Inventory Market Information: Buyers React to Lennar’s and Coupa’s Experiences; Coherent Bidding Battle Continues

28 mins read

On this episode of MarketFoolery, host Chris Hill is joined by Motley Idiot analyst Jason Moser to speak about Lennar‘s (NYSE:LEN) rise on robust first-quarter outcomes and continued optimism about America’s housing market. Additionally, Coupa Software program (NASDAQ:COUP) delivers a shock revenue within the fourth quarter, however shares nonetheless dump. The blokes additionally focus on the escalating bidding conflict in Silicon Valley as Lumentum (NASDAQ:LITE), MKS Devices, and II-VI all make bids to purchase Coherent (NASDAQ:COHR).

To catch full episodes of all The Motley Idiot’s free podcasts, try our podcast middle. To get began investing, try our quick-start information to investing in shares. A full transcript follows the video.

This video was recorded on March 17, 2021.

Chris Hill: It is Wednesday, March 17. Completely happy St. Patrick’s Day! Welcome to MarketFoolery. I am Chris Hill. On Monday, Jason Moser was on the present. Becoming a member of me as we speak, his Irish cousin, Jason O’Moser. Because of being right here, sir.

Jason Moser: [laughs] Effectively, prime of the morning to you.

Hill: We have got software program earnings, we have a bidding conflict in Silicon Valley, which I’m more and more fascinated by. However we will begin as we speak with housing. Lennar’s first quarter income got here in larger than anticipated and gross margins rose practically 5%. That appears fairly huge for a homebuilder. Let’s face it, the housing market is sizzling. Lennar is without doubt one of the largest homebuilders in America, so it appears proper that shares are up slightly bit this morning.

Moser: I believe you mentioned it there, the housing market is unquestionably sizzling and definitely administration has been saying as a lot for the previous a number of quarters. Whenever you look to homebuilders, Lennar actually needs to be certainly one of, if not the primary one in your record. That is the most important U.S. homebuilder by income. If we simply look again to what they have been saying, even simply as latest as September of 2020, the language relating to the market in that quarterly earnings launch, they actually have been harping on the basics of the housing market remaining robust, pushed clearly clearly by file low rates of interest. But additionally, usually talking, simply an beneath provide of stock. It actually has been an enormous profit on this cut-off date the place it is comprehensible to assume that possibly most customers would have been enjoying fairly heavy protection over the previous yr given what’s been happening. The housing market although, it simply actually continues to chug alongside. 

Should you have a look at the numbers that they recorded for the quarter, earnings have been up 60%, income up 18%. Should you have a look at deliveries, up 19%, new orders up 26%. That new order greenback worth was really 31% and the backlog displays loads of exercise coming down the pipe right here for 2021 as properly. Should you have a look at the feedback from administration within the launch and within the name, they simply stay believers within the power of the housing market. Rates of interest are going to remain comparatively low for a while, however we’re nonetheless in a scenario the place there is a scarcity of properties on the market and now you’ve got acquired this mixture of low rates of interest, robust private financial savings, you’ve got acquired now stimulus that has been launched right here, family formation continues to drive demand across the nation. All of this put collectively, it actually makes for a superb scenario for Lennar and different homebuilders. I believe, once more, going again to what I mentioned earlier, I believe that should you’re trying on the homebuilder areas, it in all probability must be the primary one you contemplate simply primarily based on its measurement and place available in the market.

Hill: A number of instances when housing is within the information — I should not say a variety of instances — typically when housing is within the information, right here in america, it is virtually as if the headline is definitely about particular markets. Notably, when these markets are getting, quote-unquote, “overheated.” We have seen this simply prior to now decade with San Francisco, with Seattle, any variety of locations. For people who find themselves taking a look at Lennar for the primary time, is there any regionality that they should keep in mind, or does Lennar basically play everywhere in the nation?

