Tag Archives: industry

Time To Buy Cyber Security ETFs On Decent Q4 Results?

Though the cyber security industry has lost its momentum in the past several months, partially due to the weakness in the broad technology sector, it is poised for exponential growth in the coming years in the face of increasing cybercrime and the need to protect against these threats. According to Gartner, global security spending will increase 4.7% year over year to $75.4 billion in 2015 with some analysts projecting the global market to grow from $77 billion in 2015 to $170 billion by 2020 . The Q4 earnings reports of several industry players reflect this trend as most of them have beaten our earnings and revenue estimates with an encouraging outlook. Yet, they failed to drive the space and its ETFs higher that might suggest an attractive entry point at the current level. Let’s dig into the earnings results of some of the cyber security firms that have the largest allocation to the ETFs in this industry: Cyber Security Earnings in Focus CyberArk Software (NASDAQ: CYBR ) reported earnings per share of 30 cents and revenues of $51.5 million, outpacing the Zacks Consensus Estimate of 13 cents and $44 million, respectively. The company projects earnings per share in the range of 15-16 cents on revenues of $42.5-$43.5 million, up 29-32% year over year, for the ongoing first quarter. The lower-end of both the guidance was well above the Zacks Consensus Estimate of 12 cents for earnings and $42 billion for revenue. For 2016, revenues are expected to grow 27%-29% to $205-$207 million and earnings per share are projected in a band of 83-86 cents. The lower-end of both the full year guidance was also well above the Zacks Consensus Estimate of $203 million for revenue and 67 cents for earnings. However, analysts were expecting earnings per share of 17 cents and 91 cents for the ongoing quarter and fiscal year, respectively, which sent shares of CYBR tumbling following the earnings announcement on February 11 after the closing bell. The stock lost 10.8% on February 12. FireEye (NASDAQ: FEYE ) beat our earnings estimate but missed on revenues. Net loss per share came in at 73 cents, narrower than the Zacks Consensus Estimate of 76 cents loss but revenues of $185 million fell shy of our estimate of $187 million. FireEye expects revenues of $167-$177 million for the first quarter and $815-$845 million for the full year. The midpoint of the range was in line with the Zacks Consensus Estimate for the quarter and above our estimate of $824 million for the year at the time of earnings release. Net loss per share is projected in a range of 49-53 cents for the first quarter and $1.25-$1.32 for the full year. The midpoint of both projections was better than the Zacks Consensus Estimate of a loss of 81 cents and $3.00, respectively. Shares of FEYE fell 3.3% in the normal trading session following its earnings announcement on February 11 after the closing bell. Check Point Software Technologies (NASDAQ: CHKP ) topped our estimates on both the top and the bottom lines by $2 million and 6 cents, respectively. It expects earnings per share of 99 cents to $1.05 on revenues of $395-$410 million for Q1. The midpoint was well above our estimate of 93 cents for earnings but below our estimate of $403 million for revenues at the time of the earnings release. For the fiscal year, revenues and earnings are expected in the range of $1.72-$1.79 billion and $4.45-$4.60, respectively. The midpoints of both are well ahead of the Zacks Consensus Estimate of $1.75 billion and $4.08, respectively. The stock has risen nearly 4.6% since its earnings announcement on January 28 before the opening bell. Fortinet (NASDAQ: FTNT ) missed our earnings estimates by 6 cents but outpaced the same on the revenue front by $1 million. Fortinet sees revenues in the range of $270-275 million and earnings per share of 8-9 cents for the ongoing third quarter; the midpoints of both were lower than our estimates of $277 million and 9 cents, respectively, at the time of the earnings release. For 2016, the company expects revenues to grow more than 24% to $1.25-$1.26 billion and earnings per share to come in the range of 67-69 cents. The upper end of both the projections was above our estimate of $1.24 billion and 23 cents, respectively. The stock has plunged nearly 8.5% following the Q4 earnings announcement on January 28 after the closing bell. Last but not the least, Juniper Networks Inc. (NYSE: JNPR ) outpaced on both the bottom and the top lines by 3 cents and $0.22 billion, respectively. For the first quarter, the company expects earnings per share in the range of 42-46 cents and revenues in the range of $1.15-$1.19 billion. The Zacks Consensus at the time of earnings release was pegged at 37 cents for earnings and $1.201 billion for revenues. Shares of JNPR are down nearly 17.7% since its earnings announcement on January 27 after the closing bell. ETFs in Focus The string of earnings beat but rough stock performances have put this niche area of the technology sector in focus for the days ahead. Currently, there are a couple of cyber security ETFs that investors could stock up on beaten down prices: PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) The fund offers global exposure to those companies that ensure safety to computer hardware, software and networks, and fight against any sort of cyber malpractice. It tracks the ISE Cyber Security Index, holding 34 securities in its basket. It is well spread out across components, as each security holds less than 4.9% of total assets. From an industrial look, software and programming accounts for nearly 66% of the portfolio while communication equipment and IT consulting & data services round off the top three. In terms of country exposure, U.S. firms take the top spot at 68%, followed by Israel (12%), the Netherlands (6%), Japan (4%), United Kingdom (4%), South Korea (3%), Finland (2%), and Canada (1%). The fund has amassed $636.6 million in AUM and charges 75 bps in fees per year from investors. Volume is solid as it exchanges 495,000 shares in hand per day. HACK has lost 17% over the past one month. First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ: CIBR ) This ETF has accumulated over $105 million in its asset base within eight months of its debut. It charges 60 bps in annual fees and trades in moderate average daily volume of more than 68,000 shares. The fund follows the Nasdaq CTA Cybersecurity Index, which measures the performance of companies engaged in the cyber security segment of the technology and industrials sectors. In total, the product holds 34 stocks in its basket with Cisco Systems (NASDAQ: CSCO ) taking the largest allocation of 7.14% share while other firms account for less than 5.7% of the assets. Further, it is skewed towards the software industry at 46.2%, while communications equipment rounds off the next spot with a double-digit allocation. Like HACK, American firms account for 69% of CIBR while the Netherlands, China, Israel and many others make up for a single-digit allocation. The ETF has shed 13.3% in the same period. Original Post

