The surge in stock prices during the past four weeks has sent many of my buy recommendations substantially higher--well beyond Max Buy Prices. New Max Buy and Min Sell Prices will reflect new data and forecasts in the next Cabot Benjamin Graham Value Investor on July 28. Biogen, General Motors and Alliance Data reported exceptional sales and earnings results this week.
Eighteen Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. I have one new sell recommendation: Fortive (FTV). Prices appearing after each stock symbol are the closing prices on Thursday, July 21. Reports are for the quarter ended June 30, 2016 unless otherwise stated. Sales and earnings increases and decreases are based on year-ago comparisons. This update also includes some interesting questions from subscribers with my responses.
At the end of this update, I present two indexes listing 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, July 29, 2016. My schedule for the next five weeks will be:
* Thursday, July 28, Cabot Value Model issue 265V
* Friday, July 29, Weekly Update
* Thursday, August 4, Cabot Enterprising Model issue 265E
* Friday, August 5, Weekly Update
* Friday, August 10-12, Cabot Conference - No Weekly Update
* Friday, August 19, Weekly Update
* Friday, August 26, Weekly Update
Company Reports
Aetna (AET 118.30) is facing an uphill battle in its proposed merger with Humana. The Department of Justice has filed suit to block the merger, alleging that the merger, along with the Anthem/Cigna deal would cut competition drastically and encourage higher healthcare insurance costs for Americans. I think the DOJ will win. Aetna’s will likely produce better revenue and profit growth in the second half of 2016. The company will report second-quarter results on August 2. Hold.
Alliance Data Systems (ADS 228.82) beat second-quarter sales and earnings estimates by a wide margin. Sales advanced 17% and EPS climbed 11% after sales and EPS both increased 5% in the prior quarter. Management expects sales and earnings growth to accelerate during the second half of 2016. Recent acquisitions and strength across all segments aided the better-than-expected results. My Max Buy and Min Sell Prices will be adjusted in the July 28 Cabot Benjamin Graham Value Investor based on the new data and forecasts. For now, Buy at 198.22 or below.
AT&T (T 42.52) failed to meet forecasts by the slimmest of margins. Revenue jumped 23% and EPS rose 4% after increasing 24% and 14% in the previous quarter. The company’s purchase of DIRECTV one year ago is producing noticeably better-than-expected sales and earnings growth. AT&T’s new video streaming services are scheduled to launch later this year. The new streaming services will help to serve every segment of the video industry and offer customers any content virtually wherever and whenever they want it. Management reaffirmed its forecasts for 2016. Buy at 42.79 or below.
Benchmark Electronics (BHE 22.89) reported another decline in sales and earnings. Sales fell 13% and EPS dropped 26% after declining 12% and 21% in the previous quarter. Management expects to report slight improvements in third-quarter results. Engaged Capital, an activist investor, recently won two seats on Benchmark’s board of directors. Engaged owns 4.9% of Benchmark and will likely push the company to use its $500 million cash hoard to expand its business and buy back shares. BHE shares have jumped 18% during the past 10 weeks and could rise further. Hold.
Biogen (BIIB 282.45) easily beat expectations. Sales climbed 12% and EPS soared 22%. Growth was driven by increases in worldwide revenues from the company’s multiple sclerosis and hemophilia drugs and treatments. Management raised ESP guidance by a noticeable amount for the remainder of 2016. Several important drugs are in late-stage development including treatments for Alzheimer’s disease and neurological conditions. Biogen’s CEO, George Scangos, will depart soon after a successor is found, but the change should be uneventful. Buy at 251.14 or below.
Cummins (CMI 118.46) hiked its quarterly dividend to $1.025 from $0.975. The yield is now 3.5%. Cummins will report second-quarter results on August 2. Hold.
Fortive (FTV 50.24) was spun off from Danaher (DHR (81.29) on July 1. Initial reports indicate that Fortive, with its industrial technologies and instrumentation businesses, will grow slowly during the next year or so. Danaher, on the other hand, will likely grow more rapidly because of its dental, water and life sciences segments.
My new buy and sell targets for Danaher are Max Buy Price 75.42 and Min Sell Price 100.37. At this point, analysts’ sales and earnings estimates are conservative, because there has been limited guidance from Danaher. As soon as analysts begin to raise estimates, I will increase my Max Buy and Min Sell Price targets. I think that it is safe to buy Danaher at the current price in anticipation of better-than-expected results during the next several quarters.
I advise selling your Fortive shares. You might consider investing the proceeds from your Fortive sale to buy more shares of Danaher. Sell FTV at the current price.
General Motors (GM 32.03) reported exceptional results. Sales rose 11% and EPS surged 45% after increasing 4% and 48% in the prior quarter. Pickup truck and SUV sales in the U.S. were especially strong. Sales in China were surprisingly robust. Management raised its raised its EPS forecast for the third and fourth quarters.
