What is an EV Company Worth?
We continue to watch in amazement the values that the market puts on electric vehicle makers, with the most recent example of Rivian Automotive (RIVN). Since its IPO at $78/share, RIVN shares have doubled, making the EV company’s roughly 900 million shares worth a total of about $144 billion. This makes it the #3 most valuable car company in the world.
Rivian has delivered 156 vehicles in its history and will probably lose $2 billion this year. This compares to Volkswagen (the former #3 company), which will likely earn $15 billion this year on the 6.5 million vehicles it has delivered so far this year, which includes 300,000 electric vehicles. VW, no slouch in the high-performance EV segment, has delivered almost 29,000 Porsche EVs.
Rivian has orders for about 55,000 vehicles from individuals and another 100,000 from 20% owner Amazon. The company says it can produce 200,000 vehicles a year, if it expands its current facilities, by perhaps 2024. That’s a long time to wait for what may be an outdated vehicle, especially when it takes only a $1,000 fully-refundable deposit to hold a retail order.
Upstart Rivian looks youthful and exuberant when compared to the relative old-timer Tesla. Musk’s company is on track to deliver (and presumably sell) 2 million units/year by 2023.
But, when we attempt to assess the value of GM, we find that Rivian, Tesla and others are not useful at all as peers. These EV companies are essentially meme stocks that trade on sentiment rather than enduring value. GM and traditional car companies have strong if not exciting revenue growth and cash flows – clearly of no interest to meme traders.
Looking at valuations, Rivian trades at $720,000 per vehicle produced (based on its 200,000/year target), while Tesla trades at about $500,000/vehicle (based on $1.0 trillion market value and 2 million units/year). On the news that Hertz was ordering 100,000 Teslas, TSLA shares jumped 12%, adding roughly $120 billion of market value. Those incremental Hertz-Teslas were apparently worth $1.2 million/vehicle.
Dull giant VW trades at about $12,700/vehicle produced, assuming a recovery to its normal 11 million vehicle volume. General Motors is valued at about $11,500/vehicle, based on its $92 billion market cap and a normalized output of 8 million vehicles.
Is a Tesla in a few years really worth 43x a GM vehicle today?
We certainly appreciate the reality of wider operating margins at Tesla (perhaps 25%) and the hope of wide margins at Rivian, as well as the absence of legacy pension and other liabilities, compared to margins of perhaps 10% at General Motors. We also recognize the vast array of side hustles including battery production, insurance, fleet/ride-sharing, and other high-margin services that Tesla can provide, along with the cache of its brands. But we wonder if GM and VW really are that far behind in the EV transition and their ability to offer new services. Can the value gap be even reasonably justified? We think not.
But until the gravity of easy money and high speculation unravels, there likely won’t be much to pull the valuations together. And when they do eventually converge, it will be Tesla and Rivian becoming cheaper a lot more than it will be from GM becoming more valuable. Our valuation of GM and its various EV initiatives will stay modest and for now we’re sticking with our 69 price target.
Share prices in the table reflect Tuesday (November 16) closing prices. Please note that prices in the discussion below are based on mid-day November 16 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.
Send questions and comments to Bruce@CabotWealth.com.
Today’s Portfolio Changes
None.
Last Week’s Portfolio Changes
None.
Upcoming earnings releases
November 16: Bristol-Myers Squibb (BMY) Investor Day
November 17: Cisco (CSCO)
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 October 27, Bristol-Myers reported good third-quarter results, with revenues increasing 10% and matching the consensus estimate. Earnings rose 23% and exceeded the consensus estimate by about 2%. Management raised their full-year earnings guidance fractionally. Revenues for the company’s key three products, which produce about 65% of total revenues, grew at rates between 7% and 15% compared to a year ago. Sales from its “New product portfolio” of up-and-coming treatments of $344 million (about 3% of total sales) grew 53% from the second quarter, suggesting strong opportunities ahead. Bristol generated strong free cash flow of about $5 billion, reduced net debt by $3.1 billion, repurchased $500 million in stock and paid about $1 billion in dividends. Overall, we remain confident in Bristol’s revenue outlook.