The Altman Z-Score In Edward Altman’s Own Words

By Larry Cao, CFA The Altman Z-score is a famous formula for measuring a company’s financial worthiness devised by Edward Altman . I sat down with Altman in Hong Kong recently to discuss the Z-score, its original inspiration, evolution over the years, use and misuse, as well as the current credit situation around the world. In this first installment, Altman discusses how the model was initially developed and what has changed since then. For the rest of our conversation, please stay tuned for additional installments in the weeks ahead. Larry Cao, CFA: Can you start by giving us some background on how you came across the problem and how you developed the formula as a solution? Edward Altman: When I was a graduate student at UCLA in the mid-1960s, one of my mentors, Professor J. Fred Weston, knew that I was looking for a topic for research, and he wrote me a one-word note one day: “bankruptcy.” In those days, bankruptcy was not a very popular research area, although there had been some work done using individual measures to look at the financial risk of companies. I decided I had to look at the subject of predicting financial distress of companies using a multivariate approach. You know, sometimes breakthroughs are not so much a function of the brilliance of the people but the timing and the luck. And I was very lucky to be a Ph.D student at the right time in the right place. If I had thought about this subject two years earlier, I would not have had the computer firepower that was just beginning to come on campuses in the United States. If I had been on the scene two years later, someone else would have already done the work. I combined a number of financial indicators with a technique for statistical classification known as discriminant analysis to predict bankruptcy. That was written in 1967, published in 1968, [and] known as the Z-score model or the Altman Z-score. And this model originally was built and still is mainly relevant for manufacturing companies. I had no idea that, almost 50 years later, people would still be using it and, indeed, using it more than ever. In your paper, you used five categories of variables – liquidity, profitability, leverage, solvency, and activity – to predict insolvency. How did you end up choosing the specific variables in the model? At that time, there were a lot of variables in the literature that you could choose to predict insolvency. But I decided there are two variables that were potentially very powerful but had not been used yet. One was the retained earnings: The argument there being a firm that has grown its assets mainly by reinvesting earnings is healthier than a firm that has grown the assets by using “other people’s money.” Retained earnings is also a measure of the age of the company and leverage. So that one measure combined leverage, profitability over the life of the company minus dividends, and also the age or experience of the company. You would think it makes a lot of sense because it does go back to the history of the companies and says, “Hey, how much money have you made and how much of that have you reinvested rather than paid out to your owners?” Yet you don’t come across models that use retained earnings very much these days. That’s true. It’s funny. Retained earnings/total assets is so powerful in my model, but you don’t find them very much taught in the classroom or found in the literature. I found it extremely important and helpful in almost every model I built over the years, for different industries and countries. What’s the other new variable you identified? The other new variable then – even though now it’s quite commonly understood – was the market value of the equity relative to the book value of the debt, as opposed to the book value of equity. It was the first study that – even before the Merton model, which was 1973, 1974 on risky debt – anticipated the importance of market equity relative to book debt as a very important indicator where it represents the ability of the company to raise money from the capital markets to pay down the debt or to expand the company. So market equity is now a fundamental part of many so-called structural models provided by Merton, KMV, and a number of other providers. So Z-score is a statistical model, with all the parameters driven by the particular sample. [Exactly] For a different sample, should users get new estimates for the parameters? The original sample was manufacturers. Rather than updating the original model for, say, more recent bankruptcies, which we can do, what we prefer to do is build new models. I developed the Z”-score model in 1995 mainly for emerging market and non-manufacturing industrial companies. We also decided to take out the fifth variable, sales to assets. And we re-estimated the coefficients. So you took out an activity ratio? Exactly. It was very sensitive to the industry and, to some extent, the country. There was a new breed of corporate debt coming from emerging markets in the mid-90s, such as from Mexican, Brazilian, and Argentinian companies. And we tried to get a model which was more appropriate for that segment of the world and for manufacturers and non-manufacturers. We find that Z” is far more robust across sector and countries than Z-score, although both do a good job in classifying companies as to their bankruptcy potential with the same further modifications. How did the five variables rank in terms of importance? We look at the relative contribution and its statistical test. It turns out return on assets is number one. Retained earnings to total assets is number two. Market equity to total liabilities, three. Sales to assets, four. And the least important one, surprisingly, is the liquidity ratio, net working capital to total sales. Has the ranking changed from Z to Z”? No, it has not changed, except that sales/total assets is no longer a factor in the revised Z-score model. Fascinating. Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

