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Value Investor
Wealth Building Opportunites for the Active Value Investor

February 23, 2022

Mike Tyson inadvertently offers sage advice for investors. We add a new Buy, two stocks are approaching our price targets so we put them under review, and one stock surges following a shareholder-friendly payout announcement.

“Everybody has a plan until they get punched in the mouth.”
Former heavyweight boxing champion Mike Tyson’s quote, above, was his response to questions about how opponents would plan to fight him. The other boxers could prepare all they wanted, he implied, but once in the ring, they are going to get hit, perhaps in ways not fully anticipated, and those hits are going to hurt.

Little did Mike know that he was giving sage advice to investors.

Inflation is surging and the Fed is giving plenty of notice to investors that interest rates are going up. Taking the cue, financial analysts and mainstream news commentators are providing a steady stream of predictions about the size and timing of the upcoming rate hikes. Everyone has time to plan and no one should be surprised when interest rates are officially raised.

Once the Fed starts lifting rates, however, the knock-on effects will be hard to predict. History is littered with financial accidents due to rising interest rates, including the global financial crisis a decade ago and the Long-Term Capital Management debacle from 1998. The steady decline of interest rates over the past decade may have stanched the flow of accidents, but it hasn’t permanently outlawed them. This rate cycle will likely produce at least a few. Some fund somewhere will be caught off-guard. The blow-up could spill over and create a financial contagion across the markets.

Investors should, must, plan for rate hikes. This doesn’t mean heading for the bunkers. Rather, it includes locking in low interest costs, securing lines of credit, reducing risk exposures whether in stocks or other investments, and building some extra cash. It means getting a buy-list ready to take advantage of others’ panicked selling. It means developing an awareness that the range of outcomes over the next year or two could be a lot wider and more unconventional/unexpected than recent history might suggest. And, it means getting psychologically ready to get hit in ways that might be unexpected. Like Mike’s punches, the hits are going to hurt. But, with preparation, they may not hurt quite so much, especially if investors have some counter-punches ready to go.

Scheduling notice:
Your chief analyst will be traveling next week, so the regular monthly edition of the Cabot Undervalued Stocks Advisor will be published on Wednesday, March 9. There will be no weekly update next week.

Share prices in the table reflect Tuesday (February 22) closing prices. Please note that prices in the discussion below are based on mid-day February 22 prices.

Note to new subscribers: You can find additional color on our thesis, recent earnings reports and other news on recommended companies in prior editions of the Cabot Undervalued Stocks Advisor, particularly the monthly edition, on the Cabot website.

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Today’s Portfolio Changes
Allison Transmission Holdings (ALSN) – New Buy
The Coca-Cola Company (KO) – From Buy to Buy/Under Review (approaching price target)
Arcos Dorados (ARCO) – From Buy to Buy/Under Review (approaching price target)

Last Week’s Portfolio Changes

Upcoming Earnings Reports
Wednesday, February 23: Molson Coors (TAP)
Wednesday, March 2: Aviva plc (AVVIY)
Wednesday, March 16: Arcos Dorados (ARCO)

Growth/Income Portfolio
Bristol-Myers Squibb Company (BMY) shares sell at a low valuation due to worries over patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026). However, the company is working to replace the eventual revenue losses by developing its robust product pipeline while also acquiring new treatments (notably with its acquisitions of Celgene and MyoKardia), and by signing agreements with generics competitors to forestall their competitive entry. The likely worst-case scenario is flat revenues over the next 3-5 years. Bristol should continue to generate vast free cash flow, has a solid, investment-grade balance sheet, and trades at a sizeable discount to its peers.

On February 4, Bristol-Myers reported healthy fourth-quarter results and reiterated its reasonably encouraging full-year 2022 guidance for flat revenues and a 4% earnings per share growth. The core business appears likely to perform well even as sales of Revlimid (27% of total revenues) could slide by 25% as the treatment loses patent protection. Sales rose 8% (ex-currency) and were in line with estimates, while adjusted earnings rose 25% and were modestly above estimates.

The company maintained its long-term 2-5% revenue growth and low to mid-40s operating margin targets as well as its outlook that it will generate $45-$50 billion in free cash flow from 2022-2024. If met, these results would be plenty strong enough to boost Bristol’s shares significantly. Bristol’s balance sheet remains sturdy.

