In this Weekly Update, 11 Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news during the past week. I also include questions from subscribers along with my answers. Prices appearing after each stock symbol are the closing prices on Thursday, December 1, 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, 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:
• Thursday, December 8, Cabot Enterprising Model issue 269E
• Friday, December 9, Weekly Update
• Friday, December 16, Weekly Update
• Friday, December 23, Weekly Update
• Monday, December 26, Wall Street’s Best Daily
• Tuesday, December 27, Wall Street’s Best Daily
• Friday, December 30, No Weekly Update – New Year’s weekend
• Thursday, January 5, Cabot Value Model issue 270V
• Friday, January 6, Weekly Update
Company Reports
Activision Blizzard (ATVI 35.58) is down $10 during the past month to the current 35.58. Increased competition in the gaming industry is leading to deep discounting for new releases from Activision, Electronic Arts, Take-Two Interactive and others. The reduced prices could lead to disappointing fourth-quarter sales and earnings despite the usual boost from holiday spending. E-sports gaming could spark renewed growth for Activision in 2017. Sales and EPS will likely surge 15% to 20% in 2017, which will help ATVI to rebound significantly. Buy at 43.38 or below.
Avigilon (AVO.TO 12.48) shares have soared more than 50% during the past month as investors begin to realize the earnings potential of the company. Management’s new focus on profits will help meet higher expectations. AVO.TO took a hit this week, though, when the company announced it will attempt to sell the nine-story office building it purchased November 2015. With real estate prices extended in Vancouver, British Columbia, the building could fetch $100 million, more than double the $42 purchase price of 13 months ago. Avigilon proposes to lease the entire building back from a purchaser. If finalized, the transaction will reduce debt and provide cash for general working capital purposes. Hold.
Bristow Group (BRS 16.01) shares have soared 36% during the past month. Rising oil prices, spurred by the OPEC agreement to cut oil production by 1.2 million barrels per day, could help earnings in 2017. Bristow is small and speculative, but the stock could rise considerably further during the next several quarters. Hold.
Convergys (CVG 24.58) shares have been volatile lately, as investors weigh the likely effects of President-elect Trump’s new healthcare policies. In my opinion, speculation concerning any effects on Convergys are premature. Hold.
Eaton Vance (EV 40.46) reported better results for the quarter ended October 31. Revenue advanced 2% and EPS climbed 8% after declining 4% and 2% respectively in the year ago quarter. Assets under management increased an impressive 8% from a year ago. Improved results should extend into the current quarter, bolstered by the increase in stock prices but tempered by the flight from fixed income securities. On October 21, the company announced the signing of an agreement to acquire Calvert Investment Management, a subsidiary of Ameritas Holding Company. Calvert manages $12.3 billion of fund and separate account assets as of September 30. Completion of the transaction is expected on or before December 31, 2016. Hold.
General Motors (GM 36.43) jumped on news that November auto sales at GM rose an impressive 10%. The auto boom continues to roll on, despite naysayers who doubt the rise is sales can continue. General Motors is exceeding sales forecasts by taking market share from Ford, Chrysler and foreign automakers. Hold.
Gildan ActiveWear (GIL 27.26) reported mixed results for the quarter ended October 2. Sales rose 6% but EPS dipped 4% after decreasing 4% and 2% a year ago. Market conditions in retail continued to be challenging, although Gildan-branded underwear gained more than 10% from a year ago. Gildan’s integration of Alstyle and Peds is adding meaningful sales and cash flow. Lower selling prices were partially offset by lower raw material costs. Management forecast similar results for the fourth quarter, but stated that sales and earnings growth will accelerate in 2017. Hold.
Kroger (KR 33.36) reported mixed results for the quarter ended November 5. Sales climbed 6% but EPS fell 5% after increasing 4% and 7% in the previous quarter. Same-store sales inched ahead 0.1%. Sales and earnings were hampered by lower food prices. Management lowered its EPS guidance for the fourth quarter by a minimal amount. KR management indicated EPS will increase 5% to 8% in 2017. Hold.
Penske Automotive Group (PAG 51.72) has signed an agreement to purchase CarSense, a stand-alone specialty retailer of used vehicles in the U.S. The acquisition is expected to generate estimated annual revenue of approximately $350 million and will likely add $0.07 to $0.09 per share to earnings. The transaction is expected to close in the first quarter of 2017. CarSense has only five locations operating in Pennsylvania and New Jersey. CarSense is dedicated to reconditioning and retailing high-quality, late-model used vehicles. The purchase will help diversify Penske’s business and provides Penske with an opportunity to expand the CarSense model to other markets across the U.S. and complement Penske’s existing core auto retail business. Hold.
Royal Bank of Canada (RY.TO 87.30) delivered disappointing earnings. Revenue surged 16% but EPS fell 5% after increases of 16% and 4% in the prior quarter. The bank missed expectations due to higher provisions for energy sector losses, increased expenses and lower-than-expected capital-markets revenue. Retail banking was also sluggish. Impaired loans increased 71% from a year earlier due to higher impaired oil and gas loans. Wealth management earnings jumped 55% due largely to the inclusion of City National, which was acquired one year ago. Rising oil prices, spurred by the OPEC agreement to cut oil production by 1.2 million barrels per day, could help earnings in 2017. Hold.
Skyworks Solutions (SWKS 71.78) shares slipped after an analyst forecast slower sales due to slower smartphone sales and increased competition in the chip sector. However, Skyworks’ investment in the Internet of Things and the very successful introduction of the iPhone 7 will produce solid results in 2017. Buy at 79.77 or below.
Questions and Answers
Q. Is BIIB in a buyable dip or a big problem? (from subscriber C.W.)
A. Biogen’s (BIIB 295.78) recent price drop presents an excellent buying opportunity. The company’s competitor, Eli Lilly, failed in a late-stage clinical trial for the treatment of mild dementia in patients with Alzheimer’s disease. Biogen is also pursuing a treatment for Alzheimer’s, but the company’s studies have produced more positive results, which will be revealed more fully on December 5. However, Biogen does not expect to complete its research and receive FDA approval until 2019 or 2020. In the meantime, BIIB has several other drugs for various maladies in the pipeline, which are nearing FDA approval. BIIB shares are a strong Buy. Buy at 334.06 or below.
Q. I have missed a few Sell Alerts in the past and wondering if “Buy or Sell” alerts (in between monthly issues) could use some change in format? Perhaps a separate “Buy or Sell” email rather than embedded in weekly updates? (from subscriber K.S.)
A. Your comment regarding my format for Sell Alerts is well taken. From now on, I will include the Sell Alert in the title of the email. For example, the title of the November 11 should have been Cabot Benjamin Graham Value Investor Update 11/11/16 and CVS Sell Alert. Then I will feature the Sell Alert separately in the first paragraph of the Update. Any other Sell Alerts during the week will be sent in a separate email.
Q. Have you changed ZBH from “hold” to “buy”? I did not see that change, but it is on your list of stocks that you “advise investing in.” Maybe I just missed the change. (from subscriber R.H.)
A. Zimmer Biomet (ZMH 99.79) was rated a Hold (but almost a Buy) at the beginning of November, and I changed my opinion to include the company in my top 10 undervalued stocks to perform well if President-elect Trump enacts some or all of his proposed policies. ZBH plummeted when third-quarter earnings were announced, but I believe ZBH will fully recover during the next few months. Buy at 100.54 or below.
Index of Latest Summaries – Recommendations featured in recent issues.
