BA – Boeing Has No Path To Recovery

Aerospace & Defense

Shares of The Boeing Company (NYSE: BA), once one of the great industrial companies of the world, remain down 39% so far in 2020, against the S&P 500 which is up 10%. No one should expect a recovery.

Boeing has received some good news. Its crash-prone 737 MAX will return to the skies over the U.S. and Europe. But, the airline industry has been scorched by a drop in passenger traffic due to COVID-19. Even with a vaccine, many experts believe normal passenger traffic will not return for years. In the meantime, carriers, some of which are bankrupt and other teetering in that direction, will not need new planes at any time in the foreseeable future. Boeing’s customers are as badly crippled as it is, if not worse.

Boeing’s third-quarter results were ugly. Revenue dropped 29% to $14.1 billion. Boeing lost $401 million compared to a profit of $1.3 billion in the year-earlier period. Negative operating cash flow was $4.8 billion compared with a negative cash flow of $2.4 billion in the same period a year ago.

The revenue picture was worse for Boeing’s commercial aircraft business, down 56% to $3.6 billion. At least its Defense, Space & Security operations did much better. Revenue was off only 2% to $6.8 billion. Boeing should consider spinning this business out to give investors something of substance to hold onto.

President and Chief Executive Officer Dave Calhoun commented as the results were released: “The global pandemic continued to add pressure to our business this quarter, and we’re aligning to this new reality by closely managing our liquidity and transforming our enterprise to be sharper, more resilient and more sustainable for the long term.”

The problem is that the pandemic’s effects will go on for years.

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GPS – Should You Invest In Gap Inc's Stock Now?

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LONDON, UNITED KINGDOM – 2020/08/22: American worldwide clothing and accessories retailer, Gap logo … [+] seen in Central London. (Photo by Keith Mayhew/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images
Gap Inc’s stock (NYSE: GPS) gained more than 10% last week while the S&P 500 fell nearly -1%. Nearly a month ago we argued that Odds Are That Gap Inc’s Stock Will Go Up. Turns out that Gap’s stock has climbed nearly 25% in the month of November. While positive developments regarding a Covid-19 vaccine played their role, there is more to Gap that can sustain its momentum. Why do we say this? Because its fundamentals as well as our AI engine, that analyzes past patterns in stock movements to predict near term behavior, suggest so. Let’s see what might be in store for Gap’s investors.
What the AI engine says – Based on past pattern analysis, our AI engine predicts expected return for of 3.6% for Gap’s stock over the next 1 month. The expected return for 3 months and 6 months is significantly higher at 12.3% and 21.6%, respectively. Our detailed dashboard highlights the expected return for Gap given its recent move, and can also use this to understand near-term return probabilities for different levels of movements.
But what about the fundamentals? Our dashboard Big Movers: Gap Moved 10.6% – What Next? lays this out, suggesting that the more probable way for Gap Inc’s stock now is up.

Despite the impact of Covid-19, Gap’s stock price has increased nearly 38% this year. This is, in fact, at odds with how the stock behaved between 2017 and 2019, suggesting that the worst might be over for investors. At the beginning of this year, Gap’s trailing 12 month P/S ratio was 0.4. This figure decreased -20% to 0.32, before ending at 0.35. Compared to Gap’s P/S multiple of 0.35, the figure for its peers FL, and CASY stands at 0.71 and 0.77, respectively, indicating significant room for growth. If we look historically, we find that Gap’s P/S ratio has remained above 0.5, which again reinforced the likelihood of multiple expansion as the demand bounces back. The underlying growth, except for margins, supports this. Gap’s revenue has increased 3.3% from $15,855 Mil in 2017 to $16,383 Mil in 2019, although margins declined from 5.3% to 2.1% during the same time frame. The last 12 months show a completely different picture but that was expected, and temporary, due to Covid-19 restrictions. Overall, we believe that Gap could be still be a good investment.

