While the market action has been somewhat exciting this week (though in the wrong direction), it was fairly dull for Cabot Undervalued Stocks Advisor recommended stocks in terms of news. This news drought will fade as five companies report later this week, with six more the following week. In a market that is nervous about the pandemic, next week’s elections and the ongoing lack of a stimulus package, investors will look to this company-specific information to price the shares.
Anticipation and anxiety are both running fairly high about the election next week. Based on recent polls, about 45% of voters will be thrilled with the outcome, about 45% will be quite disappointed and about 10% will be non-committal about how they feel.
Given the sharp political divide in the country these days, it will be easy to let one’s emotional response to the outcome (assuming a clear winner is determined) drive their investing decisions. Regardless of whether you are in the “whew, the country’s future has been saved” camp or the “oh no, the country is toast” camp, it’s important to make investing decisions based on the valuation and fundamentals of each security. We have a saying, “stocks don’t know who you voted for,” to convey the importance of separating emotions from investing when deciding whether to buy or sell a specific stock.
Our only political commentary about the election is to stress the importance of voting. From a big-picture perspective, it is imperative that as many registered voters as possible cast their ballots. More voters means a clearer picture about who people want as their governmental leaders. Also, as a college professor once reminded me long ago, voting gives each voter the legitimate right to complain (he used a more colorful word) about things. This alone could be reason enough to be counted.
Share prices in the table reflect Tuesday (October 27) closing prices. Please note that prices in the discussion below are based on mid-day October 27 prices. Send questions and comments to Bruce@CabotWealth.com.
Upcoming Earnings Releases
October 28: MKS Instruments (MKSI)
October 29: Columbia Sportswear (COLM)
October 29: Molson Coors Beverage Company (TAP)
October 29: Quanta Services (PWR)
October 30: Total S.A. (TOT)
November 2: Marathon Petroleum (MPC)
November 4: Equitable Holdings (EQH)
November 5: Voya (VOYA)
November 5: Universal Electronics (UEIC)
November 5: General Motors (GM)
November 6: ViacomCBS (VIAC)
TODAY’S PORTFOLIO CHANGES
No changes
LAST WEEK’S PORTFOLIO CHANGES (October 21 letter)
Columbia Sportwear (COLM) – from Buy to Hold
Quanta Services (PWR) – from Buy to Hold (raising price target to 64 from 61)
GROWTH PORTFOLIO
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.
There was essentially no news on the stock this past week. MKSI reports earnings after the market closes on Tuesday, October 27, and after our publishing deadline. The consensus earnings estimate is $1.78.
MKSI shares fell 4% this past week, as the market overall has been sloppy. Quarterly earnings are a primary mover of the shares, so we view the recent moves as mostly noise. The shares have about 19% upside to our 130 price target.
Valuation remains reasonable at 14.0x estimated 2021 earnings of $7.83. The estimate is unchanged from last week. HOLD
Quanta Services (PWR), based in Houston, Texas, is a mid-cap provider of specialized engineering and technical services to the electrical power, telecom and natural gas pipeline industries. Over 65% of its revenues are produced from regulated electric, gas and other utility companies. Quanta emphasizes highly predictable, non-discretionary installation, upgrade, maintenance and repair contracts that provide it with a healthy flow of recurring revenues. While construction contracts produce about half of its revenues, these are primarily lower-risk transmission, distribution and substation projects that are essential to its customers.
Quanta’s strategic priorities emphasize growing its base business, increasing its margins and creating new growth platforms. It is migrating toward low capital-intensity contracts, helping reduce its risks. The company is well-positioned to benefit from growing demand for renewable energy, including solar, wind and hydro-powered electricity generation, as it provides critical services to integrate these into the power grid. Its small (about 5% of revenue) telecom operations continue to grow sharply, with future growth prospects bolstered by the transition to 5G-based infrastructure.
There was essentially no news on the company in the past week. Quanta reports earnings on October 29, pre-market. The consensus earnings estimate is $1.09.
PWR shares dipped about 3% this past week, with about 4% upside to our recently-boosted 64 price target.
The stock trades at 18.3x estimated 2020 earnings of $3.35 and about 15.0x estimated 2021 earnings of $4.08. The 2021 estimate ticked up a cent in the past week. On estimated 2021 EBITDA, the shares trade at 8.9x EV/EBITDA. With PWR close to our (new) price target, we moved the shares to a Hold rating. HOLD
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. 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 has lower margins) compared to its food processor peers.
