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.   

Buy the stocks of Universal Health Services Inc (NYSE: UHS)

Summary: 

Universal Health continues to benefit from higher number of Medicaid and Medicare patients, which lowers uncompensated charges thereby driving top-line growth. Moreover, accretive acquisitions present significant growth opportunities in the behavioral market. The recently announced share buyback program will boost earnings in 2016. Meanwhile, estimates have been stable lately ahead of the company’s second-quarter earnings release. We note that the company has positive record of earnings surprises in recent quarters. However, frequent acquisitions present integation problems. Moreover, higher level of debt remains a significant headwind. 

Reasons To Buy: 

• Currently valued at $2.9 trillion, the U.S. healthcare industry is expected to grow by leaps and bounds in the coming years as the population ages. The rising number of baby boomers, who are expected to account for more than 20% of the total U.S. population by 2029, boosts demand for healthcare services. Per the Centers for Medicare and Medicaid Services’ (CMS) projection, total U.S. healthcare spending is poised to rise 6.1% annually on an average between 2016 through 2024, as a result of the increasing number of insured patients, faster projected economic growth and an aging population. We believe that these trends present significant growth opportunities for Universal Health.  
• Universal Health is expected to significantly benefit from the favorable Obamacare ruling passed in late June this year. A broader insured customer base will not only lower charity care and bad debts but also increase admission rates on the back of improving affordability among patients. In 2015, net revenue per adjusted admission inched up 3.9% year over year. We believe lower amount charity care and uninsured discounts will improve top-line growth over the long term. 
• Over the years, acquisitions have played a key role in building Universal Health’s growth trajectory. The company spent $534 million on acquisitions that added almost 700 beds to its overall facilities. In Feb 2015, the company bought Orchard Portman House Hospital, a 46-bed behavioral health care facility located near Taunton in the U.K. Further, in August, Universal Health took over Alpha Hospitals Holdings Limited in the U.K. The Alpha Hospitals takeover expanded Universal Health’s tally to 21 hospitals and approximately 1,100 beds in the nation. In October, the company acquired Foundations Recovery Network for approximately $350 million. This transaction expands Universal Health’s footprint in the U.S. by adding 322 residential beds across 4 facilities and 8 outpatient centers. The company further plans to set up 140 beds over the next 12 months. We believe the company will continue to pursue acquisitions that will help it to expand its domestic as well as international presence. 
• Behavioral facility acquisitions help Universal Health to win market share in the fast growing addiction and mental health disorder market. New laws (2008 Mental Health Parity and Addiction Equity Act as well as Obamacare) have raised the insurance coverage for patients suffering from substance abuse as well as mental disorders, which is a major positive for companies like Universal Health. The company focuses on behavioral indications like eating disorders, sexual trauma, Autism as well disorderliness in the military through its patriot support program. These will further boost admission rate thereby driving top-line growth over the long term. 

Risks:  

• Since inception, Affordable Care Act (ACA) or Obamacare has significantly benefitted the hospital industry, including Universal Health, by increasing the insurer base and lowering uncompensated charges. However, the upcoming presidential elections can upset this momentum as Republicans continue to oppose the various provisions of law. A Republican president at the White House will likely spell doom for the ACA, which does not bode well for the whole hospital industry in our view. 
• Universal Health derives a significant portion of its operating revenues (35% in 2015) from the Medicare and Medicaid programs. The company generates $90 million of Medicaid revenues annually from each of the following states – Texas, Washington, D.C., California, Nevada, Illinois, Pennsylvania, Virginia, Florida and Massachusetts. Thus, any cut in state government reimbursements owing to budgetary constraints may impact the company’s overall financial performance. The hospital service industry will face approximately $600 billion in reimbursement cuts over the next decade, and Congress has ordered a number of cuts in hospital payments to fund the increase in physician payments. We believe that this is a potent headwind for the company, especially for the long term. 
• Universal Health continues to acquire a large number of hospitals. While this improves revenue opportunities, it adds to integration risks. The frequent acquisitions may impact its balance sheet in the form of a high level of goodwill and intangible assets, which totaled $3.60 billion, or 37.3% of its total assets as of Dec 31, 2015. Frequent acquisitions are also a distraction for management and could impact organic growth, going forward. 
• Universal Health’s balance sheet is highly leveraged. As of Dec 31, 2015, total debt stood at $3.45 billion. Such high debt levels may limit the company’s expansion plans and aggravate risks. Higher interest expense on debt is also expected to impact profits.  

