Eleven Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. I have included one sell recommendation: Avnet, Inc. (AVT). Prices appearing after each stock symbol are the closing prices on Thursday, August 18. Reports are for the quarter ended June 30, 2016 unless otherwise stated. Sales and earnings increases and decreases are based on year ago comparisons. I also include some interesting questions from subscribers with my responses.
In addition, I present two Indexes. These list companies featured in the Cabot Value Model or in 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. Reading the list alphabetically by company name, 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, August 26, 2016. My schedule for the next five weeks will be:
* Tuesday, August 23, Cabot Wealth Advisory
* Friday, August 26, Weekly Update
* Thursday, September 1, Cabot Value Model issue 266V
* Friday, September 2, Weekly Update
* Thursday, September 8, Cabot Enterprising Model issue 266E
* Friday, September 9, Weekly Update
* Friday, September 16, Weekly Update
* Friday, September 23, Weekly Update
Company Reports
Aetna (AET 121.04) announced that it will withdraw from 11 of the 15 state health insurance exchanges in 2017. Management stated that the company lost $200 million in the second quarter after losing nearly $200 million in the previous five quarters. Losses were attributed to new subscribers with more existing health conditions than expected.
Prior to the announced withdrawal, the U.S. Department of Justice announced that it will block the proposed merger of Aetna and Humana as well as the merger of Anthem and Cigna. Aetna will challenge the Justice Department’s ruling. Court proceedings will start December 5, 2016. Hold.
Allergan (AGN 252.93) reported unexciting second quarter results. Sales increased 2% but EPS fell 9% after increasing 48% and 15% respectively in the prior quarter. Management reduced its sales and earnings estimates for the remainder of 2016, partly because Allergan is not reporting the sales and earnings of its generics business due to the pending sale of the business to Teva.
Allergan will receive $33 billion in cash plus $7 billion in Teva stock when the deal closes in October 2016. The mountain of cash will be used to pay down debt, buy back shares, and acquire small companies.
Last year, the U.S. Food and Drug Administration approved three new drugs which could generate $2.5 billion in sales next year. In addition, Allergan has developed another 10 drugs which could generate a total of $12 billion in sales within the next several years. EPS are expected to rise 5% in 2016, and then accelerate and surge 20% in 2017 and 2018. Hold.
Avigilon (AVO.TO 9.71) reported disappointing second quarter results, and forecast more of the same for the second half of 2016. Sales increased 17% but EPS dropped 50% after sales rose 20% and EPS fell 30% in the prior quarter. Management changed its strategy at the beginning of the quarter to attract new customers searching for lower-priced products.
The company lowered its price on several products, which helped bring in new sales, but the lowered prices hurt profit margins. Avigilon will begin offering a new line of lower-priced cameras during the current quarter, which should boost sales, but earnings will continue to lag.
In addition, Avigilon transferred manufacturing operations to its new facility in Texas, which will increase operating expenses. The new plant will be able to produce $1 billion of new products, but the company’s sales will only total $525 million in 2016. The empty space at the plant will boost overhead expenses. Finally, Avigilon will move into new headquarters in Vancouver during the current quarter, which will incur move-in expenses. The building will be double the current headquarters space, and will probably be under-utilized during the next few years.
Avigilon’s management is very proactive and aggressive. In addition to the expansion of facilities, the company is spending heavily on research, marketing, and the development of new products. The strategy is working well in that sales have increased rapidly during the past 5 years, but earnings haven’t caught up yet. Avigilon is an excellent long-term investment, but it will take another 2 years or more to realize its full potential.
If you are a long-term investor, I advise holding your Avigilon shares. The volatility of EPS will continue to cause the shares to rise and fall, but 2 years from now, I think we’ll be sitting on a nice profit. Buy AVO.TO at 14.06 or below on the Toronto Exchange. Buy AIOCF at 11.48 on the U.S. Over-the-Counter.
Avnet (AVT 41.28) reported another weak quarter. Sales declined 8% and EPS fell 26% after decreasing 8% and 3% in the prior quarter. The weak sales and earnings trend will continue in the current quarter, according to management’s forecast.
Avnet is selling at a reasonable price at 9.9 times current EPS and with a dividend yield of 1.6%, but company’s growth prospects are unfavorable. Therefore, I recommend selling Avnet at this time. Sell.
Cisco Systems (CSCO 30.48) beat sales and earnings estimates for the quarter ended July 31. Sales dipped 2% but EPS advanced 7% after sales decreased 1% and EPS increased 6% in the previous quarter. Management forecast modest growth for the current quarter.
Cisco will cut 5,500 employees, or 7% of its workforce. The move is in reaction to the company’s shift to software services from hardware products. Revenue from sales of switching equipment rose 2% during the June quarter, but router equipment sales fell 6%. Savings from employee cuts will be reinvested in Cisco’s faster growing service businesses, such as security, cloud and internet of things. Hold.
Convergys (CVG 29.51) produced strong second quarter results. Sales fell 3% but EPS surged 24% after sales decreased 2% and EPS increased 6% in the prior quarter. Management raised its sales and EPS forecast for the remainder of 2016, based on the company’s expected purchase of a company called buw, which offers business process outsourcing services to leading companies in Germany. Hold.
