Earnings Reports Flying In!

Earnings reports are flying in. We thought Air Products’, Hasbro’s, and Lockheed’s quarterly updates were standouts.

By Brian Nelson, CFA

It’s time to make some noise! Seriously, we just debunked a decades-old myth that the average active investor theoretically cannot outperform, net of fees. We also just showed theoretically how empirical asset pricing models in using realized data are off the mark. I think both of these are huge deals in the field of finance. Make some noise. I talk about these developments in subchapters of our new book, Value Trap! You can read about the contents of the book on Amazon. I hope that we hear more about these developments on a larger scale in the coming years. How wonderful that might be. That said, let’s get to some of the earnings reports out recently.

In alphabetic order by ticker symbol: APD, BA, CAT, KO, EBAY, GD, HOG, HAS, KMB, LMT, PG, UTX, VZ

Air Products (APD): We’re huge fans of the oligopolistic industrial gas business, and Air Products is now bumping up against 52-week highs. In its fiscal second-quarter report, released April 24, the company raised the lower end of its fiscal 2019 earnings guidance range to $8.15-$8.30 from $8.05-$8.30 previously. Adjusted earnings per share advanced 17% in the most recently-completed period, while it posted a record adjusted EBITDA margin of 37.7%. Expected earnings growth for fiscal 2019 is now 10% at the midpoint of the range. View Air Products’ stock page >>

Boeing (BA): There were no real surprises in Boeing’s first-quarter 2019 numbers, released April 24. The company has been battling negative perception as a result of the widely-publicized 737 MAX crashes, and given the uncertainty regarding any potential fallout, management pulled its 2019 guidance. Total backlog of $487 billion includes 5,600 commercial airplanes, however, and we think Boeing will once again fly high. Its shares are still a bit pricey at current levels though. View Boeing’s stock page >>

Caterpillar (CAT): Caterpillar’s results will ebb and flow with the economic cycle, and its first-quarter results, released April 24 suggest things are still going pretty well in key diversified industrial and mining end markets. The earth-moving equipment maker raised its 2019 earnings per share outlook, to the range of $12.06-$13.06 from $11.75-$12.75 previously, thanks to a tax adjustment. Underlying fundamentals are still solid, however. First-quarter revenue advanced 5% while it put up record first-quarter profit per share. View Caterpillar’s stock page >>

Coca-Cola (KO): Coca-Cola put up solid first-quarter numbers April 23. In fact, they were great. Organic sales jumped 6%, beating consensus by a couple percentage points, and its operating margin also came in better than expected. This led to a top- and bottom-line beat for the period. We still think the market is giving Coca-Cola’s shares too much of a premium, however, given the company’s large net debt position. As long as organic growth holds up, it doesn’t seem investors will ask too many questions about valuation. View Coca-Cola’s stock page >>

eBay (EBAY): eBay seems to get lost in all the e-commerce media hype, but the company is mounting a comeback. Shares are close to a 52-week high, as of this writing April 24, and its first-quarter 2019 report revealed top- and bottom-line numbers that came in better than expected. We would like to see revenue growth a little stronger, and while we prefer other plays on e-commerce, it was good to see eBay getting things back on track. View eBay’s stock page >>

General Dynamics (GD): General Dynamics’ shares have been under some pressure since they peaked in early 2018, but we didn’t see anything in the quarterly report that would suggest its most recent breakout of the downtrend won’t hold, at least for now. The company noted that order activity remained strong across both its aerospace and defense platforms, something we’ve been hearing from other companies, too. Orders of $10.7+ billion in the quarter resulted in a solid book-to-bill of 1.2 to 1. View General Dynamics’ stock page >>

Harley Davidson (HOG): Harley is facing some tough times. The motor bike maker is trying to attract millennials and Generation Z but hitting the open road like generations’ past may not be as exciting in a world of digital entertainment. The company is in some sort of political maelstrom, too, with the EU tariffs and Trump even going so far as to say to boycott Harley’s products. The company first-quarter 2019 results didn’t little to assuage our long-term secular concerns. View Harley Davidson’s stock page >>

Hasbro (HAS): Former Dividend Growth Newsletter portfolio winner Hasbro posted excellent first-quarter 2019 numbers April 23 that remained consistent with our underlying thesis of the equity. The company’s higher-margin Entertainment, Licensing and Digital segment is simply on fire, with sales advancing 24% in the quarter. We still like Hasbro, and we might even add shares back to the Dividend Growth Newsletter portfolio in the future. View Hasbro’s stock page >>

Kimberly-Clark (KMB): Kimberly-Clark put up good first-quarter numbers April 22 thanks in part to strong product pricing gains. We had grown concerned about pricing power of branded consumables given developments late last year, and we don’t think the threats of cost inflation and private-label competition are neutralized. Innovation will be key for consumer staples equities, and net debt positions will only offer headwinds to future dividend growth. We like Kimberly-Clark, but there are other stronger dividend payers out there, in our view. View Kimberly-Clark’s stock page >>

Lockheed Martin (LMT): Lockheed issued a fantastic first-quarter report April 23, and the defense contractor raised its fiscal 2019 earnings per share guidance to the range of $20.05-$20.35 per share, up from $19.15-$19.45. It also upped its fiscal 2019 revenue growth guidance, too, on the heels of a near-23% increase in revenue during the first quarter. The company may be getting some interest from investors as a result of Boeing’s woes, but it’s hard not to like Lockheed in any case. Shares aren’t a bargain, however. View Lockheed’s stock page >>

Procter & Gamble (PG): P&G has been doing a lot better than we would have expected. We thought it shed too many of its brands too fast, but the company is still managing to put up solid organic growth, which came in at 5% during its fiscal third-quarter results, released April 23. The company is another consumer staple whose pace of dividend growth will be weighed down by its net debt position in coming years. We like P&G, but we like other dividend payers more at the moment. The company remains on our watch list, however. View P&G’s stock page >>

United Technologies (UTX): In a sign that the aerospace market remains as strong as ever, United Technologies posted a solid first-quarter 2019 report April 23, and the company raised the lower end of its earnings guidance to the range of $7.80-$8.00 from $7.70-$8.000 previously. Management noted that it might feel some minor pain from the 737 MAX groundings, but nothing terribly material. United Tech has come roaring back since the December 2018 doldrums. We still like the company a lot. View United Tech’s stock page >>

Verizon (VZ): Verizon is a cash cow, and nobody is going to disagree with that. Where we grow concerned with any of the big telecom players, however, is their net debt positions. Verizon’s long-term debt stood at over $100 billion at the end of its fiscal first-quarter 2019, with negligible cash by comparison. That doesn’t mean Verizon is of poor credit quality, per se, but it does mean that when the going gets tough, its debt load could make things worse. Nothing wrong with Verizon’s first-quarter report, but we tend to be debt averse when we can. View Verizon’s stock page >>

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Brian Nelson In Silicon Valley May 11!

The book tour for Value Trap started Saturday April 13 in Chicago. Here is the tentative schedule for the remainder of 2019/2020. We’d be super excited to meet you if you’re in town. We’ll have more details about upcoming events as the year progresses. If you have any other suggested venues/cities, please just let me know! Let’s make it happen. Here’s what I have penciled in at the moment.

May 11: Silicon Valley (Shoup Park Garden House, see image below)
August 3: Twin Cities (Jax Cafe in Minneapolis)
September 17: St. Louis
November 16: Los Angeles (Skirball, Magnin Auditorium)
October, 2020: Phoenix

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“This book is a welcome, no-nonsense addition to the many straight-shooting financial guides on the market.”