Exxon & Chevron: Shockingly Different Results
Chevron (CVX) and Exxon Mobil (XOM) are two of the world’s largest energy companies with market capitalizations of $223 billion and $341 billion, respectively. They are also the only 2 energy sector Dividend Aristocrats.
To begin, let’s discuss Exxon’s performance. Exxon Mobil reported first quarter financial results on Friday and the company seriously missed expectations on both the top and bottom lines.
Exxon’s earnings-per-share of $0.55 missed estimates by $0.13 while revenues of $63.63 billion missed expectations by $3.72 billion. The company’s earnings-per-share also declined by 50% over the same period a year ago. Exon’s Chairman and CEO, Darren Woods, stated that:
“ The change in Canadian crude differentials, as well as heavy scheduled maintenance, similar to the fourth quarter of 2018, affected our quarterly results .”
This statement is difficult to stomach when juxtaposed against Chevron’s performance (which also reported earnings on Friday).
Chevron’s revenue also missed expectations (by $3.2 billion at that), and yet the company’s earnings-per-share of $1.39 beat expectations by $0.16. Chevron’s earnings-per-share declined by 27% year-on-year (compared to Exxon’s 50% decline).
While both energy companies were impacted by lower crude oil prices as well as weaker margins in both the downstream and chemicals segments, Chevron’s superior performance was driven by the upstream segment, which saw production volumes grow 7% from the first quarter of 2018.
Exxon Mobil and Chevron both offer appealing combinations of high expected returns and solid safety scores. While their performance in the most recent quarter was very different, they do have one commonality: both securities earn buy recommendations from Sure Dividend at current prices.
Colgate-Palmolive: Hurt By Foreign Exchange
Colgate-Palmolive (CL) reported first quarter earnings last Friday. Results were better than expected, but the company’s performance was negatively impacted by foreign exchange fluctuations.
Colgate-Palmolive’s revenue decreased by 3.0%, which was comprised of gross unit volume growth of 1.0%, pricing increases of 2.0%, and a whopping 6.0% negative impact from foreign exchange.
On the bottom line, net income decreased by 11% while diluted earnings-per-share decreased by 9%, with the per-share figure being boosted by the company’s share repurchase efforts.
Colgate-Palmolive’s President and CEO, Noel Wallace, made the following statement in conjunction with the earnings release:
“ We are pleased with the improvement in organic sales growth this quarter and that the growth was broad based, with emerging markets and developed markets each growing 3.0%. We believe our plans to accelerate growth are beginning to pay off, as the stronger organic sales growth we delivered in the quarter had a better balance between pricing and volume growth than we saw in the fourth quarter of 2018. This growth was led by our toothpaste and Hill’s businesses. Advertising investment increased in absolute dollars and as a percent to sales versus first quarter 2018, with increases as a percent to sales in every division. Colgate’s leadership of the global toothpaste market continued during the quarter with our global market share at 41.7% year to date. Our global leadership in manual toothbrushes also continued with Colgate’s global market share in that category at 31.6% year to date.”
Colgate-Palmolive also provided new guidance with the publication of its first quarter earnings release. The company expects net sales to be flat to up low-single-digits, with organic sales growth of 2% to 4%. Colgate-Palmolive also expects a low-single-digit decline in earnings-per-share.
While Colgate-Palmolive’s headline figures are not necessarily impressive, the company beat consensus estimates for both earnings and revenues.
Looking ahead, we believe that the company’s irrationally high valuation makes it extremely unattractive for investors today. Colgate-Palmolive earns a sell recommendation from Sure Dividend at current prices.
Archer-Daniels-Midland Stock Wilts On Earnings Announcement
Archer-Daniels-Midland (ADM) reported first quarter 2019 earnings on April 26th.
The company’s stock fell 1.9% the day of the announcement, while the S&P 500 was up 0.5%.
First quarter earnings revealed that ADM’s adjusted earnings-per-share in the quarter were down 32%, falling from $0.68 in the same quarter a year ago to $0.46 in the most recent quarter.
ADM’s CEO Juan Luciano had the following to say about the company’s results:
“The first quarter proved more challenging than initially expected. Impacts from severe weather in North America were on the high side of our initial estimates, and the ethanol industry environment limited margins and opportunities."
While first quarter results certainly left much to be desired, it’s important to note that ADM’s profits do fluctuate significantly based on commodity prices which are affected by the weather. There’s no cause for alarm with ADM’s weaker earnings-per-share this quarter.
On the positive side, ADM announced the following items, which should boost shareholder returns ahead:
ADM is creating an independent subsidiary for its ethanol operations. Importantly, the company may spin off its ethanol operations to shareholders in the future . Spin-offs in general are beneficial for shareholders as they show the company is more interested in shareholder returns than building a larger business empire.
The company is undertaking a project to centralize and standardize its business activities and processes to assimilate recent acquisitions. The plan is already bearing fruit, with the capital expenditure budget for fiscal 2019 falling 10%.
We view ADM as a buy at current prices. The company’s stock appears a bit undervalued. And its status as a Dividend Aristocrat (25+ years of rising dividends) coupled with its above-average 3.4% dividend yield should appeal to dividend growth investors.
General Electric Stock Surges After Better-Than-Expected First Quarter
There has not been much to celebrate lately for General Electric’s (GE) shareholders. The company’s recent performance has included multiple dividend cuts and a bevy of earnings disappointments. This changed in the company’s first quarter earnings release.
More specifically, General Electric significantly beat consensus estimates, causing the stock to surge by more than 10% in this morning’s premarket trading.
The industrial conglomerate generated revenues of $27.3 billion, which was in-line with analyst expectations, and adjusted earnings-per-share of $0.14, which beat estimates of $0.09 by a whopping 56% .
What caused the company’s better-than-expected performance in the first quarter?
It was largely due to the timing of ‘certain business items’. Here is some commentary from the firm’s Chairman and CEO, H. Lawrence Culp Jr.:
“We saw progress in the first quarter as we continued to execute on our priorities to improve our financial position and strengthen our businesses. We announced the sale of BioPharma, closed the Wabtec merger, settled WMC, and improved our operating performance. We delivered strong industrial orders in the quarter, up 9 percent organically, with backlog closing at $374 billion, up 6 percent year over year. Our quarterly results were better than our expectations, largely driven by timing of certain items, which should balance out over the course of the year. Therefore, we expect our performance for the year to be in line with our previous commentary.”
The previous guidance that General Electric’s CEO refers to in the quote above came in the company’s March Outlook Call with analysts. The guidance includes:
GE Industrial segment organic revenue growth in the low-to-mid-single-digit range.
Adjusted GE Industrial margin to expand in a range from flat to 100 basis points.
Adjusted GE Industrial free cash flows of -$2 billion to $0 billion. This is expected to be positive in 2020 with the pace of improvement accelerating in 2021.
Financial targets that include a credit rating in the Single A range, an Industrial leverage ratio of less than 2.5x net debt to EBITDA, and a GE Capital debt-to-equity ratio of less than 4x.
General Electric’s performance was better than the markets expected. With that said, the company’s total return outlook looks poor – and that was before the 10% surge in stock price. Accordingly, General Electric earns a sell recommendation from Sure Dividend at current prices.
GM Trucks Through First Quarter Results (Literally)
General Motors (GM) reported first quarter financial results early this morning. The performance of the company’s new full-size truck launch was the headline item in its earnings release. The second sentence of the company’s press release is contained below:
“The company’s full-size truck launch is ahead of plan and drove strong pricing for the quarter in North America. Average transaction prices for GM’s all-new full-size crew cab pickup trucks are up $5,800 over the outgoing models.”
Separately, the company’s actual financial performance was not exceptionally strong. Net revenue of $34.9 billion decreased by 3.4% over the first quarter of fiscal 2018 while the company generated negative $3.9 billion of adjusted automotive free cash flow. Adjusted diluted earnings-per-share decreased by 1.4% year-on-year.
