Third-quarter earnings season is in full swing. With the markets as volatile as they’ve ever been in the past few years, let’s run through some of the most important reports thus far this week. All fair value estimate and dividend yield information is as of the date of this article.
3D Systems (DDD)
3D Systems is a leading provider of 3D content-to-print solutions including 3D printers, print materials and on-demand custom parts services for professionals and consumers alike. The company’s third-quarter profit warning was a shot across the bow for other 3D-printing related stocks including Stratasys (SSYS), Voxeljet (VJET) and Camtek (CAMT). 3D Systems now expects third-quarter revenue of $164-$169 million and non-GAAP earnings per share in the range of $0.16-$0.19, both numbers below consensus. Investors that are dabbling in these speculative entities should understand that investing is not about jumping on board the hottest and fastest-growing technology, but instead, it is identifying mispriced future free cash flow streams. 3D Systems is finally growing more interesting from a valuation standpoint after its steep price drop, but you won’t see us adding shares to any portfolio anytime soon (on the basis of our methodology, among other things).
Abbott (ABT)
Aside from adjusting its deal terms with Mylan (MYL), Abbott’s third quarter was business as usual, with the firm raising the mid-point of its full-year 2014 adjusted earnings per share guidance, to the range of $2.25-$2.27, reflecting double-digit expansion. Abbott continues to execute well, with quarterly performance coming in a penny better than internal targets. Sales momentum is also solid, with the firm posting 6.7% sales expansion on an operational basis–the pace of growth excludes the sale of the developed markets branded generics pharmaceuticals business. The company is one of our favorite ideas that we don’t include in the Dividend Growth portfolio. More than 40% of the world’s population will be 50 or older by 2050, offering tremendous opportunities across Abbott’s business lines. We value shares at $41 each.
AT&T (T)
There was really nothing special in AT&T’s third-quarter report. We’ve been saying for a while that the company’s best years are behind it, and we’re talking about the dividend, too. The telecom giant now expects full-year revenue to grow 3%-4% on a year-over-year basis, down from its prior guidance of 5%. Perhaps the brightest catalyst for AT&T is its acquisition of DirecTV (DTV), but we’re not counting on the deal to reshape the entire entity. We think investors may be setting themselves up for disappointment in holding AT&T’s shares…just for its dividend yield. At 5.4%, the yield is enticing. But will AT&T be able to raise its dividend for many consecutive years longer? We’re not so sure. AT&T may eventually turn into just another fixed income vehicle. The company’s Dividend Cushion is 0.3. We value shares at $34 each.
Boeing (BA)
Aerospace giant Boeing put up a fantastic third-quarter report and raised its core earnings outlook for 2014 to $8.10-$8.30 per share (was $7.90-$8.10). The company’s total backlog reached a record $490 billion in the quarter, advancing from $440 billion at the beginning of the period. Free cash flow in the period, however, was a meager $317 million, and we would have liked to see better performance on the operating cash-flow line. Boeing uses a unique accounting method to recognize revenue and earnings, and the firm’s cash flow performance is more important than others because of it. No matter how one slices or dices it, however, demand for airplanes remains very healthy. Still, we continue to exercise caution with respect to cyclicals at this point in the cycle. We value Boeing’s shares at $133 each, though we generally prefer opportunities in the aerospace supply chain. Once we’re ready to dive back into cyclicals, aerospace suppliers such as Precision Castparts (PCP) and Astronics (ATRO) will be at the top of the list.
Broadcom (BRCM)
Broadcom is a leader in semiconductor solutions for wired and wireless communications and may have the broadest portfolio of system-on-a-chip (SoC) technology. The periodic 9 on the Valuentum Buying Index had a fantastic third-quarter report and issued fourth-quarter top-line guidance above consensus estimates. We think Broadcom is one of the best technology firms that we don’t include in the newsletter portfolios, along with Qualcomm (QCOM). It’s good to see the company executing well. Our fair value estimate of shares is $48 each.
