David Schilansky, COO of DBV Technologies SA – ADR (DBVT), says the revenue side of the company is very simple. DBVT is a loss-making company and does not generate any significant revenues.
“We do benefit from what we call credit tax research, which is really a tax inflow from the French government related to the spend to the R&D expenditures, but this is the only source of revenue that we have, and it’s about 4 million euro per year, so it’s really nonsignificant at this stage,” he says.
Schilansky says the company burned roughly 3.5 to 4 million euro per month last year and this year to date. He says that burn rate will accelerate in the future as DBVT intensifies the number of clinical studies it is running.
“We’re also setting up a commercial infrastructure in the U.S., but we’re not giving precise numbers,” he says. “What we have said about our current cash position is that close to 300 million euro will finance DBV until the launch of the product in the U.S.”
Analyst James Marsh upgraded Dreamworks Animation Skg Inc (DWA) earlier this year after the company announced a restructuring and made some management changes.
“Basically what has been happening at DreamWorks over the last few years is the company has been trying to diversify away from feature films and build the television business, build the consumer products business, and a new media unit. So when the company releases the next blockbuster film, they have multiple ways to monetize that hit, and I think it was the right strategy,” Marsh says.
Marsh thinks restructuring is the right approach and that DreamWorks will lower its film production costs substantially. The investments the company has made in consumer products are starting to pay off, and Marsh says it seems to be one of the only major media companies that has a digital business that seems to be working.
“So we like the DreamWorks story a lot at this level. And I think next year, TV business will still be doing $200 million-plus in revenues,” he says. “You have a new ‘Shrek‘ movie coming out. So I think it will be off to the races for DreamWorks as you go into 2016.”
While many analysts are bearish on Pandora Media Inc (P), Piper Jaffray & Co. Analyst James Marsh has a constructive view of the stock. He previously had a “hold” rating on the stock, and his primary concern was that the company was having trouble monetizing its listenership.
“However, they got back on track on that front, and I think monetization is probably the single most important thing to follow when you are trying to make money on the Pandora stock,” he says.
Marsh says two issues have put a lid on the share’s performance. One is the ongoing rate renegotiation process at the Copyright Royalty Board, which he expects to wrap up by the end of the year. The other is a steady stream of competitors moving into the market, which he says Pandora has done a good job of fending off.
“We think we will get positive news from the Copyright Royalty Board. It also removes the uncertainty about the largest expense line, content costs,” Marsh says. “And I think it also provides an opportunity for Pandora to work more directly with the labels after that deal is done, so that they can move their service internationally.”
Ben Mogil, Analyst at Stifel Nicolaus & Co., recently downgraded MSG Networks Inc (MSGN). He says the downgrade reflects his view that the regional sports channel is one of the three in the market that does not have full-year programming.
“So it is very vulnerable as people drop down service levels,” he says.
There is a segment of the population that doesn’t want sports, Mogil says. But, he says there is also a segment that is happy to get sports, but doesn’t want to watch the Rangers or Knicks, but wants to watch another local team.
“So one of the challenges in a market like New York, where you’ve got three different sports networks, is that there are many people who get the network who either don’t care about sports or about these particular teams,” Mogil says. “We think in that environment that’s a channel which is pretty vulnerable.”
Piper Jaffray & Co. Analyst James Marsh says the content-creation business is a good place to be right now. As such, one of the stocks he likes is Lions Gate Entertainment Corp. (LGF).
“There is a battle between SVOD and the traditional pay-television platform, and Lionsgate is effectively the arms merchant here,” Marsh says.
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Marsh says Lionsgate provides shows like “Orange is the New Black” to Netflix and “Anger Management” to FX. Therefore, the company benefits regardless of who wins the battle between SVOD and pay TV.
“So in many ways, certainly over the moderate term, I don’t think Lionsgate really cares who wins this battle for the television as long as they are buying original content from them; so I think companies like that are the best positioned,” Marsh says.
Cubic Corporation (CUB) CFO John D. Thomas says the company is targeting to add $200 million in annual sales in the near term from its C4ISR business. He says that profit margins should be better than the company’s other businesses.
