Valuentum Exclusive Analysis for the Discerning Investor

Symbol Keyword

Image Source: Valuentum

By Brian Nelson, CFA

Pantry stuffing was prevalent during the second quarter, and mall-based retail is holding up better than some had expected. Cloud-based services companies continue to experience breakneck growth, and medical procedure volumes are picking up as we learn more and more about COVID-19.

NetApp, Inc.

NetApp (NTAP) is another one for your radar. According to the firm’s recent 10-K Filing, NetApp is a leader in hybrid cloud data services. The company helps its “customers ensure their data and applications are in the right place at the right time with the right characteristics and capabilities to enable new insights and accelerate innovation.” The cloud space continues to be in favor by investors.

NetApp reported its first quarter of 2021 August 26, and the results were a sight to see. The company’s public cloud services annualized recurring revenue advanced 192%, while its all-flash array annualized net revenue run rate increased 32%. These are fantastic growth rates under any economic conditions, and CEO George Hurian had the following to say in the press release:

We executed well in the first quarter. Revenue, operating margin and EPS all exceeded our guidance, despite a challenging environment. Enterprises are increasingly prioritizing transformational and hybrid cloud projects, which drove our momentum as customers turn to NetApp to help them achieve these goals. We are building on a strong foundation of industry-leading data-centric software innovation, trusted customer relationships and an open-ecosystem approach that is strengthened by partnerships with the leading public cloud companies who endorse our Data Fabric Strategy. NetApp is uniquely positioned to help our customers unlock the best of cloud.

Looking ahead to the second quarter of its fiscal 2021, NetApp expects net revenue to be in the range of $1.225-$1.375 billion and non-GAAP earnings per share in the range of $0.66-$0.74. Shares haven’t done much year-to-date, falling more than 30%. The pop in the stock after earnings may be the catalyst to get shares back on track, however. NetApp doesn’t make the cut for addition to the newsletter portfolios, but we’re watching it very closely.

Urban Outfitters, Inc.

The worst may be behind Urban Outfitters (URBN) if its price chart has something to say about it. Through the time of this writing (August 27), the stock is up nearly 30% on the week, and while we are generally staying far away from retail and mall-based retail, in particular, we're still paying very close attention to developments. The owner of brands such as Anthropologie, BHLDN, Free People, Terrain, and its namesake said that its digital channel helped to mitigate some of the sales pressure from temporary store closings during its second quarter, report released August 25, and that “all brands were profitable” as it enters “the fall selling season with lean inventories and positive momentum.” You’re likely not going to find us adding any mall-based retailer to the newsletter portfolios anytime soon, but the performance at Urban Outfitters indicated that digital may be most of the industry’s “saving grace” if the group can capture demand from the channel.

Hewlett Packard Enterprise Company

With high-flyers such as Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), and beyond, there’s probably not much room in any portfolio for Hewlett Packard Enterprise Company (HPE), which was spun off from Hewlett-Packard Company in November 2015. We can tell you up front that we’re not interested in the name, but we’re still paying close attention to “old tech,” including the likes of IBM (IBM) and Blackberry (BB), which we hardly hear of anymore given Apple’s dominance in the smartphone arena.

HPE’s fiscal third-quarter report, ended July 31, was actually decent, however. Revenue advanced 14% on a sequential basis and gross profit was up 8% sequentially, but despite the top-line resilience, GAAP earnings were meager at a penny per share in the period. Still, free cash flow of $924 million advanced 43% from the prior-year period, and we’d be remiss if we didn’t tell you about it. The company is targeting a GAAP net loss per share of $0.35-$0.31 for fiscal 2020, and we just don’t see the name fitting anywhere in the newsletter portfolios.

J.M. Smucker Company

The J.M. Smucker Company (SJM), which makes the iconic brands of Folgers, Jif, Uncrustables, and Milk-Bone, along with its namesake, experienced a nice bump in demand during its first quarter of fiscal 2021, results released August 25. Net sales advanced 11% in the period thanks to pantry stuffing by consumers during the COVID-19 pandemic, helping to propel free cash flow significantly higher in the period, to $332.4 million (up from $148.5 million in the year-ago period). Here’s what CEO Mark Smucker had to say:

Our first quarter results exceeded our expectations, particularly for the coffee and consumer foods portfolios. Consumers continued to seek out trusted and iconic brands as we achieved strong growth across nearly all our categories. This exceptional performance highlights the strength of our portfolio, the potential of our consumer-centric growth strategy, and our commitment to operate with financial discipline. We expect continued momentum in the second quarter and are pleased to raise our full-year guidance. We remain confident in our ability to deliver on our fiscal year 2021 goals, advance our long-term strategy, and deliver increased shareholder value.

Looking ahead to fiscal 2021, the company’s net sales are expected to advance marginally, as opposed to previous expectations calling for a modest decline. Free cash flow is also expected to be higher than prior expectations during the fiscal year, with management calling for the measure to be in the range of $925-$975 million, up from $900-$950 million previously. Adjusted earnings per share guidance for fiscal 2021 was also markedly increased (now $8.20-$8.60, was $7.90-$8.30).

Medtronic plc

Medtronic (MDT) is facing a number of headwinds as hospitals defer discretionary surgeries amid the COVID-19 pandemic, but this dynamic is also generating increased pent-up demand. CEO Geoff Martha noted the following conditions in the company’s fiscal first-quarter 2021 results, released August 25:

We reported solid improvement from last quarter, and our results reflect a faster than expected recovery from the depths of the pandemic we saw back in April. Procedure volumes began to recover around the world, and we’re leveraging our pipeline of innovative products to drive share gains in a number of key businesses.

Medtronic didn’t provide financial guidance as uncertainty related to the COVID-19 pandemic remains, but we still like the name a lot. The company’s share price is bumping up against the high end of our fair value estimate range at the time of this writing, but investors can do a lot worse than being a shareholder of Medtronic. It last raised its dividend by 7%+ in May, and its dividend metrics remain healthy.

-----

Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.

Brian Nelson owns shares in SPY and SCHG. 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.