The company hosted an Analysts Day on November 16 (yesterday). We will provide an update and our thoughts next week.
BMY shares slipped 1% in the past week and have about 32% upside to our 78 price target. Valuation remains remarkably low at 7.6x estimated 2022 earnings, compared to 12x or better for its major peer companies. The stock’s 6.7x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.
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 3.3% 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.
Cisco reports earnings on November 17 (today), with a consensus estimate of $0.80/share. We will provide our analysis next week.
CSCO shares were flat in the past week and have about 5% upside to our 60 price target. The shares remain attractively valued, and offer a 2.6% dividend yield. We continue to like Cisco. BUY
Coca-Cola (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 October 27, Coca-Cola reported an encouraging quarter. Revenues rose 16% from a year ago (better than the consensus estimate) as more economies around the world are recovering from the pandemic. Earnings rose by 18% from a year ago and beat the consensus estimate by about 12% although higher marketing spending fractionally trimmed operating margins. Free cash flow was strong, as well. Management raised their full-year revenue, earnings and free cash flow guidance, and expressed confidence in continued momentum through 2022. The Coca-Cola story remains on track.
There was no significant company-specific news in the past week.
KO shares were flat this past week and have about 13% upside to our 64 price target.
While the valuation is not statistically cheap, the shares remain undervalued given the company’s future earning power and valuable franchise. Also, the value of Coke’s partial ownership of a number of publicly traded companies (including Monster Beverage) is somewhat hidden on the balance sheet, yet is worth about $23 billion, or 9% of Coke’s market value. This $5/share value provides additional cushion supporting our 64 price target. KO shares offer an attractive 3.0% dividend yield. BUY
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.
In Dow’s third quarter (reported Oct 21), revenues grew 53% from the pandemic-weakened quarter a year ago and were about 6% above the consensus estimate. Operating earnings of $2.75/share compared to $0.50/share a year ago and were about 7% above the consensus estimate. Sales growth and margin improvements were strong across the board compared to a year ago, but further margin improvements seem unlikely from here given the near-ideal conditions in place last quarter and partly this quarter. Dow generated an immense $2.5 billion in free cash flow, which went toward debt reduction, dividends, pension funding and inventory. Overall, a respectable report for Dow.
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 news flow related to economic growth, energy prices and any industry capacity changes. In the meantime, Dow shareholders can collect a highly sustainable 4.8% dividend while waiting for more share buybacks, more balance sheet improvement, more profits and a higher valuation.
There was no significant company-specific news in the past week.
Dow shares rose 2% this past week and have 31% 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 in June and we think it will divest its animal health segment sometime in the next five years.
On October 28, Merck reported strong third-quarter results. Revenue net of currency changes grew 19%, driven by robust growth in Keytruda (+21%) and Gardasil (+63%). Animal Health segment sales grew a sturdy 14%. Sales of Januvia were flat. Adjusted earnings increased 26% (ex-currency) and were about 14% above the consensus estimate. Sales of its key products were strong and clinical trials for the promising Covid treatment molnupiravir were positive. Merck’s adjustments are large and varied, making analysis and a clean year-over-year comparison difficult. Management incrementally raised their fourth-quarter revenue and profit guidance but to levels that were slightly below the consensus estimate. Merck did not provide a balance sheet or cash flow statement. Overall, the Merck story remains on track.
Berkshire Hathaway sold its remaining Merck shares along with its Organon shares. We make little of these divestitures other than that they appear to have been tactical (shorter-term) rather than strategic (longer-term, or perhaps “forever”) holdings.
Merck continues to sell large volumes of its Covid treatment, with over 6 million doses sold globally, even as Pfizer’s apparently more effective pill is on the horizon. It is not possible to gauge the profitability of either company’s treatment, but we anticipate that it will be limited as both Merck and Pfizer are licensing generic versions to boost global availability.
