Cisco Delivers, Deere Disappoints, Pinterest Plummets, More Reports
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In alphabetical order by ticker symbol: AMAT, BIDU, CSCO, DE, FLO, INTC, JACK, PINS, WMT
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Applied Materials (AMAT): Applied Materials reported better-than-expected second-quarter fiscal 2019 results May 16, but the headline print wasn’t that exciting. Revenue dropped 23%, its operating margin gave back 6.3 percentage points, and diluted earnings per share dropped 34%, but the results were “toward the top-end of (its) guidance range, reflecting solid execution across the company in a business environment that remains challenging.” The chip-maker’s risk profile is too high for our taste, and we just have a hard time getting comfortable with the instability of operating results. We value shares of Applied Materials at $48 each, and its Dividend Cushion ratio stands at a very healthy 3.6 (~2% dividend yield). Given the fast-changing dynamics of the chip sector and weakening underlying fundamentals, the stock just doesn’t fit well in any newsletter portfolio, however. View Applied Materials’ stock page >>
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Baidu (BIDU): One would have thought we’d see a strong report from Baidu on the heels of solid reports from Alibaba (BABA) and JD.com (JD), but that wasn’t the case. The company’s first-quarter 2019 results, released May 16, came in lower-than-expected, and management noted that it expects “online marketing in the near term to face a challenging environment.” Despite the 15% year-over-year revenue growth in the quarter (20%+ excluding the impact of announced divestitures), operating income swung to a RMB 936 million loss from a RMB 4,568 million gain as content costs, traffic acquisition costs, bandwidth costs, SG&A, and R&D each soared in excess of the pace of revenue expansion. Not only are profits facing pressure, but management guided second-quarter revenue to just 1%-6% year-over-year growth, excluding divested revenue. We expect to lower our fair value estimate on the news. View Baidu’s stock page >>
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Cisco (CSCO): Cisco reported a fine fiscal third-quarter report May 15, and the stock reacted well during the trading session May 16. Cisco is a rare idea that is included in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, and we won’t be removing it anytime soon. During the April quarter, revenue advanced 6% on a year-over-year basis (excluded divestitures), while non-GAAP earnings per share of $0.78 outpaced the consensus forecast, increasing 18% in the period. Product and service gross margins also expanded nicely in the quarter, while operating cash flow, adjusted for a one-time tax event in the prior period, advanced 16%. Cisco’s fiscal fourth-quarter top-line guidance calling for growth in the range of 4.5%-6.5% and non-GAAP earnings per share in the range of $0.80-$0.82 was healthy, and management continues to “invest in (its) innovation pipeline to drive long-term profitable growth.” The company ended the quarter with $34.6 billion in cash and investments compared to $23.7 billion in short- and long-term debt, good enough for a solid net cash position. We expect to take a look at our model, but Cisco’s performance was well-received. Shares yield ~2.5%. View Cisco’s stock page >>
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Deere (DE): Deere’s second-quarter fiscal 2019 results, released May 17, weren’t exactly what we were looking for. The company’s top-line expanded nicely at a pace of 5.8%, but non-GAAP earnings per share missed the consensus estimate, and the tried-and-true agricultural equipment maker lowered its outlook for 2019. Net sales are expected to advance 5% in fiscal 2019 (was 7%), while net income is now targeted at $3.3 billion (was $3.6 billion). Deere noted softening conditions in the agricultural sector, mostly due to trade war considerations (“concerns about export-market access, near-term demand for commodities such as soybeans and a delayed planting season in much of North America”). Deere is prudently managing inventory, which will impact production levels and the rate of sales during the back half of 2019. Though the long term remains bright, we expect to tweak our fair value estimate lower upon review. Deere is not a holding in any newsletter portfolio. View Deere’s stock page >>
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Flowers Foods (FLO): Flowers Foods is an under-the-radar income idea, with a dividend yield of north of 3%. Though its Dividend Cushion ratio is near parity (we’re neutral on dividend health), the company has now paid 66 consecutive quarterly dividends. Flowers Foods is one of the largest producers of packaged bakery foods in the US, sporting Nature’s Own and Wonder as top brands, and its first-quarter performance, released May 15, showed continued resilience in the face of private-label competition. Organic net sales advanced 3%, while adjusted diluted earnings per share came in at $0.32, slightly better than consensus. The quarter marked record top-line sales, and consumers seem to be willing to accept price increases across its key brands. Commodities, labor and transportation costs continue to pressure margins, but the firm continues to execute well. Looking ahead to all of fiscal 2019, sales growth is targeted in the range of 2%-4%, while adjusted diluted earnings per share is targeted in the range of $0.94-$1.02, both achievable. We expect a modest bump in our fair value estimate. View Flowers Foods’ stock page >>