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UTL – Unitil For The Short Term And Maybe Beyond

Unitil Corporation (UTL) has had a tough year, and it has been reflected in the stock price. Opening the year at $62, the stock had fallen to around $33 in early November.
Source: Seekingalpha.com
Since then, the stock has recovered to reach the $39 mark.
Source: Seekingalpha.com
Unitil is a gas and electric distribution utility with no generating assets and only a relatively small gas transmission business. Since it is a small utility, its business is concentrated in parts of Massachusetts, New Hampshire, and Maine making it highly susceptible to economic cycles in that northeast area.
Source: Unitil Q3 2020 Presentation
Just about everything that can go wrong for a company, with the exception of criminal behavior, has afflicted this small-cap utility.
Warmer weather, shutdowns due to the Coronavirus, as well as moratoriums on shut-offs of nonpaying customers have affected revenue and profits.

Sales of electricity and gas actually increased but margins remained under threat.
Source: Unitil Q3 2020 Presentation
The company sold off its Usource energy consulting business to NextEra Energy (NEE) in 2019, with the resulting gain improving its 2019 results but making its 2020 comparisons look worse.
Source: Unitil Q3 2020 Presentation
With all this bad news, why should investors even bother with this member of the Russell 2000?
Natural Gas Business

In 2019, revenue from Unitil’s gas operations was $203.4 million for 2019, which represents about 46% of Unitil’s total operating revenue. Natural gas sales margins were $122.2 million in 2019, or 57% of Unitil’s total sales margins.
In contrast, revenue from Unitil’s electric utility operations was $233.9 million for 2019, which represents about 53% of Unitil’s total operating revenue. Electric sales margins were $91.9 million in 2019, or 43% of Unitil’s total sales margins.
(Source: Unitil 2019 Annual Report)

Natural gas may represent less than half of the company’s operating revenue but it has a much larger impact on the company’s earnings. That is important to realize for two reasons:

Natural gas has higher usage during the winter months resulting in the company’s business being much more dependent on colder weather.
Commercial and industrial customers are large users of natural gas making the company’s profits more affected by any downturn in those companies’ businesses.
Lower usage of gas and electricity has directly impacted the company whose revenues are based on usage.
Last winter was relatively mild, as it was forecasted by the National Oceanic and Atmospheric Administration.
In addition, the economic slowdown brought on by the pandemic heavily affected businesses nationwide, including in New England with New Hampshire showing a 36.9% drop in GDP from the 1st to the 2nd quarters of 2020 and Maine recording a 34.4% decline.
For Unitil, the result was losses from commercial and industrial customers that could not be made up by increases in residential usage.
Source: Unitil Q3 2020 Presentation
Debt
Not everything connected with the lower stock price can be blamed on weather and the pandemic. Unitil carries a relatively high level of debt, and because it is a smaller company, receives a less favorable interest rate than would be available to a larger company with more diverse operations to spread the risk.
Source: Unitil Q3 2020 Presentation
In 2019, the company ended the year with $437.5 million of long-term debt and $58.6 million in short-term debt. This compares to its $73.1 million in operating income.

Short-term tailwinds
We are now coming into the winter season, with the October-December and January-March quarters being the company’s most important time of the year for its revenue.
The expectation is normal precipitation (Source: NOAA), while the Old Farmers Almanac believes that the north will be colder than normal.
At the same time, while businesses may continue to suffer during the winter months, by the second quarter of 2021, it is hoped that the national recovery will be far enough along that businesses in New England would have resumed more normal operations increasing their need for both natural gas and electricity.
Longer-term opportunities
There is an ongoing push in New England to move businesses and households away from fuel oil and towards more sustainable sources of heating, and while natural gas remains important to the company, it also has significant electricity assets.
For households, natural gas will remain their source of heat for decades to come even as electrification reaches other areas such as transportation and businesses.
In its 2019 Annual Report, Chairman, President, and Chief Executive Officer Tom Meissner writes:

Electrification doesn’t specifically target natural gas; it targets all fossil fuels across the transportation and heating sectors, including fuel oil, propane, gasoline, and diesel fuel. Natural gas is but a small sliver of the fuel mix providing heat and transportation in our region, and is the cleanest alternative. As such, we continue to see an important role for natural gas as we ensure our customers have access to clean, reliable, and affordable transportation and heating options in the cold weather climate of northern New England.

