Election season is now in full swing. In less than seven weeks, or only 49 days, the country will select its next president, representatives from all 435 House congressional districts, 35 senators and 12 state governors. As we all know, this election has plenty of controversies, not only about the various candidates but also about a wide range of political and previously non-political-but-now-politicized issues. These issues are real and the stakes are high. It’s easy to get caught up in the pre-election gravitational pull.
While the pandemic had subdued the campaigns for much of the year, the strength of the election day gravity will only accelerate from here. It’s nearly impossible for media coverage to remain neutral, and even neutral-ish coverage can be viewed as partisan this season. Media editorial commentary, combined with a likely surge in advertising and other promotions, along with the presidential debates starting on September 29, all of which are by definition partisan, only heighten the news flow that draws in our attention like an interstellar black hole. The closer we get to November 3, the more powerful the pull. By election day the news flow gravitational pull will be so strong that nothing will escape its overwhelming power.
To successfully navigate this abyss, it is critical to remember to separate political views from investment views. In the ideal investment mind, election-driven emotions play no role. Rather, the mind focuses exclusively on the objective merits of each potential investment. In the real world, our minds mix together all sorts of emotions and investing ideas – and the accelerating gravitational pull of the election can cloud good investing decisions.
I once met a successful investor who made no investment decisions up to 45 days before any presidential election just to avoid these risks. Perhaps he was channeling the ancient Greek mythology hero Odysseus, who made his crew tie him to the mast so that his crew wouldn’t follow his commands lest the Sirens draw his ship into the rocks.
One way to help identify and weaken the emotional pull from the election is to ask, “Is my investment decision based on what I think will happen, or is it based on what I think should happen?” The should is probably based on the emotions, whereas the will is more likely to be based on reason. Either way, simply being aware of the risks is probably half the cure.
Investing smartly is hard enough with all the usual noise and now the pandemic-related complications. Investing smartly during an election season is challenging at best. But remember, it will all be over (hopefully) come November 4.
Share prices in the table reflect Tuesday (September 15) closing prices. Send questions and comments to Bruce@CabotWealth.com.
TODAY’S PORTFOLIO CHANGES
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LAST WEEK’S PORTFOLIO CHANGES (September 9 letter)
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GROWTH PORTFOLIO
Chart Industries (GTLS) is a leading global manufacturer of highly-engineered equipment used in the production, transportation, storage and end-use of liquid gases (primarily atmospheric, natural gas, industrial and life sciences gases). Its equipment cools these gases, often to cryogenic temperatures that approach absolute zero. Chart has no direct peers, offering turnkey solutions with a much broader set of products than other industry participants. The company was featured in “Cabot’s 10 Best Stocks to Buy and Hold for 2020.”
The company generates positive free cash flow and is prioritizing reducing its modestly elevated debt from its 2019 cash acquisition of Harsco’s Industrial Air-X-Changers business, as well as continuing its sizeable cost-savings program.
While second-quarter sales growth was flat and adjusted per-share earnings fell about 7% from a year ago, the company reinstated its guidance for above-consensus full-year 2020 earnings. Chart provided encouraging updates on its cost savings programs and described new initiatives and orders in hydrogen-based energy equipment.
GTLS shares have rebounded in the past week, rising about 12%. The stock is likely riding some of the tech stock resurgence and was probably oversold last week. Also, as the company is deep into cryogenics, its shares will likely benefit from the increased interest in hydrogen-based vehicles even though the profit impact for Chart will likely be minimal for some time.
The shares have about 12% upside to our 79 price target.
We are not big fans of technical analysis. However, an odd maxim that I heard long ago that stuck in my mind – and which has generally been right – says that “all gaps are closed.” This suggests that GTLS stock will fall to the 57 range, which would close the price gap produced on July 23 (following its earnings release). If the shares were to fall to this level, this would be a buying opportunity not a selling opportunity, in our view.
