Image shown: Qualcomm’s chart is looking mighty attractive.
By Brian Nelson, CFA
We continue to like Facebook (FB), PayPal (PYPL) and Apple (AAPL) as ideas in the Best Ideas Newsletter portfolio following their calendar second-quarter 2021 reports, released recently. Vertex Pharma (VRTX) is our favorite way to play emerging CRISPR technologies through its partnership with CRISPR Therapeutics (CRSP), and we were mighty pleased with Dividend Growth Newsletter portfolio holdings Republic Services (RSG) solid 8% dividend increase and Qualcomm’s (QCOM) impressive momentum.
Facebook’s revenue soared 56% in the second quarter, and the company leveraged its operating margin to over 1000 basis points of year-over-year expansion. Both net income and diluted earnings per share more than doubled at the social media giant during the period. The company has generated $16.6 billion in free cash flow during the first half of 2021, and it ended June with $64+ billion in cash and cash equivalents.
We’re sticking with our recently raised $515 per share fair value estimate of Facebook. Please note that our valuation model has been updated following the quarterly report and now includes rolled-forward 2020 historicals, as well as updated forecasts for the coming years. In our view, the sell-off following the quarterly report has to do with concerns over expectations of Facebook’s potentially slowing revenue growth in coming periods, but these views are overblown, and in our view, more than factored in.
Our five-year look-forward build of Facebook’s top-line growth, for example, is as follows: 34.8% (2021), 18% (2022), 15% (2023), 13.5% (2024), and 12% (2025) – note the slowing pace of expansion. It is these very assumptions, in part, that drive our $515 per share fair value estimate of the company. Investors should not be expecting accelerated revenue growth at Facebook at all. Facebook’s post-quarterly report can be downloaded here (pdf), and the data in the table on its stock web page will be refreshed this weekend.
PayPal’s second-quarter 2021 report was fine, from our perspective. Total payment volume grew an impressive 40% (36% on an FX-neutral basis), helping drive 19% net revenue expansion (17% on an FX-neutral basis). Non-GAAP earnings per share of $1.15 was better than the $1.07 mark achieved in the second quarter of 2020. The company reaffirmed its 2021 outlook for net revenue growth of ~18.5% on a FX-neutral basis and non-GAAP earnings per share to grow ~21%, to ~$4.70. Our top- and bottom-line forecasts for 2021 are roughly in-line with guidance, and our $304 per-share fair value estimate of PayPal remains unchanged. Shares sold off to ~$283 on the report as the market had been expecting a guidance raise, but the company’s long-term outlook remains bright.
It was hard for us to find much wrong with Apple’s calendar second-quarter (fiscal third-quarter) report either. The iPhone maker posted revenue growth of 36% in the period and quarterly earnings per share of $1.30, both better than consensus forecasts. We recently updated our report for Apple, and our estimate of its intrinsic value now stands at $150 per share. Shares of Apple closed at $145 each at the end of the trading session July 29. As with Microsoft (MSFT), Apple may be one of the best dividend growth stocks in the coming decades.
Apple’s CFO Luca Maestri had the following to say about the quarterly report: “Our record June quarter operating performance included new revenue records in each of our geographic segments, double-digit growth in each of our product categories, and a new all-time high for our installed base of active devices. We generated $21 billion of operating cash flow, returned nearly $29 billion to our shareholders during the quarter, and continued to make significant investments across our business to support our long-term growth plans.”
Vertex Pharma’s second-quarter report, released after the market close July 29, was solid, and the company raised its full-year 2021 guidance for product revenues to the range of $7.2-$7.4 billion. Its cystic fibrosis franchise continues to help those battling the disease, and its pipeline programs continue to advance, despite recent setbacks. Management noted that it has five programs in mid- or late-stage clinical trials, and we’re excited to hear about new developments that are on the horizon in the next 12 months or so. Vertex Pharma is our key biotech exposure in the Best Ideas Newsletter portfolio, and we’re excited about its partnership with CRISPR Therapeutics.
One of our favorite garbage haulers Republic Services also had a nice second-quarter report, with results released after the market close July 29. The company beat top-line and bottom-line expectations, and it raised its full-year adjusted earnings per share guidance to the range of $4.00-$4.05, up from $3.74-$3.79 previously, and its full-year adjusted free cash flow guidance to the range of $1.45-$1.475 billion, up from $1.35-$1.4 billion previously. Management upped the dividend payout to $0.46 per share on a quarterly basis, which reflects an 8% leap and a forward yield of ~1.6%.
On July 28, Dividend Growth Newsletter portfolio holding Qualcomm also reported excellent numbers, and its chart is looking mighty attractive. During the calendar second quarter (third fiscal quarter), the company registered revenue growth of ~65% and diluted earnings per share expansion of 139%, with management noting that it is “seeing unprecedented demand for (its) technologies as the pace of digital transformation accelerates.” Qualcomm has an impressive 3.4 Dividend Cushion ratio as it yields ~1.9%. Its better-than-expected outlook for the third calendar quarter (fourth fiscal quarter) has sent shares soaring.
Thus far, second-quarter earnings season has been solid. Investors may be looking to take some profits, but we believe they’ll likely be buying back their favorite ideas toward the back half of the year. The market continues to be a bit cautious on tech in light of growing regulatory concerns in China, and inflationary pressures may temporarily hurt some within the consumer staples arena, but we’re not reading too much into either of these concerns. We maintain our very bullish take on the markets, and we believe that the newsletter portfolios are very well positioned for the ongoing bull market.
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Image Source: Value Trap
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, and IWM. Brian Nelson’s household owns shares in HON, DIS, HAS. Valuentum owns shares in VOO, SCHG, DIA, and QQQ. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.