Moser: Lennar positively has a presence in some areas across the nation greater than others. I believe it is in all probability slightly bit misguided to get targeted on one specific locality. I do know that saying in actual property is location, location, location. Whenever you have a look at homebuilders, it is apparent they run by way of cycles. Whenever you have a look at a inventory chart for one thing like Lennar, for instance, it is one other a kind of companies the place within the close to time period, relying on the place you really begin proudly owning the inventory, that may actually dictate quite a bit about how your turns shake out, not less than within the quick time period, however additional out, you look 5 years versus 10 years. Over 5 years, it is probably not something spectacular, it is really underperformed. However you look out over 10 years, it turns into much more obvious. Since you’ve had the prospect to simply actually virtually ignore these cycles and the ebb and circulation that comes from. I believe, once more, with an organization like Lennar, given its scale, given its presence across the nation, that simply means buyers should focus much less on the locality aspect of issues and actually extra about simply understanding their final aim as an investor and the size of time they’re prepared to be affected person with holding an organization like a homebuilder.

Hill: Fourth quarter outcomes for Coupa Software program have been higher than anticipated. Income was larger than anticipated. Wall Road was anticipating a loss, Coupa posted a shock revenue. Why is the inventory down 7% this morning?

Moser: [laughs] Effectively, Chris, let’s return in time to June of 2020. We have really talked about Coupa’s earnings report on this present, I consider. I mentioned on the time, whereas the corporate was rising like a weed, it was turning into fairly obvious that they current a really compelling worth proposition to the companies they serve, that the chance for a enterprise, for an funding like this, not less than within the close to time period, actually is valuation. It is nonetheless a really modest money circulation enterprise, unprofitable, buying and selling for that 35-40 instances gross sales quantity as so many of those newer software program corporations are doing so. From a enterprise perspective, I do not assume actually there’s something to be involved with right here in any respect. As a matter of reality, I believe buyers who’ve a stake in Coupa ought to really feel fairly good about issues. Once more, I believe it actually simply is valuation greater than something, except for one little level that I will notice from the quarter and what they anticipate right here coming in 2020. 

If we have a look at the precise numbers they recorded, income $163.5 million, it was up 47% from a yr in the past, subscription income $135 million, it was up 37% from the identical interval final yr. One of many metrics they used to essentially hammer dwelling how enterprise is rising and what number of corporations are leaping onboard and what they’re spending by way of that Coupa platform, the cumulative spend beneath administration is now at $2.3 trillion versus $1.7 trillion a yr in the past. Coupa is all about enterprise spend administration, the BSM, that enterprise spend administration. I believe a superb analogy they even draw themselves is Coupa is to enterprise spend administration a lot as Salesforce is to buyer relationship administration. I believe that helps hammer dwelling the market alternative right here. However I believe the priority not less than as we speak and it is a truthful one, it is in all probability a bit extra quick time period in nature, it looks as if it is a bit extra related to an acquisition the corporate made. In November of final yr, they purchased this firm referred to as LLamasoft, which in the end is simply bringing extra synthetic intelligence into their provide chain administration choices. LLamasoft, that acquisition, it’ll play out on margins right here within the coming yr. They did notice for the yr that margins are in all probability going to be slightly bit pressured. However actually once more, that does appear to be timing-related, acquisition-related. 

Whenever you have a look at the acquisition they made there of LLama, they’re bringing on prospects together with Boeing and Denon and Residence Depot and Nestle. I imply, actually, actually huge prospects. Whenever you couple that together with the community results {that a} enterprise like Coupa already boasts, once more, I believe you need to be inspired with the report and with what the corporate is doing. I believe that the promoting of the inventory as we speak is valuation associated and possibly slightly little bit of concern on that margin language on the decision. However once more, I do not assume that is actually core business-related as a lot as it’s growth-related. It is one thing they will get by way of, which might then make one assume that, properly, if you would like, the lower of Coupa’s jibe, so to talk, and maybe as we speak is an fascinating alternative to think about shopping for a few shares.

