Today’s news: Stock market notes; Marathon Petroleum (MPC) announces first-quarter results and M&A activity and moves from Strong Buy to Hold; TiVo (TIVO) announces first-quarter results, a dividend decrease and an intention to separate into two companies.
The S&P 500 index rose 25% from its December low to its May high. It would normally take two full years for stocks to rise at that pace. Consequently, all investors should expect the market to pull back and rest. The pullback may have already begun, or the market could snap upwards and the pullback could arrive later. Either way, be thankful for the huge year-to-date run-up in stock values, and be prepared for stocks to bounce around in the future.
I anticipate the S&P 500 easily receding to 2,750, which would be down 200 points from the recent high, although a more serious pullback could put the S&P at 2,650.
While I realize that news media will link this pullback to trade wars, they would also link the pullback to any other news topic du jour. The more important fact is that a pullback was going to arrive, even if the biggest news story of the day was just a groundhog seeing its shadow.
Marathon Petroleum (MPC – yield 4.1%) reported a first-quarter loss of ($0.09) per share vs. the consensus $0.05 due to lower-than-expected refining margins. Revenue beat forecasts at $28.6 billion vs. the expected $26.8 billion. The company generated $1.2 billion of cash flow during the quarter; and repurchased $885 million of stock, higher than analysts’ expectations and ahead of schedule for their intention to repurchase $2.5 billion of stock during 2019.
Marathon also announced that they will combine their two midstream units in a $9 billion deal: MPLX will acquire Andeavor Logistics LP (ANDX). The merger allows for significant cost synergies and more efficient capital deployment. A Cowen & Co. analyst commented, “This transaction can likely unlock $2 billion value net to MPC that is being discounted by the market due to the overhang of this combination and concerns around future growth.”
Prices on heavy, sour crude oil are rising due to infrastructure and production constraints in Canada and Mexico, OPEC cuts, and Iranian and Venezuelan sanctions. The higher prices are cutting into profit forecasts for oil refining companies, including Marathon, Valero Energy (VLO) and Phillips 66 (PSX). As a result, Marathon plans to cancel a refinery project that is no longer anticipated to be cost-effective.
Reuters reports, “‘We really see the narrowing of the spreads to be a short-term issue,’ Marathon Chief Executive Gary Heminger told Reuters, saying the company is keeping their existing coking units full.” However, Marathon has “halted plans to add a coking unit to its Garyville, Louisiana refinery that would have processed more heavy crude. Marathon said the coker, which was expected to come online in 2021, was no longer financially viable due to narrowed spreads.” Marathon is expected to save $800 million due to the cancellation of the coking project.
As with many energy companies, profits at Marathon are expected to fall in 2019 and to then rise significantly in 2020. The current consensus earnings estimates point to profits falling 13% in 2019 and rising 61% in 2020. The 2020 price/earnings ratio is 6.1, indicating significant undervaluation.
I’m moving MPC from Strong Buy to a Hold recommendation while I wait for the price chart to stabilize. I have no intention of removing such a profitable company from the Growth Portfolio. Hold.
TiVo Corp. (TIVO – yield 4.2%) reported first-quarter results yesterday, and announced that the company will spin off its Product business to shareholders in a tax-free transaction during the first half of 2020.
The company reported $158.2 million revenue, and non-GAAP earnings per share (EPS) of $0.16. The company expects full-year 2019 EPS within a range of $0.72-$0.76, and full-year revenue within a range of $640-$654 million. Cash on hand was $327 million.
Management reduced the quarterly dividend to $0.08 per share, in a quest to optimize corporate balance sheets in advance of the separation of the two company divisions: Intellectual Property Licensing (consisting of Rovi and Tivo licensing portfolios and other patents) and Product. “In preparation for the separation, the Board and management are focused on determining the optimal strategy, operating structure and capital allocation policy for each business. Accordingly, the Board felt it prudent to adjust the current dividend in order to optimize our two balance sheets in advance of the separation. While this is a lower dividend than in previous quarters, it still provides a meaningfully higher yield than the S&P 500 average dividend yield.”
CEO Raghu Rau plans to lead the company through the 2020 spin-off of the Product division. Mr. Rau said, “We are pleased that our Board has approved the separation of TiVo’s Product and IP Licensing businesses and believe both businesses will be better positioned independently. We believe the separation will unlock shareholder value and increase our flexibility in pursuing new and growing market opportunities. Throughout the separation process, the Board of Directors will continue to be open to strategic transactions for each business that could create additional stockholder value and is actively engaged in discussions with interested parties for each business.”
Business continues as usual at TiVo. Approximately 22 million subscriber households around the world use TiVo’s advanced television experiences. The company was granted 194 new patents in 2018. During the quarter, TiVo announced their first IPTV deployments of TiVo User Experience 4, and signed a large social media company to an IP licensing contract. The company is also launching several new products and business models later this year. (Investors can refer to the earnings press release for lots of detail about products and customers.)
Litigation with Comcast continues. Management fully expects Comcast to eventually pay the licensing fees that are at the heart of the litigation.
Investors may access the earnings conference call for greater detail.
I continue to believe that TiVo offers excellent technology to the communications industry. Nevertheless, I plan to remove the stock from the Buy Low Opportunities Portfolio. Investors should continue paring back their positions in TIVO. Sell into strength. This is a micro-cap stock, which means if I issue a blatant Sell recommendation on the stock, it will crash the share price. I aim to repeat this suggestion to pare back your shares for several weeks before finally issuing a Sell recommendation and removing TIVO from the portfolio. Hold.