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Intel (INTC): We’ve been fans of Intel for some time, and we didn’t think much of the firm backing away from building 5G models as a result of the Qualcomm-Apple truce, but the company reported a disappointing outlook for fiscal 2019 April 25, and then this was followed by a rather ho-hum three-year outlook, issued May 8. Management is looking for low-single-digit revenue growth, flat PC sales and double-digit data center expansion, offset by weak levels of profitability given the 10nm ramp over the three-year period. Shares have found support in the mid-$40s, but we note that the story has gotten significantly more complicated for the dividend growth investor. If Intel’s share price does not hold at these levels, we may consider removing the company from both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, replacing it with Parker-Hannifin (PH), Top New Dividend Growth Idea: Parker Hannifin. View Intel’s stock page >>
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Jack In The Box (JACK): We think Jack In The Box is less exciting after it completed the sale of Qdoba in March of last year to an affiliate of Apollo Global (APO). We were sorry to see the firm let the brand go, as Qdoba has a tremendously bright future, in our view. In any case, Jack In the Box reported decent second-quarter fiscal 2019 results May 15. The small-cap restaurant revealed systemwide same-store sales growth of a modest 0.2%, and management noted that it was able to drive better traffic “without sacrificing margins.” Restaurant-level margin increased 120 basis points, to 27.6% of company restaurant sales during the fiscal second quarter, thanks in part to “refranchising and lower maintenance and repairs expenses.” Shares have been in a steady decline since the beginning of 2017, and we won’t be adding the company to the newsletter portfolios, but we’re watching them closely for a breakout of the downtrend. View Jack In The Box’s stock page >>
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Pinterest (PINS): One of the more-recent IPOs, Pinterest reported disappointing first-quarter results out of the gate May 16, something rather unusual for new issues to do, from our experience. Readers not familiar with Pinterest should note the social media site is based around ‘Pinners’ (otherwise known as users) building up their profile by placing ‘Pins’ (which the company refers to as “visual recommendations”) on their individual ‘boards’ (which forms the basis of the Pinner’s profile). At the end of the first quarter of 2019, Pinterest had over 290 million monthly active users (abbreviated MAUs) and is still very much in growth mode. Pinterest does not pay out a dividend and is very unlikely to do so for the foreseeable future, as retained cash flow will likely be used to enhance its growth trajectory through increased investments in the business. Still, Pinterest continues to lose money ($41.4 million during the first quarter), and it issued a lower-than-expected forecast for 2019 revenue (now $1.055-$1.08 billion, consensus: $1.09 billion). We’re not interested in Pinterest and continue to point to Facebook (FB) as our favorite social media idea. Facebook’s shares are very cheap, and the company continues to bounce back from the doldrums of last summer. View Pinterest’s stock page >>
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Walmart (WMT): In the age of e-commerce proliferation, Walmart is holding its own quite well. The big box discount retailer reported first quarter fiscal 2020 results May 16 that showed consolidated revenue advancing 2.5%, excluding currency fluctuations, and the company posting its best US comp sales for the first quarter in 9 years (3.4%). Its US e-commerce operations experienced 37% revenue expansion thanks in part to strength in online grocery and home and fashion, but we’re less enthused about the performance of Sam’s Club, where comp sales increased a modest 0.3%. Though management is blaming tobacco sales, we think the customer experience at Sam’s Club has deteriorated given the hassles of in-store sales kiosks pitching unrelated products to customers. Net sales at Walmart International advanced 1.2% on a constant-currency basis. Overall, however, Walmart’s operating income declined 3% on a consolidated basis, and free cash flow fell $2 billion, to $1.4 billion in the quarter. We’re viewing the report as mixed. Our fair value estimate of $100 per share for Walmart remains unchanged. View Walmart’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.