Image source: Visa

Let’s have a look at the quarterly reports from a few stocks in the news July 21.

By Brian Nelson, CFA

Visa’s (V) Margin Profile Remains Excellent

Top-weighted position in the Best Ideas Newsletter portfolio is approaching the “century mark” after reporting solid fiscal third-quarter results July 20. Visa’s net operating revenue advanced 26% on a year-over-year basis in the quarter thanks in part to the inclusion of Visa Europe, and the company recorded GAAP net income of $2.1 billion, or $0.86 per share, better than consensus expectations. Visa CEO Alfred Kelly noted that performance reflected “strong growth in payments volume, cross-border volume, and processed transactions, which were powered by economic tailwinds in the US and globally.”

We love Visa’s network-effect competitive advantage, its lofty operating margins (annual operating margins in the mid-60s), and that it takes on no credit risk, unlike a couple of its rivals. Net cash provided by operating activities ($6.4 billion) has more than doubled during the nine months ended June 30, 2017, versus the same period last year ($3.12 billion), while capital-spending remains subdued, running at $512 million so far this fiscal year. Visa does have a net debt position on the balance sheet, but there are few companies that have better business models tied to long-term secular trends (a cashless society). Though we could trim the weighting in Visa in the Best Ideas Newsletter portfolio (given how it has grown), we’re still big fans of shares.

To access Visa’s stock page: https://www.valuentum.com/search2?searchtext=v&searchtype=symbol

Microsoft’s (MSFT) Free Cash Flow Surges

Dividend Growth Newsletter portfolio holding Microsoft reported solid fiscal fourth quarter results July 20. The company that recently acquired LinkedIn remains a compelling long-term dividend growth idea, in our view, and we continue to be huge fans of both its balance-sheet strength and free cash flow generation, two dynamics that only serve to strengthen its dividend profile. On a GAAP basis, revenue advanced 13%, while net income more than doubled in the period. On a non-GAAP basis, diluted earnings per share increased more than 40%, to $0.98 per share, up from $0.69 per share in the year-ago period. CEO Satya Nadella was very pleased with the company’s “innovation across (its) cloud platforms,” and impressively, the company noted that it delivered “30% growth in commercial bookings” in the most recently-reported quarter.

At the end of June 2017, Microsoft’s total cash and short-term investments totaled ~$133 billion against a long-term debt load of ~$86.2 billion, revealing a significant net cash position on the books. Free cash flow generation during the 12-months ending June 20, 2017, was $31.4 billion versus $25 billion during the same period last year. All the improvement in free cash flow performance was a result of higher operating cash flow generation, music to our ears as it speaks of high quality and continued investment in the business. All in, we continue to like the fundamental strength of Microsoft’s business model, the company’s fortress-like balance sheet, and its ability to drive high quality free cash flow generation via improved operating performance. Microsoft’s free cash flow generation during fiscal 2017 covered cash dividends paid 2.65 times.

To access Microsoft’s stock page: https://www.valuentum.com/search2?q=msft&searchtype=symbol&btn=Search

General Electric (GE) Stumbles Again

General Electric’s fundamental outlook has deteriorated substantially in light of the company’s recent moves to shed its financial operations (and SIFI designation) while simultaneously doubling-down on energy exposure. We originally liked the idea of GE shedding some of its financial assets (and still do), as the Financial Crisis showed what sort of damage widespread financial assets could wield on even the strongest operating entities, with the company cutting its dividend payout during the depths of the last recession. However, GE has now become a victim of bad timing, with its pursuits of energy assets, Alstom and the tie-up with Baker Hughes (BHGE), given that energy-resource prices continue to be under sustained selling pressure. Meanwhile, financial assets have started to come back into favor.

We removed General Electric from the newsletter portfolios some time ago, given our updated analysis that suggested the company’s free cash flow generation will be quite tight with respect to the coverage of expected cash dividends paid in coming years. We wrote a note here on that particular topic, and while we said that we still very much like the strength of GE’s industrial assets, we just demanded a bit more with respect to its financial profile when it comes to a dividend payer that income investors are counting on. GE’s second-quarter results, released July 21, came in slightly better than consensus expectations on the top and bottom line, but outgoing CEO Jeff Immelt’s comments that, “given (its) outlook on oil and gas, (GE) is trending to the bottom end of the range of $1.60-$1.70 EPS for the year,” the report wasn’t welcomed by the market at all.

New incoming CEO John Flannery will have its work cut out for him, and we expect he might reset Street expectations even lower as he begins his tenure, and that may even be a potential cut to the dividend. Unlike many other household names and strong brands, GE doesn’t have a consecutive dividend growth track record to preserve, and therefore, the board may be more open to evaluating capital allocation policies than in the case of other companies that may have been raising their dividends each annum for the past 20, 30, or more years. A dividend cut could free up cash to work on deleveraging GE’s balance sheet, which could have been accomplished instead of the massive share buybacks recently (which have indirectly added incremental leverage to the entity).

To access GE’s stock page: https://www.valuentum.com/search2?q=ge&searchtype=symbol&btn=Search