Looking at New England today, most of the region is served by a combination of Eversource (ES), Avangrid (AGR), Algonquin Power & Utilities (AQN) and Emera (OTCPK:EMRAF) leaving Unitil the only small, investor-owned utility in the region with no generation operations. How long it can remain independent is up to how well the utility serves its shareholders.

In July, the company hired a new CFO, Robert B. Hevert, who came from the energy consulting firm of ScottMadden, Inc. It will be interesting to see what impact he has on the company’s operations going forward.
Conclusion
Investors in Unitil have been ill-treated by the stock this past year, but the small investor-owned utility has both challenges and prospects. A colder winter, a return to more normal business conditions, and a different approach by the new CFO may provide shareholders with the rewards they have missed up to now.
Disclosure: I am/we are long UTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

LYRA – Lyra Therapeutics: An Intriguing Risk/Reward Proposition Tackling Chronic Rhinosinusitis

Introduction
Lyra Therapeutics (LYRA) is an early-stage biotechnology company developing drugs that target ear, nose and throat diseases. It will shortly be reading out Phase 2 top line data on its primary product – an implantable scaffold that delivers consistent doses of an approved steroid for six months into the sinuses of chronic rhinosinusitis sufferers. I believe the trial has a high chance of success. The company is on a very sound financial footing, is valued cheaply, and I feel it offers a truly attractive risk/reward profile over the coming months.
Chronic Rhinosinusitis
Chronic rhinosinusitis (CRS) is the inflammation of the sinuses and/or the nasal passage for a period of over 12 weeks. It is one of the most common chronic diseases, and can have a significant impact on patients’ quality of life. Besides the symptoms of the disease itself – including pain, swelling, congestion, post-nasal drainage and loss of taste or smell – the maintenance of the condition can be unpleasant, time-consuming and ineffective. Frequent visits to medical offices can be needed, with daily nasal irrigation and steroids sprays required.
Many patients will not find much relief in the above, and while there are a couple of other treatment options, including temporary oral steroids or Dupixent, the next step may be surgery. This surgery is expensive, painful and, unfortunately in many cases, isn’t actually effective long term, with many patients requiring either further medications or even revision surgery. Clearly, surgery is not an ideal outcome, and doctors would be keen to try new medications that could help before patients reach that stage.

CRS patients can be placed into four broad buckets: surgically naïve with polyps, surgically naïve without polyps, post-surgery with polyps and post-surgery without polyps. Polyps are growths in the nasal passage due to CRS and generally exacerbate the symptoms. Around 20% of CRS sufferers have polyps.
Pre-surgery, treatment is largely based on the aforementioned nasal steroid sprays, or oral steroids / Dupixent for severe cases with polyps. Post surgery, there are more approved medications for those with polyps, including other antibody treatments. The trend for new drugs coming into the space generally seems aimed at the more severe patients, utilising “heavier” medications that come with noticeable side effects as well as a high price tag. This is seen as an acceptable trade-off for those patients most affected by CRS.
It seems clear that there is a large gap in approved treatment options for those pre-surgery, especially for non-polyp sufferers. The below graphic from Lyra’s recent presentation sums this treatment landscape up:

Source: Lyra Corporate Presentation
The number of patients affected by CRS is very large: in the recent Jefferies interview (November 2020), Lyra’s CEO stated an estimate of 14,000,000 patients in the US, which seems accurate. Approximately 8,000,000 seek medical treatment, and a large proportion is not adequately treated by current options. Lyra state that 4,000,000 fail medical management, and of these, 400,000 proceed to surgery. This leaves a vast majority with a significant unmet medical need, especially for those without polyps.

Source: Lyra Corporate Presentation
Lyra’s Solution
The company takes the view that steroids are actually a very effective therapy for CRS, but the current delivery by nasal spray is highly inefficient. Much of the steroid is ingested rather than delivered where needed, and quickly leaves the site of inflammation. The sprays also rely on patient compliance in administering regularly.
Lyra’s solution is to utilise the FDA-approved steroid Mometasone Furoate used in nasal sprays, but to deliver it through its proprietary biocompatible scaffold technology.

