On Thursday, Caterpillar (CAT) and 3M (MMM) helped buoy the markets, but results from Amazon (AMZN) after the close and news of the potential first case of Ebola in New York city have put investors in a somewhat defensive mood. Still, the quarterly release of Dividend Growth portfolio holding Microsoft (MSFT) was very impressive. The markets continue to digest a mixed third-quarter earnings season that revealed poor results from large, global firms such as McDonald’s (MCD), Coca-Cola (KO), AT&T (T) and IBM (IBM).
Getting into the details, Caterpillar beat estimates on both the top and bottom lines in the third quarter, and the firm raised its profit outlook for 2014 to $6.50 per share excluding restructuring costs, which compares to $6.20 previously and $5.85 per share in January. Caterpillar’s business model has a lot of operating leverage, so with any earnings beat, it has the potential for being a large one, and in the third quarter, it was. Still, management acknowledged that economic growth remains slow and pointed to cost management and operational execution for the beat. Most of Caterpillar’s earnings growth is coming on flat sales. Management said 2015 would still be very challenging:
Despite cautious optimism for improved global economic growth, significant risks and uncertainties remain that could temper growth in 2015. Political conflicts and social unrest continue to disrupt economic activity in several regions, in particular, the Commonwealth of Independent States, Africa and the Middle East. The Chinese government’s push for structural reform is slowing growth, and the ongoing uncertainty around the direction and timing of U.S. fiscal and monetary policy actions may temper business confidence. As a result, our preliminary outlook for 2015 expects sales and revenues to be flat to slightly up from 2014.
3M’s third-quarter results weren’t as strong as those of Caterpillar’s, in our view, but the firm still raised its bottom-line outlook for the year, to $7.40-$7.50 per share from $7.30-$7.55 previously. 3M revealed growth across all segments of its operations during the period:
Organic local-currency sales growth was 5.4 percent in Health Care, 4.3 percent in Electronics and Energy, 4.2 percent in Industrial, and 3.1 percent in both Consumer, and Safety and Graphics. On a geographic basis, organic local-currency sales grew 6.0 percent in the U.S., 4.9 percent in Asia Pacific, 0.8 percent in EMEA (Europe, Middle East and Africa) and 0.4 percent in Latin America/Canada.
Caterpillar yields 3%, while 3M yields 2.5%.
After the close, Amazon (AMZN) blew up in its third quarter. Though cash flow trends at the online retailing giant improved, we’re not at all interested in adding the company to the newsletter portfolios. For one, Amazon’s business model is extremely leveraged to its operating margin, and long-term levels of profitability remain highly uncertain. On the basis of our analysis, we estimate that Amazon’s intrinsic value can swing $50 per share for every one percentage point variation in mid-cycle, normalized levels of profitability. The pendulum can swing both ways, meaning the probable range of fair value outcomes is rather large. Translation: shares are too risky for our taste.
The biggest positive of the day came from Dividend Growth portfolio holding Microsoft (MSFT). The software giant’s first quarter fiscal year 2015 results were fantastic. Management noted strong performance across its commercial and consumer segments, with GAAP revenue soaring 25%+ and adjusted operating income advancing 10%+. It is fantastic to see Microsoft growing at such a rapid pace on the top line, and as we’ve stated many a time before, the company is perhaps one of the biggest bargains on the market today. Shares are also lining up to be a top-performing Dividend-Aristocrat-to-be. Mr. Softy is the largest weighting in the Dividend Growth portfolio.