General Motors may be forced by U.S. regulators to recall another 4.3 million vehicles for potentially defective Takata air bag inflators, a call-back that would cost the U.S. automaker $550 million. GM previously recalled 2.5 vehicles earlier in 2016 for the same problems. GM believes that “the results of further testing and analysis will demonstrate that the vehicles do not present an unreasonable risk to safety and that no repair will ultimately be required.”
GM said its Takata inflators have a unique design that doesn’t pose a safety risk. The company’s data showed no cases of an airbag rupturing among 44,000 deployments in large GM pickups and SUVs that contain Takata inflators. In my opinion, GM will not be required to recall vehicles, and the company’s rising market share will propel sales and earnings growth further during the next four quarters. Buy at 30.94 or below.
Grainger, W.W. (GWW 215.27) reported disappointing second-quarter results. Sales advanced 2% but EPS fell 15% after sales and EPS increased 3% in the previous quarter. Grainger’s Canadian business continued to be affected by low oil prices, the fires in Fort McMurray and unfavorable foreign exchange. Management lowered its sales and earnings forecast for the remainder of 2016 based on continued weakness in Canada. The company’s recent acquisitions, restructuring efforts in the U.S. and Canada, and online successes bode well for long-term potential. Hold.
Johnson Controls (JCI 45.53) produced solid results for the quarter ended June 30. Sales slipped 1% but EPS rose 18% after sales dipped 2% and EPS increased 18% in the prior quarter. The Johnson Controls-Hitachi joint venture continues to exceed expectations. Johnson’s purchase of Tyco international will be completed sooner than expected on September 2. The new Johnson Controls will then spin off its automotive seating and interiors segment into a new company called Adient. The spinoff will be completed on October 31. Adient and Johnson Controls will be domiciled in Ireland, with a favorable tax rate of 10% to 12%. Johnson’s transformation is expected to produce accelerated sales and earnings growth in 2017 and beyond. Hold.
Quest Diagnostics (DGX 84.02) exceeded estimates. Revenue dipped 1% but EPS advanced 7% after increasing 2% and 7% in the previous quarter. Management is refocusing on its diagnostic information services business, which is more profitable than its products business. A recent acquisition and new agreements with hospitals will bolster second half results. Hold.
Schlumberger (SLB 80.02) reported weak results, but expects improvement. Sales dropped 20% and EPS plummeted 74% after declines of 36% and 47% respectively in the prior quarter. Conditions worsened in most parts of the company’s operations, but management believes Schlumberger has now reached the bottom of the oil cycle. The company is now shifting its focus onto recovering pricing concessions to boost profits. Second-quarter sales exceeded sales in the first quarter--the first sequential increase in six quarters.
Schlumberger completed its purchase of Cameron International and entered into agreements to acquire two small companies at advantageous prices. Schlumberger also repurchased stock during the quarter at a favorable price of 72.77 per share. The long-awaited recovery in the oil industry appears to be starting. Hold.
Skyworks Solutions (SWKS 70.92) surpassed Wall Street expectations. Sales declined 7% and EPS fell 8% after increasing 2% and 27% in the previous quarter. Sales faltered because of Apple’s reduced demand for Skyworks semiconductors. However, exciting new products will greatly bolster sales and earnings during the next several quarters.
Skyworks recently gained several new deals with Google, Samsung, General Motors, Huawei and others. New business with Huawei is especially important, because Huawei is China’s largest producer of smartphones and is rapidly gaining worldwide market share from Apple and Samsung. Skyworks’ board of directors increased the quarterly dividend to $0.28 from $0.26. Buy at 62.07 or below.
Southwest Airlines (LUV 37.32) revenue missed but earnings beat estimates. Revenue rose 5% and EPS soared 42% after increasing 9% and 20% in the prior quarter. The company flew fuller planes and jet fuel costs declined 10.1%. Increased competition forced the airline to offer deep-discount fares. Management stated that revenue will continue to weaken slightly in the current quarter, as competitive conditions continue to force lower fares.
Southwest suffered a massive computer outage and 1,300 flights were canceled and 4,300 more were delayed around the country. A router breakdown set off a chain of failures in critical technology systems and backup systems failed to work as expected. Southwest said that most systems had recovered and were functioning by Thursday morning, July 21. The company expects to replace its aging reservations system next year at a cost of $500 million. Southwest’s stock price dropped 11.2% on July 21, which has created an excellent buying opportunity. Buy at 43.58 or below.
Starbucks (SBUX 57.60) reported solid results for the quarter ended June 28. Sales advanced 7% and EPS climbed 17% after increasing 9% and 18% in the previous quarter. Same-store sales rose 7% in China and 4% in the U.S. Starbucks blamed political and social unrest at home and abroad for disappointing results that caused its third straight sales-target miss. Management forecast better sales growth in the next several quarters.