Source: Lyra Corporate Presentation
This scaffold is inserted in an ENT’s office, non-invasively with local anaesthetic, and can deliver a consistent steroid dose to the correct location over a period of six months. It is clear that this delivery mechanism, if it works, improves on nasal steroid sprays in every way. I am sure patients would be attracted by this one-off procedure rather than using daily nasal sprays for substandard results.
Lyra are working on two versions of this device – one for surgically naïve patients and one for post-surgery patients, who will have larger sinus cavities. The bulk of my report is focused on the former, named LYR-210, as this is the product furthest along in development and the one the company is prioritising. The latter, LYR-220, is essentially a scaled-up version that the company is hoping to bring into clinical trials by the end of 2021.

Source: Lyra Corporate Presentation
Again, I want to emphasise that these products are aimed at both polyp and non-polyp CRS sufferers. An FDA-approved treatment for this wide range of patients could be very successful, with non-polyp patients currently underserved. Insurance, too, should be open to paying for an efficacious treatment that can potentially negate the need for expensive surgery (estimated to be in the region of $13,772 on average – plus ongoing maintenance / repeat surgeries if required).
LYR-210 Phase 1 Results
Lyra ran a successful phase 1 trial, the details of which you can see below:

Source: Lyra Corporate Presentation
In terms of safety, a key outcome of such early trials, the data was highly encouraging. No product-related Significant Adverse Effects were recorded, and systemic steroid levels were “either unquantifiable or at the lower limit of quantification”. Systemic steroid levels are clearly an issue when present and are the reason why oral steroids are only prescribed for CRS on a temporary basis in severe cases.
Below are the results of total symptom improvement, measured using the SNOT-22 scale:

Source: Lyra Corporate Presentation

Source: Lyra Corporate Presentation
As we can see, there was a good response to LYR-210 shown in these patients. The initial effect was rapid in many cases, with a gradual build in magnitude throughout the period, and with a slight rebound at the end of the trial.

Source: Lyra Corporate Presentation
We can see in this chart the difference between symptom improvement of polyp and non-polyp patients. Polyp patients seemed slower to improve, but within a couple of months actually enjoyed greater symptom reduction. Both these facts make sense logically – polyps are harder to treat (so slower onset) and cause significant symptoms, so the relief should be greater when they are treated.
I find the breadth of the results impressive, as well as the magnitude – though we must bear in mind that this is only an early Phase 1 trial with a small sample size. The trial was certainly encouraging, however.
Phase 2 LANTERN Trial
Based on the success of the above Phase 1 trial, Lyra moved on to a Phase 2. This is due to read out top line data in December 2020 (the CEO confirmed the company is still on track for this in the recent Jefferies call).
The study design can be seen below:

Source: Lyra Corporate Presentation
One key point here is that as well as the 2,500 μg dose from the Phase 1 trial, the company is also including a 7,500 μg dose in the Phase 2 trial. Lyra sees the ability to use these large doses as a great advantage of its platform compared to other delivery systems, and we can tentatively expect that a larger dose should relate to better symptom reduction.

Another note is that the primary endpoint was selected to be the change in the 4 Cardinal Symptoms, with the SNOT-22 measure relegated to a secondary endpoint. These two measurement systems are highly correlated, and it seems Lyra simply feel the Cardinal Symptoms framework is a better measure.
An important consideration is that the trial was negatively affected by the COVID-19 pandemic, and the company had to cut enrollment short to 67 patients, from the original plan of 110 patients. This allowed Lyra to continue the trial safely and has led to the company being able to report data on time next month – however, it must be considered that this lower enrollment may make it more difficult to obtain statistical significance of results. The CEO said in the recent Jefferies call, however, that the original enrollment target was conservative and, given especially the expected increased benefit of the high dose in the trial, they are not concerned. In addition, they clarified the key aim of the Phase 2 trial is to help design a pivotal Phase 3 trial; not to necessarily achieve statistical significance in its own right.
I feel, based on the design of the product and the encouraging results in the Phase 1 trial, it is highly likely the Phase 2 trial will be a success. I am excited to see whether the higher dose leads to a higher improvement in symptoms for patients, including speed of response for polyp patients.
Future Expansion
As mentioned previously, the company is pursuing a larger version of this product to target post-surgery patients. Success in LYR-210 should be a strong indicator that LYR-220 will work too.
In addition, this platform could be utilised for many different diseases in the future:

Source: Lyra Corporate Presentation
Clearly, though, the immediate focus of the company is on CRS, and that must come to fruition for the company to prosper in the near term.
Perceptive Advisors
Perceptive Advisors is a very well-regarded Life Sciences hedge fund. Similar to the other large funds in the space, they will conduct significant due diligence before entering a position and in my eyes their involvement in a company is a big green flag.
When it comes to Lyra, Perceptive Advisors is a significant holder, owning just shy of 25% of the company. Not only that, two of their Managing Directors sit on the board of Lyra. This, to me, is incredibly bullish. These types of industry professionals usually will only take a board seat in companies they are particularly interested in and believe in. I feel it is clear that Perceptive Advisors is very positive about the company.
It is difficult to know the exact cost basis of Perceptive’s holding, as they were involved in earlier financing rounds ahead of this year’s IPO at $16 per share, as well as the IPO itself.
Another of my favourite funds to watch, RA Capital, holds a 6.31% stake.
Financial Situation
A key reason why I believe Lyra offers a great risk/reward balance is that it is very well-funded – guiding that it will hold in the region of $70 million cash on its balance sheet at the end of the year. This compares very favourably to its current market capitalisation of $140 million, giving an enterprise value of just $70 million. This, in my view, puts a hard limit on the downside if the trial is a failure.
It is encouraging that institutional demand was so strong for shares at $16 in the IPO, and I believe the current valuation is really quite low. Considering the high chance of success in the trial, and the cash balance limiting downside, I feel the risk/reward opportunity is skewed in an investor’s favour.
Risks
The main risk is that the trial will fail. This would undermine Lyra’s technology and likely lead to negative sentiment on its future prospects.

The company’s level of funds should be enough to conduct a Phase 3 trial on LYR-210, while getting LYR-220 to Phase 2 stage. However, as ever in the world of small-cap biotech companies, it is likely at some point that there will be further financing. Hopefully, this would be at a much higher price than today, but the company is at the whim of trial results as well as market conditions. I am happy, however, that its current balance sheet is robust.
FDA approval is always a risk with companies at this stage, but the FDA has shown that it is willing to approve products in this space, and frankly, if trial results are good enough, Lyra should be approved. Should the Phase 2 trial succeed, we should hear much more about the future approval pathway in the coming months.
There is a risk that insurance companies won’t be willing to pay for the product. However, as mentioned before, I believe there is a strong case that it would be in their best economic interest to do so. This is because it could potentially avoid the need for expensive surgery and other treatments.
Finally, competition is always a risk. I have already mentioned some other drugs approved for CRS, though I do feel the trend in drug development so far has been towards the harder-to-treat, post-surgery polyp patients. Lyra’s initial focus on surgically naïve polyp and non-polyp patients should stand it in good stead against other drugs approved for the condition as a whole.
For example, there is a drug called Sinuva approved for polyp patients post surgery that works in a similar way. This is a much smaller patient pool than Lyra is aiming for. Further, Sinuva only lasts for 90 days, versus 6 months for Lyra. The Sinuva implant also only delivers a dose of 1,350 μg, markedly lower than Lyra’s product.
Potential valuation
It is very difficult to accurately predict a future value for an early-stage company such as this. As it progresses down the regulatory pathway and more information is announced on factors such as pricing, more clarity will be available.