For General Motors, one of the numbers that is cited most widely by the firm’s management team is adjusted EBIT (earnings before interest and taxes). Adjusted EBIT declined from $2.6 billion in Q1 2018 to $2.3 billion in Q1 2019
Still, there were some positive components to the company’s earnings release. General Motors’ high selling mix (above 80%) of trucks, SUVs, and crossovers allowed the corporation to book its highest average transaction price for any first quarter in the company’s history. As mentioned, trucks were also a noticeable strong point, as first quarter sales of the 2019 Chevrolet Silverado and GMC Sierra were up 20% year-on-year.
In addition, while General Motors’ performance declined over last year, the company actually materially beat analyst expectations. General Motors’ adjusted diluted earnings-per-share of $1.41 came in well above consensus estimates of $1.12, but revenue of $34.9 billion missed estimates by $660 million.
Overall, General Motors’ first quarter was mixed on several fronts. Still, the company has high-single-digit expected returns and earns a cautious buy recommendation from Sure Dividend at current prices. We do note that prospective GM investors should have the willingness to stomach the inherent volatility of the automotive manufacturing sector - and elevated potential for a dividend cut during recessions.
McDonald’s: 15 Straight Quarters Of Comparable Store Sales Growth
McDonald’s (MCD) reported its first quarter results for fiscal 2019 this morning. The company’s stock was up more than 3% in pre-market trading following the announcement.
Highlights from the quarter are below:
Global comparable sales increased 5.4%
Constant-currency system-wide sales increased 6.0%
Earnings-per-share were flat (up 5% using constant currencies)
The company’s CEO Steve Easterbrook had the following to say about the company’s results:
"We started the year strong with our 15th consecutive quarter of positive global comparable sales, reflecting continued broad-based momentum across each of our global segments. We remain focused on running better restaurants and elevating the experience for our customers by providing convenience on their terms through delivery, Experience of the Future, and our evolving digital channels.
Two years into the Velocity Growth Plan, our sustained performance gives us confidence that our strategy is working, as more customers are experiencing a better McDonald’s every day. We remain focused on optimizing execution of the Plan, and our recent acquisition of Dynamic Yield further demonstrates our relentless determination to seize opportunities to unlock greater potential and position McDonald’s for long-term sustainable growth."
The aforementioned Dynamic Yield acquisition (which was reportedly for more than $300 million) is an interesting one for a restaurant. Dynamic Yield works with brands to create an ‘Amazon style’ personalized online experience.
McDonald’s plan is to use Dynamic Yield to create menus that respond to weather changes, trending items, and current restaurant traffic, and suggest what to order next based on what you’ve already added to your order.
Comparable store sales growth was strong at McDonald’s, and 15 straight quarters of comparable store sales growth is incredible. But with that said, earnings-per-share were flat.
McDonald’s is the largest restaurant business in the world. But it appears overvalued at current prices. We rate the security as a hold. Investors looking to add shares or initiate a position are best suited to wait until the price-to-earnings ratio dips to a more reasonable level of around 20. The price-to-earnings ratio is currently ~24x expected 2019 earnings.
Mastercard: The Remarkable Growth Continues
Mastercard also reported first quarter financial results this morning. We are unsurprised to see that the firm’s remarkable growth continues unabated.
More specifically, Mastercard’s revenues grew 9% on a reported basis and 13% on a constant-currency basis as the global trend to a cashless society means more people are using its cards each year.
Further down the income statement, Mastercard actually reduced its operating expenses from $1.8 billion last year to $1.7 billion this year, which resulted in 21% operating profit growth (27% on a constant-currency basis).
On the bottom line, Mastercard’s net income grew 25% (or 31% ex-currency) and diluted earnings-per-share increased by 28% (or 33% ex-currency). On an adjusted basis (which excludes one-time charges), net income increased 19% and diluted earnings-per-share increased by 24%.
Mastercard also continued to be a very shareholder-friendly allocator of capital in the quarter. The company repurchased 8.7 million shares at a cost of $1.8 billion and also distributed $340 million in dividend payments to stockholders.
Mastercard’s CEO, Ajay Banga, made the following statement in conjunction with the earnings release:
“We’re off to a very good start this year with strong revenue and earnings growth. We continue to make significant progress, developing innovative new products with partners like Apple and Goldman Sachs, expanding the geographic footprint of our real-time payment solutions, and announcing several acquisitions to advance our cross-border payments, safety and security, and merchant engagement strategies.”
Mastercard continues to perform exceptionally well as a business. We expect the company to generate high-single-digit returns moving forward, which allows it to earn a buy recommendation from Sure Dividend at current prices
Cummins Powers Forward With Strong First Quarter Results
Cummins (CMI) announced results for its first quarter of fiscal 2019 this morning.
The diesel engine manufacturing company saw revenue grow 8% versus the same quarter a year ago. This is a favorable result from an established industrial company. Cummins was especially dominant in North America were sales grew 13%. International sales were up just 1%.
Better yet, the company’s margins improved significantly . EBITDA grew to 17.2% of sales versus 12.6% of sales in the same quarter a year ago.
Margin gains caused earnings-per-share to jump as well; adjusted earnings-per-share came in at $3.97 versus $2.43 in the same quarter a year ago for growth of 63%.
Better-than-expected results allowed Cummins’ management to issue an improved guidance for fiscal 2019. EBITDA as a percentage of sales guidance was increased from 16.0% at the midpoint to 16.5% at the midpoint. The company’s sales growth guidance of 0% to 4% remained in line with previously issued guidance.
We view Cummins as somewhat undervalued at current prices. It retains its buy ranking from us, especially after today’s results.
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Apple Beats Sales & Earnings Expectations
Apple (AAPL) reported financial results for the second quarter of 2019 yesterday after the markets closed.
The company’s financial results were strong. Apple generated quarterly revenue of $58 billion, which beat consensus estimates by $620 million and declined by 5.1% over the same period last year. Revenue breakdown by product category is shown below:
- iPhone: $31.0 billion
- iPad: $4.9 billion
- Mac: $5.5 billion
- Services: $11.5 billion
- Wearables and Home: $5.1 billion
Diluted earnings-per-share of $2.46 declined by 10% year-on-year. While a 10% decline on earnings may seem like poor performance on the surface, this figure actually beat analyst estimates by $0.10.
Here’s what the company’s CEO, Tim Cook, said about Apple’s performance in the quarter:
“Our March quarter results show the continued strength of our installed base of over 1.4 billion active devices, as we set an all-time record for Services, and the strong momentum of our Wearables, Home and Accessories category, which set a new March quarter record. We delivered our strongest iPad growth in six years, and we are as excited as ever about our pipeline of innovative hardware, software and services. We’re looking forward to sharing more with developers and customers at Apple’s 30th annual Worldwide Developers Conference in June.”
Apple also continued its remarkable capital return program. The company returned over $27 billion to shareholders through share repurchases and dividends, and also authorized an additional $75 billion for share repurchases. These efforts caused Apple’s diluted share count declined by 7.3% year-on-year.
Apple also announced a 5% increase to its quarterly dividend and better-than-expected guidance for the current quarter. All these factors caused the company’s stock to rise by nearly 6% in after-hours trading following the earnings release.
Overall, we were delighted to see Apple beat expectations for the second quarter of fiscal 2019. The company appears fairly priced today and earns a hold recommendation from Sure Dividend at current prices…
CVS Health Corporation Surges On Earnings Beat
CVS Health Corporation (CVS) reported earnings this morning before the market opened. The company’s results were remarkably strong:
Revenue of $61.6 billion increased by 34.8% and beat expectations by $1.26 billion
Adjusted diluted earnings-per-share of $1.62 increased by 9.5% and beat expectations by $0.11.
