Twenty Cabot Benjamin Graham Value Investor companies reported quarterly financial results. Five produced outstanding results: AbbVie, Harman, Lear, LKQ and Penske, while five reported rather weak results: Apple, Avnet, Ensco, Gilead and Synaptics. I will review all the quarterly reports within the next few days and offer Sell recommendations if necessary.
Prices appearing after each stock symbol are the closing prices on Thursday, April 28. Reported results are for the quarter ended March 31, 2016 unless otherwise noted. Sales and earnings increases and decreases are based on year-ago comparisons.
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 most recent four months with the dates my company summaries were published so you can quickly find my recent write-ups for the model stocks.
My next Weekly Update will be sent to you on Friday, May 6, 2016. My schedule for the next four weeks will be:
* 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
* Thursday, May 26, Cabot Wealth Advisory
* Friday, May 27, No Weekly Update (I’ll be on vacation)
Company Reports
AbbVie (ABBV 61.24) delivered strong results for the first quarter ended March 31. Sales advanced 18% and EPS surged 22% after increasing 17% and 27% respectively in the prior quarter. Humira sales (60% of total sales) climbed 15%, while AbbVie’s other drug sales climbed even more. AbbVie is aggressively adding new drugs and treatments by way of new drug launches and new acquisitions with the goal of lowering its dependence on Humira.
AbbVie will buy cancer drug-maker Stemcentrx for $5.8 billion plus incentives. Stemcentrx has several drugs in early stage and late stage development, which are expected to add significant sales and earnings starting in 2018. AbbVie expects to close the deal before June 30. Management lowered its forecast for 2016 earnings slightly to account for the initial negative impact of the Stemcentrx purchase. Buy at 54.43 or below.
Aetna (AET 114.63) beat sales and earnings forecasts. Revenue rose 4% but EPS declined 4% after increasing 2% and 12% in the prior quarter. New enrollees from the Affordable Care Act boosted revenue, but higher claims from these enrollees hurt earnings. Management raised its 2016 EPS forecast slightly, based on first-quarter results. Aetna is on track to finalize the purchase of Humana before the end of 2016. Buy at 107.76 or below.
Aflac (AFL 69.01) reported solid results. First quarter revenue rose 4% and EPS advanced 12% after revenue dropped 12% and EPS increased 21% in the previous quarter. Total new premium sales climbed 16%. Aflac’s revenue and earnings have been negatively affected by the falling Japanese yen in recent years, but the yen has strengthened in 2016. As a result, the company reported its best quarter in several years. Aflac derives a significant portion of revenue and earnings from its operations in Japan. Management provided a positive forecast for the remainder of 2016. Hold.
Apple (AAPL 94.81) reported terrible sales and earnings. Sales fell 13% and EPS dropped 18% after increases of 2% and 8% in the prior quarter. Apple’s major products, including iPhones, iPad tablets and Mac personal computers, all suffered noticeable sales declines. There were a couple of bright spots, though. Sales of Apple watches and Apple services gained more than 20% each.
Sales in Japan increased 24%, sales in India soared 56%, whereas sales in China tumbled unexpectedly. The company increased its massive stock buyback program, and hiked the quarterly dividend to $0.57 from $0.52, resulting in a yield of 2.3%. Management provided an uninspiring forecast for the current quarter, but second-half results should begin to show improvement and bolster Apple’s depressed stock price.
Investor Carl Icahn announced that he sold all of his Apple shares recently, based on concerns that Apple’s sales in China could become problematic unless the company lowers its prices for iPhones and other devices. Hold.
Avnet (AVT 41.90) reported lackluster results. Sales fell 8% and EPS slipped 3%, after decreasing 9% and 4% in the previous quarter. Technology products sales and sales in China dragged overall sales lower. Management will focus on expanding Internet of Things offerings and other fast-growing products, although current-quarter results will mirror the reported quarter. Hold.
Baker Hughes (BHI 47.88) reported another large deficit. Sales dropped 42% after plummeting 49% in the prior quarter. BHI’s deficit was $2.22 per share compared to $2.35 in the previous quarter. The company reported that the global rig count dropped 41% from a year ago. Baker Hughes’ merger with Halliburton is being challenged by the U.S. Department of Justice and could fall through. On April 22, I issued a Sell recommendation for Baker Hughes because its stock price reached my Min Sell Price of 47.92. Sell.
Baxter International (BAX 44.26) reached its Minimum Sell Price of 44.77 after surging to a new all-time high on April 27. The company reported a slight decrease in sales for the first quarter, and a small EPS rise. BAX shares are now overvalued. Sell.
C.H. Robinson (CHRW 70.83) reported mixed results. Sales fell 7% and EPS climbed 14%, after sales decreased 4% and EPS increased 14% in the prior quarter. Trucking and ocean logistics volumes increased 7% and 17% respectively, but lower pricing dampened the increases. Intermodal volume declined 13% and air transport volume fell 11%. Management forecast similar results for the current quarter. Hold.
Corning (GLW 18.89) delivered weak results. Sales fell 10% and EPS dropped 20% after declining 7% and 19% in the prior quarter. Weaker pricing and production issues hampered sales and earnings. Management expects results to bounce back in the current quarter and show “significant improvement” during the remainder of 2016. Goldman Sachs is predicting that Gorilla glass--already a staple of mobile devices--might become the standard for automotive glass as well. Gorilla glass is stronger and 30% lighter than the soda lime glass now used in the automotive industry. The change, if it occurs, will be slow. Hold.