We highlighted Bristol-Myers in the recent Cabot Turnaround Letter as a “like watching paint dry” stock that may be boring to watch but should ultimately provide a strong return for investors.

BMY shares slipped 1% in the past week and have about 16% upside to our 78 price target. Valuation remains low at 8.6x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 8.1x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.

Assuming an average of $15 billion/year in free cash flow, the shares trade at a 10% free cash flow yield.

Either we are completely wrong about the company’s fundamental strength, or the market must eventually recognize Bristol’s earnings stability and power. We believe the earning power, low valuation and 3.2% dividend yield that is well-covered by enormous free cash flow make a compelling story. BUY

Cisco Systems (CSCO) is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.

On February 16, Cisco reported encouraging fiscal second-quarter results that suggest that the company is making progress with its growth initiatives. Revenues rose 6% from a year ago (although 2 points of this were due to acquisitions) and were in line with the consensus estimate. Adjusted earnings of $0.84/share increased 6% and were about 4% above the $0.81 consensus estimate. Cisco removes stock-based compensation expenses from its adjusted earnings – a dubious practice but because they consistently do this, we can gauge the changes in underlying earnings with reasonable effectiveness. Forward guidance for the third quarter and full year were also encouraging as these pointed toward respectable revenue and earnings growth.

The company said that product orders rose a healthy 33%, such that it has a record-high product backlog of $14 billion, up 150% from a year ago. Demand for Cisco’s products remains strong, yet the backlog increase is partly due to unfilled orders that are accumulating due to supply constraints. Services revenue fell 1% as the company said that it couldn’t deliver on hardware support contracts due to supply constraints. The annualized recurring revenue base grew 11%, indicating better visibility as the company transitions to a subscription-based model.

Cisco’s gross margin of 65.5% eroded from 66.9% a year ago but improved from the first quarter. The decay is due to the rising importance of products, which generally carry lower margins than services, as well as decaying product margins. Healthy control of operating expenses helped maintain a relatively steady operating margin.

The company raised its dividend by 3% (or 1 cent). It also increased its share repurchase program by $15 billion to a total of $18 billion but assigned no end date. Cisco repurchased an impressive $4.8 billion of shares in the second quarter. The balance sheet has $9.6 billion of debt net of cash, down 26% from the July fiscal year end. Cash flow was healthy but restrained by advance payments to secure components.

CSCO shares rose 4% in the past week and have 17% upside to our 66 price target. The dividend yield is an attractive 2.7%. BUY

The Coca-Cola Company (KO) is best-known for its iconic soft drinks yet nearly 40% of its revenues come from non-soda beverages across the non-alcoholic spectrum. Its global distribution system reaches nearly every human on the planet. Coca-Cola’s longer-term picture looks bright but the shares remain undervalued due to concerns over the pandemic, the secular trend away from sugary sodas, and a tax dispute which could cost as much as $12 billion (likely worst-case scenario). The relatively new CEO James Quincey (2017) is reinvigorating the company by narrowing its oversized brand portfolio, boosting its innovation and improving its efficiency, as well as improving its health and environmental image. Coca-Cola’s balance sheet is sturdy, and its growth investing, debt service and dividend are well-covered by free cash flow.

On February 10, Coca-Cola reported strong fourth-quarter results and provided a favorable 2022 outlook. Revenues of $9.5 billion rose 10% from a year ago and were about 7% above estimates as demand for Coca-Cola’s products, as well as pricing, are rebounding. Adjusted earnings fell 5% due to elevating marketing spending but were 10% above estimates. The company’s strategy of emphasizing its more dominant brands and boosting its marketing effectiveness appears to be working.

For 2022, the company guided to 7-8% organic revenue growth, driven by higher volumes, favorable mix changes and incrementally higher pricing. Organic earnings per share growth was guided to +5-6%. We think the company is being conservative with guidance. And, as long as Coke continues to generate strong free cash flow and produces solid revenue growth, most investors won’t care about lackluster earnings per share growth.

There was no significant company-specific news in the past week.

