Fourteen Cabot Benjamin Graham Value Investor companies reported financial results in the past week. Six reports were outstanding, including BJ’s Restaurants, Danaher, General Motors, Johnson Controls, Southwest Airlines and UnitedHealth Group. Investors boosted share prices of these six companies after the results were announced. Three companies reported rather weak results, including Benchmark Electronics, Knight Transportation and Schlumberger. Investors’ reaction was understandably negative, but these companies will likely produce noticeably better results within the next several quarters.
If sales and earnings improve, the depressed stock prices of Benchmark, Knight and Schlumberger will likely climb considerably within the next year. Quarterly sales and earnings reports are important, but long-term investors (that’s us) need considerable patience to shrug off a bad report or two. As long as each of your companies’ prospects are clearly improving, your patience will be well rewarded sooner than you think.
Prices appearing after each stock symbol are the closing prices on Thursday, April 21. Reported results are for the quarter ended March 31, 2016, unless otherwise noted.
At the end of this update, I present two indexes of the companies featured in the Cabot Value Model and the Cabot Enterprising Model during the past four months so you can quickly find my recent write-ups.
My next Weekly Update will be sent to you on Friday, April 29, 2016. My schedule for the next four weeks will be:
* Tuesday, April 26, Cabot Wealth Advisory
* Friday, April 29, Weekly Update
* Thursday, May 5, Cabot Value Model issue 262V
* Friday, May 6, Weekly Update
* Thursday, May 12, Cabot Enterprising Model issue 262E
* Friday, May 13, Weekly Update
* Friday, May 20, Weekly Update
Company Reports
Alliance Data Systems (ADS 202.60) reported solid first-quarter results. Revenue and EPS (earnings per share) increased 5%, compared to increases of 18% and 20% respectively for the prior quarter. Revenue from Canadian operations exceeded expectations, but revenue from other sources lagged. Management believes revenue and earnings growth will accelerate during the remainder of 2016. The current dip in ADS’s stock price presents an excellent buying opportunity. Buy at 211.82 or below.
Benchmark Electronics (BHE 19.48) reported disappointing results. Sales declined 12% and EPS dropped 21% after sales decreased 12% and EPS rose 5% in the previous quarter. Sales to technology companies weakened, and will remain weak in the current quarter. Management is focusing on growing high-price, high-margin sales where demand is increasing. Management forecast lower sales and earnings for the current quarter, before improvement in the latter half of 2016. BHE shares now sell at 1.21 times net current asset value (NCAV) and 1.00 times tangible book value. Both ratios indicate that Benchmark is clearly undervalued. Hold.
BJ’s Restaurants (BJRI 40.80) generated solid first-quarter results. Sales rose 8% and EPS surged 31%, after increasing 9% and 39% in the prior quarter. Same store sales advanced only 0.6%, and operating margins improved for the seventh consecutive quarter. Recent weakness in the stock offers an excellent buying opportunity. Buy at 42.03 or below.
Celanese (CE 70.72) reported solid first-quarter results and raised its 2016 outlook. Sales fell 3% and EPS rose 7%, after falling 14% and 2% respectively in the prior quarter. Sales and earnings were bolstered by new products and lower oil raw material costs. Management raised its outlook, projecting EPS to increase 8% to 10% in 2016, up from 5% to 10% anticipated earlier. Hold.
Danaher (DHR 95.99) beat estimates and raised guidance. Sales climbed 15% and EPS jumped 16%, after increases of 9% and 38% in the previous quarter. Danaher’s 2015 purchase of Pall Corp. is producing better than expected results. Danaher will spin off its industrial businesses later this year and use the $3 billion proceeds to pay down debt. Management raised its 2016 profit forecast. Buy at 96.89 or below.
General Motors (GM 32.64) beat sales and earnings forecasts. Sales climbed 4% and EPS soared 48% after flat sales and 17% EPS growth in the prior quarter. Sales were strong in the U.S., China and Europe. GM is using excess cash flow to invest in advanced technology and innovations. The company’s $500 million investment in Lyft is paying off. The ride-hailing service is gaining market share from taxi cabs and rental car companies at a rapid rate. GM’s board of directors raised the quarterly dividend to $0.38 from $0.36 bringing the yield to 4.7%. Buy at 31.18 or below.
