Special Situations ideas for the week of 17 September 2017

If you need a full analysis/detailed write-up, please email on kedar@kedarcap.com . I will NOT respond to anonymous emails.

Best Buy (BBY): Investment Thesis

Shorting at $65.00 (43.9% upside) over 1 to 2 year investment horizon. BBY offers an attractive risk-return profile for an investor willing to wait before taking a short position. In spite of fundamental challenges to its business, an extra week of holiday sales, coupled with major share buybacks and short term margin improvement, are likely to push shares into making another year end high. Despite the recent sell off, BBY trades at a historical high multiple of 6x EBITDA and a forward P/E of close to 13x. This echo’s of a company whose investors expect it to continue to beat expectations – a sentiment I do not share. On the contrary, not so palatable results might be in the cards, as the tailwinds from ‘Renew Blue’ disappear, while BBY is simultaneously expected to make major reinvestments to find new growth opportunities, replace older revenue and capture more dollars per customer. The likely results? Top line growth, profit margins and cash flow will come under pressure resulting in a definite price correction. 

Special Situations ideas for the week of 11 September 2017

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s, WSJ, IBD, and other publications. If you have

questions, feel free to write to me on kedar@kedarcap.com

Market View: The August-to-November window of Year Seven has shown a strong downward bias, even when the extreme case of 1987 is omitted. S&P 500 might correct 6% - 8% correction, with Russell 2000 down 13% - 14%. We are already halfway there. With the completion of this sell off, there is a good chance of another up leg—which could be the bull market’s last. A standard balanced portfolio with 60% in the S&P 500 and 40% in 10-year Treasuries has generated 8% in annualized return since 1880. The same 60/40 mix over the past 138 years provided a median portfolio yield of 4.1%, with more than half generated by income. Today, the yield 2.1%. Stocks were more overvalued in early 2000 with bonds in the 2016. Today, both are overvalued and returns could be stuck between 3% - 4% over 10 years. Investors should be on the lookout for technical indicators for some red flags. A breakdown in markets before the final culmination is a process, not a quick reaction. In 1990 bull market peaked in 1998, yet the Nasdaq and the blue-chip indexes went up for another 2 years. The very disjointed price action of the past couple of weeks could be the beginning of a topping process. A short-term correction can be followed by a new rebound before the bull market comes to an end in sometime in 2018. There is already a slowdown in the auto market with single-family housing close to peaking out. Also, the banking sector, a barometer for the health of the overall economy is acting as one would expect toward the end of an expansion phase. FDIC in its quarterly said that that total loans and leases by banks and other insured institutions rose by just 3.7% from a year earlier; a third consecutive quarterly deceleration and is down from a 6.7% pace of growth a year ago. Credit-card charge-offs soared by 24.5% in the 2Q17 marking the seventh straight increase, however, charge-offs on loans to commercial and industrial borrowers, however, declined by 9.7%, possibly due to a recovering energy sector. Add to that the Federal Reserve unwind of its balance sheet and higher interest rates. With low interest rates far too long, the level at which the rates begin to bite can be lower than commonly believed. For example, a 10-year bond yield of 3% or 3.5% might be enough for investors to dump stocks as opposed to a 5.5% to 6%, in earlier days. Adding to all this is an assumption that nothing will be done to lower individual tax rates or corporate tax rates until much later in 2018 while companies are expected to face rising wage pressures. Moreover, annual nonfarm payroll employment growth has slowed to 1.5%. In the past, when you’ve approached that level, a recession has usually been on the 12-month horizon.

DowDuPont (DWDP: NYSE): This story might not be completely over, even though the merger is complete. There are multiple ways to win as DWDP separates into at least three companies, each with a number of incremental independent paths to further increase shareholder value. On the merger level, the story, is still unfolding. Execution on $3bn of cost synergies and $1bn of growth synergies as the merged entity then breaks up into at least three companies’ remains to be seen. There is also an under-levered balance sheet to take advantage of as net debt/EBITDA stands at 1.5x. Materials Co. -- one of the expected spinoff companies -- is likely receiving a lower implied multiple due to markets being overly bearish on the ethylene cycle. This value will be unlocked as the cycle evolves and if DWDP separates and monetizes the commodity assets. Then comes the Ag Company as it shows earnings growth in the near future with stability in seed pricing and some improvement in crop chemistry inventory levels. With Syngenta delisted, and Monsanto acquired by Bayer, Ag Copany remains the only global publically traded pure play on seeds, biotech, and crop chemistry. On the Specialty Company, the CEO Ed Breen’s history, this company can see strategic activity and can be potentially sold. Given the cost synergies, the combined company trades at 9x EBITDA which might be a bit low, if an analysis is done based on sum-of-the-parts.