On the top line, CVS Health’s revenue surged as this was the company’s first full quarter after its seminal merger with health insurer Aetna. On the bottom line, the company was able to offset the dilution associated with the Aetna transaction (shares outstanding increased by 27.8% year-on-year) by generating strong revenue synergies and reasonable cost management.
CVS Health’s President and Chief Executive Officer, Larry Merlo, made the following statement in conjunction with the earnings release:
“We generated strong first quarter results, providing positive momentum to start the year. Following the close of our Aetna acquisition in late November, our first full quarter of combined operations was a success in many ways. In the quarter we continued to advance our integration efforts while beginning to launch new innovations such as our HealthHUB® concept stores. With our differentiated collection of health care assets we are uniquely positioned to lead the transformation of the U.S. health care system. We remain relentlessly focused on creating value for clients and customers while driving both near and longer-term returns for our shareholders.”
CVS Health also revised its full-year financial guidance with the publication of its first quarter earnings release. More specifically, the company’s new guidance is listed below with prior guidance in parentheses:
Adjusted operating income of $15.0 billion to $15.2 billion
($14.8 billion to $15.2 billion)
Adjusted earnings-per-share of $6.75 to $6.90
($6.68 to $6.88)
Overall, CVS’s first quarter earnings release was much better than the markets anticipated. Shares are up nearly 6% in this morning’s premarket trading.
Despite this rise, the company continues to look attractive thanks to its cheap valuation, 3.7% dividend yield, and growth prospects. CVS Health earns a buy recommendation from Sure Dividend at current prices.
Southern Company’s Q1 Results Come IN South Of Expectations
Southern Company’s (SO) first quarter earnings release came in slightly below expectations this morning. More specifically, the company’s revenue of $5.41 billion missed expectations by $250 million while adjusted earnings-per-share of $0.70 missed expectations by $0.02.
Southern Company has experienced plenty of change over the last year. The company’s revenue of $5.41 billion declined significantly from the $6.37 billion reported in the same period last year. This decrease was primarily related to a reduction in revenue related to the sale of Gulf Power and other assets.
Separately, the company’s Chairman, President, and CEO, Thomas A. Fanning, provided an update on Southern Company’s Plant Vogtle project, which will be the largest nuclear power station in the United States upon completion:
“I am extremely pleased with our performance year-to-date, and believe we are well-positioned to achieve our financial targets for 2019. In addition, we just completed a review of the Plant Vogtle project and I’m pleased to report that we still expect to meet our targets for cost and the regulatory-approved schedule for the completion of the new nuclear units.”
To rewind, the project has experienced many setbacks and difficulties after Westinghouse Electric Company filed for Chapter 11 bankruptcy in March of 2017 due to losses from its two U.S. nuclear construction projects. Later that year, Southern Company’s division Southern Nuclear officially took over construction from Westinghouse.
Overall, Southern Company’s results came in slightly worse than expectations, but we do not believe there is any reason to be concerned about this utility business in the long run.
At the security level, Southern Company is trading above our fair value estimate and thus earns a hold recommendation from Sure Dividend at current prices.
Caterpillar Hikes Its Dividend & Sets New Financial Targets
This morning, Caterpillar (CAT) published a press release containing various important pieces of information for self-directed investors. The announcements included:
A 20% increase to its quarterly dividend
The expectation to double Machine, Energy & Transportation sales to $28 billion by 2026 and deliver higher adjusted operating margins through the cycles of three to six percentage points above historical performance.
The plan to “ return substantially all Machine, Energy & Transportation free cash flow to shareholders through continued dividend growth and more consistent share repurchases.”
We view this announcement as quite positive for Caterpillar’s shareholders.
The company appears capable of delivering low double-digit returns from its current price and earns a buy recommendation from Sure Dividend today.
AmerisourceBergen: Pharma Distributor On Pace For All-Time Earnings-Per- Share Highs
AmerisourceBergen (ABC) is one of the 3 large pharmaceutical distributors in the U.S. that together have ~90% market share.
AmerisourceBergen reported its fiscal 2019 second quarter results this morning. Highlights from the release are below:
- Revenue up 5.6% versus the same quarter last year
- Adjusted earnings-per-share up 8.8% versus the same quarter last year
Revenue was very slightly below analyst expectations. Adjusted earnings-per-share came in 7.7% higher than analyst expectations.
The company also raised its guidance from a range of $6.65 - $6.85 to a range of $$6.70 - $6.90; a 2.1% increase.
Steve Collins, AmerisourceBergen’s president, chairman, and CEO said the following about the companies results:
“AmerisourceBergen continues to execute and deliver strong performance with good growth in customer volumes, double-digit Specialty distribution growth and overall strong execution across both the Pharmaceutical Distribution Services and Global Commercialization Services & Animal Health groups this quarter. As we move into the second half of the year, our fiscal 2019 outlook remains strong. AmerisourceBergen continues to be well positioned for long-term growth and we have the utmost confidence that our differentiated strategy and focus on providing innovative services and solutions for our partners will continue to drive sustainable value for all of our stakeholders.”
We continue to be bullish on AmerisourceBergen. The company’s stock looks undervalued as it is trading at just 10.8 times expected 2019 earnings. We believe a fair P/E ratio for the stock is around 15.
And, the company is on pace to hit all-time earnings-per-share highs this year. Overall, we expect earnings-per-share growth of around 8% annually from AmerisourceBergen. Finally, the security offers investors a dividend yield of 2.2% which is slightly higher than the S&P 500’s yield.
We view AmerisourceBergen as a compelling buy at current prices. The company’s newest earnings only further reinforce our buy recommendation.
S&P Global: Slightly Misses Expectations
S&P Global (SPGI), the provider of credit ratings and financial data, reported first quarter financial results this morning before the market opened. The company’s performance was slightly worse than expected but still relatively solid.
Here’s what the figures look like. Revenue of $1.6 billion was essentially unchanged compared to the same period a year ago.
Excluding acquisitions, divestitures, and the impact of foreign exchange, S&P Global’s revenue would have increased 1% over the first quarter of fiscal 2018.
On the bottom line, adjusted diluted earnings-per-share of $2.11 increased by 5% year-on-year.
Here’s what the company’s President and Chief Executive Officer, Douglas Peterson, had to say about the company’s performance in the quarter:
“The markets have come a long way since the depths of December as they began to stabilize in the second week of January. We don’t let market disruptions interfere with our business plans. During the quarter we continued to execute on our strategic investments – fueling new product launches, technology projects, and improved productivity across the Company as we continue to Power the Markets of the Future.”
S&P Global also reaffirmed its 2019 financial guidance with the publication of its first quarter earnings release. The company continues to expect to generate adjusted diluted earnings-per-share between $8.95 and $9.15 in the full fiscal year. At the midpoint, this implies growth of 6.5% over fiscal 2018’s comparable figure.
S&P Global’s performance in the first quarter was worse than both analyst estimates and our long-run expectations for the company. With mid-single-digit total return potential at current prices, the company’s common equity earns a hold recommendation from Sure Dividend at current prices.
Kellogg: Earnings Beat & CFO Change
Kellogg (K) had two newsworthy press releases this morning.
First, the company reported its fiscal 2019 first quarter results. Highlights from the quarter are below:
- Organic net sales grew 0.3% year-over-year
- Adjusted earnings-per-share fell 15.4%
Despite weak results, the company actually reported adjusted earnings-per-share 6.3% higher than what analysts were expecting. Still, we find a 15.4% decline in adjusted earnings-per-share to be somewhat troubling. The earnings-per-share decline was due to:
- Higher tax rate
- Negative currency effects
- Higher interest expenses
- Lower returns on pension assets
All of the above are not central to Kellogg’s core business, which actually saw revenue grow slightly in the quarter.
Also, Kellogg is in the process of divesting its Keebler cookie and related brands to Ferrero for $1.3 billion. The transaction is expected to close in July. The move is being made to help Kellogg focus on its “core brands” to spur growth.