Grainger, W.W. (GWW 227.89) easily beat estimates. Sales and EPS improved 3% after declining 1% and 11% in the previous quarter. Recently acquired businesses exceeded expectations, but lower sales and a $12 million loss in Canada were disappointing. Grainger implemented information technology improvements in Canada, which will boost productivity and improve service. Management reiterated its modest sales and earnings growth forecast for the remainder of 2016. Hold.
Johnson Controls (JCI 41.58) reported solid results and raised 2016 guidance. Sales declined 2%, after falling 7% in the prior quarter. EPS surged 18%, though, after rising 4% in the prior quarter. Johnson’s sales slip was attributed to the divestiture of several businesses. Record battery sales in China and the Johnson Controls-Hitachi building efficiency joint venture exceeded expectations. Management expects the merger with Tyco to close on October 1, 2016. The company will then spin off its automotive seating division to shareholders on October 31. Management boosted its EPS forecast for 2016 by $0.15. Buy at 40.11 or below.
Knight Transportation (KNX 26.72) reported disappointing sales and earnings. Sales fell 6% and EPS dropped 22%, after declining 8% and 10% in the prior quarter. Management attributed the shortfall to excess trucking capacity, price competition from rivals, and weak U.S. industrial production. However, with significantly lower new truck orders and the recent expansion of industrial production in March, management expects an “improved environment” later in the year. Hold.
Quest Diagnostics (DGX 75.00) reported solid results. Sales rose 2% and EPS advanced 7%, after sales dipped 2% and EPS were flat in the previous quarter. Management expects the first-quarter trends to continue during the remainder of 2016. Additional divestitures and cost reductions could help produce better than expected earnings. Hold.
Schlumberger (SLB 80.30) produced weak results. Sales plummeted 36% and EPS dropped 47%, after declining 39% and 57% in the prior quarter. Persistent low oil prices and the decline in activity have caused project delays, job cancellations and activity disruptions. North America revenue fell 25% from the fourth quarter as the U.S. land rig count declined 31% following customer budget cuts.
The U.S. land rig count has fallen to around 400, representing a drop of 80% from the peak of October 2014. International revenue declined 13% due to a combination of customer budget cuts, activity disruptions, seasonal winter slowdowns and continued pricing pressure.
Schlumberger finalized its purchase of Cameron on April 1, which will add significant sales and earnings when the oil industry environment improves. Management expects further deterioration in the current quarter, and cut another 2,000 jobs. The company does not expect a recovery to start until 2017 at the earliest. However, Schlumberger is very well positioned for the intermediate and long term as markets start to recover. Hold.
Southwest Airlines (LUV 47.75) generated another excellent quarter. Revenue rose 9% and EPS jumped 20%, after increasing 8% and 204% in the prior quarter. Southwest improved its load factor (capacity utilization) to 80.5% from 80.1%, while fuel costs per gallon decreased 11%. The company’s moved the retirement date for its ‘Classic’ Boeing 737-300 fleet to 2017 from 2018. Although the transition will result in fewer aircraft and lower available seat-mile capacity in 2017, profits will continue to climb. Buy at 44.97 or below.
Travelers Companies (TRV 109.03) reported weak earnings, but raised its dividend. Revenue inched ahead 1%, but EPS fell 9%, after declines of 2% and 6% in the previous quarter. Higher catastrophe costs from hail storms in Texas and lower investment income hurt profits. Higher interest rates, expected in June, will bolster income from Travelers’ considerable bond holdings. The company’s board of directors hiked the quarterly dividend to $0.67 from $0.61. The yield is now 2.5%. Hold.
UnitedHealth Group (UNH 132.96) reported excellent first-quarter results. Sales surged 25% and EPS advanced 14%, after sales increased 30% and EPS declined 19% in the previous quarter. Optum sales and earnings soared 54% and 49% respectively. Optum, a division of UnitedHealth, offers advice on cost cutting and quality of care development to healthcare businesses.
UnitedHealth suffered losses from participation in Affordable Care Act exchanges that have led the company to exit exchange marketplaces in all but a few states in 2017. Buy at 128.14 or below.
Index of Latest Summaries – Recommendations featured in recent issues.