Buy the stocks of Washington Federal Inc. (NASD: WAFD)

Summary: 

Washington Federal’s third-quarter fiscal 2016 (ended Jun 30) earnings beat the Zacks Consensus Estimate, largely driven by higher net interest income, a provision reversal and falling operating expenses. However, a marginal dip in other income was an undermining factor. While growing demand for loans should continue fueling the company’s organic growth, a robust capital position will help it grow inorganically. Also, the company’s steady capital deployment activities should draw investors’ attention. However, we remain apprehensive about the impact of weak cost control, compressed margin and substantial exposure to a risky loan portfolio on the company’s profitability.

Reasons To Buy: 

• Growth in loans indicates a strong business trend for Washington Federal. With improvement in the economy and investors’ rising confidence, the demand for loans is expected to grow further. The company generated net loans of $9.63 billion as of Jun 30, 2016, which constituted 65% of its total assets.
• Washington Federal's credit quality continues to improve. Since fiscal 2010, credit costs (including provision for loan losses and gains/losses on sales of REO) have declined significantly. Notably, provision for loan losses reflected a reversal of $1.7 million in the first nine months of fiscal 2016 compared with an expense of $45.0 million in fiscal 2010.
• Washington Federal’s earnings streak, along with its trend of returning capital to shareholders, should boost investors’ confidence in the stock. The company has been consistently hiking its dividend over the past several fiscal years – 18% in 2015, 10% in 2014, 11.1% in 2013, 12.5% in 2012, 33.3% in 2011 and 20.0% in 2010. Additionally, the company has share buyback authorization in place. As of Jun 30, 2016, the company had authorization to repurchase around 1 million shares. 

Risks: 

• Mounting operating expenses pose a major challenge for Washington Federal. Over the last 6 years (2010–2015), expenses have increased at a CAGR of 11.3%, with the same trend continuing in the fiscal first nine months of 2016. Expenses should increase further due to branch acquisitions and continued investment in franchise. 
• Washington Federal is benefiting from deposit re-pricing due to lower deposit rates, but it is lagging its competitors with respect to the same. Though NIM increased in the fiscal first nine months of 2016 and in fiscal 2015, it has been declining over the past 4 fiscal years – 3.35% in 2011, 3.18% in 2012, 3.17% in 2013 and 3.05% in 2014 – due to lower yields on cash and investment balances. We expect NIM to remain under pressure until the interest rate environment improves significantly. 
• Further, Washington Federal has considerable exposure to risky loan portfolios. Nearly 69% of the company’s loan originations comprise of commercial loans. We also remain concerned about the company’s exposure to consumer loans, accounting for the remaining 31% of the total loan originations. Though the company has been reducing its exposure to these loan portfolios, we do not anticipate significant improvement any time soon. 

Buy the stocks of Reliance Steel & Aluminum Co. (NYSE: RS)

Summary:

Estimates for Reliance Steel have been goning up ahead of its second-quarter 2016 earnings release. The company has positive record of earnings surprises in recent quarters. Reliance Stee is well placed to leverage the strong momentum across a number of end markets, including aerospace. It should also gain from its broad and diversified product base, wide geographic footprint and aggressive acquisition strategy.

