Report
Valens Research

Valens Equity Insights and Inflections - 2018 05 09

VFC currently trades near historical highs relative to Uniform Earnings, with a 24.2x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to expand from 25% in 2017 to record-high 34% levels in 2022, accompanied by 1% Uniform Asset shrinkage going forward. However, analysts have less bullish expectations, projecting Uniform ROA to remain at current 25%-26% levels through 2019, accompanied by immaterial Uniform Asset shrinkage. Moreover, Valens' qualitative analysis of the firm's Q4 2017 earnings call highlights that management has concerns about Williamson-Dickie, their portfolio, and margins. At current valuations, markets are pricing in a near-best-case scenario for VFC, and considering management concerns about their outlook, any negative surprise could lead to material equity downside.


FB Q1 2018 Embedded Expectations Analysis – Management's confidence about advertising, growth, and innovation imply market expectations are too bearish, and upside is warranted

GE Q1 2018 Embedded Expectations Analysis – Market expectations are for a recovery in Uniform ROA, but management has concerns about revenues and costs


TSN Q1 2018 Embedded Expectations Analysis – Market expectations are for Uniform ROA to remain near current peaks, and management is confident in their Prepared Foods segment and their team

ALXN, ASML:NLD, CSX, DHI, DHR, FAST, GOOGL, HON, IBM, K, NKE, NOVN:CHE, ORCL, PM, TWTR, TXT
Underlyings
Alexion Pharmaceuticals Inc.

Alexion Pharmaceuticals is a biopharmaceutical company serving patients and families affected by rare diseases through the discovery, development and commercialization of therapies. The company has developed and commercialized two complement inhibitors to treat patients with paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome, as well as the complement inhibitor to treat anti-acetylcholine receptor antibody-positive generalized myasthenia gravis and neuromyelitis optica spectrum disorder in patients who are anti-aquaporin-4 antibody positive. In addition, the company has two enzyme replacement therapies for metabolic disorders, hypophosphatasia and lysosomal acid lipase deficiency.

Alphabet Inc. Class A

Alphabet is a holding company. Through its subsidiaries, the company is engaged in a collection of businesses, which its primary business is Google. The company reports all non-Google businesses collectively as Other Bets. Google's main products and platforms are Android, Chrome, Gmail, Google Drive, Google Maps, Google Play, Search, and YouTube. The company also provides advertisers with tools that help them attribute and measure their advertising campaigns. In addition, Other Bets includes Access, Calico, CapitalG, GV, Verily, Waymo, and X, among others. Other Bets primarily engages in the sales of internet and TV services through Access as well as licensing and research and development services through Verily.

ASML Holding N.V.

CSX Corporation

CSX provides rail-based freight transportation services. The company's principal operating subsidiary, CSX Transportation, Inc., provides a link to the transportation supply chain through its rail network, which serves centers in states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. The company's CSX Intermodal Terminals, Inc. subsidiary owns and operates a system of intermodal terminals, primarily in the eastern United States and also performs drayage services (the pickup and delivery of intermodal shipments). The company's Total Distribution Services, Inc. subsidiary serves the automotive industry with distribution centers and storage locations.

D.R. Horton Inc.

D.R. Horton is a homebuilding company. The company's business operations consist of homebuilding, a majority-owned residential lot development company, financial services and other activities. The company's financial services operations provide mortgage financing and title agency services to homebuyers in its homebuilding markets. The company's subsidiary, DHI Mortgage, provides mortgage financing services primarily to its homebuyers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers. The company's subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to its homebuyers.

DANAHER CORPORATION

Danaher designs, manufactures and markets medical, industrial and commercial products and services. The company's segments include: Life Sciences, which provides research tools to study genes, proteins, metabolites and cells, in order to understand the causes of disease, identify therapies and test drugs and vaccines; Diagnostics, which provides analytical instruments, reagents, consumables, software and services that hospitals, physicians' offices, reference laboratories and other critical care settings use to diagnose disease and make treatment decisions; and Environmental and Applied Solutions, which provides products and services to protect resources and global food and water supplies.

Facebook Inc. Class A

Facebook is building and engaging products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and in-home devices. The company's products include: Facebook, which enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers; Instagram, which is a place where people can express themselves through photos, videos, and private messaging, and explore their interests in businesses, creators and communities; Messenger and WhatsApp, which are messaging applications; and Oculus, which connects people through its Oculus virtual reality products.

Fastenal Company

Fastenal is engaged in the wholesale distribution of industrial and construction supplies. The company is a distributor of fasteners and related industrial and construction supplies. This includes threaded fasteners, bolts, nuts, screws, studs, and related washers, as well as miscellaneous supplies and hardware, such as pins, machinery keys, concrete anchors, metal framing systems, wire rope, strut, rivets, and related accessories. The company's fastener product line is primarily sold under the Fastenal product name.

General Electric Company

General Electric is a technology industrial company. The company's segments include: Power, which serves power generation, industrial, government and other customers with products and services related to energy production; Renewable Energy, which engineers and manufactures energy equipment and projects, grid solutions and digital services; Aviation, which designs and produces commercial and military aircraft engines, digital components, electric power and mechanical aircraft systems; Healthcare, which provides healthcare technologies; and Capital, which provides financial products and services that build on the company's industry capabilities in aviation, power, renewables, healthcare and other activities.

Honeywell International Inc.