Special Situation Ideas for the week of 20 August 2017

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s, WSJ, IBD, and other publications. If you have

questions, feel free to write to me on kedar@kedarcap.com

Barnes & Noble (BKS): BKS is a retailer of books and other content and media, including educational products with a stock market value of $523m. Sandell Asset Management, a well-known activist is urging the board of BKS to take it private. The fund believes that BKS is significantly undervalued for several reasons, including the steep drop in retail valuations in FY17 due in large part to the dominance of Amazon. BKS trades at a lower EV/EBITDAx than nearly every other publicly traded retailer despite being the only truly national bookstore chain. Physical bookstores are not going away anytime soon, and even if they were to decline, the intrinsic value of BKS is still materially greater than where it trades. Recent acquisition of Whole Foods by Amazon and of Staples by Sycamore Partners are two examples of sophisticated investors and operators realizing that retail companies are better off private than public in this environment. Similarly, BKS would be a good acquisition for a financial buyer interested in its cash flow and low leverage, or an internet or media company looking for a retail presence based on its countrywide footprint of stores. Recently, Sandell urged Bob Evans Farms to sell its restaurant business, valuing it at $560m, which was ultimately sold for $565m. BKS trades at 3.2x FY18 EV/EBITDA, with FY17 EBITDA at 170m. If BKS goes private, it can be taken private at $12 a share, a big premium to where it trades currently.

Seagate Technology (STX): STX is a provider of electronic data storage technology and solutions. The Company's principal products are hard disk drives (HDDs). The company has a market value of $9.5bn. What got my attention was the recent invitation by the company to ValueAct Capital, a well know fund, which was invited to serve as an observer on STX’s board. The stock price has declined to $32 a share from $48.96, as early as March, 2017. The fund holds 7.2% stock with an average cost of $35.04 per share. This is an increase from 4% that it held in September, 2016. STX is a good business in a rational industry with strong cash flow—but the company is misunderstood. The market is focused on one of the more visible parts of STX’s business, namely the traditional PC business, which happens to be one of the smallest parts of its operations. It is the hard-drive business that is fueling it’s growth, and it is hard drives that are the backbone of the cloud and other distributive storage businesses. Seagate is one of two big players in this market, and it has valuable intellectual property. The company’s current chairman and CEO (until October), Stephen Luczo, was on the Microsoft board with ValueAct partner Mason Morfit, while director Mike Cannon was on the Adobe board with ValueAct partner Kelly Barlow. STX has a return on Equity of 52%. Current dividend yield is approx. 8%. At 10x FY18 earnings, there is upside to the stock price, if STX can streamline costs and improve end user demand for its product.

Gardner Denver Holdings (GDI): GDI makes pumps, compressors, and flow-control devices. In FY12, GDI, then decentralized and inefficient, was hit by slowing demand for its natural-gas-related equipment and a softening in its key European industrial markets. In FY13, after a push by activist, it was sold to KKR for $76 a share. After 4 years of restructuring, KKR took GDI public at $20 a share. KKR owns almost 75% of the shares. The post-IPO lockup on selling ends in November. KKR emphasized on developing new management talent, expanding margins, accelerating growth, and allocating capital more efficiently. Of its 100 top business managers, 45 are new. Reading into its first quarterly report, it seems like the strategy is beginning to pay off. Cash flow rose strongly in each of its three businesses—industrial, energy, and medical. While the company had a net loss of $146.3m, due to factors related to the IPO, quarterly revenue, at $579m, was 25% above the year-earlier level, and cash-flow margins were up by 4%. GDI trades at 11x Ebitda compared with 13x for rivals. For example, Graco (GGG), fetches 16x Ebitda. The reason for lower multiple might be the market underestimating GDI’s ability to rebound in energy, its second-biggest market behind industrial. Its backlog of bookings to billings in the sector is a respectable 1.3x. Energy is starting to turn up again. Gardner Denver is using its strong cash flow to pay down debt, invest in core products and technologies, and make acquisitions. Net debt/ adjusted Ebitda has dropped to 3.8x from 7.3x a year ago. The pump market is expected to earn $1.42, on $2.44bn of revenue for FY18. With proper execution, shares can rise more than 40% from where they trade right now.