New CEO Dean Banks officially took the CEO role on October 3. Given his lack of industry experience but strengths in technology, we will be watching what changes he makes.
There was no news on Tyson for the week.
TSN shares ticked up about 1% this past week and remain at the bottom of their 58-65 trading range. The stock has 28% upside to our 75 price target.
Tyson currently trades at 11.7x estimated 2020 earnings of $5.03/share and 10.0x estimated 2021 earnings of $5.86. The 2021 estimate ticked down a cent in the past week. Currently the stock offers a 2.9% dividend yield. While the shares may take some time to recover, we are staying with the name. 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.
There was no meaningful news this week for UEIC.
UEIC shares rose about 4% in the past week, and have 17% upside to our 47 price target.
UEIC shares trade at 11.3x estimated 2020 earnings of $3.56 and 9.3x estimated 2021 earnings of 4.31. Both estimates were unchanged compared to last week.
We are patient for now with UEIC shares because of the larger opportunity on the horizon, potential for better results in the third and/or fourth quarters, and the increasingly low valuation. 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 (32% implied upside).
There was essentially no news on the stock this past week. For Voya’s upcoming earnings report, we expect some higher costs related to Covid mortality and write-offs related to lower interest rates. We anticipate an update on the pending closing of its life insurance business. When completed, Voya will likely step up its share repurchases.
Voya shares fell 3% in the past week, generally following along with the market’s volatility. The shares will likely continue to move with the overall market, reflecting theoretical changes in the value of its investment portfolio, and thus its book value. However, the company is relatively well-hedged, and the fixed income markets remain sturdy, limiting the effects on Voya’s balance sheet strength. The stock has about 25% upside to our 62 price target.
VOYA trades at 13.3x estimated 2020 per-share earnings of $3.74 and 8.3x estimated per-share earnings of $5.96. The 2020 estimate rose a cent this past week. 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. We are looking for Bristol-Myers to return to overall revenue growth, both from resilience in their key franchises (Opdivo, Revlimid and Eliquis) and from new products currently in their pipeline. We also want to see the company execute on its $2.5 billion cost-cutting program. We see most of these initiatives remaining intact after it completes the MyoKardia acquisition.
Like most biopharma companies, Bristol frequently issues news releases regarding its various treatments. Unless they meaningfully either strengthen or weaken our view on the company, we likely won’t comment on them here. It was generally a quiet news week for Bristol.
BMY shares fell 2% in the past week. The shares have about 30% upside to our 78 price target.
The stock trades at a low 8.0x estimated 2021 earnings of $7.41 (estimate dipped 1 cent from last week). The 3.0% dividend yield is well covered by the company’s enormous $13.5 billion in free cash flow likely this year. BUY
Broadcom, Inc. (AVGO) designs, develops and markets semiconductors (about 72% of revenues) that facilitate wireless communications. The company’s foundation is its #1 industry position in high performance RFIC (radio frequency integrated circuits), whose use in high-end smartphones has driven Broadcom’s growth and profits. About 25% of total revenues come from chips that go into high-end smartphones, with Apple providing about 20% of Broadcom’s total revenues. The company also provides software that runs technology infrastructure including telecom and corporate networks (about 28% of total revenue).
Apple’s new phone announcements will restore some growth to the iPhone volumes but we don’t expect a “supercycle” with this round of phones. While we are enthusiastic about the adoption of 5G telecom technology, it might take another 5-10 years to fully develop. This round of 5G phones will be helpful to Apple, and thus supportive of Broadcom’s chip sales.
It was a quiet news week for Broadcom. While there have been some large chip company deals lately (including AMD buying Xilinx, SK Hynix buying Intel’s flash memory chip unit, Nvidia buying ARM Holdings, Analog Devices buying Maxim Integrated Products), we don’t expect Broadcom to be a buyer, given its commitment to reduce its debt. However, with a personality-run company like Broadcom, there is always the possibility of a deal. Bite-sized at $10 billion market cap, ON Semiconductor (ON) could be on the menu, but we’d readily admit that this is more of an example of a target as we otherwise would be purely speculating.
AVGO shares slipped about 4% in the past week. The stock has about 13% upside to our 410 price target.