Honeywell International is a technology and manufacturing company. The company has four segments: Aerospace, which supplies products, software and services for aircrafts; Honeywell Building Technologies, which provides products, software, solutions and technologies including building control and optimization, energy management, access control, video surveillance, fire products, and remote patient monitoring systems; Performance Materials and Technologies, which develops and manufactures chemicals and materials, process technologies and automation solutions; and Safety and Productivity Solutions, which provides products and software that improve productivity, workplace safety and asset performance.

International Business Machines Corporation

International Business Machines provides integrated solutions and products that utilize data, information technology, capability in industries and business processes. The company has five segments: Cloud and Cognitive Software, which provides a range of software offerings; Global Business Services, which provides consulting, systems integration, application management and business process outsourcing services; Global Technology Services, which provides project services, managed and outsourcing services, cloud-delivered services, and technical and IT support services; Systems, which provides technology and service; and Global Financing, which provides client financing, among others.

Kellogg Company

Kellogg is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. The company's principal products are snacks, such as crackers, savory snacks, toaster pastries, cereal bars, granola bars and bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles. The company's snacks brands are marketed under brands such as Kellogg's, Cheez-It, Pringles, Austin, Parati, and RXBAR. The company's cereals and cereal bars are generally marketed under the Kellogg's name, with some under the Kashi and Bear Naked brands. The company's frozen foods are marketed under the Eggo and Morningstar Farms brands.

Nike, Inc.

Novartis AG

Novartis is a multinational healthcare group based in Switzerland. Co. provides healthcare solutions that address the evolving needs of patients and societies worldwide. Co.'s broad portfolio includes innovative medicines, eye care products and cost-saving generic pharmaceuticals. Co.'s operations are organized along three operating divisions: Innovative Medicines Division; Sandoz Division; and Alcon Division. Co.'s operations are supported by the Novartis Institutes for BioMedical Research and Novartis Business Services.

Oracle Corporation

Oracle provides products and services that address enterprise information technology (IT) environments. The company's products and services include applications and infrastructure offerings. The company's cloud and license business engages in the sale, marketing and delivery of its applications and infrastructure technologies through cloud and on-premise deployment models including its cloud services and license support offerings; and its cloud license and on-premise license offerings. The company's hardware business provides Oracle Engineered Systems, servers, storage, industry-specific hardware, operating systems, virtualization, management and other hardware-related software to support diverse IT environments.

Philip Morris International Inc.

Philip Morris International is a holding company. Through its subsidiaries, the company is a tobacco company engaged in the manufacture and sale of cigarettes, smoke-free products and associated electronic devices and accessories, and other nicotine-containing products in markets outside the United States. The company's portfolio comprises international and local brands including Marlboro, which is complemented in the premium-price category by Parliament. The company's other international cigarette brands are Bond Street, Chesterfield, L&M, Lark and Philip Morris. The company also owns various local cigarette brands, such as Dji Sam Soe, Sampoerna A and Sampoerna U in Indonesia, and Fortune and Jackpot in the Philippines.

Textron Inc.

Textron is a multi-industry company. The company's segments include: Textron Aviation, which manufactures, sells and services Beechcraft and Cessna aircraft, and services the Hawker brand of business jets; Bell, which supplies military and commercial helicopters, tiltrotor aircraft, and related spare parts and services; Textron Systems, which includes unmanned systems, marine and land systems, and simulation, training and other; Industrial, which designs and manufactures a variety of products within fuel systems and functional components and specialized vehicles product lines; and Finance, which provides financing to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.

Twitter Inc.

Twitter provides products and services for people, organizations, advertisers, developers and platform and data partners. The company's product, Twitter, is a global platform for public self-expression and conversation in real time. The company's mobile application, Periscope, lets anyone broadcast and watch video live with others. The company's products and services for advertisers include Promoted Products such as Promoted Tweets, Promoted Accounts, and Promoted Trends. The company's products for developers and data partners provide tools and public application programming interfaces to build applications and other products that utilize Twitter data and syndicate and distribute Twitter content across their properties.

Tyson Foods Inc. Class A

Tyson Foods is a food company. The company's operations consist of breeding stock, contract farmers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through its wholly-owned subsidiary, Cobb-Vantress, Inc., the company is engaged as poultry breeding stock supplier. The company also processes live fed cattle and hogs and fabricates dressed beef and pork carcasses into primal and sub-primal meat cuts, case-ready beef and pork and fully-cooked meats. The company produces a range of fresh, frozen and refrigerated food products. The company operates in Beef, Pork, Chicken and Prepared Foods segments.

V.F. Corporation

VF is an apparel and footwear company. The company designs, produces, procures, markets and distributes a variety of lifestyle products, including outerwear, footwear, occupational and performance apparel, jeanswear, backpacks and luggage for consumers of all ages. Products are marketed primarily under the company-owned brand names. The company's segment comprised of: Outdoor, which includes performance-based and outdoor apparel, footwear and equipment; Active, which includes active apparel, footwear and accessories; Work, which consists of work and work-inspired lifestyle apparel and footwear and occupational apparel; and Jeans, which markets denim and related casual apparel products.

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Valens Research
Valens Research

In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:

  • GAAP and IFRS have failed to provide rules for reliable financial statement reporting
  • Stock analyst recommendations are not grounded in disciplined financial analysis
  • Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
  • Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available

We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.

  • Corporate credit ratings remain years behind the fundamental underpinnings of company performance
  • Stock analysts continue to make recommendations with deeply inherent biases
  • Research firms have failed to break down the walls between credit, equity, and macroeconomic research
  • The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming

The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.

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