Berkshire’s Buybacks, More Earnings Reports
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In alphabetical order by ticker symbol: ANET, ATVI, BRK.B, CHD, DWDP, DNKN, GILD, HBI, K, TEVA
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Arista Networks (ANET): Arista reported a solid first-quarter report May 2, but its outlook for the second quarter left something to be desired. The cloud networking company could offer a hint to what to expect from Cisco (CSCO) when it reports in the coming week or so. Arista’s revenue during the first quarter was fine, jumping 26%, and earnings per share also handily beat, but top-line guidance for the second quarter came in at $600-$610 million, below consensus forecasts. It’s still early in the year to jump to any conclusions, but investors in Cisco should perhaps set expectations a bit lower given rival Arista’s outlook. View Arista’s stock page >>
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Activision Blizzard (ATVI): Activision’s share price has faced significant pressure since it peaked in the Fall season of last year. The company, probably best know for its Call of Duty and World of Warcraft franchises, noted in its first-quarter report, released May 2, that it “outperformed (its) first-quarter outlook,” but net bookings of $1.26 billion came in below the $1.38 billion from the year prior. For all of 2019, Activision expects net bookings to come in at $6.3 billion, this, too, below consensus expectations of $6.4 billion. Activision will continue to be a hit-or-miss play on consumer entertainment and gaming, and because of this, shares will always remain speculative. Our fair value estimate stands at $59 per share. View Activision’s stock page >>
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Berkshire Hathaway (BRK.B): Warren Buffett’s company remains one of our favorites so long as he is at the helm. The Oracle (88 years old) and Charlie Munger (95) were themselves last weekend at the Berkshire annual meeting. We’re okay with Berkshire taking a stab in Amazon (we value shares north of where they are currently trading), and Berkshire’s involvement in the Occidental (OXY) deal looks to be quite lucrative given the yield on the preferred stock. Berkshire bought back $1.7 billion of stock during the first quarter, more than the $1.3 billion in all of last year. Buffett’s value principles dictate to buy shares when the stock is undervalued, a move that benefits continuing shareholders. Berkshire remains one of the top-weighted ideas in the Best Ideas Newsletter portfolio. View our three-part write-up on Berkshire’s 2018 Shareholder Letter >>
Church & Dwight (CHD): Church & Dwight is yet another consumer staples entity with a net debt position that is trading at nosebleed multiples. The company’s first-quarter report, released May 2, was solid, and there was nothing wrong with its fiscal 2019 guidance calling for revenue to advance 5%-6% and earnings per share to come in at $2.26-$2.28. The issue is that, even at the high end of that bottom-line range, the company’s shares are trading at more than 30 times current-year numbers, with meaningful net debt on the books. The company’s dividend remains solid, boasting a yield 1.2% and a Dividend Cushion ratio of 2.3, but shares aren’t cheap. View Church & Dwight’s stock page >>
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DowDuPont (DWDP): The combined entity from the merger of DuPont and Dow Chemical has seen better days. Shares have been under pressure for some time now, and the company’s first-quarter results, released May 2, didn’t give us much confidence that things are getting back on track. Net sales dropped 9% versus the year-ago period, while adjusted earnings per share also declined. GAAP earnings per share was more than halved from last year’s quarter. Management pointed to “unprecedented bad weather, margin compression in key value chains, and sluggish auto and smartphone market conditions.” We think there is more at work than meets the eye. We’re staying on the sidelines. View DowDuPont’s stock page >>
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Dunkin’ Brands (DNKN): The parent company of Dunkin’ Donuts is doing a lot of things right. We like its mostly-franchised business model that positions it well from rising labor costs. During the first quarter, revenue advanced nearly 6%, while adjusted diluted earnings per share grew more than 8%, to $0.67 per share. Its adjusted operating income margin advanced roughly 150 basis points from the year-ago period. For 2019, the company is expecting low-single-digit comp growth for Dunkin’ US and Baskin-Robbins US, and it expects to add between 200-250 net new Dunkin’ units. Diluted adjusted earnings per share is still targeted at $2.94-$2.99 for the year. View Dunkin’ Brands’ stock page >>
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Gilead Sciences (GILD): The company that cured HCV is still feeling the impact of its success. Developing a cure for a disease inevitably truncates the long-term revenue stream, and Gilead is now more dependent on its pipeline than ever before. The acquisition of Kite Pharma should help, and the company’s reported numbers are starting to improve. Gilead’s first-quarter report, released May 2, showed revenue advancing to $5.3 billion (versus $5.1 billion in the year-ago period) and non-GAAP diluted earnings per share coming in at $1.76 versus $1.48 per share last year. HIV sales continue to be driven by Biktarvy, and 2019 guidance was reiterated. Gilead is no longer a part of the newsletter portfolios. View Gilead’s stock page >>
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Hanesbrands (HBI): Hanesbrands’ stock looked mighty cheap during the doldrums of the market sell off in December 2018, and it has come rallying back toward our fair value estimate. Though we expect modest upside from here, we’re not looking back at this former newsletter portfolio holding. Its ~3.3% dividend yield isn’t supported by a lofty Dividend Cushion ratio, and its net debt position is just not comforting, especially given the company’s languishing competitive position in apparel. Hanesbrands did see some life from its Champion brand during the first quarter, results released May 2, but the brand is “tired,” in our view. Our fair value estimate stands at $21 per share, nonetheless. View Hanesbrands’ stock page >>
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Kellogg (K): Kellogg continues to work to right the ship, and while its forward earnings multiple may not be as lofty as some of its consumer-staples peers, it still retains a massive net debt position. The company is targeting net sales to advance 1%-2% during 2019, but adjusted earnings per share to decline more than 10% as a result of its divestiture plans (it is selling its cookies, pie crusts, ice cream cones and fruit snack businesses). Higher factory costs, increased input-cost inflation and costs to offer alternative pack formats are eating heavily into profits, with currency-neutral adjusted operating profit falling 4.6% during its first quarter results, released May 2, despite adjusted currency-neutral revenue growing more than 7%. We view shares of Kellogg as fairly valued at the time of this writing. View Kellogg’s stock page >>
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Teva Pharmaceutical (TEVA): Teva continues to be at the mercy of performance of its key drug Copaxone, which is now succumbing to generic competition. We gave management the benefit of the doubt years ago that it would be able to defend this franchise, but the executive team has let us down. Meanwhile, generic price-fixing allegations remain in the news, and any sort of outcome with respect to this investigation is nearly impossible to handicap, creating even further overhang on the stock. The company reiterated its 2019 bottom-line guidance in the range of $2.20-$2.50 per share, but we wouldn’t call shares cheap, given ongoing erosion of Copaxone-related profits in coming years. View Teva’s stock page >>
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.