Caterpillar’s Fourth-Quarter Performance Is Better Than Feared; Free Cash Flow Significantly Improved
January 27, 2014
Caterpillar released fourth-quarter results Monday, and while the performance was better-than-feared, it still wasn’t pretty. Revenue dropped 10% in the quarter, but management was able to edge out a $0.08 adjusted profit-per-share increase from the same period a year ago thanks to aggressive cost cutting. Still, it wasn’t much to write home about, especially given the sharp drop in sales of new and relatively high-margin machines for mining equipment, which punished full-year results. We think Caterpillar’s dealer network is a significant competitive advantage. The company’s reach is phenomenal, with about 50 dealers in the US and over 140 outside of the US (serving over 180 countries). But near-term trends do not at all look favorable for the firm. Industry surveys
Surveying Fourth Quarter Earnings at Health Care Firms
January 27, 2014
The broader equity markets have been under pressure for much of January, and while it may be tempting to consider completely exiting stock investing for a time, we’re staying the course with both of our actively-managed portfolios. We had been expecting a contraction in price-to-earnings (P/E) multiples across the broader market (see our outlook here), and the performance thus far in 2014 has not been surprising. In case you may have missed it, I sent out some very important thoughts over the weekend to keep in mind as uncertainty and volatility increase through the course of 2014: Stay focused on @Valuentum portfolio holdings (best ideas), #asset allocation (cash) in portfolios and #prudence in allocating new capital. — Brian Nelson, CFA
How the Grammys Can Make You a Better Investor
January 26, 2014
“If you know how each Recording Academy member will vote, it’d be difficult to not pick the Grammy winners. If you know how each investing discipline will vote with their capital to drive the stock up or down, it’d be difficult to not pick stock winners.” I love this time of year. It’s when Valuentum has the greatest opportunity to teach some of its core beliefs in investing. Today, Sunday, January 26, some of us will be tuning in to watch the Grammys, the premier outlet for honoring achievements in the recording arts. What most of us don’t know, however, is that the skills of an onlooker consistently picking the winners of a Grammy are, in substance, similar to the
Valuentum’s Dividend Growth Portfolio Gems Shine Bright
January 25, 2014
We couldn’t be happier with the fundamental performance of two of the larger holdings in the Dividend Growth portfolio. Procter & Gamble (PG) and Microsoft (MSFT) both reported solid fiscal second-quarter earnings (calendar fourth-quarter earnings) this week. Procter & Gamble boasts some of the most-recognized branded consumer packaged goods and holds a significant share position in the markets in which it operates. The company boasts 120+ consecutive years of dividend payments and 55+ consecutive years of dividend increases. Procter & Gamble’s dividend payout is rock-solid, and we were reminded as much when it released fiscal second quarter results Friday. On an adjusted basis, organic growth advanced 3%, leading to a solid currency-neutral, core earnings-per-share advance of 8% during the period,
Starbucks’ Investors Are Forgetting That Coffee Costs Can Go Back Up; Shares Lack Valuation Support
January 24, 2014
Starbucks (SBUX) has one of the strongest and most-recognized brands in the world. We think its brand name is largely responsible for it being able to charge lofty prices on its coffees and drinks, despite significant competition in each of its markets. Starbucks’ fiscal first-quarter results (ending December 29, 2013) reminded us of this solid position, which appears to be nearing impregnability given the strong pace of traffic trends and profit improvements. The coffee giant announced Thursday that it experienced 12% revenue growth during its fiscal first quarter thanks to strong holiday sales and solid store traffic, which drove quarterly revenue to a record $4.2 billion. Even though prices for its beverages are set at premium levels, the firm is
SEC Proposes Barring the Chinese Units of the Big 4 Accounting Firms for 6 Months; A Washington-Beijing Scuffle; Neither Firm-Specific, Nor Is It “New” News
January 24, 2014
On Thursday, Reuters reported that SEC Administrative Law Judge Cameron Elliot believes “Chinese units of the global ‘Big Four’ accounting firms (KPMG, Deloitte & Touche, PricewaterhouseCoopers and Ernst and Young) should be suspended from auditing U.S.-listed companies for six months in an escalation in a long-running dispute over regulators’ access to documents.” Though the accounting firms have indicated that they intend to appeal against the ruling, the article did unnerve investors in many US-listed Chinese stocks, including Baidu (BIDU), which notes Ernst & Young Hua Ming LLP as its principal external auditor. This is not “new” news. Baidu goes to great lengths to highlight this scenario as a risk in its 20-F on page 32, with potential de-listing (not bankruptcy or
Icahn’s In-depth Letter to Apple Still Does Not Remove Time Horizon
January 24, 2014
We believe Apple’s (AAPL) shares have valuation upside (see 16 page report), but as we have outlined before here, activist investor Carl Icahn’s proposal to force Apple to buy back stock over a certain time period (“during fiscal 2014”) as opposed to under a certain price (our fair value estimate) is imprudent. We encourage Icahn to further revise his proposal. Additionally, we think Icahn’s valuation process is too simplistic (see footnote 1), and we encourage him to disclose a more rigorous valuation assessment of the firm that takes long-term forecasts into consideration. Said differently, we’d like him to justify why Apple should trade for 16 times earnings on the basis of Apple’s own financials, not merely use the consensus market multiple for justification.
McDonald’s Operating Income Flat in Fourth Quarter
January 23, 2014
When a firm’s Valuentum Dividend Cushion score starts to fade as McDonald’s (MCD) score did recently, it shouldn’t come as a surprise that the trajectory of its dividend growth will start to fade, too. McDonald’s recently increased its dividend 5%, but payout expansion will become increasingly more difficult if the fast-food giant continues to post results like its fourth-quarter performance, released Thursday. During the period, McDonald’s revealed a global comparable sales decline of 0.1% as a result of a negative comparable guest count and flat consolidated operating income (up 1% excluding currencies). This performance, of course, is not conducive to large future dividend increases. In the US, McDonald’s comparable sales decreased 1.4% in the fourth quarter, as operating income advanced
Our Investment Thesis on Union Pacific Remains on Track; Pricing Growth Strong
January 23, 2014
Must Read: Joint Outlook for the Railroad and Coal Industries Union Pacific (UNP) showed why the company is included in the Best Ideas portfolio when it reported fourth quarter results Thursday. The company’s headline was nice: “Best-Ever Quarterly Results.” That’s saying quite a bit as coal shipments continue to provide stiff headwinds across much of the industry. Norfolk Southern (NSC), for example, recently reported an 8% decline in coal volumes during its fourth quarter, its results released Wednesday. Though revenue carloads of coal declined 10% during Union Pacific’s fourth quarter, strong pricing almost completely offset the weakness in this segment. Average revenue per car across all of Union Pacific jumped 6% in the quarter, far better than inflation. We continue to
United Technologies, Precision Castparts Confirm Aerospace Strength
January 23, 2014
On Wednesday, industrial conglomerate United Technologies (UTX) reported solid fourth-quarter results. During 2013, earnings per share and net income attributable to common shareholders advanced 16% and 17%, respectively, over the prior year period. Though most of it was acquired expansion, sales jumped 9%, while the company’s adjusted segment operating margin increased 90 basis points, to 15.7%. Cash flow from operations came in at $7.5 billion for the year and capital expenditures were $1.7 billion, resulting in free cash flow of $5.8 billion (or 9.3% of sales). We were particularly pleased with CEO Chenevert’s comments about witnessing an acceleration of organic growth throughout the year. Fourth-quarter organic sales growth was 4% (better than the 1% pace recorded for the entire year),
