Six Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. In this Update, I also include some interesting questions from subscribers with my responses.
Prices appearing after each stock symbol are the closing prices on Thursday, May 19. Reports are for the quarter ended March 31, 2016 unless otherwise noted. Sales and earnings increases and decreases are based on year-ago comparisons.
In addition, I include two indexes that list companies featured in the Cabot Value Model or in the Cabot Enterprising Model during the most recent four months. The indexes 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, June 3, 2016.
My schedule for the next four weeks will be:
* 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
* Friday, June 24, Weekly Update
Company Reports
Apple (AAPL 94.20) received a surprise when Berkshire Hathaway’s quarterly report revealed that Warren Buffett and company had purchased a $900 million stake in AAPL shares. The news hit just days after billionaire investor Carl Icahn reported that he recently sold all his AAPL holdings (worth nearly $5 billion), saying Apple could face problems in China.
Mr. Buffett seeks long-term value, whereas Mr. Icahn looks for short-term gains in companies he thinks could become worth more by putting cash to better use. Buffett is willing to ride out Apple’s recent sales and earnings slowdown, which is priced into the stock and setting it up for worthwhile future gains. Hold.
Baxalta (BXLT 43.72) delivered excellent first-quarter results. Sales advanced 14% and EPS climbed 18%, after sales increased 5% and EPS fell 17% in the prior quarter. New products, including treatments for hemophilia and leukemia, added noticeable sales and earnings to the company’s results. Baxalta continued to accelerate investments in research and development during the quarter.
Baxalta shareholders will likely receive an offer (expected in early June) to tender their Baxalta shares to Shire Pharmaceuticals (SHPG) of Ireland. If the merger is approved, shareholders will have the option of receiving $18.00 per share in cash plus shares of Shire (in the form of ADS shares that can be traded on the NYSE or Nasdaq), or holders can opt for no cash and all Shire shares. I recommend opting for cash and Shire shares, because the $18.00 conversion to Shire shares will be paid in Shire common shares that only trade on international exchanges, not in the U.S. I also recommend using the $18.00 cash to purchase additional Shire ADS shares to avoid a small holding in Shire. The transaction will probably become taxable if you own Baxalta in a taxable account. Hold.
Cisco Systems (CSCO 27.57) reported decent results for the quarter ended 4/30/16. Sales slipped 1% but EPS climbed 6%, compared to flat sales and an 8% EPS increase in the previous quarter. Growth in Asia bolstered sales and earnings. Management is encouraged by the company’s progress in transitioning to a software and subscription-based business. The move will temporarily hamper reported sales growth, but future results will show steadier progress. Hold.
McKesson (MCK 180.96) and Wal-Mart Stores (WMT 69.20) will expand an alliance for jointly procuring generic medicines in an attempt to lower costs. Walmart, which has been obtaining generics with McKesson for several years, is looking to strengthen its pharmacy business as well as cut costs, which became a significant drag on earnings last year. Buy at 161.73 or below.
Nissan Motor (NSANY 18.77) recorded strong sales again. U.S. sales soared 13% in April after increasing 13% in March. Hold.
Southwest Airlines (LUV 42.17) increased its quarterly dividend to $0.10 from $0.075. The new yield is 0.9%. Buy at 44.42 or below.
Questions and Answers
Q. About your advice to take all Shire shares from the Baxalta exchange. My brokerage, Fidelity, is telling me that the $18 part would be exchanged into common Shire shares and not into ADRs. Common shares do not trade in the U.S. but on the international market. The partial share in the deal would be given as ADRs so we would end up with both types if we take it in all Shire shares. Wouldn’t it be better to take the $18 and then use it to purchase Shire ADRs? in that way we would end up with all ADRs in our Shire position. (from subscriber Charles.K.)
A. I am glad that you passed along the Baxalta/Shire information to me quickly. I missed an important piece in the conversion terms. As you concluded, it will make a lot more sense to take the $18 cash and buy Shire ADRs, so that you will then hold all ADRs in your position. Thank you for double-checking and passing along your findings.
Q. I realize this author on Seeking Alpha looks for companies to “short.” More to the point, I am interested in whether your evaluation on BRS has changed since your last update? Is it time to throw in the towel? (from subscriber S.A.)
A. I am familiar with Jay Yoon and his hedge fund tactics. However, much of his claims are over-exaggerated. Bristow (BRS 14.05) is not enjoying the best of times because of low oil prices and drastic cuts in drilling. Revenue rose 11% in 2013 and 2014 before falling 6% in 2015. Long-term debt has increased in recent years, but now sits at 43% of total capital--slightly more than Schlumberger’s rock-solid 33%. Bristow’s cash on hand is $132 million, and cash flow dipped to $75 million ($3.77 per share) in 2015.
Bristow’s search and rescue business is ramping up nicely, which will offset the slumping helicopter taxi service to oil rigs. The company is in the initial stages of rolling out its unmanned aerial vehicle services business using drones to inspect difficult-to-access areas of large oil rigs and other kinds of equipment.
Management has taken steps to cut costs by reducing the dividend and by lowering capital expenditures by $200 million. Bristow reported a deficit in the September quarter, but there should be no more deficits in the foreseeable future.
Mr. Yoon has managed to send BRS shares plummeting during the past couple of weeks with his social media blast against the company. The stock has become clearly oversold, which makes it a poor time to think about selling. I recommend holding your shares for long-term recovery. Hold.
Index of Latest Summaries – Recommendations featured in recent issues.