Report
Valens Research

Valens Equity Insights and Inflections - 2018 01 24

ADBE currently trades near peak historical valuations relative to UAFRS-based (Uniform) Earnings, with a 38.3x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to increase from 34% in 2016 to record levels of 73% in 2021, accompanied by 6% Uniform Asset growth. However, analysts have less bullish expectations, projecting Uniform ROA to only improve to 40% by 2018, accompanied by 30% Uniform Asset growth. Moreover, Valens' qualitative analysis of the firm's Q4 2017 earnings call highlights that management has concerns about revenues and their growth outlook. At current valuations, markets are pricing in a best case scenario for the business, and considering management concerns about their outlook, any negative surprise could lead to material equity downside.

A Q4 2017 Embedded Expectations Analysis – Market expectations are for record-high Uniform ROA, but management has concerns about comps, R&D investments, and international markets


MAR Q3 2017 Embedded Expectations Analysis – Market expectations are for record-high Uniform ROA, and management is confident about their loyalty program, the integration of sales teams, and asset recycling targets


RTN Q3 2017 Embedded Expectations Analysis – Market expectations are for record Uniform ROA performance, but management has concerns about demand and growth

A, MAR, RTN
Underlyings
Adobe Inc.

Adobe is a software company. The company provides a line of products and services used for creating, managing, delivering, measuring, optimizing, engaging and transacting with content across personal computers, devices and media. The company's segments are: Digital Media, which provides products, services and solutions that enable individuals, teams and enterprises to create, publish and promote their content; Digital Experience, which provides a platform and set of applications and services through Adobe Experience Cloud; and Publishing, which contains products and services that address market opportunities including eLearning solutions, web conferencing, web application development and printing.

Agilent Technologies Inc.

Agilent Technologies is engaged in life sciences, diagnostics and applied chemical markets. The company's segments are: Life Sciences and Applied Markets Business, which provides instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products; Diagnostics and Genomics Business, which includes the genomics, nucleic acid contract manufacturing and research and development, pathology, companion diagnostics, reagent partnership and biomolecular analysis businesses; and Agilent CrossLab Business, which spans the entire lab with its consumables and services portfolio to improve customer outcomes.

Cardinal Health Inc.

Cardinal Health is a healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories and physician offices. The company's segments include: Pharmaceutical and Medical. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, specialty pharmaceutical and over-the-counter healthcare and consumer products in the United States. The company's Medical segment manufactures, sources and distributes Cardinal Health branded medical, surgical and laboratory products, which are sold in the United States, Canada, Europe, Asia and other markets.

Fidelity National Information Services Inc.

Fidelity National Information Services is a provider of technology solutions for merchants, banks, and capital markets firms globally. The company's solutions include merchant acquiring solutions; payment solutions; global eCommerce solutions; processing and ancillary applications solutions; digital solutions; fraud, risk management and compliance solutions; electronic funds transfer and network services solutions; card and retail payment solutions; wealth and retirement solutions; item processing and output services solutions; securities processing and finance solutions; global trading solutions; asset management and insurance solutions; and corporate liquidity solutions.

Humana Inc.

Humana is a holding company. Through its subsidiaries, the company is a health and well-being company. The company manages its business with three segments: Retail, which consists of products sold on a retail basis to individuals including medical and supplemental benefit plans, such as Medicare and state-based Medicaid Contracts; Group and Specialty, which consists of employer group commercial fully-insured medical and specialty health insurance benefits, including dental, vision and life insurance benefits, as well as administrative services only; and Healthcare Services, which includes pharmacy solutions, provider services, clinical care services, and predictive modeling and informatics services

Intercontinental Exchange Inc.

Intercontinental Exchange is a holding company. Through its subsidiaries, the company is a global operator of regulated exchanges, clearing houses and listings venues, and a provider of data services for commodity, financial, fixed income and equity markets. The company operates regulated marketplaces for listing, trading and clearing an array of derivatives contracts and securities across primary asset classes, including metals, equities, bonds and currencies, and also provides mortgage and technology services. In addition, the company provides data services to support the trading, investment, risk management and connectivity needs of customers. The company has two segments: Trading and Clearing and Data and Listings.

LINDE AG

Linde is a gases and engineering company based in Germany. Co. operates through two divisions. The Gases division provides a range of compressed and liquefied gases as well as chemicals. Co.'s gases are used in the energy sector, in steel production, chemical processing, environmental protection, and welding, as well as in food processing, glass production and electronics. The Engineering division is engaged in industrial plants construction globally, focusing on market segments such as plants for the production of hydrogen and synthesis gas, air separation and olefins as well as plants for natural gas treatment.

M.D.C. Holdings Inc.

M.D.C. Holdings is engaged in the homebuilding and financial services. The company's homebuilding operations consist of its subsidiaries that purchase finished or develop lots to the extent necessary for the construction and sale primarily of single-family detached homes to first-time and first-time move-up homebuyers. The company's financial services operations include: HomeAmerican Mortgage Corporation, which originates mortgage loans for its homebuyers; American Home Insurance Agency, Inc., which provides third-party insurance products to its homebuyers; and American Home Title and Escrow Company, which provides title agency services to its homebuilding subsidiaries and its customers in certain states.