Merck shares rose 2% this past week and have about 17% upside to our 99 price target.
If the company produces earnings close to the current estimates and continues to provide evidence of solid post-Keytruda prospects, as we expect, the shares are considerably undervalued.
Merck produces generous free cash flow to fund its current dividend (now yielding 3.1%) as well as likely future dividend increases, although its shift to a more acquisition-driven strategy will slow the pace of increases. BUY
BUY LOW OPPORTUNITIES PORTFOLIO
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 re-open. 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, currency and the chances that a socialist might win next year’s Brazilian presidential elections will continue to move ARCO shares.
Arcos reported very strong third-quarter results that were sharply higher than a year-ago and well-above consensus estimates. As conditions are normalizing across its Latin America and Caribbean markets, revenues and profits are surging above even pre-pandemic 2019 levels. With better profits and cash flow, Arcos’ previously high debt ratio is now very reasonable at 2.0x adjusted EBITDA, alleviating an overhang on the shares.
In the quarter, earnings of $0.12/share compared to a $(0.14)/share loss a year ago and the $0.07/share consensus estimate. Revenues of $726 million rose 56% from a year ago and were well-above the $678 million estimate.
Adjusted EBITDA rose to $90 million. To best gauge the size of this profit, it compares to $26 million a year ago, and $48 million in the second quarter. It is also stronger than the $76 million in Adjusted EBITDA from the third quarter of 2019, suggesting that its underlying profits are at worst on par with, and probably a lot better than, the pre-pandemic period. On another comparison, its Adjusted EBITDA margin of 12.4% was higher than the pre-pandemic 10.2% margin, providing more support for our view that Arcos is emerging in great shape from the pandemic.
Results were consistently strong across all of its geographies except Venezuela. Adjusted results exclude Venezuela, a country in economic turmoil but only a tiny portion of Arcos’ overall results. For Venezuela, we estimate that 95 of its 102 stores are closed, with the remaining stores producing about $3 million in total revenues and essentially zero profits in the quarter.
Higher profits is producing more free cash flow, such that Arcos repaid some debt and added $45 million in cash to its cash balances in the quarter.
Operationally, the company seems to have adapted well to the pandemic with improved technology (digital sales now 36% of total sales), strong off-premises sales (drive-thru/delivery sales comprised nearly half of total sales), new products/promotions to maintain its relevance, and new health protocols to boost customers’ confidence in the stores’ safety.
Despite the difficult currency and political conditions in Latin America, which appears to be more of an investor deterrent than a customer deterrent, Arcos is performing well “on-the-ground.”
ARCO shares moved up 7% on the strong earnings report this past week and are basically at our initial recommendation price of $5.36 – reflecting the benefit of buying when expectations are low. The stock has about 43% upside to our 7.50 price target.
We remain steady in our conviction in the company’s recovery. The low share price offers a chance to add to or start new positions. BUY
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 (UK, 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.
Aviva provided a third quarter trading update. It reports earnings every six months, so this report was an interim, revenue-only update. In its update, the company showed strong net inflows into its Savings & Retirement and Aviva Investors segments and strong new business in its General Insurance segment. Overall, the core business is showing good growth, suggesting a renewed relevance and competitiveness to its product offerings. Costs continue to be restrained, with adjusted costs (which they call ‘controllable costs’) declining 2% from a year ago and is on-track to meet its annual cost-cutting targets despite cost inflation.
Strategically, Aviva is nearly finished with its market exits: France, Italy General Insurance and other major markets are sold, with Poland, Italy Life and Vietnam remaining. Aviva is making progress with its share repurchases, completing about two-thirds of its £750 million plan. Capital levels, remittances and liquidity remain robust. The company will update investors next March on its capital return plans.