The shares trade at 16.4x estimated FY2020 earnings of $22.05 and 14.4x estimated FY2021 earnings of $25.21. Both estimates were unchanged in the past week. The shares pay a 3.6% dividend yield. 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 reported third quarter earnings of $0.50/share, down 45% from a year ago. The results were well-ahead of the $0.31/share consensus estimate. Dow’s actual earnings (using GAAP accounting) were a ($0.04)/share loss, but the company adjusted this for $0.54/share in various charges and a gain on the sale of their railroad infrastructure assets, to arrive at the $0.50/share number. We’re generally fine with these adjustments as long as they are clearly one-time rather than recurring, have clear merit within the context of the company’s strategy, and eventually lead to better “clean” results.
Revenues fell 10% from a year ago but in-line with estimates. The company delineates the sources of the decline using a straightforward price x volume disclosure. Local prices fell 9% with no impact from currency, while volumes fell 1%.
Operating EBITDA, a scrubbed measure of cash operating profits excluding the various charges and gains, fell 20% from a year ago, to $1.5 billion, largely due to the weaker sales but partly offset by cost-cutting.
Compared to the pandemic-damaged second quarter, Dow saw healthy sequential gains in revenues (+16%) and a near-doubling (+96%) of its Operating EBITDA.
Overall, Dow is making progress toward its strategic goals. Free cash flow, which they define as cash from operations, including working capital changes, less capital spending, was a healthy $1.5 billion. This was actually higher by $156 million compared to a year ago. The company also received $315 million from its rail asset sale and will receive another $620 million in the fourth quarter from its marine/terminal asset sale. So far this year, Dow has reduced its debt net of cash by 12%, or about $1.8 billion. This is fairly impressive given everything that has happened this year.
Their cost-cutting appears to be making progress and the CEO said they remain on track for $300 million in cuts this year. Management provided an encouraging outlook.
Dow shares fell about 4% this past week and have about 27% upside to our 60 price target.
The shares trade at a reasonable 15.0x estimated 2022 earnings of $3.14, although this is two years away. This estimate rose about 6 cents, or 2%, for the week, partly driven by the stronger-than-expected earnings report. We would expect small additional increases over the next week or so as analysts update their estimates.
Valuation on estimated 2020 earnings of $1.42 is less meaningful as this assumes no recovery, although we note that this estimate was only $0.85 three weeks ago. Dow’s strong third quarter is driving the increase.
The high 5.9% dividend yield is particularly appealing for income-oriented investors. Dow currently is more than covering its dividend and management makes a convincing case that it will be sustained. However, there is a small risk of a cut if the economic and commodity recoveries unravel. 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 spinoff 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.
Total was awarded 67 megawatt-peak solar projects in France, helping consolidate its position as the country’s second-largest solar power developer.
The company is expected to report earnings on October 30th. Due to different conventions by data services for aggregating, converting and normalizing Total’s earnings estimates, there doesn’t appear to be a usable consensus estimate.
The shares provide a 10.0% dividend yield. Total has said that, in essence, their dividend is safe as long as Brent oil prices remain above $40/barrel. Brent crude (the London-based benchmark) prices fell back to about $41 on Monday but have lifted modestly since. One might best consider about half of the dividend safe, and the other half more speculative based on oil prices.
TOT shares slipped 7% this past week. Investors worry about rising Covid cases, especially in Europe, which increases the risk of new demand-weakening stay-at-home orders. Total’s shares have about 39% upside to our 43 price target.
TOT shares trade at 10.8x estimated 2021 earnings of $2.85 and 7.5x estimated 2022 earnings of $4.10. The 2022 estimate slipped by 5 cents this past week. We would consider the 2022 estimate to reflect “normalized” earnings.
The shares have slid below the 33 support and investor sentiment is awful. Given the increasingly volatile (weak) commodity prices, we are less likely to want to add to our position on weakness. The company’s ADRs trade on the NYSE with one TOT share equal to one ordinary share. 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.
There was essentially no news on Columbia in the week. The company reports earnings on October 29th, with the consensus earnings estimate at $1.26.
Columbia’s shares were rose 4% this past week. The shares have about 4% more upside to our 100 price target. With little upside, we have the shares rated a Hold. We think the company remains well-positioned but given its exposure to consumer spending that may remain dampened, we are sticking to our price target and the fundamental assumptions behind it.
