Buy the Stocks of Juniper Networks, Inc. (NYSE: JNPR)

Summary: 

Juniper is a leading provider of networking solutions and communication devices. The company has outperformed the broader market over the last six months. Moreover, estimates have been stable lately ahead of the company's Q4 earnings release. We also note that the company has positive record of earnings surprises in recent quarters. Juniper’s frequent product launches, cost reduction initiatives and improving execution are encouraging. Additionally, the company’s expansion into the software

defined network segment should strengthen its position in the networking space.

Further, customer wins like Telefonica will continue to drive top-line growth in the near term. However, an uncertain global macro environment and potentially weak investment patterns among customers are the major headwinds. Moreover, stiff competition and ongoing consolidation in the telecom market remain concerns.

Why will you buy JNPR ??

Juniper’s networking architecture runs on a single open source operating software named Junos. A common platform spanning across all the routing, switching and security areas reduces complexity in increasingly complex data centers. Juniper also offers a Software Development Kit (SDK) to its partners and customers to allow additional customization. Leveraging the operating system, Juniper introduced several products and enhancements over the last few years. We consider this to be a real differentiator, which gives Juniper a competitive advantage. 

Juniper is set to capitalize on the growing demand for data center virtualization, cloud computing and mobile traffic packet/optical convergence. The company is offering its new suites of products such as the T4000 core router, QFX data center platform, ACX and PTX packet/optical solution among others. With the growing usage of smartphones and tablets, mobile data traffic has gone up. This has resulted in growing demand for advanced networking architecture, in turn leading service providers to spend more on routers and switches. Juniper is expected to benefit from the higher spending pattern among carriers to upgrade their networks to support the incremental growth in data traffic. Increased spending from AT&T and Verizon — Juniper’s two large customers — are expected to aid its top line, going forward. We believe Juniper’s new products will be able to meet the escalating needs and thereby find easy acceptance among customers. 

Juniper entered the Software Defined Networking (SDN) space with the acquisition of SDN start-up Contrail Systems (Dec 2012). According to IDC, the SDN space is expected to generate $3.7 billion in revenues by 2016. Juniper is optimistic about its SDN products and believes that the technology is increasingly attracting customer attention. The company has expanded its SDN product portfolio with new software and hardware offerings such as Junos Fusion, NorthStar Controller and CSE2000 Carrier Services Engine. These products help customers to build high-IQ networks and cloud-based architectures. However, SDN technology is relatively new and may take some time to catch on. With gradual demand growth, we believe that Juniper is well positioned to generate steady revenues from this area.

Juniper has been successful at developing global channel partners and strategic reseller relationships with Ericsson, International Business Machines Corp. and Nokia Siemens Networks. In addition, Juniper has worked with more than 9,000 channel partners to reach customers globally. The company created the J-Partner program for its preferred reseller and alliance partners. The company has also developed partnerships with market leaders, such as Avaya Inc., Microsoft Corporation, NEC and Symantec Corporation. Apart from this, Juniper and IBM entered into an Original Equipment Manufacturer agreement, according to which IBM will provide Juniper’s Ethernet networking products and support as part of its data center portfolio of products. Recently, Juniper collaborated with VMware to provide private cloud-based solutions across the APAC region. Through this collaboration, Juniper will combine its MetaFabric architecture with VMware’s NSX network virtualization platform that provides private cloud-based services. These partnerships will enhance its networking technology ultimately helping companies to transfer an enormous amount of data through

different networks. These partnerships will help Juniper to enhance its reach and expand the customer base.

Juniper in 2014 devised a strategic Aggressive Capital Return Plan under which it has targeted to return $4.1 billion to shareholders by 2016-end. Since 2014, the company had returned approximately $3.91 billion. These initiatives will not only boost earnings per share but also instill shareholders’ loyalty.

Buy the stocks of KB Home(NYSE: KBH)

Summary: 

KB Home delivered impressive results during the first two quarters of 2016, surpassing the Zacks Consensus Estimate on both counts in both the quarters. Healthy housing industry and strong demand trends in the markets served by KB Home in the first half drove the strong results. It was benefitted from strong backlogs in the previous quarters and broke the previous trend of soft revenues resulting from delays in construction and lower number of homes delivered in 2015. While demand in Houston is stabilizing, it will take a while before it rebounds. Moreover, community count, which declined during second quarter 2016, due to fewer home openings, is expected to decline further in the third quarter of 2016. The company does not expect community count to recover till 2017 beginning. 