KO shares rose 2% in the past week. We are reviewing this stock’s rating given its limited 3% upside to our current 64 price target. BUY/Under Review

Dow Inc. (DOW) merged with DuPont to create DowDuPont, then split into three companies in 2019 based on product type. The new Dow is the world’s largest producer of ethylene/polyethylene, the most widely used plastics. Investors undervalue Dow’s hefty cash flows and sturdy balance sheet largely due to its uninspiring secular growth traits, its cyclicality and concern that management will squander its resources. The shares are driven by: 1) commodity plastics prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; 2) volume sold, largely driven by global economic conditions, and 3) ongoing efficiency improvements (a never-ending quest of all commodity companies). We see Dow as having more years of strong profits before capacity increases signal a cyclical peak, and expect the company to continue its strong dividend, reduce its pension and debt obligations, repurchase shares slowly and restrain its capital spending.

Industry conditions will likely be strong for a while. Dow remains well-positioned to generate immense free cash flows over the next few years, even as the stock market cares little about cash but rather is focused on the incremental newsflow related to economic growth, energy prices and any industry capacity changes. In the meantime, Dow shareholders can collect a highly sustainable 4.6% dividend yield while waiting for more share buybacks, more balance sheet improvement, more profits and a higher valuation.

On January 27, Dow reported a strong quarter. Revenues grew 34% and were about 1% above consensus estimates, while earnings grew sharply compared to a weak year-ago result and were slightly above consensus estimates. Higher prices, up 39%, drove the strong results, as volumes fell. Operating expenses rose only moderately. Free cash flow, much of which the company is returning to shareholders, was impressively strong.

Dow guided for a strong first quarter, with adjusted EBITDA to increase about 20%, which would be significantly above the consensus estimate. The results and guidance are generally supportive of our “stronger for longer” view.

Dow shares remain inexpensive. The stock price is rising but so are earnings and cash flow estimates, such that the already-low valuation multiples aren’t increasing. Holding back Dow shares are concerns about the sustainability of the current price and volume trends later in 2022 and into 2023 and beyond. We continue to keep our 78 price target and watch the dividends and internal cash flow build up while we wait.

There was no significant company-specific news in the past week.

Dow shares fell 3% in the past week and have 29% upside to our 78 price target. BUY

Merck (MRK) shares are undervalued as investors worry about Keytruda, a blockbuster oncology treatment (about 30% of revenues) which faces generic competition in late 2028. Also, its Januvia diabetes treatment may see generic competition next year, and like all pharmaceuticals it is at risk from possible government price controls. Yet, Keytruda is an impressive franchise that is growing at a 20% rate and will produce solid cash flow for nearly seven more years, providing the company with considerable time to replace the potential revenue loss. Merck’s new CEO, previously the CFO, is accelerating Merck’s acquisition program, which adds return potential and risks to the story. The company is highly profitable and has a solid balance sheet. It spun off its Organon business last June and we think it will divest its animal health segment sometime in the next five years.

On February 3, Merck reported reasonably good fourth-quarter results that were better than estimates, and provided encouraging full-year 2022 guidance. The core business is performing well, with Keytruda sales rising 16% and Gardasil sales jumping 50%, but investors remain unconvinced about Merck’s ability to replace the eventual loss of Keytruda and other products that face generic competition in coming years, despite a reasonably convincing pipeline discussion on the conference call. Overall sales rose 23% and adjusted earnings rose 84%. Merck did not disclose balance sheet or cash flow data, so we will wait for the 10Q in a few weeks.

The Merck story continues to require considerable patience but remains on track.

There was no significant company-specific news in the past week.

Merck shares fell 2% in the past week and have about 30% upside to our 99 price target. The company has a strong commitment to its dividend (3.6% yield) which it backs up with generous free cash flow, although its shift to a more acquisition-driven strategy will slow the pace of dividend increases. BUY

Buy Low Opportunities Portfolio
New Buy: Allison Transmission Holdings, Inc. (ALSN) – Allison Transmission is a midcap ($6.4 billion market cap) manufacturer of vehicle transmissions with about $2.7 billion in revenues. About 76% of sales are produced in North America. Many investors reflexively dismiss this company, viewing it as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world. However, this view would be incorrect. Allison produces no car and light truck transmissions, instead it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Its 35% EBITDA margin is sharply higher than its competitors and on-par with many specialty manufacturers. And, it is a leading producer and innovator in electric axles which all electric trucks will require. Another indicator of its advanced capabilities: Allison was selected to help design the U.S. Army’s next-generation electric-powered vehicle.

