Fourteen Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. I have changed my opinion for AbbVie (ABBV) and McKesson (MCK) from Hold to Sell. This update also includes questions from subscribers along with my answers. Prices appearing after each stock symbol are the closing prices on Thursday, November 3, 2016. Reports are for the quarter ended September 30, 2016 unless otherwise stated. Sales and earnings increases and decreases are based on year-ago comparisons.
I also present two indexes that list companies featured in the Cabot Value Model or 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:
• Thursday, November 10, Cabot Enterprising Model issue 268E
• Friday, November 11, Weekly Update
• Friday, November 18, Weekly Update
• Monday, November 21, Wall Street’s Best Daily
• Friday, November 25, No Update – Thanksgiving Weekend
• Thursday, December 1, Cabot Value Model issue 269V
• Friday, December 2, Weekly Update
• Thursday, December 8, Cabot Enterprising Model issue 269V
• Friday, December 9, Weekly Update
Company Reports
AbbVie (ABBV 55.89) reported mixed third-quarter results. Sales climbed 8% and EPS advanced 7%, after increasing 18% and 17% in the prior quarter, respectively. ABBV’s board of directors increased the quarterly dividend to $0.64 from $0.57. The dividend yield is now 4.6% which is one of the highest in the pharmaceutical sector. Lower-than-expected Humira sales caused sales and earnings to fall short of expectations.
The disappointing results and management’s forecast for similar growth in the fourth quarter sent ABBV down 9%. The selling seems excessive, because ABBV’s current P/E is now rock-bottom at 11.6 and the 4.6% dividend yield is very attractive. AbbVie’s sales and EPS increased 16% during the past 12 months and will likely advance another 10% to 15% during the next 12 months.
However, AbbVie derives 64% of sales from Humira, and the company has boosted the rheumatoid arthritis drug by 126% during the past five years. However, the increase is partially needed for marketing, research and development, and the drug’s 126% price increase does not include negotiated discounts and rebates.
I believe the battle over drug pricing will stay in the news for an extended period. Donald Trump and Hillary Clinton have vowed to coerce drug companies and distributors to lower prices, and Senators Elizabeth Warren, Bernie Sanders and others have been outspoken in their efforts to bring drug prices down.
Whether politicians are successful in their efforts is immaterial, though. ABBV will be under pressure for quite some time before any resolution is achieved. In the meantime, I advise selling ABBV now while this battle rages. My objective is to buy ABBV back a year from now when its price is lower. Sell.
Aetna (AET 105.20) reported solid results. Sales and earnings squeaked past analysts’ forecasts, and management’s fourth-quarter estimates were in line with analysts. Sales climbed 6% and EPS rose 9% after increasing 5% and 9% in the previous quarter. Management stated that Aetna will lose $1.00 per share this year because of losses from its Affordable Care exchange-related business. Aetna will withdraw from most of the exchanges in 2017 bolstering earnings by $1.00 per share next year.
Management is optimistic that its merger with Humana will be successful despite the U.S. Justice Department’s antitrust case that will go to trial on December 5, with a decision expected in mid-January. The recent pullback in shares is excessive but AET should resume its upward trajectory soon. Hold.
Allergan plc (AGN 188.82), based in Ireland, reported disappointing sales and earnings, and management lowered its estimate for fourth-quarter earnings. The company, though, declared a quarterly dividend of $0.70, its first dividend in its history. The dividend yield will be 1.5% when dividend payments begin in early 2017.
Third-quarter sales fell 11% and EPS dipped 1% after sales increased 2% and EPS decreased 9% in the prior quarter. During the quarter, Allergan completed the sale of its global generic drug business to Teva. Allergan received $33.4 billion cash plus 100 million shares of Teva.
Management has already begun to utilize its new cash hoard by paying down debt, buying back stock, and entering into agreements to purchase six small businesses. Allergan is enduring a transitioning period, which will lead to better sales and earnings growth in 2017. Lastly, management has vowed to keep Allergan’s drug prices low. Hold.
Facebook (FB 120.00) reported exceptional results. Sales soared 56% and EPS skyrocketed 165%, after increases of 59% and 184% in the prior quarter. Mobile advertising revenue climbed 20% and now makes up 84% of total ad revenue, compared to 78% of revenue in the year ago quarter. Despite all the good news, Facebook shares dropped 5.6% following the news release.
Management warned that advertising revenue growth will decelerate from 37% in the third quarter 2016 to about 16% in mid-2017. The company will focus on adding capacity, including hiring more employees and building more data centers. The current dip in FB offers investors an excellent buying opportunity to buy one of the leading growth stocks in the stock market. Buy at 129.73 or below.
Fortress Investment (FIG 4.94) produced solid results. Revenue declined 1% but EPS soared 53%, after falling 25% and 13% in the prior quarter. Management provided a very optimistic outlook for the next several quarters. Hold.
Gilead Sciences (GILD 71.76) recorded disappointing sales and earnings. Sales declined 10% and EPS fell 19%, after decreasing 6% and 12% in the previous quarter. Lower drug sales for hepatitis C virus, down 37%, were only partially offset by higher sales for HIV remedies. The drop in sales for hepatitis C virus was attributed to deep discounts offered by Gilead, prompted by stiff competition from Merck and AbbVie.
GILD sells at only 6.9 times EPS. The company is a good candidate to be acquired because of Gilead’s expanding HIV drug sales and several additional drugs in development that could add significant sales in future years. Hold.