The divestiture will reduce adjusted earnings-per-share this year. As a result, management has lowered its guidance and expects adjusted earnings-per-share to fall 10% to 11% this year.
And finally, Kellogg announced that current CFO Fareed Khan is stepping down and being replaced by Amit Banati, who is currently Kellogg’s president of AMEA (Asia, Middle East, Africa) operations.
The change was unexpected, but we are happy to see someone who has been with Kellogg for an extended period of time take the role of CFO. Fareed Khan joined Kellogg in February of 2017, while Amit Banati joined the company in 2012.
We view Kellogg as undervalued by 10% to 15% at current pre-market open prices (the stock is down 5% to ~$56/share as of this writing). We expect Kellogg to return to growth of around 5% annually over the long run after this year. This growth plus the company’s robust dividend yield of nearly 4% makes the company a buy at current prices.
Newell Brands: The Turnaround Shows Signs Of Progress
Newell Brands (NWL) posted better-than-expected first quarter 2019 earnings results this morning.
The company generated $0.14 in adjusted earnings-per-share. Analysts were expecting $0.06 in adjusted earnings-per-share. Newell more than doubled analyst expectations for adjusted earnings-per-share. Revenue was very slightly ahead of expectations as well.
Newell stock was up over 3% in pre-market trading as a result. The company’s President and CEO Michael Polk said the following about quarterly results:
“We have had a good start to the year and are encouraged by the improvement in results in the first quarter. Sales were at the higher-end of our expectations, operating margins increased as a result of disciplined cost management, normalized EPS was well ahead of our expectations, and operating cash flow was significantly improved versus last year. We have taken decisive action to strengthen performance and those actions are beginning to yield results. As expected, U.S. retailer headwinds associated with the Toys ‘R’ Us bankruptcy and the Writing industry retailer landscape have begun to moderate as we exit the first quarter, setting up what we believe will be a more constructive environment for the balance of 2019.”
While Newell did show improvement this quarter versus expectations, the company is still going through a difficult period as it offloads “non-core” brands and focuses on its best opportunities.
Sales fell 5.5%, with core sales (currency adjusted) declining 2.4%. And while adjusted earnings-per-share beat estimates, they were down to $0.14 from $0.28 a year ago.
But with that said, the company did generate $200 million in operating cash flow versus negate $402 million in the same quarter a year ago. Strong operating cash flows bode well for the company going forward.
And with revenue down somewhat, the strong earnings beat was due primarily to reducing overhead . With Newell able to materially reduce its operating expenses. Selling, general, and administrative expense declined 17.3% versus the same quarter a year ago for savings of $108.4 million in the quarter alone.
Newell reaffirmed its guidance for fiscal 2019. Details for the company’s guidance are below:
- Net sales of $8.2 billion to $8.4 billion
- Core sales: low single digit decline
- 20 to 60 basis point improvement in normalized operating margin
- $1.50 to $1.65 in normalized earnings-per-share
- $300 million to $500 million in operating cash flows
Newell shares are currently for around $15. This means they are trading for around 10x expected adjusted earnings-per-share this year. And this is off a lower earnings base; earnings-per-share are likely to improve significantly in the years ahead as Newell cotninues to streamlline its operations.
We view Newell as a buy at current prices. The company’s earnings beat and significant cost reductions show that management is executing its plan to improve shareholder value.
3M Goes Shopping: Industrial Conglomerate Buys Acelity For $6.7 Billion
On May 2nd, 3M Company (MMM) announced that it is acquiring Acelity Inc. and its KCI subsidiaries from its current owners – a consortium comprised of Apax Partners, the Canadian Pension Plan Investment Board, and the Public Sector Pension Investment Board. The purchase price is an enterprise value of approximately $6.7 billion, including the assumption of debt and subject to closing and other adjustments.
This purchase price is difficult to evaluate without understanding the earnings power of the Acelity business. Fortunately, 3M provided some color on this topic in the acquisition announcement. The acquired company generated revenue of $1.5 billion in 2018 and the purchase price implies an EB/EBITDA multiple of approximately 11 after including “expected run rate cost synergies.” For context, 3M is trading at a current EV/EBITDA multiple of approximately 13.3.
Here’s what 3M’s Chief Executive Officer, Mike Roman, stated about the transaction in the company’s press release:
“Acelity is a recognized leading provider of advanced wound care technologies and solutions and an excellent complement to our Health Care business. This acquisition bolsters our Medical Solutions business and supports our growth strategy to offer comprehensive advanced and surgical wound care solutions to improve outcomes and enhance the patient and provider experience. We are excited to bring Acelity’s technologies and dedicated employees to our team. Together, we will apply 3M science to bring differentiated offerings to key wound and operative care solutions worldwide.”
The company’s press release also included some important information about the impact of this acquisition on the company’s near-term financial results.
More specifically, 3M stated that the acquisition should subtract $0.35 from GAAP earnings-per-share in the next twelve months. On an adjusted basis, the impact will be much more positive. The acquisition is expected to add $0.25 to earnings-per-share after excluding purchase accounting adjustments and anticipated one-time expenses related to acquisition and integration.
For context, we previously expected 3M to generate earnings-per-share of around $9.50 in fiscal 2019.
Lastly, 3M reduced its share repurchase guidance as a result of this transaction. The company now expects 2019 stock buybacks to be in the range of $1.0 billion to $1.5 billion versus $2.0 billion to $4.0 billion previously.
Overall, this acquisition looks to be a modestly positive event for 3M’s shareholders. The company’s stock continues to trade above our fair value estimate and earns a hold recommendation from Sure Dividend at current prices.
Shell: Earnings Beat Despite Lower Oil Prices
Yesterday, Royal Dutch Shell PLC (RDS.B) reported financial results for the first quarter of fiscal 2019. The company beat expectations despite persistently lower oil prices thanks to strong performance from its trading segment and higher prices in the liquid natural gas (LNG) market.
Shell’s income attributable to common shareholders increased by 2% in the quarter. However, the company prefers to measure its performance on a “current cost of supplies” (CCS) basis, which it describes as: “ the earnings measure used by the Chief Executive Officer for the purposes of making decisions about allocating resources and assessing performance. On this basis, the purchase price of volumes sold during the period is based on the current cost of supplies during the same period after making allowance for the tax effect. CCS earnings therefore exclude the effect of changes in the oil price on inventory carrying amounts. Sales between segments are based on prices generally equivalent to commercially available prices.”
On a CCS basis, Shell’s adjusted earnings decreased by 2% year-on-year. GAAP earnings-per-share increased by 4%, while CCS adjusted earnings-per-share declined by 6%. The company’s performance by segment (measured using CCS earnings) is listed below:
Integrated Gas: 5.3% growth
Upstream: 11.2% growth
Downstream: 3.2% growth
Corporate: Net loss increased by 192%
(These are likely unallocated expenses with no associated revenue)
Shell’s interim dividend was maintained at $0.47 per share.
Here’s what Shell’s CEO, Ben van Beurdan, had to say about the company’s performance in the quarter:
“Shell has made a strong start to 2019, with the first quarter financial performance demonstrating the strength of our strategy and the quality of our portfolio of assets. The power of our brand, serving millions of customers every day, continues to be a differentiator. Our integrated value chain enabled our Downstream business to deliver robust results despite challenging market conditions. The consistent financial performance across all our businesses provides confidence in meeting our 2020 outlook.”
Shell’s first quarter was much better than the markets anticipated. Moreover, the company’s stock appears capable of delivering excellent returns from current prices, and shares earn a buy recommendation from Sure Dividend.
Emerson Electric: Lowered Guidance Causes The Stock To Drop
This morning, industrial conglomerate Emerson Electric (EMR) reported financial results for the second quarter of fiscal 2019. The company met earnings expectations, missed revenue expectations, and lowered its guidance range, which caused the company’s stock to dip in this morning’s premarket trading.
