A current AIM Fund holding: SAP ADR (SAP) by Jack Gorski. "This German software firm looks strong in 2017 and beyond"

SAP SE ADR (SAP, $97.00): "Potential Cloud Growth Puts SAP Revenues up and into the Sky"

By: Jack Gorski, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• SAP SE (NYSE:SAP) is a German software corporation that provides enterprise application software to help enhance and manage business operations for their clients. The company focuses on two business segments: The Applications, Technology & Services segment, in which software subscriptions are sold, and the SAP Business Network segment, which encompasses all their cloud, professional and education services.

• SAP can expect to see more customers adopt their SAP S/4 HANA platform now that AMERI Holdings, Inc. has added it to their service, offering it to clients worldwide.

• Cloud revenue growth has proven to be the main driver and executives now have improved their judgement, raising their estimates to revenues of €29 billion by 2020. 

• As of April 20^th, SAP has confirmed that 16 startups will begin their one year mentorship at the SAP StartUp Studio in Bangalore, India. Last year only seven startups were accepted.

• Management was recently restructured to encourage more strength within the company. Jennifer Morgan and Adaire Fox-Martin have been named to the executive board.

Key points: Cloud services are growing faster than expectations and are now the lead driver for revenue growth moving forward into 2017. SAP is currently the number one enterprise cloud company with 95 million users and growing. YoY Cloud Subscription and Support Revenue is up 31% to €3.01 billion. SAP has raised their 2017 forecasts, now projecting sales of €23.5 billion. They stated the new internet based software and services provides a more predictable revenue stream over the tradition software licenses.

Management has also expressed confidence in the customer adoption of S/4 HANA. HANA has generated €4.0 billion in license and maintenance revenue since its launch. Revenues are expected to grow now that AMERI Holdings, Inc. will now be offering the platform to its clients worldwide. S/4 HANA has already doubled used YoY with nearly 1,300 new customers in Q4 2016, of which 30% are new SAP customers.

At the SAP Capital Markets Day on February 9^th, management displayed some confidence that while margins might shrink in 2017, this year will represent the margin trough and thus margins should expect to grow in 2018. SAP is now offering a hybrid licensing model that is now offering a more subscription based service, rather than charging an upfront fee. The new payment structure produced a Q4 2016 operating margin of 35.9 percent. The decision of how customers choose to pay will have a major effect on margins moving forward.

What has the stock done lately?

SAP has seen a 10.45% increase in Q1 2017. This increase can possibly be attributed to higher expected cloud growth and more S/4 HANA subscriptions. Since their Capital Markets Day on February 9^th, the stock is up over $5.00. Relatively Q1 2017 has shown stable growth, as rising prices reflect investor confidence in the growth of cloud based revenues, despite flat expected organic licenses growth.

Past Year Performance: SAP has increase 27.86% over the past year, but still has potential to grow. Despite ups and downs from different like Brexit, still managed to outperform major indices for the second year in a row. Additionally, they performed well against their major competitors, and are still trading with a price to earnings multiple lower than the average of its comps.

Source: FactSet

My Takeaway

SAP has massive potential to increase their customer base with the rollout of their S/4 HANA platform. With assistance from AMERI Holdings, Inc. SAP can expect high subscription revenue growth in FY 2017 and FY 2018. Despite lack of certainty of margins due to changes in payment methods, SAP is positioned nicely to expand revenue in the years to come. Establishing itself as the number one enterprise cloud based provider worldwide, 

SAP has certainly produced a large moat, separating it from its competitors. With strong business model and newly structured management force, SAP is likely going to see massive success and continue to push its stock to all-time highs.

Source: FactSet

Marquette's AIM International Equity Fund Holdings and Performance as of 4/30/2017

AIM International Equity Fund Holdings and Performance as of 4/30/2017

April 2017 is the first month that the AIM students in the Class of 2018 were responsible for managing the three AIM Funds. The International Fund posted a return of 0.83% which was between the two benchmark (Russell Global xUS Index and S&P ADR Index). During the month of April there were four sets of presentations which began to change the makeup of the International portfolio.

This past week’s equity write-ups can be found at:  AIM Equity Write-Up 04/28/17

and every AIM write-up since the inception of the program in 2005 is archived here). 

