Seventeen of my Benjamin Graham companies reported quarterly financial results or other noteworthy news. I also include questions from subscribers along with my answers. Prices appearing after each stock symbol are the closing prices on Thursday, October 27, 2016. Reports are for the quarter ended September 30, 2016 unless otherwise stated. Sales and earnings increases and decreases are based on year-ago comparisons.
I also present two indexes, which list companies featured in the Cabot Value Model or in the Cabot Enterprising Model during the most recent four months so you can quickly find my recent write-ups for stocks appearing in the models.
My schedule for the next five weeks will be:
* Tuesday, November 1, Cabot Wealth Advisory
* Thursday, November 3, Cabot Value Model issue 268V
* Friday, November 4, Weekly Update
* Thursday, November 10, Cabot Enterprising Model issue 268E
* Friday, November 11, Weekly Update
* Friday, November 18, Weekly Update
* Monday, November 21, Wall Street’s Best Daily
* Friday, November 25, No Update - Thanksgiving Weekend
Company Reports
Aflac (AFL 70.21) produced solid results for the quarter ended September 30. Revenue surged 13% and EPS advanced 17% after increasing 3% and 14% in the previous quarter. Sales and earnings received a big boost from the drop in the yen, which plunged 16% during the past year. Aflac derives a majority of its sales and income from Japan. Management raised its estimates for sales and earnings for the fourth quarter by a healthy amount, which bodes well for 2017 as well. Aflac’s board of directors raised the quarterly dividend to $0.43 from $0.41, boosting the yield to 2.4%. The increase marks the 34th straight year of dividend increases. Hold.
Alphabet (GOOG 795.35) recorded exceptional results. Sales surged 20% and EPS jumped 27% after increasing 21% and 42% in the prior quarter. The company’s paid clicks increased 33%, offsetting a decline in ad prices. Consumers continue to spend more time on smartphones, and advertisers spend more and more money on smartphone ads. More than half of Alphabet’s revenue is now generated from ads on mobile devices. The company’s Android mobile operating system appears in 87% of the world’s smartphones. Google controls 95% of the mobile-search market, compared with 78% on personal computers. Google’s dominance in search and advertising in the smartphone business portends exceptional growth in future quarters and years. Buy at 759.96 or below.
Apple (AAPL 114.48) reported improved results. Sales declined 9% and EPS fell 15% after decreases of 15% and 23% in the prior quarter. Apple’s sales and earnings slump could be over, based on reports that sales of its new iPhone 7 are considerably higher than expected. Revenue from Apple’s services business grew an impressive 24%. Apple reported it had $238 billion in cash, which renewed speculation that the company could easily fund a major acquisition. Hopefully, Apple will find a suitable target within the next year and put its cash hoard to work for investors. Hold.
Arris International (ARRS 27.12) reported solid growth, but management forecast weakness in the fourth quarter. Sales soared 41% and EPS surged 33% after increasing 37% and 58% in the previous quarter. Management’s forecast for sales and earnings in the fourth quarter fell slightly short of analysts’ expectations, causing the stock to drop 8%. Arris’s integration of Pace plc is ahead of schedule and producing better than expected results. Buy at 28.37 or below.
AT&T Inc. (T 36.52) produced mixed third-quarter results. Revenue rose 5% and EPS were flat after rising 23% and 4% in the previous quarter, respectively. The company’s total international video customers declined by 47,000. AT&T also lost 326,000 U-verse customers but gained 323,000 satellite TV customers supported by its purchase of DirecTV in July 2015.
The big news from AT&T is the announcement that the company intends to acquire Time Warner for $85 billion. AT&T is hoping that Time Warner’s popular TV and movie content will create a combined company less dependent on two difficult businesses: wireless service and TV distribution. The massive size of this proposed deal is drawing the attention of regulators, politicians and competitors. The AT&T/Time Warner merger will need to clear many regulatory hurdles. Investors currently believe there is less than a 50% chance of the deal getting approved.
Lastly, AT&T raised its quarterly dividend to $0.49 from $0.48, boosting the yield to 5.3%. The company has raised its dividend every year during the past 33 years. Buy at 40.20 or below.
Benchmark Electronics (BHE 25.15) reported solid results. Sales fell 9% but EPS climbed 7% after decreasing 13% and 26% in the prior quarter. Management provided a positive forecast for fourth-quarter sales and earnings. Hold.
Biogen (BIIB 290.89) reported good results. Sales rose 6% and EPS climbed 13% after increasing 12% and 22% in the prior quarter. The slowdown in the MS (multiple sclerosis) market for the treatment of MS in the U.S. is concerning, although Biogen continues to gain market share. MS patients needing treatment declined 2% from a year ago. Biogen is focusing on several very promising drugs in various stages of development. Buy at 317.19 or below.
Danaher (DHR 78.33) reported excellent third-quarter results. Sales surged 18% and EPS climbed 23% after increasing 17% and 16% in the prior quarter. All results are adjusted for the spinoff of Fortive (FTV) on July 5. I recommended selling Fortive previously. Management raised its EPS forecast for the fourth quarter slightly. Danaher expects to buy molecular-diagnostics company Cepheid in the fourth quarter. Buy at 82.38 or below.
