Nine of my Benjamin Graham companies reported quarterly financial results or other noteworthy news. I also include some interesting questions from subscribers with my responses.
Prices appearing after each stock symbol are the closing prices on Thursday, May 12. Reports are for the quarter ended March 31, 2016 unless otherwise noted.
In addition, I include two indexes that list companies featured in the Cabot Value Model and the Cabot Enterprising Model during the most recent four months. The indexes identify the companies and indicate when my summaries of the companies were published so you can quickly find my recent write-ups for stocks appearing in the models.
My next Weekly Update will be sent to you on Friday, May 20, 2016. My schedule for the next four weeks will be:
* Friday, May 20, Weekly Update
* Thursday, May 26, Cabot Wealth Advisory
* Friday, May 27, No Weekly Update - I’m on vacation
* Thursday, June 2, Cabot Value Model issue 263V
* Friday, June 3, Weekly Update
* Thursday, June 9, Cabot Enterprising Model issue 263E
* Friday, June 10, Weekly Update
* Friday, June 17, No Weekly Update - Canada Conference
Company Reports
Allergan (AGN 216.08) delivered solid sales and earnings. Sales soared 48% and EPS climbed 15%, after increasing 78% and 33% in the previous quarter. Allergan’s merger with Pfizer has been blocked by the U.S. Justice Department. The company is on track to sell its generic drug business to Teva Pharmaceuticals for $40.5 billion, mostly cash. Both companies are confident that the deal will win final approval and close in June.
Allergan will use the cash proceeds to buy back $10 billion (10%) of its own shares, use part to pay down long-term debt, and hold most of the remainder to make small acquisitions. Management hinted that dividends could begin in 2016 or 2017. Allergan’s strong portfolio of promising branded drugs and drugs in development will propel robust growth during the next several years. Hold.
Avigilon (Toronto Stock Exchange: AVO.TO 13.90; U.S. Over-the-Counter: AIOCF 10.81) reported disappointing sales and earnings. Sales climbed 15% but EPS dropped 31%, after increasing 37% and 12% respectively in the prior quarter. Mediocre sales growth can be attributed to Avigilon’s small size and volatile sales and earnings from quarter to quarter. Higher research and development expenses caused part of the earnings shortfall. Management forecast accelerating sales and earnings growth during the remainder of 2016. Avigilon completed a major security camera installation at Columbia University and introduced several new products. The recent dip in the stock price provides an excellent buying opportunity. Buy at 15.99 or below.
Baxter International (BAX 45.63) is offering its holders the opportunity to exchange their BAX shares for Baxalta (BXLT 41.78) shares. If you still own Baxter, I recommend exchanging your Baxter shares for Baxalta. Baxter has added a 7.52% incentive to entice shareholders into tendering, which sweetens the deal further.
I previously recommended selling Baxter when its stock reached my Min Sell Price of 44.77 on April 27. If you have not sold your BAX sharers, I advise exchanging your shares rather than selling. You will save selling fees and you will receive extra BXLT shares as a result of the bonus incentive. The offer will expire at midnight on May 18, 2016, but some brokerages are requiring BAX holders to tender their shares sooner. The offer will likely be prorated on the basis of shares tendered versus total available shares if more shares are tendered than Baxter can exchange.
Additional details can be found at http://www.dfking.com/BAX/.
After the Baxter tender offer is completed, all Baxalta shareholders will likely receive a second offer (expected in early June) to tender their BAX shares to Shire Pharmaceuticals (SHPG 173.81) of Ireland. If the merger is approved, shareholders will have the option of receiving $18 per share in cash plus shares of Shire, or no cash and all Shire shares. I recommend opting for all Shire shares, so that you won’t wind up with a small Shire holding. In either case, the transaction will probably become taxable if you own Baxalta in a taxable account.
Convergys (CVG 27.94) recorded solid first-quarter results. Sales slipped 2% but EPS rose 6% after sales declined 2% and EPS increased 2% in the prior quarter. The company’s board of directors hiked the quarterly dividend to $0.09 from $0.08. Increased business from existing healthcare clients and added business from new clients in high-growth industries mostly offset the weakness in the communications industry. Management’s forecast for the remainder of 2016 included slow sales and earnings growth, with accelerating growth very possible in 2017. Hold.
Disney, Walt (DIS 101.73) reported weaker than expected sales and earnings. Sales advanced 4% and EPS climbed 6%, after increasing 14% and 36% in the prior quarter. ESPN, Disney’s cable sports network, continued to experience declining subscriptions, which peaked at 100 million U.S. homes in 2010. During the past five years, subscriptions fell 8% to 92 million homes. In addition, Disney World attendance in Florida declined slightly because of a drop in visitors from economically troubled Brazil.
Disney’s studio entertainment segment recorded blockbuster results. The company will open its much-anticipated Shanghai Disney Resort on June 16, which will bolster results going forward. A dip below 100 will present an excellent buying opportunity. Buy at 99.36 or below.