The company opened 474 net new stores globally in the quarter, bringing total stores to 24,395 in 74 countries worldwide. Membership in the Starbucks Rewards loyalty program increased 18% to 12.3 million members in the U.S. Starbucks will expand its health care offering for all eligible U.S. partners (employees). The enhanced benefits give Starbucks’ partners more choice, cost savings opportunities and personalized support. The company will continue to fund 70% of the premium costs and cover 100% of preventive care services. Buy at 54.46 or below.
Travelers Companies (TRV 116.72) produced mediocre revenue and earnings. Revenue inched ahead 1% but EPS fell 13% vs. a revenue increase of 1% and EPS decrease of 9% in the previous quarter. Higher catastrophe weather-related losses in several regions of the U.S. and the Fort McMurray wildfires in Canada weighed on results. Lower net investment income contributed to lower profits but solid gains in personal insurance and business insurance buoyed results. Hold.
UnitedHealth Group (UNH 142.87) recorded excellent second-quarter results. Sales surged 28% and EPS advanced 10% after increasing 25% and 14% in the prior quarter. UnitedHealth’s Optum (44% of total sales) continues to shine with 52% sales growth during the quarter. Also, the company’s purchase of Catamaran a year ago will bolster sales and earnings in future quarters. Management lowered its forecast for 2016 EPS based on higher than expected claims from Affordable Care Act customers. Buy at 139.59 or below.
Whirlpool (WHR 182.72) reported excellent results. Sales were flat from a year ago, but EPS surged 30% after sales declined 5% and EPS increased 23% in the prior quarter. Management raised its earnings guidance for the second half of 2016. Cost controls and recent acquisitions boosted results.
The U.S. Commerce Department will begin charging duties on washing machines built in China by Samsung Electronics and LG Electronics. The Commerce Department upheld a complaint by Whirlpool alleging that the companies sell their washers in the U.S. for less than they cost to produce. The tariffs will help Whirlpool compete more effectively in the U.S. Hold.
Questions and Answers
Q. I appreciate speed of sell recommendations. But your buy recommendations are always withheld until the issue is distributed. I’m usually late as a result. Encourage treating buy and sell recommendations with same respect in terms of speed of advisement. (from subscriber T.C.)
A. I send out buy recommendations as quickly as I possibly can. On the Tuesday before the issue is sent to you, I choose my buy recommendations based on data that is no more than one day old. On Wednesday, I write about my choices, make any last minute substitutions, and then send my copy, charts, etc. to Cabot. On Thursday, you receive the issue, complete with buy recommendations. Sometimes my recommendations rise in price before you receive your issue, and sometimes prices decline. Usually the price changes are small.
I advise buying more than one stock at a time, so that if one stock that you are interested in is above my Max Buy Price, you can offset the high price by buying a stock that is below my Max Buy Price. I hope this approach will work well for you.
Q. I am looking for a couple of stocks in the health sector. (from subscriber W.N.)
A. My two favorite stocks in the healthcare sector are Gilead and AbbVie.
Gilead Sciences (GILD: Current Price 87.24; Max Buy Price 94.78) concentrates on treatments for human immunodeficiency virus/AIDS, liver diseases such as hepatitis B virus and hepatitis C virus, and serious cardiovascular/metabolic and respiratory conditions. Gilead is losing market share in some of its leading drugs, but the company recently received FDA approval for a couple of new drugs which could catapult sales and earnings higher than most analysts expect.
Gilead has developed several other promising drugs which will be launched within the next few years. At only 7.3 times current EPS with a dividend yield of 2.3%, GILD shares are way undervalued. I expect the stock to reach my Min Sell Price of 128.90 within one to two years. Gilead will report second-quarter results on July 25.
AbbVie (ABBV: Current Price 63.89; Max Buy Price 61.86) focuses on the development and marketing of therapies for complex and serious ailments such as rheumatoid arthritis, cancer, psoriasis, Crohn’s disease, HIV, hepatitis C, Parkinson’s disease and chronic kidney disease. Management is working diligently to expand AbbVie’s portfolio of products. The company has introduced several new drugs recently, and has many more drugs in its pipeline wading through the FDA approval process.
AbbVie is also partnering with several leading drug companies to develop and market new drugs and treatments. AbbVie will continue to acquire smaller biopharmaceutical companies to bolster revenue and earnings growth. At 13.9 times current EPS and with a 3.6% dividend yield, ABBV offers excellent value. I expect the stock to reach my Min Sell Price of 86.09 within in two years. AbbVie will report second-quarter results on July 25.
Index of Latest Summaries – Recommendations featured in recent issues