We raised the fair value estimates on nine stocks by more than 10% in June. However, a fair-value boost isn't a buy signal. A stock is only a "buy" from our perspective if it's trading well below our fair value estimate, after being adjusted for uncertainty. In fact, none of the stocks upgraded last month are trading in buying range today.
So why bother flagging these changes? We think that stocks that have seen significant fair value increases are worth investigating further. After all, some bit of good news or positive insight--a meaningful change in revenue expectations, improving margins, or other new information--triggered the change. And sometimes, the change indicates that a company's prospects are brighter than we'd previously thought.
(Note that we raised our fair value estimates on several stocks not included here after they announced they were being acquired: Cypress Semiconductor (CY), which announced it would be acquired by German chipmaker Infineon Technologies (IFNNY); Tableau Software (DATA), which is being bought bySalesforce.com (CRM); and Caesars Entertainment (CZR), which will be acquired by Eldorado (ERI).)
Here are the Stock Analyst Notes about three of the stocks on the list--including one which enjoyed a moat upgrade and a fair value boost in June.
Twilio (TWLO)
"We are raising our fair value estimate for Twilio to $130 per share from $89, while changing our moat rating from none to narrow and maintaining our positive moat trend. We are upgrading our moat rating to narrow because of reduced concern about customer concentration and development of engagement cloud offerings such as Flex.
Twilio is a communication platform-as-a-service (cPaaS), which developers can utilize to facilitate communication (text, voice) in 180 countries. CPaaS platforms enable individuals or enterprises to integrate real-time omnichannel communication tools into business applications. Twilio operates as the back-end communications infrastructure for companies and provides easy-to-use APIs to allow integration with a customer’s applications. Simple examples of such integrations include enabling two-factor authentication for a website or enabling push notifications to remind a customer about a dinner reservation. Many of the uses for Twilio offer greenfield opportunities and we believe Twilio has ample opportunity to grow revenue over the decade as it continues to expand applications for its platform.
Twilio has three application layers that work in conjunction to support developers: super network, programmable communications cloud, and engagement cloud. Through its super network, Twilio connects with 3,000 global network-service providers (nearly double the relationships of its closest competitor) and ensures communications are routed most efficiently and effectively through the network. The programmable communication cloud allows developers to connect to the super network using easy-to-use APIs. The APIs are used to embed voice, text, and video into applications. Engagement cloud consists of pre-built APIs for specific use, such as Flex for contact centers. We believe the super network relationships are most difficult to replicate and Twilio’s developer-friendly APIs make it the default communication platform."
--John Barrett, analyst
Merck (MRK)
“We are increasing our fair value estimate to $91 from $78 per share largely based on increased projections for Keytruda, as we expect the drug to gain the lion's share of the late stage non-small cell lung cancer (NSCLC) market as well as close to 40% of the adjuvant NSCLC market. Overall, we continue to have expectations for steady long-term growth, partly driven by the solid outlook for cancer drug Keytruda and to a lesser extent the strong outlook for HPV vaccine Gardasil (largely in international markets). Keytruda is key to Merck's valuation and we expect it will be a leader in the immuno-oncology market. We expect the drug to reach peak sales of over $25 billion largely based on strong efficacy in several cancer types including lung, head and neck, melanoma, and several other cancer indications. In looking at the entire company, over the next five years, we expect that Merck will post 7% annual top-line growth with new drugs offsetting drugs lost to generic competition. Potential game changers to the growth rate include the company's pipeline immuno-oncology drugs that can move quickly through clinical development. Merck still faces generic competition to older drugs Remicade, Zetia and Vytorin over the next few years. However, we believe pipeline drugs and growth from existing drugs will offset the near-term generic headwinds. Overall, we expect slightly improving margins over the near term as overall sales are represented by more specialty-oriented drugs that carry strong pricing power and need less marketing support.”
--Damien Conover, director
PG&E Corp (PCG)
“We are raising our PG&E fair value estimate to $14.50 per share from $12.50 after analyzing reported bankruptcy exit plans from the company and its creditors. Both plans would preserve more postbankruptcy equity value than we had estimated.
PG&E's stock still trades near a 50% premium to our new fair value estimate, and we remain more bearish than other analysts. We are reaffirming our no moat, stable moat trend, and very high uncertainty ratings.
We estimate the creditors' reported plan would cut $13 billion of equity value. It would create an $18 billion trust for fire victims comprising about $9 billion from shareholders and $9 billion from bondholders. Shareholders also would contribute $4 billion to a proposed state wildfire insurance fund.
A creditor-led group would take control of the company, keep insurance proceeds, and overhaul PG&E's management and board, according to reports. This comes shortly after shareholders voted to expand the board to 15 directors, including new CEO Bill Johnson.
We estimate PG&E's plan would eliminate about $11 billion of equity value. The company would create a $14 billion trust for fire victims and contribute $3 billion to the proposed insurance fund, all in equity through securitization and $2.2 billion of insurance proceeds. Bondholders would take a $7 billion cut, or about 30% of debt outstanding.
We had assumed shareholders would fund a $13.5 billion trust for fire victims, resulting in $11.3 billion of lost equity value net insurance proceeds. We are raising our trust estimate to $15 billion and assume shareholders contribute $4 billion to the proposed state wildfire insurance fund. This results in $9.8 billion of lost equity value after insurance proceeds and $7 billion debt reduction.”
--Travis Miller, strategist
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