The company generates considerable free cash flow, which has helped it maintain a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years. The shares were highlighted in our latest Cabot Turnaround Letter as a “like watching paint dry” stock, and as it fit our 13F criteria, as noted value investment firm Polaris Capital Management recently took a sizeable position (1.5% stake) in the company. Allison shares offer an attractive 1.9% dividend yield.

Valuation at 6.8x estimated 2022 EBITDA is below the company’s historical average and undervalues its franchise and financial strength. We are putting a 48 price target on ALSN shares. From a tactical perspective, investors may want to establish a starter position here, then add if the shares exhibit significant weakness. BUY

Arcos Dorados (ARCO), which is Spanish for “golden arches,” is the world’s largest independent McDonald’s franchisee. Based in stable Uruguay and listed on the NYSE, the company produces about 72% of its revenues in Brazil, Mexico, Argentina and Chile. The shares are depressed as investors worry about the pandemic, as well as political/social unrest, inflation and currency devaluations. However, the company has a solid brand and high recurring demand and is well-positioned to benefit as local economies reopen. The leadership looks highly capable, led by the founder/chairman who owns a 38% stake, and has the experience to successfully navigate the complex local conditions. Debt is reasonable relative to post-recovery earnings, and the company is currently producing positive free cash flow.

Macro issues, including issues in Brazil including its economic conditions (in particular, inflation, running at a 10.4% rate), currency and the chances that a socialist might win next year’s Brazilian presidential elections will continue to move ARCO shares. Brazil is one of the most Covid-vaccinated countries in the world, which reduces pandemic-related demand risks.

On January 26, the company released strong preliminary fourth-quarter results. Same-store sales compared to two years ago (pre-pandemic) rose 24% and Adjusted EBITDA rose above the prior quarterly record which was set in the fourth quarter of 2019. The company has a reasonably aggressive new store opening plan – an encouraging indicator of its confidence in its future. There was no transcript or other details from Arcos’ recent presentation at the Credit Suisse 2022 Latin America Investment Conference, but there was likely no incremental news, either. Arco reports full results on March 16.

There was no significant company-specific news in the past week.

ARCO shares continued their march higher, rising 3% in the past week, leaving only 3% upside to our 7.50 price target. We remain steady in our conviction in the company’s recovery, but are reviewing our price target. BUY/Under Review

Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc was hired as the new CEO in July 2020 to revitalize Aviva’s laggard prospects. She divested operations around the world to re-focus the company on its core geographic markets (U.K., Ireland, Canada), and is improving Aviva’s product competitiveness, rebuilding its financial strength and trimming its bloated costs. Aviva’s dividend has been reduced to a more predictable and sustainable level with a modest upward trajectory. Excess cash balances are being directed toward debt reduction and potentially sizeable special dividends and share repurchases.

Much of our interest in Aviva is based on its plans for returning its excess capital to shareholders, including share repurchases and dividends. These distributions could be substantial. We also look for incremental shareholder-friendly pressure from highly regarded European activist investor Cevian Capital, which holds a 5.2% stake.

Two directors will be retiring from the board, with one new director being added. The addition, Andrea Blance, has considerable financial industry experience, although we have no insight into the role, if any, that Cevian Capital played in the changes.

Aviva shares slipped 1% in the past week. Insurance company stocks are sensitive to financial market gyrations (in both directions) they have leveraged balance sheets with their principal tangible assets being investments and securities. Aviva shares have about 20% upside to our 14 price target. The dividend, which produces a generous 5.2% yield, looks fully sustainable. BUY

Barrick Gold (GOLD), based in Toronto, is one of the world’s largest and highest-quality gold mining companies. About 50% of its production comes from North America, with the balance from Africa/Middle East (32%) and Latin America/Asia Pacific (18%). Barrick will continue to improve its operating performance (led by its new and highly capable CEO), generate strong free cash flow at current gold prices, and return much of that free cash flow to investors while making minor but sensible acquisitions. Also, Barrick shares offer optionality – if the unusual economic and fiscal conditions drive up the price of gold, Barrick’s shares will rise with it. Given their attractive valuation, the shares don’t need this second (optionality) point to work – it offers extra upside. Barrick’s balance sheet has nearly zero debt net of cash. Major risks include the possibility of a decline in gold prices, production problems at its mines, a major acquisition and/or an expropriation of one or more of its mines.

