In this Weekly Update, I include summaries for three 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 unless otherwise stated, and prices appearing after each stock symbol are the closing prices on Thursday, May 18, 2017.
The stock market took a big hit on May 17, as the Dow Jones Industrial Average dropped 373 points. Politics in the U.S. and even internationally have had little effect on the U.S. stock market’s stellar advance since President Trump’s election in November until this week. May 17’s market decline was caused by a sudden drop in confidence in the President brought on by the firing of FBI director James Comey.
Investors and members of Congress, for the moment at least, are questioning Mr. Trump’s ability to lead our country without causing daily disruption. Investors fear that the President’s agenda to cut taxes, increase infrastructure spending and ease regulations could be in jeopardy.
Subsequently, yesterday May 18, former FBI chief Robert Mueller was appointed to oversee the federal investigation into Russia’s alleged meddling in the November presidential election. The appointment of a credible person dampened investors’ fears. In addition, conservative billionaire Charles Koch announced he is launching a multimillion dollar campaign to help push the President’s tax plan through Congress. The campaign will include massive advertising and the involvement of activists.
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:
- 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
Avigilon AVO.TO 14.73) reported somewhat weak first-quarter results. Sales rose 15% and EPS declined 22%, after increasing 25% and 21% in the prior quarter. The company launched several new products and added new personnel to its sales team. Avigilon sold its headquarters building in Vancouver, BC for $107.5 million Canadian, and will lease the building back from the new owner. Management expects profits to improve during the remainder of 2017. Buy at 16.88 or below.
Cisco Systems (CSCO 31.38) beat sales and earnings forecasts for the quarter ended April 30, but management’s forecast for a 4% to 6% drop in sales for the current quarter sent shares down 7.2%. Sales declined 1% and EPS 5% after sales fell 3% and EPS increased 3% in the previous quarter. Cisco will lay off another 1,100 employees as part of a major restructuring program. The company is shifting its focus from hardware to software and services. The change will produce better growth in the future. Hold.
Home Depot (HD 155.70) recorded excellent results for the quarter ended April 30. Sales climbed 5% and EPS surged 16% after increasing 6% and 19% in the prior quarter. Same store sales rose 5.5% overall, and 6.0% in the U.S. The shortage of houses for sale in the U.S. is causing homeowners to stay in their old homes and take on new renovation projects. The flourishing homebuilding sector is also creating heightened demand for Home Depot products and services. Hold.
Questions and Answers
Question. Will you let me know if you are still as confident as you were previously on Chicago Bridge & Iron (CBI)? Should I double down? (From subscriber P.G.)
Answer: Note: On May 18, CBI announced the retirement of Philip K. Asherman, 66, from his role as President and Chief Executive Officer of CBI and as a member of the company’s Board of Directors effective July 1, 2017. Patrick K. Mullen will become President and Chief Executive Officer. I believe this is good news. The company’s leadership has been in question, and a change was long overdue.
I have searched for additional clues to explain why Chicago Bridge & Iron (CBI 19.35) is continuing to fall. I haven’t found anything to fully explain the drop in the price, but I would like to keep you informed of the latest news and rumors. I continue to have confidence in my Buy rating because CBI is a big company and makes lots of money.
The initial drop in the stock a week ago, when CBI announced weak first quarter results, is old news. However, there is a rumor circulating that Toshiba could declare bankruptcy soon. CBI does some work with Toshiba, but the impact on CBI would likely be small or minimal because CBI is a giant company.
The outcome of a CBI lawsuit against Westinghouse Electric, CBI’s former Shaw subsidiary, is up in the air. CBI is suing Westinghouse for $428 million regarding the calculation of working capital involved in the sale of Westinghouse to Toshiba. Westinghouse is suing CBI for $2 billion claiming that CBI hid some of the problems in two Westinghouse nuclear power projects in South Carolina and Georgia. CBI sold its Westinghouse subsidiary to Toshiba in 2015, and Westinghouse declared bankruptcy in March 2017. The judge will decide how the case should proceed after arguments were heard on May 3, 2017. Because of its complexity, the case could drag on for years.
The drop in CBI shares is still a mystery because the Westinghouse fiasco is far from being resolved, and the impact of a Toshiba bankruptcy is slight. The possibility of an activist investor taking a large position in CBI is now a good possibility. A push for executive changes that could get the company back on course would provide a huge boost to CBI’s stock price, but no rumors are brewing. CBI is still a Buy, with limited downside and plenty of upside possibilities.
Question: Can you give me your current thinking on Greenhill (GHL)? I purchased GHL back in March when it was on the Current Buy Recommendations list (around $29). It has since dropped over 20% to $23. What is your near-term and long-term outlook for the company? Should I continue to Hold? (From subscriber J.G.)
Answer: Greenhill & Co. (GHL 21.55) reported disappointing 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. Earnings tend to be volatile, depending on large fees that the company earns on mergers and acquisitions.
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. Management believes the poor showing in the first quarter is temporary, and revenue and profit growth will resume in the current quarter and next several quarters. I will likely add Greenhill to my Enterprising Model Buy list soon. I am waiting for the stock to settle. Hold.
Index of Latest Summaries – Recommendations featured in recent issues.
