Changes in Opinion: Convergys (CVG) Hold to Sell and TRI Pointe Group (TPH) Buy to Sell.
In this Weekly Update, I include summaries for 15 Cabot Benjamin Graham Value Investor companies that have reported quarterly financial results or other noteworthy news during the past week. I also include questions from subscribers along with my answers. Prices appearing after each stock symbol are the closing prices on Thursday, February 23, 2017.
Also in this Update, I 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:
- Monday, February 27, Wall Street’s Best Daily
- Tuesday, February 28, Wall Street’s Best Daily
- Thursday, March 2, Cabot Value Model issue 272V
- Friday, March 3, Weekly Update
- Thursday, March 9, Cabot Enterprising Model issue 272E
- Friday, March 10, Weekly Update
- Friday, March 17, Weekly Update
- Tuesday, March 21, Wall Street’s Best Daily
- Wednesday, March 22, Wall Street’s Best Daily
- Friday, March 24, Weekly Update
- Friday, March 31, Weekly Update
Company Reports
Apple (AAPL 136.53) shares have soared 51% during the past nine months based on rising sales and earnings forecasts. So far in 2017, AAPL has gained an impressive 18% compared to an increase of 6% for the S&P 500 Index.
There’s speculation that Apple’s 10th anniversary iPhone, expected later this year, will be a big success. Anticipated features include three sizes instead of the usual two. The case will be made almost entirely of glass complete with the effects of an infinity swimming pool. The new phone could also provide wireless charging. These and possibly other improvements could enable Apple to charge record prices for the phone.
Apple, as usual, is being very secretive about the new features, so this is all speculation. The guessing game will likely continue to push Apple’s stock price higher during the next several months, though. My Min Sell Price of 161.22 appears to be achievable within the next six to 12 months. Hold.
Arris International plc (ARRS 26.26) reported excellent fourth-quarter sales and earnings. Sales soared 60% and EPS surged 25% after increasing 41% and 33% respectively in the prior quarter. Results receive a big boost from Pace, a company acquired in January 2016. Arris’s backlog of orders jumped 54%, which should lead to substantially higher sales in 2017.
Management’s is forecasting slower sales and earnings for the current quarter with sales falling 10% and EPS dropping. Management cited several short-term obstacles including the termination of a customer’s call center contract and some customers’ high inventories. High inventories will lead to lower demand during the current quarter. The news caused Arris’s stock price to drop 14%, which is way overdone. Growth should resume in the second half of 2017.
In addition, Arris will purchase Broadcom’s Ruckus Wireless and Brocade’s ICX Switch operations for $800 million cash. The purchases will expand Arris’s leadership in converged wired and wireless networking technologies beyond individual homes into the education, commercial and hospitality segments. The purchases will add significant sales and earnings in the second half of 2017. Arris is on track to achieve its long-term goals. Hold.
Convergys (CVG 22.63) reported lackluster results. Sales advanced 1% but EPS fell 11% after sales were flat and EPS rose 2% in the previous quarter. Management forecast flat sales growth and flat EPS growth in 2017 disappointing investors. CVG fell 9% in reaction. After solid sales and earnings gains in the first half of 2016, Convergys has fallen into a mild slump which will likely continue through the end of 2017. Therefore, I recommend selling your CVG shares now.
Convergys was first recommended in the December 2014 in the Cabot Enterprising Model using my low price-to-book-value analysis. The stock has gained 12.2% during the past 26 months compared to an increase of 17.9% for the Standard & Poor’s 500 Index. Sell.
Eaton Vance (EV 47.20) reported solid results for the quarter ended January 31, 2017. Revenue advanced 7% and EPS climbed 2% after increasing 2% and 8% in the prior quarter. Management expects favorable revenue and earnings growth during the next three quarters. EV tacked on 5% after results were announced. Total assets under management surged 20% from a year ago. Calvert Management, acquired on December 30, 2016, boosted assets by 9%. Hold.
