Let’s keep the good times going, would you say?
Brian Nelson, CFA
The good news during this first-quarter earnings season hasn’t let up, and we must say we’re very happy to say so.
Newsletter portfolio holdings, our favorite ideas at any time, continue to exceed expectations. The Valuentum Buying Index helps us identify new ideas to consider, while the Dividend Cushion ratio helps us avoid dividend cuts. The Economic Castle rating helps us identify the best economic value-creators across our coverage universe. All three of these metrics (and our opinions on many more, including fair values/ranges and the like) you can’t find anywhere else but at Valuentum. We don’t leave any stones unturned when it comes to investment analysis. In our April 26 write-up, we talked about all the good things we’ve been hearing from Visa (V), PayPal (PYPL), Hasbro (HAS) and many other newsletter portfolio holdings, but we received some good news from a few others today, April 27, too.
Best Ideas Newsletter portfolio Alphabet (GOOG, GOOGL) continues to plow ahead, with shares hitting all-time highs. The search engine giant’s first-quarter results, released April 27, were fantastic and beat expectations on both the top and bottom line. Alphabet has done an excellent job adapting to mobile advertising, and businesses continue to pay up to be found on the world-wide web. Alphabet’s revenue advanced 24% on a constant-currency basis in the quarter as it pushed its operating margin higher. Free cash flow generation of $7 billion in the quarter jumped 35% from $5.2 billion in the same period last year. The company ended the quarter with $92.4 billion in total cash, which excludes $6.1 billion in non-marketable securities; long-term debt of $3.9 billion is negligible in this context. We continue to love shares of Alphabet, the company formerly known as Google.
Investors were looking to sell Intel (INTC) after its first-quarter report, released April 27, but we’re not sure they should. Revenue at the newsletter portfolio holding leapt 7% on a non-GAAP basis to a new quarterly record, while non-GAAP operating income jumped 20% thanks to improved selling prices and better cost control. How can investors be disappointed with that showing? Plus, the midpoint of the Intel’s guidance for the second quarter came in ahead of what the Street was anticipating, and the chip giant raised its full-year revenue outlook $500 million as it upped earnings per share by $0.05. The commentary in Intel’s press release was also fantastic, especially as it relates to product pricing:
The company also generated approximately $3.9 billion in cash from operations, paid dividends of $1.2 billion, and used $1.2 billion to repurchase 35 million shares of stock. Intel’s board of directors has approved a $10 billion increase to Intel’s share buyback program, which brings the amount currently available for future buybacks to approximately $15 billion.
“The first quarter was another record quarter, coming off a record 2016. We continued to grow our company, shipped our disruptive new Optane memory technology, and positioned Intel to lead in new areas like artificial intelligence and autonomous driving,” said Brian Krzanich, Intel CEO. “The ASP strength we saw across nearly every segment of the business demonstrates continued demand for high-performance computing, which will only increase with the explosion of data.”
The Trump administration’s new tax proposals may play right into the hands of our more optimistic views on the master limited partnership (MLP) space as these pass-throughs may benefit more directly, according to Reuters. Anybody who is anybody knows about our fantastic call on the MLPs in June 2015 regarding their impending collapse, and our call in January 2016 on their recovery. We include the ALPS Alerian MLP ETF (AMLP) in the portfolio of the Dividend Growth Newsletter, and we include the once-poster child for MLPs Kinder Morgan (KMI), which is no longer an MLP, in the Best Ideas Newsletter portfolio. Kinder Morgan continues to hover around our fair value estimate following its first-quarter report, released April 19, but it’s good to have Mr. Trump in our corner with respect to our positions in energy. We continue to monitor opportunities as the ongoing energy-price recovery ensues.
Amazon (AMZN) had a decent first-quarter report, released April 27, relative to expectations, but the company remains one of those that we think investors will wake up to a few years from now and wonder why shares are substantially lower than today’s levels. They may ask at that time what has changed to have caused such a fall, but really it just comes down to the uncertainty of its valuation equation. Not even Amazon knows what its profit margins (its key lever) will look like a few years in the future, and even though many haven’t cared about Amazon’s profitability in the past, they eventually will. Amazon’s guidance ranges for profits are among the largest in our coverage. But with the company generating ~ $10 billion in free cash flow during the trailing twelve months, its business is firing on all cylinders. You know where we stand, but it’s for investors to decide whether ~$10 billion in annualized free cash flow is enough to justify its ~$450 billion stock equity market capitalization. We’re skeptical investors are being reasonable.
One of our top-rated Economic Castles, Domino’s (DPZ) continues to hit the ball out of the park. Domestic company-owned comparable sales advanced more than 14% in its first-quarter report, released April 27. The company’s mostly-franchised business model allows it to generate substantial returns on invested capital, and how can any investor be disappointed with the pizza giant’s third consecutive quarter of double-digit same store sales in the US. Starbucks (SBUX), another strong return generator, hit a slightly disappointing tone during its fiscal second-quarter report, released April 27, as global same-store sales came up a bit light. Global comps still advanced 3%, however. We like Domino’s and Starbucks, but neither are included in the newsletter portfolios. This could change at the right price.