Disney. Walt (DIS 96.65) easily beat sales and earnings forecasts. Sales rose 9% and EPS climbed 10% after increasing 4% and 6% in the prior quarter. The company’s movie business performed very well, but the ESPN sports network experienced fewer subscribers. New movies and the recent opening of Disney’s new amusement park in Shanghai, China bode well for the next couple of quarters. Buy at 97.91 or below.
Eaton Vance (EV 39.96) recorded solid results for the quarter ended July 31. Revenue declined 4% and EPS dipped 2% after declining 8% and 17% in the previous quarter. Assets under management rose 7%. The company’s NextShares exchange-traded managed funds gained two new clients: Interactive Brokers Group and UBS Financial Services. Management is upbeat regarding the next couple of quarters. Hold.
Nissan Motor (NSANY 19.23) produced solid results. Sales were flat and EPS declined 4% after sales increased 5% and EPS dropped 36% in the prior quarter. Sales in the U.S. rose 8%, and sales in China increased 7%. Hold.
Rackspace Hosting (RAX 27.77) reported excellent results. Sales climbed 7% and EPS jumped 40% after increasing 8% and 85% in the prior quarter. Rackspace is expanding rapidly into international markets. Management provided a positive forecast for third quarter sales and earnings. No further news has developed since rumors surfaced that Rackspace might be acquired by a private equity firm. Hold.
Scripps Networks (SNI 64.37) produced excellent results. Sales advanced 22% and EPS rose 6% and increasing 24% and 46% respectively in the prior quarter. Advertising revenue was noticeably strong. The purchase of Polish broadcaster, TVN, continues to deliver better than expected sales and earnings. Buy at 67.54 or below.
Questions and Answers
Q. I have a Roth IRA. I have a time line of five years. I am looking for a stock that would steadily make money over the next five years. I would say I have a medium risk tolerance. Could you recommend any stock or stocks that might be a fit for what I am looking for? (from subscriber J.C.)
A. Five years is a relatively short time line in the stock market, so I hesitate to give you one or two stocks that you could depend on to perform well without some degree of risk. I advise investing in either or both of my stock ETF recommendations: iShares MSCI USA Min Volatility ETF (USMV 46.48) and SPDR S&P Dividend ETF (SDY 86.14). Both contain blue-chip stocks and offer rising dividends. Otherwise, an investment in AbbVie (ABBV 66.77) and AT&T (T 41.40) should provide a good return with an attractive 4% dividend yield.
Q. What is your current take on BRS, now down 69% since your recommendation in your October 2015 letter? It is setting new lows, but still rated as hold. I am relatively new to your service - do you normally hold onto a stock during this significant of a decline? (from subscriber R.W.)
A. I attempt to sell stocks before they take a dive, but I underestimated how far down oil prices could go and how long the industry would suffer. Bristow Group (BRS 12.79) is one of many stocks that have plummeted, but I should have seen it coming sooner rather than later.
Bristow is still a valuable company, and sooner or later, investors will realize its value. In the meantime, I think we should be patient and wait for the oil crisis to pass. The company reported second quarter results during the week, and here is my summary:
Bristow Group (BRS) recorded another deficit, as sales declined 21%. Bristow has produced five negative earnings results during the past six quarters. Sales were negatively impacted by the continuing slump in offshore oil drilling activity, leading to substantially lower demand for Bristow’s helicopter taxi services. In addition, the British pound has depreciated noticeably following Brexit.
Management expects to offset future weakness in the British pound with cost reductions. However, weak demand for the company’s helicopter taxi service will likely continue during the next three quarters. On a brighter note, Bristow is completing its ramp-up of its search and rescue contract in the U.K., and posted a 74% revenue increase in the second quarter. Search and rescue now makes up 14% of total revenue.
Bristow’s stock price has plummeted during the past two years, and is now one of the most undervalued stocks in my database. Hold.
Q. Please address Johnson Control (JCI) tender offer. What should I do? (from subscriber P.D.)
A. Johnson Control (JCI 44.99) 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 Oct. 31 or sooner. Adient and Johnson Controls will be domiciled in Ireland, with a favorable tax rate of 10% to 12%. JCI’s transformation is expected to produce accelerated sales and earnings growth in 2017 and beyond.
You will probably receive some notices concerning JCI’s Tyco merger and spinoff of Adient. I advise selling the Adient shares when you receive them in your brokerage account. The terms of the spinoff call for rewarding you with one share of Adient for each 10 shares of JCI that you own. Adient will therefore become a small holding for you, and probably not worth holding.
Q. I have a 40% gain on DG. It has been drifting lower each day. What do you think about selling it and moving that cash to one or two of your newer picks. (from subscriber W.N.)
A. Dollar General (DG 91.00) has declined slightly after reaching an all-time high of 96.75 on July 26. The correction seems normal, and I expect the stock to start to recover before quarterly financial results are reported on August 25th. One of the key numbers I will look at will be same store sales, which increased only 2.2% in the April quarter.
Growth during the next several quarters will be fueled by new store openings, and sales gained from Walmart’s exit from its Walmart Express and Neighborhood Market stores.
The current P/E ratio for DG is a bit high at 21.7, although DG’s stock price has worthwhile upside potential to reach my Min Sell Price of 117.71. You might consider placing a trailing stop loss order 10% below the daily high price. The stop loss order will preserve most of your gain and allow you to participate in future gains if the stock climb’s to new highs.
Index of Latest Summaries – Recommendations featured in recent issues.