Sometimes, even a long-term investment can be predicated on some short-term catalysts that need to swing the right way for a company. For investors, it's important to be on the lookout for factors that could potentially change your long-term investing thesis.
With that in mind, we asked three of our contributors to highlight a company they will be following closely in the first quarter and why. Here's what makes Adobe Systems (ADBE -0.36%), Charles Schwab (SCHW -2.79%), and U.S. Silica Holdings (SLCA -9.41%) worth following when the next earnings report comes out.
Keeping the ball rolling
Tim Brugger: (Adobe Systems): It's been nothing short of a stellar 2017 for Adobe shareholders. With its stock up nearly 18% in 2017 -- close to 43% in the past 12 months -- Adobe is hitting on all cylinders. That is exactly why it warrants watching this quarter.
Make no mistake: Adobe's strong run is warranted. CEO Shantanu Narayen's push to drive annual recurring revenue (ARR) is paying off handsomely. Adobe finished last year with a record $5.85 billion in revenue and ended 2016 with an astounding $4.01 billion ARR. What makes ARR so critical from an investor's perspective is that unlike an overreliance on new sales to drive growth, recurring revenue is a relatively stable, not to mention reliable, foundation to build upon.
The question going forward is: Can Adobe continue its successful transformation? Investors will know soon with Adobe's first-quarter earnings call scheduled for March 16. Continued growth of Adobe's creative, document, and marketing cloud units is certainly worth monitoring. However, even Adobe's growing momentum in the cloud takes a back seat to its ARR results.
Another benefit to Adobe's ARR push is it should help rein in spending. It simply costs less to service existing customers than rely on new sales. Last quarter was an example of that. Adobe reported a 23% jump in sales to a record $1.61 billion. Operating expenses also increased but by just 13% to $919.6 million. The result was a whopping 63% improvement in operating income, largely due to inexpensive ARR growth. Can Adobe keep the ball rolling?
The future for brokers
Jordan Wathen (Charles Schwab): I have to hand it to Charles Schwab. The company voluntarily slashed its commission prices and ETF fees to ensure that it maintains lower prices than many in its peer group. That's good for investors, but is it good for business?
The future of the brokerage industry is very much up in the air. As index funds increase in number and size, fewer people are trading individual stocks, pressuring commissions across the industry. As a result, brokers are turning to recurring revenue sources like fund fees, rather than transaction-driven commissions, to earn a profit.
Charles Schwab's model may be best aligned with where the industry is headed, as it generates very little net revenue from pure commissions. Last year, commissions made up just 10% of its net revenue. The vast majority (85% of net revenue) was earned from its banking operation and its asset management arm.
I have little doubt that Charles Schwab's conference call will see a number of questions about the future for brokerage services. Luckily, since it earns very little from commissions compared to competitors, its executives should feel free to be a little more honest in their assessment.
Roaring back in 2017
Tyler Crowe (U.S. Silica Holdings): It wasn't that long ago when U.S. Silica Holdings and the rest of the frack sand industry were left for dead when the price for oil and gas started to collapse in 2014. Production and drilling activity dried up fast, and many frack sand producers were left with a lot of sand in their inventory and debt loads that looked like they were going to drag many players under. Dividends were slashed, debt covenants were breached, and management teams were forced to make desperate equity issuances to raise capital at the expense of large shareholder dilution.
U.S. Silica avoided most of these pitfalls at it had kept a more modest balance sheet heading into the crash, and was able to use capital from equity raises to gain market share rather than need to cover current expenses. This has put U.S. Silica in a unique opportunity to benefit from the renaissance of the frack sand industry as of late.
The first noticeable thing has been the increase in active rigs in the U.S., which recently rose for the 11th straight week in a row to 789, so there is an increase in drilling activity in general. What isn't talked about as much is the increase in sand used per well. Producers have found that more sand per well means better rates of return, so over the past few years, the average sand used per well has increased two to three times depending on the shale formation. So, as we see modest gains in rig count, it will have a multiplier effect on total sand demand.
Last quarter, U.S. Silica saw a 34% increase in sand volumes sold compared to the prior quarter, and management noted on its recent conference call that it expects sand prices to increase as inventories get drawn down and sand producers slowly ramp up production at its idle facilities. This suggests that we could see a strong quarter from U.S. Silica in the first quarter, and 2017 could be a great year for sand producers in general.