The current valuation remains reasonable at 22.6x estimated 2021 earnings of $3.12 and 17.3x estimated 2022 earnings of $4.06. Estimates have stabilized. As the stock keeps moving up, it incrementally becomes less attractive. We are staying with our Buy rating but eyeing a move to Hold as the shares approach our target, unless we see compelling reasons to raise our target. BUY
MKS Instruments (MKSI) generates about 49% of its revenues from producing critical components that become part of equipment used to make semiconductors. MKS’ products are generally in the stronger segments of this currently healthy market. While MKSI shares closely track the broad semiconductor indices, the expansion of its Advanced Markets segment, including its 2016 acquisition of Newport Corporation, as well as its 2019 acquisition of semiconductor-related Electro Scientific Industries, may allow its shares to break out. MKS recently promoted 13-year company veteran Dr. John T.C. Lee to CEO.
MKS reported strong second-quarter results and raised its 3Q guidance substantially. The ESI acquisition added incrementally but its full potential has yet to be realized.
After falling sharply in the tech sell-off, MKSI shares ticked down about 1% in the past week, but have been ticking up in recent trading along with the Philadelphia Semiconductor Index (SOX). The shares have about 22% upside to our 130 price target.
Traders might want to nibble here. Tech price momentum is notoriously hard to trade but the shares seem to have found a floor, of sorts. For longer-term holders of MKSI, at 13.6x estimated 2021 earnings of $7.84, we consider the shares reasonably undervalued. HOLD
Quanta Services (PWR) is a leading specialty infrastructure solutions provider serving the utility, energy and communication industries. Their infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, with 65% of revenues coming from regulated electric, gas and other utility companies. We view this company as high-quality, well-run and resilient. Quanta achieved record annual revenues, operating income and backlog in 2019, and reported strong second-quarter 2020 results. The company is pursuing a multi-year goal of increasing margins while maintaining low capital intensity. Dividend payouts and share repurchase activity have continued uninterrupted during the pandemic.
On Monday, Quanta filed for a “mixed shelf offering,” which allows the company to pre-register securities with the Securities and Exchange Commission for later use. This allows the company to take the securities off the shelf and use when needed, thus avoiding any delays that might come from the registration process. Shelf offerings are common and companies do them for many reasons, including for refinancing debt and for funding future acquisitions. Quanta’s “mixed” offering means that it is pre-registering both stocks and bonds. We don’t anticipate anything imminent by Quanta.
PWR shares mostly held their price during the tech sell-down and ticked up about 1% in the past week. The stock currently has about 17% upside to our 61 price target.
The stock trades at 15.8x estimated 2020 earnings of $3.30 and about 12.9x estimated 2021 earnings of $4.02. For long-term holders, Quanta stock looks well positioned to continue to prosper. BUY
Tyson Foods (TSN) is one of the world’s largest food companies, with over $42 billion in revenues last year. Beef products generate about 36% of total revenues, while chicken (31%), pork (10%), and prepared/other contribute the remaining revenues. It has the #1 domestic position in beef and chicken with roughly 21% market share in each. Its well-known brands include Tyson, Jimmy Dean, Hillshire Farms, Ball Park, Wright and Aidells. As only 13% of its sales come from outside the United States, Tyson’s long-term growth strategy is to participate in the growing global demand for protein. Second quarter results were strong. The company has more work to do to convince investors that the future is brighter, particularly as it is more of a commodity company (and hence lower margins) compared to its food processor peers.
New CEO Dean Banks (joined Tyson in 2017, officially takes CEO role on October 3) has already made some staffing moves.
Asian swine flu was recently discovered in Germany, leading to a ban in hog exports. This could incrementally benefit TSN shares, which probably has helped drive the 6% share price increase in the past week. TSN shares are just above their 58-65 trading range. The stock has 15% upside to our 75 price target.
Tyson currently trades at 13.1x estimated 2020 earnings of $4.99/share and 10.5x estimated 2021 earnings of $5.87, and offers a 2.6% dividend yield. BUY
Universal Electronics (UEIC) is a major producer of universal remote controls that subscription broadcasters (cable and satellite), TV/set top box/audio manufacturers and others provide to their customers. The company pioneered the universal remote, named the ‘One for All’, which was quickly adopted by consumers after its launch in 1986. Since then, the company has expanded into a range of remote control devices for smart homes, safety and security and other residential and commercial applications, driven by its proprietary technology. The company has a global roster of customers, with about 40% of sales produced outside the United States. Comcast is a 10%+ customer and they hold warrants for up to 5% of Universal’s shares.
For UEIC shares to start a sustained move upward, their revenues need to stop declining and turn (even if slightly) positive. While expanding profit margins help, the shares aren’t cheap enough for this to make much of a difference yet.
