Earnings season, which brings quarterly financial reports to light, has begun. Initial quarterly reports have spawned some volatile action in individual stocks. Some of the wide swings are warranted and some aren’t. I sort through the maze and offer my advice on nine companies in the updates below.
I also include an important question on Canadian Tire from a subscriber along with my answer. Max Buy and Min Sell Prices are the recent price targets appearing in the Cabot Enterprising Model Issue 276E, which was sent to you on July 20. Prices appearing after each stock symbol in this Update are the closing prices on Thursday, July 20, 2017.
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 four weeks will be:
Tuesday, July 25, Wall Street’s Best Daily
Friday, July 28, Weekly Update
Thursday, August 3, Cabot Value Model issue 277V
Friday, August 4, Weekly Update
Thursday, August 10, Cabot Enterprising Model issue 277E
Friday, August 11, Weekly Update
Friday, August 18, Weekly Update
Friday, August 25, Weekly Update
Company Reports
Alliance Data Systems (ADS 238.62) reported disappointing sales and EPS. Sales rose 4% and EPS advanced 4%, after increasing 12% and 2% in the prior quarter. Ed Heffernan, president and chief executive officer of Alliance, stated that sales will remain solid during the remainder of 2017, but $0.40 of EPS will be delayed until 2018. Analysts had been expecting accelerating sales and earnings growth in 2017. ADS shares dropped 9.5% after sales and earnings were released.
Management, however, remains quite optimistic about 2018. Sales are forecast to climb 12% and EPS are expected to jump 19% to $21.50. Since 2018 is less than six months away, I advise you to stay on board. In fact, if your ADS holding is small, you can add shares. If you don’t own Alliance Data Systems, I advise buying at the current low price. Buy at 258.55 or below.
Blackstone Group LP (BX 34.28) report excellent second-quarter results. Revenue climbed 30% and EPS surged 34%, after increasing 100% and 165% in the previous quarter. The revenue and earnings results came up short of analysts’ estimates, but 30% growth is quite satisfactory.
Assets under management increased 4% from a year ago. The limited partnership reported strong gains in investment and real estate income, and weak performance from its energy holdings. During the quarter, Blackstone sold shares of Hilton Worldwide Holdings and office buildings acquired in 2007. Last month, Blackstone entered into an agreement to sell Logicor, its European logistics real estate firm, for $14 billion.
Blackstone will pay a quarterly distribution of $0.54 in the third quarter compared to distributions of $0.87 in the prior quarter and $0.36 in the year-ago quarter. Blackstone’s yield is 6.7% based on the last four quarterly payments. Buy at 33.70 or below.
Danaher (DHR 83.20) beat Wall Street expectations. Sales advanced 6% and EPS climbed 10%, after increasing 7% and 8% in the prior quarter. Management anticipates accelerating growth during the remainder of 2017, supported by improving order trends and added sales and profits from the Pall and Cepheid acquisitions. Hold.
Home Depot (HD 147.03) stock price fell 4.1% on July 20. Sears announced that the company will start selling its Kenmore appliances on Amazon, becoming the latest big American brand to capitulate to the online retail giant. Amazon’s move into appliances, including refrigerators, stoves and dishwashers, signals the online behemoth’s first foray into large bulky items. The news scared investors owning shares of home improvement giants Home Depot and Lowe’s, causing the big appliance sellers to drop more than 4%.
The Amazon-Sears venture will likely place a cloud over Home Depot and Lowe’s. However, Sears’ total sales of $22 billion is dwarfed by Home Depot and Lowe’s combined sales of $165 billion. Further, Home Depot and Lowe’s sales are well diversified with appliances making up a small fraction of total sales. Sears, as everybody knows, is teetering on the verge of bankruptcy. The company’s debt load is a burden, the company has produced huge deficits every year for the past six years, and Sears and its Kmart subsidiary are closing stores every month. Sears will need to compete on price, which will squeeze profits further.