Here are what the numbers look like. Emerson Electric generated revenue of $4.57 billion, which fell short of consensus analyst expectations by $70 million. Still, Emerson Electric’s revenue improved meaningfully over last years period. GAAP net sales increased by 8% while underlying net sales increased 4% (which excludes unfavorable currency translations of 2% and a positive impact from acquisitions of 6%).
Moving down the income statement, Emerson Electric’s gross profit margin of 42.1% contracted by 70 basis points while operating profit margin of 15.8% contracted by 50 basis pints and pretax margin of 14.8% contracted by 70 basis points.
Margins contracted due to a combination of unfavorable product mix, cost inflation from recent acquisitions and a $7 million charge related to the acquisition of General Electric’s Intelligent Platforms business.
On the bottom line, GAAP earnings-per-share of $0.84 increased by 11% versus the same period a year ago – a strong showing, to be sure.
However, Emerson Electric’s guidance dampened any strength from to its performance in the most recent quarter. The company reduced its GAAP earnings-per-share guidance to $3.60 to $3.70, down slightly on the top end from previous guidance of $3.60 to $3.75.
Emerson Electric scores extremely well on our two proprietary safety scores. With that said, the company appears priced to deliver mid-single-digit returns moving forward. Accordingly, Emerson Electric earns a hold recommendation from Sure Dividend at current prices.
Anheuser-Busch Inbev Falls On Earnings Miss
Anheuser-Busch recently reported financial results for the first quarter of fiscal 2019. The company’s results disappointed the market and shares have fallen in this morning’s pre-market trading.
With that said, the company’s financial results were strong in some respects. Anheuser-Busch reported volume growth of 1.3%, revenue growth of 5.9%, and EBITDA growth of 8.2% with EBITDA margin expanding by 86 basis points in the quarter.
Brazil was a source of strength for the company, as the country experienced double-digit volume growth in both the beer and non-beer businesses (which outperformed the regional industry in both categories). In addition, the company’s “Global Brands” – Budweiser, Stella Artois, and Corona – grew by 8.5% globally and 14.0% outside of their home markets.
On the bottom line, results were weaker. Adjusted earnings of $1.572 billion decreased by 6.7% from the $1.685 billion of earnings generated last year. Adjusted earnings-per-share of $0.79 also decreased by 7.1% over the $0.85 generated last year. The company attributes its earnings weakness to foreign exchange impacts, stating “ our strong performance was more than offset by the negative impact of unfavorable currency translation effects.”
Lastly, Anheuser-Busch provided an update on its outlook for fiscal 2019. The company expects to deliver “strong” growth in revenue and EBITDA, while maintaining its $3.2 billion cost synergy target related to the acquisition of SAB in 2016. The company did not provide earnings-per-share guidance.
Anheuser-Busch appears positioned to deliver mid-single-digit expected returns moving forward. In addition, the company recently cut its dividend and continues to score poorly on our safety scores. Accordingly, the company earns a sell recommendation from Sure Dividend at current prices.
Omega Healthcare Investors Shows Signs Of A Turnaround
Yesterday evening, Omega Healthcare Investors (OHI) – a past recommendation of the Sure Retirement Newsletter – reported financial results for the first quarter of fiscal 2019.
In the quarter, the company generated funds from operations of $0.67 per share, representing a decrease of 5.6% year-on-year, and adjusted funds from operations per share of $0.76, which represents a decline of 2.6%. Omega’s AFFO per share beat consensus analyst expectations, which called for AFFO of $0.73 per share.
Perhaps more importantly, Omega Healthcare Investors’ management team included some statements in the earnings release that indicate that the company’s operating environment should improve moving forward. More specifically, the trust’s Chief Executive Officer, Taylor Pickett, said:
“While our operators continue to battle a challenging operating environment, a number of positive factors lead us to believe this environment will improve in the near future. The implementation of the Patient Driven Payment Model (“PDPM”) and the recently announced 2.5% increase in Medicare reimbursement, both starting in October, will augment the improving census driven by a multi-decade demographic tailwind.”
Omega also made progress a number of troubling tenant issues. More specifically, in the first quarter the trust resolved the sale and transition of its legacy Orianna assets (recall that Orianna is a tenant of Omega Healthcare that defaulted on its lease obligations).
Omega Healthcare also said that it “ began to see our general and administrative expenses tick down as legal costs began to moderate.”
Lastly, Omega Healthcare Investors announced that it had provided one of its operators, Daybreak, near-team liquidity relief in the form of a $2.5 million rent deferral in each of the first two quarters of 2019.
Looking ahead, Omega Healthcare Investors reaffirmed its 2019 guidance for AFFO. The trust expects to generate AFFO per diluted share between $3.00 and $3.12 in the twelve-month reporting period. For context, Omega Healthcare Investors currently pays a quarterly dividend of $0.66, which implies a full-year payout ratio of 88% using the bottom of management’s guidance band.
Omega Healthcare Investors currently earns D and B ratings for Dividend Risk and Retirement Suitability. With that said, the company seems capable of delivering mid-teens total returns if management can execute and resolve all current tenant issues. With that in mind, the company earns a buy recommendation from Sure Dividend, but only for investors that can stomach this risk tolerance.
Western Union: Divestitures, Repurchases, & Growth Difficulties
Western Union (WU) – a past recommendation of the Sure Retirement Newsletter – announced its first quarter results yesterday. The security was down more than 3% in pre-market trading today as the market did not respond favorably to the company’s results.
The company reported EPS of $0.39, which missed analyst estimates of $0.43 by $0.04. Revenue of $1.34 billion also missed analyst estimates, which called for $1.36 billion in revenue on the quarter.
Revenue did increase 2% on an adjusted constant-currency basis. And the $0.39 in EPS were 13.3% lower than adjusted EPS in the same quarter a year ago. Poor EPS results were due to lower revenues, an increase in acquisition and divestiture expense, and a higher tax rate.
On the bright side, Western Union spent $175 million om share repurchases during the quarter, around 2% of the company’s market cap at current prices.
In more big news for Western Union, the company expects to divest its Speedpay business this month for $750 million. The bulk of proceeds will go to more share repurchases and paying down the company’s sizeable ~$3 billion debt load. This divestiture (and the much smaller Paymap divestiture) is expected to reduce EPS by $0.10 this fiscal year and next fiscal year, but will focus the company further on cross border transactions.
The company’s guidance calls for a low single-digit increase in adjusted constant-currency revenue. Western Union’s EPS guidance, excluding proceeds from the aforementioned divestitures was reduced from a range of $1.83 to $1.95 to a new range of $1.82 to $1.92.
The company expects to spend $500 to $600 million on share repurchases in each of the next 2 fiscal years. These repurchases will decrease the company’s share count by ~10% from now through 2020 if done near current prices.
We expect total returns nearing 10% annually for Western Union, largely because we see the security as undervalued. But there are certainly risks here. Namely, the company existing in an extremely competitive space which is reflected in Western Union’s difficulty in achieving meaningful growth. We rate the company as a hold at current prices.
Cardinal Health’s “Earnings Beat” Is Surprisingly Disappointing
This morning, Dividend Aristocrats Cardinal Health (CAH) reported financial results for the third quarter of fiscal year 2019. The company “beat” expectations on both the top and bottom lines. With that said, the company’s core performance was not nearly as strong as financial media would suggest.
On the top line, Cardinal Health generated revenues of $35.2 billion, which represents an increase of 5% from the same period a year ago. Further down the income statement, the company reported adjusted earnings-per-share of $1.59, growth of 14% year-on-year. The company’s Chief Executive Officer, Mike Kaufmann, made the following statement on the company’s performance in the quarter:
“We are pleased that Cardinal Health again delivered overall operating results that were consistent with our expectations for the quarter. Solid progress on our strategic initiatives, the recent renewal of our largest customer and our ability to navigate evolving market dynamics give us confidence over the long term.”