Hill: We actually talked over the previous few months about shares which have had an ideal run. Even with the drop as we speak, this can be a inventory that is up greater than 80% over the previous yr, so it is had an ideal run. Now we have talked about any variety of shares which have put up nice numbers when it comes to their newest earnings and it falls in that. That is nice however it’s not good, and so we see that pullback. I suppose I used to be simply stunned. You realize this enterprise higher than I do. I used to be simply stunned as a result of this was so a lot better [laughs] than Wall Road was anticipating. It would not have shocked me to see the inventory principally flat on this information, however I used to be like, “I do not know. This actually looks as if it was an ideal quarter.”

Moser: Effectively, I believe it is an excellent lesson for buyers, significantly new buyers who’re actually simply getting their ft moist over the previous couple of years right here, significantly over the past yr. In case you have this notion that shares solely go up and value does not matter, hear, I’ve acquired information for you, that is not essentially the case. Use these durations when shares go down nearly as good studying experiences, I believe, at the start. However in the end, additionally, value does matter. It’s one thing to notice, when value to gross sales is basically the brand new value to earnings. That brings ahead a variety of progress, a variety of expectations that these corporations should ship on sooner or later. It is to not say that they will not, however that does affect your return. It’s a must to perceive how that performs into it. 

With every thing that Coupa is doing properly, once more, at 35-40 instances gross sales, you simply should remember that with any of those corporations that you just’re shopping for, so whenever you see nice outcomes, investing is basically all in regards to the future. Once they’re telling us that the longer term right here, not less than for the approaching yr, profitability would possibly witness some headwinds whatever the purpose, that is going to be one thing that in all probability impacts that actually lofty value to gross sales a number of. Once more, I do not assume it is something to be terribly involved about, however I believe it is a good lesson for buyers. Simply at all times keep in mind that the value does matter and also you wish to take that sort of stuff into consideration whenever you’re taking a look at these varieties of companies.

Hill: Coherent is again within the information. Coherent is an organization specializing in tools to make and measure lasers. Again in January, Coherent agreed to be acquired by Lumentum in a deal value $5.7 billion. Persist with me right here. In February, MKS Devices got here in with a proposal of $6 billion. After that, II-VI got here in with a proposal of $6.4 billion which leads us to this morning and Coherent saying that Lumentum has elevated their authentic bid to $6.9 billion. Oh, by the best way, shares of Coherent are up 70% year-to-date. Not prior to now 12 months, simply right here in 2021. [laughs] There are a few completely different ways in which I wish to go right here. Let me begin with this, as a result of once we talked about this on MarketFoolery again in January, one of many stuff you had mentioned about coherent was, and I am paraphrasing, however you mentioned, look, they do some fascinating stuff, they do some issues that Lumentum does not do, however Coherent as a enterprise is struggled over the previous yr. I suppose my first query is, are you stunned by this bidding conflict for this enterprise? [laughs]

Moser: Yeah. I have to say I am slightly bit stunned by it. I’d pay cash for Dan to insert Because the World Turns music into [laughs] this intro as a result of actually this is sort of a cleaning soap opera of 2021 to date, I imply, this has been fairly fascinating to observe. I imply, I’ve beneficial Lumentum and II-VI as shares for members over the course of the years. I imply, I did not see this coming. It actually felt like with the preliminary Lumentum Coherent tie up, each events have been joyful. They got here to an settlement. Initially, that transaction was valued at round $5.7 billion, Coherent stockholders would get $100 per share in money and 1.1851 shares of Lumentum for every Coherent share. Then as you famous, this went backwards and forwards with a couple of completely different corporations, and actually all of it blows right down to what Coherent does properly. 

