From Bioverativ’s takeout to Visa’s stock price surge to General Electric’s continued pain, there’s a lot going on in the stock market. Let’s cover some ground.
By Kris Rosemann and Brian Nelson, CFA
It’s hard to believe this but our best idea in the Best Ideas Newsletter portfolio, Visa (V), is now a $124+ per share stock. We know how to pick ‘em, would you say? We don’t get everything correct, of course, but if you’ve read anything on our website, we can only hope that you’ve witnessed Visa’s meteoric rise. The high end of our updated fair value estimate range for Visa is north of $130 per share. What a wild ride it has been, to say the least, and how about Dividend Growth Newsletter portfolio idea Boeing (BA)? Incredible, no? Unfortunately, not all stocks have been in favor, despite this incredible bull-market run.
Industrial bellwether General Electric (GE), for example, despite bouncing a bit during the January 23 trading session, continues to make headlines as shares face additional pressure following an announcement that included a $6.2 billion charge related to its legacy reinsurance business. Liquidity concerns are creeping up for the conglomerate as GE Capital is not expected to pay dividends to the parent company in coming years as it works to rebuild its reserves. Some observers suggest a capital raise may be on the way, but cash flow shortfalls at the company were a key reason we decided to remove the idea from our newsletter portfolios in May 2017.
Biopharma giant Celgene (CELG) has agreed to acquire Juno Therapeutics (JUNO) for $87 per share in cash, or ~$9 billion, confirming previous reports of a potential deal in the works. Shares of Celgene continue to face pressure on the deal news, as they did upon initial reports as well. The two companies already have a ten-year partnership in which Celgene took a 10% stake and, “the two companies will leverage T cell therapeutic strategies to develop treatments for patients with cancer and autoimmune diseases with an initial focus on Chimeric Antigen Receptor Technology (CAR-T) and T Cell Receptor (TCR) technologies.” In other news, it was announced that one of our favorite biotech ideas Bioverativ (BIVV) will be acquired by Sanofi (SNY) for $11.6 billion.
Food retail investors are holding their breath as the first Amazon Go (AMZN) grocery store opens in Seattle. The cashier-less store tracks shoppers with scanners, cameras, and sensors to determine what goods they choose, then charge their Amazon accounts automatically. Prices at the store are between those of a convenience store and mainline grocer, according The Seattle Times. If the pilot goes well, some grocers are concerned the concept will be rolled out across the entire Whole Foods store base. We’re not ruling out anything when it comes to Amazon—it continues to generate tremendous free cash flow to invest across a plethora of new initiatives.
US trade partners are not happy with the Trump administration after its decision to add steep tariffs to solar panel (TAN) and washing machine imports. China has tabbed the tariffs as “an abuse,” South Korea (EWY) plans to file a complaint with the WTO, and Mexico (EWW) stated its intentions to use all legal means possible to make the US meet its international commitments. Shares of Whirlpool (WHR) and a number of solar firms have benefit from the news as the solar tariffs are not as punitive as some industry observers had anticipated. First Solar (FSLR) has performed remarkably well since we placed a near-$50 fair value estimate on it in April 2017 when the equity was trading below $30. It has now more-than-doubled since then.
In other world news, Bank of America Merrill Lynch thinks world oil (USO, OIL) demand could peak as soon as 2030 due to the rapid uptake of electric vehicles thanks in part to Tesla (TSLA). The bank expects 40% of all car sales to be electric vehicles by 2030. South Korea has taken another shot at the global cryptocurrency markets (XBT, GBTC) as it plans to ban the use of anonymous bank accounts for cryptocurrency trading beginning January 30. This move brings the country, which is believed to be the world’s third largest crypto-trading market, more in-line with financial rules across global markets.
Halliburton (HAL) reported a strong finish to 2017 and issued an optimistic outlook before the open January 22. Earnings leapt nearly 50% on a year-over-year basis as the rebalancing global crude oil market supports increasing activity in North America, where the company generates ~55% of its revenue. Management also noted “positive discussions” with its international customers, a sentiment that was echoed last week by rival Schlumberger (SLB), which expects 2018 to mark the first year of growth in its international operations since 2014. Crude oil prices have been bouncing really nicely of late, too.
