We couldn’t be more pleased with Facebook’s first-quarter 2018 results, and we are reiterating our ~$240 per-share fair value estimate on the company. We’re also adding Chipotle as an idea to the simulated Best Ideas Newsletter portfolio, and we’re putting three other speculative considerations on your radar.
By Brian Nelson, CFA
Facebook (FB) seems to be back in the driver’s seat. We never thought it was out of the race, but many may have thought the negative press would do its shares in … permanently. Not the case. Facebook’s first-quarter 2018 results were fantastic, adding to other strong reports from core simulated Best Ideas Newsletter portfolio ideas, “A Trifecta of Good Reports: Visa, Facebook, PayPal.” Shares of Facebook still look mighty cheap, and now they have the wind of the market back in their sails. We’re calling Facebook a Valuentum stock, if it wasn’t already. It is among the top-weighted ideas in the simulated Best Ideas Newsletter portfolio. Facebook now registers a 10 on the Valuentum Buying Index!
We’re adding Chipotle (CMG) to the simulated Best Ideas Newsletter portfolio on strength following its first-quarter 2018 report. We think the restaurant chain is back on track, and with new leadership at the top, we expect a number of initiatives (some yet to be announced), not the least of which is the possibility for breakfast, to drive the company to new heights. New Chipotle CEO Brian Niccol, who came over from Yum! Brands’ (YUM) Taco Bell is the person for the job, and we can’t rule out pricing support from the possibility of private-equity interest. Many established, but still-growing restaurant chains are off the public markets, namely the buyout of Panera Bread and the purchase of Buffalo Wild Wings, and we think private equity could possibly take a stab at Chipotle in coming years. We think a starter position in the 1.5-2.5% range for the simulated Best Ideas Newsletter makes sense. We’ve raised our fair value estimate of Chipotle to $453 per share from $372 per share previously.
We’re putting three speculative ideas on your radar, too. We’re not adding them to the simulated newsletter portfolios, but they have been up-and-coming on our watch list. The first is Boston Beer (SAM), which has faced an onslaught of new competition from a surge in craft breweries in the US and larger macro brews scooping up smaller craft breweries and flooding retailers’ shelves with new selections. We don’t think competition will let up anytime soon, but we do think that the Better Beer category, which includes craft beer, is one with tremendous long-term potential, despite slowing growth rates more recently. Boston Beer’s equity is still quite pricey as shares may have a buyout premium embedded within them, but we’re warming up to the company’s fundamentals, which may have hit an inflection point.
The second speculative idea that we’re putting on your radar is Churchill Downs (CHDN). We can’t seem to figure this one out. The company bought and sold Big Fish Games over the course of a couple years, revealing perhaps a misfiring in strategic direction, but its move to acquire more and more casinos to diversify its thoroughbred racing operations continues to pay off. During its first quarter of 2018, for example, net revenue advanced 13% on a year-over-year basis, while adjusted earnings per share came in at $1.09. Adjusted EBITDA advanced 36%, to $49.2 million in the quarter, with almost all of it coming from its casino businesses, $44.3 million, making it almost a pure-play casino operator these days. Shares aren’t cheap trading at ~20x enterprise value-to-EBITDA and 20x+ consensus adjusted earnings per share for 2019, but the market seems to love its shares these days.
We also wanted to get Advanced Micro Devices (AMD) on your radar. We continue to prefer Intel (INTC), of course, but we value shares of AMD at ~$13 each, revealing some modest upside potential for an equity in an overpriced stock market. AMD’s first-quarter revenue advanced a whopping 40% on a year-over-year basis, while its operating income increased $109 million, to $120 million in the quarter. First-quarter earnings per share also swung into positive territory for the period, coming in at $0.08, all measures on a GAAP basis. Management spoke very positively about gaming and datacenter adoption, too, and the executive suite seems excited about plans for sustainable revenue growth and profitability.
If you’re looking for more background on what’s been working and what hasn’t been working so far in 2018, please have a look at Valuentum’s Head of Data Kris Rosemann’s latest write up, “What’s Working (or NOT Working) in Today’s Market?” We’ve been expecting commodity prices to bounce back after years of pain, and it should be no surprise to anyone that REITs, master limited partnerships (MLPs), consumer staples, and other interest-rate-sensitive equities are leading the fall. Income investors should continue to keep their guards up in any rising interest-rate environment.
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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.