Earnings reports from Biogen (good enough but little helpful news on the Tecfidera and aducanumab wildcards), Freeport-McMoran (strong), Mattel (encouraging) and Trinity Industries (weak - patience is needed). All retain their Buy ratings and price targets.
Biogen (BIIB) - Revenues increased 2% from a year ago, while adjusted net income per share increased 12%. Tecfidera revenues rose modestly (producing about 32% of total revenues), offsetting declines elsewhere. High-margin royalty revenues grew 20%. Revenues were about 7% ahead of consensus while earnings were about 28% ahead of consensus. The company modestly reduced forward revenue guidance but raised earnings guidance by about 7% (which assumed no impact from generic Tecfidera competition).
Overall, its core business seems sturdy, with wide optionality in both directions from Tecfidera and aducanumab.
Unfortunately, Biogen provided little clarity on the likelihood of FDA approval of Alzheimer’s treatment aducanumab or the outlook for Tecfidera (which is likely facing imminent competition from generics). Both remain wildcards. BIIB shares’ underlying valuation could swing from perhaps $175 to $400 depending on how these play out, compared to the current $272 price.
Biogen continues to produce generous cash flow, at about $1.9 billion in the quarter. The company did a huge share repurchase of $2.8 billion, or about 5% of total shares outstanding. Despite this large repurchase, it has over $5 billion in cash/securities on hand at quarter-end.
In a surprise move, Biogen announced that the CFO will depart and be replaced by an outside hire. We have limited insight into the motivation behind the change, but for now we will assume it is benign. The new CFO brings considerable acquisition experience - which Biogen may find handy if it needs to acquire new growth vehicles should its aducanumab and Tecfidera products stumble.
Biogen’s shares could be volatile in coming months as we receive more information on its wildcards.
We continue to rate Biogen (BIIB) shares a Buy with a $360 price target.
Freeport-McMoRan (FCX) - Revenues of $3.1 billion fell 14% from a year ago. Adjusted net income of $0.03/share improved from a $(0.05)/share loss. Freeport had raised its Q2 guidance significantly in early July, so actual results were in-line with this guidance.
A primary driver of Freeport’s revenues and share price is the price of copper, as copper generates about 80% of Freeport’s total revenues. Compared to a year ago, copper prices fell 7% and volumes fell 6%, so copper revenues fell about 13%.
Gold revenues grew about 26% on sharply higher prices, partly offset by lower sales volumes. Gold generates about 13% of total revenues. Molybdenum revenues fell about 40% on lower volumes and prices.
Operating cash flows for the quarter were $491 million. The company said they expect full-year operating cash flows of about $2.6 billion. Freeport expects 2021 operating cash flows to increase significantly, due to a near-doubling of its Indonesia copper and gold volumes as these mines ramp up production. Its Cerro Verde mine in Peru appears ready to restore its former production volumes after Covid-related restrictions. The Lone Star copper project in Arizona is on-track to add perhaps 6% to Freeport’s annual production. The company also said lower costs next year will help boost cash flow.
Indonesia currently accounts for about 25% of total copper production and essentially 100% of total gold production. The Indonesia government will essentially nationalize the above-ground mine in January 2023, leaving Freeport with a smaller share, so the company is aggressively building out a nearby underground mine to offset this loss and thus remove an overhang on the stock. These new mines are still in their early buildouts. Progress is encouraging, but the risk from delays or disappointments remain high.
Freeport has cut its operating and capital spending this year. Liquidity appears fine and the balance sheet carries $9.9 billion in debt (the nearest senior debt maturity is in 2022), a manageable sum but one that we would like to see trimmed. The company said that if conditions remain strong, it could reinstate its dividend in 2021.
Overall, we’re hanging onto Freeport, recognizing the operational risks ahead, the volatile nature of copper prices (now back to nearly $3/pound), and the relief rally that has returned FCX shares to over $13 following their harrowing collapse in March to $5.
