In this Weekly Update, I include summaries for 17 Cabot Benjamin Graham Value Investor companies that reported quarterly financial results or other noteworthy news during the past week. Financial reports are for the quarter ended March 31, and prices appearing after each stock symbol are the closing prices on Thursday, April 27, 2017.
The stock market’s breakout to the upside will likely continue despite stretched valuations. We are now about half way through earnings season, and the results look good. Average sales gains for our 27 stocks that have reported thus far are 13%. Average earnings per share increases are 16%. Companies reporting exceptional results include Alphabet, Blackstone, Celgene, LKQ, Taiwan Semiconductor and Western Digital. Laggards include GNC Holdings, Greenhill, Schlumberger, Travelers and Whirlpool.
Also in this Update, I present two indexes that 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, May 4, Cabot Value Model issue 274V
- Friday, May 5, Weekly Update
- Monday, May 8, Wall Street’s Best Daily
- Thursday, May 11, Cabot Enterprising Model issue 274E
- Friday, May 12, Weekly Update
- Monday, May 15, Wall Street’s Best Daily
- Friday, May 19, Weekly Update
- Friday, May 26, No Weekly Update – My Daughter’s Wedding
- Friday, June 2, Weekly Update
Company Reports
Alphabet (GOOG 874.25) easily beat forecasts. Sales surged 22% and EPS jumped 28% after increasing 22% and 7% in the prior quarter. The company reported rapid growth despite complaints in mid-March regarding Google customer ads running alongside objectionable content on YouTube. The gaffe prompted many marketers to pull their spending from the video site. The company responded by giving advertisers more control over where their ads appear. The misstep caused little damage to first quarter profits and management noted that You Tube continues to grow at a significant rate.
Paid clicks, where an advertiser pays only if a user clicks on ads, rose 44%, well above the expected rise of 30%. Mobile search continues to grow exponentially, fueled by mobile shopping. The exceptional results will likely send my Min Sell Price above $1,000 in May. Buy at 831.40 or below.
AT&T (T 39.91) reported tepid first-quarter results. Sales dipped 3% and EPS rose 3% after sales decreased 1% and EPS increased 5% in the previous quarter. AT&T’s DirectV arm lost 233,000 customers during the quarter, and AT&T’s most profitable business, wireless phone services, lost 348,000 customers to rivals T-Mobile and Sprint.
The news at AT&T wasn’t all bad, though. The company’s merger with Time Warner, owner of CNN, TNT, HBO and the Warner Bros. film and TV studio, is on track to close before the end of 2017. The deal will help AT&T potentially find new areas of growth and could transform the phone company into a media giant, making it less dependent on the lagging phone business. Buy at 42.57 or below.
Biogen (BIIB 276.57) reported solid results. Sales advanced 3% and EPS jumped 17% after increasing 1% and 12% in the prior quarter. Recently launched Spinraza (treatment for spinal muscular atrophy) is off to a promising start with the company working on expanding the drug’s access to all patients. Spinraza received a positive opinion in Europe this week. On the Alzheimer’s disease front, Biogen said that it expects both the ENGAGE and EMERGE studies on aducanumab to be 50% enrolled by mid-May. Buy at 276.66 or below.
Celgene (CELG 123.97) recorded solid sales and earnings results. Sales climbed 18% and EPS soared 27% after increasing 16% and 36% in the previous quarter. Celgene’s main drugs for multiple myeloma, Pomalyst and Imnovid, grew 33%. Cancer drugs Revlimid and Abraxane grew 20% and 5%, respectively. Otezla, a drug for psoriasis and psoriatic arthritis, increased 24% to $242 million in sales, but failed to meet analysts’ $337 million forecast. Management predicted the positive momentum will continue during the remainder of 2017 and raised its earnings forecast a tad. Buy at 128.72 or below.
Eastman Chemical (EMN 81.66) reported improved results. Sales advanced 3% and EPS rose 8% after sales declined 2% and EPS increased 5% in the previous quarter. Aggressive cost management and disciplined capital allocation led to rising sales and profits. Buy at 81.16 or below.
EQT Midstream Partners L.P. (EQM 78.34) continued to grow. Revenue rose 9% and EPS fell 2% after increasing 14% and 4% in the prior quarter. EQT Midstream raised its quarterly dividend for the 20th consecutive quarter. The raise to $0.89 from $0.85 increases the dividend yield to 4.5%. EQM forecasts 20% growth in its annual per unit distribution for 2017. Buy at 78.77 or below.
General Motors (GM 34.54) reported excellent sales and earnings. Sales advanced 11% and EPS jumped 35%. In the U.S., results were driven by robust retail sales of full-size trucks, up 3%, and crossovers, up 16%. In China, sales declined 5% during the quarter, although Cadillac sales soared 90%. In 2017, GM plans to launch three new crossovers in the U.S., and nine new or refreshed SUVs and multi-purpose vehicles in China. GM continues to gain market share as a result of the company’s new management team. Hold.
