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Thursday, July 27, 2017

TRADE PLAN OF THE DAY ($DOX) AND ALIBABA OPTION TRADE CLOSED FOR PROFIT OF 20%

Hi Guys,

We are once again seeing record highs for the major indices at midday, and it is the ongoing strength in earnings news that is powering the lift. Facebook (FB) followed the upside earnings trend yesterday after the bell and the stock is up more than 5% in midday trading. Having traditional industrial companies and the FANG stocks releasing great earnings is a huge plus for this bull market, but it just makes some bulls wonder how long this party can last. The Fed sounded dovish on rates yesterday, but who knows?


In economic news, weekly jobless claims came in at 244,000 versus last week's 234,000 and the expected 245,000. This indicates that the employment picture is holding up extremely well. June durable goods orders rose 6.5% versus the expected 5.3% increase and May's 0.1% decline. We will see if we can build on these midday gains, so stay tuned! On a side note, Amazon's (AMZN) Jeff Bezos has officially surpassed Microsoft's (MSFT) Bill Gates as the world's richest man. Bezos is now just above $90 billion, while Gates' is slightly below $90 billion. This is definitely a "wow" moment for Bezos, who began 20 years ago selling books online at a loss!

Amdocs Ltd. (DOX)

July 28, 2017


COMPANY DESCRIPTION

Amdocs Limited (DOX) is a global provider of software and services solutions to the communications, entertainment, and media industry service providers.




INVESTMENT THESIS

Amdocs is currently trading at less than 17 times our 2017 earnings estimate, a very reasonable multiple for a growing telecommunications company. At current levels, we believe there is significant upside to the shares. The shares have consistently posted gains in recent years and are less volatile than many other technology companies and downside risk is limited in our opinion.

Amdocs business has been consistent. Revenue has risen 2%-3% or more every year since 2012, while operating margins have increased 10-20 basis points over that same time period. The company’s customers include the largest communications and content service providers, providing Amdocs with a predictable revenue stream.

DOX has a long history of returning cash to shareholders by way of share buybacks and dividends. Management has increased the dividend 14% annually since a dividend was initiated in 2012. The dividend is currently $0.22 per share, which yields 1.4%. On average, Amdocs has spent more than $400,000 annually on share buybacks, reducing the share count from 187 million to 151 million in five years.



RECENT DEVELOPMENTS

On May 9, the company reported a strong second quarter with revenue and earnings above our estimates. We are encouraged that the company’s business with AT&T (T) is recovering from weakness seen in the first half of 2016. Amdocs reported second-quarter revenue of $966 million, $5 million above the consensus estimate. Operating earnings rose from $0.86 in 1Q16 to $0.94 per share, matching the consensus estimate. Higher earnings reflect a second straight quarter of recovery in the North American market, which grew 8.5%. Amdocs continued to benefit from the pay TV market in the U.S. during the second quarter. The gross margin expanded 20 basis points to 35.5%, while operating margin rose from 16.6% to 17.2%.



EARNINGS GROWTH & ANALYSIS

We expect the company’s dominant market position to result in consistent 2%-5% revenue growth. We expect the industry to continue to grow at a low-single-digit pace and expect DOX to benefit from that growth.

For 2017, we now estimate earnings of $4.00 per share, up from a prior $3.90. For 2018, we are raising our estimate from $4.20 to $4.25 per share.



RISKS

Amdocs receives more than a third of total revenue from AT&T and just 10 just customers contribute more than 70% of the company’s business. In 2016, AT&T decided to postpone a project and this significantly influenced Amdocs’ growth. Europe is about one-eight of revenue and consists of many projects, which are sometimes delayed. Amdocs has pointed out that its business is won through competitive bidding, so if it is less effective in winning bids its business could decline.



VALUATION

We rate Amdocs a BUY and are establishing a target price of $80. Our price target implies a multiple of 20 times our estimate, which is above historical multiple. However, multiples for the Software Technology sector have widened in recent years and we believe a premium is warranted. At its current price, the shares offer investors the prospect of a 20% total return.



Amdocs Ltd. (DOX)
Current Price: $67.39
Target Price: $80
Current Valuation: 16.8 times FY17 EPS
Target Valuation: 20 times FY17 EPS



Alibaba Group Holding Ltd. (BABA), Achieved Its $159.30 Price Target

The following weekly Option Trades option idea should have been closed today for a 20% profit, as the underlying stock in the recommendation, Alibaba Group Holding Ltd. (BABA), achieved its $159.30 price target. The reason that the return was not nearly as high as the 99.36% anticipated return is because BABA achieved its target in just THREE DAYS, and most of the time premium was left in the options.


Ideas presented on 7/24/17

Call (Bull) Debit Spread on Alibaba Group Holding Ltd. (BABA, current price $152.26)
Buy 10 - October 2017, $150 strike calls for $10.75
AND
Sell 10 - October 2017, $160 strike calls for $6.10

Based upon Trades' projected share price of $159.30 at (or before) expiration on 10/20/17, Return on Investment (ROI) would be 99.36% (including reasonable commission) if BABA rises 4.62% in the next 12 1/2 weeks. Options are suitable for only very aggressive investors.
CLOSED ON 7/27/17 for approximately a 20% profit

Previous ideas can be seen here: HERE


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