Top-Weighted Visa Leaps to Mid-$160s, More Earnings Reports

Alphabet (GOOG, GOOGL): Shares of Alphabet, the parent of Google, reported first-quarter performance April 29 that may have revealed weakness in the revenue story at the search giant. The miss was rather large on the top line during the quarter, but we note revenue growth still was a very robust 19% on a constant-currency basis. Embedded in our fair value estimate are expectations for ~15% annual growth over the next five years. We still think that is achievable. Its non-GAAP operating margin in the quarter, excluding a European competition law fine, was 23%, below our five-year average annual forecast in the mid-20s. Free cash flow surged in the quarter, to $7.4 billion, and Alphabet ended the period with $113.5 billion in total cash and marketable securities. We think the market is overreacting to the revenue miss, and while we expect a downward revision to our fair value estimate, we’re not panicking. No change to the Best Ideas Newsletter portfolio. View Alphabet’s stock page >>

Eli Lilly (LLY): Lilly continues to reposition its portfolio, having disposed of Elanco Animal Health and completing the acquisition of Loxo Oncology and its pipeline of medicines. Trulicity was the star drug in the first quarter, results released April 30, with the drug’s revenue advancing 30% on a year-over-year basis, and the pace of expansion was enough to offset steep declines in Cialis, which faced weakness due to generic competition. Taltz, Besaglar and Jardiance also experienced nice growth in the period. On a non-GAAP basis, Eli Lilly is targeting 2019 earnings guidance in the range of $5.60-$5.70 per share, up 3%-5% versus last year’s mark, but revenue guidance for the year was a little light. The company sports a dividend yield 2% and a healthy Dividend Cushion ratio of 2.2 at the time of this writing. View Eli Lilly’s stock page >>

General Electric (GE): General Electric’s equity is back near the $10 per-share mark, as it hopes to put some of its legacy problems behind it. Having shed off most of its financials operations and having doubled-down on energy assets while commodity prices swooned, at the same time it bought back boatloads of stock at elevated prices, a move it must now regret, GE is no longer the company it once was. The company’s first-quarter results, released April 30, showed total revenue falling 2% (industrial segment organic non-GAAP revenue improved 5%), and adjusted GE Industrial free cash flow of -$1.2 billion (negative $1.2 billion) on a non-GAAP basis. We think it will take years for GE to right the ship (it may be too late for this cycle), and when it is all said and done, the company may never return to its glory years. We’ll be watching Industrial free cash flow closely to assess the progress of any turnaround, but the best days are likely behind GE. Nonetheless, the dead-cat bounce continues. View General Electric’s stock page >>

General Motors (GM): General Motors’ shares are cheap, in our view, and we like having some exposure to the automotive sector in the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, even if the business does have cyclical tendencies. GM’s first-quarter results, released April 30, weren’t the greatest as net revenue, auto operating cash flow, and EBIT-adjusted margin all faced pressure on a year-over-year basis. Our thesis on GM is one that is value-based, however. Annualizing first-quarter EPS-diluted-adjusted for the year, one arrives at $5.64 per share. At ~$40 per share, GM is trading at about 7 times this year’s earnings, and that’s based on what we consider to be a conservative annual number. GM expects adjusted-diluted earnings per share in the range of $6.50-$7.00 for this year, and adjusted automotive free cash flow in the range of $4.5-$6 billion. GM’s shares look cheap even for a cyclical industrial with operating leverage. The company sports a dividend yield north of 4%, too. View General Motors’ stock page >>

Ingersoll-Rand (IR): Ingersoll-Rand’s shares are bumping up against all-time highs, and for good reason. The company’s first-quarter results, released April 30, were solid, with both revenue and non-GAAP earnings per share coming in better than expected. During the period, organic revenue advanced 8%, its adjusted operating margin expanded 90 basis points, while adjusted continuing earnings per share leapt 27%. Ingersoll-Rand also raised its full-year 2019 adjusted earnings per share guidance to the high end of its previously-issued range, to $6.35. We love the company, but shares aren’t cheap at current levels, even as we intend to raise our fair value estimate on the news. View Ingersoll-Rand’s stock page >>

Lumber Liquidators (LL): Lumber Liquidators hasn’t quite recovered from the ’60 Minutes’ scandal of years past. Negative publicity and regulatory actions against the firm have soured its prospects. Though Lumber Liquidators’ business is not as strong as it once was, the company remains one of the best examples of the Valuentum Buying Index in action. The stock registered a 1 (the worst rating) in December 2013 when shares were trading north of $104 each (they are in the low teens now). Although key legal issues are now largely behind the firm, the company’s operating loss in its first-quarter performance, released April 30, left much to be desired. We’re not interested in bottom fishing with this name. View Lumber Liquidators’ stock page >>