We like the turnaround underway at Aviva, but even as patient investors we find their semi-annual profit updates (rather than quarterly), and their agonizingly slow and vague capital return plans to be unsatisfactory. March 2022 is another four months away, following many months already of vague color on the timing of payouts to shareholders. And, its final 2021 dividend won’t be determined and paid until next May – almost half a year away even as it is a valuable signal about Aviva’s capital priorities. We agree with Cevian that Aviva has the capacity to return considerably more than £4 billion. The company seems to be holding back perhaps in anticipation of an acquisition – this could either be attractive or not, but would change the capital return story.
Aviva’s earnings estimates slipped this past week, entirely due to the weaker British pound relative to the dollar. Aviva shares were flat this past week and have about 30% upside to our 14 price target. 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%). The market has little interest in Barrick shares. Yet, 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 more cash than debt. 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 November 4, Barrick reported reasonable third-quarter results. Revenue slipped 20% from a year ago, due to 14% lower gold volumes and 8% lower gold prices which were fractionally offset by higher copper revenues. Lower revenues partly offset by controlled costs led to a 25% decline in adjusted EBITDA. Importantly, Barrick reiterated its full-year production guidance for 4.4 to 4.7 million ounces of gold, helped by improved output at its Nevada Gold Mines and successful operational turnarounds at previously troubled mines in Tanzania and Argentina. We want to see mining companies at least meet their production guidance, as it indicates that the company has a good handle on its mines’ operations.
Barrick continues to boost production through mine upgrading and re-openings, capital spending remains restrained. Barrick is looking for acquisitions in Canada but said it will remain careful about valuation. The balance sheet and free cash flow remain strong.
This past week, commodity gold prices ticked up by about 2% to $1,863/ounce while the 10-year Treasury yield jumped to 1.61%. The strong 6.2% inflation rate as indicated by the October CPI drove the changes. The U.S. Dollar Index, another driver of gold prices (the dollar and gold usually move in opposite directions) is trading at 95.71, up 2% in the past week. The index remains about 3% below its pre-Covid late 2019 level of about 99. Per-ounce gold prices seem range-bound between $1,700 and $1,900 for now, even as speculative positioning seems to be increasing.
As the shares appear to have bottomed out for now, this might be a good time to buy more Barrick shares. Fundamentally, the company is doing well and has solid leadership, quality mines and a very strong balance sheet. It might take a long time, but we remain confident that eventually the shares will hit the target price. At some point, the economy and capital markets will become more volatile, and the Fed and Congress will unleash more aggressive stimulus, providing what is likely to be an unmitigated positive for gold prices and for Barrick shares.
Barrick shares moved up 6% this past week and have about 30% 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.
On its recurring $0.09/quarter dividend, GOLD shares offer a reasonable 1.7% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year (no clarity on 2022 special dividends), lifting the effective dividend yield to 3.8%. BUY
ConocoPhillips (COP), based in Houston, Texas, is the world’s largest independent E&P company, with about two-thirds of its production in the United States. Conoco’s shares are depressed, as investors avoid climate-unfriendly companies, have low interest in exposure to volatile and unpredictable oil and gas prices, worry that company management will lose its new-found capital spending discipline, and are concerned that OPEC+ will re-open their spigots, sending oil prices tumbling.
We see resilient oil prices, as demand remains strong, alternatives aren’t yet plentiful enough, supply growth is restrained as shareholders prioritize cash flow rather than capital spending, and as majors seek to reduce their carbon footprint. We like Conoco’s low valuation, investment grade balance sheet, strong free cash flow, and public commitment to limiting its capital spending to 50% of its annual cash flow. The shares offer a respectable base-level dividend to shareholders that appears rock-solid.
On November 2, ConocoPhillips reported healthy third-quarter adjusted earnings of $1.77/share, which compares to a $(0.31)/share loss a year ago. Earnings were about 16% higher than the consensus estimate. Revenues nearly tripled the year-ago results and were about 15% higher than the consensus estimate as commodity prices surged. Energy production rose about 2% (fine with us). Conoco’s production remains unhedged, so changes in commodity prices flow directly to its revenues.
