Image Source: Fortune Live Media, Fortune Most Powerful Women Dinner With Yahoo CEO Marissa Mayer
Apple (AAPL)
There were no real surprises in Apple’s fiscal third quarter (calendar second quarter) results.
The iPhone maker posted record quarterly revenue and net earnings of $49.6 billion and $10.7 billion, up ~33% and ~39%, respectively, thanks to record fiscal third-quarter sales of iPhone and Mac; its highest ever sales from services and the successful execution of the launch of the Apple Watch also buoyed performance. An “amazing quarter,” iPhone revenue advanced 59%, and customers and investors alike are looking forward to the release of iOS 9, OS X El Capitan and watchOS 2 in the fall. Apple’s gross margin expanded 30 basis points in the quarter, to 39.7%.
Keys to the quarter: One quarter is not going to make or break Apple. Expectations are high for the company to deliver, but its valuation is not factoring in significant growth beyond this year and next, making it an attractive idea with a nice, growing dividend to boot. We value shares at nearly $150 each, offering significant upside potential.
IBM (IBM)
IBM has alienated its investor base and has become the poster child for low-quality earnings.
Big Blue does not have an answer for its revenue growth problems, and in our view, has become a classic value trap, though we don’t view shares as undervalued. In the second quarter, adjusted revenue fell 1%, but reported revenue dropped 13% as a result of currency and divestitures. Operating net income from continuing operations and operating diluted earnings per share in the quarter fell 17% and 15%, respectively. That ‘strategic imperatives’ revenue and ‘cloud’ revenue jumped 30% and 70% on a currency-neutral basis, respectively, doesn’t change the revenue miscues of the past and clearly aren’t moving the needle.
Keys to the quarter: IBM’s shares have dropped but so has its intrinsic value. Most of the buybacks of yesteryear were completed at value-destructive pricing. The company expects operating non-GAAP earnings per share of $15.75-$16.50 in 2015, which suggests shares are cheap at 10 times earnings, but the company is a classic case of a value trap: operating earnings are plummeting on lower revenue. We value shares at $170 each, roughly in line with its current price.
Lexmark (LXK)
Lexmark’s second-quarter results weren’t much to talk about. The company’s non-GAAP revenue came in roughly flat from the year-ago period, while non-GAAP earnings per share did the same. The company noted ongoing headwinds from a strong US dollar and challenges within its laser supply channel. Lexmark’s ‘Enterprise Software’ revenue more than doubled in the period, while deferred software revenue did the same, but offsetting such strength was significant weakness across its Imaging Solutions and Services (ISS) segment, an area that holds consumer and business hardware and supplies the firm is exiting.
Keys to the quarter: Shares gapped down significantly on the flat performance and guidance for third-quarter earnings per share of $0.51-$0.61 per share, well below a consensus estimate of nearly $0.90. Turnarounds are notoriously difficult to navigate, and it looks to us that Lexmark’s will take a bit longer than anticipated. We’re staying on the sidelines.
Linear Tech (LLTC)
There wasn’t much operating leverage in Linear Tech’s fiscal quarter ended June 28. Quarterly revenues advanced nearly 4%, while net income increased at 2.3%, resulting in what best can be described as ho-hum performance. The pace of revenue and earnings expansion represented a marked slowdown from reported fiscal 2015 numbers that showcased top-line growth of ~6% and net income expansion of ~13%, but most of the bottom-line increase was due to lower non-operating interest expense.
Keys to the quarter: Linear Tech rounded out fiscal 2015 with performance that was less-than-exciting. In the release, management noted that as the quarter progressed, global macroeconomic conditions worsened, which hurt the pace of bookings “considerably.” Lower bookings will translate into a 7%-12% sequential decline in revenue in the fiscal first quarter. We can’t see rushing in to shares in light of this fundamental performance.
Microsoft (MSFT)
Microsoft remains one of the best value-based, dividend growth ideas on the market today.
The software giant exceeded both top and bottom line expectations in its fiscal fourth-quarter (calendar second quarter) report. The period included a previously-announced impairment charge, though we note the figure was a bit higher than expectations. The quarterly performance wasn’t great even on a non-GAAP basis, as revenue dropped 5% and operating income fell 3%. Operating earnings per share advanced 11% thanks to share buybacks, however. With the quarter in the rear-view mirror, all eyes will be on the upcoming release of Windows 10 and the implications on Microsoft’s growing ecosystem.
Keys to the quarter: With Surface, Xbox, Bing, Office 365, Azure, Dynamics CRM Online, Microsoft has a number of top-line growth engines, but the PC market will remain an inescapable driver behind performance. We’re anxiously awaiting the launch of Windows 10, but Microsoft’s solid balance sheet and impressive free cash flow means we’re not going anywhere. The company is one of our best bets for a potential Dividend-Aristocrat to be.
Verizon (VZ)
The telecommunications space has never been more competitive.
Total operating revenue advanced 2.4% in the quarter, but operating income only nudged 1.8% higher. Net income was essentially flat as share buybacks bolstered performance. Verizon added 1.1 million net retail postpaid connections in the quarter and posted its lowest postpaid churn rate in 3 years. It’s hard not to like segment EBITDA margins of ~44% recorded in its wireless segment during the period, but we certainly can dislike its ~$110 total long-term debt load. Cash and cash equivalents have dropped to ~$3.3 billion from ~$11 billion at the beginning of the year.
Keys to the quarter: Verizon’s recent acquisition of AOL (AOL) is backward-looking at best, and the recent acquisition of the remaining interest in the crown jewel of the wireless industry, Verizon Wireless, means it may be running short of ideas. We’re still evaluating Verizon for addition to the Dividend Growth Newsletter portfolio, but our instinct tells us its debt load will come back to haunt shareholders. We’re not rushing into any decisions, especially in light of the cutthroat competition across the wireless space.
Yahoo (YHOO)
We’ve been very happy with Marissa Mayer as of late. She is doing the best with what she has, and under her tenure, Yahoo’s shares have performed quite well. GAAP revenue leapt 15% on a year-over-year basis in the second quarter, and the company’s display business experienced a pace of expansion not registered since 2010. Adjusted EBITDA performance was still weak in the quarter, however, and the company swung to a net loss on a year-over-year basis. Fending off the triple threat of Google (GOOG), Facebook (FB) and Twitter (TWTR) may be too much for any advertiser these days.
Keys to the quarter: The second quarter doesn’t mean much, as the direction of Yahoo’s shares rest heavily on one unique catalyst: an IRS decision. Will the “tax man” make the firm’s expected Spin-Off taxable? The push for corporations to “pay their fair share” has probably never been higher in the history of the US, and we wouldn’t be surprised if the IRS makes things incredibly difficult for the executive suite at Yahoo. The IRS has already put an end to the plans of many corporations seeking tax-inversion deals in 2014 and 2015. Why let Yahoo slide?