Sixteen Cabot Benjamin Graham Value Investor companies reported quarterly financial results. Four produced outstanding sales and earnings: AMC Networks, IntercontinentalExchange, Priceline and Scripps Networks, and four reported rather weak results: Maiden Holdings, McKesson, Prudential and WestJet Airlines. I will review all of the quarterly reports soon and offer sell recommendations if necessary.
I have been asked many times why some stocks go down, even after reporting very good quarterly sales and earnings. Often, the mystery can be solved if you read management’s comments regarding future expectations. Sometimes management will warn that, even though sales and earnings for the reported quarter exceeded forecasts, the company will experience a slowdown during the next quarter or two.
Negative guidance from management can cause a sharp drop in a company’s stock price. Priceline (PCLN) is a prime example of a company that reported strong sales and earnings growth, but management’s tepid guidance caused Priceline’s stock price to drop considerably. In Priceline’s case, the drop in the stock seems like an excellent opportunity to buy a high-quality company at a bargain price. Management assured investors that the slowdown will be temporary, which is why I believe Priceline’s stock will bounce back quickly.
Prices appearing after each stock symbol are the closing prices on Thursday, May 5. Reports are for the quarter ended March 31, 2016 unless otherwise noted. Sales and earnings increases and decreases are based on year-ago comparisons.
I also include two indexes that list the companies featured in the Cabot Value Model or the Cabot Enterprising Model during the most recent four months. The indexes identify the companies and the dates when my company summaries 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 13, 2016. My schedule for the next four weeks will be:
* 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 - on vacation
* Thursday, June 2, Cabot Value Model issue 263V
* Friday, June 3, Weekly Update
Company Reports
AMC Networks (AMCX 67.22) delivered excellent first-quarter sales and earnings. Sales rose 6% and EPS (earnings per share) surged 20%, after increasing 11% and 16% in the prior quarter. The immense popularity of AMC original programming, including The Walking Dead, Better Call Saul and Fear the Walking Dead, resonated well with viewers and advertisers. The company lowered the interest rate on part of its long-term debt from 7.75% to 5.00%. The move will add $0.25 to EPS annually. Buy at 70.73 or below.
Cognizant Technology (CTSH 57.59) met forecasts. 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.
Cummins (CMI 113.89) reported relatively good results. Sales fell 9% and EPS tumbled 13%, after declining 6% and 18% in the previous quarter. North American sales dropped 10%, and international sales fell 8%. Sales in Latin America and Asia hurt sales results. Global sales of engines and power generators fell 10% and 19% respectively. Management is hopeful that the oil and gas and mining industries will begin to recover within the near future, which will provide opportunities for Cummins to rebound strongly. Hold.
CVS Health (CVS 105.13) reported solid 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 Target’s healthcare clinics, provided a big boost to sales.
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 current price. Buy at 102.51 or below.
Fortress Investment (FIG 5.00) hiked its dividend but missed expectations. The board of directors increased the quarterly dividend to $0.09 from $0.08 and added a special dividend of $0.11. Fortress’s yield is now 8.8% based on the last four quarterly and special dividends (7.2% based on the new quarterly $0.09 rate).
Revenue inched ahead 2% and EPS advanced 33%, after revenue declined 9% and EPS increased 7% in the prior quarter. Assets under management advanced 1% from a year ago. Fortress’s first quarter fund performance was very solid with most funds beating comparable indexes and benchmarks.
On April 28, 2016, Fortress announced that it is exiting its Convex Asia Fund before June 30. Convex Asia did not contribute to Fortress’s earnings in 2015, and the move is part of an effort to restructure Fortress and focus on more profitable areas of the business. Terms of the sales were not available. Fortress management is upbeat concerning future prospects for the company. Hold.
General Motors (GM 30.53) reported 3.5% lower sales in April due to lower sales to rental car companies. GM is withdrawing from the rental car market because of the low profit margins of the rental business. Other car and truck sales registered strong gains. Buy at 31.56 or below.
Gildan Activewear (GIL 30.89) produced mixed results. Sales fell 7% after increasing 39% in the previous quarter. EPS rose 17%, which met estimates. Management reconfirmed its guidance for the remainder of 2016, which calls for solid sales and earnings growth. Sales were hampered by lower distributor inventory replenishment and weak demand from department stores.
