“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, August 24, 2020

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"



Option Trade – Medtronic plc. Ordinary Shares (NYSE:MDT) Calls

Thursday, August 27, 2020

** OPTION TRADE: Buy MDT JAN 15 2021 110.000 CALLS at approximately $3.60 (Up to $3.85).

Place a pre-determined sell at $7.20.

Also include a protective stop loss of $1.45.

Ireland-based medical device major Medtronic PLC (NYSE:MDT) topped Wall Street expectations, although earnings and sales fell in its fiscal first quarter, as the company said it’s recovering faster than expected from the pandemic.

For its fiscal 2021 first quarter ended July 31, Medtronic posted adjusted earnings of 62 cents per share on $6.51 billion in sales. Medtronic earnings per share tumbled 51% and sales fell 13%.

On average, analysts polled by FactSet called for adjusted profit of 16 cents per share on $5.4 billion in sales for the maker of heart valves, pacemakers and other medical devices. In the year-ago period, Dublin, Ireland-based Medtronic posted earnings of $1.26 a share on $7.49 billion in sales.

The company blamed a decline in medical procedures due to the Covid-19 pandemic for the decline. Still, the medical device company pointed out that it halved its sales decline. Revenue tumbled 26% year over year for its fiscal fourth quarter ended April 24.

Shares advanced 3.7% to $104.08 in early market trading on Tuesday.

About Medtronic…..

Medtronic develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group.

The medical device maker employs more than 90,000 people worldwide, serving physicians, hospitals and patients in more than 150 countries.

The Report.....

"We reported solid improvement from last quarter, and our results reflect a faster than expected recovery from the depths of the pandemic we saw back in April," said Medtronic CEO Geoff Martha said in the earnings release. "Procedure volumes began to recover around the world, and we're leveraging our pipeline of innovative products to drive share gains in a number of key businesses."

Each of Medtronic's business units posted sales declines except one. Sales for the respiratory, gastrointestinal & renal unit rose 5% to $720 million, as sales of ventilators more than doubled in the Covid-19 era. But the company's surgical innovations unit saw the biggest sales decline, 24%, to $1.08 billion.

Because of the effects of Covid-19, Medtronic is not providing guidance. For Medtronic's fiscal 2021 ending on or near April 30, analysts project adjusted earnings of $3.59 per share on $27.8 billion in sales. At those numbers, profit would fall 22% and sales would dip 4%.

The Pandemic Effect.....

Medtronic's declines in revenue and profitability in Q1 were significantly narrower than the steep falls the company suffered in the previous quarter. The main reason in both instances was the coronavirus pandemic, which has ramped up postponements and even cancellations of elective surgeries (resources have to be shifted to the fight against coronavirus and COVID-19, after all, and many patients are avoiding nonemergency hospitalization).

But those patients are coming back, according to the company, and as a result its prospects are improving. "Procedure volumes began to recover around the world, and we're leveraging our pipeline of innovative products to drive share gains in a number of key businesses," said CEO Geoff Martha in the press release announcing earnings.

Medtronic shares have been hard hit dropping 9% on a year-to-date basis as many hospitals that use its medical devices had deferred elective procedures due to the coronavirus pandemic.

Going Forward.....

The COVID-19 pandemic will continue to be the main wild card for the healthcare stock going forward. Because of the uncertainty created by the pandemic, Medtronic didn't provide financial guidance for the full year or for its fiscal second quarter.

Geoff noted, though, that procedure volumes are recovering across the world. He said, "We are driving toward faster and broader topline growth, not just as we emerge from the pandemic, but sustainable growth over the long term."

Analysts Thoughts.....

CFRA Research analyst Kevin Huang maintained a strong buy rating and price target of $121 on MDT stock.

"The company's commentary suggested that MDT gained market share across most of its businesses in recent months," Huang wrote in a research note.

He pointed out Medtronics' "numerous regulatory approvals" this year. He said the company's received 130 such approvals in 2020 in the U.S., Europe, Japan and China.

Ahead of the financial results, Cohen & Co. analyst Josh Jennings last week reiterated a Buy rating on the stock with a $110 price target, saying shares should benefit from the company’s fiscal calendar in F1Q’21.

Jennings had expected results to reflect strong elective procedure recovery trends. While this is anecdotally understood, Street models do not fully account for the month/month improvements experienced from May through July, he added.