GNC Holdings (GNC 7.72) shares dropped 7% on February 16 after the company released disappointing fourth-quarter results and suspended its dividend. Shares turned around quickly, though, and have increased 17% during the past week. Interim CEO Robert Moran purchased 600,000 shares on February 21, which investors interpreted as a vote of confidence that GNC’s prospects are improving. Michael Hines, a GNC director, purchased 125,000 shares on the same day. Buy at 10.61 or below.
Home Depot (HD 144.71) reported excellent results for the quarter ended January 31, 2017 and hiked its dividend. Sales advanced 6% and EPS surged 23% after increasing 6% and 19% in the prior quarter. Same-store sales rose an impressive 5.8%. Strong home-building and home-improvement markets and rising consumer confidence and spending aided Home Depot’s strong sales performance. Management expects similar good results during the next three quarters.
HD’s board of directors raised the quarterly dividend to $0.89 from $0.69 resulting in a higher current yield of 2.5%. I will reassess my Max Buy and Min Sell Prices for HD in the upcoming Cabot Value Model Edition published on March 2. Buy at 135.47 or below.
Lear (LEA 142.88) increased its quarterly dividend to $0.50 from $0.30. Lear’s dividend yield is now 1.4%. Lear previously reported excellent fourth-quarter results. Hold.
LKQ Corp. (LKQ 31.58) reported slower growth in the fourth quarter. Sales climbed 23% and EPS advanced 22% after increasing 30% and 32% in the previous quarter. Sales in Europe soared 60% thanks largely to several acquisitions and the opening of 10 new branches. LKQ will sell its glass manufacturing business. Management provided a conservative forecast for sales and earnings growth in 2017, which sent LKQ shares down 4%. Hold.
Magna International ‘A’ (MGA 45.15) reported solid results. Sales jumped 13% and EPS rose 9% after increasing 16% and 33% in the prior quarter. Magna gained market share from competitors during the quarter.
Magna increased its quarterly dividend to $0.275 from $0.25 U.S. dollars. The new yield is 2.4%. Buy at 46.01 or below.
Nissan Motor (NSANY 19.68) announced that Chairman, President and CEO Carlos Ghosn will step down from his duties at Nissan. Mr. Ghosn will remain CEO of Renault and take on a new role to oversee the three-way alliance between Nissan, Renault and Mitsubishi. Nissan owns 15% of Renault, and recently acquired a 34% majority interest in Mitsubishi for $2.3 billion. Renault, in turn, owns 43% of Nissan.
Mr. Ghosn, as administrator, will help the three automakers compete with larger rivals and create synergies through shared purchasing, expanded global markets and shared manufacturing facilities. Nissan and Renault have benefited from their alliance dating back to 1999. The unusual alliance is expected to benefit Nissan in 2017 and beyond. Hold.
Royal Bank of Canada (RY.TO 98.26) easily beat estimates for the quarter ended January 31, 2017. Revenue advanced 2% and EPS surged 16% after revenue increased 16% and EPS declined 5% in the previous quarter. Wealth management income soared 42% from a year ago, bolstered by higher interest income, greater assets under management and increased performance fees.
Royal Bank increased its quarterly dividend to $0.87 from $0.83 Canadian dollars. The new yield is 3.5%. The stock is nearing its Min Sell Price of 100.40 on the Toronto Stock Exchange or 76.51 on the New York Stock Exchange. I will issue a sell alert if Royal Bank reaches my Min Sell Price. Hold.
Scripps Networks Interactive (SNI 81.70) reported mixed results. Sales gained 4% but EPS dropped 20% after increasing 3% and 17% in the prior quarter. Advertising revenue increased 7.5%, which was encouraging, but accounting adjustments caused earnings to fall. Management provided an upbeat outlook for 2017, sending SNI up 8%. Hold.
Toll Brothers (TOL 33.96) reported mixed results for the quarter ended January 31, 2017. Sales dipped 1% and EPS rose 5% after sales surged 15% and EPS declined 16% in the prior quarter. Toll’s number of homes delivered increased 12% to 1,190, but the average home price dropped 11% to $773,700 due to changes in product mix and the recent purchase of Coleman Homes.
New contracts rose 14% in dollars and 22% in units compared to a year ago, which bodes well for the next several quarters. Management raised its forecast of homes delivered by 100 units, and the board of directors initiated a quarterly dividend of $0.08. The indicated yield is 0.9%. Shares rose 6%. Hold.