In my opinion, the stock prices for HD and LOW will drop a bit further, but then move sideways for a while before climbing to record highs. I recommend buying high-quality HD if the price declines to 138.00 or below. Buy at 138.00 or below.
Lowe’s (LOW 72.56) stock price fell 5.6% on July 20. The new agreement between Sears and Amazon will have the same effect on Lowe’s as it will on Home Depot. See my thoughts in the Home Depot summary above. I am lowering my Max Buy Price for Lowe’s by 10% to 68.68 to allow for uncertainty. Buy at 68.68 or below.
Schlumberger (SLB 67.02) reported surprisingly strong second-quarter results. Sales rose 4% and EPS popped 52% after sales increased 6% and EPS decreased 38%. North America sales jumped 18% following the company’s increased deployment of idle hydraulic fracturing equipment and services to meet accelerating land activity during the quarter. Offshore activity in the U.S. Gulf of Mexico remained weak. International demand was lackluster during the quarter, but management expects a noticeable increase in overseas activity during the remainder of 2017 and into 2018. I will consider switching Schlumberger from Hold to Buy in my August Cabot Value issue. Hold.
Scripps Networks (SNI 79.01) stock price jumped 17% this week after rumors spread that the company is in talks with Discovery Communications and Comcast. A bidding war could ensue, although Comcast seems unlikely to make an offer. The negotiations between Scripps and Discovery reportedly are serious, and a merger announcement could come within a week or two. If SNI climbs to my Min Sell Price of 89.80, I will recommend selling the stock. Hold for now.
Travelers Companies (TRV 124.57) missed analyst forecasts for the second quarter in a row. Revenue climbed 6% and EPS fell 13% and revenue increased 4% and EPS dipped 7% in the prior quarter. Catastrophe and other weather-related losses hurt earnings. Net investment income grew 9%, but underwriting gains plummeted 55%. Revenue and earnings results will likely continue on the same path unless the U.S. economic growth picks up speed or if interest rates rise more rapidly. Hold.
UnitedHealth (UNH 191.50) reported excellent second-quarter results. Revenue rose 8% and EPS popped 26% higher after revenue and EPS increased 9% and 31% in the previous quarter. UnitedHealth’s decision to withdraw from most of the Affordable Care Act exchanges has eliminated most of the losses incurred from the exchanges. The company’s Optum health services segment continues to grow at an impressive pace. UnitedHealth management raised its forecast for second half revenue and earnings. Buy at 181.52 or below.
Questions and Answers
Question: I’m trying to buy Canadian Tire CTCA.TO at TD Ameritrade but they do not have that symbol. They do have CDNAF and CNDTF and the pricing seems different so your Max Buy doesn’t seem to correspond? (From subscriber S.L.)
Roy: Canadian Tire (CTCA.TO 143.92; CDNAF 114.50) is traded both on the TSX (Toronto Stock Exchange) and on the U.S. Over-the-Counter market. Investors cannot trade Canadian stocks on the TSX without a Canadian brokerage account. In my experience, U.S. citizens are not allowed to open a Canadian brokerage account without dual citizenship. Therefore, U.S. investors must purchase Canadian Tire shares through a U.S. broker on the U.S. Over-the-Counter market. The U.S. symbol for Canadian Tire is CDNAF.
Volatility can be extreme, though, because CDNAF shares trade sparsely with average daily volume of 4,400 shares. On some days, CDNAF doesn’t trade at all. The difference in Canadian Tire’s stock prices quoted on the TSX compared to the U.S. Over-the-Counter is spread between the Canadian dollar and the U.S. dollar. The Canadian dollar is currently worth 0.7946 U.S. dollars. CDNAF is currently trading at a $0.15 premium. Buy at or below 149.74 Canadian (CTCA.TO) or at or below 116.95 U.S. (CDNAF).
Index of Latest Summaries – Recommendations featured in recent issues.