 

Reasons to Buy: 

Built-to-Order Approach Gives Competitive Advantage: In order to drive profit per unit, KB Home operates through its operational business model – KBnxt – by which construction is initiated only after a purchase agreement has been executed. KBnxt appeals particularly to high-income consumers. This high-income group likes to enjoy the flexibility to design their homes and is ready to pay more for the same, thus driving the average selling price and revenues. KB Home is opening more design studios, expanding the size of existing stores and introducing new displays in a bid to attract these customers.  

Aggressive Land Acquisition Strategy: The company invests aggressively in land acquisition and development, mainly in high-end locations, which is critical for community count as well as top-line growth. The company spent around $967.2 million in fiscal 2015, $1.47 billion in fiscal 2014 and $1.14 billion in fiscal 2013 for acquisition and development of land, significantly higher than $564.9 million spent in 2012. The company expects to invest $1.5 billion in land and development in fiscal 2016. It has already acquired land for fiscal 2016 and most of the lots required for fiscal 2017, which is expected to generate a steady source of revenues, going ahead. 

Growth Initiatives to Drive Profitability: Over the last three years, KB Home has focused on four strategic initiatives to drive its profit and revenues, and ensure its success in fiscal 2016 and beyond. These initiatives include boosting community count, achieving higher revenue per community and higher profitability per unit, and increasing asset efficiency and return on capital invested. The company opens communities in highly favorable submarkets, primarily in the Central and West Coast regions, particularly California, where housing demand is strong and supply is limited. Moreover, the company focuses on profit per unit by improving cost efficiencies without compromising on the quality of the product.  

A Positive Housing Market Outlook: 2015 was more or less a good year for the housing market, possibly the best since 2007 when the housing recession set in. Despite a weak start this year amid equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. The spring selling season in 2016 was better than the last year. The springtime weather boosts construction activity and traffic trends. Positives like an improving economy, modest wage growth, low unemployment levels, low interest rates, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance for the second half. Improving labor markets, falling unemployment rates, low mortgage rates and a limited home supply are supporting a continued rise in home prices, thereby booting homebuilders’ top line. 

Moreover, housing remained an affordable option in 2015 as mortgage rates remained close to historic lows. Even if mortgage/interest rates rise with the Fed probably announcing further federal fund rate hikes this year or next, the rates should still remain reasonable, in our view, keeping housing affordable. Modest hikes in interest rates in the context of an improving economic environment can be a net positive for the housing sector Apartment rental rates have been moving up, making home buying more financially attractive. Additionally, as the millennial generation leaves their parents’ home, a sharp spike in household formation is translating into higher demand for new homes. With oil prices still subdued and the job market looking good, the demand for new homes is on a steady rise. 

Further, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing. The convergence of healthy demand and low inventory levels is boosting new home sales and is expected to continue for some time. More than 50% of the company’s deliveries are generated from first time buyers. KB Home is witnessing strong demand from this buyer segment. With an improvement in the employment market, the millennial generation is increasing moving out of their parents’ homes. This is translating into higher demand for new homes.  

Last Earning Report: 

Risks: 

Rising Labor, and Land Costs: Rising labor costs are threatening margins as they limit homebuilders’ pricing power. Labor shortages are leading to higher wages and delays in construction, which eventually hurts the number of homes delivered. Also land prices are increasing due to limited availability. More inflation is anticipated, going ahead. This is denting homebuilders’ margins considering that home price increases are moderating. 

Concentration in a Few Markets: KB Home depends heavily on the housing market in Central U.S. (Colorado and Texas) and the West Coast (California). Lack of geographic diversity exposes the company to fluctuations in a few markets and does not allow it to capitalize on the strong housing demand in other regions of the U.S. Houston is dependent on the oil complex, which is hurting the region’s overall economy and thereby home sales. While demand in Houston is stabilizing, it will take a while before it rebounds.  

Supply Constraints: Several years of production deficits during the housing downturn limited the supply of both rental and new homes in the country. At present, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing. The labor market has also tightened with limited availability of labor arresting the rapid growth in housing production. Moreover, community count, which declined during the second quarter of 2016 due to fewer home openings, is expected to decline further in the third quarter 2016. The company does not expect community count to recover till 2017 beginning. 

Federal Government Actions: The federal government’s actions related to economic stimulus, taxation, borrowing limits could affect consumer confidence and spending levels which, in turn, could hurt both the economy and the housing market. With the Fed announcing a hike in the benchmark Federal Funds target rate in December last year, for the first time since 2006, mortgage rates will probably rise later in 2016 or in 2017. High mortgage rates dilute the demand for new homes as mortgage loans become expensive. This lowers purchasing power of the buyer’s and hurts volumes, revenues and profits of homebuilders.  

