Sell Greenhill & Co. (GHL)
In this Weekly Update, I summarize the latest news for 21 companies. I also include an important question on Ulta Beauty 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. Results are for the quarter ended June 30. Prices appearing after each stock symbol in this Update are the closing prices on Thursday, July 27, 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 four weeks will be:
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
Wednesday, August 16, Wall Street’s Best Daily
Friday, August 18, Weekly Update
Thursday, August 24, Wall Street’s Best Daily
Friday, August 25, Weekly Update
Company Reports
Alphabet (GOOG 934.09) reported strong second-quarter results, despite some concerns. Sales surged 21% and EPS jumped 27% after increasing 22% and 28% in the prior quarter. The earnings increase excludes the company’s $2.7 billion fine paid to the European Commission.
Clicks on ads soared 52%, although profit margins decreased due to expanded mobile use, which generates lower profit margins for the company. Margins are expected to decrease in future quarters as well. GOOG’s stock price fell 4% after the earnings release, which is small compared to the stock’s 25% surge in 2017. The lower profit margins on mobile device advertising is well-known and should not surprise investors. The current dip in GOOG offers an excellent buying opportunity. Buy at 941.82 or below.
AT&T (T 39.41) shares rose 5% after reporting strong second-quarter results. Sales dipped 2% but EPS climbed 10% after sales declined 3% and EPS increased 3% in the prior quarter. AT&T’s bundle packages retained customers who were satisfied with savings from combined phone, TV and internet service. The company lost another 199,000 video customers in the U.S., though its new DirecTV Now streaming service gained 152,000 subscribers to finish the quarter with 491,000 accounts.
AT&T, the largest pay-television operator in the U.S. after acquiring satellite provider DirecTV, is waiting for government authorities to approve its proposed purchase of Time Warner. If successful, the acquisition will add CNN, HBO and the Warner Bros. film and TV studio to AT&T’s portfolio. The deal, valued at $85 billion is due to close in the fourth quarter. Buy at 37.93 or below.
Avigilon (AVO.TO 14.41) announced a new contract with Fulton County School System in Atlanta, Georgia, to enhance safety for over 100 schools. Avigilon’s Appearance Search technology will be utilized to analyze video data used to help track a person’s or a vehicle’s route and identify previous and last-known locations. Avigilon will report second-quarter financial results on August 9. Hold.
Biogen (BIIB 287.95) reported encouraging results enabling management to raise full-year revenue and earnings guidance. Sales advanced 6% and EPS fell 15% after sales and EPS increased 3% and 17% respectively. In June, Biogen completed an exclusive licensing agreement with Bristol-Myers Squibb for BIIB092, a biopharmaceutical with potential to treat Alzheimer’s disease and other progressive neurodegenerative disorders.
Biogen’s rollout of Spinraza, used in the treatment of spinal muscular atrophy, generated $203 million sales compared to $47 million in the prior quarter.
Biogen completed the purchase of Remedy Pharmaceuticals’ CIRARA for the treatment of large hemispheric infarction, a severe form of ischemic stroke where brain swelling often leads to death. Biogen recorded a $120 million charge related to the acquisition of in-process research and development expenses, which led to a drop in second-quarter earnings. Buy at 281.59 or below.
Celgene (CELG 134.15) beat second-quarter sales and earnings estimates. Sales surged 19% and EPS rocketed 75% higher after increasing 18% and 27% in the previous quarter. Sales of the company’s leading drug, Revlimid, used to treat blood cancer, advanced 20%, while Celgene’s other drugs performed very well in the U.S. and overseas. Management lowered its EPS guidance slightly for the remainder of 2017. Buy at 127.75 or below.
Eastman Chemical (EMN 85.02) delivered strong second-quarter sales and EPS. Sales rose 5% and EPS climbed 17% after increasing only 3% and 8% in the prior quarter. Management increased its earnings forecast slightly for the remainder of 2017.
Management’s efforts to reduce costs and improve productivity are producing better than expected results. In addition, recent acquisitions are adding noticeable sales and earnings. Buy at 83.65 or below.
EQT Midstream Partners LP (EQM 76.57) reported mixed results. Sales climbed 12% and earnings per share were flat after sales increased 9% and EPS declined 2% in the previous quarter. Increased pipeline capacity boosted sales, but expenses associated with the expansion weighed on earnings. The partnership increased the quarterly dividend to $0.935 from $0.890, resulting in a yield of 4.9%. EQM is targeting annual per unit distribution growth of 30% to 40% for several years.
EQM’s corporate sponsor, EQT Corp., announced plans to acquire Rice Energy. If the purchase is approved by government agencies, EQT Corp. will acquire Rice’s midstream assets. EQT Corp. intends to sell the Rice midstream assets to EQM, which is projected to generate considerable profits. Buy at 76.17 or below.