Conoco generated a large $2.8 billion in free cash flow, repurchased $1.2 billion in shares and reduced debt by $300 million. Most of the $10.9 billion in cash on hand will be spent on buying Shell’s Permian assets – a good use of funds in our view.
On the post-earnings conference call, the company said that its capital spending would be in line with prior commentary, adjusted for the Shell acquisition which should close by year-end. However, management said that inflation may push up spending by perhaps as much as 8-9%.
In its quarterly regulatory report, Berkshire said it added to its holdings of oil major Chevron (CVX). While the 24% increase in shares appears large, the position still is relatively modest and perhaps is a hedge against rising oil prices. Nevertheless, the position size is moving in the right direction for our purposes.
West Texas Intermediate crude is currently trading at $80.10/barrel, down about 3% this past week, while natural gas in the United States is priced at $5.35, up about 6% from last week. We anticipate continued volatility in commodity prices, particularly as winter is approaching.
ConocoPhillips shares slipped 4% this past week and have about 10% upside to our 80 price target, even as earnings estimates moved noticeably upwards. On a recurring $0.46/quarter dividend, COP shares offer a 2.5% dividend yield. BUY
General Motors (GM) is making immense progress with its years-long turnaround. It is perhaps 90% of the way through its gas-powered vehicle turnaround, and is well-positioned but in the early stages of its electric vehicle (EV) development. GM Financial will likely continue to be a sizeable profit generator. GM is fully charged for both today’s environment and the EV world of the future, although the underlying value of its emerging EV business is unclear.
On October 27, GM reported a complicated third quarter. On the surface, the results looked awful as nearly every headline metric fell sharply from a year ago. However, the results were much better than analysts had expected, and earnings of $1.52/share “blew away” the $0.97 consensus estimate. And, GM raised its full-year earnings per share guidance by 5%. Yet, this new full-year guidance implied a weaker fourth quarter than analysts were expecting.
Beneath the bad news was some good news: GM vehicles are in strong demand, with more favorable pricing and a more-profitable mix than in the strong year-ago period. The problem was that the company couldn’t complete and then deliver enough vehicles due to shortages of semiconductor chips.
As described in further detail in our November 3 note, we have mixed views on GM shares. The valuation is below our target and the company remains a healthy generator of massive cash flow backed by a strong balance sheet. But it will likely spend heavily on advanced technologies for years – at least through the end of the decade (beyond the 2020-2025 window in which it will spend $35 billion) – draining that cash from shareholders in search of EV profits that are currently speculative.
For now, we’re keeping our Buy rating, yet are thinking a lot harder about this stock.
GM will introduce 10 new EVs into South Korea by 2025, but due to chronic labor issues there it won’t manufacture the cars in Korea. This is a risky strategy – GM’s cars may need to be sharply better than others in Korea if consumers stage a de facto boycott.
GM shares rose 6% this past week, and have 11% upside to our 69 price target.
The valuation remains attractive. The P/E multiple is helpful, but not a precise measure of GM’s value, as it has numerous valuable assets that generate no earnings (like its Cruise unit, which is developing self-driving cars and produces a loss), its nascent battery operations, and its other businesses with a complex reporting structure, nor does it factor in GM’s high but unearning cash balance which offsets its interest-bearing debt. However, it is useful as a rule-of-thumb metric, and provides some indication of the direction of earnings estimates, and so we will continue its use here. BUY
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 straight-forward – 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 re-instated its dividend.
On October 28, Molson Coors reported reasonable third-quarter results. Earnings rose 8% from a year ago and were 16% above the consensus estimate. Revenues of $2.8 billion rose 1% but were 3% below estimates. Adjusted EBITDA fell 11% and was 5% below estimates, mostly due to higher input and marketing costs. The results showed that company is making incremental progress with its turnaround, but we had expected better results, especially as Europe seems to have mostly reopened. Underlying free cash flow is running about $933 million for the year-to-date, weaker than a year ago but is plenty large (if the company can sustain this rate) to continue to pay down its debt, fund its capital spending and dividend, and repurchase shares. Management remains confident in its fourth quarter outlook, reiterating its full-year revenue (down 5% compared to 2020) and earnings guidance (no change from 2020).