Buy the stocks of American Eagle Outfitters Inc. (NYSE: AEO)

Summary: 

Keeping its positive earnings streak alive for the seventh straight time, American Eagle posted splendid second-quarter fiscal 2016 results. Apart from outperforming our estimates, both top and bottom lines rose year over year. Results mainly gained from the company’s constant efforts to enhance brands via innovations, make technological advancements as well as its commitment toward enriching consumer experience. Continued strength noted in its American Eagle and aerie brands also boosted results. Further, management issued a decent third-quarter view, as it entered the fall season with great expectations. Also, global expansion plans and omni-channel growth are likely to enable the company to augment business. However, high dependence on external suppliers and macroeconomic headwinds may dampen results. The company’s attempt to grow globally also exposes it to currency woes and other global risks.

 

Reasons to Buy: 

Strong Brand Portfolio: American Eagle is one of the major specialty retailers of fashionable apparel and accessories in the U.S. and Canada. The company has a strong portfolio of well-established brands, each focused on the unique characteristics and rapidly changing preferences of target customers. We believe that the company’s focus on enhancing consumer experience by providing top-quality products is likely to place its brands well in the evolving retail space. 

Splendid Q2 Results, Favorable Outlook & Robust Earnings History: American Eagle delivered impressive second-quarter fiscal 2016 results, wherein both top and bottom lines increased year over year, alongside outpacing our estimates. Notably, the company’s bottom line has outperformed the Zacks Consensus Estimate for seven straight quarters now, with an average beat of 14.4%. Results in the second quarter gained from the company’s constant efforts to enhance brands via innovations, make technological advancements as well as its commitment toward enriching consumer experience. Also, results benefited from continued strength noted in its American Eagle and aerie brands. Additionally, this quarter marked the aerie brand’s fifth straight quarter of over 20% comparable-store sales (comps) growth, further underscoring the brand’s inherent strength. Looking ahead, management remains confident of its near-term prospects, as it entered the fall season with solid expectations with regard to market opportunities as well as the company’s robust execution. These factors highlight American Eagle’s strong future potential, which also encouraged management to issue a favorable outlook for the third quarter. 

Omni-channel & International Growth to Boost the Top Line: American Eagle has been strengthening its global presence for some time now after witnessing strong profitability at its overseas licensed stores, with little capital requirements. In line with this strategy, the company has fortified its presence in South Korea, Singapore, Greece, Peru, Chile, Bahrain and Oman. Moreover, the company intends to take the count of international licensed stores to 181 by the end of fiscal 2016. Apart from this, American Eagle is striving to develop its omni-channel platform to reach customers in every possible way. Hence, the company has been improving its website as well as mobile app. We believe these plans for international expansion, together with its omni-channel growth, provide significant opportunities to the company to expand its business and cater to the incredible global demand for its products. 

Last Earnings Report: 

American Eagle Q2 Earnings & Sales Beat: 

American Eagle came out with splendid second-quarter fiscal 2016 results, wherein both sales and earnings increased year over year and outdid estimates, thereby marking the company’s seventh consecutive positive earnings surprise. Quarterly earnings of $0.23 per share surged 35.3% from $0.17 recorded in the prior-year quarter and beat the Zacks Consensus Estimate of $0.21. Results gained from the company’s constant efforts to enhance brands via innovations, make technological advancements as well as its commitment toward enriching consumer experience. Further, the company’s quarterly results benefited from continued strength noted in its American Eagle (“AE”) and aerie brands. The company’s total revenue advanced 3.2% year over year to $822.6 million, which surpassed the Zacks Consensus Estimate of $818.7 million. Comps improved 3%, compared with an 11% jump recorded last year. Brand-wise, comps increased 24% at the company's aerie stores and 1% at AE Total Brand outlets. Notably, this marked the aerie brand’s fifth straight quarter of over 20% comps growth. 

Quarter in Detail: 

Gross profit in the quarter rose 8% to $307 million, with the gross margin expanding 160 basis points (bps) to 37.3%. The gross margin expansion was driven by better merchandise margins, which in turn stemmed from lower costs and higher selling prices, somewhat offset by greater delivery costs associated with digital sales growth. Selling, general and administrative (SG&A) expenses increased 2% year over year to $200 million, reflecting higher investments in brand advertising and variable selling costs, somewhat compensated by strong cost management efforts. However, as a percentage of sales, SG&A expenses declined 20 bps to 24.3%. The company’s operating income came in at $69 million, marking a 29% rise from $53 million recorded in the prior-year quarter. At the same time, operating margin expanded 160 bps to 8.3%. 

