There are two sectors poised to grow strongly over the next couple of years and we are going to play both this week.
Stocks Dropped from Watch List:
TRN - Trinity Industries
This position was opened with a TRN trade at $17.75 on March 7th.
Active Watch List Stocks:
UTX - United Technology
This position remains unopened until UTX trades at $98.25.
New Watch List Entry:
FFIV - F5 Networks - Company Description
F5 Networks develops, markets and sells application delivery networking products that optimize the security, performance and availability of network applications, servers and storage systems.
With the vast amount of Internet traffic now being served over mobile devices utilizing 4G speeds and now advancing towards significantly faster 5G speeds it is imperative for companies to improve the speed and security of their networks.
Just to catch everyone up on how much faster 5G (5th generation) is than 4G here is a comparison.
3.5G = 42 Mbps (megabytes per second)
4G/LTE = 100 Mbps
4G/LTE.Cat 4 = 150 Mbps
4G/LTE Adv = 1,000 Mbps
5G = 5,000 Mbps to 10,000 Mbps (estimates)
The 5G standards have not been officially defined but multiple vendors are touting speeds with existing equipment up to 7,500 Mbps. Qualcomm is currently producing Snapdragon processors for smartphones with Cat.10 modems that are capable of 450 Mbps.
To put all of this in perspective for F5 Networks. At advanced 4G/LTE speeds you could download an entire standard definition movie in under 5 seconds. A theoretical 5G speed could download an entire HD BlueRay movie in under a second.
Obviously that means the servers and networks delivering this content securely must also have this capability, otherwise those superfast mobile devices will be suffering significant lag times.
Since most datacenters and networks are still delivering content at the 3G rate there is a vast amount of untapped opportunity for those companies like F5 that are bridging the technology gap.
You hear about the Internet of Things (IoT) and how much network capacity will have to increase to add tens of billions of additional devices like lights, thermostats, refrigerators, every TV now being produced and nearly every car now being produced as an Internet hot spot.
As cloud systems garner additional customers the vast amount of storage required plus the amount of network connectivity required to access that storage is growing exponentially. This week I added a new cloud account with Amazon to use as a backup and I have been uploading 150 Gb of data continuously for the last 4 days and the job is only half done and Amazon has fast servers.
Securing all that data and network traffic and delivering it instantly is what F5 does. They provide multiple highly concurrent platforms and specifically position service providers for next generation networks.
As an illustration they offer a blade server (VIPRION B445) that can handle 1.2 billion concurrent connections and more than 20 million connections per second using only an 8 blade chassis and 100 Gbe hardware. I would explain how fast that is but it would require far more space than I have here. To say it is mind boggling would be an understatement.
In their Q4 earnings they reported earnings of $1.32 that beat estimates for $1.27. Revenue rose +5.8% to $489.5 million, which also beat estimates. Service revenues rose +14.9%. The company guided for earnings in Q2 of $1.61 to $1.64 and analysts were expecting $1.32.
Shares rallied on the earnings beat to plateau at $100 over the last week. I believe that $100 level is going to break and we will see shares retest the recent highs at $120 in the months ahead.
With a FFIV trade at $101.50
Buy Jan $105 LEAP Call, currently $9.85, no initial stop loss.
Sell short Han $85 put, currently $5.10, no initial stop loss.
Net debit $4.75
BA - Boeing Company Profile
Boeing designs, develops, manufacturers, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems worldwide. If it flies on earth or in space Boeing probably has their hand in its design and manufacture.
Boeing has had a relative dry spell in orders in 2016. For the prior four weeks they signed no new orders for commercial aircraft but they made up for it last week when they booked the biggest order of the year. They sold one 767 to FedEx, four 777s to United Airlines and 25 new 737s to United. However, at the same time United cancelled four 787 orders. That represents a net new order total of about $2.5 billion. Earlier in the year United also committed to buy (40) 737-200 aircraft at a list price of $80.6 million each.
So far in 2016, counting the orders from last week, Boeing has new orders for:
1 Boeing 767
1 Boeing 787
88 Boeing 737s
10 Boeing 777s
Boeing also has orders from the Air Force for 179 KC-46 tankers built out of 767 airframes. That contract is worth $43 billion and they have to be delivered by August 2017. The first 18 are already in production with Boeing working on some outside their buildings in Everett Washington. They do not have enough room inside the manufacturing facility because they are backed up on 787 deliveries. Last July FedEx bought 50 of the 767s in a freighter configuration. Boeing expects to sell more than 1,000 model 737 freighters with most going to China and Asia. Boeing sees $550 billion in aircraft demand from Southeast Asia in the years ahead.