Stable/rising revenues could come from a recovery in net cable subscriptions, particularly upon the return of live sports (a major driver of new subscriptions) or when in-home installations resume. Another source of revenue growth may come from upgraded products that allow better control of set top boxes that manage a wide range of media including cable, Netflix/etc., and other digital technologies. Also, the company is expanding into Alexa-like home devices, which could boost revenue growth.
UEIC shares have continued to slide, falling about 11% in the past week. We believe this ongoing weakness relates to the lack of resolution to its revenue growth issues. The shares have fallen through support at 38.
UEIC shares have 31% upside to our 47 price target. We are patient for now with UEIC shares because of the larger opportunity set on the horizon, potential for better results in the third and/or fourth quarter, and the increasingly low valuation.
UEIC shares trade at 10.0x estimated 2020 earnings of $3.57 and 8.3x estimated 2021 earnings of 4.31. The estimates remain unchanged from last week and appear to have bottomed out. BUY
Voya Financial (VOYA) is a U.S. retirement, investment and insurance company serving 13.8 million individual and institutional customers, with $606 billion in assets under management and administration. The company previously was the U.S. arm of Dutch financial conglomerate ING Group, from which it was spun off in 2013. Voya has several appealing traits. Even though it is well capitalized, it is migrating toward a capital-light model, which should allow it to use some of its excess capital to repurchase shares. Strong earnings and cash flows, lower capital intensity and share repurchases should help boost its share price to our 62 target (30% implied upside).
Voya announced that its pending life insurance sale will be delayed until the fourth quarter. While it has received most of the necessary state and federal approvals, there apparently are a few still outstanding. We believe the sale will be completed and that Voya will receive the expected $1.5 billion in cash proceeds.
Voya shares have declined about 3% in the past week, as insurance companies have generally been laggards. Voya does carry a large investment portfolio, but the market’s recent sell-off should have minimal impact on their capital base.
VOYA trades at 12.4x estimated 2020 per-share earnings of $3.86 and 7.9x estimated per-share earnings of $6.02. BUY
GROWTH & INCOME PORTFOLIO
Bristol-Myers Squibb Company (BMY) is a New York-based global biopharmaceutical company. In November 2019, the company acquired Celgene for a total value of $80.3 billion, including $35.7 billion in cash and $40.4 billion in stock. The deal included a contingent value right (or CVR) in which Celgene shareholders could receive up to $9/share in additional cash depending on Bristol-Myers reaching all three milestones. One of the milestones has been reached. The maximum total payments would be $6.8 billion, and expire upon the final March 31, 2021 milestone. The rights are tradable (BMY.RT), and currently are priced at just under 2.00, down sharply from their high of about 4.62 in April. Related to the deal, Bristol-Myers divested the rights to Otezla for $13.4 billion.
The acquisition was controversial given the high price (54% premium to Celgene’s share price), concerns over possible patent risk to Celgene’s blockbuster $5 billion Revlimid treatment (about 30% of its total revenues), and the possibility that Bristol-Myers itself could be sold for a high price without the deal. Several value-oriented firms including Wellington Management and Dodge & Cox, along with activist Starboard Value, opposed the deal. However, the merits of Celgene’s “Big 5” late-stage treatments and up to 22 early-state treatments won the support of a strong majority of shareholders.
Bristol promised $2.5 billion in deal synergies by 2022 (about 5% of combined revenues) and 40% earnings per share accretion. These financial benefits, helped by low-cost debt and the CVRs, provide some metrics to evaluate the value created by the deal.
New Bristol-Myers has three primary groups: Immuno-Oncology (Opdivo), Hemotology (Revlimid) and Immunology (Eliquis). The top three treatments produce about 67% of Bristol’s total revenues. The company continues to develop these franchises and expand into new treatments. Overall, we think the pipeline is reasonably healthy – ultimately this is where the value for shareholders will be produced.
Bristol-Myers’ financial priorities include developing its treatment pipeline, paring down its debt and paying its dividend. The $47 billion in debt is about 2x next year’s EBITDA (a measure of cash operating earnings) a manageable sum. Management wants to reduce this to 1.5x, or perhaps by $12 billion, by the end of 2023. We think this is readily accomplishable. The company carries $21 billion in cash.