Special Situation Ideas for the week of 6 August 2017

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s and other publications. If you have questions, feel free to write to me on kedar@kedarcap.com

CSTM:  It is a Netherlands-based company engaged in developing aluminum products for a range of markets and applications, including aerospace, automotive and packaging. The company IPO’ed back in 2013 at $15 share, before rising to an all time high of $34/$35. Since then, due to operational issues, financial mismanagement and poor leadership, the stock suffered and traded under $5 per share. To add to the woes was a poor aerospace market. However, recently, CSTM got a new management, which oversaw operational turnaround. The new management team is helped by improving aerospace, auto and can market.

The stock, according to bloomberg had some recent takeover interest.  From what I have known with my own research, the management was not very keen to sell at this price. Longer term, the company has a bright future, and I can easily see this stock double from here, if held for medium to long time. This stock was part of my portfolio when it was trading at $5 a share. I would advise this company should be seriously looked into.

TGNA: Tegna Inc. has a portfolio of media and digital businesses that provide content. The company recently spun-off its cars.com segment, and also divested its stake in Careerbuilder, the job hiring portal. What remains with the company is a host of TV stations in important states in the US. With the changing political landscape, especially with the recent election of Mr. Trump, we can only expect increased political spending which will benefit the company. 2018 should start off stronger with the benefit of both the Super Bowl and Winter Olympics at their core NBC stations and could bring the benefits of local consolidation and a stronger than expected political year.

Additionally, with a  pure play within the content transmission and media sector, the company can easily become a takeover target for a larger firm looking to expand via acquisitions.

Special Situation Ideas for the week of 17 July 2017

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s and other publications. If you have questions, feel free to write to me on kedar@kedarcap.com

SHORT: Best Buy (BBY):  Best Buy  is a provider of technology products, services and solutions. It has operations in the United States, Canada and Mexico.
The company reports in 5 distinct segment: Consumer Electronics - home theater, home automation, digital imaging, health and fitness and portable audio (approx. 33% of rev); Computing and Mobile Phones - computing and peripherals, networking, tablets, mobile phones (including related mobile network carrier commissions), wearables (including smart watches) and e-readers (approx.46% of rev); Entertainment - gaming hardware and software, movies, music, technology toys and other software (approx. 5% of rev); Appliances - major appliances, for example, refrigeration, dishwashers, ovens, laundry, etc.) and small appliances for example, coffee makers, blenders, etc. (approx. 11% of rev); and Services - consultation, design, delivery, installation, set-up, protection plans, repair, technical support and educational classes (approx. 5% of rev). The stock has had quite a run-up in its share price in the last year, a run-up which was helped by the rise in the stock markets. The top line has remain largely flat to down, despite this rise. Most of the growth trends impacting BBY are directly correlated to population growth, housing recovery, and health living trends. Aside the top line, even the gross profit and operating profit margins have remained largely flat. So the question is – why a meteoric rise in the stock price? The answer lies in the rise in EPS mostly, from cost cutting and buyback in stock. Since FY15, the company has bought back stock and cut costs, both operating and fixed – a step that has directly impacted its bottom-line. That coupled with steady rise in housing and a positive trend in job markets has positively impacted BBY. The positive cash flow generation has been mostly deployed to keep the dividends and buy back the stock – not the best way to grow the business. The company has historically traded at 10x earnings multiple. Putting 13x earnings multiple and assuming the company earns between $4 - $4.50, the stock can trade as high as $54 a share, which it currently is. This also assumes an EBITDA north of $2.2bn. The recent announcement in another $3bn in share buybacks might keep the momentum going for a bit more. However, the risk to the downside are much higher, given the rise in stock markets, highs in employment rate, tightening of federal reserve policy and a growth in housing which is little long in its tooth. This coupled with the day when the magic of cost cutting and share buyback comes to an end, the stock can tumble more than 25% in the mid 40ies.