“DTECH adds the capability of ruggedizing networks,” he says. “They retrofit a lot of Cisco equipment and make it ready for the battle zone.”
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As for future acquisition, Thomas says Cubic will be targeting overseas defense-related businesses. He says the company has made three international acquisitions in the last couple of years, but still has an appetite for more.
“Overall, we are focused on growing the C4ISR business. We are looking at growing what we call our NextCity initiative in transportation, which is pushing us into some adjacent areas along the lines of real-time passenger information, intelligent highways, toll roads and parking,” he says. “These are different kinds of markets that we’re not really big in today, so those would be the key focus areas for us.”
Portfolio Manager Brian Massey of Mar Vista Investment Partners says his firm has been a long admirer of American Tower Corp’s (AMT) business model and management team, and that the stock has been a terrific compounder for investors.
“We often hold it up as the poster child of the kind of compounding machines we prize. A single tower generates attractive amounts of excess capital, and management has plenty of opportunities to reinvest that capital either in new builds or acquisitions at very high rates of return,” Massey says.
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Massey says American Tower has significant scale advantages and that incremental returns are almost 100% once a tower is built. He adds that secular growth drivers for tower infrastructure around the globe are powerful, as wireless demand is expected to grow 50% per year over the next five years.
“To give an example of the global opportunity, the U.S. has 1,500 subscribers per tower compared to almost 4,400 subscribers per tower in Brazil. The numbers are even more staggering in the other developing markets. We think there is a very long secular tailwind of densifying wireless networks that will allow American Tower to grow revenues organically 6% to 9%,” Massey says.
Graco Inc. (GGG) is one of the stocks that William Blair & Company Analyst Nick Heymann is currently recommending. He says the stock currently meets the criteria for low 20s return on invested capital, mid-20s EBIT, and mid-single-digit organic growth, as well as very strong free cash conversion.
“In Graco’s case, their forward fundamental visibility has recently been diminished because they were required by the Department of Justice to sell a business called Liquid Finishing, which accounted for about 12% or $0.46 of their earnings of $3.65 last year,” Heymann says. “They completed that divestiture for a good price in April this year, and investors currently haven’t quite figured out how all those earnings are going to be replaced.”
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At this point, Heymann believes that $.40 of the $.46 of earnings from Liquid Finishing has now been replaced based on recent acquisitions or accelerated share repurchase. And, he says Graco has additional opportunities in the second half of 2015 to further expand incremental earnings potential.
“With $300 to $400 million of additional cash optionality and financial flexibility, they can continue to repurchase their stock or make small accretive acquisitions,” he says. “Alternatively, they can generate incremental sales and earnings growth from their continued efforts to accelerate their very nominal penetration for their products in emerging markets.”
Stifel & Nicolaus & Co., Inc., analyst Joseph DeNardi has a buy rating on Lockheed Martin Corporation (LMT). He says management teams of defense companies, by and large, understand that investors own their stocks for cash generation.
“Even though Lockheed made a pretty sizable acquisition, they said that they can continue to grow the dividend and repurchase stock,” DeNardi says.
Lockheed also announced the planned spinout or sale of their services business. DeNardi says he thinks management recognizes what they need to do to keep investors happy.
“Also, I think the international market is getting better in terms of demand signals, particularly the Middle East, Europe and Asia Pacific,” DeNardi says. “I think the demand in those markets is very strong, so I think that’s helping to offset a softer U.S. defense spending environment.”
Stifel & Nicolaus & Co. Analyst Joseph DeNardi has a “buy” rating on Raytheon Company (RTN), a technology company specializing in the defense, civil government and cybersecurity markets. He says Raytheon is a longer-term thesis, and is best positioned to benefit from strong international business.
“Thirty percent of their business is international, 44% of their backlog is international customers, so they have a really good runway for continuing to grow the international business,” DeNardi says.
International business is typically higher margin than U.S. sales. DeNardi says he believe that will differentiate Raytheon over the next few years.
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