It’s been an interesting week for quarterly earnings reports. Today I’ll bring you up-to-date on seven companies. Three reported earnings way above estimates, three below estimates, and one exactly on target.
For the companies that missed Wall Street’s estimates, their outlooks remain strong. I will not recommend a Sell unless the outlook becomes negative or a scandal arises. (In overvalued markets, I will recommend stock sales when stocks have run up ridiculous amounts, but we’re not in that kind of market.)
I expect continued difficulty with the broader market through this election cycle. Investors eventually calm down, and markets regain sanity. Please be patient.
American International Group (AIG, Growth Portfolio) released third quarter results yesterday afternoon. Operating EPS were $1.00 when Wall Street expected $1.21.
- The company’s improvement in its core loss ratio was less exciting this quarter than in the second quarter, and AIG took $323 million in charges for loan loss reserves, contributing to the market’s disappointment in the earnings report. Earnings were also affected by adverse foreign currency movements related to the British pound.
- The good news is that expenses are down 12% year-to-date, exceeding its goal of 6% ($700 million) in full-year expense reduction. AIG is progressing toward its 2017 return on equity (ROE) goal of 9%.
- AIG spent $2.6 billion on dividends and share repurchases in the quarter. The company also authorized another $3 billion in share repurchases, with $4.4 billion remaining from the prior repurchase authorization.
AIG traded down to price support around $57 today. The stock remains extremely undervalued, and the current dividend yield is 2.1%. I consider the current price to be a buying opportunity. Strong Buy.
GameStop (GME, Growth & Income Portfolio) pre-announced third quarter 2017 results yesterday, and it was a carbon copy of recent quarterly reports: video game sales are weak, while sales of technology brands and collectibles continue to grow rapidly. In terms of game-changing news (pardon the pun), there’s nothing horrendous happening. It’s just a painful product transition for a company that’s been reaching record gross margins and record profits via its new strategy, in the midst of incredibly skeptical investors. The press release continues to forecast lots of good product news for 2017.
Third-quarter EPS are now expected to be 45 to 49 cents vs. the consensus estimate of 56 cents, when GameStop reports results on the afternoon of November 22. The company revised its full-year 2017 EPS forecast down to a range of $3.65 to $3.80, when Wall Street had expected $3.99. Prior year earnings had totaled $3.90 per share. This is the first time that investors have been faced with declining year-over-year earnings for GameStop. Subsequent year estimates still point to earnings reaching record levels.
The stock has fallen to a degree that’s hard to comprehend. You simply can’t find other companies with EPS near $4.00 that also have 7% dividend yields, with share prices as low as 20. For example, a low-but-normal P/E of 12 would put the share price at 45!
I encourage investors to hold GME, because there’s no logical reason that the price-pendulum will not swing widely toward much higher numbers. In addition, I encourage dividend investors and those who love buying dirt-cheap bargains, to buy GME now.
I realize that this stock has been incredibly frustrating, but in any portfolio of five to 10+ stocks, you’re going to have stocks that senselessly rise or fall ridiculous amounts, then later adjust to normalcy. If the company were suffering financially or scandal-ridden, I would absolutely tell investors to Sell. But nothing like that is happening with GME. Buy.
Harman International (HAR, Buy Low Opportunities Portfolio) reported first quarter 2017 results this morning. Non-GAAP* EPS were $1.87 vs. the consensus estimates** of $1.53 and $1.54. Sales were $1.8 billion vs. the consensus estimate of $1.73 billion. All business segments experienced year-over-year revenue increases, with gross margins also rising. The large quarterly outperformance will almost certainly lead to upwards earnings revisions.
HAR has been trading between 78 and 88, and will now likely rise toward the top of that range. Buy.
* Earnings per share are often reported in various ways within an earnings release. Consensus estimates are derived from “non-GAAP” or “adjusted” earnings per share.
** Estimates from Zacks and Thomson Reuters frequently vary by a penny or so, because they are polling slightly different sets of analysts.
Loews (L, Cabot Wealth Advisory) – I wrote about Loews on September 15 for Cabot Wealth Advisory. The company reported third quarter operating EPS of 89 cents, when the market had expected 69 cents. Quarterly profits came in 30% higher than Wall Street had expected due to increases at its CNA Financial and Loews Hotels businesses.
Full-year 2016 EPS are now expected to grow 44.1%; whereas at the time of my September 15 report, EPS were projected to grow 33.4%. 2017 EPS are currently expected to grow 17.5%, with a P/E of 13.3. The stock remains undervalued.
Here are my previous remarks on the share price: “Given a neutral-to-bullish stock market, Loews’ price could easily climb to 44 this fall, with a good chance of proceeding upward to price resistance at 48. Once the stock reaches 48, it will likely rest for a while. Traders should sell at 48.” The price briefly shot up to 43.68 on the earnings announcement, then came back down to just-below 42.
Growth stock investors should consider owning Loews.
Quanta Services (PWR, Growth Portfolio) reported third quarter EPS of 55 cents this morning, on target with Wall Street’s expectations. Revenue was $2.04 billion vs. the consensus estimate of $2.08 billion. The company is pleased with strength in both business segments, citing “numerous large pipeline projects that moved into construction during the third quarter,” and expects strong second-half 2016 results.
Full-year 2016 EPS are expected to grow aggressively, in a range of 36% to 40.5%, with 2017 EPS growing approximately 27%. The respective P/E’s are 17.9 and 13.8. The stock is undervalued, with its 2017 P/E at the bottom of its long-term P/E range, which often reaches 30-40 and higher.
The stock reacted by fluctuating 7% within its trading range, which has been 26 to 30 since late September. Strong Buy.
Vulcan Materials (VMC, Growth Portfolio) reported third quarter EPS of $1.01 yesterday, when the market expected $1.13. Results were impacted by extremely wet weather and slow project starts. The company forecasts growth in volume, pricing, and margins in 2017. Full-year projections will likely come down a bit, yet the stock will remain quite undervalued.
The share price remains within its recent trading range, with a slightly bullish short-term chart. Strong Buy.
WellCare Health Plans (WCG, Growth Portfolio) reported adjusted third quarter EPS of $1.63 on November 1, when the market was expecting $1.11. The huge outperformance will lead to upwards earnings revisions, in a year when earnings were already expected to grow 46%. I’ll continue to assess WCG’s valuation as the numbers change, but it’s currently fairly valued.
The share price jumped to new all-time highs on the news, reaching as high as 129 intra-day. The chart is extremely bullish. Continue to hold your shares. Hold.