The shares trade at 22.7x estimated 2021 earnings of $4.22. The earnings estimate increased by 4 cents from a week ago. For comparison, the company earned $4.83/share in 2019. HOLD
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 spinoff. AXA currently owns less than 10% of Equitable. With its newfound 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. Equitable has continued its share repurchase program through the pandemic.
AllianceBernstein shares (AB) are modestly attractive in their own right. While the price spike on the Morgan Stanley/Eaton Vance merger news took away a lot of the appeal, the stock has fallen back recently. The company reported decent (but not stellar) earnings last week. Our October 14th note has more color on AllianceBernstein.
We currently don’t expect much change in Equitable’s ownership stake in AllianceBernstein. Buying the remaining stake would be potentially expensive and may entail the loss of the favorable tax rates. And, Equitable receives steady cash flows with minimal capital requirements, so it may be reluctant to part with its stake.
There was essentially no other news on Equitable this past week. For Equitable’s upcoming earnings report, we expect some higher costs related to Covid mortality and write-offs related to lower interest rates.
EQH shares slipped about 4% this past week and have about 46% upside to our 28 price target. The shares continue to trade around their 20 IPO price.
Like many insurance companies, investors often value Equitable on a book value basis. On this basis, EQH shares trade at 67% of its $28.68 tangible book value, a considerable discount. We note that the book value will likely move around some in the third and fourth quarters, depending on the timing of the mark-to-market of its private equity investments and other factors.
EQH shares are also undervalued on earnings, trading at 4.3x estimated 2020 earnings of $4.46 (estimate is up 1 cent from a week ago). While the shares may trade in sync with the overall stock market, given its investment-driven operations, we see more upside than downside. The shares offer a 3.5% dividend yield. STRONG 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 as the pandemic unfolds. Near-term, the shares will trade based on progress with a federal stimulus plan, the general U.S. economic outlook, trends in light vehicle sales, its progress with alternative vehicles and of course its earnings, which will be reported pre-market on November 5th.
No definitive news has emerged yet on the outcome of the Nikola negotiations, but we expect some agreement by the December 3 deadline. Even that date is subject to change if needed. We think that GM will likely retain the partnership but take a higher equity stake either directly or through some type of warrants.
GM reported that they have sold out of their first year of production for the new $99,995 list price GMC Hummer EV, which will start production in fall, 2021. While likely small in terms of profits, it is huge in terms of showcasing GM’s ability to compete in electric vehicles, assuming the GMC Hummer EV is reliable.
This past week, GM shares slipped about 1%, but have gained about 38% since the end of June. The stock has about 27% upside to our 45 price target. The target price implies 8.2x multiple on 2022 estimated earnings of $5.50.
GM shares trade at 12.7x estimated 2020 earnings of $2.80 and 7.4x estimated 2021 earnings of $4.79. Both estimates moved up from a week ago. GM remains an attractive cyclical stock. 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). The deal will likely close in early 2021. Some of the proceeds will likely be returned to shareholders through share repurchases.
There was essentially no news on Marathon Petroleum this past week.
MPC shares fell about 2% in the past week. Although the shares have 43% upside to our 41 price target, the uncertainty around the margin outlook keeps us, for now, from raising the shares to a Buy rating.
However, we have done further research into the industry and are finding that, given the sharp stock price sell-offs, these stocks may have considerable appeal for highly-risk-tolerant investors who can wait perhaps a year or two.
Near-term, the margin and volume outlook is humbling to say the least, as the rising number of Covid cases threatens a return to stay-at-home orders. However, we believe that eventually a combination of vaccine/prevention/saturation will boost the demand for oil products. Interestingly, the surge in to-the-front-deliveries has kept the demand for diesel fuel used by trucks relatively sturdy.
The shares will continue to trade near-term around progress on a federal stimulus plan, the pace of the economic recovery and gasoline/jet fuel consumption, on oil prices and refiner margins, and possibly on any hurricane-related sentiment (the season technically runs until November 30). An emerging issue is the possibility of a Democratic sweep in the upcoming election; oil refiners would be particularly exposed to higher corporate income tax rates and bans on fracking (which could increase the input cost of their domestic oil supplies).