Reasons To Buy:

• Reliance Steel’s core business strategy is to enhance its operating results by way of strategic acquisitions and expansion of its existing operations. The company is focused on diversifying its products, customers and geographic coverage which helps it to counter the adverse effects macro and microeconomic events. The acquisitions of McKey and National Specialty Alloysvenabled the company to improve its product offerings along with expansion into newer markets. Moreover, the company, in April 2012, wrapped up the acquisition of all the assets of the Worthington Steel Vonore plant from Worthington Industries Inc. (WOR). The acquisition, which complements Reliance Steel's existing portfolio, expands its presence in the Southeastern regions of the U.S. The acquisition of the assets of Airport Metals marked Reliance Steel’s first foray of into the Australian market. The company further expanded its global network with the addition of these assets. Moreover, the acquisition of Sunbelt has allowed Reliance Steel to serve customers across a number of oil and gas well drilling categories including vertical, horizontal, directional and deepwater drilling applications. The company hopes to leverage Sunbelt’s growing presence in specialty markets. Moreover, the acquisition of Metals USA is a strategic fit with Reliance Steel’s portfolio and complements its existing customer base, product mix and geographic footprint. With the acquisition, Reliance Steel added about 48 service centers, which are strategically located throughout the U.S. The company expects synergies of $15 million to $20 million a year. The acquisition of primarily carbon steel and aluminum products processor Haskins Steel will also allow Reliance Steel to penetrate into locations where it did not have a presence earlier. Moreover, the acquisition of Aluminium Services UK Limited will enable the company to expand its presence in the aerospace market. The buyout of Fox Metals and Alloys is also expected to strengthen Reliance Steel’s foothold in the oil and gas space which has been an attractive and growing market for the company. The buyout of Tubular Steel also boosts the company’s long-term growth strategy and strength by expanding its product portfolio and end market diversification.  
• Reliance Steel is seeing strength across aerospace, automotive and heavy equipment markets. Aerospace remains a strong market as manifested by healthy demand and pricing. Demand in this market is expected to be supported by higher commercial aerospace build rates. Aerospace accounted for around 10% of the company’s sales in 2015. Strong demand is also witnessed in the automotive market, backed by the company’s toll processing businesses in the U.S. and Mexico as well as increased use of aluminum in the industry. Reliance Steel expects sustained momentum across these markets in 2016. 
• Reliance Steel remains committed to offer incremental returns to its shareholders. The company, in February 2015, raised quarterly dividend by 2.8% to $0.40 per share. It paid dividend worth $120.1 million in 2015. Moreover, it bought back 6.2 million shares for $355.5 million in 2015. The company, in Oct 2015, adjusted its current share repurchase program and increased the number of shares to be repurchased under the authorization by 7.5 million along with extending the repurchase program through Dec 2018. The company has sufficient liquidity and cash flows to support dividend payouts and share buybacks moving ahead.  

Risks: 

• Reliance Steel’s non-residential construction market is its largest end market. However, it continues to be its weakest. While there has been a modest recovery of late, demand levels remains significantly below the peak level achieved in 2006. Some customers in the construction industry are in seasonal business. As a result, revenues in some months are lower due to reduced number of working days for shipments of products, resulting from vacation and holiday closures at some of its customers. In addition, the company’s business in the energy markets is expected to remain under pressure in the near term due to weak oil pricing. The company’s energy-related volumes tumbled 41% year over year in 2015. 
•  Reliance Steel’s operating results depend primarily on prices for and availability of metals. While the pricing environment has somewhat improved of late, weak metals pricing continues to weigh on the company's sales as witnessed in the most recent quarter. Prices for carbon steel products and nickel are expected remain soft in the near term. A significant decrease in carbon steel product prices from current levels may have an adverse impact on the company’s gross profit margins and profitability. 
• Reliance Steel remains challenged by the weak steel industry fundamentals. The U.S. steel industry has been hit by high levels of imports of cheaper steel products. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices, and sometimes even at a loss. The steel industry also remains affected by overcapacity which continues to outpace demand. There is not enough demand for steel products due to weakness in construction end markets, resulting in excess supply. Contributing towards this inventory glut are production ramp ups by domestic steel producers and rapid growth in Chinese production.  

