Sell Maiden Holdings (MHLD) and Nissan (NSANY)
In this Weekly Update, I include summaries for 10 Cabot Benjamin Graham Value Investor companies that reported quarterly financial results or other noteworthy news during the past week. I also include questions from subscribers along with my answers. Financial reports are for the quarter ended March 31, and prices appearing after each stock symbol are the closing prices on Thursday, May 11, 2017.
My special report on the state of the U.S. economy highlighting the auto industry and several other sectors is available on the cabotwealth.com website under Cabot Benjamin Graham Value Investor tab or click here. In the report, entitled, Special Report on Stocks to Buy, Stocks to Hold, and Stocks to Sell, I discuss which sectors look good and which sectors look bad.
I see further gains for stocks in the technology, financial, industrial, materials, consumer discretionary and healthcare segments. I foresee problems in the oil, automotive and retail sectors. Activision Blizzard (ATVI) and Penske Automotive (PAG) are recommended to be sold, along with Maiden Holdings (MHLD) and Nissan (NSANY). See below for details on MHLD and NSANY.
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:
Tuesday, May 16, 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
Thursday, June 8, Cabot Value Model issue 275V
Friday, June 9, Weekly Update
Thursday, June 15, Cabot Enterprising Model issue 275E
Friday, June 16, Weekly Update
Company Reports
Allergan (AGN 231.01) announced first-quarter results that met forecasts. Sales rose 5% and EPS climbed 10% after sales declined 4% and EPS increased 14% in the prior quarter. Allergan’s leading brands led by Botox performed well and new products enjoyed successful introductions. The company completed the acquisitions of LifeCell and ZELTIQ, which will deliver additional sales and earnings in future quarters. Allergan reported that seven new drugs are scheduled to launch in 2017. Management raised its sales and earnings forecast for the remainder of 2017 by a small margin. All systems are go at the company. Buy at 239.08 or below.
Berkshire Hathaway (BRKB 163.27) reported mixed results. Revenue surged 25% but EPS dropped 27% after increasing 11% and 14% in the previous quarter. Catastrophe losses caused by hail and wind storms hurt results in the company’s reinsurance group. Berkshire doubled its holding in Apple, and still ended the quarter with $79 billion in cash. Berkshire’s book value rose 3.5% from a year ago. Buy at 165.21 or below.
Chicago Bridge & Iron (CBI 24.32) reported weak results. Sales declined 11% and EPS plunged 76% after decreasing 22% and 46% respectively in the prior quarter. Management stated that the company is winning new contracts, including a $1.3 billion contract from Total Petrochemicals, which bodes well for the future. But earnings were hurt by underperformance on two large construction projects. Management lowered its 2017 forecast for EPS to $3.50 to $4.00, compared to $4.10 expected by analysts. The company earned $4.23 in 2016.
I believe the drop in earnings is a temporary setback, and additional contract awards for infrastructure projects in the U.S. and elsewhere with provide a boost to future sales, earnings and CBI stock price. CBI sells at 6.8 times expected EPS of $3.75, which is a bargain. Buy at 32.06 or below.
Disney, Walt (DIS 109.58) produced solid numbers despite further problems at ESPN. Sales advanced 3% and EPS added 15% after declines of 3% and 10% in the prior quarter. Disney movie studios and theme parks and resorts produced profit gains of 21% and 20% respectively.
Sports cable network ESPN suffered weak results again. Consumers prefer video streaming which takes market share from traditional cable TV. Disney will introduce an ESPN-branded subscription streaming service soon. The company is also cutting costs and laying off 100 journalists and on-air commentators at ESPN.
The opening of Shanghai Disney recreation park plus five new Disney movies slated to be released before the end of 2017, including Star Wars Episode VIII, will provide continued growth during the remainder of 2017. Hold.
Magna International ‘A’ (MGA 44.67) easily beat analysts’ estimates. Sales climbed 5% and EPS raced 25% higher after increasing 8% and 4% in the previous quarter. The company raised its full-year sales forecast slightly. Magna’s $1.9 billion purchase of transmission manufacturer Getrag helped offset the loss of a contract with BMW Mini.