While orders may be slow so far in 2016 the backlog of business is very healthy. Boeing delivered 750 jets in 2015 and expects to easily beat that number in 2016. As of the end of January Boeing had an order backlog of (4,392) 737 planes, (20) 747, (80) 767, (524) 777 and (779) 787s. The biggest order block is the 737s and that is one of Boeing's most profitable planes. The total backlog is something like 7 years of orders. Historically the backlog has run 2-3 years of production so it is more than double that today.
Add in the satellite and missile businesses and that is one busy company. As oil prices rise in late 2016 and 2017 the demand for more energy efficient planes will boost their orders even more. Some airlines are making do today with older less efficient planes because fuel is so cheap. Once prices rise again so will the orders. China's demand for planes is rising with double-digit growth in passenger traffic. One out of every four planes built goes to China.
Boeing expects to begin delivering the 777X models in 2019. The big jets are very expensive. The 777X-8 will cost $371 million and seat 350-375 passengers. The 777X-9 will list at $400 million and seat 400-425 passengers. They will have carbon fiber wings, burn 12% less fuel and be 10% cheaper to operate than competing aircraft.
Shares of Boeing declined in January after news of an SEC probe into the company's "program accounting" that shifts R&D expenses and production costs. They are the only major company to use that method but the technique is recognized under GAAP. Basically they are allowed to calculate profits over the life of the program and assign average costs to each airplane. That allows them to recognize profits earlier in the life cycle of each model but it reduces the profits on the back end. Nothing is expected to come from the SEC probe. Boeing is a very large company and they would not do anything that would jeopardize their future.
The analyst consensus for the stock is a target of $165 with a close of $124 on Friday. Earnings are April 20th.
With a BA trade at $125.50
Buy Jan $130 LEAP Call, currently $8.00, no initial stop loss.
Sell short Jan $100 LEAP Put, currently $4.35, no initial stop loss.
Net debit $3.65.
Active Watch List Play Descriptions:
UTX - United Technology - Company Description
United Technology is an $80 billion company that provides technology products and services to building systems and aerospace industries worldwide. They build elevators, refrigeration units, electronic security products, electric power generation and management, etc. The aerospace segment supplies flight sensing and management, engine controls, intelligence, reconnaissance, maintenance, engine components, landing systems, etc. I could go on for several paragraphs but the key here is that they do everything and do it well.
A couple weeks ago Honeywell and United Technology acknowledged they had held talks about a merger/acquisition. Honeywell reportedly offered $108 billion or $108 per share for the company. United said the offer undervalued the company and would not succeed in getting regulatory approval. Honeywell "strongly" disagreed with that assesement.
Honeywell and United have been talking on and off for 15 years about some sort of merger because their business lines would fit together very well. Reportedly there were serious discussions in may 2011 when UTX approached HON about a merger. Those talks failed and the companies began talking again in April 2015. Those talks also failed to reach an agreement.
Honeywell approached the chairman and the CEO of UTX again in February and initial talks were highly positive. However, they fell apart again a week later when UTX said the price was too low and they could never get regulatory approval.
On March 1st, Honeywell said it had dropped all plans to pursue an acquisition of UTX because the company appeared unwilling to negotiate.
A UBS analyst recommended buying UTX because the "company is still in play" whether from Honeywell or somebody else. With shares at $97 and the last "undervalued" Honeywell offer at $108 that leaves plenty of room for upside. Even if no acquisition comes to pass, the shares were trading at $125 last March. With acquisition interest I believe UTX shares could head back to those highs over the next few months, market permitting.
Earnings are April 19th.
I am recommending two entry points for this position. If shares move higher, we will enter the play at $98.25. If shares move lower in a weak market we will enter the position at $94.25. ONLY ENTER ONE POSITION using the first entry point that is hit.
With a UTX trade at $98.25, buy Jan $105 LEAP Call, currently $3.65
With a UTX trade at $94.25, buy Jan $100 LEAP Call currently $5.60
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