Buy the stocks of Greif, Inc. (NYSE: GEF)

Summary: 

Estimates have been going up ahead of Greif’s third-quarter fiscal 2016 earnings release. The company has a positive record of earnings surprises in recent quarters. Greif expects its fiscal 2016 results to gain from implementation of transformation efforts. The company raised earnings per share guidance for fiscal 2016 to the range of $2.20 to $2.46. Further, Greif’s second half of the fiscal year is historically stronger due to seasonality, particularly tied to the agricultural markets. It will also benefit from sale of non-core assets, consolidation of facilities, investment in capacity and cost reduction activities. 

Reasons to Buy: 

  

• Greif raised earnings per share guidance for full-year fiscal 2016 to the range of $2.20 to $2.46, from the prior band of $2.10 to $2.40 per share. This excludes gains and losses on the sale of businesses, timberland and property, plant and equipment, acquisition costs and restructuring and impairment charges. The company expects fiscal 2016 results to continue to gain from further implementation of its transformation efforts. Further, the company’s second half of the fiscal year is historically stronger due to seasonality, particularly tied to the agricultural markets. 
• Even though the flexible products business (FPS) had an operating loss of $1 million in the second quarter, Greif expects the segment to deliver positive EBITDA in fiscal 2016. Further cost reductions, improvement in under-performing operations in specifically Turkey, Mexico and Vietnam and focusing on completion of the commercial initiatives will drive growth. 
• Greif has been successful in fixing under-performing businesses and divested non-core assets and closed facilities which will drive long-term performance. The company completed three divestitures in a period of six months ending April 30, 2016. The gain on the disposal of businesses was $2.8 million in the six month period. Greif also continues to accelerate headcount reductions, and slash entertainment and travel budget by increasing video conferencing usage and eliminating all non-sales related travel. These actions will be accretive to earnings. 
• Greif’s plans to expand gross margins are gaining traction. The company is executing process improvements in all commercial sourcing supply chain and operations. In addition, the company raised free cash flow range guidance to $130 million to $160 million. 
• Greif’s IBC business in North America had the best volume in past six quarters. The business continues to improve in fiber in spite of its largest customer plant being closed. The company started to enter into the seasonal agricultural markets which will be positive. Moreover, the ISM (Institute for Supply Management) index rose in June to 53.2 and it's been over the target expansion range of 50 in the past three months. 

Risks: 

• Greif’s fiscal 2016 results will be affected by a sluggish global industrial economy, weaker containerboard prices and the continued strengthening of the U.S. dollar compared to other currencies. 
• Even though Greif will benefit from its strategic transformation plans in the future, this has resulted in significant impairment and restructuring charges. During the second quarter fiscal 2016, Greif recorded restructuring charges of $5.4 million, consisting of $4.3 million in employee separation costs and $1.1 million in other restructuring costs, primarily consisting of professional fees incurred for services specifically associated with employee separation and relocation. The company has increased restructuring expense by roughly $5 million for the full year 2016. 
• Falling oil prices has a direct impact on demand for industrial packaging in the energy sector. A number of energy producers had cut exploration and production activities in response to sharply declining oil prices, especially the North America focused smaller companies. Lower oil prices have also started to impact the cost of Greif’s raw materials. 
• Industrial economy in Europe remained unchanged in the past six months. Greif witnessed slow and steady growth in the majority of EMEA region. Further, the company continues to see a very broad slowdown in China, which is particularly impacted by continued pressures caused by supply and demand imbalance in a lot of the commodity material sectors.The company also doesn't see any short-term relief in Brazil. This has negatively impacted steel drum business that serves the industrial sector. These factors remain headwinds in the near term. 

Buy the stocks of CMS Energy Corporation (NYSE: CMS)

Summary: 

CMS Energy’s investments in infrastructure development projects, replacement of aged infrastructure and application of smart technologies will enable it to provide reliable services to customers. The company's sustained efforts to expand its renewable portfolio are also impressive. However, stringent environmental regulations, volatile commodity prices and risks related to impending regulatory cases could deter growth. Moreover, weather variations tend to impact the demand for electricity and natural gas, thereby leading to a fluctuating performance. 