Financial Position: 

American Eagle ended the fiscal second quarter with cash and cash equivalents of nearly $247.9 million compared with $327.3 million in the prior-year quarter. The low cash balance is attributed to $227 million spends related to share buybacks, $94 million of dividends and $135 million in capital expenditure in the past one-year period. In second-quarter fiscal 2016, the company incurred $36 million of capital expenditure. For fiscal 2016, management now targets nearly $160 million as capital expenditure, which marks the lower end of its previously targeted range of $160–$170 million. As of Jul 30, 2016, American Eagle’s total inventory was $422.2 million, up 3% from the comparable year-ago period. The company expects inventory at cost to increase in the low-single digits at the end of third-quarter fiscal 2016.  

Store Update: 

During the second quarter, American Eagle inaugurated four new AE Brand stores and one Tailgate Clothing Co. store (which was acquired at 2015 end), while it closed three AE stores and four aerie stores. Alongside, on the global platform, the company opened 13 international licensed stores. As of Jul 30, 2016, American Eagle operated 1,044 company stores and 158 international licensed outlets. By the end of fiscal 2016, the company expects to operate 181 international licensed stores. Its total store count at the end of fiscal 2016 is expected in the range of 1,045?1,050. 

Guidance:

Management remains confident of its near-term prospects, as it entered the fall season with solid expectations with regard to market opportunities as well as the company’s robust execution. Also, management remains focused on enhancing consumer experience by providing top-quality products, in an attempt to place American Eagle’s brands well in the evolving retail space. Consequently, the company offered its view for third-quarter fiscal 2016, wherein it anticipates comps growth at a low single-digit rate. Further, the company projects earnings per share in the band of $0.40–$0.41 compared with $0.35 earned in the prior-year quarter.  

Risks: 

High Dependence on Outside Suppliers: American Eagle does not own or operate any manufacturing facility and therefore, depends on third-party manufacturers for all its merchandise. The company’s operations may be adversely affected in case of any import disruptions, like manufacturers’ failure to ship orders on time or meet the company’s standards. 

Macroeconomic Challenges & Seasonality of Business: The apparel retail industry is consumer driven and hence, very sensitive to the health of the economy. Spending on apparel and accessories is heavily dependent on the personal disposable income of consumers. The current macroeconomic challenges such as high household debt and unemployment levels may restrain consumers from spending on these items. Further, the seasonal and cyclical nature of the company’s business puts it at risk as failure to perform well during the peak season might hurt its annual performance.  

 

Buy the stocks of The Cheesecake Factory Incorporated(NASD: CAKE)

Summary: 

Cheesecake Factory posted second-quarter 2016 results with earnings of $0.78 surpassing the Zacks Consensus Estimate by 11.4%. Also, earnings were up 13% year over year on higher top-line and lower share count. Revenues of $558.9 million missed the consensus mark by 0.6% but increased 5.7% year over year. Comps increased 0.3% at Cheesecake Factory restaurants. Although comps were hurt by a 2.7% decline in traffic, it was partly offset by menu price increase of 2.9% and positive mix of 0.2%. In fact, on the back of solid bottom-line performance in the second quarter, the company increased its earnings guidance for full-year 2016. Meanwhile, announcement of a 20% increase in the quarterly dividend should bolster investor confidence in the company’s financials and therefore improve its market position. However, higher costs and sluggish comps at the Grand Lux Café brand raises concerns. 

Reasons To Buy:

Strong Brand Recognition: Cheesecake Factory is one of the most recognized upscale casual restaurants operating in the U.S. It taps all dining preferences from lunch and dinner day parts to the mid-afternoon and late-night day part. Notably, the company posted 26 consequent quarters of positive comps at The Cheesecake Factory restaurants. Cheesecake Factory is well positioned to sustain its same-stores sales growth owing to a constant increase in guest traffic. 