Despite these strong headline figures, Cardinal Health’s operating performance was not as robust. The company’s GAAP operating earnings decreased by 21% in the quarter while adjusted operating earnings fell by 15%.
What caused the tremendous difference between Cardinal Health’s operating earnings and earnings-per-share?
While share repurchases played a role (diluted shares outstanding declined from 315 last year to 299 this year, a drop of 5.1%), the more important factor was a reduction in the company’s tax rate. Cardinal Health’s GAAP tax rate fell from 45.1% last year to 20.0% this year, while its adjusted tax rate fell from 37.5% last year to 21.6% this year.
To understand how the company’s tax rate was so high last year, consider the following statement made by CEO Mike Kaufmann in last year’s third quarter earnings release:
“Our non-GAAP operating earnings came in largely as expected this quarter. However, our non-GAAP EPS was adversely affected by a significant negative change in our effective tax rate primarily associated with our Cordis business. Our team is moving aggressively to address our operational and supply chain issues at Cordis. Under the leadership of our new Medical Segment CEO, Jon Giacomin, we are implementing a series of initiatives to improve those operations and drive greater efficiencies. While these initiatives will take some time, we remain confident in the potential of this business and the value it provides to cardiovascular patients.”
Unfortunately, we believe that Cardinal Health’s “earnings beat” announced this morning was largely a result of a terrible quarter last year, not strong performance this year. The company’s revenue continues to grow at a mid-single-digit pace, yet costs are a problem: gross profit declined by 8% and operating performance declined by 21% in the quarter. Net income increased solely because of a significant, one-time decrease in its tax rate.
Despite Cardinal Health’s margin troubles, the company saw fit to increase its guidance with the publication of its third quarter earnings release. Cardinal Health now expects to generate adjusted earnings-per-share between $5.02 and $5.17 in fiscal 2019. The company generated $5.00 of adjusted earnings-per-share in fiscal 2018.
Overall, we were disappointed by Cardinal Health’s declining operating profits in the most recent quarter, particularly after media outlets began labeling the release as an “earnings beat” immediately after publication. With that said, the company remains tremendously undervalued (a price-to-earnings ratio below 10) and has a long history of steadily increasing dividend payments. Accordingly, Cardinal Health continues to earn a buy recommendation from Sure Dividend at current prices. Any material amount of good news from this company has the potential to cause the valuation to re-rate meaningfully higher.
Disney Beats Expectations Thanks To Parks, Fox, & Direct-To-Consumer
The Walt Disney Company (DIS) reported financial results for the second quarter of fiscal 2019 yesterday after the market closed. It was a strong report overall and shares are slightly higher in this morning’s pre-market trading.
On the top line, Disney’s revenue of $14.9 billion increased by 3% year-on-year, while operating income declined by 10% and adjusted earnings-per-share declined by 13%.
The disparity between Disney’s revenue growth and its profit growth was driven by a mix of factors. While Disney’s revenue actually grew year-on-year, this included a decline in high-margin Studio Entertainment revenue (which saw sales fall due to the strong performance of Black Panther and Star Wars: The Last Jedi in the year-ago quarter) and a large increase in the Direct-to-Consumer & International segment, which is currently unprofitable.
While the company’s profitability declined from last year’s comparable quarter, the company beat analyst expectations on both the top and bottom lines. Disney’s Chairman and Chief Executive Officer, Robert A. Iger, made the following statement in conjunction with the earnings release:
“We’re very pleased with our Q2 results and thrilled with the record-breaking success of Avengers: Endgame, which is now the second-highest grossing film of all time and will stream exclusively on Disney+ starting December 11th. The positive response to our direct-to-consumer strategy has been gratifying, and the integration of the businesses we acquired from 21st Century Fox only increases our confidence in our ability to leverage decades of iconic storytelling and the powerful creative engines across the entire company to deliver an extraordinary value proposition to consumers.”
In the quarter, Disney also benefited from 11 days of contribution from Twenty-First Century Fox, which was acquired on March 20th, 2019 for cash as well as the issuance of 307 million common shares. This added $373 million of revenue and $25 million of operating income to Disney’s consolidated financial results.
Overall, Disney’s performance in the second quarter was better than expected. With that said, shares trade modestly above our fair value estimate, so Disney earns a hold recommendation from Sure Dividend at current prices.
Energy Transfer: Excellent Results In Q1 2019
Yesterday after the market closed, Energy Transfer LP (ET) reported financial results for the first quarter of fiscal 2019.
Results were better than expected and it was a record quarter for the master limited partnership. Key statistics from the quarter are below:
Revenue increased by 10.4% to $13.1 billion.
Adjusted EBITDA of $2.80 billion increased by 40% from the first quarter of 2018.
Distributable cash flow of $1.66 billion increased by 39% from the first quarter of 2018.
Energy Transfer operated with a distribution coverage ratio of 2.07x, yielding excess coverage of $856 million of distributable cash flow, equivalent to a payout ratio of 48% using distributable cash flow as the denominator.
Energy Transfer reaffirmed its 2019 outlook for Adjusted EBITDA, which calls for full-year Adjusted EBITDA of about $10.7 billion and capital expenditures of approximately $5 billion.
And most importantly, the company’s distributable cash flow per unit surged 34.1% to $0.63 versus $0.47 in the same quarter a year ago.
Energy Transfer’s strong results were driven by gains in all five of its operating segments. The partnership is performing better than expected.
Looking ahead, Energy Transfer seems capable of delivering mid-teens total returns from its current price. Accordingly, Energy Transfer earns a buy recommendation from Sure Dividend today.
Muy buenos resultados, mejorando las previsiones y los resultados del año pasado.
Mantienen el guidance para este año
Mantienen incremento del 10% del dividendo en 2020 despues de subirlo este 2019 otro 10%.
Enbridge Beats Earnings Expectations
This morning, midstream energy conglomerate Enbridge reported financial results for the first quarter of fiscal 2019. The company’s performance soundly beat analyst expectations and Enbridge set an all-time company high for adjusted EBITDA.
Key figures from the report are below:
Enbridge’s adjusted EBITDA increased by 10.7% to $3.8 billion.
Adjusted earnings-per-share declined by a penny to $0.81, due entirely to an increase in the number of shares outstanding, which increased by 19.6% year-on-year.
Distributable cash flow increased by 19.3% to $2.8 billion.
Enbridge’s CEO, Al Monaco, made the following statement in conjunction with the earnings release:
“It was another strong quarter for Enbridge across all of the business units. We’re pleased with the operational and financial performance, and we’ll continue to advance our key strategic priorities throughout the balance of the year, with an enhanced focus on capital allocation, growth and return on investment to maximize shareholder value.”
Importantly, Enbridge reaffirmed its guidance for full-year distributable cash flow, which is expected to be in the range of $4.30 to $4.60 per share. The company currently pays a quarterly dividend of $0.738 per share, which implies a DCF payout ratio of 66% using the midpoint of Enbridge’s financial guidance.
Enbridge’s high dividend yield and robust growth prospects make it attractive for investors at current prices. The midstream energy company earns a buy recommendation from Sure Dividend at current prices.
Buckeye Partners To Be Acquired For A 27.5% Premium
We expected a ‘business as usual’ earnings release from past Sure Retirement Newsletter recommendation Buckeye Partners (BPL) this morning…
The all cash transaction values Buckeye Partners at a $10.3 billion enterprise value and $6.5 billion equity value. The deal was unanimously approved by Buckeye’s board of directors. It will close after a majority of Buckeye shareholders approve the deal, and other customary closing requirements are completed.
Separately, the company announced fairly weak quarterly earnings this morning. Distributable cash flow per unit declined 17.4% from $1.13 in the same quarter a year ago to $0.94 this quarter.
