August 31, 2016

Valens Equities Weekly Insight and Inflections for August 31, 2016


Each week the Valens Securities team highlights our most interesting insights from across our tools and our analysis, including individual company industry and macro insights.

Expectations for UNP to see a continued ROA’ expansion are unwarranted, as both management and analysts are losing confidence in the firm’s outlook

UNP - 2016 08 31

UNP is trading at a 22.0x V/E’, which is near historical averages. At these levels, the market is pricing in expectations for ROA’ to improve from 9% in 2015 to 11% in 2020, accompanied by 1% Asset’ growth. However, analysts have bearish expectations relative to the market, expecting ROA’ to decline to 8% in 2016 before recovering to only 9% in 2017, accompanied by 1% Asset’ shrinkage. Moreover, these estimates have substantially declined as of late, another bearish signal. In addition, Valens’ qualitative analysis highlights that management appears concerned about macro headwinds and their ability to drive growth and further margin expansion. Given shrinking management and analyst confidence surrounding the firm’s fundamentals, current market expectations are too bullish, and multiple compression and equity downside may be warranted.

Market Insights
Most Compelling Long Ideas
FB, ZG, DLTR, DHI, GOOGL
Most Compelling ECF™ Inflections
CRUS, ABC, AYI, WCN, MA

Company Specific Highlights & Insights:
SEHK:2018, ENTXBR:ABI, AER, AMT, BA, BSX, CL, COH, DAL, DHR, EXPE, FCX, GILD, KORS, LEA, MCD, MRK, MTH, PFE, ENXTPA:SAN, ST, SYF, TAP, TGP, TWTR, TWX, UNH, VZ

Aggregate ECF™ Trend Analysis:
Management confidence levels continue to be volatile, ranging between 24 month highs and 24 month lows in the past 6 months. In April, Management Confidence spiked higher, but the metric subsequently rolled over in recent months, falling to the low end of its range. This signaling that growth remains elusive, as management teams continue to not be confident enough to invest in their businesses.

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