"The extra selling week [in April] dynamic provides us with confidence that MDT’s business units performed at a similar level to competitors who have already reported C2Q’20 results,” Jennings wrote in a note to investors.

Several analysts commented on the stock.....

  • Bank of America reiterated a “buy” rating and issued a $130.00 price objective on shares of Medtronic in a research report on Friday, May 22nd.
  • Citigroup boosted their price target on shares of Medtronic from $108.00 to $120.00 and gave the stock a “buy” rating in a research report on Wednesday.
  • Oppenheimer restated a “buy” rating and set a $112.00 price target on shares of Medtronic in a research report on Tuesday.
  • Finally, Piper Sandler restated a “buy” rating and set a $120.00 price target on shares of Medtronic in a research report on Tuesday, August 11th.

Three research analysts have rated the stock with a sell rating, four have given a hold rating, twenty have issued a buy rating and one has assigned a strong buy rating to the company. The stock currently has an average rating of “Buy” and a consensus price target of $115.78.

Summary.....

Medtronic stock has a 50 day simple moving average of $97.11 and a 200 day simple moving average of $97.54. The company has a market capitalization of $134.50 billion, a PE ratio of 29.22, a P/E/G ratio of 3.65 and a beta of 0.67. The company has a quick ratio of 1.72, a current ratio of 2.13 and a debt-to-equity ratio of 0.43. Medtronic PLC has a 1 year low of $72.13 and a 1 year high of $122.15.


Option Trade – Texas Instruments Incorporated (NASDAQ:TXN) Calls

Monday, August 24, 2020

** OPTION TRADE: Buy TXN NOV 20 2020 145.000 CALLS at approximately $5.20 (Up to $5.80).

Place a pre-determined sell at $10.40.

Also include a protective stop loss of $2.10.

Semiconductor stock Texas Instruments Incorporated (NASDAQ:TXN), headquartered in Dallas, Texas, an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, is starting to look good.

The Internet of the Things is really just shorthand for connected and automated machines that communicate without human intervention. Of course, getting the IoT up and running will require lots and lots of different kinds of chips that all need to interact with each other. These include analog chips, which detect inputs from the physical world such as heat or pressure, and convert them into digital signals, as well as embedded processors, the tiny chips that usually perform a specific function within a "smart" appliance or machine.

Semiconductor giant Texas Instruments makes analog and embedded chips across a wide variety of end markets. Over the years, TI has made a big push into industrial and automotive sectors, as management believes that factories and cars are two industries set to become "smarter" and more automated over the long term.

That still seems like a good long-term bet; however, the industrial and automotive industries are two sectors that are hurting right now in the COVID-19 recession. When you combine that with the industrial recession of 2019 caused by the U.S.-China trade war, it's been two pretty bad years for Texas Instruments' end markets.

Yet despite all that, Texas Instruments still generated $5.7 billion in free cash flow over the past 12 months, for a current price-to-free-cash-flow multiple of about 22.4 times. That performance during such trying times is a testament to TI's industry-best capital allocation policies and long-term orientation, which has given TI industry-low manufacturing costs, diverse end-market exposure, and high margins.

Its stock has risen about 42% from a March 16 low of $93.09 amid the coronavirus market recovery.

About Texas Instruments …..

Texas Instruments Incorporated designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide.

It operates in two segments, Analog and Embedded Processing. The Analog segment offers power products to manage power requirements in various levels using battery management solutions, portable components, power supply controls, point-of-load products, switches and interfaces, integrated protection devices, high-voltage products, and mobile lighting and display products.

The Report.....

Texas Instruments reported second-quarter 2020 earnings of $1.48 per share over a month ago, which surpassed the Consensus Estimate by 68.2%. The bottom line was also higher than management’s guided range of 64 cents to $1.04 per share. Further, the figure improved 8.8% year over year and 19.3% sequentially.

The company reported revenues of $3.24 billion, which beat the Consensus Estimate by 9.3%. The top line also came within management’s guided range of $2.61-$3.19 billion.

However, the figure declined 12% from the year-ago quarter and 2.7% from the prior quarter.

Sluggishness in the company's Analog and Embedded Processing segments, and softness in the automotive market owing to coronavirus-led disruptions impacted the top line negatively.