General Motors (GM 31.33) easily beat forecasts. Sales advanced 10% and EPS rose 15% after increasing 11% and 45% in the previous quarter. Strong demand for SUVs, pickup trucks and luxury vehicles boosted sales and earnings throughout much of the world, including Europe and China. The slowing demand for cars in the U.S. is troublesome, but GM is taking market share and its international growth is accelerating. GM’s stock price continues to lag, but the 4.9% dividend yield provides a nice return while you wait for the stock to move higher. Buy at 32.22 or below.
Knight Transportation (KNX 28.96) beat analysts’ sales and earnings estimates with smaller decreases. Sales declined 7% and EPS dropped 22% after falling 8% and 21% in the prior quarter. KNX has jumped 7% during the past week. Increased fuel costs, higher driver pay and higher corporate taxes weighed on earnings. Management provided an upbeat outlook for the next several quarters. Hold.
Lear (LEA 121.04) reported excellent third-quarter results, which sent shares higher. Sales advanced 5% and EPS jumped 25% after increasing 2% and 30% in the previous quarter. Sales were helped by the company’s market share gains in automotive seating and electrical systems. Lear announced the signing of an agreement to join a strategic partnership with Tempronics for thermoelectric seat heating and cooling technology. Tempronics’ technology will provide Lear with the ability to heat and cool seats faster while utilizing less energy than systems available today. Also, Management raised its earnings forecast for the fourth quarter. Hold.
LKQ Corp. (LKQ 31.82) sank after the company cut guidance for the fourth quarter. Sales surged 30% and EPS climbed 32% after increasing 8% and 11% in the prior quarter. Recent acquisitions bolstered results. Management slightly lowered its guidance for the current quarter based on recent slow demand. The slowdown is not expected to extend into 2017. LKQ’s lower stock price is attractive. Buy at 34.29 or below.
Quest Diagnostics (DGX 79.93) reported tepid results, which sent its stock price down a bit. Sales were flat and EPS advanced 7% after sales dipped 1% and EPS increased 7% in the previous quarter. Management forecast sales and earnings for the fourth quarter in line with analyst estimates. DGX has gained 17% this year and should continue to perform well. Hold.
Southwest Airlines (LUV 39.24) reported disappointing results, which sent the stock 8.5% lower. Revenue fell 3% and EPS plummeted 30% after increasing 5% and 42% in the previous quarter. Intense competition forced Southwest and other carriers to cut fares. In addition, a computer outage in July forced the airline to cancel more than 2,000 flights. Management expects airline fares to remain under pressure during the remainder of 2016, although the company raised fares by $5 each way on October 27. The current low price presents an excellent buying opportunity. Buy at 41.83 or below.
TRI Pointe Group (TPH 11.10) produced disappointing results, which drove shares down 7.5%. Sales fell 11% and EPS sank 29% after increases of 26% and 24% in the prior quarter. New home orders increased 26% year-over-year in the month of September. Management expects to continue this momentum into the fourth quarter due to the success of TRI Pointe’s new community openings. Buy at 14.72 or below.
VMware (VMW 75.77) reported solid third-quarter results. Sales advanced 6% and EPS climbed 12% after increasing 6% and 4% in the prior quarter. Management raised its sales and earnings forecast for the fourth quarter. VMware will introduce several new products in the fourth quarter, and join with Amazon to add VMware vSphere-based cloud service to Amazon Web Services. Buy at 73.58 or below.
Whirlpool (WHR 147.69) shares dropped 11% after the company reported weak results. Sales dipped 1% and EPS rose 5% after sales were flat and EPS increased 30% in the prior quarter. Management lowered its forecast for fourth-quarter sales and earnings. The steep drop in the British pound following Britain’s June vote to leave the European Union cut into Whirlpool’s sales and profits. Most appliances Whirlpool sells in Britain are imported from elsewhere in Europe, which pushed up production costs. The company raised prices by 5% in July and another 10% in September. Management blamed uncertainty caused by the Presidential election for the weakness in U.S. sales. Domestic sales should bounce back before year-end. Buy at 162.31 or below.
Questions and Answers
Q. I wanted to get your thoughts on AT&T. The current price is below your max buy price but with the outstanding purchase of Time Warner, is it wiser to let that deal work through before investing in this company? (from subscriber M.K.)
A. I believe now is a good time to buy AT&T (36.52) while the stock is depressed. The Time Warner purchase will add value to AT&T because of Time Warner’s hefty cash flow. However, the deal faces an uphill battle to get approved by the various regulatory agencies. In my opinion, there’s a good chance the deal won’t win approval. AT&T possesses a bright outlook whether its purchase of Time Warner goes through or not, and its stock price is undervalued. Buy at 40.20 or below.
Q. Do you believe that AT&T will continue its same dividend after its acquisition of Time Warner? (from subscriber R.S.)
A. AT&T (T 36.52) commented that it will very likely continue its same dividend (recently raised to $0.49 per quarter) during the next three quarters, and further, will add to its history of increasing the dividend every year. With its latest increase, AT&T has hiked its dividend for 33 straight years. The merger, if completed, will add Time Warner’s considerable cash flow, which will make it easy for AT&T to continue increasing dividends, even though AT&T will take on additional debt. Buy at 40.20 or below.
Index of Latest Summaries – Recommendations featured in recent issues.
