I follow quite a lot of companies, so the usefulness of a watchlist for me cannot be overstated. Without my watchlist, I'd be unable to keep up with my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, and I don't guarantee I'll take action on the companies being discussed. But I promise that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
Merger Monday started off with a bang as Medtronic announced a whopping $42.9 billion buyout of medical device and supply company Covidien (NYSE:COV) in a combination cash and stock deal. Together, the two companies will have annual revenue of $27 billion, including $3.7 billion from emerging markets, with the deal expected to be accretive to Medtronic's EPS by fiscal 2016. Thereafter, Medtronic anticipates it will be "significantly accretive."
The deal was constructed in order to take advantage of the cost synergies of combining Medtronic and Covidien's operations, as well as to further globalize and complement their product portfolios. But let's not forget that Covidien is incorporated in Ireland, so with this takeover Medtronic can also move its headquarters to Ireland and escape high U.S. corporate taxes. According to Bloomberg, Medtronic has around $20.5 billion in overseas cash on which it would have to pay a 35% tax rate if it tried to bring that cash back into the U.S. If Medtronic sets up shop in Ireland, it will have instant access to this cash. With Medtronic executives expecting $850 million in cost savings by 2018, I'd estimate the annual tax savings alone for Medtronic-Covidien could approach $300 million or more.
But the big question now is how easily Medtronic will be able to incorporate Covidien into the fold. While I do agree with Medtronic's press release that their products complement each other well, especially when it comes to vascular products where the combined entity will have incredible product diversity and accompanying pricing power, I'm concerned the integration of Covidien might be messier than investors have surmised.
While we are looking at substantial cost synergies and tax savings, most of these cost reductions are going to take years to implement. In fact, Medtronic's costs are likely to soar over the short term as a direct result of this acquisition. If you're in Medtronic for the next decade, then this probably isn't too much of a concern. But if you've been eyeing Medtronic -- which pays a 2% yield and has boosted its dividend in each of the past 37 years, including an announced 9% dividend increase on Monday -- from the sidelines, you may get your chance to nab shares lower than where they're at now simply because of investors' often unrealistic synergy expectations.
This is a merger that has big implications in the medical-device sector, and it certainly bears watching going forward.
DreamWorks Animation (NASDAQ:DWA)
Sometimes movie companies just suffer from a bit of bad timing, which is exactly what I suspect happened with DreamWorks Animation this past weekend with the release of How to Train Your Dragon 2. As a refresher, the original How to Train Your Dragon grossed approximately $495 million in box office sales and an additional $122.7 million in domestic DVD sales. In other words, this was an incredibly successful movie, and its sequel has been highly anticipated.
Unfortunately, as DreamWorks shareholders found out on Monday, things don't always go as planned. For its opening weekend, How to Train Your Dragon 2 netted "just" $49 million in comparison to 22 Jump Street, which brought in $57 million. Analysts had been projecting between $60 million and $65 million in opening-weekend sales for How to Train Your Dragon 2, given how successful the original movie was.
As for me, I simply chalk it up to poor timing. DreamWorks was forced to go up against one of the other biggest projected blockbusters of the summer in 22 Jump Street, and it also released its movie during a holiday weekend right as high school and college graduations were ongoing. Again, the timing is a bit suspect, but there's nothing to suggest that How to Train Your Dragon 2 won't be a wild success.
Consider for a moment that its sequel brought in $6 million more than the original did on its opening day weekend, so it's not exactly behind the eight ball. In addition, the movie netted $26.1 million in overseas markets. So for its first (suboptimal) weekend, it hauled in $75.6 million. Simply put, it has already recouped more than half of its $145 million cost to make in just a few days. Of course, this doesn't factor in marketing and advertising costs, but DreamWorks has a panache for picking out well-qualified brand-name partners to ally itself with. In fact, a video game based on the movie was recently released, which should further drum up interest in the sequel.
All told, given Dreamworks' ability to knock animated movies out of the park more often than not, I believe the stock's latest slide could be an incredible buying opportunity. The downside, of course, is that the studio can only release a handful of animated films per year. But if it's delivering more winners than losers, it means there will likely be at least one or two home runs each year.
For those of you short-sellers looking for a potentially ripe opportunity to pounce on a highflying stock, allow me to introduce you to real estate information marketplace Zillow.
Before I get into the specifics of why Zillow could be short-sale material, let's go over some basics -- namely, that Zillow is a rapidly growing online business. Fueled by near-record low interest rates, Zillow recorded revenue growth of 70% in the first quarter to $66.2 million, with its unique monthly visitor count jumping to 79 million in April -- a 50% year-over-year increase. Specifically, Zillow is seeing gains across the board in terms of advertising revenue, as well as marketplace revenue. In sum, the business model isn't a total wash, and in a strong housing environment Zillow could be a solid-performing business.
But it's my opinion that we aren't in a strong housing market at the moment. Earlier this week the National Association of Homebuilders' Market Index, while moving higher, showed a reading a 49, which is still indicative of a bearish tone from industry leaders despite lending rates hovering around 4%! Considering that weekly loan originations are well off their 2013 highs I would suggest that consumers are extremely sensitive to even the slightest interest rate fluctuations. This would mean that if interest rates begin to normalize following the end of QE3, home sales could drop notably, hurting Zillow's business model.
And don't even get me started of Zillow's projected growth trend slowdown compared to its current valuation. According to Wall Street estimates Zillow's top-line growth will wane to 35% in fiscal 2015 and to less than 20% by 2017. But based on its current price, Zillow is still valued at -- get this -- 60 times 2017's fiscal EPS projections! In other words, we have to look three years out just to get to a somewhat ridiculous PEG ratio of three.
With few housing indicators looking healthy, Zillow might be the perfect short-sale for the investor willing to take on a high-risk, high-reward scenario.
Is my bullishness or bearishness misplaced? Share your thoughts in the comment section below and consider following my cue by using these links to add these companies to your free, personalized watchlist to keep up on the latest news with each company:
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Zillow. It also owns shares of Medtronic and recommends Covidien and DreamWorks Animation.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.