Nevertheless, uptrend in personal electronics and industrial markets acted as a tailwind for the company during the quarter under review.

The company’s strong investments in new growth avenues, and research and development activities are positive.

Also, Texas Instruments is likely to address the rising unforecasted demand in the current scenario well on the back of short lead times and high availability of products for immediate shipment.

As well, the company remains confident on its portfolio of long-lived products and efficient manufacturing strategies. Additionally, continuous returns to shareholders are likely to help the stock rebound in the near term.

Texas Instruments CEO Rich Templeton said in a news release that, "Our cash flow from operations of $6.3 billion for the trailing 12 months again underscored the strength of our business model.”

"Free cash flow for the same period was $5.7 billion and 42% of revenue. This reflects the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter (semiconductor wafer size) Analog production."

For third-quarter 2020, Texas Instruments expects revenues between $3.26 billion and $3.54 billion.

Earnings are expected in the range of $1.14 to $1.34 per share.

Influencing Factors.....

Texas Instruments' gross margins held steady because the production of its analog and embedded chips requires less capital than more advanced chips. TI's shift from 200mm to 300mm wafers in recent years also reduced its total production costs by up to 40%.

TI benefited from stronger sales of personal electronics throughout the pandemic last quarter, and the growing healthcare market offset the weakness of its other industrial markets.

The Pandemic Effect.....

The pandemic has kept almost everyone indoors, with technology dominating people’s daily lives. Online services have got a boost, leading to increased use and huge demand for high-performance computer applications (HPC), gaming devices and peripherals, wearables, drones, and VR/AR devices. This has resulted in escalated demand for semiconductors.

Also, the evolution of semiconductor manufacturing processes from 10 nanometer (nm) to 7 nm and even 5 nm technology is opening new business avenues. Increasing demand for electronic gadgets ranging from television sets, smartphones to videogames during the pandemic is further helping chipmakers.

With the economy reopening, sales of smartphones rebounding in markets like China and more people spending time on their mobile phones, the semiconductor industry might stand to benefit in the near term. Worldwide sales of semiconductors increased 5.1% in June to $34.5 billion from $32.9 billion a year earlier.

Per the IDC Semiconductor Applications Forecaster, the coronavirus outbreak is going to impact the industry. Slowing smartphone sales during the coronavirus pandemic was a cause of concern for not only mobile manufacturers but also chipmakers. However, this is slowly changing with economies finally opening up.

China — one of the biggest markets for chipmakers — is also rebounding. Moreover, microchip demand is likely to get a boost with the 5G boom in Europe and parts of Asia, including China and Singapore. IDC expects 5G volumes to grow this year which should act as a tailwind to the semiconductor market.

Considering the growth prospects of chip makers on a data center boom and HPC push, it makes sense that Texas Instruments will benefit.

As well, the company serves diverse end markets, so it can weather setbacks better than most. For example, its personal electronics and industrial markets performed well.

Analysts Thoughts.....

Several analysts commented on the stock.....

  • DZ Bank upgraded shares of Texas Instruments from a “hold” rating to a “buy” rating and set a $158.00 target price for the company in a research report on Thursday, July 23rd.
  • BMO Capital Markets upped their target price on shares of Texas Instruments from $150.00 to $165.00 and gave the stock an “outperform” rating in a research report on Wednesday, July 22nd.
  • Charter Equity upgraded shares of Texas Instruments from a “market perform” rating to a “market outperform” rating in a research report on Wednesday, July 22nd.
  • Finally, Rosenblatt Securities upped their target price on shares of Texas Instruments from $135.00 to $160.00 and gave the stock a “buy” rating in a research report on Wednesday, July 22nd.

Four investment analysts have rated the stock with a sell rating, fourteen have assigned a hold rating and ten have assigned a buy rating to the company’s stock.

Summary.....

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising.

Texas Instruments has a market capitalization of $128.53 billion, a P/E ratio of 26.33, a PEG ratio of 2.98 and a beta of 1.11. Texas Instruments Incorporated has a 52-week low of $93.09 and a 52-week high of $140.88. The company has a 50 day simple moving average of $132.19 and a 200-day simple moving average of $120.22. The company has a quick ratio of 2.94, a current ratio of 3.92 and a debt-to-equity ratio of 0.82.