Second-quarter results were good enough, with flat revenues but 38% growth in adjusted earnings per share. Bristol-Myers raised their full-year earnings guidance by 6 cents, or about 1% ... so small as to be irrelevant but at least it was in the right direction. We think the company will report more respectable results in the third quarter as patients make more visits to their doctors.
Management commentary pointed to improved growth prospects in 2021. While debt remains essentially unchanged since year-end, the cash balance has increased to $22 billion from $16 billion, reflecting strong cash generation. This cash flow is an important part of the Bristol-Myers story.
One emerging but unmeasurable risk cited by some analysts is increased drug price controls following the U.S. presidential election. While initially this looked more likely if the Democratic Party won the White House, it is now looking more likely even in a Republican re-election as the president is increasingly pressing for more price controls.
We are setting our price target for BMY to 78, based on 7.5x cash operating earnings of $25 billion in 2022, compared to estimates for about $21 billion for 2020. This would translate into about 9.7x estimated 2022 earnings of $8.08.
Bristol-Myers declared their $0.45/share quarterly dividend.
BMY shares have ticked up about 2% in the past week.
The stock trades at a low 8.0x estimated 2021 earnings of $7.45. The generous 3.0% dividend yield is well-covered by the company’s enormous $13.5 billion in free cash flow likely this year. STRONG BUY
Broadcom (AVGO) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. CFO Tom Krause expects to continue paying the dividend and paying down debt in 2020 (none of which is maturing this year), even under poor economic conditions. Share buybacks and M&A activity are on the back burner for now.
The company reported healthy earnings, with revenues increasing 6% from a year ago, fractionally ahead of consensus estimates. Adjusted per-share earnings of $5.40 was about 5% higher than a year ago and about 3% higher than consensus estimates. Its third-quarter guidance was consistent with current estimates. Broadcom is heavily reliant on Apple’s iPhone – the recent delay in the next-generation, 5G iPhone will weigh on its near-term results but should be offset by extra strength in the fourth quarter.
AVGO shares resumed their upward climb, adding about 5% to their price this past week, and are now re-approaching their prior high.
We will finalize our price target for AVGO shares in next week’s edition.
Broadcom is a growth and income stock as well as a useful trading stock. Full-year profits are expected to grow 3% to $22.02 in FY2020 and then by 15% to $25.22 in FY2021. The shares trade at a 16.7x multiple of estimated FY2020 earnings, and pay a 3.5% dividend yield which appears sustainable. HOLD
Dow Inc. (DOW) is a commodity chemicals company with manufacturing facilities in 31 countries. In 2017, Dow merged with DuPont to temporarily create DowDuPont, then split into three parts in 2019 based on the newly-combined product lines. Today, Dow is the world’s largest producer of ethylene/polyethylene, which are the world’s most widely-used plastics. Dow is primarily a cash-flow story driven by two forces: 1) petrochemical prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; and 2) ongoing efficiency improvements (a never-ending quest for all commodity companies to maintain their margins).
Dow’s second-quarter earnings report was satisfactory, with revenues down 24% and profits turning negative, reflecting the sluggish economic conditions in the period. Cash flow was strong, and liquidity and the balance sheet remain sturdy. Dow will weather the downturn but its outlook is more subdued than we anticipated.
The company announced another asset sale this week, with a deal to sell Gulf Coast marine and terminal operations for $620 million to a private equity group. This sale is part of a strategic plan to reduce its non-core assets to improve its capital use and reduce debt.
Dow shares jumped about 7% this past week as investors appear to be incrementally shifting to more cyclical stocks. The shares have about 17% upside to our 60 price target.
The shares trade at a reasonable 17.5x estimated 2022 earnings of $2.91, although this is two years away. Valuation on estimated 2020 earnings of $0.74 is less meaningful as this assumes no recovery.
The high 5.5% dividend yield is particularly appealing for income-oriented investors. It has a small risk of a cut if the economic and commodity cycles remain subdued, although management makes a convincing case that the dividend will be sustained. HOLD
Total S.A. (TOT), based in France, is among the world’s largest integrated energy companies, with a global oil and natural gas production business, one of Europe’s largest oil refining/ petrochemical operations, and a sizeable gasoline retail presence. The company is also expanding somewhat aggressively into renewable and power generation business lines, including its 51% stake in SunPower (SPWR) and its holdings of recent spin-off Maxeon Solar Technologies (MAXN). Overall, the alternative energy initiatives may either be highly profitable or value-destructive.