More changes will be made to the funds before the end of the semester with at least two more ballots submitted to the AIM students for their approval. As the student are learning, International stocks also can have some rather surprising moves over the short-term. There were some rather dramatic movers (up and down) during the month - these are listed below – with Canadian and Mexican stocks underperforming as a result of the Trump Administration’s potential policy changes..

For the Month of April 2017	Total  Return
AIM International Equity Fund	0.83
Benchmark:Russell Global xUS	2.32
Benchmark:S&P ADR	0.73
Top Performers
WNS (Holdings) Ltd ADR	11.92
Travelport Worldwide Ltd	11.89
Caesarstone Ltd	9.52
Canadian Solar Inc	8.39
Worst Performers
Cameco Corp	-13.37
Imax Corp	-10.29
Controladora Vuela Compania de Aviacion SAB de CV ADR A	-9.54
Golar LNG Ltd	-8.66

The following table displays the current AIM International Fund holdings as of 4/30/2017. The fund retains a relatively sector neutral posture and the students employ traditional bottom-up fundamental analysis in selecting the holdings. Regional exposures will some large under- and over-weights.

Marquette's AIM Small Cap Equity Fund Holdings and Performance as of 4/30/2017

AIM Small Cap Equity Fund Holdings and Performance as of 4/30/2017

April 2017 is the first month that the AIM students in the Class of 2018 were responsible for managing the three AIM Funds. The Small Cap Fund posted a return of 1.14% which was slightly better than the benchmark (Russell 2000 Index). During the month of April there were four sets of presentations which began to change the makeup of the Small Cap portfolio.

This past week’s equity write-ups can be found at:  AIM Equity Write-Up 04/28/17

and every AIM write-up since the inception of the program in 2005 is archived here). 

More changes will be made to the funds before the end of the semester with at least two more ballots submitted to the AIM students for their approval. As the student are learning, small cap stocks can have some rather surprising moves over the short-term. There were some rather dramatic movers (up and down) during the month - these are listed below.

The following table displays the current AIM Small Cap Fund holdings as of 4/30/2017. The fund retains a sector neutral posture and the students employ traditional bottom-up fundamental analysis in selecting the holdings.

The fourth set of stock pitches by the AIM Class of 2018 were delivered on 4/28/2017 in the AIM Room before 60 students

The 4th Set of Marquette AIM Equity Fund pitches for the Class of 2018 were presented on Friday, April 28, 2017 in the AIM Room 

Students from James Madison High School attended the AIM pitches

This past week, the fourth set of stock recommendations were presented by students in the AIM Class of 2018.  The pitches were presented in the College of Business Administration's AIM Room and over 60 students were in attendance (including nearly 30 high school students from James Madison Academic Campus). This is the second year that the students visited the AIM program.

James Madison Academic Campus, located on the Northwest side of Milwaukee, is a comprehensive high school (Grades 9 through 12). JMAC offers a challenging curriculum of highly rigorous classes that includes AP English Literature, AP Statistics, AP US History, Honors English, Honors World History, Restorative Justice, Robotics, Pre-Calculus, Calculus, and the NAF Academy. 

In addition to the JMAC and AIM students in attendance, more than 20 people viewed the AIM presentations via webcast throughout the afternoon. The AIM students were also joined by Brent Adams, an AIM alumnus. Mr. Bill Walker and students in the AIM Classes of 2017 and 2018 asked excellent questions of the student-presenters and offered many useful observations and comments.

Brooke Porath pitched Ollie's (OLLI)

Brooke Porath was the first AIM presenter of the afternoon – and she pitched Ollie’s (ticker OLLI), an emerging retailer in the consumer discretionary sector. Dr. David Krause, AIM program director said, "I was pleased that the students from James Madison high school we were able to watch Brooke present her stock. I know they were impressed with the Q&A session and how Brooke answered the students questions about the stock recommendation.” 

Dr. Krause added, “This was an impressive set of presentations and the write-ups again were quite strong - and the students were well prepared. The first four groups of presenters have started the Class of 2018 on a positive note. We’ll have one more set of presentations next week – the last day of the semester."