Reasons To Buy:

• CMS Energy’s regulated electric power operations in Michigan generate a relatively stable and growing earnings stream. It is currently focusing on several issues such as capacity maximization, reliability improvement, clean power generation and infrastructure upgrade. The company plans to spend $17 billion between 2016 and 2025, the majority of which will be directed toward infrastructure development projects. This includes $8.6 billion that has been allocated for 2020. These initiatives will enable the company to provide reliable services to its customers and achieve its long-term EPS growth target of 5–7% in 2016 and 6–8% in 2017. Moreover, capital investments have helped the company to reduce operation and maintenance costs by 4% over the 2014–2015 period. CMS Energy further projects to reduce these costs by at least 10% by 2018. 
• Under the electric utility operations, CMS Energy focuses on strengthening circuits and substations, replacing aging poles and installing smart meters. Between 2016 and 2025, the company plans to invest around $10.77 billion in its electricity operations, including roughly $3.41 billion for electricity reliability and distribution activities. Meanwhile, the company plans to invest around $5.3 billion through 2020 in its electricity operations, including roughly $2.0 billion for electricity reliability and distribution activities. The company expects overall sales growth of about 1% on a conservative side at its utility operations through 2020. 
• CMS Energy has a large natural gas system in place and plans to expand it over the next decade. The company plans to deploy around $6.23 billion for its projects under gas operations between 2016 and 2025. This ambitious growth plan includes $1.6 billion for the replacement of aging infrastructure and improvement of service reliability over the next five years. Addition of the Jackson gas-fired plant will add flexibility, while reducing operating costs. Major expansion of the Ludington Pumped Storage facility will further benefit the company’s portfolio. 
•  We appreciate CMS Energy’s sustained efforts to expand its renewable portfolio. In 2014, the company’s Consumers Energy unit achieved its renewable capacity target of 10% per year earlier than expected with the completion of the 111-MW Cross Winds Energy Park. At 2015 end, Consumers Energy had wind and hydroelectric generation capacity of 34 MW and 1,069 MW, respectively. Through 2020, the company plans to spend around $0.7 billion on environmental programs required to comply with state and federal laws and regulations. In addition, CMS Energy continues to expand its solar operations. In Apr 2016, the company brought on-line the first large-scale solar project at Grand Valley State University. The company is constructing a second site at Western Michigan University, which is expected to commence operations by the end of 2016 summer. A site in the Lansing area is also under consideration. By the end of 2016, the company plans to have 10 MW of utility scale solar on its system. These additions will increase its renewable energy share above 10% that was mandated in the 2008 energy law. 
• CMS Energy maintains a stable liquidity position, besides exhibiting a strong cash generating capacity. As of Mar 31, 2016, cash and cash equivalents were $177 million. In the first quarter, the company generated cash of $632 million from operating activities. Besides investing in infrastructure projects, a favorable financial position enables CMS Energy to pay dividends at regular intervals. In Jan 2016, the company increased its quarterly dividend to $0.31 per share, up 7% from $0.29, maintaining a dividend payout ratio of 62%. The company expects dividend growth to be in line with its EPS growth guidance of 5–6% for 2016 and 6–8% for 2017. This initiative will enable the company to retain investor interest in the stock. 

Risks:  

• Despite executing several pollution-control measures at its power generating facilities, increasing stringency of environmental regulations on curbing carbon emissions during electricity generation remains a major concern. At present coal accounts for about 33% of its total generation mix. Meeting environmental regulations require the company to invest increasingly in low emission infrastructure at its generation systems that would in turn affect its margins.
• CMS Energy’s businesses are sensitive to commodity prices. An upward movement in fuel prices could increase the company’s cost of operations.
• Adverse decisions in regulatory cases may negatively impact CMS Energy’s earnings. Profitability of regulated utilities depends upon rate relief at regular intervals in Michigan. Although the company can self-implement its requested rate hike for six months, an adverse rate case decision will force the company to refund the incremental bill charged to its customers. 
• Weather conditions have a significant impact on the demand for electricity and natural gas. A milder winter or a cooler summer in CMS Energy’s service territories results in reduced utility usage, thereby affecting its financial performance. 