While low energy prices have hurt Total like all integrated producers, the company’s low production costs (management claims its costs are below $30/barrel), efficient operations and sturdy balance sheet position it well relative to its peers. Also, the company’s production growth profile may still be among the best in the industry despite sharp capital spending reductions. The company maintains its confidence in its ability to pay its dividend as long as oil prices are above $40/barrel. With Brent prices holding at about $42, the high 7.8% dividend yield appears safe for now.
TOT shares have about 13% upside to our 43 price target.
Consensus estimates point to full-year EPS of $1.41 and $2.90 in 2020 and 2021, respectively. The company’s ADRs trade on the NYSE with one TOT share equal to one ordinary share. The P/E multiple of 13.1x estimated 2021 earnings reflects only partial recovery toward normalized earnings of around $4.00. At $4.00 in earnings, the shares trade at about 9.5x. TOT shares didn’t move much in the past week despite weaker oil prices. Investors should add to positions below 38. HOLD
BUY LOW OPPORTUNITIES PORTFOLIO
Columbia Sportswear (COLM) produces the highly-recognizable Columbia brand outdoor and active lifestyle apparel and accessories, as well as SOREL, Mountain Hardware, and prAna products. For decades, the company was successfully led by the one-of-a-kind Gert Boyle, who passed away late last year. The Boyle family retains a 36% ownership stake and Gert’s son Timothy Boyle remains at the helm.
Recent financial results were weak but better than consensus estimates. The balance sheet remains sturdy, with $476 million in cash yet a miniscule $3 million (not billion) in total debt.
Columbia’s shares continue to move up, gaining 4% this past week. The shares have gained about 15% since our recommendation and have about 8% more upside to our 100 price target. We will stay with our Buy rating for now, but as the stock is approaching our target we are evaluating a move to Hold.
The shares currently trade at 22.2x estimated 2021 earnings of $4.16. For comparison, the company earned $4.83/share in 2019. The stock has appeal for value investors and for growth investors with patience for what might be a slower recovery than other growth stocks. Traders will find COLM shares appealing given their sensitivity to consumer and economic re-opening trends. BUY
General Motors (GM) under CEO Mary Barra (since 2014) has transformed from a lumbering giant to a well-run and (almost) respected auto maker. The company has smartly exited many chronically unprofitable geographies (notably Europe) and trimmed its passenger car roster while boosting its North American market share with increasingly competitive vehicles, particularly light trucks. We consider its electric and autonomous vehicle efforts to be near industry-leading. Its GM Credit operations are well-capitalized but will be tested in the pandemic. The shares will remain volatile based on the pace of the economic re-opening, U.S.-China relations, its successes in improving its relevance to Chinese consumers, and the size of credit losses in its GM Financial unit.
We think the recently announced deals with Honda Motors and Nikola are positive. GM and Honda have collaborated on a variety of initiatives in the past, and any expansion of the relationship, particularly with the development of new technologies, is favorable in our view.
The Nikola deal has triggered a considerable amount of doubt around Nikola’s CEO and the degree to which the company has any actual products or technologies, as well as some doubt as to whether GM did adequate due diligence.
We think GM did enough due diligence, which is reflected in the terms of the deal. While GM is “buying” a $2 billion stake in Nikola (11% ownership), it is paying for it with in-kind services and materials, which will be contributed to the production of Nikola’s vehicles on GM production lines over a multi-year period. GM also gets a board seat, providing it with essentially unlimited access to any Nikola information it wants. Also, GM is essentially getting to test its new technologies on someone else’s vehicles.
If GM was simply writing a $2 billion check, with no board seat and taking a completely passive role, we would consider this a very poor decision that would rattle our confidence in Mary Barra. However, the deal as we understand it is a relatively savvy deal with minimal risk for GM.
Interestingly, Nikola came public via a SPAC (Special Purpose Acquisition Company) led by Steve Girsky. Girsky previously was an auto industry analyst for Morgan Stanley, transitioned to executive roles in the auto industry and eventually joined GM’s board of directors. We think Girsky has considerable credibility and almost certainly helped broker this deal as a trusted link between the two companies.
