Brian Nelson

Caterpillar Misses on Both Top and Bottom Lines

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Caterpillar (CAT) has yet to breach the low end of our fair value estimate range, despite releasing a dismal third-quarter report Wednesday. Revenue dropped 18% on a year-over-year basis, while earnings per share tumbled more than 40% (both below consensus expectations). The firm also issued a revised 2013 outlook and now expects sales to be about $55 billion (was $56-$58 billion) with profit per share of $5.50 (was $6.50 per share in the middle of the range). As we outlined after the firm’s second-quarter report, released July 25: It appears that neither Cat nor its dealer network, which plans to reduce inventories even further, expects a robust recovery in demand anytime soon. Though cleaning out channel inventories by under-selling end-user … Read more

Surveying 3Q Performance from the Large Defense Contractors

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Northrop Grumman Executes Nicely in 3Q But Reveals Declining Backlog On Wednesday, Northrop Grumman (NOC) reported strong third-quarter results considering the competing budget priorities in Washington and the subsequent difficult revenue environment. The defense contractor’s revenue dropped 2.6%, as expected, but its segment operating income increased 4.5% thanks to roughly 90 basis points of segment operating margin improvement. Third-quarter diluted earnings per share leapt 17.6%, and free cash flow swelled to $860 million (14.1% of sales), up from $748 million (11.9% of sales). We very much liked the profitability improvements and its increased free-cash-flow conversion during the period, but the firm’s backlog performance in the quarter wasn’t stellar: As of September 30, 2013, total backlog was $37.5 billion compared with … Read more

Evaluating 3Q Results at Panera and Chipotle

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High-flying restaurant peers, Panera (PNRA) and Chipotle (CMG), reported divergent performance in their respective third-quarter results. Though one is a bakery and the other a high-end burrito maker, their comparable growth trajectories make them relevant peers for discussion. Panera’s third-quarter report, released Tuesday, showed relatively strong top-line and bottom-line expansion of 8% and 17%, respectively, but the real issue was with the firm’s fourth-quarter outlook. For starters, the bakery-café cut its fourth-quarter comparable sales growth expectations for company-owned restaurants to the range of flat-to-up-2% versus 3-5% previously. Panera also cut its fourth-quarter earnings-per-share guidance to $1.91-$1.97 per share from $2.05-$2.11 previously on expected margin contraction of more than 100 basis points on a year-over-year basis. Though the new bottom-line outlook … Read more

One of Our Top Housing-Related Ideas Surges

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When we outlined Whirlpool (WHR) as one of our favorite housing-related plays in late May of this year, we thought shares would do well. From the May 29 write-up: “Whirlpool possesses tremendous operating leverage, so a small increase in sales will have a large impact on the bottom line. This aspect of its business model coupled with improving operational performance makes us confident that the appliance pure-play has room to the upside (the high end of our fair value range for Whirlpool is $175 per share).” Recent equity price performance hasn’t disappointed – the firm’s stock has more than doubled the market return since that article was released (14.4% versus 6.2%), as shown below, and Whirlpool’s third-quarter earnings, issued Tuesday, didn’t … Read more

Don’t Take Our Word For It; Ask CEO Reed Hastings; Netflix’s Shares Are Overpriced

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We give Netflix (NFLX) CEO Reed Hastings a lot of credit. Not too many CEOs will go on record saying that its firm’s share price is being supported by “momentum-investor-fueled euphoria,” but he did. Netflix remains one of the most overpriced stocks on the market, in our view. Click here for that list — it’s near the top. Pasted below, please find the most important part of Netflix’s third-quarter shareholder letter (red circle added by us). If you understand anything about Netflix’s stock, it should be this: “In calendar year 2003 we were the highest performing stock on Nasdaq. We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003.” Image Source: Netflix Share Price Performance Today Valuentum’s Take … Read more

Evaluating Third-Quarter Performance of a Few Bellwethers

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DuPont’s 3Q Free Cash Flow Leaves Much to Be Desired DuPont (DD) reported third-quarter results Tuesday that showed revenue advancing 5% (thanks primarily to higher volume growth) and operating earnings of $0.45 per share, a modest bump from the same period a year ago. The standout on the top line was ‘Agriculture’ sales, which jumped 15% thanks to higher insecticide volumes and higher seed prices in Latin America. Excluding its ‘Performance Chemicals’ division, which suffered from price declines for titanium dioxide, refrigerants, and fluropolymers, all operating segments posted increased operating earnings versus last year. DuPont noted that it expects fourth-quarter operating earnings to be up substantially from that of the year-ago period, but it still reiterated its full-year operating earnings … Read more

McDonald’s Underwhelms in 3Q; Outlook Not Mighty

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On Monday, McDonald’s (MCD) posted third-quarter results that left much to be desired. Global comparable sales barely moved higher at 0.9%, while consolidated operating income advanced a modest 6%. Diluted earnings per share increased at a similar pace to $1.52 per share, but the disappointment was certainly from the top line. Comparable stores in the US increased just 0.7% in the third quarter thanks to the popular Monopoly promotion and the new Mighty Wings. We thought the latter would have had a greater impact given the significant recent marketing promotions. Comparable sales in Europe jumped 0.2% thanks to strong performance in the UK and Russia, partially offset by weakness in Germany. Same-store sales in the Asia/Pacific, Middle East and Africa … Read more

Dividend Growth Gem Hasbro Boasts Excellent 3Q

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Hasbro (HAS) posted solid third-quarter revenue and earnings Monday that exceeded consensus expectations. Revenue jumped 2%, while operating profit improved 3% thanks to modest improvement in the firm’s operating margin. Adjusted net earnings of $1.31 per diluted share in the third quarter compares to $1.24 per share generated in the prior-year period, or more than a 5% increase. We were very pleased with management’s comments that brand initiatives are resonating well with consumers and that it has increased its presence in faster-growing geographies. Though performance in the US and Canada continues to languish as a result of weakness in the ‘Boys’ and ‘Preschool’ categories, the firm’s ‘International’ and ‘Entertainment and Licensing’ segments performed wonderfully. Image Source: Hasbro Sales in Europe, … Read more

Third-Quarter Industrial Earnings Support Exposure in Best Ideas Portfolio

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For starters, if you haven’t yet read through our piece on General Electric’s (GE) third-quarter earnings, it’s a must-read. The step-up in backlog and order trends at the industrial behemoth are quite remarkable, and we think GE’s performance bodes well for the sector as a whole. Still, let’s drill down on a few themes across the industrial space and how our Best Ideas portfolio is well-positioned to capture the strength of underlying trends. Danaher (DHR) Danaher reported third-quarter results Thursday that showed revenue expansion of 5.5% and diluted net earnings per share growth of 9%. The company generated 30 basis points of operating-margin improvement and generated more than $800 million in free cash flow, or about 17.8% of revenue (a very … Read more

General Electric Reveals Order Strength; Registers Record Backlog

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General Electric (GE) put up a darling of an order number Friday with its third-quarter financial results. Though revenue and operating income faced pressure during the period due to asset reductions at GE Capital and foreign-exchange headwinds, the industrial conglomerate’s order performance was off the charts: US orders jumped 18%, Europe orders advanced 17%, and growth market orders leapt 22%. Needless to say, the global business environment improved significantly during the third quarter, and we’re not sure the threat of a US government shutdown (and by extension, the shutdown itself) did much to impede the business of global industrial conglomerates. GE’s backlog of equipment and services at the end of the quarter was its highest ever at $229 billion (up … Read more