Focus on Expansion: Despite challenging economic conditions, Cheesecake Factory has been expanding in the domestic as well as international markets. The restaurants opened over the past three years are performing better than the erstwhile locations. The company remains focused on opening its restaurants at high grade sites to hit targeted returns. Besides the domestic market, the company is of late foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait and Lebanon and Chile. In 2016, the company plans to open eight company-owned restaurants along with four to five restaurants internationally under licensing agreements. Also, the company recently launched a Cheesecake Factory outlet at the Shanghai Disney Resort– marking the company’s entry in China, East Asia, a region known for its economic growth and healthy investment returns. The region boasts a relatively younger population and a growing middle class with higher disposable income. Therefore, entry into this market will further boost traffic and comps. 

Initiatives to Boost Sales: The company is committed to boost its sales and improve margins to survive in the competitive environment. In order to boost comps, the company is focusing on improving its speed of service and training its servers so that they render higher level of service. Meanwhile, given consumers preference for healthy food, the company introduced a new category called Super Foods last year. It features items that contain nutrient rich ingredients such as kale, blueberries, almonds, salmon and quinoa. Going forward, the company intends to carry on with menu innovation by adding new Super Food items as well as the famous The Cheesecake Factory indulgences. Moreover, in the second quarter of 2016, the company completed the rollout of its new server training program. Also, in order to capitalize on the latest technology, the company rolled out its mobile payment app, CakePay. Cheesecake factory has also increased its focus on home and office delivery and is currently piloting a delivery service with a third-party partner in select locations. Additionally, the company continues to focus on its gift card program. Gift card sales increased approximately 25% on an average in each of the past two years. These initiatives would help the company to continue to keep up the trend of positive comps. 

Focus on Improving Margins: The company is evaluating different approaches to limit its costs. It installed a cost management system with substantial capabilities across production, planning and inventory management a few years ago to help analyze usage and waste. Amid current soft environment, such efforts to control costs would help to improve margins. 

Cash Deployment Strategy: Cheesecake Factory continuously returns wealth to shareholders via dividends and share repurchases. The company returned $141 million in cash via share buybacks and dividends in 2015, higher than its target. Moreover, the company has continuously paid quarterly dividends since it announced its first dividend payment of $0.12 per share in 2012. Since then, the company has increased its dividend four times, by 17%, 18%, 21% and 20% in 2013, 2014, 2015 and 2016, respectively. 

Risks:   

Rising Costs to Keep Profits Under Pressure: Of late, the company’s profits have been under pressure owing to a rising wage rates scenario. Moreover, the company’s unit expansion plans, pre-opening costs of outlets and costs related to sales initiatives are major headwinds.  

Soft Consumer Spending: The restaurant industry has been experiencing low consumption over the last few quarters. Despite moderate improvement in economic growth, consumers are increasing their spending only modestly as an increase in jobs this year is yet to translate into significantly higher wages. Higher health care costs and still-tightened credit availability continue to hurt consumer discretionary spending in the U.S. As a result, Americans are unwilling to dine out, which is pulling down the company’s sales. 

Continued Sluggish Performance in Grand Lux Cafe: Continued underperformance of Grand Lux Cafe remains a matter of concern. Segment comps have been declining over the past few quarters as the company has been increasing menu prices. These menu price increases amid a soft consumer spending environment have been hurting traffic trends and thereby comps. In fact, owing to higher wage rate, the company intends to once again increase menu prices in the near term. This would further hurt traffic.  

Buy the stocks of Ingram Micro Inc. (NYSE: IM)

Summary: 

The world’s leading technology distributor Ingram Micro reported better-thanexpected second-quarter 2016 results, with both the top and bottom lines surpassing the Zacks Consensus Estimate. However, revenues decreased on a year-over-year basis primarily due to foreign exchange fluctuations. Nonetheless, its focus on highmargin markets and strategic acquisitions to increase market share are encouraging. Ingram Micro has been signing distribution deals with a number of original equipment manufacturers, thereby expanding the product portfolio. Furthermore, we remain fairly optimistic about its strategic relationships with network giants such as Juniper Networks, Cisco and IBM. Additionally, the company’s focus on cloud computing products is expected to drive growth. 