SHORT: Verint Systems (VRNT): The Company with a $2.5bn market cap specializes in customer engagement, cybersecurity, fraud, and risk and compliance software and services for some 10,000 customers in 180 countries around the world. The shares have risen nearly 30% over the past 12 months, yet its weakening track record over the past four years suggests that investor enthusiasm is misplaced. Revenue growth has dropped steadily, from 24% in Fy15, which ended Jan. 31, to an 8% decline in FY17. The sales drop happened despite the company having spent $765mn in that period on three major acquisitions designed to increase sales. Over the same period, costs for R&D, among other expenditures, have risen about twice as fast as revenue.  Based on GAAP, the company reported a loss of 47c in FY17 from an income of 99c in FY14. Although non-GAAP EPS is only 15x estimates EPS of $2.71 for FY18, GAAP EPS estimate is just 16c for a P/E of 250x. For a company that has been growing through acquisitions, stock-based compensation; acquisition expenses; restructuring expenses; amortization of acquired technology; and impairment charges are real costs and not extraordinary expenses. The current valuation is priced to perfection. Its customer-engagement business, which is about two thirds of sales, and its cyber intelligence business, which is the other third, compete with the likes of Oracle, Microsoft, and Salesforce.com (CRM). If the company does not get bought by a firm expect the price to drop.

LONG: Hain Celestial Group (HAIN) : The Company deals with organic and natural foods and other products. Most recently, Engaged Capital has submitted seven candidates for election to Hain’s eight-seat board. The fund bought into the company at an average cost of $34.63 per share. The company has a market value of $4bn. Engaged was an investor in Hain 2 yrs ago, and had successful activist engagements at natural/organic companies Boulder Brands and SunOpta. Hain has a great portfolio of organic brands, but suffered some setbacks, including a lengthy accounting issue it rectified on its own and slowing of top-line growth as its retailer mix evolved from natural specialty stores to major grocers. While Hain has done a great job of acquiring brands, its poor integration of them has led to profit margins much lower than peers. So the first opportunity here is operational: A more-efficient supply chain and rationalization of SKUs could double margins. The second opportunity is strategic. Hain is the last pure-play organic food company large enough to move the needle for companies like Pepsi and Kraft. Engaged has had a constructive engagement with management. The investor nominated seven directors not as a power grab, but to address the severe lack of relevant experience on the Hain board. There are also some positive trends that might help HAIN grow. For example, approximate annual growth in consumption of natural/organic foods over the past ten years in the U.S. is approx. 10%. In the US, less than 10% of all foods sold is organic/natural. While Hain has 3,000 SKUs, or stock-keeping units, only about 500 drive 90% of its revenue. If the fund plays its card right, there is a huge opportunity to drive.

I have been busy running money for some families, for over 3 years. Decided to take a break and restart the blog while I decide my next move/job.

I have done research on few ideas here, others I have read online on Barron’s and other publications. If you have questions, feel free to write to me on kedar@kedarcap.com

MACRO: The S&P’s 500 is trading for roughly 18x future earnings. The historical norm is 16x. A price/earnings multiple of that magnitude historically has suggested limited upside.

Corporate performance in the U.S. has been pretty good. Revenues were up 7%ish in 1Q17, and earnings were up 14%. Emerging markets are up about 20%, and even some slow-growing European markets have performed well. There are other things happening: some deal activity, and a lot of activist investing. Leveraged buyout firms are flush with capital and ready to invest. So are private equity firms, which are investing in expensive public equities.  The Federal Reserve will likely raise rates again. It is a little behind the curve, and the equity market is a little ahead of itself. Flat or rising rates will limit multiple expansion, which accounted for two-thirds of the S&P 500’s 98% return in the past 5yrs.There might be some moderation in the second half. Complacency is high and volatility is low, so we are set up for a more rugged market in the second half. Then there is also concern about auto loans, which have climbed to about $1.2Tn from $820bn in ’07, and student loans, which are now $1.3T, up from $410bn.
The biggest risk is that the Federal Reserve continues to raise rates as the economy begins to show signs of slowing. The pace of economic activity is an important thing to watch. So is Washington. The rhetoric coming out of Washington is that a lot of positive things are happening. Investors are overly optimistic about what the Trump administration can accomplish.

Internationally, China is delivering 6.5% economic growth like clockwork, although China is slowing, and that is the key to what will happen in the 2H and beyond. A few months ago, China appointed a new head of the China Banking Regulatory Commission to reform the financial sector. Reform means that China will have to squeeze out excessive leverage and systemic risks, and it can’t do that without doing some damage. Right now, China has a mini credit crunch. It is the only country in the world with an inverted yield curve, and not because the central bank has tightened rates. It is because the system has tightened due to reforms. The shadow banking system has been squeezed, and the banking system is short of deposits, so there is a funding problem.

