Brian Nelson

The Transformation of Novartis Continues

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Image Source: Taki Steve Leadership change can often bring a great deal of uncertainty especially when a new leader is replacing a successful CEO. In the case of Novartis, we are witnessing a focused effort to streamline the business: a deliberate attempt to shift focus from a sprawling healthcare enterprise towards a more pure-play pharma/biotech powerhouse with an innovative, cutting-edge product portfolio. By Alexander J. Poulos Key Takeaways We liked that Novartis divested its stake in its healthcare joint-venture with GlaxoSmithKline, and we were very pleased with the large sale price of $13 billion. The cash proceeds will offer increased financial flexibility at Novartis. We’re not completely against the company’s near-$9 billion deal for AveXis, though this, too, had a … Read more

Demand Bouncing Off Multi-Year Bottom at Caterpillar

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Improvement in Caterpillar’s underlying end markets is driving its performance, and management took the opportunity following a solid showing in the first quarter of 2018 to raise its bottom-line guidance for the full year. The market, however, did not look favorably on management’s comments that the first quarter should be expected to be the “high-water mark” for the year in terms of margin performance. We’ve updated our fair value estimate of shares. By Kris Rosemann It may seem like an eternity ago, but as recently as 2016, Caterpillar (CAT) was at the tail end of its only stretch of four years of consecutive annual sales declines in more than 90 years of business. The demand environment for the heavy machinery … Read more

Twitter’s Problems: Slow Growth in the US and Low-ROI for Small Business

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Image Source: Xiaobin Lui We like Twitter’s improved free cash flow generation and net cash position on the balance sheet, but it’s too hard for small businesses to build customer trust on the platform, and the lack of engagement from followers at mom-and-pop businesses is almost hard to believe. It seems like Twitter remains primarily a distribution platform for politicians, the media and celebrities, those already having exposure from other avenues. Small, mom-and-pop businesses – the bread and butter behind future advertising revenue at Twitter – can’t make Twitter work for them as returns on their investment remain minimal, at best. By Brian Nelson, CFA We had warmed up to Twitter (TWTR) in February because we thought the platform may … Read more

We Said Consumer Staples Would Underperform

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Consumer Staples Stocks Underperform — We think investors are wising up to the risks of consumer staples stocks, and increasing risk-free rates seem to already be complicating the investment decision-making process for many investors. Consumer staples equities in the S&P 500 are currently trading at ~19.4 times forward 12-month earnings, well above their sub-17 times 10-year trailing average. We believe investors will continue to swap out of these steady-eddy, but overpriced, gems in the near term, in favor of higher-beta commodity and energy-oriented companies as the market sets up to surge in 2017. We have been warning about the tipping point in Treasury yields and implications on dividend-paying consumer staples equities for some time. – Brian Nelson CFA, December 2016, … Read more

Lockheed’s Shares Still Not Cheap

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Image shown: “Lockheed Martin F-35 Joint Strike Fighter Lightning II test aircraft AA-1 undergoes flight testing over Fort Worth, Texas (source).” We liked Lockheed Martin’s first-quarter 2018 report, and we liked even more that the company raised its full-year outlook for revenue, operating income and earnings per share. Operating cash flow performance was weighed down by pension contributions and backlog didn’t advance in the period, but the backdrop for defense spending remains healthy given ongoing geopolitical tensions. Shares of Lockheed aren’t cheap, however. By Brian Nelson, CFA We were generally pleased with Lockheed Martin’s (LMT) first-quarter 2018 results that showed revenue advancing ~3.8%, and the company leveraging top-line growth into ~20% expansion in business segment operating profit, to $1.31 billion. … Read more

United Tech Ups Guidance; Outlook Bodes Well For Aerospace Supply Chain

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Image Source: hj_west We think activist pressure on United Technologies is unwarranted, and we were highly encouraged by the company’s execution during the first quarter of 2018. Performance at Pratt & Whitney and UTC Aerospace Systems bodes well for the aerospace supply chain. By Brian Nelson, CFA There’s a lot to like about United Technologies (UTX). The company is one of our favorite industrial companies, and we’re probably most fond of its aerospace exposure. We’re against a break-up of the company as we continue to believe United Technologies is on the verge of fantastic top and bottom-line expansion in coming years thanks in part to the burgeoning backlog of unfulfilled deliveries at the airframe makers, Boeing (BA) and Airbus (EADSY). … Read more

Coca-Cola’s Free Cash Flow Generation Could Be Better

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Coca-Cola reported messy first-quarter 2018 results, making an assessment of its underlying free-cash-flow generation paramount. Coverage of cash dividends with free cash flow generation has become rather tight in recent years, and the company’s net debt position isn’t exactly encouraging. Very few companies have the competitive advantages and dividend growth track record of this tried-and-true beverage giant, however. By Brian Nelson, CFA On April 24, beverage giant Coca-Cola (KO) reported non-GAAP organic revenue growth of 5% in its first-quarter 2018 results. The headline number of a 16% decline in net revenue may be disturbing at first glance, but most of the decline came from refranchising/divesting its bottling operations. At the core, concentrate sales growth came in at 4% while price/mix … Read more

Alphabet May Need to Clean Up Its Spending

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Alphabet, the company formerly known as Google, put up decent first-quarter 2018 results with respect to the top line, but the company is facing a rising cost and capital-spending profile. The first quarter could have been a lot better, in our opinion. By Brian Nelson, CFA   On April 23, Alphabet (GOOG, GOOGL) reported relatively disappointing first-quarter 2018 results. Revenue advanced 23% on a constant-currency, year-over-year basis, but operating income increased at a more modest 6.6% pace, as Alphabet’s operating margin dipped 5 percentage points. Google’s advertising revenue did well in the period, and the company even trimmed its “Other Bets” operating loss, but operating income of $8.37 billion wasn’t nearly as good as we would have liked. Traffic acquisition … Read more

Market Not Overreacting to Hasbro’s Miss; Shares Up

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Toy giant Hasbro turned in a poor first-quarter report April 23, but the market is not overreacting as the issues weighing on its performance are largely transient, in our view. By Kris Rosemann Simulated Dividend Growth Newsletter portfolio idea Hasbro’s (HAS) first-quarter 2018 results, released April 23, weren’t great as the liquidation of Toys “R” Us in the US and UK and retail inventory overhang in Europe weighed on its top line. The issues impacting its business are not reflective of the underlying health of the business, in our view, and the market has largely recognized this view, too, with its share price moving meaningfully positive intraday April 23 following a fairly considerable premarket dip. Management continues to expect 2018 … Read more

Incyte’s Ongoing Disappointments and Ultragenyx’s Exciting Development

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The pharma/biotech sector, unlike other mainline industries, is driven by the clinical data readouts on the next-gen molecules in the clinical pipeline. We have witnessed many exaggerated moves with an often-binary outcome on the smaller single molecule entities, but we also have witnessed a negligible impact on the broader, more-diverse industry behemoths. We wanted to touch on a few recent data readouts to illustrate the volatile, risky yet potentially lucrative nature of the industry. By Alexander J. Poulos Key Takeaways The iShares Nasdaq Biotech ETF serves as an excellent proxy for investors to gain broad exposure to a number of biotech equities, but it is not for the faint of heart. Incyte has disappointed on a number of occasions. From … Read more