Also, the partnership announced another $0.75 distribution payable on May 28th to shareholders of record as of May 20th.
We view fair value for Buckeye Partners at around $39/share before today’s weak earnings. The IFM acquisition is for a bit above our expected fair value of Buckeye Partners. As a result, we recommend investors sell Buckeye Partners if it trades near its acquisition price and reinvest the proceeds elsewhere.
Investors tempted to hold out for the final distribution on May 28th should note that the company’s stock should fall by approximately the amount of the distribution on May 20th (the ex-dividend date).
Walmart Delivers Impressive U.S. Comparable Sales Growth
Earlier this morning, retail giant Walmart (WMT) reported financial results for the first quarter of fiscal 2020. The company exceeded consensus estimates on both the top and bottom lines, sending the stock up modestly in today’s premarket trading.
Walmart generated revenues of $123.9 billion, which represents an increase of 1.0% from last year’s comparable quarter. Excluding foreign exchange movements, revenue increased by 2.5% year-on-year.
The U.S. segment was particularly strong. Walmart U.S. generated comparable store sales growth of 3.4%, which was the best first quarter comp number in 9 years and represents the fourth consecutive quarter with U.S. comp growth above 3%.
Other segments of Walmart’s domestic business also improved nicely. Sam’s Club sales increased by 0.3% while eCommerce sales grew 28%.
On the bottom line, Walmart generated GAAP earnings-per-share of $1.33, which surged by a remarkable 85% over last year’s period. However, some investigation reveals that this $1.33 figure includes $0.20 from an unrealized gain on the company’s equity investment in JD.com. Excluding this, the company’s adjusted earnings were $1.13, down a penny from last year’s $1.14.
Overall, Walmart’s first quarter earnings release impressed the markets, largely due to its better-than-expected comparable store sales growth here in the United States.
With that said, the company trades well above our fair value estimates and seems unlikely to deliver adequate returns moving forward.
Accordingly, Walmart earns a sell recommendation from Sure Dividend at current prices.
Cisco Delivers A Double Earnings Beat With Adjusted EPS Up 18%
Yesterday, Cisco (CSCO) reported financial results for the third quarter of fiscal 2019. The company beat expectations for both revenue and earnings amid broad product revenues growth and double-digit growth in both operating income and earnings-per-share.
On the top line, Cisco’s revenue (excluding the impact of divestitures) increased by 6% year-on-year while operating income rose 12%. On the bottom line, net income increased by 13% while adjusted earnings-per-share increased by 18%.
Cisco continues to be a remarkably shareholder-friendly allocator of capital. The company returned $7.5 billion of capital to shareholders in the first quarter, composed of $1.5 billion of dividend payments and $6.0 billion of share repurchases.
The company also provided guidance for the fourth quarter of fiscal 2018 with the publication of its third quarter earnings release. Revenues are expected to increased by 4.5%-6.5% while adjusted earnings-per-share growth is estimated to be 14.3%-17.1%.
Cisco’s third quarter earnings release was better than the market expected and shares are up about 3.5% in this morning’s premarket trading.
Looking ahead, the company seems capable of delivering mid-single-digit total returns from its current prices. Cisco earns a hold recommendation from Sure Dividend today.
Flowers Foods: Another Earnings Beat From This Blue Chip Dividend Stock
Flowers Foods (FLO) is the third company discussed in today’s newsletter that beat earnings expectations. The company reported earnings for the first quarter of fiscal 2019 yesterday and exceeded consensus estimates for both earnings and revenues.
Flowers Foods saw sales increased by 4.8% to $1.264 billion (or 3.0% growth excluding the acquisition of Canyon Bakehouse ) while adjusted diluted earnings-per-share increased by 6.7% to $0.32.
Here’s what Flowers Foods’ President and Chief Executive Officer, Allen Shiver, said about the company’s performance in the quarter:
“We achieved record sales in the first quarter and are proud of the solid start to the year. In our core business, we benefited from pricing actions taken to mitigate inflationary headwinds as well as continued growth from key brands including Dave’s Killer Bread, Nature’s Own, and Wonder. The recently acquired Canyon Bakehouse also drove top-line growth, and we remain on-track with the rollout of the brand across our distribution network.
While we are pleased with the results of our growth initiatives and pricing actions to date, inflationary headwinds from commodities, labor, and transportation continue to pressure margins. Therefore, in addition to improving price realizations, the team is focused on our supply chain optimization initiatives, which are intended to drive productivity and reduce fixed costs.”
Mr. Shiver is retiring next week after 41 years with the company. His replacement is Ryals McMullian Jr., who is Flowers’ Chief Operating Officer.
Flowers Foods provided updated guidance with the publication of its first quarter earnings release. The company expects to generated sales growth of 2.0% to 4.0% for the full fiscal year, with adjusted earnings-per-share in the range of $0.94 to $1.02 (which represents growth of zero to 8.5%).
We were delighted to see such strong performance from Flowers Foods in the most recent quarter. With that said, the company trades slightly above our fair value estimate today. Flowers Foods earns a hold recommendation from Sure Dividend at current prices.
- Realty Income raises $845 million in stock offering to repay credit line debt
- Lockheed Martin’s Sikorsky line wins a $1.1 billion Navy contract
- The U .S. & Canada are eliminating steel tariffs between each other
- Johnson & Johnson is recalling some of its surgical staplers
- AbbVie’s glioblastoma treatment fails late-stage study
- JPMorgan Chase will acquire medical payment company InstaMed for more than $500 million
Home Depot Tops Earnings Expectations
This morning before the markets opened, Home Depot (HD) reported quarterly results that beat the market’s expectations for both earnings and revenues.
Here are what the numbers look like:
Home Depot generated sales of $26.4 billion in the first quarter of fiscal 2019, which represents a 5.7% increase from the same period a year ago.
Comparable sales increased by 2.5% while comparable sales in the U.S. increased by 3.0%.
On the bottom line, net earnings were $2.5 billion, which represents growth of 4.2% year-on-year.
Diluted earnings-per-share of $2.27 increased by 9.1% over the same period a year ago.
Note that the remainder of the company’s revenue growth outside of comparable sales was due to this year containing 53 weeks of sales (rather than the normal 52 weeks), which shifted the reporting period to a higher period of sales within the calendar year.
Here’s what Home Depot’s Chairman and Chief Executive Officer, Craig Menear, said about the company’s performance in the quarter:
“We were pleased with the underlying performance of the core business despite unfavorable weather in February and significant deflation in lumber prices compared to a year ago. Looking ahead, we remain excited about the momentum we are seeing with our strategic investments. As a result of these initiatives, and the current macroeconomic and housing backdrop, today we are reaffirming our sales and earnings guidance for fiscal 2019. I would like to thank our associates for their hard work and continued dedication to our customers.”
Home Depot also reaffirmed its 2019 financial guidance with the publication of its first quarter earnings release. The company continues to expect sales to grow by about 3.3% and comparable sales to be up approximately 5.0%. On the bottom line, Home Depot expects to generate diluted earnings-per-share growth of approximately 3.1% in fiscal 2019.
Home Depot is a high-quality business and the stock appears positioned to deliver excellent returns moving forward. The company earns a buy recommendation from Sure Dividend at current prices.
Kohl’s Plunges 10% After A Rough Earnings Report
Kohl’s (KSS) reported financial results for the first quarter this morning. Results were much worse than expected. The company’s stock plunged by approximately 10% in this morning’s premarket trading.
Indeed, there was not much to like about Kohl’s performance in the quarter. Comparable sales declined by 3.4%, gross margins contracted by 10 basis points, selling, general, and administrative expenses rose by 1.2%, and net income declined by 17%. Diluted earnings-per-share declined by 16%, partially offset by the positive impact of share repurchases.