Facebook (FB 170.44) reported exceptional second-quarter results that topped expectations. Sales surged 45% and EPS popped 69% after increasing 49% and 73% in the prior quarter. Mobile ad revenue grew 53% from a year ago and now makes up 87% of Facebook’s total ad revenue. Facebook now has over two billion monthly active users, more than one in four people in the entire world. Two-thirds of FB’s users are daily users. North America makes up only 12% of Facebook’s monthly active users but is responsible for 49% of the company’s revenue.
Instagram has begun to contribute to earnings, whereas Messenger and WhatsApp will add profits in future years. Hold.
General Motors (GM 35.94) reported mixed second-quarter results. Sales dipped 1% and EPS dropped 40% after increasing 11% and 35% in the previous quarter. GM’s strategy to sell its money-losing Opel unit and shutter operations in India and South Africa reduced profits by $1 billion or $0.80 per share. The moves will allow GM to deploy resources and capital to higher-return opportunities. The company will introduce a new line of heavy-duty pickup trucks in 2018 and revitalize its high-end Cadillac line-up.
Slower than expected passenger car sales in the U.S. prompted GM to begin cutting production. The cuts follow a buildup of one million GM vehicles sitting on dealer lots. Third-quarter results will be weak because of production cuts, but the new and improved General Motors should produce renewed earnings growth in 2018. Hold.
Gilead Sciences (GILD 74.96) recorded better than expected sales and earnings. Sales fell 8% and EPS declined 10% after falling 17% and 19% in the prior quarter. Management raised its sales forecast for the remainder of 2017, although 2018 could be challenging after AbbVie introduces a new hepatitis C virus treatment to compete with Gilead. End-of-quarter cash stood at $28 per share, which Gilead could use toward a major acquisition or to attract a buyer. Hold.
GNC Holdings (GNC 10.95) reported encouraging results. Sales fell 5% and EPS plunged 76% after declining 4% and 49% in the previous quarter. Same-store sales dipped 1% from a year ago. GNC took asset impairment charges of $0.18 during the quarter.
New management believes GNC is headed in the right direction, bolstered by meaningful transaction growth, improvement in the company’s internet business and increased enrollment in loyalty programs. GNC shares soared 17% because of management’s comments. Buy at 9.39 or below.
Greenhill & Co. (GHL 19.95) reported poor revenue and earnings again. Revenue fell 26% and EPS plummeted 68% after declining 15% and 71% in the prior quarter. Management’s forecast for improved second-quarter results failed to materialize. Greenhill hired nine new managing directors in 2017, which added to expenses. GHL shares fell 4% to 19.15 in after-hours trading on Thursday, July 27.
Normally, new directors require several months to develop new investment transaction revenue. The cost of new directors increased but revenue remained low. Management has not provided a forecast of revenue or earnings for the remainder of 2017. Analysts have lowered their EPS forecast for 2017 to $0.90 from $1.40 and for 2018 to $1.49 from $1.78. The earnings slump could force the company to cut its dividend. Greenhill’s performance is disappointing. Sell.
Johnson Controls (JCI 40.14) reported solid third-quarter results in line with estimates. Sales inched ahead 1% and EPS advanced 16% after increasing 3% and 11% in the prior quarter. Sales growth has lagged management’s expectations, due to slower than expected sales growth at newly acquired Tyco International. Cost savings from Tyco synergies will continue to help boost earnings.
The sale of JCI’s Scott Safety unit to 3M Company is expected to close before December 31. The $1.8 billion cash proceeds, will be used to repay a portion of the Tyco International merger-related debt. Management guided current quarter EPS slightly lower, which led to a 7% drop in the JCI stock price, followed by a 3% rebound in after-hours trading on Thursday, July 27. Hold.
LKQ Corp. (LKQ 33.91) produced solid results. Sales climbed 7% and EPS declined 2% after increasing 22% and 17% in the previous quarter. Results fluctuations are caused by LKQ’s multiple acquisitions each quarter. During the second quarter, the company acquired seven companies in the U.S. and in Europe. Management raised its sales and earnings guidance for the remainder of 2017. Hold.
LyondellBasell Industries (LYB 86.53) recorded excellent results. Sales advanced 15% and EPS climbed 10% after sales increased 25% and EPS declined 16% in the prior quarter. Ethylene production surged 27% and oil refining volumes jumped 45% from a year ago. Lyondell increased its quarterly dividend to $0.90 per share from $0.85. LYB’s dividend yield is now 4.2%. Buy at 82.94 or below.
Price (T. Rowe) Group (TROW 82.67) reported excellent second-quarter results. Revenue rose 12% and EPS surged 30% after increasing 12% and 23% in the previous quarter. Assets under management advanced 5%. In addition, 88% of T. Rowe Price’s mutual funds earned Morningstar ratings of four or five stars (five stars is best).
The firm has reduced the management fees of some of its mutual funds to stay competitive with ETFs and other mutual funds. Despite the reductions, T. Rowe Price continues to produce increased revenue and earnings. Fees were boosted by strong stock market returns and solid investor inflows. The TROW stock price has increased 11.4% this month. Buy at 75.33 or below.
