Comparing The Q2 2019 Earnings Releases Of Dominion Energy & Southern Company
This morning large utilities Southern Company (SO) and Dominion Energy (D) reported 2nd quarter earnings for fiscal 2019.
On the top line, Dominion Energy significantly outperformed Southern Company. Dominion Energy’s revenue grew 28.6% versus the same quarter a year ago. High revenue growth was due in large part to the company’s SCANA acquisition. Southern Company’s revenue fell 9.4% versus the same quarter a year ago. While Dominion’s revenue grew due to an acquisition, Southern Company’s revenue shrank due to the disposition of Gulf Power. Both companies missed analyst consensus estimates for revenue.
Revenue certainly matters, but acquisitions and divestitures cloud the picture. Adjusted earnings-per-share growth versus the same quarter a year ago is a better comparative measure of performance between these two large utilities.
- Southern Company generated flat (0%) adjusted EPS growth
- Dominion Energy generated a 10.9% adjusted EPS decline
Flat adjusted EPS are typically not a favorable outcome. But in comparison to Dominion Energy’s adjusted EPS decline, Southern’s flat adjusted EPS are preferable. Southern Company also exceeded consensus analyst adjusted EPS estimates by 11.1%, while Dominion’s results were in line with consensus analyst estimates.
While top line results initially favor Dominion Energy, adjusted EPS tell a different story. Southern Company’s earnings beat and avoidance of an adjusted EPS decline show that it outperformed Dominion Energy this quarter.
Despite its weaker results in Q2 2019, we expect higher total returns over the long run from Dominion Energy. With that said, both Dominion Energy and Southern Company appear somewhat overvalued today. We rate both of these large utilities as holds at current prices.
Apple Beats Revenue and Earnings Estimates Thanks to China Rebound Shares +4%
Yesterday after the markets closed, technology giant Apple (AAPL) reported financial results for its third quarter of fiscal 2019. Thanks to better-than-expected performance in Apple’s Greater China segment, the company’s revenue and earnings both exceeded analyst expectations, causing shares to jump 4% in after-hours trading.
On the top line, Apple posted quarterly revenue of $53.8 billion, which compares positively to the $53.4 billion consensus estimate and increased by 1% over the same period a year ago. The impressive revenue figure also represents the largest June-quarter revenue in Apple’s history. International sales accounted for 59% of the company’s revenue in the quarter.
As mentioned in the introduction to this analysis, Apple’s better-than-expected revenue number was largely due to better-than-expected sales in the Greater China segment. The geographic breakdown of Apple’s revenue is shown below:
- Americas: $25.1 billion (2.1% growth)
- Europe: $11.9 billion (1.8% decline)
- Greater China: $9.2 billion (4.1% decline)
- Japan: $4.1 billion (5.6% growth)
- Rest of Asia Pacific: $3.6 billion (13.3% growth)
It is hard to overstate the importance of the Greater China segment to Apple’s long-term growth prospects, so better-than-expected performance from that segment was a welcome sight for investors. They are not the only ones watching the numbers, either; on the earnings conference call, Apple’s Chief Executive Officer Tim Cook made the following statement about the Greater China segment’s performance in the second quarter:
“I’d like to provide some color on our performance in Greater China, where we saw significant improvement compared to the first half of fiscal 2019 and return to growth in constant currency. We experienced noticeably better year-over-year comparisons for our iPhone business there than we saw in the last two quarters and we had sequential improvement in the performance of every category. The combined effects of government stimulus, consumer response to trade-in programs, financing offers, and other sales initiatives and growing engagement with the broader Apple ecosystem had a positive effect. We were especially pleased with a double-digit increase in services driven by strong growth from the App Store in China.”
Let’s next talk about Apple’s revenue performance by product segment. On a company-wide basis, Apple’s revenue growth was driven entirely by strength in its Services segment – which is comprised of subscription services like Apple Music, the App Store, and other non-device purchases made by its customers - and partially offset by declining product sales. More specifically, Apple’s Services revenue grew by 12.6% to $11.5 billion while product sales declined by 1.7% to $42.4 billion.