TRI Pointe Group (TPH 12.11) reported disappointing fourth-quarter results. Sales declined 12% and EPS dropped 31% after decreasing 11% and 29% in the previous quarter. TRI Pointe’s backlog units increased 3%, but the dollar value of its backlog decreased 5%. The average sales price in backlog at quarter end fell 8% to $554,000.
Management is optimistic that the company can deliver 10% more homes in 2017 than in 2016 at an average price of $570,000, an increase of 3% over 2016. Compared to the company’s backlog, management’s forecast seems unachievable. Therefore, I advise selling your TPH shares now. Sell.
UnitedHealth Group (UNH 162.60) is accused of overbilling Medicare and defrauding the U.S. of hundreds of millions of dollars. The lawsuit, filed by a disgruntled former executive of the company, caused UNH shares to slide 4%, but the stock has since recovered. UnitedHealth stated that the claims were untrue and that the company will fight the suit vigorously. Buy at 164.21 or below.
Questions and Answers
Q: Please provide your current thoughts on SNCR. It moved up in the fall, perhaps on takeover speculation, but now it is down some 17% after earnings fell short and its acquisition of IL. (from subscriber P.R.)
A: Synchronoss Technologies (SNCR 30.86) fell sharply after reporting weak fourth-quarter results. The company completed its acquisition of Intralinks Holdings during the quarter, as well as the divestiture of its carrier activation business. Management forecast slow growth in 2017 as Synchronoss integrates Intralinks. The forecast shocked investors a bit, but the overreaction has created an excellent buying opportunity. The company operates in the fast-growing cloud business, and the future looks bright after 2017. Buy at 38.30 or below for long-term holding.
Q: I have seen more recent comments regarding Whirlpool. These include:
- Estimated 4.7% growth in sales in 2017 and 5.2% in 2018. Outlook also reflects a recovery in the US housing market.
- Increase in gross margins benefited from tame raw material inflation, modest price increases, a shift in product mix and cost savings.
- EPS per S&P is $16.05 for 2017 and $18.49 for 2018.
Also, the U.S. Depart of Commerce announced in December 2016 a final decision that Samsung and LG engaged in ongoing dumping of clothes washers from China into the U.S., in violation of the trade law agreements. A healthy duty has been assessed against each company. This should be a positive for WHR and should allow for better competition and could lead to market share gains in North America.
They have also increased their dividends over the last 5 years and are buying back stock.
I know your max buy for the company was $160.16, but does the more recent info noted above change your opinion in any way? (from subscriber G.H.)
A: Whirlpool (WHR 180.72) seems poised for better growth in 2017 and 2018, but analysts have been lowering their estimates. Value Line and Standard & Poor’s have lowered their EPS forecasts, and analysts have lowered their average estimate for 2017 to 15.61 from 16.07 on average, and for 2018 to 17.58 from 18.35. Recent developments, especially the decision against Samsung and LG, would seem to indicate that Whirlpool will easily beat lowered estimates.
In my opinion, the sharp rise in consumer confidence will lead to robust consumer spending in 2017 and 2018, which will provide an additional boost. My current 2017 EPS estimate is $15.84, but $16.00 to $16.15 seems achievable. Whirlpool has missed estimates during the past couple of quarters, so a couple of “beats” could send the stock up over 200. S&P has a 12-month price target of 201 and my Min Sell Price is 203.25, but both could be low by about 10% to 15%. If so, WHR’s current price is quite reasonable with 25% upside potential during the next 12 months. I expect another quarterly dividend hike of $0.10 when the board of directors meets in the second quarter. Buy.
A: Where can I find your most recent buy recommendation on AIOCF?
Q: The last full write-up for Avigilon (AIOCF 11.65) appeared in my January 12, 2017 Cabot Enterprising Model Issue: I usually write up stocks about every four months. I anticipate writing about quarterly sales and earnings in my Weekly Update after Avigilon reports fourth-quarter results on February 28. Until then, see the January Cabot Enterprising Model Issue.
Index of Latest Summaries – Recommendations featured in recent issues.