The shares trade at 12.1x estimated 2022 earnings of $2.37. This estimate fell as major brokerage firms become more pessimistic on refining profits. The 2022 estimate is a reasonable proxy for “normalized” even though it is two years away. Estimates are for a loss of $(4.09) this year and a loss of $(0.81) in 2021. The 2020 estimate improved modestly but the 2021 estimate deteriorated.
Like most energy stocks, MPC offers a useful vehicle for traders: its economics are closely tied to oil prices yet the company has stabilizing operations like its refining and MPLX midstream businesses (although these are being sold). The large and pending cash inflow from the Speedway sale provides additional balance sheet stability and downside protection relative to most other energy companies. The 8.1% dividend yield looks reasonably sustainable unless the economic conditions remain subdued for an extended period. HOLD
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’ primary worry about Molson Coors is its lack of meaningful (or any) revenue growth as it has relatively few of the fast-growing hard seltzers and other trendier beverages in its product portfolio. So, the key is for revenues to be stable or slightly positive – rapid growth is not necessary for the stock to work as this is a revenue and cash-flow stability story.
Any indication that it is building its “alternative” beverage capabilities would be positive, as would resilience/recovery in its core beer volumes. Other concerns, like its modestly elevated (but investment grade) debt and the size/stability of its free cash flow, generally stem from the revenue debate. 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 4.1% yield on the current price.
A recent industry report showed reasonably stable overall demand for beer and other alcoholic beverages in September, providing some encouragement for the Molson Coors story. We will find out more when Molson Coors reports on October 29th. The consensus earnings estimate is $1.03.
TAP shares slipped 1% in the past week. The shares have about 71% upside to our 59 price target.
The shares trade at 9.6x estimated 2020 earnings of $3.59 and 8.9x estimated 2021 earnings of $3.88. Both estimates are unchanged from last week. These valuations are remarkably low.
On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.8x estimates, 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 momentum-driven market, TAP shares have considerable contrarian appeal. 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. STRONG BUY
Terminix Global Holdings (TMX) is both a new company and an old company. While the name “Terminix” is one of the largest and most widely recognized names in pest control, the company previously was obscured inside of the ServiceMaster conglomerate. With the sale of its ServiceMaster Brands operations recently completed, the company changed its name to Terminix and started trading under the TMX ticker symbol on October 5th.
Terminix shares fell sharply last year due to new disclosures about its legal liability from deficient termite treatments. These liabilities will likely cost the company upwards of $100 million or more.
In early 2020, the company fully addressed its problems by removing the CEO, announcing plans to divest its non-pest control operations, and ring-fencing the termite treatment liabilities. These steps should allow the company to put its difficult past behind it. In August, Brett Ponton, former head of Monro (MNRO) joined as the new CEO. His leadership at Monro led to sales growth and a strong recovery in its share price. Our expectation is that he will bring sales growth, operational efficiency and integrity to Terminix, ultimately leading to a higher share price.
There was little news on Terminix in the past week. Terminix shares were unchanged in the past week and have 20% remaining upside to our 57 price target.
Reliable consensus earnings estimates are not yet available, but we anticipate that 2022 estimates will settle at around $1.60/share. This would put the TMX multiple at a high 29.7x, but we recognize that these types of companies generally are valued on EV/EBITDA. On this basis, the shares trade at about 16.5x EBITDA.
Major risks include the possibility of new disclosures that would significantly increase the company’s litigation expenses, difficult industry competition that may exert pricing pressure, and possible execution risks by the new leadership. TMX shares carry more risk than our typical recommendations, but if its litigation and sub-par margins are behind them, we see a clear path to a higher stock price.
With a reasonable valuation, solid balance sheet, renewed focus and better revenue and margin outlook, there is a lot to like about Terminix. 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.
There was very little meaningful news on Viacom this past week. We’re intrigued by Viacom’s streaming push. With Disney’s major change in strategy to emphasize streaming, Viacom’s increasingly unified streaming service becomes more attractive as an acquisition target, particularly with the company’s relatively small $17.8 billion market cap.
VIAC shares ticked up about 3% this past week and have about 51% upside to our 43 price target.
ViacomCBS shares trade at about 7.3x estimated 2021 EBITDA, which we believe undervalues the company’s impressive leadership and assets. On a price/earnings basis, VIAC shares trade at 6.1x estimated 2021 earnings of $4.63 (estimate ticked up from a week ago). ViacomCBS shares offer a sustainable 3.4% dividend yield and look attractive here. BUY