Greenhill & Co. (GHL 28.20) reported weak first-quarter results. Revenue dropped 15% and the company recorded a loss of $0.02 per share compared to increases of 34% and 196% in the prior quarter. Uncertainty with respect to government policy initiatives relating to taxes and regulation diminished the pace of transaction activity in the U.S. and around the world.
Greenhill added six new Managing Directors during the first quarter. In the early days of April, transaction activity picked up, bringing the company’s year-to-date revenue back into line with forecasts, and costs back into a more normal relationship with revenue. Hold.
Johnson Controls (JCI 42.16) posted solid results. Sales advanced 3% and EPS climbed 11% for the quarter ended March 31. Management provided an upbeat outlook for the remainder of 2017. Management’s guidance for 15% EPS growth in 2017 disappointed some investors, but improved economic growth in Europe could bolster JCI’s 2017 results.
Johnson Controls announced plans to sell its Scott Safety business to 3M for $2.0 billion cash. The proceeds will be used to pay down some of the debt incurred by the acquisition of Tyco. Hold.
Lear (LEA 142.59) produced excellent first-quarter sales and earnings. Sales climbed 7% and EPS surged 26% after sales decreased 2% and EPS increased 19% in the previous quarter.
Lear will acquire Grupo Antolin’s seating business, headquartered in France, with operations in five countries in Europe and North Africa. Grupo Antolin’s capabilities are an excellent complement to Lear’s existing seating business. The transaction is expected to close before June 30. Hold.
LKQ Corp. (LKQ 31.19) exceeded estimates. Sales surged 22% and EPS advanced 17% after increasing 23% and 22% in the previous quarter. Management raised its 2017 EPS estimate slightly.
In addition to completing the divestiture of the company’s automotive glass manufacturing business, LKQ acquired parts recycling businesses in Michigan and Sweden, and a specialty automotive products business in Pennsylvania. Buy at 30.10 or below.
LyondellBasell Industries. (LYB 87.42) reported mixed results. Sales surged 25% but EPS sagged 16% after increasing 10% and 6% in the prior quarter. U.S. sales continued to improve, while global demand showed considerable improvement. Earnings were hurt by high factory maintenance costs, which will diminish during the remainder of 2017. Buy at 94.50 or below.
Penske Automotive (PAG 49.05) produced solid results. Sales advanced 5% and EPS climbed 7% after sales dipped 1% and EPS increased 12% in the prior quarter. The number of cars sold climbed 11.6% but same-store dollar sales declined 2.2% due to foreign exchange headwinds. Robust sales in the United Kingdom and added sales from recent acquisitions aided results.
Penske purchased a top performing Mercedes-Benz dealership in Phoenix, Arizona, that will add annual sales of $250 million. Penske derives substantial sales and profits from the U.K. which is producing solid growth. The U.S dollar is showing signs of weakening and could boost earnings above expectations. Hold.
Starbucks (SBUX 61.30) reported solid earnings but sales fell short of estimates. Sales advanced 5% and EPS jumped 15% after increasing 7% and 17% in the prior quarter. Same-store sales rose 3% in the U.S. and 7% in China. Starbucks opened 427 new stores during the quarter, bringing its total store count to 26,161.
U.S. Starbucks Rewards membership grew 11% year-over-year to 13.3 million members. Starbucks Rewards represented 36% of U.S. company-operated sales in the quarter, with Mobile Payment reaching 29% of transactions and Mobile Order and Pay growing to 8% of transactions. U.S. business accelerated during the quarter, leading management to forecast strong growth during the next two quarters and beyond. Weakness in the company’s stock price will present an excellent buying opportunity. Buy at 59.67 or below.
Western Digital (WDC 85.71) easily beat expectations by a wide margin. Management raised its earnings forecast for the current quarter by a noticeable amount. Sales surged 65% and EPS soared 77% after increasing 47% and 44% in the previous quarter.
Sales and earnings received a big boost from Western Digital’s purchase of SanDisk in September 2016. Western Digital has evolved into a leader in the fast-growing data storage industry. Rapid growth should continue during the next several quarters. The stock price is set to surge during the next several days. Buy at 87.14 or below.
Whirlpool (WHR 185.86) reported tepid results. Sales advanced 4% but EPS fell 5% after increasing 2% and 6% respectively in the previous quarter. Restructuring efforts in Europe weighed on sales and earnings. Management expects solid growth during the remainder of 2017. Whirlpool increased its quarterly dividend to $1.10 from $1.00, boosting the yield to 2.4%. Hold.
Zimmer Biomet Holdings (ZBH 118.10) recorded decent sales and earnings, but management reduced its sales and earnings forecast for the remainder of the year. Sales climbed 4% and EPS advanced 6% after increasing 4% and 2% in the prior quarter. Management forecast similar growth in the current quarter, which could lead to accelerated growth in the second half of 2017. Hold.
Index of Latest Summaries – Recommendations featured in recent issues.