On February 16, Barrick reported a strong quarter, raised its base dividend by 11% and announced a $1 billion share buyback program.

Adjusted net earnings of $0.35/share were flat compared to a year ago but about 17% above estimates. Broadly, most metrics including revenues, production, average commodity prices and expenses were comparable to a year ago. Free cash flow was 34% lower due to higher cash uses for working capital and capital spending. Overall, the company continues to execute reasonably well and generate sizeable free cash flow while keeping its balance sheet free of debt net of cash, even after distributing $1.4 billion to shareholders during the year.

The company said that its production was in line with guidance (as previously released) and that it replaced its depleted reserves with new reserves of a higher grade. Barrick appears to be maintaining its mine quality without over-spending, although its capital spending was 18% higher in 2021 than the prior year.

Barrick’s leadership is getting the same message about returning cash to shareholders as oil company executives are – restrain capital spending and tie cash distributions to cash flow. In a new plan, Barrick introduced a performance-based dividend: as its cash balance increases, it will pay a special quarterly dividend of as much as $0.15/share. Using rough math, the company said a $100/ounce increase in gold would produce $1.5 billion of incremental annual cash flow, or about $0.84/share. So, if gold goes to perhaps $1,950/ounce, on an annual basis the company should be able to sustainably pay the maximum $0.60/share performance dividend. Combined with the $0.40/share base dividend, this equates to $1.00/share total annual dividend, for about a 4.2% yield. Combined with the $1 billion share repurchase, the total shareholder yield would be about 7%.

Over the past week, commodity gold rose 3% to $1,904/ounce. Per-ounce gold prices are at the very high end of the $1,700 and $1,900 trading range. The 10-year Treasury yield slipped to 1.94%, a move which is noise in our view given the still-easy monetary policy while inflation is running at a 7.5% rate.

The U.S. Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions), was unchanged at 96.03. The index remains about 3% below its pre-Covid late-2019 level of about 99.

Barrick shares jumped 12% this past week and have about 17% upside to our 27 price target. The price target is based on 7.5x estimated steady-state EBITDA and a modest premium to our estimate of $25/share of net asset value. BUY

Citigroup (C) – Citi is one of the world’s largest banks, with over $2.4 trillion in assets. The bank’s weak compliance and risk-management culture led to Citi’s disastrous and humiliating experience in the 2009 global financial crisis, which required an enormous government bailout. The successor CEO, Michael Corbat, navigated the bank through the post-crisis period to a position of reasonable stability. Unfinished, though, is the project to restore Citi to a highly profitable banking company, which is the task of new CEO Jane Fraser.

There was no significant company-specific news in the past week.

Citi shares fell 5% over the past week and have about 33% upside to our 85 price target. Much of the weakness can be attributed to the removal of incremental momentum from rising interest rates.

The valuation remains attractive at 81% of tangible book value and 8.3x estimated 2022 earnings. Our set of peer banks currently trade at an average of 2.0x tangible book value and 12.7x estimated 2022 earnings. Citi shares are among the cheapest in the banking sector – a major attraction as expectations are low. As the bank grinds along with its turnaround, the valuation should continue to lift.

Citigroup investors enjoy a 3.2% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program. BUY

ConocoPhillips (COP) is the world’s largest independent E&P company. We recently moved COP from a Buy to Hold and then Hold to Sell. The company is well-managed, has strong oil and natural gas assets and a healthy balance sheet. Conoco generates considerable free cash flow at current commodity prices, of which it is returning much to shareholders. However, the risk/return trade-off was no longer favorable following the sharp run-up in the share price. The COP recommendation produced a 41% total return since our original Buy recommendation last September. SELL

Molson Coors Beverage Company (TAP) is one of the world’s largest beverage companies, producing the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its revenues come from the United States, where it holds a 24% market share. Investors worry about Molson Coors’ lack of revenue growth due to its relatively limited offerings of fast-growing hard seltzers and other trendier beverages. Our thesis for this company is straightforward – a reasonably stable company whose shares sell at an overly-discounted price. Its revenues are resilient, it produces generous cash flow and is reducing its debt. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. The company recently reinstated its dividend.