It is an interesting exercise to examine Apple’s revenue by product, which we’ve broken out below:
- iPhone: $26.0 billion (11.8% decline)
- Mac: $5.8 billion (10.7% growth)
- iPad: $5.0 billion (8.4% growth)
- Wearables, Home and Accessories: $5.5 billion (48.0% growth)
- Services: $11.5 billion (12.6% growth)
Apple’s fastest-growing business both in terms of percentages and absolute dollars in the Wearables segment, driven by strength in the Apple Watch and AirPods product categories.
Moving down the income statement, Apple’s cost of sales increased faster than its revenue, which led to less gross profit in the quarter. Cost of sales increased by 2.2% to $33.6 billion while gross profit decreased by 1.0% to $20.2 billion.
Similarly, Apple’s operating expenses increased by 11.2% (driven primarily by a 15.0% increase in research and development) while operating income decreased by 8.5% to $11.5 billion.
On the bottom line Apple’s net income was $10.0 billion, a decrease of 12.8% year-on-year. Apple’s aggressive share repurchase program (more on that later) meant that the company’s per-share performance was much better, however.
The company’s diluted earnings-per-share fell by only 6.8% over 2018’s comparable period. Perhaps most importantly, Apple’s diluted earnings-per-share of $2.18 came in meaningfully higher than the $2.10 consensus estimate from sell-side analysts.
Apple’s guidance for the fiscal 2019 fourth quarter was also better than expected. The company’s guidance is listed below along with the equivalent figure from last year’s comparable quarter:
- revenue between $61 billion and $64 billion ($62.9 billion)
- gross margin between 37.5 percent and 38.5 percent (38.3%)
- operating expenses between $8.7 billion and $8.8 billion ($8.0 billion)
- other income/(expense) of $200 million ($303 million)
- tax rate of approximately 16.5 percent (14.0%)
Lastly, Apple continued to be an extraordinarily shareholder-friendly allocator of capital in the quarter. The company returned over $21 billion to shareholders, including $17 billion through open market repurchases of almost 88 million Apple shares, and $3.6 billion in dividends and equivalents.
Looking out over a longer time horizon, Apple’s capital return program is even more impressive. Since the company began its share buyback program in fiscal 2012, it has repurchased $288.2 billion of company stock while also paying $85.0 billion in dividend payments. In the second quarter alone, Apple saw its share count decline by 6.6% over the same period a year ago.
Overall, it was an excellent quarter from Apple. The company’s business performed better than expected and its per-share results continue to be boosted by its share repurchase program. The company’s stock trades slightly above our fair value estimate after yesterday’s earnings release, so Apple earns a hold recommendation from Sure Dividend today.
Mondelez Beats Q2 Estimates, Raises 2019 Guidance; Shares +0.5%
Yesterday after the markets closed, Mondelez International (MDLZ) reported second quarter 2019 financial results. The company’s earnings met expectations, but its sales – particularly its organic sales – were better than expected, causing shares to rise modestly premarket.
On the top line, Mondelez saw net revenues decline by 0.8% year-on-year, driven entirely by unfavorable currency impacts. Excluding currency, organic net revenues grew by 4.6% through a combination of volume, mix, and pricing gains.
Further down the income statement, Mondelez’s gross profit margin contracted by 90 basis points to 40.7% due to unfavorable year-over-year changes in currency and commodity hedging activities. Adjusted gross profit increased by $106 million and margin was flat at 40.6%.
Excluding non-recurring accounting charges, the company’s operating income performance was similar. Operating income increased by $41 million at constant currency and operating profit margin was flat at 16.7%.
On the bottom line, adjusted earnings-per-share of $0.57 increased by 9% year-on-year. Mondelez also generated plenty of cash in the quarter, with year-to-date cash from operating activities of $1.0 billion and free cash flow of $581 million.
In the second quarter, Mondelez was also a very shareholder-friendly capital allocator. The company returned $700 million to shareholders through a combination of stock repurchases and cash dividends. The company also announced a 10% increase to its quarterly dividend with the publication of its second quarter earnings release.