Instead, for these companies, I prefer to work out a very rough estimate of future sales potential and work backward to factor in the risks ahead. If this “back of the napkin” estimate relates to a valuation markedly higher than today’s valuation, I will consider investing, tailoring my investment and price targets as milestones are reached.
The target market here is large and growing, and I will use Lyra’s 4,000,000 estimate of patients that are failed by the standard nasal spray approach. If we assume that the company, if successful, is able to reach 5% of these patients at peak, that relates to 200,000 treated patients.
In terms of pricing, Sinuva costs $1,400 / cycle of three months, or $5,600 annually. The annual price of Dupixent is in the region of $37,000. Other antibody-type drugs will have similar price tags and will be reserved for very severe patients. I feel Lyra could price very competitively at, say, $3,000 annually. I would think the actual price will prove to be higher, but I will stay conservative at this stage.
This gives an estimated peak sales figure of $600,000,000. A rule of thumb I use for such investments is that in a buyout scenario, acquirers may pay 3-5 times peak sales. 3x peaks sales in this case could be in the region of $1.8 billion.
However, as stated before, there are some major assumptions here, and there is a long way to go for Lyra. The best-case scenario would clearly be fantastic for shareholders, but the company needs to succeed in its Phase 2 trial first, then the Phase 3, and then commence the road to approval and commercialisation.
I do feel there is significant potential for a rerating of the stock in the event of positive Phase 2 results next month, particularly as the company is flying under the radar somewhat and is not followed as closely as some of its peers. The float is also low.
I would hope for a market cap of $400 million in the event of good results, with the potential for further significant uplift as the path ahead becomes clearer and the market becomes more aware of the company. A $400 million market cap translates to roughly $31 a share, or just under a 3x uplift in share price.

Results that are slightly ambiguous (a possibility given the reduce enrollment rate) would lead to more muted stock action.
Many things have to go right for Lyra to hit its potential, but the potential is impressive.
Conclusion
Lyra is a company focused on addressing a significant unmet need in a large patient population. If we visualise the size of the patient pools in CRS as being a funnel, Lyra targeting pre-surgery polyp and non-polyp patients is right at the mouth. Much of its competition on the market is focused at the other end of the funnel, in the more-difficult-to-treat post-surgery polyp patients (with an accompanying high price). Lyra has the potential to become an important part of treatment for this disease, after nasal sprays, and could significantly reduce the need for expensive, painful, ineffective surgery.
Of course, the company is very early-stage, and a lot can go wrong. However, the path should be clearer after next month’s trial results. The strong balance sheet underpins the current value, and I feel the risk/reward is very attractive right now. I am greatly encouraged by Perceptive Advisor’s involvement and its decision to take not one but two seats on the board.
Taking an educated chance now could give investors the opportunity to front-run institutional and retail buyers after the top line data next month, and the company’s low float and underfollowed nature could lead to an explosive move.
Disclosure: I am/we are long LYRA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

TSLA – Tesla Rolls Out Firmware Update After Hacker Discovers Model X Security Flaw

A Belgian security researcher has discovered a flaw to overwrite and hijack the firmware of the key fobs in Tesla Inc (NASDAQ: TSLA) Model X, effectively allowing the hacker to steal and take control of the car that’s not on the latest software update, Electrek reports.
What Happened: Lennert Wouters is a security researcher at Belgian university KU Leuven. He claims to have a series of hacks that can get around the Model X’s improved cryptography security feature, unlocking the keyless entry system.
According to Wouters, the attack takes minutes to execute and requires inexpensive gear. He discovered and informed Tesla of the bug in mid-August.
[embedded content]

Wouters published his findings after Tesla began to roll out an over-the-air software update version 2020.48 to all its Model X cars this week.
Why It Matters: Tesla has a good relationship with hackers and has a bug report bounty program, with a maximum payout of $15,000 after an increase in 2018. The Elon Musk-led company has ramped up its security team over the years and its relationship with hackers through participation in hacking conferences.
Model X key fobs hack is Wouters’ third Tesla hack in three years, according to ZDNet. He published two other Tesla hacks in 2018 and 2019.
Price Action: TSLA shares rose 6.58% to $521.85 on Monday.
Image Courtesy: Wikimedia

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