Let’s go around the horn with recent investment-related news. Let’s say goodbye to Panera, talk about SeaDrill’s infamous demise, follow up on the Coach dividend saga, address Cisco’s payout strength and attractive valuation, update readers on Medtronic’s portfolio optimization initiatives, and try to reason through Tesla’s recent price surge.
By Kris Rosemann and Brian Nelson, CFA
Goodbye Panera
I think most of us were surprised a bit Wednesday morning, April 5, to see Panera Bread (PNRA) taken private by JAB Holding Company for $315 per share in cash. Shares of Panera started the year just above the $200 price tag, so the buyout is a nice payoff for investors that have been holding strong in the fast-casual concept. JAB Holding also owns Keurig Green Mountain, Peet’s Coffee & Tea, Caribou Coffee, Einstein Noah, and Krispy Kreme, among other well-recognized brands, so Panera can be considered a great fit for JAB’s portfolio. There are obvious synergies.
For Panera shareholders though, the price tag is simply a gift. We had been skeptical of the long-term growth potential of the high-carb bakery and sweets concept, one that would have to overcome a trend toward a more health-conscious millennial consumer (MILN), especially as the demographic becomes a larger percentage of the overall population. We posit that Chipotle’s (CMG) troubles may have been in part why Panera had become so attractive to private equity, perhaps the burrito-operation eliminating itself from private-equity consideration in light of its many, many troubles of late.
By most accounts, both Starbucks (SBUX) and Domino’s Pizza (DPZ) had been in the hunt for Panera, and while many are speculating that major changes in the competitive landscape may occur as a result of this go-private deal, both the quick-service and fast-casual spaces are already ultra-competitive, stacked with strong rivals that aggressively market and price offerings. It seems like there is a new concept sprouting up every day. How things could get more competitive remains to be seen, as the need to lure traffic to locales has noticeably become more and more difficult given the many more choices consumers have to choose from.
For those keeping count, Panera ended its public life as one of the best-performing, if not the best-performing, restaurant stocks of the past 20 years – up over 8,000%. It started out as one 400 square foot cookie store in Boston. What a story.
SeaDrill’s End
“SeaDrill is a name that will live in infamy, probably more because of its die-hard dividend growth base that supported the stock through thick-and-thin, only to see their capital nearly wiped out.” – Brian Nelson, CFA
Seadrill (SDRL) announced April 4 that it will be pursuing Chapter 11 proceedings, and that based on several factors, “the company currently expects that shareholders are likely to receive minimal recovery for their existing shares.” None of this is surprising – Valuentum had warned about SeaDrill’s negative free cash flow and massive net debt repeatedly for many years, until this end. It is a shame if anybody believed SeaDrill would make it.
Related: SDLP
Coach To Pick Up Kate Spade?
We ventured into Coach (COH) in the Dividend Growth Newsletter portfolio, in part because of the aspirational brand’s tremendous balance sheet cash position. However, its purchase of the Stuart Weitzman brand, and now indications that it is planning to buy Kate Spade (KATE) have us more-than-perturbed. The strength of Coach’s dividend will suffer as the buyer in the transaction, and we no longer like the dividend without a substantial net cash balance sheet to protect it, unfortunately. We plan to remove the company from the Dividend Growth Newsletter in the coming weeks.
Don’t Forget About Cisco’s Big Dividend Hike
Let’s not forget that newsletter portfolio holding Cisco (CSCO) recently hiked its quarterly payout in a meaningful way during its fiscal second-quarter results, released earlier this year.
The networking giant doesn’t have the longest dividend track record, but when it comes to the past several years, few companies can rival the growth and strength of its payout. The most recent increase in the quarterly dividend was a solid 12%, bringing it to $1.16 per share on an annualized basis (its forward yield is now approaching 3.5%). The dividend will be paid on April 26 to shareholders on record as of April 6. What has us most excited about Cisco’s dividend though is that it still has plenty of room for continued growth, based on its impressive Dividend Cushion ratio of 2.7.
Further, the company has several of the most enviable characteristics of an income-based idea: a net cash-rich balance sheet, a capital-light operation enabling strong free cash flow generation, and the ongoing transition to a software and subscription based business model, which will only accentuate those characteristics. In addition to its strong dividend growth profile, we find shares of Cisco to be compelling from a valuation standpoint (one of just a few in this frothy market today)–both on a discounted cash flow and relative valuation basis. We plan to continue to include shares of Cisco in both newsletter portfolios for the foreseeable future as we expect an ongoing robust annual pace of dividend expansion.
Medtronic Back Above $80; To Sell Medical Supplies Unit?
We’ve been watching shares of Dividend Growth Newsletter portfolio holding Medtronic (MDT) very closely in light of the political uncertainty engulfing the healthcare sector of late. Shares have faced some added pressure from management’s “changing” definition of free cash flow, something we didn’t like at all, but we’re giving the executive suite time to regain credibility. It has such a fine franchise, and the team is transparent.
The latest from Reuters is that Cardinal Health (CAH) may be looking to scoop up Medtronic’s medical supplies business “for close to $6 billion.” We’re viewing this event as a significant positive for Medtronic’s dividend, particularly in light of Medtronic’s hefty debt load that came along with its buyout of Covidien. Reuters is saying that sources close to the deal anticipate an announcement later this month. We’ll be waiting for confirmation.
Tesla’s “Castle in the Air”
Speculators are buying up Tesla’s (TSLA) shares on hopes the company may be the real deal. The company announced April 2 that it delivered “just over 25,000 vehicles” in the first quarter of 2017, a new quarterly record and nearly a 70% increase over the first quarter of last year. Shares have surged to a new all-time high, and Tesla’s market capitalization of ~$49 billion is now greater than Ford’s (F) and is nearly that of GM’s (GM)! The market is off its rocker, and everybody wants a piece; even Tencent (TCEHY) has taken a 5% passive stake in Tesla.
Let’s stick to the numbers for now. In 2015 and 2016, the company has reported an operating loss of $717 million and $667 million, respectively. Net income in each year has fared worse, cumulatively at more than a loss of $11 per share. Cash and cash equivalents stood at ~$3.4 billion at the end of 2016, less than the $6 billion in long-term debt, so the balance sheet remains far from net cash-rich. Capital expenditures have run, on average, at ~$1.5 billion during the past couple years. Where’s the value? It’s all “castles in the air” when it comes to Tesla. It must be “cool” to own shares, and how can anyone get comfortable when Elon Musk is addressing the “shorts” on Twitter:
Stormy weather in Shortville …
— Elon Musk (@elonmusk) April 3, 2017
Until the next update …