The enterprise hasn’t carried out all that nice not too long ago and a part of that’s simply as a consequence of basic market situations. However this all blows right down to getting Coherent’s laser experience, and that is lasers and photonics. This represents an enormous alternative and that is one thing that Lumentum does, however it’s a really small a part of their enterprise. Lumentum’s larger focus, as I’ve talked about earlier than, is on that vertical cavity floor emitting laser expertise. I do know it is a mouthful, however that is in the end sensor-based expertise that is going to play extra into our lives as we see 5G and 6G connectivity get quicker. So then you definately quick ahead to as we speak. Now, I imply, Coherent stockholders will obtain $220 per share in money and 0.61 shares of Lumentum. So, they actually sweetened the deal by amping up the amount of money versus the proportion of shares that you’d get in Lumentum shares. 

I believe one more reason why this deal, that is in all probability the final tango, I believe these in all probability will wrap it up as a result of you will have a tech funding agency on the market, Silverlake, which is basically supporting this deal. I imply, they’ll make investments $1 billion within the new enterprise. They have, I believe, one thing like $80 billion in property beneath administration as we speak, very tech targeted. So that they have a variety of experience in a variety of these completely different areas. Once more, that is in regards to the laser enterprise. Lumentum clearly desires it, II-IV, I perceive why they might need it as properly, It isn’t low cost. That is one thing the place they’ll be paying round an EV to EBITDA of 60 instances. That is slightly bit reflective of lower than regular instances given the present state of affairs. Nonetheless, they’re paying up for it and should be feeling fairly good proper now to be a Coherent shareholder understanding that you just’re in such excessive demand.

Hill: You return to January fifteenth, which was, I consider, the final buying and selling day, or earlier than the unique bid was introduced. Shares of Lumentum are down practically 20% since then. I get that a part of it’s the total drop in Nasdaq shares that we have seen over the previous month. However should you’re a Lumentum share, I am questioning if the reverse is true, the reverse of what you mentioned about Coupa Software program. Effectively, should you just like the Coupa Software program enterprise yesterday, you will in all probability prefer it extra now that the inventory is 80% cheaper. Should you have been considerably OK with the deal as Lumentum shareholder when it was $5.7 billion, are you much less OK with it now? I imply, you need to be, it is $6.9 billion, you’ll be able to’t be thrilled that you just’re paying a better value.

Moser: Effectively, they’re paying extra, I imply, it actually stays to be seen as as to whether it’ll be value it, proper? I imply, that’s these of us know the enterprise clearly higher than we do. I believe it is secure to imagine there’s going to be a wholesome chunk of Goodwill that strikes over to Lumentum’s steadiness sheet. Goodwill is a kind of issues you possibly can view any variety of methods, in the end, even when they take impairments, then you definately simply checked out it by way of an adjusted lens, we’re dwelling beneath an adjusted world now, Chris, although, I do not know. That might be one thing buyers would focus terribly. This deal is basically going to double the scale of Lumentum. 

I perceive them coveting that laser aspect of the enterprise; I completely get that. in the event that they consider that they will notice the fee financial savings, and it does sound like they went again by way of the numbers and got here up with some further methods to avoid wasting cash to justify this elevated provide, then extra energy to them. I believe getting that Silverlake backing is encouraging, as a result of it does seem to be you’ve got acquired a couple of different properly faculty events within the area that appeared like they actually again this mixture. Typically talking, yeah, I might slightly see them get it for cheaper than costlier, however I suppose time will inform as as to whether it actually finally ends up paying off as a result of no questions, it’ll make it a a lot bigger firm and it’ll open up the market alternative for this newly sized Lumentum as soon as the deal closes.

Hill: Jason Moser, thanks for being right here.

Moser: Thanks.

Hill: As at all times, folks on this system might have curiosity within the shares they speak about, and The Motley Idiot might have formal suggestions for or towards, so do not buy or promote shares primarily based solely on what you hear. That is going to do it for this version of MarketFoolery. This present is blended by Dan Boyd. I am Chris Hill. Thanks for listening. We’ll see you tomorrow.

This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even certainly one of our personal — helps us all assume critically about investing and make choices that assist us turn into smarter, happier, and richer.

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