Reasons To Buy:

• Ingram Micro is one of the biggest players in the IT distribution business. The sheer size and business volume ensure bargaining power with product manufacturers and resellers. The company’s geographical diversity makes it a logical choice for manufacturers seeking to increase international exposure. Moreover, it helps the company to mitigate the risk of operating abroad and enables it to take advantage of high growth opportunities in emerging markets, apart from nurturing its channel relationships. 
• Ingram Micro has been restructuring its business by reducing headcount in all its operational regions and consolidating its mobility and distribution warehouse operations. In the first phase of action, Ingram Micro consolidated all its German mobility and distribution warehouse operations into a single unit. It also merged the Belgian warehouse with its Netherlands operations. These restructuring initiatives also enabled the company to operate from lower cost locations in Europe. The resultant annual cost savings are expected to be nearly $100 million in 2016. With these business realignments in place, Ingram Micro expects to focus its business resources on high-margin growth opportunities, especially in cloud computing and data-center solutions that will not only generate additional revenues but also support margins. 
• Ingram Micro’s exposure to the small and medium business (SMB) segment could prove to be a key growth driver. Being one of the largest segments of the IT market in terms of customers and total revenue, the SMB end-user segment generates higher gross margins for distributors as suppliers find it difficult to establish their presence in the market. Most of the current spending by SMBs is centered on cloud computing because this enables significant cost savings. This is increasing the demand for technology and helping distributors such as Ingram. Research firm TechNavio expects worldwide spending by SMBs to grow at a compounded annual growth rate of 5.54% during 2013–2018. It is expected that SMB IT spending will be predominantly in the areas of telecommunications equipment, packaged software and IT services. Additionally, adoption of cloud-based services will gain prominence during this time. Ingram’s focus on these segments is therefore likely to translate into strong growth. 
• Strategic acquisitions have not only expanded Ingram Micro’s geographic reach but also broadened its product portfolio. Moreover, certain acquisitions have given the company a strong foothold in the mid-range enterprise market. Of the many acquisitions made by the company in the recent past, the most significant ones are NETXUSA and Ensim Corporation. In late Nov 2014, the company acquired Anovo, a Paris-based provider of after-sales support for phone and electronic devices. The next month, it bought majority stake in Armada, the largest value-added technology distributor in Turkey. During 2013, Ingram Micro took over SoftCom, CloudBlue and Shipwire which enhanced its products and services portfolio. These acquisitions have expanded the company’s presence in the high-margin products and services market that includes fee-for-service mobility device lifecycle solutions, traditional logistics solutions and cloud-based solutions. We believe these acquisitions will not only enhance the company’s offerings but also help it to garner additional revenues. 
• It is essential for an IT distribution company to monitor its internal as well as channel inventories. Companies like Ingram have to maintain close relationships with their resellers while checking the inventory’s suitability for the purpose of satisfying customer demand. This helps to optimize the required investment in inventory. Ingram ensures that its catalog is updated with products most desired by its customers, and thereby improves inventory management, realizes higher-margin opportunities, and develops merchandising and pricing strategies that produce enhanced business results. 
• Ingram Micro launched the Cloud Marketplace on a global platform through which channel partners and professionals can avail the required cloud services. First launched in North America, the Cloud Marketplace received huge response prompting its global launch. The Ingram Micro Cloud Marketplace has more than 200 cloud-based solutions from over 70 vendors, which include Salesforce.com, VMware and AVG Technologies. The company has added several cloud service providers such as Charter, Logix and Softlayer to expand its cloud-based offerings. Ingram Micro’s initiative comes at an opportune moment as cost benefits of cloud computing are compelling companies to engage in massive information technology restructuring and upgrades. According to a study by IHS Inc., spending on cloud-based services should surge almost three times and reach $235 billion in 2017 from $78.2 billion in 2011. We expect this to work in favor of distributors like Ingram Micro. 

Risks: 