Buy the stocks of Boston Scientific Corporation (NYSE: BSX)

Summary:

We remian optimistic about Boston Scientific's recently introduced global restructure plan, the execution of which will result in fulfillment of its margin leverage goals and help Boston Scientific produce low-to-mid-teens EPS growth, ahead of the industry average. Boston Scientific is currently leaving no stone unturned to strengthen its core businesses and invest in new technologies and global markets, which accounted for the sales upside across all its geographies in the first quarter. Moreover, we are encouraged with the company gaining a number of approvals for its products. The company’s Urology business is also gaining traction from the AMS urology portfolio acquisition. However, apart from a difficult foreign exchange scenario, we are concerned with the disappointing performance of the company’s core CRM segment with worldwide pacemakers and defibrillator sales declining over the past few quarters. 

Reasons to Buy:

Progress on Restructuring Initiatives: Boston Scientific’s restructuring plan is aimed at addressing financial pressures in a changing global marketplace, strengthening operational effectiveness and efficiency, and supporting new growth investments. Major actions under this plan include continued implementation of the company’s ongoing Plant Network Optimization (PNO) strategy (aimed at simplifying our manufacturing plant structure, reducing manufacturing costs and improving gross margins), consistent focus on driving operational efficiencies and ongoing business, and commercial model changes among others. According to Boston Scientific, the PNO strategy has simplified its manufacturing plant structure by shifting certain production lines among facilities. The full benefit of PNO, which has already been completed, should start to reflect in the company’s Rhythm Management adjusted operating margin through the second half of 2016. This restructuring program is also expected to result in total pre-tax charges of approximately $255–$270 million. The program is aimed at generating savings, a part of which will be reinvested in the company’s strategic growth initiatives. Benefits from this program should strengthen the business over the coming years. The company looks to benefit from this growth-driven initiative over the long term. 

Encouraging Near to Longer-Term Growth Plan: In May 2015, Boston Scientific announced its latest near-to-longer term growth plan. As an extension to the company’s 2014 restructuring strategy, the current plan aims at driving mid-single-digit organic revenue growth and consistent adjusted operating margin expansion. This in turn will lead to double-digit adjusted EPS growth at constant exchange rate or CER. The detailed growth plan includes meaningful innovation; global collaboration; continued focus on driving operational efficiencies; and ongoing business and commercial model changes. The company is also focusing on expanding globally and creating emerging market scale on new R&D capabilities, local partnerships and branding. It estimates emerging market contribution to increase from 10% in 2014 to 15% by 2017. Other activities under the plan involve rationalizing organizational reporting structures to streamline various functions, eliminate bureaucracy, increase productivity and better align resources to business strategies and marketplace dynamics. 

Focus on Emerging Markets: An important part of Boston Scientific’s growth strategy is to continue pursuing development opportunities outside the U.S. by expanding global presence, inclusive of the emerging markets. Against the backdrop of flattening or declining sales growth in developed markets like the U.S. and Europe, Boston Scientific is gradually strengthening its presence in the emerging markets, in countries like Brazil, Russia, India and China (BRIC). In first-quarter 2016, business from the emerging markets registered a robust 21% organic growth rate, ahead of the company’s target of reaching 15% of sales by 2017 from 8% in 2013. This encouraging performance was driven by 19% growth in China in the reported quarter. The company is gaining strong ground in India as well. It is currently targeting about 10 emerging markets for additional emphasis. Boston Scientific hopes to sustain its strong overall international performance taking into consideration several key new product launches that are in the early stages of their rollout. The company is also optimistic about its core cardiology segment which is gradually stabilizing with growth in the BRIC nations. The cardiology capacity in China is expected to double by 2017. In India, business is projected to grow more than 15% annually. 