 

Grant Runnoe, Cameron Butler, Timothy Donovan,
Armando Avila, Lauryn Trautmann,
Alex Czachor, and Jacob Schwister

This week’s equity write-ups can be found at:

AIM Equity Write-Up 04/28/17

Brooke Porath, Grant Runnoe, Cameron Butler, Timothy Donovan, Armando Avila, Lauryn Trautmann, Alex Czachor, and Jacob Schwister from the Class of 2018 pitched their stock recommendations as potential additions to Marquette’s AIM Equity Funds. Ballots will be sent to students in the AIM Class of 2018 to determine which stocks are added to the funds; a 2/3rd affirmative vote is required.

Students in the AIM program manage over $2,500,000 of the University's endowment. Balloting will take place over the weekend to determine which of the stocks listed above will be added to the AIM Funds.

 

Jacob Schwister pitched Jazz Pharmaceuticals (ticker JAZZ)

The AIM student equity pitches take place each Friday afternoon during the semester – either in the AIM Room or at a local investment company. The students prepare and distribute a professional equity write-up (note: every AIM write-up since the inception of the program in 2005 is archived here). 

The Fourth Set Stock Pitches for the AIM Class of 2018 are on Friday, April 28, 2017 at 2:45 CST – Join us.

You can join the AIM Program Student Equity Presentations in person, online or via Twitter on Friday, April 28th at 2:45 pm CST

The AIM student equity pitches take place each Friday afternoon during the semester – either in the AIM Room or at a local investment company. Watch the live presentations by the students in the AIM Class of 2018 (see webcast link below).

 April 28 Webcast Link

The students prepare and distribute a professional equity write-up (note: every AIM write-up since the inception of the program in 2005 is archived here).

 This week’s equity write-ups can be found at:

AIM Equity Write-Up 04/28/17

The students are responsible for making a seven-minute pitch before their peers, faculty and any alumni or investment professional in attendance. Following the student’s pitch the floor is opened for questions and answers for about ten minutes. This has been highly instructive, as the students must be prepared to defend their investment recommendation and answer questions in an extemporaneous manner.

How to comment using Twitter:

• Go to the MarquetteAIM Twitter account (you can use Search Twitter on your site) and click Follow
• During AIM presentations, go to #AIMpitch and follow the tweets (discussion) on Twitter (it will also be appearing on the Rise Display Board in the AIM Room and on your smartphone)
• Tweet your comments and questions during the AIM equity pitches
• Follow the rules of etiquette for using Twitter during AIM pitches
• Use the hashtag #AIMpitch to start each tweet
• Use $TICKER (note: this is called a cashtag and it be should the unique ticker/symbol for the stock that is being presented, ex: $TSLA)
• Keep you comment short because each tweet is limited to a maximum of 140 characters
• Example for Tweeting on a student’s Tesla equity pitch (note: the ticker for Tesla is TSLA):
•  #AIMpitch $TSLA How do lower gas prices impact demand for electric cars?

Jamie Jackson of Stairway Partners met with student managers of the Investment Club on Tuesday, 4/25/17

Jamie Jackson of Stairway Partners with students in the Investment Club

On Tuesday, April 25, 2017, Jamie Jackson of Stairway Partners visited Marquette and met with students involved with the Investment Club. Mr. Jackson, CFA is a Managing Partner with the St. Paul and Chicago-based investment firm. He is responsible for investment research, strategy, portfolio management, and trading – and he has over 20 years of investment experience. Mr. Jackson holds BS and MBA degrees from Marquette University and is increasing his involvement with the AIM program.

He talked with the student managers of the Investment Club about Stairway Partners’ investment philosophy which is grounded in the fundamental belief that the overwhelming majority of a portfolios’ risk and return is determined by its asset class mix – not by the selection of individual investments. This approach of using ETFs and index funds is similar to the approach used by the Investment Club.

Jamie Jackson discussed their approach to asset allocation

The concept of asset allocation drives their clients’ investment policy and long-term asset allocation strategies allowing for portfolios that properly reflect risk, return and cash flow requirements. 

Dr, Krause, AIM program director said, "The Marquette students found the discussion useful and helped provide them with a framework for setting long-term risk and return expectations – and provided with an appreciation of how to manage through times of market turmoil (i.e. Financial Crisis of 2008)."

Dr. Krause added, “It was a treat for Jamie Jackson to meet with the students. His experiences in the industry and explanation of Stairway Partners’ investment philosophy and process was valuable for the students to hear. The students in the Investment Club look forward to meeting with Mr. Jackson during the fall semester.”