Mondelez also increased its financial guidance with the publication of its second quarter earnings release. The company now expects to generate organic net revenue growth of 3% or higher while adjusted earnings-per-share growth is expected to be around 5% on a constant-currency basis.
Overall, it was a solid quarter from Mondelez and we were pleased to see the company’s strong organic revenue figure. The company has reasonable growth prospects and is fair recession-resistant, but trades significantly above our fair value estimate today. Accordingly, Mondelez earns a sell recommendation from Sure Dividend at current prices.
Church & Dwight Beats on the Top and Bottom Lines, Raises Guidance; Shares +0.8%
This morning before the markets opened, Church & Dwight (CHD) reported financial results for the second quarter of fiscal 2019. The company’s results beat expectations on both the top and bottom lines, causing shares to rise modestly in this morning’s premarket trading.
On the top line, Church & Dwight generated sales growth of 5.0%, comprised primarily of 4.9% organic sales growth. The company’s domestic organic sales growth was 5.0% while international domestic sales growth was 9.1%.
Church & Dwight’s Chief Executive Officer, Matthew Farrell, made the following statement on the company’s revenue trend in the quarter:
“Q2 organic sales growth of 4.9% was exceptionally strong and exceeded our 3.5% outlook. Q2 was the fifth consecutive quarter of greater than 4% organic growth and the fourth consecutive quarter of positive price and product mix (+4.8%). Our categories continue to grow, our market shares are healthy, and we’ve introduced new products in many of our categories. Thirteen of our 15 domestic categories grew during the quarter and more than half have grown for at least 7 consecutive quarters. In the domestic business, 9 out of 12 power brands met or exceeded category growth in the second quarter. The international business continues to perform strongly with reported sales growth of 6.0% and organic growth of 9.1%.”
The company saw modest gross margin expansion to compliment its solid revenue performance. More specifically, Church & Dwight’s gross margin expanded by 30 basis points to 44.6% due to price increases, acquisition accounting in connection with the FLAWLESS acquisition, and productivity programs, partially offset by higher commodity and manufacturing costs.
On the bottom line, Church & Dwight saw earnings-per-share growth of 12.2% and adjusted earnings-per-share growth of 16.3%.
Church & Dwight increased its full-year financial guidance with the publication of its second quarter earnings release. The company now expects 6% total sales growth and 4% organic sales growth, with gross margin expansion of 80 basis points. Church & Dwight also expects to generated adjusted earnings-per-share of $2.47, which represents 9% growth from the same period a year ago. Lastly, cash flow from operations is expected to be $800 million.
It was an excellent quarter from Church & Dwight, but the company persistently trades well above our fair value estimate. We believe the stock is likely to deliver total returns in the low single-digits moving forward, which causes it to earn a sell recommendation from Sure Dividend at current prices.
General Electric Beats Earnings Expectations, CFO to Resign; Shares +5%
This morning before the markets opened, General Electric (GE) reported financial results for the second quarter of fiscal 2019. Due to an earnings beat and a separate press release detailing its CFO’s resignation, shares of General Electric have risen by 5% in this morning’s premarket trading.
First, let’s briefly discuss the company’s CFO succession. General Electric’s outgoing CFO is Jamie S. Miller, who joined the company as Vice President, Controller and Chief Accounting Officer in 2008. She then became Chief Information Officer for two and a half years before moving to become the President and CEO of GE Transportation. Ms. Miller became GE’s CFO in October of 2017.
General Electric has not identified a replacement yet, but instead has initiated a search to identify its next CFO. Ms. Miller has agreed to remain in her role to assist with a smooth transition. It is difficult to say the exact cause of Ms. Miller’s departure from the company, but its performance certainly can’t have helped – GE’s stock is down by more than 50% since she became CFO amid a slew of financial and debt problems.
