Fourteen Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news during the past week. In today’s update, I also include questions from subscribers along with my answers. Prices appearing after each stock symbol are the closing prices on Thursday, January 26, 2017.
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:
• Thursday, February 2, Cabot Value Model issue 271V
• Friday, February 3, Weekly Update
• Friday, February 10, No Weekly Update – MoneyShow in Orlando
• Thursday, February 16, Cabot Enterprising Model issue 271E
• Friday, February 17, Weekly Update
• Friday, February 24, Weekly Update
• Monday, February 27, Wall Street’s Best Daily
• Tuesday, February 28, Wall Street’s Best Daily
Company Reports
Alliance Data Systems (ADS 221.70) reported solid fourth-quarter results. Sales advanced 5% and EPS climbed 13% after increasing 19% and 20% in the previous quarter. New legislation in Ontario, Canada will prohibit the time-based expiration of reward points associated with all loyalty programs. ADS’s AIR MILES Reward Program previously expired after five years, which will not be allowed under the new law.
Alliance Data took a one-time charge recorded as a reduction of fourth-quarter revenue. The company will create a new rewards program to comply with the law. Fourth-quarter sales were hurt by the write-down and the stock initially fell after the report, but is now rebounding. The lower price presents an excellent buying opportunity for one of my favorite stocks. Buy at 235.17 or below.
Alphabet (GOOG 832.15) posted exceptional results. Sales surged 22% and EPS advanced 7% after increasing 20% and 27% in the prior quarter. Advertising on Google’s search engine rose by more than 20% from a year ago, the 20th straight quarter with 20% growth. Google’s YouTube video service kicked in meaningful revenue and earnings, and is poised to help Google to achieve rapid growth in the future.
Earnings were hurt by a one-time tax adjustment. Cash flow, though, soared 40% bringing Google’s cash hoard to $100 billion. Hold.
AT&T (T 41.77) reported mixed results. Sales decreased 1% after increasing 5% in the prior quarter. EPS rose 5% after being flat in the third quarter. AT&T lost 67,000 wireless phone customers in the U.S. in the quarter, an improvement from larger losses over the past two years. The company has focused on retaining its most profitable wireless customers and shying away from promotional offers used by rivals. AT&T’s DirecTV subsidiary bolstered sales and earnings during the quarter.
Management forecasts modest sales and earnings growth in 2017. If communications regulations are eased and corporate taxes are lowered, profits could jump significantly. In addition, AT&T’s deal to buy Time Warner could transform the phone company into a media giant, with potential to find new areas of growth. Management expects the deal to close before the end of 2017. Buy at 42.57 or below.
Biogen (BIIB 278.89) reported disappointing fourth-quarter results. Sales rose only 1% and EPS slipped 3% after increasing 6% and 13% in the prior quarter. The stock rose 2%, though, because the company reiterated that several promising new drugs are in the process of being introduced. Management expects EPS to rise 10% in 2017, in line with analysts’ estimates. Buy at 300.84 or below.
Celgene (CELG 111.53) reported solid results. Sales advanced 16% after increasing 28% in the prior quarter. Fourth-quarter EPS surged 36% from a year ago. Sales from Revlimid, Celgene’s flagship myeloma treatment, rose 16%. The drug now makes up 61% of total Celgene sales, down from the 66% contribution in the prior quarter. Sales generated by Pomalyst/Imnovid and Otezla soared 29% and 67% respectively from a year ago. Management forecast another banner year in 2017 with profits increasing 20%. Buy at 122.07 or below.
EQT Midstream Partners (EQM 77.21) raised its quarterly dividend to $0.85 from $0.815. EQM’s yield is now 4.4%. The company will report fourth-quarter results on February 2. Buy at 75.82 or below.
Greenhill & Co. (GHL 28.55) reported outstanding fourth-quarter revenue and earnings. Revenue surged 34% and EPS tripled, capping a breakout year for the company. Based on Greenhill’s backlog of assignments, management forecast rapid growth in the first half of 2017, which will likely lead to strong growth in the latter half of 2017. Profits could receive a significant boost if corporate tax rates are reduced—the company’s tax rate for 2016 totaled 35%. GHL’s price jumped to 30.00 after the report. Buy at 26.82 or below.
Lear Corp. (LEA 144.46) recorded solid results. Sales fell 2% but EPS jumped 19% after increasing 5% and 25% in the prior quarter. In December 2016, Lear acquired AccuMED, a manufacturer of specialty fabrics for auto seats and non-automotive products. AccuMED will bolster sales and earnings in 2017. New vehicle communication and connectivity products will also bolster 2017 sales. Hold.
Quest Diagnostics (DGX 92.89) beat analysts’ estimates. Sales rose 1% and EPS climbed 10% after sales were flat and EPS increased 7% in the previous quarter. Management expects sales to accelerate in 2017, based on new testing capabilities. EPS will likely rise about 7% in 2017. DGX is nearing my Min Sell Price of 95.51. I will send out a Sell Alert if 95.51 is achieved. Hold.
Starbucks (SBUX 58.46) posted disappointing results. Sales advanced 7% and EPS rose 13% after increasing 16% and 26% in the prior quarter. Same-store sales increased 3%. The increase included a 5% advance in average ticket totals and a 2% decrease in transactions.
Mobile Order and Pay represented 7% of U.S. transactions in the quarter, up from 3% in the prior year. However, the additional mobile orders caused long lines at pick-up counters and drove some customers away. The company opened 649 net new stores in the quarter, bringing total stores to 25,734 in 75 countries worldwide. SBUX shares fell 4% to 56.15 after the report. Buy at 56.33 or below.