Magna, with its experience and expertise, is gaining market share from rivals in the race to secure contracts to make parts and assemblies for electric and self-driving vehicles. Hold.
Maiden Holdings (MHLD 11.35) reported mixed results. Net premiums earned surged 15% but EPS fell 4% after increasing 6% and 41% in the previous quarter. Management forecast better results for the remainder of 2017, although analysts have ratcheted down estimates for 2017 earnings.
Maiden has missed revenue and/or EPS estimates regularly during the past several quarters. Dividends have been raised each year and now yield 5.3%, but earnings have become more erratic. Therefore, I suggest selling Maiden Holdings and moving into more attractive opportunities. SELL.
Nissan Motor (NSANY 18.93) reported decent results. Sales fell 4% after declining 6% in the prior quarter. Nissan has been offering larger sales incentives than rivals, but sales declined anyway. EPS jumped 27% after increasing 14% in the previous quarter. Management expects earnings to decline 19% during the next 12 months ending March 31, 2018 due to rising costs and slowing car sales in the U.S.
Management’s negative prediction along with the peaking U.S. auto market spells trouble ahead. I recommend selling NSANY. SELL.
Priceline Group (PCLN 1813.56) results eased somewhat. Sales traveled 13% higher and EPS climbed 7% after increasing 17% and 13% in the prior quarter. Management provided a tepid outlook for the current quarter financial results. PCLN stock price fell $100 during the past two days but is still well above my Max Buy Price of 1510.30.
Priceline’s travel booking surged 24% from a year ago, and room-nights booked were up 27% which bodes well for quarterly results for the next few quarters. Analysts, though, are lowering their EPS estimates for 2017 and 2018 in reaction to the slowdown in the first quarter. Priceline will now be able to beat estimates more easily. Hold.
Spectra Energy Partners LP (SEP 43.54) reported excellent results. Sales rose 12% and EPS fell 15% after increasing 5% and 1% in the prior quarter. Spectra’s board of directors increased the quarterly dividend for the 38th consecutive quarter. The new rate is $0.70125, up from $0.68875, resulting in a yield of 6.4%. A multitude of pipeline expansion projects, completed or in progress, will lead to accelerating sales and earnings during the next several quarters. Hold.
Wheaton Precious Metals (SLW 20.02) formerly Silver Wheaton, produced solid results. Sales gained 6% and EPS jumped 40% after increasing 29% and 27% in the previous quarter. Sales of gold (50% of sales) soared 35%, silver sales (50% of sales) dropped 31% caused by a labor strike at one of the company’s silver mines. In addition, Wheaton has two contracts expiring this year which will hold back sales. Gold prices edged up 3%, and silver prices increased 19%. Commodity prices are forecast to rise further in 2017 which will help results going forward. Hold.
Questions and Answers
Question: What are your thoughts regarding GM? Also, what are your current thoughts regarding GNC? (from subscriber C.B.)
Roy: General Motors (GM 34.11; Max Buy Price 33.71; Min Sell Price 43.20) is one of the most undervalued stocks in my database. However, the stock has weakened because of sluggish sales in the auto industry during the first four months of 2017. GM’s sales aren’t falling as much as the sales of its competitors because the company continues to take market share. Also, GM has quickly shifted manufacturing to SUVs, crossovers and pickups, which are selling well.
I dislike selling GM at the current bargain level. However, if the current downtrend in auto sales continues for the remainder of the year, I might have to recommend selling the stock.
I still like GNC Holdings (GNC 6.80). The company reported improved sales and earnings recently which sent shares substantially higher. The stock has retreated, though, because rumors about a possible takeover from KKR have disappeared. I believe GNC’s new management is improving the company’s prospects for future growth. My conclusion is that the current stock price correction presents an opportunity to buy a speculative stock at a very reasonable price.
Index of Latest Summaries – Recommendations featured in recent issues.