Moving on, let’s discuss the company’s actual financial results. General Electric’s second quarter revenues of $28.8 billion decreased by 1% year-on-year while total orders of $28.7 billion decreased by 4%. Importantly, the company’s key Industrial segment performed better, with Industrial segment organic revenues of $27.7 billion increasing by 7% year-on-year.
On the bottom line, General Electric generated adjusted earnings-per-share of $0.17, including a $0.06 benefit from a tax audit resolution.
With the publication of its second quarter earnings release, General Electric also increased its financial guidance for the remainder of the fiscal year. The company now expects the following (March’s financial guidance is included in parentheses):
- Industrial Segment Organic Revenue Growth: Mid-single digits (low-to-mid-single digits)
- Adjusted EPS: $0.55 to $0.65 ($0.50 to $0.60)
- Adjusted Industrial Free Cash Flows: negative $1 billion to $1 billion (negative $2 billion to flat)
- Adjusted GE Industrial Margin Expansion: flat to up ~100 basis points (unchanged)
- Restructuring (Industrial) Expense: $1.7 billion to $2.0 billion ($2.4 billion to $2.7 billion)
- Restructuring (Industrial) Cash: $1.5+ billion ($2.0+ billion)
General Electric’s Chief Executive Officer, Larry Culp, made the following statement in conjunction with General Electric’s guidance increase in the earnings release:
“Due to improvements at Power, lower restructuring and interest, higher earnings, and better visibility at the half, we are raising our full-year outlook for Industrial segment organic revenues, adjusted EPS, and Industrial free cash flows, and we are holding our margin guidance. We will continue to take planned actions to improve our businesses and monitor some market headwinds, and we remain focused on driving continuous improvement and delivering for our customers. I am encouraged by our team’s progress and dedication to date.”
General Electric’s earnings release was better than expected and, overall, we are pleased to see the company’s turnaround is progressing better than we expected. With that said, the stock does not seem to offer particularly attractive returns, but it does have high risk. Because of this, General Electric earns a sell recommendation from Sure Dividend at current prices.
Enterprise Products Partners Reports Strong DCF Growth In Q2; Shares +2%
This morning before the markets opened, Enterprise Products Partners reported second quarter financial results for the period ending June 30th, 2019. The company’s performance was strong and shares have increased by 2% in this morning’s premarket trading.
Here are what the numbers look like. Enterprise Products Partners’ revenue of $8.3 billion decreased by 2.3% year-on-year, but this was more than offset by prudent cost management further down the MLP’s income statement.
Indeed, Enterprise Products Partners saw total costs and expenses decrease by 9.9% year-on-year. This meant that a number of the company’s profitability metrics increased substantially.
Operating income increased by 58.2% while fully diluted earnings-per-unit increased from $0.31 to $0.55. Cash flow from operating increased by 38.2%, adjusted EBITDA increased by 18.2%, and free cash flow increased by 37.6%.
Perhaps the most important metric for MLP investors is distributable cash flow, which measures how much cash is available to fund Enterprise Products Partners’ juicy 6.0% distribution yield. In the second quarter, Enterprise Products Partners saw distributable cash flow increase by 21.2%, which gives an extremely safe 1.8 times coverage ratio for the firm’s $0.44 cash distribution per unit.
Here’s what the Chief Executive Officer of Enterprise Products Partners’ general partner, A.J. “Jim” Teague, said about the MLP’s performance in the quarter:
“Enterprise reported record volumes and cash flow from operations during the second quarter of 2019. Each of our business segments reported increases in gross operating margin compared to the second quarter of last year. In total, we reported 16 operational and financial records during the quarter. Record volumes included our liquid pipelines at 6.6 million barrels per day, marine terminals at 2.0 million barrels per day, NGL fractionation volumes at 1.0 million barrels per day and natural gas pipeline volumes at 14.5 trillion Btus per day.”
We believe that this was another strong quarter from Enterprise Products Partners, which has reaffirmed our belief that it is likely the most well-managed MLP in the public universe. With a 6.0% distribution yield, reasonable growth prospects, and a slightly undervalued unit price, the MLP earns a buy recommendation from Sure Dividend at current prices.
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