We retain our Buy rating on Freeport-McMoran (FCX) shares with a $20 price target.
Mattel (MAT) - Revenues of $732 million fell 15% from a year ago, while adjusted net loss per share of $(0.26) was about 13% worse than a year ago. Revenues were about 7% higher than estimates while the loss was much smaller than the $(0.34)/share consensus. Adjusted EBITDA fell to $31 million compared to $42 million a year ago. Adjustments were relatively minor in the quarter and essentially the same as the year-ago period.
North America sales rose 3% and International sales fell 33%. Barbie sales were surprisingly strong, up 43% in North America and up 7% globally. Most of the global sales decline was attributed to widespread store closures. About 96% of retailers are now open. Also, some of the sales decline was due to weak sales of action figures: this year’s sales couldn’t match the strong contribution from Toy Story 4 last year, particularly with the lack of new movie releases this year.
Gross margins improved sharply, to 44%, from about 40% a year ago, as production and related cost savings programs are working. The higher margin allowed gross profits to fall by only $21 million despite the $128 million decline in revenues. Operating expenses were lower by $26 million. All-in, the adjusted operating loss was $5 million smaller than a year ago. This was fairly impressive. Below the operating line, higher interest expenses and unchanged tax costs weighed down net income.
For the rest of 2020, while the company wouldn’t provide any revenue guidance, it said gross margins would increase by 150 to 250 basis points from 2019.
Mattel records revenues when they ship goods to retailers, primarily to replenish retailer inventories. So, an important indicator of future sales is how well its products are currently selling at retailers. Management said that these point-of-sale trends improved during the quarter, along with e-commerce sales. Retailers currently are maintaining tighter inventories, so Mattel’s sales lagged the stronger POS sales. Mattel’s factories are open and their supply chains are performing relatively well. This is critical as the company is ramping up for the holiday selling season.
On the balance sheet, net debt slightly increased from a year ago but less cash was tied up in working capital. Over time, Mattel needs to pay down its oversized debt load which costs them close to $200 million in interest each year.
Mattel is pressing forward to generate value from its brands. It is launching new products and games, and its Mattel Films division has nine movie projects in development. The Covid pandemic has delayed some of its film initiative, however.
MAT shares have a long way to recover, but the turnaround is making progress despite the huge effects of the pandemic.
We continue to rate Mattel (MAT) shares a Buy with a price target of $38.
Trinity Industries (TRN) - Results were weak. Revenues of $509 million were 31% below a year ago. Adjusted per share earnings of $0.02 fell 93% from a year ago. Adjustments included a $1.86/share write-down of its assets. Operating profits, excluding the write-offs, fell 60%. Revenues were modestly ahead of consensus while earnings were well-below the $0.08/share consensus.
Most of the revenue decline was due to lower sales of new and lease-fleet railcars. Profits on railcar sales was just above break-even. Leasing and management revenues (about 36% of total revenues) fell only 3%, while the segment’s profits were up slightly. The lease fleet is 95% utilized, which is healthier than many analysts expected, but was 98% a year ago. Pricing pressure is hurting profits, as the industry is considerably oversupplied with railcars. Despite this, Trinity’s 2020 railcar production schedule is fully-booked.
Trinity generated $154 million in operating cash flow, and liquidity remains robust. It is cutting its cost structure, led by its new CEO Jean Savage, who had the unfortunate timing of joining the company just weeks before the Covid lockdowns. Trinity said that it continues to expect as much as $450 million in tax refunds over the next 12-18 months.
Overall, it was a difficult quarter as industry conditions are clearly soft. The company remains somewhat exposed to the broad economy and more directly to rail traffic. Currently, there is a sizeable glut of railcars, with new demand coming from a low but steady volume of replacement cars. We expect demand to remain subdued for at least a few quarters, but the company should prosper when the economy recovers.
Trinity maintained their dividend (3.9% yield) and appears committed to retaining.
We continue to rate shares of Trinity Industries (TRN) a Buy with a $26 price target.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.