Coca-Cola (KO)
Our fair value estimate continues to be below Coca-Cola’s share price. The firm’s yield of ~2.8% is enticing, but convergence to its intrinsic value of $37 per share could wipe out several years of dividend payments. Net revenue is only marginally higher year-to-date through the end of the third quarter, while operating income is only up 2% year-to-date, and these growth rates reflect the company’s positive ‘Share a Coke’ campaign. Macroeconomic headwinds, obesity headwinds, and aggressive competitive pricing are forcing Coca-Cola to accelerate cost-cutting endeavors. The firm increased its productivity target to $3 billion in annualized savings by 2019. Coca-Cola’s long-term high-single-digit EPS growth target doesn’t justify its lofty price tag, and management expects growth to be below those levels in 2014 (and flat performance in 2015). The company is not executing as well as Pepsi (PEP) at the moment, and this is a change of opinion from before.
Core Labs (CLB)
Core Labs is in a class by itself. Revenue to free cash flow conversion has been top-notch and excess economic profit creation has been impressive (many times that of peers). Senior management and scientists own $100+ million of stock, closely aligning them with shareholders. We especially like its focus on ROIC. However, its outlook for fourth-quarter earnings was disappointing. The firm now sees fourth-quarter earnings per share of $1.53-$1.56, lowered from the previous range of $1.56-$1.61. Core Labs’ fourth-quarter revenue guidance also came in below consensus expectations. We like the company’s fundamentals a lot, but weak Brent crude oil prices has altered the upward trajectory a bit. We value the company at $153 per share.
Kimberly-Clark (KMB)
Kimberly-Clark has raised its dividend in each of the past 40+ years, and the company’s Dividend Cushion score indicates future dividend increases are in store for investors. The firm beat estimates on both the top and bottom lines in the third quarter, but it reduced its outlook for fiscal year 2014 earnings to the range of $5.93-$6.03 versus $6.00-$6.15 previously. However Kimberly-Clark announced a restructuring plan that should help bolster earnings expansion in the out-years. We value shares at $103 each, so investors are paying up for its dividend track record.
Norfolk Southern (NSC)
The railroad issued a disappointing third quarter report, missing on both the top and bottom lines. The executive suite also did its best to dissuade investors of the merits of railroad combinations. The rumor mill has been fast at work after deal talks between Canadian Pacific (CP) and CSX (CSX) became public. Our favorite railroad continues to be Best Ideas portfolio holding Union Pacific (UNP) for myriad reasons. We won’t be adding another railroad to the newsletter portfolios anytime soon. You can access Union Pacific’s landing page here >>
United Technologies (UTX)
It’s just hard not to like United Technologies. The company put up a fantastic third-quarter report, with organic expansion driving most of the improvement. Backlog trends remain solid, and as with Boeing, commercial aerospace exposure is among the most resilient around. Still, investors should be cautious with cyclicals in this tumultuous global economic environment, and we’re not taking concerns over growth in Europe and China lightly. In any case, we value shares of United Technologies at $113 each.
Yahoo (YHOO)
On August 11, 2005, Yahoo invested $1 billion in Chinese e-commerce firm Alibaba (BABA) for a 40% stake. Current CEO of Yahoo, Marissa Mayer, was busy at Google (GOOG) trying to chop down rival Yahoo at that time. She is now benefiting greatly from previous management’s decisions to take a stake in the Chinese giant, which now sports a market capitalization of ~$225 billion. After years of revenue pressure, Yahoo achieved 1% top-line growth in its third quarter. Adjusted EBITDA, however, still fell 8% in the period. The Alibaba monetization continues to be the story with Yahoo at the moment, and we’re far away from saying the core of Yahoo is back on track. Please have a look at Google’s third-quarter results here for comparison. We continue to hold shares of Alibaba in the Best Ideas portfolio, adding to the position recently.