There was no significant company-specific news in the past week.
TAP shares rose 6% in the past week and have about 42% 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 8.2x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. 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.
Organon reported a mixed quarter. Revenue of $1.6 billion fell 3% (excluding currency benefit) from a year ago and was in-line with the consensus estimate. Adjusted earnings of $1.67/share fell 30% from a year ago but was about 16% above the consensus estimate. Adjusted EBITDA of $636 million fell 15% from a year ago but was 11% higher than estimates.
Organon shares have been weak following the report. We believe most of the weakness is related to concerns about revenues in the Established Brands and Nexplanon, and the lower profit margin guidance. The announcement that Organon is acquiring Forendo Pharmaceuticals seems like a modest positive given its promising treatments and success-based purchase price. We remain steady in our conviction on OGN shares, especially given the low valuation.
Sales in its core Women’s Healthcare segment fell 10%; while management’s explanation – that year-ago volumes were artificially elevated and made for a difficult comparison, and that physician visits this past quarter were suppressed by Covid – made some sense, we need to see solid strength going forward. Management said that the key Nexplanon treatment (sales fell 8%) should see double-digit sales growth in the fourth quarter.
Established Brands sales (about two-thirds of total revenues) fell 8%. This segment includes a range of products that are approaching or already past their patent expirations, so the decay rate is important. Here, management expects erosion to taper to perhaps 2% – acceptable to us but we need to see it.
Management re-affirmed its full-year 2021 revenue and earnings guidance, but said that the EBITDA margin will be lower in the future due to rising research costs.
In the quarter, revenue of $1.6 billion fell 3% (excluding currency benefit) from a year ago and was in-line with the consensus estimate. Adjusted earnings of $1.67/share fell 30% from a year ago but was about 16% above the consensus estimate. Adjusted EBITDA of $636 million fell 15% from a year ago but was 11% higher than estimates.
Biosimilar segment sales rose a strong 39% ex-currency. Sales in Established Brands slipped 8% but excluding known patent losses fell only 4%. While Organon’s overall EBITDA margin of 39.8% fell from a year ago, the company is laden with spin-off costs that are already known to investors. Free cash flow remains healthy at $332 million. Net debt remains modestly elevated at 3.6x EBITDA.
OGN shares fell 10% this past week and have about 39% 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 and offer an attractive 3.4% 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 October 26, Sensata reported a strong third quarter. Revenues rose 17% net of acquisitions/divestitures, and adjusted earnings increasing 32%. Both were higher than the consensus estimates. Free cash flow was fine and the balance sheet remains sturdy and under-leveraged, so Sensata is resuming its share buyback program and will probably resume its dividend, as well as also look for more acquisitions.
However, the company’s fourth quarter guidance was light – revenues and earnings were guided to about 3-9% below consensus estimates – due to difficult auto industry conditions and higher inflation. This left the market with an unclear near-term direction. The company’s 2022 outlook remains unchanged. We retain our Buy rating as the longer-term outlook remains encouraging.