The company reports earnings pre-market on Wednesday, February 23. The consensus earnings estimate is $0.86/share.

TAP shares slipped 1% in the past week and have about 41% upside to our 69 price target. The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 8.3x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.8% dividend only adds to the appeal. BUY

Organon & Company (OGN) was recently spun off from Merck. It specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. Organon will produce better internal growth with some boost through smart yet modest-sized acquisitions. It may eventually divest its Established Brands segment. The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings.

On February 17, Organon reported an acceptable quarter. Revenues of $1.6 billion fell 1% from a year ago but were about 1% above estimates. Adjusted earnings of $1.37/share fell 30% from a year ago but were about 7% above estimates.

Women’s Health segment revenues rose 6% as its key Nexplanon sales rebounded by 37%. The rebound helped build management’s credibility as there was considerable investor skepticism around their confidence in Nexplanon. Biosimilars treatments, a source of future growth, rose an encouraging 15%. Established Brands sales slipped 2% but we consider this an improvement toward stability against headwinds from patent expirations and tighter pricing in China.

Adjusted EBITDA of $549 million fell 19% from a year ago, primarily due to higher costs that Organon is incurring as a public company compared to its subsidiary status a year ago.

Guidance for 2022 suggests that the year will basically look like 2021. Revenue growth will be flat while the adjusted EBITDA margin (and dollars) will dip about 8%. Higher research and development spending will weigh on profits. However, how Organon gets to flat revenues is encouraging – the decay rate of its products has flattened out and the trajectory is up. If one could look at the four years of 2020-2023 as four points on the letter “U”, we are now at the lower-left bottom part of the “U” and moving to the right. It seems like little is changing, but the transition from down to up is starting. Still, the company needs to execute and more work remains ahead.

The balance sheet weakened fractionally from the third quarter due to acquisitions but is stronger than at the spin-off date. Cash is $737 million while total debt is $9.1 billion, for net debt of $8.4 billion. This is about 7% below net debt of $9.0 billion just after its spin-off. We would like to see more debt reduction.

Separately from earnings, Organon announced that it has acquired from German pharmaceuticals maker Bayer the rights to two daily contraceptive pills in China as well as Hong Kong, Macau and Vietnam. Organon already owns the rights to these products in 20 other markets and these transactions in effect give the company full global rights with the exception of South Korea, cleaning up an otherwise complicated global distribution map. No terms were disclosed.

OGN shares rose 3% in the past week and have about 27% upside to our 46 price target (using the same target as the Cabot Turnaround Letter). The shares continue to trade at a remarkably low valuation while offering an attractive 3.1% dividend yield. BUY

Sensata Technologies (ST) is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. As the sensors’ reliability is vital to safely and performance, customers are reluctant to switch to another supplier that may have lower prices but also lower or unproven quality. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. The relatively new CEO will likely continue to expand the company’s growth potential through acquisitions. Electric vehicles are an opportunity as they expand Sensata’s reachable market.

On February 1, Sensata reported reasonable fourth-quarter results but forward guidance was below the consensus estimates so the stock was moderately weak on the news. Adjusted earnings rose 2% and were about 7% above the consensus estimate. Revenues rose 3% but fell 1% after adjusting for acquisitions and currency effects. The revenues were about 2% above the consensus.

Revenues were held back by weak production at automakers but helped by more content per vehicle as well as growth in industrial demand and from acquisitions. The profit margin contracted modestly due to higher labor and input costs along with higher “mega-trend” investments in electrification and other technologies that will help Sensata participate in faster-growing secular trends.

Full-year 2022 guidance was below the consensus but was reasonably encouraging: 8% revenue growth excluding acquisitions and 8% earnings per share growth (although consensus was for 15% earnings growth). Guidance was subdued partly due to an anticipated sluggish 7% growth in global auto production weighed down by China. Sensata continues to generate sizeable free cash flow, has a strong balance sheet and announced a new $500 million share repurchase program – a good move in our view as the shares are undervalued.