• The persistent decline in PC shipments remains a major concern for Ingram’s future prospect as it generates significant revenues from PC sales. According to Gartner’s latest report, PC shipments (including premium ultra-mobiles) in second-quarter 2016 fell 5.2% year over year to 64.3 million units. The appreciating U.S. dollar, consumer segment’s lack of interest in new PCs as they are opting for inexpensive mobile devices, and delay in fully deploying Windows 10 operating systems by enterprises, were the main reason behind this dismal performance. However, Gartner expects slight recovery in second-half of 2016. This is so because the firm believes that the industry may witness a faster commercial transition of Windows 10 toward the end of this year. Nonetheless, we are unsure if this will bring any massive change for PC manufacturers or the companies which largely depend on the PC industry. Further, due to PC cannibalization, Ingram Micro has been focusing on reaching distribution contracts with many Smartphones and tablet manufacturers. However, in this segment, the company not only faces intense competition from large players but also from local distributors as well as online retailers which have restrained it from gaining any substantial market share. 
• The recent forecast for worldwide IT spending by Gartner raises concerns about Ingram Micro’s near-term performance. The research firm expects worldwide IT spending to remain flat year over year in 2016 at $3.41 trillion, due to currency fluctuations triggered by Brexit. Notably, 2015 witnessed the largest U.S. dollar drop in IT spending, since the research firm started tracking expenses. Last year, the worldwide IT spending declined almost 5.8% year over year. Gartner also predicts that 2014 worldwide IT spending levels of about $3.74 billion won’t be surpassed until 2019. All this makes us skeptical about the company’s nearterm prospects. 
• The IT distribution industry is mature with numerous players. While demand is expected to remain stable over the next few years, we believe that industry growth will decline to a slower, more sustainable level. This situation will make it increasingly difficult for Ingram Micro to maintain or grow market share, meaningfully increase sales growth or expand gross margins except through acquisitions. 
• The IT distribution business is highly competitive and the company faces tough competition from major distributors, such as Arrow Electronics, Avnet, Tech Data and Synnex Corporation. Pricing among the large IT distributors appears to be rational but competitors are always introducing new pricing strategies, adversely affecting gross margins across the industry. Moreover, strategies adopted by rivals could put pressure on Ingram Micro.  
• The company’s business is subject to seasonality and obsolescence. Ingram Micro experiences particularly weak demand in the European region during the summer season resulting in lower revenue generation. Moreover, change in spending patterns during the festive season leads to allocation of funds to other consumer products that affects its business during this period. Ingram is particularly susceptible to rapid changes in the technology sector stemming from changing preferences and requirements. When customers shift to new products or platforms, it is necessary to build an inventory of new products and retire inventories of old products. This could at times result in inventories of old products that the company is unable to sell, thus impacting cash conversion. On the other hand, if it does not keep adequate stock of products, it may not be in a position to serve customers and might therefore, have to forego sales. 
• Around 58% of 2015 revenues came from businesses outside the United States. Current economic conditions have strengthened the dollar versus a number of global currencies. This will suppress growth in terms of the U.S. dollar from markets that have weaker currencies. Although we believe local or constant currency basis is better for sales analysis, the headline growth number may decline as a result. Macro uncertainty persisting in Europe has reduced IT spending to an extent, which has resulted in year-over-year decline in revenue contribution from the region.  

Buy the stocks of Visa Inc. (NYSE: V)

Summary:

Visa’s acquisition of Visa Europe will open vast business opportunity for Visa in Europe and will provide it greater scale and size diversified business. Its other strategic acquisitions and alliances, technology upgrades, effective marketing efforts and debt-free balance sheet bode well for long-term growth. The U.S. consumer growth remains strong and is expected to continue boosting Visa’s revenues in the future. Overall, the company expects a low double-digit constant dollar earnings growth. However, weaknesses in China, Brazil and other oil-based economies; a stronger U.S. dollar and global economic uncertainty are expected to dampen crossborder revenues. Visa will release earnings on Jul 21. The Zacks Consensus Estimate for fiscal third quarter is pegged at 67 cents per share which translates into year over year decline of 9.64%.  

Reasons To Buy: 

Visa acquires Visa Europe – The company has completed the acquisition of Visa Europe. Reuniting with Visa Europe was one of the company's most important long-term growth strategy. The company stands to gain a competitive edge from a strong business model with the acquisition of Visa Europe as it projects Europe to be a $3.3 trillion payments market and a high growth region in the future. Already the leading card processor, the addition of Visa Europe will further boost Visa’s market position against global arch rivals like MasterCard Inc., American Express Co. and Discover Financial Services. Visa expects low single-digit growth in first full year post acquisition followed by high-single digits upto 2020 excluding transition costs. 

Growth in Electronic Payments – Over the recent years, the shift within the global payment industry from paper-based forms of payment such as cash and checks toward electronic forms of payment such as card payment transactions has created significant opportunities for Visa’s business growth. Electronics payments are expected to flourish in the next five years. Though economic growth is likely to be normal to modest, the electronic payments market is expected to perform well in the long run. Visa, which makes up for almost half of credit card payments and three-fourth of debit card payments, dominates the global electronic payments market. VisaNet is capable of processing 65000 transaction messages per second. Despite increasing competition in the electronic payments space, Visa is expected to reign as the market leader as few competitors can match its investments in technology, security and marketing.