GM also announced that it will reveal and begin taking orders on October 20 for its new Hummer all-electric pickup truck, which apparently offers something it calls “crab mode.” For auto enthusiasts, the YouTube video helps explain it. This vehicle probably won’t be a needle-mover for GM’s profits but it is another step in the right direction.
We are placing a 45 price target on GM shares, about 42% above the current price. This implies an 8.2x multiple on 2022 estimated earnings of $5.50. GM shares ticked down about 3% in the past week, but that was due to the comparison with the spike last week. GM shares continue to generally move upward.
Current Wall Street estimates project EPS of $2.56 and $4.49 in 2020 and 2021, respectively. On the 2021 estimate, GM shares trade at a 7.0x multiple. GM remains an attractive cyclical stock for investors and traders. STRONG BUY
Molson Coors Beverage Company (TAP) – The thesis for this company is straightforward – a reasonably stable company whose shares sell at a highly-discounted price.
One of the world’s largest beverage companies, Molson Coors produces the highly-recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its $10 billion in net revenues are produced in the United States, where it holds a 24% share of the beer market.
Investors worry about the company’s lack of meaningful revenue growth, weak post-merger integration and continued margin pressure, along with the more recent weakness from Covid-19 stay-at-home orders that temporarily dried up much of the company’s revenues. Elevated debt also weighs on the shares. However, Molson Coors’ relatively stable revenues and cash flow should recover once the world’s economies more fully re-open. The debt on its investment grade balance sheet is readily serviceable and partly offset by $800 million in cash. Recent financial results have been encouraging. A new CEO is overseeing efforts to improve execution.
We anticipate that the company will resume paying a dividend mid-next year. A $0.35/share quarterly dividend is possible, which would provide a generous 3.7% yield on the current price.
The company announced some alliances this past week. First, it will partner with LA Libations to produce non-alcoholic beverages. And, it will form a joint venture with DG Yuengling & Sons, a nearly 200-year-old family-owned U.S. brewing company based in Pennsylvania. In the deal, Molson Coors will expand Yuengling’s distribution by producing and distributing Yuengling beers across the entire country except for three New England states.
Investors pushed down Molson Coors’ shares on the news, likely worried that the company is amenable to making an acquisition. We would be surprised if it did an acquisition, given its legitimate focus on maintaining its investment grade credit rating, as well as the low value of its stock. Essentially, Molson Coors doesn’t have the currency to make a smart acquisition of any size right now. We believe that management knows this, but investors apparently aren’t fully convinced, hence the share price decline. Molson Coors shares sold down by about 9% in the past week.
TAP shares have about 72% upside to our 59 price target. Patience is the key with Molson Coors shares. We think the value is solid although it might take a year or two to be recognized by the market. It is almost bizarre, in our view, that a reasonably stable food and beverage company like Molson Coors trades at perhaps half the multiple of typical consumer staples stocks.
At about 34, the shares trade at a highly discounted 9.5x estimated 2020 earnings of $3.62/share, and about 8.8x estimated 2021 per share earnings of $3.88. Curiously, both estimates ticked up a penny in the past week. While this is a microscopic increase, the important point is that they did not decrease.
On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.7x estimates. This is among the lowest valuations in the consumer staples group and well below other brewing companies. For investors looking for a stable company trading at an unreasonably low valuation in a strong momentum-driven market, TAP shares have considerable contrarian appeal. STRONG BUY
ViacomCBS (VIAC) is a major media and entertainment company, owning highly-recognized properties including Nickelodeon, Comedy Central, MTV and BET, the Paramount movie studios, Showtime and all of the CBS-related media assets. The company’s brands are powerful and enduring, typically holding the #1 market shares in the highest-valued demographic groups in the country. ViacomCBS’ reach extends into 180 countries around the world. Viacom and CBS re-merged in late 2019 and are now under the capable leadership of former Viacom CEO Robert Bakish.
Viacom is being overhauled to stabilize its revenues, boost its relevancy for current/future viewing habits and improve its free cash flow. Its challenges include the steady secular shift away from cable TV subscriptions, which is pressuring advertising and subscription revenues. The pandemic-related reductions in major sports are also weighing on VIAC shares. However, ViacomCBS’ extensive reach, strong market position and strategic value to other, much larger media companies, and its low share valuation, make the stock appealing.