Ensco plc (ESV 11.63) reported weak sales and earnings again. Sales tumbled 30% and EPS plummeted 50%, after declining 29% and 45% in the previous quarter. Ensco’s rig utilization rate dropped to 65% from 86% a year ago, and day rates fell 15% because of lower demand for rigs. The company repurchased $861 million of long-term debt at an average discount of 28% in April 2016, and raised $586 million from a common stock offering also in April. Ensco now boasts the strongest balance sheet among oil drillers. Hold.
Gilead Sciences (GILD 97.00) delivered disappointing sales and earnings. Sales increased only 2% while EPS declined 8%, after increasing 16% and 46% in the prior quarter. The sharp reversal was unexpected. U.S. sales of Harvoni plummeted 53%, which was only partially offset by gains in Sovaldi sales. Gilead was forced to discount prices for the drugs by larger amounts than expected. Sales generated from Gilead’s HIV/AIDS drug treatments were strong. Gilead continues to launch promising new drugs, and is on the lookout for possible acquisitions. GILD shares are super cheap. Buy at 136.09 or below.
Harman International (HAR 77.07) reported higher sales and earnings, but results fell short of analysts’ estimates. Sales rose 11% and EPS jumped 23% after sales increased 12% and EPS fell 6% in the prior quarter. Recent acquisitions bolstered results, but an earthquake in Japan constrained supplies, and demand weakened in Brazil and Europe. Management lowered its outlook for the current quarter. Harmon’s problems are short term. The drop in HAR shares presents an excellent buying opportunity. Buy at 82.13 or below.
Lear Corp. (LEA 115.45) delivered exceptional results. Sales climbed 3% and EPS soared 49%, after increasing 4% and 41% in the prior quarter. Management increased its earnings and cash flow guidance for the remainder of 2016. Sales increased 8% before adjusting for foreign exchange rates. Lear’s cost cuts and better efficiency bolstered the jump in earnings. Hold.
LKQ Corp. (LKQ 32.89) reported solid sales and earnings. Sales climbed 8% and EPS advanced 11%, after increasing 4% and 15% in the previous quarter. Sales in Europe were strong (up 12%), and recent acquisitions boosted results. LKQ completed its purchase of Pittsburgh Glass Works, a leading manufacturer and distributor of automotive glass products with 120 distribution branches serving over 7,000 automotive glass retailers in North America. Management increased its forecast for earnings and cash flow for the final three quarters of 2016. Hold.
Matthews International (MATW 50.16) reported strong sales and earnings. Sales rose 5% and EPS improved 12%, after increasing 3% and 9% in the prior quarter. Matthews’ recent purchase of Aurora Casket accounted for most of sales and EPS increases. Further improvement is expected in the next couple of quarters. Hold.
Penske Automotive (PAG 39.88) recorded solid results. Sales advanced 8% and EPS climbed 6%, after increasing 12% and 1% in the previous quarter. Same-store sales rose 2.5% as car and truck sales continued to trend higher. Penske continues to add dealerships. The company acquired Harper Truck Centres, which owns and operates five dealerships near Toronto, Canada. Hold.
Skyworks Solutions (SWKS 71.78) delivered sales and earnings in line with forecasts. Sales inched ahead 2% and EPS surged 27%, after increasing 15% and 80% in the prior quarter. Skyworks’ slowdown is caused by weak demand from Apple, one of Skyworks’ largest customers (44% of total sales). Management lowered its sales guidance for the current quarter but raised its EPS forecast.
The new iPhone 7, due to launch in September, will include 10% to 15% higher Skyworks content compared to the last generation phone. The increase will provide a much needed boost to Skyworks sales later in 2016. Hold.
Smith, A.O. (AOS 77.33) missed sales forecasts, but earnings beat estimates. Sales increased 3% and EPS jumped 28%, after increasing 2% and 41% in the previous quarter. Sales in the U.S. dipped 1.2%, whereas international sales rose 11.0%. China growth remained strong thanks to increased sales of water heater, water treatment and air purifier products. A.O. Smith benefited from price hikes for some of its products, and lower raw material costs. Management raised its EPS forecast slightly for the remainder of 2016. Hold.
Synaptics (SYNA 81.10) recorded terrible sales and earnings. Sales dropped 16% and EPS plunged 27%, after increasing 1% and 10% in the prior quarter. The company missed estimates by a mile. Demand from Apple, Synaptics’ second largest customer behind Samsung, weakened during the quarter. However, Synaptics posted record sales for its fingerprint authentication products, and expects the strong sales to continue. Management forecast lower sales and earnings in the current quarter, to be followed by more normal growth patterns in the second half of 2016.
Synaptics’ takeover by a Chinese group has been placed on hold until at least mid-May. Also, the group’s offer of $110 per share is expected to be lowered to less than $100 per share or the deal could be called off entirely. SYNA dropped to 71.15 in after-hours trading. Hold.
Whirlpool (WHR 174.78) reported mixed results. Sales declined 7% but EPS surged 16%, after sales decreased 7% and EPS increased 13% in the prior quarter. Whirlpool’s board of directors increased the quarterly dividend to $1.00 from $0.90. WHR’s yield is now 2.3%. Sales were disappointing, but management reiterated its sales and earnings forecast for the remainder of 2016. Hold.
Index of Latest Summaries – Recommendations featured in recent issues.