Scripps Networks (SNI 86.41) has become a possible takeover target by Discovery Communications. Discovery’s TV offerings include the Discovery channel, Animal Planet, the Oprah Winfrey Network and Science. Scripps’ lifestyle media brands include Food Network, DIY Network, Cooking Channel, Travel Channel, HGTV and Great American Country. Viacom was previously interested in buying Scripps, but Viacom is no longer interested.
Scripps is due to report quarterly financial results on August 9. SNI has risen 26% in July and is nearing my Min Sell Price of 89.80. I recommend selling SNI if the stock rises to 89.80. In the meantime, Hold.
Starbucks (SBUX 59.50) showed small improvements but management revised forecasts lower. SBUX shares slipped 6% in after-hours trading on Thursday, July 27. Sales advanced 8% and EPS rose 12% after increasing 6% and 15% in the previous quarter. Same-store sales increased 5% compared to 3% growth in the prior quarter. Customers are visiting Starbucks store less often but spending more during each visit. However, stores in China posted same-store sales growth of 7%.
Management reduced its EPS estimate for the quarter by 5% and forecast soft sales. Starbucks is closing all 379 of its Teavana mall-based stores, which will hurt sales and earnings in the current quarter. Starbucks will spend $1.3 billion to buy the 50% portion of the business in East China that it doesn’t already own. Starbucks currently owns and operates 1,500 stores in China and has said it plans to operate 5,000 Starbucks shops in China by 2021. Buy at 59.09 or below.
Triumph Group (TGI 24.95) reported disappointing results. Sales fell 12% and EPS plummeted 77% after sales declined 13% and EPS popped 114% in the previous quarter. A couple of major contracts expired on schedule, and other agreements with aircraft and aircraft parts manufacturers were adjusted. Heavy restructuring charges totaling $0.26 per share are not included in EPS. TGI shares tumbled 27% during the past week after management’s discouraging comments.
Triumph is streamlining its operations to better serve its customers and to create a foundation for sustained growth and profitability. The company won several new contracts in 2017 which will boost sales and earnings in 2018 and 2019. Management’s forecast for the remainder of 2017 remains bleak, however. Short-term investors may want to exit the stock now. However, patient long-term investors will be well-rewarded as TGI will likely rise to my Min Sell Price of 47.56 within two years. Buy at 32.97 or below.
Western Digital (WDC 91.90) produced exceptional results. Sales surged 39% and EPS nearly tripled after increasing 65% and 77% in the prior quarter. The company’s May 2016 purchase of SanDisk is providing a huge boost to Western’s results. Management’s forecast for sales and EPS for the current quarter exceeded analysts’ estimates.
Western Digital’s challenge is to stop Toshiba from selling the joint-venture memory chip business in which Western owns 50%. Toshiba’s proposed sale is set at a bargain price, which is unfavorable to Western. Western is contesting Toshiba’s right to sell 100% of the chip business. A hearing is scheduled for today, July 28, in San Francisco. Buy at 92.03 or below.
Zimmer Biomet Holdings (ZBH 125.44) produced lackluster second-quarter results. Sales inched ahead 1% and EPS advanced 3% after increasing 4% and 6% in the prior quarter. Zimmer’s purchase of LDR Holding bolstered sales and earnings. Sales and earnings should improve in 2018.
Zimmer Biomet announced that David Dvorak stepped down as chief executive and director effective July 11 as the company struggles to boost sales and profits amid production problems. Zimmer’s chief financial officer, Dan Florin, was given the added duties of interim CEO and director until a permanent CEO is named.
Hold.
Questions and Answers
Question: Do you think this is a good time to purchase Ulta Beauty? (From subscriber B.Q.)
Roy: I continue to like Ulta (ULTA 249.43), although I am concerned about discounting in cosmetics and Amazon’s possible foray into the cosmetics field. Department stores, including Macy’s and J.C. Penney, will offer discounts on cosmetics as long as lower prices continue to attract shoppers. The discounting won’t last forever, and Ulta is counteracting by offering special deals to rewards program customers.
Amazon has not pushed into selling cosmetics, especially high-end beauty products similar to Ulta’s. The latest rumor that Amazon is considering a partnership with Violet Grey, the beauty expert who sells “prestige” products online. Violet Grey sells very expensive cosmetics, which makes me wonder why Amazon might be interested in a partnership. In my opinion, Amazon won’t pursue an agreement, but Amazon is full of surprises, so I’ll keep a keen eye out for further news.
I believe Ulta’s reduced stock price offers an excellent opportunity to buy a company growing at a rapid pace. My Max Buy Price is 253.10 and my Min Sell Price is 390.32. Analysts continue to raise Ulta’s EPS estimates which now stand at 8.32 for the year ending 1/31/18; 9.89 for 1/31/19; and 12.05 for 1/31/20. I recommend buying ULTA at the current price. Buy.
Index of Latest Summaries – Recommendations featured in recent issues.