Early progress is encouraging, as cash operating profits rose by 8% and were about 27% higher than analysts’ estimates in the second quarter.
ViacomCBS announced an agreement to sell its CNET Media Group for $500 million, in a deal previously anticipated. This helps free up capital to either be reinvested in new initiatives or to reduce Viacom’s debt. Also, the company’s streaming strategy continues to unfold, as it announced a re-branding of CBS All Access as Paramount Plus.
VIAC shares continue to move upward, gaining about 5% this past week. They have now eclipsed their June 2020 spike to 28.51. The stock has about 43% upside to our 43 price target.
ViacomCBS shares trade at about 7.4x estimated 2021 EBITDA, which we believe undervalues its impressive leadership and assets.
ViacomCBS shares offer a sustainable 3.2% dividend yield and look attractive here. BUY
SPECIAL SITUATION AND MOVIE STAR PORTFOLIO
Equitable Holdings (EQH) owns two principal businesses: Equitable Financial Life Insurance Co. and a majority (65%) stake in AllianceBernstein Holdings L.P. (AB), a highly respected investment management and research firm.
Acquired by French insurer AXA in 1992, Equitable began its return to independence with its 2018 initial public offering as part of a spin-off. AXA currently owns less than 10% of Equitable. With its new-found independence, Equitable is free to pursue new opportunities.
The company is well-capitalized and has significant liquidity. Its diverse, high-quality investment portfolio is hedged against adverse changes in interest rates and equity markets. While this year’s profits will decline about 9% due to higher mortality costs, they will likely recover sharply next year. Equitable expects to continue delivering a 50-60% payout ratio through dividends and share repurchases. The shares offer a 3.6% dividend yield.
Our price target for EQH shares is 28, which translates into about 5x estimated 2022 earnings of $5.77/share, or about .72x estimated tangible book value in a few years of $39/share (assuming no share repurchases).
EQH shares have slid about 5% in the past week, much of which occurred yesterday. The company presented at the Barclays Global Financial Services conference – its comments about the value of AllianceBernstein remaining part of Equitable may have disappointed investors hoping for a breakup. The shares now trade 5% below their 20 IPO price. Since then Equitable has arguably become a better company.
Like many insurance companies, investors often value Equitable on a book value basis. On this basis, EQH shares trade at 66% of its $28.68 book value, a considerable discount.
EQH shares are also undervalued on earnings, trading at 4.3x estimated 2020 earnings of $4.42. EHQ shares are appropriate for dividend investors, growth investors and traders. While the shares may trade in sync with the overall stock market, given its investment-driven operations, we see more upside than downside. STRONG BUY
Marathon Petroleum (MPC) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, a majority interest in midstream company MPLX LP, 10,000 miles of oil pipelines, and product sales in 11,700 retail stores.
Following its agreement to sell its Speedway retail gas station chain to the Japanese company Seven & i Holdings, the parent of the 7-Eleven chain for $21 billion in cash, Marathon will be losing a huge source of annual cash flow but also will be shedding as much as 30% of its $32 billion in debt (including debt of its MPLX pipeline subsidiary). Some of the proceeds will likely be returned to shareholders through share repurchases. Also, the company will likely have a leaner cost structure as it is closing two unprofitable refiners and cutting close to $1 billion in operating expenses.
At just above 32, MPC shares have continued to slip, losing 4% in the past week. Although the shares have 32% upside to our 41 price target, the uncertainty around the margin outlook keeps us, for now, from raising the shares to a Buy rating. The 7.5% dividend yield looks reasonably sustainable.
The shares will continue to trade near-term around the pace of the re-opening of the economy, on oil prices and the currently wide refiner margins, and possibly on hurricane-related sentiment (we’re in the heart of hurricane season).
Wall Street analysts are forecasting a 2020 full-year loss of $(3.25)/share, continuing a trend downwards. Estimates for 2021 earnings also continue to weaken as they reflect the lower post-Speedway earnings power but not necessarily the lower debt, and now are $0.55/share.
Like most energy stocks, MPC offers a useful vehicle for traders: its economics are closely tied to oil prices yet the company has a more stable business, with its refining, MPLX midstream, and retail operations that dampen its volatility and provide more downside protection relative to pure exploration or energy service companies. HOLD