Harman International (HAR 80.76) reported solid results. Sales climbed 8% and EPS surged 21%, after increasing 12% and 39% in the previous quarter. During the quarter, Harman launched embedded infotainment solutions in the Audi Q5, Land Rover Discovery, Porsche Panamera 4 E-Hybrid, Skoda Kodiaq and Toyota C-HR. The company also began providing embedded infotainment solutions to the commercial truck market, launching solutions in Scania trucks and VW Group’s MAN. Buy at 79.90 or below.
IntercontinentalExchange (ICE 53.90) split 5 for 1 on Thursday, November 3. ICE’s sales rose 32% and EPS advanced 10% after increasing 42% and 18% in the prior quarter. Revenue received a big boost from ICE’s Interactive Data purchase and other purchases. Management will continue to seek additional acquisitions. Buy at 51.35 or below.
McKesson (MCK 129.59) plummeted after reporting disappointing third-quarter results. Pricing pressure brought on by McKesson’s rivals and demands by U.S. politicians for lower drug prices brought about lower pricing and lower earnings. Management provided a pessimistic outlook for the current quarter, which will likely carry into 2017. Drug distributor McKesson is feeling the pressure from consumers who are fighting high drug prices and giant drug makers who want to protect their profit margins. Sell.
Penske Automotive (PAG 43.34) reported solid results. Sales rose 3% and EPS advanced 7%, after increasing 7% and 5% in the prior quarter. The board of directors raised the quarterly dividend to $0.29 from $0.25 a year ago. The board has raised the dividend for 23 straight quarters. Penske’s dividend now yields 2.7%.
New and used car gross profit per unit increased in the U.S. by $52 and $179, respectively. The Brexit vote in the U.K. did not impact the company’s performance and business remained strong, generating a 6.9% increase in same-store unit volume. Hold.
Starbucks (SBUX 51.77) reported exceptional results for the quarter ended October 2. Sales advanced 16% and EPS surged 26%, after increasing 7% and 17% in the previous quarter. Same-store sales advanced 5% globally and 6% in China. Management initiated very positive sales and earnings guidance for the next three quarters. Also, the Starbucks board of directors increased the quarterly dividend to $0.25 from $0.20, resulting in a 1.9% yield. Buy at 54.53 or below.
Team Health Holdings (TMH 42.75) received an offer from Blackstone to buy the company for $43.50 all cash. The downside for TMH holders is minimal. The agreement includes a 40-day “go-shop” period during which TeamHealth can receive other offers from interested parties. I advise holding off selling until we see if other offers materialize. I believe TMH is worth more than $43.50. Hold.
WestJet Airlines (WJA.TO 21.12) produced considerably better results. Sales advanced 8% and EPS climbed 17%, after sales inched ahead 1% and EPS fell 39% in the prior quarter. The airline flew more passengers and cut expenses, sending shares up 5%. WestJet flew 5.9 million passengers in the third quarter, up 7% from a year earlier. Load factor, which measures how effectively it filled seats, rose to 84% from 81.8% a year ago. Management expects mediocre results in the current quarter to be followed by much-improved sales and earnings in the first quarter 2017 and beyond. Hold.
Zimmer Biomet Holdings (ZBH 102.54) produced sales and earnings that were a little shy of forecasts. Sales rose 4% and EPS advanced 2%, after sales and EPS surged 66% and 28% in the previous quarter (helped by recent acquisitions). Management forecast slow growth for the current quarter, which sent ZBH down 14%. Zimmer has made several small acquisitions recently which have hampered near-term earnings but will bolster earnings in 2017. Intense competition in the orthopedic business has kept pricing competitive, which will help the sector avoid government scrutiny. Hold.
Questions and Answers
Q. I am worried about TPH. It keeps going down. I am trying not to keep stocks that fall more than 20% yet I am also trying to follow your system. In the past, the ones that go down so far almost never get back to profitable. (from subscriber B.C.)
A. TRI Pointe Group (TPH 10.55) reported weak third-quarter sales and earnings, which sent the stock down without a recovery. The soft results appear to be a one-time event. The company closed out the quarter on a positive note with new home orders increasing 26% from a year ago. This bodes well for sales and earnings in the first half of 2017 if new home orders continue to shine. Fourth-quarter sales and earnings will likely decline again, reflecting weak demand during this past summer.
You might want to consider selling half of your position now to avoid further possible loss, and then buy back after the company reports fourth quarter results and provides guidance for 2017 (if it is positive). Sales and earnings growth is typically bumpy for companies in the home construction business, and TPH, as a small company, is prone to some short-term volatility. I’ll keep a close eye on the company’s progress and management’s comments.
Q. What words of comfort and guidance have you for the biomeds and pharmaceuticals? (from subscriber R.L.)
A. I am in the process of reviewing the 11 health care companies that are rated Buy or Hold in the Models. I intend to recommend selling some of the companies that derive more than 50% of sales from just one or two drugs. These are typically the companies that are raising the prices of their drugs by excessive amounts.
The war on drug prices is escalating, and company executives are worried that their companies could be affected. Executives are therefore lowering their sales and earnings forecasts, which is sending their stock prices down significantly. I will include a complete summary in my Weekly Update on Friday morning.
Index of Latest Summaries – Recommendations featured in recent issues