Nissan Motor (NSANY 19.05) reported solid sales and earnings for the 12 months ended March 31, 2016. Sales rose 7% and net income advanced 14%. Nissan’s stock price rose 5% after the announcement.
Nissan reached an agreement to acquire a controlling 34% stake in Mitsubishi Motors of Japan. The alliance will extend an existing partnership between Nissan and Mitsubishi, in which the two companies have jointly collaborated for the past five years. Nissan will help restore Mitsubishi’s reputation, after the company admitted falsifying fuel-economy results. The merger will likely help both companies. Nissan is buying Mitsubishi at a bargain price. Hold.
Penske Automotive (PAG 35.59) raised its quarterly dividend to $0.27 from $0.26. The increase is the 20th consecutive quarterly increase and raises the yield to 3.0%. Penske has raised its dividend every three months since it initiated a dividend in the second quarter of 2012. Hold.
Rackspace Hosting (RAX 22.82) recorded excellent results. Sales climbed 8% and EPS catapulted 85% after sales increased 11% and EPS fell 11% in the prior quarter. Rackspace continued to move away from selling hosted data services, and is now focused on support services for other cloud computing platforms. As a result, profit margins rose to 15.7% in the first quarter from 8.9% in the year-ago quarter and 11.5% in the previous quarter, enabling cash flow to jump 43% from a year ago. Investors are dissatisfied with the changes, which has caused Rackspace’s stock price to drop noticeably during the past year. Hold.
Team Health Holdings (TMH 44.30) reported mixed results. Revenue surged 35%, but EPS fell 9%. Revenue and EPS increased 24% and 9% in the prior quarter. Team Health’s November 2015 purchase of IPC Healthcare bolstered revenue. Cost savings from the merger should boost earnings in the second half of 2016. TMH shares have dropped considerably during the past six months and have attracted activist investors intent on enhancing shareholder value. Buy at 45.36 or below.
Questions and Answers
Q. What do you think is going on with Avigilon (from subscriber J.G.)
A. Avigilon (Toronto Stock Exchange: AVO.TO 13.93; U.S. Over-the-Counter: AIOCF 10.90) reported disappointing sales and earnings (as summarized in the report in this Update). Sales surged 36% in 2015, which is encouraging. If the company can continue to grow sales at a rapid rate, earnings will eventually catch up. (EPS rose 16% last year). However, the 15% growth in sales registered in the most recent first quarter is cause for concern.
Management remains optimistic, but I will be looking for major improvement in the second quarter. The company seems unable to land big contracts on a regular basis, probably because of its small size. A buyout from a large company would make sense, but I’ve never seen any interest in buying from suitors or in selling from Avigilon. The company has a modest amount of debt and strong cash flow, so I believe Avigilon will become a very worthwhile holding for you.
Q. What is your current opinion on AAPL, CTSH, CVS and KR? (from subscriber C.P.)
A. Three of the four stocks you mentioned are strong holdings. Apple has problems.
Apple (AAPL 90.32) reported lousy sales and earnings. iPhone sales are fading, and the company hasn’t created a new blockbuster gadget during the past several years. Apple worked hard to establish a foothold in China, where sales were very strong last year. First quarter 2016 China sales were very disappointing, however, and the outlook is questionable. Apple’s stock price is overdue for a bounce back to at least 100, so I’m holding off recommending a sale for now. Hold.
Cognizant (CTSH 61.13) is beating its competitors because of its comprehensive consulting services. Cognizant’s first-quarter sales advanced 10% and EPS climbed 13%, after increasing 18% and 17% in the prior quarter. The company experienced weaker demand from the healthcare sector due to merger activity, and from banking because of financial market volatility. Management provided conservative forecasts for the current quarter and full year. Hold.
CVS Health (CVS 104.85) reported solid first-quarter results. Sales surged 19% and EPS advanced 4%, after increasing 11% and 26% in the prior quarter. Same-store sales rose an impressive 4.2%, enhanced by a 5.9% increase in prescription drugs. Recent acquisitions, including Omnicare and the healthcare clinics of Target, provided a big boost to sales. The changeover of Target health services to CVS created a drag on first quarter earnings, but earnings growth will very likely begin to accelerate in the current quarter.
CVS will convert all of Target pharmacies to the CVS Pharmacy brand by the end of the summer. The company will launch a major marketing program soon after. Management astutely took advantage of the drop in CVS’s stock price in February by buying back 2.1 billion shares at a cost of $94 per share--noticeably below today’s price. The stock is stuck in the 100 to 105 range now, but will likely rise in anticipation of better results during the remainder of 2016. Buy at 102.51 or below.
Kroger (KR 34.89) has been a bit of a disappointment so far. The company reported excellent sales and earnings for the quarter ended January 31, but same-store sales increased only 3.7%. Roundy’s, which Kroger acquired in December, had lackluster same-store sales. Kroger will invest adequate funds to boost Roundy’s results. I look for strong sales and earnings, as well as an improvement in same-store sales in the back half of 2016. Buy at 36.05 or below.
Index of Latest Summaries – Recommendations featured in recent issues.