Netflix’s (NFLX) results came in after the close January 22, and shares are surging to all-time highs after the company beat consensus estimates for subscription numbers. This leap in share price comes despite expectations for the firm’s spectacular cash BURN to accelerate to $3-$4 billion (free cash flow of negative $3-$4 billion) in 2018 from $2 billion in 2017. As we’ve been saying for some time, it is not a done-deal that Netflix’s business model is scalable, and its net debt position and junk credit rating may come back to bite it, should equity markets come around to the risks embedded in its prevailing price. We think the only thing that will save Netflix’s shares from a collapse is a buyout from another media company, but its $100 billion market cap would make it a huge deal.
Wireless telecom giant Verizon (VZ) reported a strong quarter as it relates to Verizon Wireless customer growth and retention before the open January 23, and management is optimistic on the next-generation network services it plans to roll out in 2018 and beyond. Low-single-digit revenue growth expectations and an estimated $3.5-$4 billion boost to cash flow from operations from tax reform make for a sound outlook for 2018, but investors should note that free cash flow came up short in covering 2017 dividends paid, a consideration that becomes increasingly concerning after considering its massive total debt position of nearly $118 billion. Verizon yields ~4.5% at the time of this writing.
Best Ideas and Dividend Growth Newsletter idea Johnson & Johnson (JNJ) turned in solid quarterly results before the open January 23 as operational sales advanced 9.4% on a year-over-year basis in the quarter thanks to its ‘Pharmaceutical’ segment continuing to drive overall growth. Management expects top-line operational growth to slow to a range of 3.5%-4.5% in 2018, but its adjusted earnings per share guidance of $8.00-$8.20 suggests mid-to-high single digit operational growth from 2017 levels. Johnson & Johnson’s shares are now trading north of $140 each, if you can believe it, and we’re still huge fans of its dividend health. The company boasts a Dividend Cushion ratio of 2.2, with shares yielding ~2.3% at the time of this writing.
Shares of Dividend Growth Newsletter idea Procter & Gamble (PG) faced pressure following its earnings report before the open January 23 despite organic sales growth accelerating to 2% (from 1% in previous quarter) and an increase in fiscal 2018 earnings per share growth guidance to 5%-8% from 5%-7%. Volume grew 2% in the quarter, but the positive impact of sales growth in higher-priced categories was offset by a negative 1 percentage-point impact from pricing. Management was quick to point to strong productivity cost savings–operating margin held solid at 23% in the quarter as 150 basis points of productivity savings, 30 basis points of sales growth leverage, and SG&A efficiencies were offset by commodity cost increases, unfavorable geographic and product mix, unfavorable pricing impacts, and innovation reinvestments–and cash flow–cash from operating activities advanced more than 21% in the first half of the fiscal year. Shares of P&G yield ~3% at the time of this writing.
Consumer staples giant Kimberly-Clark (KMB) also reported before the open January 23, and its ho-hum results were accompanied by a global restructuring initiative and multi-year savings target for its cost savings program as it works to compete more effectively in a challenging market. The programs, which include cutting 12%-13% of its workforce, are expected to generate more than $2 billion in total cost savings over the next four years. The firm anticipates a return to organic sales growth in 2018, as well as double-digit growth in adjusted earnings per share. Shares of Kimberly-Clark yield ~3.4% at the time of this writing.
Just a few more items as we wrap things up in this news-oriented piece. Talk has picked up again about Mattel (MAT) and Hasbro (HAS), and we hope that Hasbro will keep the price in mind, if it does go forward with a buyout. We’re thinking the value of Mattel’s Barbie franchise may be permanently impaired, in part, as the new generation goes for Elsa and Anna Frozen dolls instead. We’re also watching how changes to Facebook’s (FB) news sources may impact revenue performance, but readers shouldn’t forget that Facebook generates revenue from businesses that want to reach consumers, and this won’t change, so the news feature may be more noise than substance. In somewhat of an ironic twist, H&R Block (HRB) is catching a bid after its own results will benefit considerably from tax reform. How about that?
The US government is now back up and running, as if the stock market truly cared. The bulls are running wild on Wall Street! That’s it for now.