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RSP Annual Review Part IV - Not The Final Chapter

Recs

3

February 17, 2012 – Comments (0) | RELATED TICKERS: JOY , PNRA , STJ

I think it’s actually made some sense to let some time pass before this next section of the review. These four companies represent portfolio buys from July - October 2011, so they’re not even a year old yet really. But it’s still worth taking a look, so here goes:

St. Jude Medical (NYSE: STJ)

Hits

•  This call from 3Q2011 earnings to me really emphasizes the importance of the diversity of St. Jude’s portfolio of work. The growth drivers listed I think give a good idea of where they’re placing their bets:

http://boards.fool.com/st-jude-medical-3q2011-earnings-takeaways-29613427.aspx

•  I wrote in the initial rec: And while the company has more than $2.5 billion in debt on the balance sheet, the coverage ratio of 22 eliminates any concerns. Their net debt position has improved since then to about $1.8 billion; headed in the right direction.

•  Research and development expense continues to rise with revenue. In fact based on TTM numbers they spent 12.5%, right in line with intentions. This is important as R&D helps spawn new products and technologies.

Miss

•  The share price is down! OK seriously, this kind of headline risk sucks:

http://bloom.bg/x66Efm

Unfortunately it is part and parcel with this line of work and will continue to happen. We can only hope they’re few and far between and they get out in front of them fast.

Panera (Nasdaq: PNRA)

Hits

•  Continues to sell and perform. Comps are up, store traffic is up, checks are up and food cost inflation remains in check leading to more profitable operations.

•  Continue to focus on slow controlled growth. Trying new things like installing drive-throughs in restaurants. When they initially rolled this idea out the 40 stores they tested each showed a 20% improvement in revenue.

•  Average weekly sales (AWS) are at record-highs for the year in both company-owned and franchise stores. Based on their outlook management is raising guidance for the upcoming year on assumptions that include same store sales growth, transaction growth and average check growth.

Miss

•  There’s not really much I dislike about this company. The stock is pretty richly priced right now, so I would probably be waiting for the inevitable earnings miss to buy more. But while I appreciate their slow growth approach, I would also love to know more about international intentions which they still say very little about. I believe that will be an important part to the long-term viability of this investment.

Masimo (Nasdaq: MASI)

Hits

•  Worldwide installed base of equipment to 979,000 at year end, up nearly 15% versus 2010. This opens them up for the recurring sales of the consumables that go with their technology.

•  Management (Kiani in particular) continues to strike me as extremely proactive and caring about the business and the industry which he serves. The “Better Care” program here is another example of him trying to make things better:

http://yhoo.it/Ak50qG

•  “Critical to achieving broad adoption of rainbow is ensuring its availability across the range of multi-parameter OEM devices. Remember that roughly 80% of Masimo drivers shipped into the market get there through the OEM channel. We began 2012 with over 40 OEM rainbow agreements in place, more than double the number one year ago and dramatically above our original target of 30. Most importantly, the list includes Phillips, which has nearly 50% market share of the worldwide patient monitoring market.”

Miss

•  Declines in US hospital admission rates, a significant unanticipated decrease in sales to a long-time OEM partners, the lengthy delay in FDA clearance of Pronto-7, the absence of the repeat rainbow order from the US Military and the delay of our rainbow-centric Radical-7 bedside device led to the worst product revenue growth rate we have ever had at just 14%. This shows the number of external factors that will come into play for a small company like Masimo. It’s definitely an uphill battle for them, but part of the bet here is on Kiani and so far I’ve no reason to doubt him.

Joy Global (NYSE: JOY)

Hits

•  Still see an environment of improved capital spending on the parts of the miners. Spending will increase as much as 15% this year as some projects roll over from last year and others begin, Chief Executive Officer Michael Sutherlin said. In December, he forecast spending would increase 10% this year.

•  In December Joy completed their $580 million purchase of the 41% stake in China’s IMM., giving it a 69% shareholding. Then began a tender offer on Jan. 6 for the rest of the shares. CEO Sutherlin said Joy doesn’t plan to sell stock to fund the deal. This will give JOY very key exposure with China’s leading underground coal-mining equipment maker.

•  Let’s put this one under hits and misses:

http://bit.ly/z4KkzL

I like that it emphasizes the high expectations of China for 2012 and the effect it should have. But just as in the miss, it’s a two-way street and any slowdown in the machine would hurt.

Miss

•  Coal continues to be pushed out of our energy policy slowly but surely here in the US and this is no surprise. We will need to keep a close eye on emerging markets and how they perform in the face of ongoing global adversity. Particularly if we do witness a slowdown in the China machine.

Takeaways

The takeaway here is very simple: I like all four companies and have no plans to cut any positions. That said, I do need to keep in mind adding to some positions as money continues to flow into my account. (Nice problem to have huh?) So if I had to choose two today it would probably be Joy Global and St. Jude.

Allocation-wise I think those make more sense as I think St. Jude is relatively lower on the risk scale and a good price. Joy Global has crept up a bit, but I think it’s still cheap honestly given what they do and the scale they’re building out.

Joy Global is coming out with earnings it looks like on February 29th, so that could be a pivotal day. Any big whack in the stock price could lead to addition to the position. Guess we’ll see.

Foolish best,

Jason

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