Kohl’s adjusted figures were slightly better. The company reported adjusted net income growth of negative 8% and adjusted diluted earnings-per-share growth of negative 5%.
Michele Gass, Kohl’s Chief Executive Officer, made the following statement in conjunction with the earnings release:
“The year has started off slower than we’d like, with our first quarter sales coming in below our expectation. We are actively addressing the opportunities that impacted our first quarter sales and we have strong initiatives that will enhance our sales performance in the second half. We are incredibly excited about our nationwide rollout of the Amazon returns program as well as several important brand launches and program expansions. Operationally, the team reacted appropriately throughout the quarter by managing expenses in line with our expectations. While we are planning the year more conservatively, we continue to invest in our business and operate with a view on our long-term success.”
To make matters worse, Kohl’s dramatically reduced its financial guidance with the publication of its quarterly earnings release. The company now expects to generate adjusted earnings-per-share of $5.15 to $5.45 in fiscal 2019, down significantly from prior guidance of $5.80 to $6.15.
We previously had a buy rating outstanding on Kohl’s Corporation, but this may be revised when our analyst covering the company can take a closer look at the company’s earnings. We advise subscribers to wait for our next Sure Analysis report on the company (due later this week) before taking any action in their investment portfolios.
AutoZone Prints An Excellent Earnings Release
AutoZone, the nation’s leading retailer and distributor of automotive parts and accessories, reported earnings for the third quarter of fiscal 2018 this morning. The company’s report was very strong and shares are up by nearly 3% in this morning’s premarket trading.
AutoZone’s strength began with its top line figures. Net sales of $2.8 billion increased by 4.6% over the same period a year ago, while same store sales increased by 3.9%.
Gross profit margin expanded to 53.6% from 53.5% last year, which was attributable to the sale of two lower-margin business units over the last year and partially offset by lower merchandise margins caused by a shift in sales mix.
Operating expenses rose to 33.9% of sales from 33.0% of sales last year due to increased payroll expenses.
On the bottom line, AutoZone’s net income increased by 10.7% while diluted earnings-per-share of $15.99 increased by 19.2%. Remarkably, shares repurchases added 8.5% of growth to the company’s earnings-per-share as AutoZone spent $1.3 billion on share repurchases through the first three quarters of its current fiscal year.
Looking back over a longer time horizon, AutoZone’s share repurchase history is nothing short of amazing. The company has repurchased 146,236 shares for cancellation since 1998, and has just 24,611 shares outstanding today. This is a track record that is essentially unmatched among the universe of public companies today.
The company has repurchased over 85% of its outstanding shares since 1998. This means even if the company hadn’t grown since 1998, shares would be nearly 7x as valuable today as in 1998 due to share buybacks.
Looking ahead, we continue to believe that Autozone has excellent growth prospects moving forward. With that said, the company trades above our fair value estimate today. Because of this, AutoZone earns a hold recommendation from Sure Dividend at current prices.
Target Beats Expectations, Up 7% Premarket
Target Corporation (TGT) announced first-quarter financial results this morning that beat analyst expectations. As a result, the stock is up nearly 7% in this morning’s premarket trading.
Target’s earnings beat started with its top line results. The company generated comparable sales growth of 4.8%, driven primarily by traffic growth of 4.3%, with the remainder coming from price increases.
Comparable digital sales contributed 2.1% to Target’s overall comparable sales growth. The company’s first quarter digital sales growth was very impressive, coming in at 42 percent. Same-day fulfillment services drove “well over half” of the company’s digital sales growth.
Further down the income statement, operating income increased by 9.0% year-on-year while adjusted earnings-per-share increased by 15.9%.
Importantly, Target expects this momentum to continue. The company expects low-to-mid-single digit growth in its comparable sales in the second quarter, while its second quarter earnings-per-share guidance implies high-single-digit growth compared to last year’s comparable quarter.
For the full fiscal year, Target expects to generate a low-to-mid-single-digit increase in comparable sales and both GAAP and adjusted earnings-per-share between $5.75 and $6.05. For context, Target generated earnings-per-share of $5.39 last year, so the midpoint of this financial guidance implies growth of 9.5% over last year’s comparable period.
Overall, it was a solid quarter from Target Corporation. The company presents an excellent mix of solid returns and low risk today and earns a buy recommendation from Sure Dividend at current prices.
Lowe’s Stock Is Down ~8% On Lower Guidance
Lowe’s (LOW) reported first quarter fiscal 2019 earnings this morning. Highlights from the home improvement retail giant’s report are below:
Comparable store sales up 3.5%, with U.S. comparable store sales up 4.2%
Sales growth of 2.2%
Adjusted earnings-per-share grew 2.5% to $1.22 per share
Lowe’s management team had previously announced its intent to sell its Mexico operations. After more market research, the company decided to sell the assets of its Mexico operations instead. This resulted in an $82 million tax benefit in the quarter (which made GAAP earnings-per-share $1.31 versus $1.22 in adjusted earnings-per-share), partially offset by $12 million in operating costs from Mexico operations.
The company’s president and CEO had the following to say about Lowe’s first quarter results:
"Our first quarter comparable sales performance is a clear indication that the consumer is healthy and our focus on retail fundamentals is gaining traction. Our commitment to improving in-stocks and customer service coupled with our focus on winning with the pro customer were integral to driving improved sales. However, the unanticipated impact of the convergence of cost pressure, significant transition in our merchandising organization, and ineffective legacy pricing tools and processes led to gross margin contraction in the quarter which impacted earnings. We are taking the necessary actions to more systematically analyze and implement retail price changes to mitigate cost pressure. Our recent acquisition of the Retail Analytics platform from Boomerang Commerce will also assist in modernizing and digitizing our approach to pricing. We are still in the early stages of our transformation, and with the changes we are putting in place, we expect to deliver improved gross margin performance over the balance of the year. "
Weaker than expected margins caused Lowe’s to reduce its fiscal 2019 guidance as well. The company’s expected adjusted earnings-per-share for fiscal 2019 were reduced from $6.05 at the median to $5.55 at the median.
Lowe’s stock was down 7.8% in pre-market trading due to weaker guidance. Overall, we believe the security is trading near a buy price. Lowe’s is a high quality Dividend King, but we believe it remains just a touch overvalued at current prices. It will be a confirmed buy when trading at or below our fair value price-to-earnings ratio of 17.5, which equates to a price of ~$97 using the new lower expected fiscal 2019 adjusted earnings-per-share guidance.
Eaton Vance Blows Buy Earnings Expectations
Eaton Vance (EV), an asset management firm headquartered in Boston, reported second quarter earnings yesterday that were significantly better than what the market anticipated. Shares rose 7.6% yesterday as a result.
On the top line, Eaton Vance generated revenues of $411.9 million, which actually declined slightly from the $412.7 million that it generated in the same period a year ago. With that said, Eaton Vance’s revenue figure was still slightly better than the market was anticipating.
It was on the bottom line where the company’s financial results truly shined. Eaton Vance generated adjusted earnings-per-share of $0.89 in the second quarter of fiscal 2019, which increased by 16% from the same period a year ago and 22% from the first quarter of 2019.
Eaton Vance’s Chairman and Chief Executive Officer, Thomas E. Faust, made the following statement in conjunction with the earnings release:
“Strong market returns and continued net inflows combined to drive Eaton Vance’s consolidated assets under management to record levels in the second quarter of fiscal 2019. While improved from the prior quarter, the Company’s operating income continues to be adversely affected by declines in managed assets of certain higher-fee strategies and spending in support of business growth.”
We continue to view Eaton Vance as a very attractive investment opportunity today. The company earns A ratings for both Dividend Risk and Retirement Suitability and we expect double-digit returns moving forward for today’s investors.
Accordingly, Eaton Vance continues to earn a buy recommendation from Sure Dividend at current prices. Eaton Vance is a holding in the Real Money Portfolio of The Sure Dividend Newsletter.