ETF Trends For 2016: Part 3, Management Fees

In part 1 of this series, we reviewed the growth of the ETF market in 2015 and introduced the series by covering currency-hedged products. In part 2 , we took a look at robo-advisors, a well-covered topic that could have a huge impact on the way ETFs are utilized. In this final piece in the ETF Trends series, we will cover management fees and the competition it causes between issuers, and a conclusion on the potential for the ETF Industry in 2016. The ETF Fee War While some issuers are creating funds for specific market niches, other issuers are taking a different approach when looking to stand out in the sea of possible funds, as articulated by Crystal Kim for Barron’s : Early this November, BlackRock (NYSE: BLK ), the largest exchange-traded fund provider by assets, trimmed fees by two to three basis points (two to three one-hundredths of a percent) on seven iShares Core ETFs. The expense ratio of the iShares Core S&P Total U.S. Stock Market (NYSEARCA: ITOT ) was taken down to 0.03%, winning the crown for cheapest ETF on the market-briefly. That is, until Schwab (NYSE: SCHW ) matched it by lowering fees by one basis point on four large-cap ETFs. The Schwab U.S. Large Cap fund (NYSEARCA: SCHX ) now stands toe-to-toe with its counterpart at iShares, fee-wise. For every $10,000 invested, the rival funds cost a mere $3. That’s cheaper than a copy of Barron’s at the newsstand. There are pieces covering the ETF price war going back to 2010, so this is by no means a new discussion topic for ETF investors. However, price wars continue to play a role in the ETF investment scene as a way to attract retail investors. The Trefis Team lays this relationship out for us: The largest avenue of growth for ETF providers over the coming years is expected to be the retail investor market, which remains extremely under-served. As retail investors are much more sensitive to expense ratios, asset managers have been trying to attract them with a string of low-cost ETFs. The following image is another from the ICI 2015 Investment Company Fact Book, showing the growth in ETF AUM by retail investors. Assets in ETFs accounted for about 11% of total net assets managed by investment companies at year-end 2014 and net issuance of ETF shares reached a record $241 billion. Click to enlarge While there are a number of funds digging deep to keep costs low in an effort to attach larger clients, the average ETF expense ratio is still 0.44%. This is mainly due to the number of active and narrow-focused funds that can still afford to charge investors more, because they are the only ones currently available in the space. But as market saturation continues, being the only player may not be a given. This is great news for investors interested in these niche offerings but aren’t willing to foot the bill at this time. For reference, the average mutual fund expense ratio is 0.70% (down from 0.90% in 2000 before ETF competition started to take hold), so it is no small feat that ETFs are as cost effective as they are today. But as issuers continue to fight for retail investors in the coming year, we should expect to continue to see expense ratios slashed. This slashing is not just good news for institutions, but the individual issuers who get to enjoy cheaper management fees as well. Concluding Thoughts For 2016: ETFs Continue To Grow When asked about the ETF industry in early 2015, Amy Belew, Global Head of ETP Research at BlackRock stated : The global ETP (Exchange-Traded Product) industry continues to grow at a double digit pace as ETPs attract a broader base of global investors than ever before. ETPs are being used by capital market participants looking for deep liquidity, to investors seeking precision exposures, to a growing segment of the market using ETFs as buy and hold investment vehicles. We are forecasting global ETP assets to double to $6 trillion over the next five years. While future trends within the ETF industry are impossible to perfectly predict, I believe this an industry that will only continue to evolve and grow to meet investors’ needs in 2016.