Marriott International Inc. Class A

Marriott International is a worldwide operator, franchisor, and licensor of hotel, residential and timeshare properties under various brand names at different price and service points. The company has operations in the following reportable business segments: North American Full-Service, which includes the company's Luxury and Premium properties located in United States and Canada; North American Limited-Service, which includes the company's Select properties located in United States and Canada; and Asia Pacific, which includes all properties in the company's Asia Pacific region.

McKesson Corporation

McKesson provides pharmaceuticals and medical supplies and services to its customers. The company's segments include: U.S. Pharmaceutical and Specialty Solutions, which provides distribution and logistics services for branded, generic, specialty, biosimilar and over-the-counter pharmaceutical drugs and other healthcare-related products to customers; European Pharmaceutical Solutions, which provides distribution and services to wholesale, institutional and retail customers in European countries where it owns, partners or franchises with retail pharmacies; and Medical-Surgical Solutions, which delivers medical-supply distribution, logistics, biomedical and other services to healthcare providers.

Mettler-Toledo International Inc.

Mettler-Toledo International is a supplier of precision instruments and services. The company manufactures weighing instruments for use in laboratory, industrial, packaging, logistics, and food retailing applications. The company also manufactures several related analytical instruments and provides automated chemistry solutions used in drug and chemical compound discovery and development. In addition, the company manufactures metal detection and other end-of-line inspection systems used in production and packaging and provides solutions for use in certain process analytics applications. The company has five segments: United States Operations, Swiss Operations, Western European Operations, Chinese Operations, and Other.

Mohawk Industries Inc.

Mohawk Industries is a global flooring manufacturer for residential and commercial spaces around the world. The company has three segments: Global Ceramic, which designs, manufactures, sources, distributes and markets a line of ceramic, porcelain and natural stone tile products used for floor and wall applications; Flooring North America, which designs, manufactures, sources and distributes broadloom carpet, carpet tile, rugs and mats, carpet pad, laminate, medium-density fiberboard, luxury vinyl tile (LVT) and sheet vinyl; and Flooring Rest of the World, which designs, manufactures, sources and distributes laminate, LVT and sheet vinyl, wood flooring, broadloom carpet and carpet tile collections.

Norfolk Southern Corporation

Norfolk Southern is a holding company. Through its subsidiaries, the company is engaged in the rail transportation of raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest and, via interchange with rail carriers, to and from the rest of the United States. The company also transports overseas freight through several Atlantic and Gulf Coast ports. The company provides intermodal network in the eastern half of the United States. The company's railroad operates in several states and the District of Columbia. The company's system reaches manufacturing plants, electric generating facilities, mines, distribution centers, transload facilities, and other businesses in its service area.

Northrop Grumman Corporation

Northrop Grumman is a security company. The company's segments include: Aerospace Systems, which is engaged in the design, development, integration and production of manned aircraft, autonomous systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems; Innovation Systems, which is engaged in the design, development, integration and production of flight, armament and space systems; Mission Systems, which is engaged in end-to-end mission solutions and multifunction systems; and Technology Services, which is engaged in delivering solutions and services in support of mission-critical networks and systems.

Raytheon Company

Raytheon, together with its subsidiaries, is a technology company, focused on defense and other government markets. The company has five segments: Integrated Defense Systems, which is engaged in integrated air and missile defense; large land- and sea-based radar solutions; command, control, communications, computers, cyber and intelligence solutions; Intelligence, Information and Services, which provides technical services to intelligence, defense, federal and commercial customers; Missile Systems, which produces missile and combat systems; Space and Airborne Systems, which develops integrated sensor and communication systems for missions; and Forcepoint, which develops cybersecurity products.

Twenty-First Century Fox Inc. Class A

Twenty-First Century Fox is a media and entertainment company with operations in the following segments: Cable Network Programming, which consists of the production and licensing of programming distributed primarily through cable television systems and others; Television, which consists of the broadcasting of network programming and the operation of power broadcast television stations; Filmed Entertainment, which consists of the production and acquisition of live-action and animated motion pictures for distribution and licensing in all formats in all entertainment media worldwide, and the production and licensing of television programming worldwide; and Other, Corporate and Eliminations.

ViacomCBS Inc. Class B

CBS is a mass media company, which operates the following segments: Entertainment, which is consists of the CBS Television Network, CBS Television Studios, CBS Global Distribution Group, Network 10, CBS Interactive, CBS Sports Network, and CBS Films as well as the company's digital streaming services CBS All Access and CBSN; Cable Networks, which consists of Showtime Networks and its digital subscription streaming offering, and Smithsonian Networks; Publishing, which consists of Simon & Schuster's consumer book publishing business with imprints such as Simon & Schuster, Pocket Books, Scribner and Atria Books; and Local Media, which consists of CBS Television Stations and CBS Local Digital Media.

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Valens Research

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  • GAAP and IFRS have failed to provide rules for reliable financial statement reporting
  • Stock analyst recommendations are not grounded in disciplined financial analysis
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  • Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available

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Many years later, our business model remains because little has changed on Wall Street.

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  • The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming

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