STOCKS

Bed Bath & Beyond (BBBY): It is based in Union, N.J. The stock is down 12% this year. Amazon.com is going to take share from everyone, but it can’t kill everything. They do a great job of selling dorm equipment that can be picked up at a store near campus. As long as the housing cycle continues, that is good for BBBY. BBBY earned $4.58 a share in the FY17 ending February. They can make FY18 is $4.30 a share. At $35, it is at 8.2x. The company just increased its dividend by 20%, and reduced its share from 245m 5yrs ago, to 145m. BBBY is a better-than-average retailer and can be a good money maker over 5 years.

CyberArk Software [CYBR]: A leader in the small, but growing, area of privileged access management security. Its products take aim at hackers attempting to infiltrate corporate networks. CyberArk has a 25% market share and could grow as enterprises shift their focus from protecting firewalls to protecting against targeted user attacks. Unlike a lot of smaller vendors, it is profitable and keeps expenses low. The company could have strategic value to Check Point Software Technologies [CHKP]. CyberArk could generate $2.25 a share of free cash flow in 2019. At 25x earnings along with their net cash, stock can go to $65 a share.

Johnson Controls [JCI]: JCI provides building products and technology solutions, including air systems, HVAC controls, and fire and security solutions. Following the September 2016 merger of Tyco and Johnson Controls, and the spinoff of the auto-parts business, Johnson became one of the largest multi-industry companies. George Oliver, head of Tyco, will become the combined company’s CEO next year. The company will realize more than $1bn, or $1 a share, of cost synergies in the next 3ys. It could produce about $4 a share of cash earnings in the fiscal year ending in Sep-19 versus $2.80 in FY16. That could propel the stock into the mid-$60s in the next two to three years.

Ichor Holdings [ICHR]: went public in December. It trades for $23.31. The company is based in California. It has 25.6m shares, a $597m market cap, and net cash of $10.3m, or 40 cents a share. It was founded in 1999 and later bought by a private equity firm, which recently sold some stock. Ichor is a leader in the design, engineering, and manufacturing of fluid and gas delivery systems for semiconductor capital equipment. Two major customers: Applied Materials and LAM Research [LRCX. Pro forma revenue can be of $576m this year, which will be up 42%. Gross profit margins can be 16.8%. Fully taxed, the company could earn $2.02 a share, versus $1.32 in FY16. Demand in semiconductor land is being driven by two things: FinFET or Fin Field-Effect Transistor, which involves putting many more layers on a chip, and 3D NAND flash memory. Customer spending on semiconductor capital equipment is expected to rise to $36bn this year, from $33.8bn.

Valvoline [VVV]:  makes automotive lubricants. It was a spin-off from Ashland Global Holdings [ASH]. VVV has 200m shares outstanding. The stock trades at $22. The company could generate $2.1bn in revenue. Earnings could climb from $1.20 to $2 a share by 2021.

The company had $1.3bn in debt and VVV could be debt-free by FY21. The company generates a lot of cash. Stock can double in 5yrs. Dividend is 20 cents a share. Electric cars don’t have pistons, so they don’t need lubricants. But Valvoline also sells industrial lubricants and equipment, and will sell other sorts of products over time. There are 1bn cars in the world, and 250mn in the U.S. Another 100mn will be produced this year. If 8% of cars are electric in 5yrs, that’s not a significant impact.

Cott [COT]: There are 139m shares outstanding, and the stock sells for $13, giving the company a $1.8bn market capitalization. Cott has made a bunch of acquisitions and has $2.15bn of net debt. It has a growing private-label business in sparkling water. In recent years, it also entered the home- and office-delivery market for water and coffee in the U.S., U.K., and Europe. Cott will generate about $450m of Ebitda this year and $550m by 2021. U.K. currency-translation problems have caused a bit of an air pocket in the results, as the pound has fallen to 1.29 to the dollar from 1.60 last year. In the next few years, the stock will overcome that. We have a price target of $21.