A current AIM Fund holding: Home BancShares (HOMB) by James Hannack “A Southeast US Community Bank with Room to Grow"

Home BancShares, Inc. (HOMB, $25.09): “No Place Like Home”

By: James Hannack, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• Home BancShares, Inc. (NASDAQ:HOMB) operates as a community bank under the name Centennial Bank, where it provides commercial and retail banking services. It currently has a loan portfolio dominated by real estate (82.1%), with commercial real estate making up 59.1% of the entire loan portfolio. HOMB also closed 2016 with a deposit base of $6.9 billion. HOMB has 142 branches located in Florida, South Alabama, New York City, and its headquarter state of Arkansas. 

• In Q4 of 2016 HOMB recorded its 23^rd quarter of record income, with income increasing from $37M in Q3 to $48.6M in Q4. For the entire year net income increased from $138M to $177.1M.

• On March 27^th HOMB announced it was going to acquire Stonegate Bank (SGBK) for ~$778.4M. The deal still needs approval, however it is expected the deal will go through. Both banks, along with Street analysts believe this acquisition is smart and is going to be accretive by ~8% to 2018 earnings. Earlier in March, HOMB announced it completed its acquisition with The Bank of Commerce, but it still has to complete its acquisition with Giant Holdings Inc. which is expected to be finished in Q1 of ’17.

• Due to HOMB’s recent acquisitions and organic growth, asset levels ($13B) have now surpassed the $10 billion level. Therefore, moving forward, HOMB is going to face greater regulation, which in turn translates to increasing expenses. Right now HOMB is estimating increases ranging from $6.5 million to $9 million.

Key points: HOMB was originally pitched in February of 2016. At the time the drivers were potential for interest rates to rise, entrance into the New York City market, and effective use of M&A markets. In regards to rates, a 200 basis-point increase would cause NII to increase by 8.74% and a 100 basis-point increase would increase NII by 4.54%. As for NYC, thus far HOMB’s investment has paid off. Last year NYC accounted for 53% of HOMB’s total loan growth. Looking forward, management is expecting NYC to increase its deposits by 186% in 2017.

In regards to effective use of M&A markets, as mentioned above, HOMB has again used M&A for strategic gains with its acquisition of SGBK. Although HOMB paid an expensive 2x tangible book multiple for SGBK, I believe it is worth it. This is because SGBK is a strong performing bank with very high asset quality, it is a good culture fit with HOMB, and it also allows HOMB to gain 25 offices in the pristine southern Florida market.

Lastly, in HOMB’s 2016 Q4 earnings call CEO Randall Sims stated, “…We are going to make core deposit growth a very important thing for us in the coming year”. Mr. Sims stressed organic growth of core deposits multiple times during the call, which is good because it will allow HOMB to grant more loans.  

What has the stock done lately?

From January to the beginning of March, HOMB’s stock rose and peaked at $29.45 due to positive economic outlooks and the promise of an interest rate increase at the Fed’s March meeting. However, due to Republican’s failed attempt at repealing Obamacare, uncertainty has built on Trump’s abilities to follow through on his promises. This uncertainty has caused shares of regional banks, such as HOMB, to plummet.

Past Year Performance: Even though the past month has been poor for HOMB’s stock, it is still up 37.0% from when it was pitched last year. Much of this growth can be attributed to the post-election surge banks experienced after President Trump was elected. In the month after the election HOMB experienced a 26% increase in stock price.

Source: FactSet

My Takeaway

Due to HOMB’s quality acquisition of SGBK, along with a continued positive outlook for rate increases to occur during the next year or two, I believe HOMB is still a good stock to own. This is because I think both the acquisition and rate hikes provide HOMB with adequate room to grow. However, if the SGBK acquisition falls through, and/or economic reports show the southeastern economy is starting to significantly slow down, then I think selling our position in HOMB should be considered.

Source: FactSet

A current AIM Fund holding: Talend ADR (TLND) by Tim Milani. “This next generation IT firm is a solid hold"

 Talend SA Sponsored ADR (TLND, $29.30): “Big Data continues to have big potential”

By Tim Milani, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

• Talend SA Sponsored ADR (NASDAQ:TLND) is a next generation information technology company that specializes in big data and cloud integration. TLND strives to help companies become more data driven by simplifying big data through its open-sourced based solutions that allow companies to act using real time and accurate information regarding their business and industry. TLND was founded in 2005 in Suresnes, France and is currently headquartered in Redwood City, CA.  

