Brian Nelson

Evaluating the Outlook for Defense Stocks

by

The defense industry is home to a number of large defense contractors—General Dynamics (GD), Lockheed Martin (LMT), Northrop Grumman (NOC) and Raytheon (RTN)—that have significant project/intellectual know-how, long-term customer/government ties, and widespread integration expertise that cannot be easily replicated by many smaller contractors. This gives established, large defense contractors a leg up on bidding for new government contracts and optimizing the margin profile for many through cost cutting and productivity enhancements. Still, competing budget priorities within the overall US budget and within the US defense budget itself will pose both challenges and opportunities for much of the group. However, long-term cybersecurity and national security risks aren’t going away, and this will ensure that the group has a steady share of … Read more

Sign of the Times: Facebook Soars, Yahoo Sours

by

On January 29, Facebook (FB) kept the fundamental momentum going in its operations. The social media giant announced impressive fourth-quarter results, revealing that revenue jumped 63% (see image below) thanks to a 76% increase in revenue from advertising. Facebook indicated that mobile advertising revenue now represents more than half of advertising revenue compared to less than 25% in the same period a year ago. Income from operations nearly doubled in the period, to $1.13 billion, as the firm’s GAAP operating margin leapt 11 percentage points, to 44%. GAAP net income advanced to $523 million, compared to $64 million in the fourth quarter of 2012. Diluted earnings per share came in at $0.20 per share in the quarter, up from $0.03 … Read more

Boeing’s Fourth-Quarter Results Were Disappointing But We’re Not Worried about the Strength of Commercial Aerospace

by

On Wednesday, aerospace and defense bellwether Boeing (BA) reported relatively disappointing fourth-quarter results. Revenue advanced 7% in the period, but core operating earnings were flat versus the prior-year quarter due to a 50 basis-point headwind in its core operating margin. Our experience with Boeing is that the firm tends to face share-price pressure when financing or emerging-market scares become prominent, the latter taking center stage in recent days—the Argentine peso collapsed and the South African rand continues to face pressure due to an unexpected rate hike. News about China—including a slowdown in manufacturing, banking concerns, and a sizzling (but more vulnerable) real estate market—isn’t helping either. Boeing is more exposed to these “news” items than most companies, particularly given the … Read more

Surveying the Outlooks of a Few Industrial Companies

by

We wanted to highlight the performance of a few industrial firms, which as the backbone of the global economy, are often used as a barometer for the trajectory of future business activity. Industrial gas company Air Products (APD), chemical bellwether DuPont (DD), diversified industrial giant Danaher (DHR), and industrial equipment maker Illinois Tool Works (ITW) all reported earnings recently. Let’s take a look at their respective outlooks for 2014. Air Products (APD) Expects Momentum to Pick Up in Second Half Looking ahead, (chairman, president and CEO) McGlade said, “We still see greater momentum in the second half of the year. Full year performance remains on track and we expect to drive earnings growth by continuing to focus on our priorities — improved asset utilization, … Read more

Housing Remains Resilient; D.R. Horton Says Has “Pricing Power”

by

On Tuesday, the US’ largest homebuilder, as measured by number of homes closed, revenue and pre-tax income, reported solid fiscal 2014 first-quarter results, lifting spirits across much of the industry. D.R. Horton’s (DHI) homebuilding revenue leapt 33% thanks primarily to a 19% increase in homes closed in the quarter and an average sales price increase of 10%, to $275,600. Home sales gross margin advanced 350 basis points, to 22.3%, helping drive a 76% increase in pre-tax income for the period. The company’s diluted earnings per share increased 80%, to $0.36. The pace of orders was also robust, jumping 14% in value to $1.5 billion and 4% in homes to 5,454. D.R. Horton’s sales order backlog also swelled 20% in value to … Read more

Ford’s Pension Under-fundedness Under Control; Magnitude of Stock Price Multiple Discount Unwarranted Even After Considering Operational (cyclicality) and Financial (Ford Motor Credit) Risks

by

Executive Summary: Ford has been a solid performer in the portfolio of the Best Ideas Newsletter. Though 2014 may not be its best year, we think the best times at the company are still ahead of it. A sub-10 trailing earnings multiple is too harsh, even after considering operational (cyclicality) and financial (Ford Motor Credit) risks. We couldn’t be happier with Ford’s (F) performance during 2013, results released January 28. Full-year 2013 pre-tax profit of $8.6 billion advanced more than $600 million from the mark in the same period a year ago and represented one of Ford’s best years ever. The company’s full-year earnings per share of $1.62, which jumped $0.21 from the same period last year, implies a trailing … Read more

5 Steps to Understand Why Apple Is Cheap; Shares Continue to Be Unfairly Weighed Down By ‘Palm Pilot’, Moto Razr” and “Blackberry’ Memories”

by

Executive Summary: For Apple to be fairly valued at its after-hours price, normalized earnings per share would have to be assumed to be about $20 per annum, half of Apple’s current annual earnings of $40+ per share. We think normalized earnings at the iPad maker are much higher than what the market is giving it credit for, especially considering the promising ideas in its product pipeline. We’ve raised our fair value estimate of Apple to $680 per share thanks to the time value associated with rolling our model one year forward, offset in part by a slightly lower growth trajectory following fiscal 2014 first quarter results (ending December 28, 2013). We continue to like shares, which are currently trading at just … Read more

Caterpillar’s Fourth-Quarter Performance Is Better Than Feared; Free Cash Flow Significantly Improved

by

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 … Read more

Surveying Fourth Quarter Earnings at Health Care Firms

by

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 … Read more

How the Grammys Can Make You a Better Investor

by

“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 … Read more