Special Situation Ideas for week of 28-September-15

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s and other publications

Energizer Holdings (ENR): Energizer Holdings split into two companies on 1-Jul-15, with smaller battery operation, known as Energizer Holdings (ENR), and Edgewell Personal Care (EPC). EPC’s history began when Energizer bought the Schick-Wilkinson Sword razor business from Pfizer (PFE) in FY03 and later built a business with $2.4bn in revenue.

EPC makes 60% of its revenue from razors and shaving cream, and 30% from sunscreen and feminine products. Infant products, including diaper-disposal system and bottles, chip in the rest. Many of the company’s brands command high market shares. Edgewell is No. 1 in sunscreen in the U.S., and in shaving is No. 2 globally behind P&G’s Gillette. EPC shares have  slid 20% since the spinoff. The drop was due to high valuation and slower growth prospects in its first full year as an independent company. Yet, with the shares at a recent $82, it looks like a good time to buy in. EPC owns well-known brands in shaving, sun care, and feminine and infant care that include Schick, Skintimate, Edge, Playtex, Hawaiian Tropic, and Wet Ones. Most of these businesses are high margin, have high entry barriers, and generate stable cash flows. EPC is also unusual in an industry where giants like Procter & Gamble and Unilever dominate. Its market capitalization is a mere $5 billion, which makes it an attractive and very digestible asset for a larger player to acquire. Acquisition multiples in the industry historically have been high. Recent Deals Include Unilever’s 2011 purchase of hair and skin products specialist Alberto-Culver, for 14.4x EBITDA, and the 2010 acquisition of SSL, the maker of Durex condoms, by Reckitt-Benckiser for 18x EBITDA. EPC trades at 12.3x FY16 EBITDA and the buyout potential limits the stock’s downside. Some industry analysts price EPC at $121 implying 16x FY17 EBITDA, and 50% upside. In FY16, starting in September, profits are expected to drop 6% on a 2.5% decline in revenue. The weakness should prove temporary as much of it relates to the transition to an independent company. For the past few years, slowly growing markets, especially in the shaving category, and intense competition have weighed on the top line. Since FY09, organic revenue growth has amounted to only 1.3% annually. However, management has been working to jump-start growth and increased its marketing spending on brands with the highest return potential. There are signs that the strategy is gaining traction. In addition, as an independent company, it’s allowing EPC to rationalize its distribution network and cut costs. In May, Energizer’s board adopted a shareholder-rights plan, or poison pill, that carries over to EPC and will discourage hostile suitors until the end of the year. Its chief aim appears to be to give the new company time to get on its feet. Company characterized FY16 as a “transition year. EPC has a good amount of FCF with $300mn expected in FY16.  It makes about 55% of its sales in the U.S. That makes it an attractive target for a company with a large emerging-markets presence that could enjoy revenue synergies from a combination. Unilever and Colgate-Palmolive (CL) fit the bill.

 Demandware (DMND) sells cloud-based services to retailers and consumer-brands companies used to develop and manage e-commerce across various platforms, including online, in-store, mobile, and social networking. E-commerce sales are expected to grow about 20% annually through FY18. DMND is growing faster yet, with annual revenue up an average of 50% over the last five years. What DMND lacks, however, after nearly a decade in business and three as a publicly traded company, are profits. Moreover, despite falling from $76 to $52.17, shares trade at a sky-high 233x projected earnings. Losses have widened steadily based on GAAP. And Wall Street’s 2015 projections seem optimistic. Then there are high noncash expenses, such as stock-based compensation packages which aren’t going to let up any time soon. Furthermore, other expenses are lately outpacing sales. In the 2Q, subscription sales rose a blistering 45% from a year ago, but costs grew at a 60% clip. DMND gets the great majority of its revenue based on a subscription model, taking a small percentage of customer sales over its platforms. It relies heavily on its ability to add new clients and create new services to further integrate clients into its system. But attracting new customers and developing new features has been increasingly expensive for DMND due to intensifying competition. Some key metrics have slowed. Annual customer growth fell to 31% last year from 35% in 2013 and 50% in 2012. The backlog increase dropped to 37% last year from 67% in 2013. While many companies would love these numbers, the trend is going the wrong way for DMND valuation. Average subscriber revenue grew 4% in the last quarter from the year-ago period, much less than the 13% average of the previous five quarters. That could mean DMND is signing up smaller customers, or prices are eroding. The biggest caveat to the skeptical thesis is a potential buyout. DMND rivals have been acquired in the past two years at 5x – 8x annual sales. But even at 8x subscription revenue that would come to less than $1.5 billion—25% below its current market value.