Visa’s New Initiatives to Bring Growth – Visa’s new initiatives to accelerate secure mobile payments by adopting the pay Wave software application as well as near field communication (NFC) and EMV chip technologies globally support its growth. Visa has partnered with MasterCard, and together they have set 2017-end as the deadline for U.S. retailers to adopt the EMV technology. It has launched Quick Chip for EMV, which allows customers to remove their EMV chip card from the terminal in two seconds or less. The launch of Visa Developer Platform is another initiative in line with Visa’s focused technology advancements. The company’s mobile wallet service – V.me along with Visa Checkout has been successful. Visa has 12 million registered users in 16 countries and 675 national institutional partners participating globally in Visa Checkout. The service is expected to be launched in six additional markets including India, France, Ireland, Spain, Poland and United Kingdom later this year. Over 250,000 merchants will accept Visa Checkout, which represents a $113 billion addressable volume. Additionally, the launch of Visa Token Service (digital tokens instead of customer’s account numbers implemented by Visa and its peers) and Authorize.Net on Apple Pay, PayPal and AliPay along with consistent focus on improved security measures and strategic alliances with various financial institutions for mobile payment applications will further accentuate the efficiency of cards within eCommerce and mobile payments (mCommerce). Given a greater flexibility, superior security and low cost of maintenance, demand for these electronic and mobile payment facilities are expected to rise by leaps and bounds in the future. 

New and Renewed contracts – Visa expects to see positive additions from the Costco and USAA conversions in 2017. It has been successful in getting a renewal of a multi-year credit and debit agreement from Navy Federal Credit Union, the world’s largest credit union and one of Visa’s most important clients in the U.S. From Jun 20, Visa cards will be exclusively accepted at Costco U.S. and Puerto Rico warehouse locations and fuel stations. Visa also renewed multi-year credit card agreements with Banco do Brasil, South America’s largest bank and SBI Card, State Bank of India’s credit card venture. Visa also intends to increase its presence in China, which is expected to be a major growth driver once the nation’s economy improves. The company is also preparing to apply for domestic license and position itself to compete domestically in China and continue to invest locally in the country. It has signed a MoU with UnionPay which should provide an important platform to strenghten and create new value for various stakeholders in the sector by collaborating on payment security, innovation, and financial inclusion. It is building relations with the Chinese governemnt by announcing partnerships with two foundations to support the government’s poverty alleviation efforts and promote inclusive finance. It has also entered into a cooperation plan which establishes Visa as a strategic partner of U.S. China’s Tourism Year. These initiatives are expected to boost Visa’s top-line growth. 

Strong Balance Sheet Position – Despite the economic turmoil that eroded the reserves of most of the organizations, Visa enjoys a strong cash and available-for-sale investment position along with strong free cash flow reserve, posing a risk-free balance sheet. This not only provides an operating leverage to the balance sheet but also provides acquisition opportunities as well as scope for capital expenditure that will enhance long-term growth. Backed by its strong cash position, the company increased its dividend each year since 2009. The company has also resumed its share buyback which was suspended in fourth quarter 2015, due to the impending Visa Europe acquisition. Thus the resumption of share buyback will further aid the company’s bottom-line. 

Risks: 

Strong U.S. Dollar hampering revenues – The U.S. dollar is expected to retain strength in the coming quarters especially if the Fed hikes rates. A strengthening U.S. dollar will translate to reduced cross border spending on U.S. goods. It will also hurt revenues. In the fiscal second quarter a 14% growth in Interntational payments volume in constant dollars,was offset by a strong dollar that limited volume growth to 4%. A decline in dollar relative to other major currencies would improve spending levels but until such a trend resurfaces, it will continue to pressurize revenues.  

Domestic Factors and Client Incentives – Visa expects weaker domestic payments volumes in the coming quarter due to persisting lower gas prices. Client incentives, which reduce revenues, are expected to be on the higher end of the expected range of 17.5–18.5% . This will come from by significant renewals and conversions mainly from U.S. Costco and USAA which adds more than 50 basis points to increntives and a percent of gross revenues in the second half of fiscal 2016. Since there was a delay in the rollout of Costco and USAA conversions, revenues recognized exceeded incentive expenses. Visa expects this trend to turn in fiscal 2017, which should benefit the company. 

Macroeconomic concerns in international markets–Visa’s revenue growth has slowed down in the previor quarters due to adverse international macroeconomic factors. Cross-border outbound commerce in China fell to single digits from 40% in yearago quarter. Canada has shifted from growth rate to negative levels. A further deterioration has been observed in commoditydominated economies such as Middle East and African economies as well as Brazila and Russia. In the fiscal third quarter too, Visa expects weakness in commodity-based economies. Collectively, a slowdown across several major economies and lower forecasted GDP growth rate, will continue to have a negative impact on revenues and growth.