There was no significant company-specific news in the past week.

ST shares slipped 3% in the past week and have about 32% upside to our 75 price target. BUY

Disclosure:The chief analyst of the Cabot Undervalued Stocks Advisor personally holds shares of every recommended security, except for “New Buy” recommendations. The chief analyst may purchase or sell recommended securities but not before the fourth day after any changes in recommendation ratings has been emailed to subscribers. “New Buy” recommendations will be purchased by the chief analyst as soon as practical following the fourth day after the newsletter issue has been emailed to subscribers.

Growth/Income Portfolio
Stock (Symbol)Date AddedPrice Added2/22/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Bristol-Myers Squibb (BMY)04-01-2054.8267.4523.0%3.2%78.00Buy
Cisco Systems (CSCO)11-18-2041.3256.3036.3%2.7%66.00Buy
Coca-Cola (KO)11-11-2053.5862.2816.2%2.6%64.00Buy
Dow Inc (DOW) *04-01-1953.5060.3012.7%4.6%78.00Buy
Merck (MRK)12-9-2083.4775.95-9.0%3.6%99.00Buy
Buy Low Opportunities Portfolio
Stock (Symbol)Date AddedPrice Added2/22/22Capital Gain/LossCurrent Dividend YieldPrice TargetRating
Allison Transmission Hldgs (ALSN)02-22-2239.9939.91-0.2%1.9%48.00New Buy
Arcos Dorados (ARCO)04-28-215.417.1732.5%7.50Buy
Aviva (AVVIY)03-03-2110.7511.648.3%5.2%14.00Buy
Barrick Gold (GOLD)03-17-2121.1322.767.7%1.8%27.00Buy
Citigroup (C)11-23-2168.1063.89-6.2%3.2%85.00Buy
ConocoPhillips (COP)9-24-2165.0291.0740.1%2.0%NASell
Molson Coors (TAP)08-05-2036.5348.5933.0%2.8%69.00Buy
Organon (OGN)06-07-2131.4235.9814.5%3.1%46.00Buy
Sensata Technologies (ST)02-17-2158.5756.89-2.9%75.00Buy

*Note: DOW price is based on April 1, 2019 closing price following spin-off from DWDP.

Buy – This stock is worth buying.
Strong Buy – This stock offers an unusually favorable risk/reward trade-off, often one that has been rated as a Buy yet the market has sold aggressively for temporary reasons. We recommend adding to existing positions.
Hold – The shares are worth keeping but the risk/return trade-off is not favorable enough for more buying nor unfavorable enough to warrant selling.
Sell – This stock is approaching or has reached our price target, its value has become permanently impaired or changes in its risk or other traits warrant a sale.

Note for stock table: For stocks rated Sell, the current price is the sell date price.

CUSA Valuation and Earnings
Growth/Income Portfolio
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
BMY 67.35 7.79 8.290.0%0.0% 8.6 8.1
CSCO 56.19 3.45 3.730.9%1.1% 16.3 15.1
KO 62.38 2.46 2.640.0%0.0% 25.4 23.6
DOW 60.24 6.69 6.480.0%0.0% 9.0 9.3
MRK 76.11 7.33 7.26-0.1%0.1% 10.4 10.5
Buy Low Opportunities Portfolio
Current 2022
EPS Estimate
Current 2023
EPS Estimate
Change in
2022 Estimate
Change in
2023 Estimate
P/E 2022P/E 2023
ALSN 40.27 5.88 7.02nana 6.8 5.7
ARCO 7.29 0.32 0.426.7%7.7% 22.8 17.4
AVVIY 11.69 1.22 1.400.0%0.0% 9.6 8.3
GOLD 23.06 1.08 1.110.0%-4.8% 21.4 20.7
C 63.79 7.65 8.450.0%0.0% 8.3 7.5
TAP 48.91 4.04 4.300.0%-0.5% 12.1 11.4
OGN 36.14 5.47 5.80-6.2%-3.0% 6.6 6.2
ST 56.66 3.99 4.610.0%0.0% 14.2 12.3

CSCO: Estimates are for fiscal years ending in July.
Current price is yesterday’s mid-day price.