Today’s news: Sanmina (SANM) moves from Buy to Retired. News stories on Apple (AAPL), Baker Hughes (BHGE), Blackstone Group (BX), DaVita (DVA) and The Mosaic Company (MOS).
Apple Inc. (AAPL – yield 1.4%) introduced new products and services this week.
• Apple revealed iPhone upgrades, including improved photo quality, longer battery life and a lower-priced model that’s intended to capture more market share in emerging markets.
• Apple’s new TV+ service will launch on November 1 and will include original content. Priced at $4.99 per month—lower than analysts’ expectations—the service includes family pricing discounts and also undercuts Disney and Netflix pricing. New purchases of iPhones, iPads and Mac devices will come with a free one-year subscription to Apple TV+.
• The new Apple Watches are immediately available, at lower prices, featuring an always-on retina display and 18-hour battery life.
• The new 7th-generation iPad is immediately available, featuring a 10.2-inch retina display.
• Apple Arcade will launch 100 games on September 19, offering a free one-month trial, with unlimited service at a cost of $4.99 per month.
While iPhone revenue still makes up over 50% of annual gross revenue and profit, Services gross profit is rapidly growing, currently at 30%. As the company evolves from more of a technology company to a consumer non-cyclical company via Services, the P/E multiple should naturally expand toward a level that’s more typical of companies like Procter & Gamble (PG) and McDonald’s (MCD), which have P/Es in the mid 20s. Apple’s 2020 P/E is 17 (September year end). (FYI for newer investors: price/earnings ratios, a.k.a. multiples, rise as share prices rise. Therefore, if Apple had a P/E of 25, the share price would be about 320.)
Needham and Bank of America Merrill promptly raised their AAPL price targets to 250.
The stock just emerged from a trading range and is now racing toward its October 2018 all-time high near 230, again attaining a $1 trillion market cap. AAPL remains my favorite buy-and-hold stock for long-term capital gains. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 3.2%) – Cash-strapped General Electric Co. (GE) continues to sell non-core assets in order to resolve balance sheet problems. Yesterday afternoon, GE sold $2.7 billion of BHGE Class A shares in a secondary offering, taking their stake in Baker Hughes down from 50.2% to less than 39%. The transaction purportedly triggered a $7.4 billion accounting charge at GE. (GE conducted a previous secondary offering of BHGE shares in November 2018.) Secondary offerings of stock essentially facilitate the transfer of stock from one owner to new owners. Secondary offerings do not dilute the outstanding share count.
The Wall Street Journal recently reported, “Last year GE recorded a $2.2 billion loss on the sale of part of its Baker Hughes stake, reducing its ownership from 62.5% to 50.2%. In SEC filings, GE has disclosed that selling below 50% will trigger it to stop reporting Baker Hughes’s financial results as part of its own results, and record its loss on the rest of its investment. GE said its paper loss on the remaining investment was about $7.4 billion as of July 24 [2019], according to the company’s 10-Q report.” This is potentially bad news for GE, but it does not affect Baker Hughes.
Once they’re no longer a majority shareholder, the number of Baker Hughes board members appointed by GE will then be reduced from five to one. Baker Hughes will also repurchase $250 million of their Class B shares from GE, funded by cash on hand and current liquidity.
Reuters reported that an analyst at Cowen & Company says GE’s partial sale removes some of the overhang to BHGE shares, and that investors like BHGE for its LNG exposure, low cap-ex and for prospects of inflection in oilfield services and equipment segment margins, as the company narrows its performance gap versus peers’.
BHGE fell 7% yesterday in response to the news that GE continues to divest themselves of their majority position in Baker Hughes. However, that’s not bad news, and the lower price should therefore be considered a buying opportunity. Buy BHGE now. Strong Buy.
Blackstone Group Inc. (BX – yield 4.1%*) – Yesterday, Hong Kong Exchanges and Clearing proposed a $39 billion takeover of the London Stock Exchange (LSE), contingent on LSE walking away from their pending Refinitiv acquisition. Despite an apparent desire to bolster their presence in Asia, LSE responded that they are committed to the Refinitiv deal. In recent years, Germany’s Deutsche Boerse has also failed in numerous attempts to buy the LSE.
Background: Blackstone Group and two other investors bought a 55% stake in Thomson Reuters’ Financial and Risk unit in October 2018, which was then renamed Refinitiv. In August 2019, the London Stock Exchange (LSE) agreed to buy Refinitiv for $27 billion. Blackstone stands to make over 100% profit on their brief investment in Refinitiv.
In other news yesterday, Blackstone announced the close of its latest global real estate fund, Blackstone Real Estate Partners IX. The fund has $20.5 billion of total capital commitments—the largest real estate fund ever raised. Blackstone’s real estate business has $154 billion of investor capital under management. Blackstone Group is the world’s largest and most diversified alternative asset manager.
BX has been marching upward for many months. Buy BX now, and buy more on pullbacks when the dividend yield is even higher. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 4.1%.
DaVita Inc. (DVA) – DaVita projected adjusted 2020 EPS of $5.00-$5.50 at this week’s Capital Markets Day. Investment bank William Blair then lowered its recommendation on DVA to “market perform,” while investment bank SunTrust Robinson raised its price target on DVA from 60 to 68. William Blair’s 2020 EPS estimate had been $5.52. Wall Street’s consensus estimate is $5.34, representing EPS growth of 14.3%, and the range of estimates is $4.16-$6.16.
DaVita is the largest provider of kidney care services and home dialysis in the U.S., treating patients with chronic kidney failure and end-stage renal disease. DaVita was featured in the September issue of Cabot Undervalued Stocks Advisor.
In recent days, DVA rose above this year’s trading range, then pulled back a bit yesterday on the William Blair comments. Presuming a neutral-to-bullish market, DVA could fairly easily rise to the upper 60s this year. Buy DVA now. Strong Buy.
The Mosaic Company (MOS – yield 0.9%) – On September 9, Mosaic announced several strategic decisions in advance of upcoming investor meetings. The company plans to promptly repurchase $250 million of its stock because “Mosaic’s stock currently presents an exceptional opportunity,” says CEO Joc O’Rourke. The company also plans to idle its Louisiana phosphate operations as a result of falling prices and oversupply in the industry. “We expect our move to idle production to tighten supply and rebalance the market. Mosaic will prioritize shipments to meet key customer needs through the idling period.” Mosaic expects strong fall fertilizer application in North America. In addition, Mosaic’s Brazilian arm, Mosaic Fertilizantes, expects to achieve 2019 synergies of $275 million, with a new goal of another $200 million in synergies by 2022.
The stock has risen in nine of the last 10 trading sessions, and is up about 22% this month. MOS could reach as high as 25 before resting again. Hold.
Sanmina Corp. (SANM) – I’m retiring SANM from the Growth Portfolio today, because 2020 earnings growth is expected to be just 5.6%. That number was higher when I originally added the stock to the portfolio in March. Earnings estimates subsequently increased for both 2019 and 2020, but with 2019 numbers rising disproportionately higher, the 2020 number no longer looks compelling. For those of you who plan to keep the stock, here is the latest news: Yesterday, Sanmina announced that Mr. Hartmut Liebel, who joined Sanmina in July as President and Chief Operating Officer, will now succeed interim CEO Michael Clarke as Chief Executive Officer. Investors are welcome to listen to the webcast of Sanmina’s September 4 presentation at the Citi 2019 Global Technology Conference. SANM is a small-cap stock, currently rising toward short-term resistance at 34. Retired.