Mastercard (MA): If it weren’t for Visa (V), we would probably include Mastercard in the Best Ideas Newsletter portfolio. [Visa’s shares are approaching $165, by the way!] MasterCard issued first-quarter results April 30 that showed a beat on the top and bottom lines. Net revenue advanced 13% on a currency-neutral basis, while operating income leapt an impressive 27%. What we like most about Mastercard (and Visa, too) is that they don’t take on credit risk like American Express (AXP) or Discover Financial (DFS), and their operating margins are through the roof. Mastercard’s operating margin came in at 56.9% during the first quarter of 2019. There may not be better businesses out there than Mastercard’s and Visa’s, in our view. View Mastercard’s stock page >>

McDonald’s (MCD): McDonald’s continues to do well. The company’s strategic refranchising initiative is paying off in spades, and it better positions the company against rising labor costs, which will hurt restaurant operators. In its first-quarter report, released April 30, McDonald’s noted that global comparable store sales advanced 5.4%, easily trouncing consensus estimates (US comps also beat expectations). That said, we would have liked to see better performance with respect to consolidated operating income, which increased a modest 3% in constant currencies and diluted earnings per share, which was up only 5% in constant currencies. We expect only a modest increase in our fair value estimate as a result of the report. Shares aren’t cheap. View McDonald’s stock page >>

Merck (MRK): Merck’s first-quarter results, released April 30, were solid, revealing a beat on both the top and bottom lines. Strength in oncology and vaccines drove the top line beat, and the company continues to drive expansion in China. Keytruda was the big revenue driver in the period, with sales jumping 60%, excluding foreign-exchange movements. Gardasil and Proquad, M-M-R II and Varivax, and Bridion also showed a nice pace of sales growth at ~30% each, more than offsetting declines at Zetia/Vytorin, given the loss of market exclusivity. Merck fine-tuned its full-year 2019 non-GAAP earnings per share to be in the range of $4.67-$4.79, the midpoint better than prior expectations. The company yields 2.7% at the time of this writing, and its Dividend Cushion stands at a healthy 1.9. View Merck’s stock page >>

Pfizer (PFE): Consistent with what we’ve been witnessing from other companies in big pharma, Pfizer also put up a nice first-quarter, with beats on both the top and bottom lines. The April 30th report showed revenue up 2%, reported net income up 9%, and adjusted diluted earnings per share up 13%. Biopharma (Eliquis, Ibrance, Prevnar 13/Prevenar 13, and Xelganz) continues to drive the pace of top-line expansion, more than offsetting weakness in its Consumer Healthcare division. The Consumer Healthcare division will be combined with GlaxoSmithKline’s (GSK) consumer healthcare business, and going forward, Pfizer will de-consolidate this segment from reported results, receiving its share of joint-venture earnings and dividends corresponding to its 32% equity stake in the combined entity. Pfizer bumped up its 2019 adjusted diluted earnings per share guidance by a penny, to the range of $2.83-$2.93 per share. Shares yield 3.4% at the time of this writing and sport a Dividend Cushion ratio of 1.8. View Pfizer’s stock page >>

Texas Roadhouse (TXRH): The restaurant probably best known for its rolls with cinnamon honey butter (yum!) put up a difficult first-quarter report April 29, missing on both the top and bottom line. We’re not looking to add shares of Texas Roadhouse to any newsletter portfolio, but the results were enough to get us thinking about profit margins across the restaurant space. CEO Scott Colosi had the following to say in the quarterly press release: “Much of the labor increase was driven by wage rate and other labor inflation that currently does not show signs of abating.” We’ll be watching trends at Dividend Growth Newsletter portfolio holding Cracker Barrel (CBRL) even more closely as a result of the report, but higher labor costs will continue to impact most of the restaurant space. Franchises such as McDonald’s are best positioned. View Texas Roadhouse’s stock page >>

Western Digital (WDC): We’d never add a memory stock to the newsletter portfolios, no matter how attractive their relative valuation measures look compared to the market. The industry is cutthroat and pricing pressures are endemic, a situation that makes predicting even next quarter’s numbers with any sort of reasonable margin of error a fool’s errand. Western Digital’s fiscal third-quarter revenue, report released April 29, cratered 27%, and its gross margin came in a few percentage points lower than expected. Management noted that its “business environment remains soft.” We find equities in the memory space “unownable.” There are so many other better stock ideas out there. View Western Digital’s stock page >>