Today’s news: Apple (AAPL) buys the entire planet ... just kidding … good earnings report. KLX Inc. (KLXI) moves from Hold to Strong Buy.
New $100 Billion Share Repurchase Authorization
Well well well. Look at Apple (AAPL – yield 1.7%).
I admit, I sat at my computer after the market closed yesterday, hitting the refresh button on the Apple (AAPL) website until they posted the second quarter earnings press release. Right away I saw the words New $100 Billion Share Repurchase Authorization and I laughed. What did we hear for the last six months?
“Oh no, Apple’s not selling enough iPhones!”
“The iPhone X is too expensive!”
“The stock is going to break support!”
You couldn’t get past a full business day without hearing a dreaded pronouncement about Apple’s pending demise. Then I’d look at the earnings projections, and remind myself that when 40 Wall Street analysts estimate 23.7% earnings growth for Apple this fiscal year, while Charlie in his basement and Savannah on the nightly news are tweeting that Apple’s in big trouble … who ya gonna believe? (Charlie is my favorite name, and I’m sure Savannah is a lovely young lady, but they don’t know jack about stocks.)
Let’s do the post-mortem and get the basic facts out of the way. Apple operates on a September fiscal calendar, and they reported second quarter results as of the end of March.
• Revenue of $ 61.1 billion slightly beat the consensus estimate of $60.9 billion, representing a new March quarter record.
• Earnings per diluted share of $2.73 modestly beat the consensus estimate of $2.68, representing a new March quarter record.
• The company increased the quarterly dividend by 16%, from 63 cents to 73 cents per share.
• At a share price of 170, the current yield is 1.7%.
• Apple expects third quarter revenue to range between $51.5 billion and $53.5 billion vs. the consensus estimate of $51.7 billion.
CEO Tim Cook commented “We’re thrilled to report our best March quarter ever, with strong revenue growth in iPhone, Services and Wearables. Customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter. We also grew revenue in all of our geographic segments, with over 20% growth in Greater China and Japan.”
Based on current consensus earnings estimates, I won’t consider AAPL to be fairly valued until the share price reaches 208. I’m quite comfortable with the idea of holding AAPL well into its next fiscal year. If the numbers turn ugly, we’ll have plenty of warning, but there’s nothing like that on the current horizon. Keep buying AAPL. And pssst, buy more on pullbacks, because that’s exactly when Apple will be repurchasing shares. Strong Buy.
KLX Inc. Selling Aerospace and Spinning Off Oilfield Services
Shares of KLX Inc. (KLX) fell yesterday upon the announcement that the company will sell its Aerospace Solutions Group to Boeing (BA) for $63 per share, and also spin off its Energy Services Group. The two transactions are expected to be completed in the third quarter (which is right around the corner).
KLXI fell 8.6% to 71.5, leaving investors wondering and worried. I spoke to three other investors and professionals who did the math on the spin-off, and reviewed one research report that analyzed the spinoff value, and we were all convinced that (a) the Energy Services Group is a highly attractive company to own and (b) the market does not yet recognize its value. Here’s what I think happened:
1. On the evening of April 30, Reuters reported on the takeover offer for the Aerospace Solutions Group at a value of $63 per share. The article portrayed $63 as the entire takeover value of KLX Inc., and did not mention the Energy Services Group or the spinoff, leaving traders and investors with the impression that the entire value of KLX Inc. is $63 per share. Reuters then doubled down on its error and published a second article to that effect. Many people who read the articles made sell decisions that pushed the stock down on the morning of May 1, leaving the rest of the market with the impression that the Boeing-KLX announcement was bad news for KXL.
2. KLX Inc. has only a few analysts covering the stock. Therefore, there was very little information being sent out into the investment community about the Energy Services Group and its value.
Right now the market is valuing the Energy Services Group at $9 per share. I would conservatively price it at $15-$20 per share. (If it traded at a P/E similar to peers Schlumberger and Baker Hughes, it would be priced in the $35-$50 range.) That means that if you buy KLXI and are willing to wait for the spinoff to take place, you will promptly get $63 cash returned to you, and the remaining principal invested in the Energy Services Group could double. Current shares of KLXI could rise to a more fair valuation, reflecting a true value of the spinoff, at any point between now and post-spinoff.
I’m changing my recommendation on KLXI from Hold to Strong Buy. I see incredible value here. Please visit the KLX website and view the webcast for more details of the upcoming transactions. Strong Buy.