• TLND had a great finish to 2016 with fourth quarter revenues of $30.5 million, up by 45% YoY, and the eighth consecutive quarter of increasing revenue growth.  This also represented a record revenue quarter for TLND.

• The company experienced a turnaround in its free cash flow and operating cash flow from the previous years.  In 2015 operating cash flow and free cash were both negative at -$10.0 million and -$10.8 million respectively whereas in 2016 both were positive at $3.4 million and $2.0 million respectively.

• Significant gains were made by the company in big data and active customers as a milestone of 1,500 customers was reached by the end of 2016. 130 new customers were added in Q4 2016 including Hewlett Packard. Other major customers for TLND include GE, Verizon, eBay, Comcast and Citi.

• TLND could represent an attractive target for a potential acquisition by another tech firm as it is still a smaller company with a market cap of $834.4 million and an excellent record and reputation in its industry.

Key points:  TLND is coming off its best quarter yet with a significant increases in its revenues, customers and operating cash flows and is poised to continue these trends well into 2017 due to several positive company indications.

The growth potential the company has in its largest areas of its business, big data and the cloud, which together represent over 50% of new client bookings, is substantial. The big data services market is predicted to grow at a CAGR of 22% from 2016 through 2020 as indicated in the most recent 20-F.  Moreover, the cloud services market is predicted to grow at a rate of 18% from 2017 through 2020 according to a new forecast released by Gartner. In addition, the revenue from big data and the cloud has already grown consistently for eight consecutive quarters and management is predicting this trend to increase total revenues to ~$32 million and ~$142 million for Q1 2017 and the full 2017 year respectively. 

TLND has also been actively developing a greater installed user base. Customers who pay the company over $100,000 in their annual subscription fees more than doubled in 2016 and increased to a total of 224 of TLND’s 1,500 customers. The subscription based model gives TLND’s customers an alternative to typical contracts and allows them to save money up front thus attracting them to TLND. This difference in strategy gives TLND a total cost ownership advantage of 3-8 times compared to its closest competition, Informatica.

Expansions into several Asia Pacific and emerging market European countries have proved highly successful for TLND. Revenue grew well past expectations for both regions by ~30% YoY in Europe and by ~130% YoY in the Asia Pacific region.  TLND is looking to continue its trend of successful expansions with its business in India, the largest region it has opened in recently.

What has the stock done lately?

TLND’s stock price had initially been quite volatile following its IPO on July 29, 2016.  The stock opened trading at $27.66 per share, and has had a 52 week high and low of $34.49 in August 2016 and $21.02 in December 2016 respectively. However, since its addition to the AIM fund in February 2017 at a price of $22.76 (2/6/2017) the stock has grown greatly and consistently by a total of ~29% to its current price of $29.30.  News of positive cash flow from operations, a record quarter and the addition of 130 new customers have helped propel the stock upwards since the earnings press release on 2/9/2017.

Past Year Performance: After an initial period of volatility following its IPO TLND has experienced a solid year in many areas of its business. Operating cash flow and free cash flow finally turned positive and both increased this year to $3.4 million and $2.0 million respectively. However, the company also had a net loss during 2016 of -$25.92 million.  The loss was due to a large R&D expense ($19.2 million) and SG&A expenses ($86.90 million) relative to gross income ($80.18 million).  

The reason for the large SG&A expense and R&D expense is that TLND is investing heavily in sales and marketing personnel that will be able to accommodate the greater than expected demand the company has experienced allowing for greater revenues in future years. Gross income grew by 40.81% YoY in 2016 from 2015 and the company’s stock has grown in value by 5.9% since its IPO in July.  Free cash flow and operating cash flow are predicted to be positive again in 2017.

Source: FactSet

My Takeaway

TLND was just recently pitched and added to the AIM fund in February of 2017 with a price target of $33.98 representing and upside of 49.30%.  Since that time TLND has already experienced growth of ~29% due to its increase in value from its unexpected record quarter in Q4 2016. The drivers that were originally pitched in addition to TLND’s growth potential in big data revenue, growth potential in cloud revenue, increasing installed user base and successful expansion all indicate that TLND has the potential to meet its target of $33.98. Therefore, it is recommended that TLND continue to be held within the AIM portfolio at its current position.