Autodesk (ADSK): The stakes are higher this week as its annual investor day on 29-Sep-15. Shares of the design-software pioneer have lost almost a quarter of their value in 2015, and investors are grappling with the company’s plan to embrace the cloud, a major transformation that will dry up earnings temporarily. By the middle of FY16 ADSK will sell its last perpetual license, a fancy term for boxed software. Thereafter, designers, engineers, and filmmakers who rely on ADSK will need to buy subscriptions for the products, all delivered via the cloud. The new business model stretches out revenue over 4 to 5 years, but doesn’t change upfront costs. Thus the hit to earnings, which could fall substantially in 2016. This is a multiyear story but the stock could benefit much sooner. ADSK’s computer-aided design, or CAD, software remains a crucial tool for creating physical objects, which are now brought to life almost universally through software. ADSK’s flagship program, AutoCAD, has a leading share of the market. The company continues to roll out new products, including new ways to manage workflow at construction sites. The shares could jump 50% in the next 18 months as investors get more comfortable with ADSK’s transition to the cloud. The change in revenue model seems to be the right thing to do for the business. The optics of the revenue makes it look worse than it actually is.

Sales could slip 1.1%, to $2.49bn, for the fiscal year ending in Jan-16, as the company trades one-time software purchases for smaller recurring payments. The decline means ADSK could lose report negative earnings for the year which are expected to bottom in fiscal FY17, and then rise from thereon. That’s a long timeline, but investors are used to looking ahead once they understand an opportunity.  The subscription transition has been a recipe for success if it’s done correctly. ADSK already offers products powered by the cloud, and sees a future in which the cloud can offer the vast computing power required by its resource-intense applications.

Vantiv (VNTV), originally a spinoff from Fifth Third Bank, stands to benefit from this industrywide shift as it operates on both sides of the same market: It provides a full suite of payment services to merchants on the one hand; and on the other, it produces the physical cards for financial institutions across the U.S. VNTV is the second-largest merchant acquirer in the U.S., representing an 18% market share in total payment transactions, overtaking a unit ofBank of America (BAC ) in 2014. First Data ranked at the top. VNTV also ranks as the No. 1 U.S. merchant acquirer in PIN debit transactions. An acquirer is a bank or other institution that accepts card payments in the merchants' behalf. On the financial services side, Vantiv holds a 10% market share in the U.S., representing more than 1,400 banking and financial customers. It is the electronic middleman that enables and links electronically retailers and point-of-sale systems to the card brands and to the card-issuing institutions. Major clients includeMacy's (M ),Office Depot ( ODP ),Kroger (KR ),Walgreens Boots Alliance (WBA), In-N-Out Burger,Wendy's (WEN),Comerica Bank (CMA) andFifth Third Bank (FITB). More recent additions include Rabobank,Capital One Financial (COF) and the U.S. Postal Service. The time when customers paid for their purchases by swiping their credit cards and signing a paper receipt is coming to an end. New cards with a microchip and PIN have made their inroads into the financial payments market. The transition to chip cards, or what the industry calls EMV migration, has challenged the industry. October is the target for the so-called "liability shift." After the shift, when a transaction takes place, the party with the weaker technology will bear the cost of the possible hack or fraud. That's why most national merchants, retailers and banks have been working hard to issue the EMV cards and install EMV card terminals. Those cards carry a chip and are accessible with a PIN instead of the classic magnetic cards that require a signature. Chip cards will enhance the security on that end, the risk may shift to the weaker links in the industry: small and medium-size businesses and online users. That's where Vantiv comes in. In addition to being a leader in the EMV transition, Vantiv also has taken steps beyond it. Vantiv has been growing via acquisition. It has made three acquisitions in recent years. At the end of 2012, it acquired Litle, an independent e-commerce payment processor for Internet and direct-response marketing transactions. Its customer base includesOverstock.com (OSTK), Ancestry.com and Wayfair (W). The other two acquisitions relate to the integrated payment space. The company is certainly benefiting from a positive secular trend. Payment security at the small and midsize merchant level is a key driver of growth for the larger, more sophisticated merchant processors like Vantiv. Vantiv also plans to use its large cash position to consider offshore acquisitions, grow its core business and return capital to shareholders.