U.S. stock market indexes rose noticeably during the past week with the Nasdaq’s 2.3% gain leading the way. Better economic data included an increase in second-quarter GDP reaching 3.0%. The ADP jobs report showed jobs in the private sector increased for the third consecutive month in August. Lastly, the administration is beginning to tout its tax cut and tax reform proposal, which will hopefully get passed before the end of the year. Lower taxes could bring a windfall for individuals and corporations. After all the hassling in Washington during the past several years, we deserve a tax break, don’t we?
In this Weekly Update, I summarize the latest news for five companies. Max Buy and Min Sell Prices are the recent price targets appearing in the Cabot Value Model Issue 278V, for which you received the link yesterday. I also include pertinent questions from subscribers with my responses. Results are for the quarter ended July 31 unless otherwise stated. Prices appearing after each stock symbol in this Update are the closing prices on Thursday, August 31, 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, September 7: Cabot Enterprising Model issue 278E
Friday, September 8: Weekly Update
Wed-Fri, September 13–15: Cabot Wealth Summit, Salem
Friday, September 15: No Weekly Update
Friday, September 22: Weekly Update
Tuesday, September 26: Wall Street’s Best Daily
Wednesday, September 27: Wall Street’s Best Daily
Friday, September 29: Weekly Update
Company Reports
Disney, Walt (DIS 101.20) will implement significant staff reductions in its ABC TV Group starting at the end of September. The company hopes to cut 10% of costs within the next six months to offset declining viewership. Disney’s broadcast network and cable channels have struggled to create new hit shows. ABC finished third last season behind CBS and NBC. The cuts will enhance EPS in future quarters. Hold.
Five Below (FIVE 47.57) shattered estimates. Sales for the quarter ended July 29 surged 29% and EPS popped 67% after increasing 21% and 25% respectively in the prior quarter. Same-store sales, helped by soaring sales of fidget spinners, rose a remarkable 9.3% after increasing 2.3% in the previous quarter. Five Below opened 31 new stores during the quarter after opening 31 in the prior quarter, augmenting management’s vigorous campaign to expand quickly. The company’s store count is now 584.
Management provided an optimistic outlook for the current quarter and remainder of the year—mostly in line with analysts’ forecasts. I expect Five Below to exceed management’s forecasts by a noticeable margin in the next couple of quarters. Hold.
Gilead Sciences (GILD 83.74) has agreed to buy Kite Pharma (KITE) for about $11 billion, all cash. Gilead seeks to diversify as sales of its hepatitis C drugs decline.
Kite’s promising new technology for harnessing the body’s immune system to fight cancer could save patients with the most serious cases of cancer, according to doctors. Kite is a leader among several companies that hope to use genetic engineering to weaponize a patient’s own immune T cells and then inject altered cells back into the patient’s blood stream to attack lymphoma and other blood cancers.
Kite’s main drug, known as axi-cel, is up for approval in the U.S. and Europe. EvaluatePharma ranks the drug among the industry’s top 10 compounds in terms of sales potential. If successful, the drug could ring up billions of dollars in sales.
Axi-cel is likely to face swift, steep competition. Novartis AG, one of the leading cancer-drug makers, beat Kite to become the first company to receive approval from the Food and Drug Administration for a bioengineered T cell drug. Several other companies are developing the drugs too. Novartis will price its drug, Kymriah, at $475,000 for one treatment.
Dr. John Milligan, CEO, said Gilead realized the deal comprised not only axi-cel but the technology for developing other cell-therapy cancer drugs. “We see it as a nice, sustainable oncology platform for decades to come,” he said.
The deal is expected to close in the fourth quarter, around the same time as the deadline for U.S. approval of Kite’s main drug. During the past several years, Gilead has built up a cash hoard of $36 billion. The company is well equipped to purchase Kite and to spend the necessary funds on marketing and research to make Kite’s axi-cel a big success. Gilead’s new success will take time, though. Hold.
LyondellBassell (LYB 90.59) shut production at several of its facilities in the Houston area as flooding from hurricane Harvey is making operations difficult or impossible. The company has shut operations at the Matagorda, Chocolate Bayou and La Porte facilities, along with its polymers plant and propylene oxide plant in Bayport. The Houston refinery continues to operate at reduced rates. The company also shut down its facilities in Corpus Christi and Victoria, Texas.
Several of the closures are due to logistical constraints beyond LyondellBassell’s control. Evidently, damage to the company’s facilities is relatively minor, and operations could return to normal reasonably soon. Buy at 90.24 or below.
Tech Data (TECD 110.29) reported solid results, but earnings fell short of expectations. Management’s forecast for current quarter earnings indicates weak earnings are likely in future quarters. Sales surged 40% and EPS climbed 23% after increasing 29% and 78% in the previous quarter.
Sales received a boost from the recent purchase of Technology Solutions from Avnet. Earnings climbed 23% but were held back by acquisition costs and lower profit margins produced by the new Technology Solutions division. Acquisition costs will dissipate, but low profit margins will linger during the next two to three quarters.
Tech Data’s earnings miss and tepid earnings forecast sent its stock price tumbling 19% after the report was released on August 31. In my opinion, investors have over-reacted and sent the shares to a very attractive level. At 11.9 times current EPS and with a very achievable five-year EPS growth forecast of 14%, Tech Data still merits my Buy opinion. Buy at 107.32 or below.
Questions and Answers
Question: Do you still consider GNC a hold since they have cut their dividend? Any idea when to expect an uptrend for this stock. (from subscriber S.P.)
Roy: GNC Holdings (GNC 8.30) reported second-quarter results that showed some noticeable improvement. The stock initially rallied to 11 before falling back to the current level. GNC’s new management is making good progress, but investors are waiting for quarterly comparisons to turn positive. I expect sales and earnings improvement to start in 2018, and expect investors to recognize the brighter outlook and send shares higher in the fourth quarter. GNC is one of the most undervalued stocks in my database. Hold.
Question: I was hoping that you would give us some guidance on the Triumph group. Seeing how they issued bonds at a whopping 7.5% interest rate, I’m a little concerned. (from subscriber L.A.)
Roy: Triumph Group (TGI 26.30) needed to draw cash from a bond sales to pay off part of its debt.
The company has $898 million in debt due within five years, so the $500 debt offering will pay off a big chunk of the company’s short-term debt load. The new debt is due in 2025 and comes with a hefty price tag of 7.75%.
The new interest rate is considerably higher than the company’s average rate of 5.3% and will add up to $0.25 per share in extra interest expense annually during the next eight years. Analysts are now forecasting EPS of $1.71 for 2017-2018 (fiscal year ends March 31, 2018), then $2.92 for the following year, and $3.73 three years out. The added expense will hurt the current year’s results, but won’t be as noticeable in subsequent years.
The new debt will strengthen Triumph’s balance sheet, but weaken its income statement. On balance, this is slightly negative for shareholders, but I will continue with my Hold opinion for long-term investors based on my forecast of solid sales and earnings growth during the next three years.
However, short-term investors might want to avoid TGI, after the company recently reported very weak sales and earnings, forecast weak results during the next 12 months, and is now adding substantial interest expense which will make matters worse. Long-term: Hold; Short-term: Avoid.
Index of Latest Summaries – Recommendations featured in recent issues.