Travelers Companies (TRV 118.13) beat expectations. Revenue rose 8% and EPS climbed 10% after revenue increased 3% and EPS fell 18% in the previous quarter. Investment income spiked 16% and net premiums written increased 3.3% from a year ago. Auto insurance profits were disappointing because distracted driving caused by increasing cellphone use triggered substantially more severe auto accidents.
Travelers and other auto insurers will seek rate increases to cover high claims. Catastrophe losses from hurricane Matthew and wildfires in Tennessee also hurt earnings. Rising interest rates could help profits in 2017. Hold.
VMware (VMW 84.22) beat analysts’ estimates again. Sales advanced 9% and EPS climbed 13% after increasing 6% and 12% in the prior quarter. New cloud products and services bolstered results. Management forecast strong results for 2017. Hold.
Whirlpool (WHR 173.94) reported mixed results. Sales inched ahead 2% and EPS advanced 6% after sales dipped 1% and EPS increased 6% in the previous quarter. Profits were severely hurt by the sharply lower pound caused by Britain’s exit from the European Union. Earnings from Europe, the Middle East and Africa plunged 80%, as weak demand added to Whirlpool’s woes. The company raised prices in Britain, but competitors didn’t follow.
In North America, Whirlpool’s largest market, fourth-quarter sales rose 7% but profits increased only 2% caused by the falling Mexican peso and aggressive discounting by competitors. Whirlpool will cut costs and introduce more profitable products in 2017. WHR fell 9% to 173.94 after the report was released. Hold.
Questions and Answers
Q. According to your Jan Drive spreadsheet, SWKS’s min sell was 102.09? I’ve lowered my sell price to 92.81 per your alert, but the stock dropped in price since. Should I just sell at the current price or wait? (from subscriber S.A.)
A. Skyworks Solutions (SWKS 91.01) briefly stayed above 92.81, and I also missed selling my shares. I advise waiting for a higher price, but wait no longer than Monday am, January 30.
Q. I would like your take on the new President and the forecast of the market? (from subscriber D.B.)
A. I think President Trump has some good ideas on how to improve the U.S. economy, and hopefully he will be able to find his way through the political jungle to get some measures enacted. The economy could receive a boost if our new President is able to lower taxes, ease regulations, negotiate better trade agreements, spend heavily on infrastructure and defense, and lower repatriation fees to bring home trillions of corporate dollars sitting in overseas bank accounts. In my opinion, Trump will accomplish some of these goals, or at least start the process, which will bolster stocks in the U.S.
Companies that will benefit from the President’s policies include companies in the financial, energy, materials and industrial sectors. Technology stocks should also perform well, but health care stocks, including drug companies, could face a tough road ahead.
Q. Should I buy more AIOCF now that our patience has paid off? I’m showing a small profit!?? (from subscriber T.A.)
A. I like Avigilon (AIOCF 11.06) and believe the company will produce four quarters of solid growth in 2017. Keep in mind, the stock tends to surge when quarterly sales and earnings are good, and plummet when results fall short. Avigilon’s problem is consistency. Like many small companies, Avigilon tends to produce a lot of surprises. I’m not going to add to my holding, but if you like the chart, the recent break-out could lead to a big gain. Demand for surveillance equipment is strong, which will help Avigilon achieve its goals.
Q. Regarding Greenhill & Co. I understand the nature of the business, however, it seems that the beta is a little high and:
• Dividend payout is high at 127%,
• After considering net profits and debt, it appears they are borrowing money to continue to pay the great dividends,
• Current ratio in only 1.27,
• Most of the stock is held by institutions per the S&P,
• Despite near-term uncertainties, GHL is expanding its investment bank staff…increasing expenditures,
• Potentially higher U.S. interest rates may slow down some mergers and
• The last few years have not seen any or very little revenue growth.
I realize that financing institutions may receive a boost if financial regulations are eased by the Trump administration. Thus, new business is anticipated, but enough to maintain the dividend rate without borrowing to pay them?
It seems we are betting on the coming growth and more efficient management to increase profits and thus the overall price. What am I missing.? (from subscriber G.H.)
A. Your facts on Greenhill & Co. are accurate. The company has produced volatile revenue and earnings results during the past decade that have produced very little growth. The one number that has remained steady has been the $0.45 quarterly dividend which has stayed at that rate for nine years. But as you pointed out, reduced cash flow and earnings in 2014 and 2015 has placed the dividend in jeopardy.
Chairman Robert Greenhill and CEO Scott Bok have embarked on an ambitious program to increase revenue and earnings. Mr. Greenhill is well-known on Wall Street after serving as president of Morgan Stanley and chairman and chief executive of Smith Barney. Recently, Greenhill and Bok attracted top-notch executives to head up operations in London and South America (x-Brazil), which will create new growth.
For the first nine months of 2016, revenue surged 26% and EPS soared 110%. Several mergers, scheduled to close in the third quarter, slipped to the fourth quarter, which will propel revenue and earnings substantially higher in the fourth quarter. Management forecasts a continuation of these trends in 2017, as well. Revenue will likely rise 12% and EPS will increase 25% in 2017. Mega-mergers will likely diminish in the U.S. in 2017, but Greenhill focuses on smaller acquisitions, mergers and workouts, which should see healthy activity. The company could exceed analysts’ forecasts in 2017 if financial regulations are eased and the U.S. economy perks up. Fourth-quarter financial results will be released on Thursday, January 26. I will be looking for $95 million in revenue, $0.60 EPS, and an indication that several deals are in the works.
Greenhill has a solid balance sheet with little debt (9% of total equity) and adequate cash, although cash flow will need to increase in 2017 to cover the hefty dividend adequately. In my opinion, Greenhill & Co. is well on its way to post strong revenue, cash flow and earnings gains during the next two years and beyond. Buy.
Index of Latest Summaries – Recommendations featured in recent issues.