Mayo Clinic Deal-to Add Value: In a major step to boost its entire medical device wing, Boston Scientific has collaborated with Mayo Clinic, a renowned nonprofit organization that works on medical research and education. Taking into consideration the latest temporary freezing of the 2.3% medical device tax, which had earlier taken a toll on the entire medical device sector discouraging research and development, this partnership is expected to prove important for Boston Scientific. The collaboration agreement states that Boston Scientific engineers and Mayo Clinic physicians have already been working together to develop new medical technologies in areas such as interventional cardiology, heart rhythm management, endoscopy, neuromodulation, urology and pelvic health. Both Boston Scientific and Mayo Clinic are optimistic about this alliance, which they hope should not suffer any longer owing to investment issues. The amount earned from the temporary tax repeal can now be channelized for reinvestment in this collaboration. We accordingly expect to see a massive productivity boost for Boston Scientific in the coming quarters. 

Impressive Value-adding Acquisitions: We are impressed with Boston Scientific’s recent acquisitions that have added several products (though many are under development) with immense potential. This, in turn, should help boost the top line in the long term. In Nov 2015, Boston Scientific acquired the interventional radiology portfolio of CeloNova Biosciences, a San Antonio-based developer of endovascular and interventional cardiology technologies. According to the company, CeleNova is a synergistic tuck-in acquisition focused on the treatment of liver cancer via localized delivery of chemotherapeutic agents. Earlier in Aug 2015, the company acquired the American Medical Systems (AMS) urology portfolio, including the Men's Health and Prostate Health businesses of Endo International. Other recent acquisitions include Xlumena buyout which should help enhance Boston Scientific’s position in the field of interventional endoscopic ultrasound or EUS therapeutics; the Interventional Division of German healthcare major Bayer AG and IoGyn, Inc. – a pre-commercial stage company. 

High Urology Potential with AMS' Urology Suit: Boston Scientific believes the recently completed acquisition of the AMS urology portfolio will nearly double the size of its urology business to $1 billion. This is expected to bring in significant synergies and solid growth prospects through portfolio innovation and international market expansion. As part of Boston Scientific's Urology and Women's Health, this business should strengthen the company's leadership in the urology device category globally while also providing strong shareholder returns. Urology represents attractive global market potential of $4 billion with large unmet patient needs and considerable international expansion opportunities. We believe the acquisition presents significant potential to the company to capitalize on this opportunity. 

Risks:

CRM Continues to Remain a Drag: Sluggish CRM sales over the recent past continue to weigh on Boston Scientific's results. The first quarter remains no exception to that with disappointing performance in the company’s worldwide pacemakers and defibrillator sales. We note that, at the beginning of 2015, Boston Scientific predicted a slowdown in worldwide CRM sales for the entire year due to replacement cycle headwinds and competitive launches in the U.S. The company earlier anticipated softness in U.S. CRM sales to continue even in the first quarter of 2016. Although the company is currently expecting a rebound in its CRM performance in the second quarter and second half 2016, we remain on the sidelines based on the challenges the company is still facing in this business, especially in the U.S. 

Exposure to Currency Movement: With Boston Scientific recording 47% of its sales from the international market, it remains highly exposed to currency fluctuations. Unfavorable currency movements have been a major dampener during the fourth quarter, as in the case of other important MedTech players too. With the trend likely to linger, the company’s revenues are expected to be hit by fluctuations in foreign exchange rates, going forward. In the first quarter of 2015, foreign exchange headwind impacted the company’s adjusted earnings by $0.10 a share. Considering this impact, for 2016, Boston Scientific expects currency headwind to the tune of approximately $100 million on revenues or $0.05?$0.06 per share on adjusted earnings relative to the year-ago quarter.

Legal Matters Hampering Growth: Boston Scientific recorded net litigation-related charges of $456 million in 2015. This relates to the increase in the company’s litigation reserve for a recent appellate court ruling in Maryland in the Mirowski case. The remainder relates to a combination of increases in our transvaginal surgical mesh product liability reserves and other adjustments. Such legal costs, when accrued over time, may substantially impact the company’s operating results and cash flows. 

Competitive Landscape: The presence of a large number of players has made the medical devices market highly competitive. The company participates in several markets, including Cardiovascular, CRM, Endosurgery and Neuromodulation, where it faces competition from large, well-capitalized companies such as Johnson & Johnson, St. Jude, Medtronic, Stryker, Smith & Nephew and Edwards Lifesciences, apart from several other smaller companies.