some rebuilding post-Sandy will likely begin.  It will be a slow process as we are in the winter season.
  • Manufacturing was also weak with a decline of 7K jobs in Nov.  The 11K increase in durable goods jobs was more than offset by the 18K decline in non-durables, such as jobs in the foods sector.
  • Average weekly hours were unchanged, while average hourly earnings increased by 4c. 
  • On the household survey front, again, the unemployment rate dipped 20bps to 7.7%.  The U-6 unemployment rate also declined by 20bps, going to 14.4%. 
  • It appears that a lot of the decline in participation rate and the increase in people no longer being in the labor force came from part-time employees.  Part-time for economic reasons dipped 168K.  114K less people were part-time workers due to bad jobs or business conditions, but the ones that could only find part-time jobs went up by 44K.  Part-time workers because of non-economic reasons declined by 335K.  We think a big chunk of that number was due to people leaving the labor force completely. 

Overall, while the change in NFP was much higher than expected.  It appears impact of Sandy remains to be seen.  We also believe that the 50K+ change in retail was driven by Christmas season and we will likely see that figure come back down for Dec. and Jan.  The S&P futures are up 4.5 points or 0.3%.  Gold and oil futures are pretty much flat. 

Thursday, December 6, 2012

Nov. NFP Projection ...

Unfortunately, due to some unexpected events, we were not able to provide our projections for Nov. ISM.  Manufacturing ISM missed expectations, while services ISM beat the consensus. 
However, we found some time to run our employment models.  The results are as follows: for Nov. we expect BLS to report an increase of 70K in the NFP count.  Our forecast is slightly below the 80K consensus. 
Obviously, the Sandy storm impacted the NFP numbers.  The storm was also an excuse used by Moody's on Wednesday morning to describe why ADP came in below expectations, even though most economists had already included an estimated impact of Sandy in their projections.  We note that weekly released initial claims had already climbed above the critical 350K level (seasonally adjusted) approx. 3 weeks before the storm hit the east coast.  In addition, those claims have remained near the 400K level even 4 weeks after Sandy.  Simply put, while Sandy impacted employment numbers negatively, we do not think it was as significant as it has been presented to us by the main uber-bullish, very popular and colorful US financial media outlet.  For this reason, we do not expect a significant bounce in the Dec. NFP count. 
Nov. employment report will be released on Friday (12/7) at 8:30AM (ET).