Management anticipates strong sales growth in the second half of 2016 based on increased space in stores, new retail programs and enhanced inventory replenishment. Earnings will receive a boost from recent new manufacturing facility openings and low raw material costs. Hold.
IntercontinentalExchange (ICE 254.02) reported excellent revenue and earnings, sending shares higher. Revenue soared 36% and EPS surged 20%, after increasing 9% and 26% in the previous quarter. The company’s data service revenue doubled, bolstered by recent purchases of Interactive Data and Trayport. Strong cash flow allowed the company to reduce debt by $500 million during the quarter. The company announced it will not make a bid for the London Stock Exchange but will actively seek other acquisition candidates. Buy at 256.72 or below.
Maiden Holdings (MHLD 12.68) reported mixed results. Total revenue climbed 8%, but EPS dropped 15%, after decreases of 4% and 11% in the prior quarter. Recent acquisitions and disciplined underwriting standards will help Maiden to rebound in the second half of 2016. The 4.4% dividend yield makes MHLD an attractive holding. Hold.
McKesson (MCK 172.70) shares jumped 4.7% on management’s positive comments about future prospects, despite the company’s disappointing sales and earnings report.
Sales advanced 4% but EPS fell 17%, well below forecasts. Year-ago sales and EPS increased 3% and 10%. Negative generic pharmaceutical pricing trends in the U.S. and consolidation in the healthcare industry hurt overall results. Management sees more profitable opportunities in several parts of its business, and forecasts solid sales and earnings growth during the next several quarters. Buy at 161.73 or below.
Nissan Motor ADR (NSANY 17.72) reported a whopping sales increase of 12.8% in March sales. The company successfully managed an incentive program ($3,362 per vehicle) to lure buyers. Hold.
Priceline Group (PCLN 1240.85) delivered outstanding sales and earnings. Sales climbed 17% and EPS soared 30%, after increasing 9% and 16% in the prior quarter. However, management’s forecast for tepid EPS growth in the current quarter sent PCLN shares down 7.5%.
Room nights booked rose 31% from a year-ago, but airline ticket sales dropped 7% year-over-year. Management’s estimates for the current quarter include 10% sales growth and flat earnings per share. The timing of certain holidays and higher promotional costs were reasons for the pessimistic outlook.
Management believes the slowdown will be temporary. The drop in PCLN’s stock presents an excellent buying opportunity. Management’s forecasts are usually conservative, and actual results could easily beat their forecast. Buy at 1,250.96 or below.
Prudential Financial (PRU 75.83) produced weak results. Revenue sank 4% and EPS dropped 22%, after declining 16% and 8% in the previous quarter. Prudential encountered lower life insurance premiums and weak asset management fees. Prudential’s income will benefit greatly when interest rates begin to rise. Hold.
Scripps Networks (SNI 63.06) reported exceptional sales and earnings. Sales surged 24% and EPS skyrocketed 138% after increasing 27% and 32% in the prior quarter. Higher ratings for many of Scripps’ shows led to a big gain in advertising revenue. International revenue grew by 400%, helped by the inclusion of recently acquired Polish TVN network. Management believes the company’s extraordinary success will continue. Buy at 62.79 or below.
Synchronoss Technologies (SNCR 28.90) produced lackluster results, as expected. Sales rose 7% and EPS were flat, after increasing 20% and 15% respectively in the previous quarter. Subscriber revenue from the company’s cloud services (50% of total revenue) increased a healthy 18%. Management provided a rosy outlook for the remainder of 2016 and beyond, promising that new products and services are ready to launch. And Synchronoss recently inked a new deal with AT&T that will include a lucrative add-on agreement with AT&T’s newly acquired DIRECTV subsidiary. Buy at 37.30 or below.
WestJet Airlines (WJA.TO 19.85) reported weak results. Sales fell 5% and EPS tumbled 35%, after declines of 4% and 28% in the prior quarter. Canada’s economy continues its weakness from depressed oil and natural gas drilling and low mining activity.
WestJet will launch its new non-stop service between six Canadian cities and London beginning May 6. Flights from Vancouver, Calgary and Toronto begin on May 6, while service from Edmonton, Winnipeg and St. John’s will begin on May 7. The flights, totaling 28 flights each week, will create a noticeable boost to sales and profits in the current quarter and beyond. Buy at 22.30 or below.
Index of Latest Summaries – Recommendations featured in recent issues.