ST shares rose 4% this past week and have about 23% 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 Added | Price Added | 11/16/21 | Capital Gain/Loss | Current Dividend Yield | Price Target | Rating |
| Bristol-Myers Squibb (BMY) | 04-01-20 | 54.82 | 59.10 | 7.8% | 3.3% | 78.00 | Buy |
| Cisco Systems (CSCO) | 11-18-20 | 41.32 | 57.00 | 37.9% | 2.5% | 60.00 | Buy |
| Coca-Cola (KO) | 11-11-20 | 53.58 | 56.22 | 4.9% | 2.9% | 64.00 | Buy |
| Dow Inc (DOW) * | 04-01-19 | 53.50 | 58.86 | 10.0% | 4.8% | 78.00 | Buy |
| Merck (MRK) | 12-9-20 | 83.47 | 84.11 | 0.8% | 3.1% | 99.00 | Buy |
| Buy Low Opportunities Portfolio | |||||||
| Stock (Symbol) | Date Added | Price Added | 11/16/21 | Capital Gain/Loss | Current Dividend Yield | Price Target | Rating |
| Arcos Dorados (ARCO) | 04-28-21 | 5.41 | 5.20 | -3.9% | — | 7.50 | Buy |
| Aviva (AVVIY) | 03-03-21 | 10.75 | 10.71 | -0.4% | 5.5% | 14.00 | Buy |
| Barrick Gold (GOLD) | 03-17-21 | 21.13 | 20.60 | -2.5% | 1.7% | 27.00 | Buy |
| ConocoPhillips (COP) | 9-24-21 | 65.02 | 72.64 | 11.7% | 2.5% | 80.00 | Buy |
| General Motors (GM) | 12-31-19 | 36.60 | 62.61 | 71.1% | — | 69.00 | Buy |
| Molson Coors (TAP) | 08-05-20 | 36.53 | 48.23 | 32.0% | — | 69.00 | Buy |
| Organon (OGN) | 06-07-21 | 31.42 | 33.54 | 6.7% | — | 46.00 | Buy |
| Sensata Technologies (ST) | 02-17-21 | 58.57 | 61.33 | 4.7% | — | 75.00 | Buy |
*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 price | Current 2022 EPS Estimate | Current 2023 EPS Estimate | Change in 2022 Estimate | Change in 2023 Estimate | P/E 2022 | P/E 2023 | P/E 2022 | P/E 2023 | |
| BMY | 59.07 | 7.81 | 8.12 | -0.10% | 0.00% | 7.6 | 7.3 | 7.3 | 7.0 |
| CSCO | 57.40 | 3.43 | 3.69 | 0.00% | 0.00% | 16.7 | 15.6 | 16.3 | 15.2 |
| KO | 56.73 | 2.43 | 2.60 | 0.00% | 0.00% | 23.3 | 21.8 | 22.5 | 21.0 |
| DOW | 59.72 | 6.26 | 6.10 | -0.20% | 0.20% | 9.5 | 9.8 | 9.6 | 9.9 |
| MRK | 84.48 | 7.17 | 7.17 | 0.60% | -0.40% | 11.8 | 11.8 | 12.0 | 11.6 |
| Buy Low Opportunities Portfolio | |||||||||
| Current price | Current 2022 EPS Estimate | Current 2023 EPS Estimate | Change in 2022 Estimate | Change in 2023 Estimate | P/E 2022 | P/E 2023 | P/E 2022 | P/E 2023 | |
| ARCO | 5.26 | 0.28 | 0.37 | 0.00% | 0.00% | 18.8 | 14.2 | 17.1 | 12.9 |
| AVVIY | 10.75 | 1.23 | 1.37 | -2.90% | -2.90% | 8.7 | 7.9 | 8.7 | 7.8 |
| GOLD | 20.80 | 1.21 | 1.22 | -1.20% | -1.20% | 17.2 | 17 | 15.8 | 15.9 |
| COP | 72.74 | 7.7 | 6.69 | 3.80% | 9.00% | 9.4 | 10.9 | 11.2 | 12.4 |
| GM | 62.40 | 6.76 | 6.98 | 0.30% | 0.90% | 9.2 | 8.9 | 8.5 | 8.3 |
| TAP | 48.57 | 4.17 | 4.43 | 0.20% | 0.50% | 11.6 | 11 | 10.4 | 9.9 |
| OGN | 33.05 | 5.88 | 6.04 | -1.30% | -1.90% | 5.6 | 5.5 | 6.2 | 6.0 |
| ST | 60.90 | 4.06 | 4.67 | 0.00% | 0.00% | 15 | 13 | 13.5 | 12.0 |
Current price is yesterday’s mid-day price.
CSCO: Estimates are for fiscal years ending in July