Image Source: Mike Cohen
Let’s take a look at some high-profile earnings reports of this week, including those from Boeing, Caterpillar, 3M, AT&T, and Verizon.
By Kris Rosemann
Boeing Raises Full-Year Guidance
Former simulated Dividend Growth Newsletter portfolio idea Boeing (BA) reported third-quarter results October 24, and a strong showing enabled management to increase its guidance for the full year. Revenue in the third quarter advanced 4% on a year-over-year basis thanks to higher defense volume and services growth as the company works to build the latter into a $50 billion business in the next five to ten years from its current $12+ billion run rate. The company’s operating margin faced pressure (GAAP operating margin contracted by two percentage points) as a result of planned investments in certain programs in its ‘Defense, Space & Security’ business and ongoing cost growth in the KC-46 Tanker program. Nevertheless, core earnings per share still advanced to $3.58 in the quarter from $2.62 in the year-ago period thanks to strong performance in its ‘Commercial Airplanes’ business and a one-time tax benefit.
Boeing’s massive backlog continued to grow during the period, advancing to $491 billion from $488 billion at the start of the quarter. It raised its revenue guidance by $1 billion, to the range of $98-$100 billion and increased core earnings per share guidance to a range of $14.90-$15.10 from $14.30-$14.50 previously. Operating cash flow guidance was maintained at $15-$15.5 billion, and capital spending guidance was reduced to $2 billion from $2.2 billion as the company continues to throw off robust free cash flow. Through the first nine months of 2018, Boeing has generated more than $11.1 billion in free cash flow, up 22% over the comparable period of 2017, which is more than 3.5 times cash dividends paid of less than $3 billion in the same period. The company’s Dividend Cushion ratio is a robust 2.6, and shares yield just over 1.9% as of this writing. We currently value shares at $333 each.
Strong Demand Continues At Caterpillar Excluding Industrial; Guidance Maintained
Caterpillar (CAT), which reported third quarter results October 23, continues to ride a wave of strong demand in key areas such as mining and heavy construction equipment, construction equipment, and most energy and transportation end markets except industrial. Third quarter sales and revenue grew 18% on a year-over-year basis thanks to volume growth across its three segments and positive pricing, particularly in its ‘Resource Industries’ business. Higher volumes and favorable pricing also led to 41% growing in consolidated operating profit from the year-ago period, and adjusted profit per share leapt to $2.86 compared to $1.95 in the comparable period of 2017. Nevertheless, the company maintained its adjusted profit per share guidance in a range of $11.00-$12.00 for the full-year 2018.
Though shares of Caterpillar faced material selling pressure as a result of the flat guidance and concerns over the future growth rate of its industrial end markets, we continue to like what we’re seeing in terms of its overall demand environment. The company was able to grow operating cash flow by $237 million on a year-over-year basis despite a discretionary $1 billion pension contribution, but operating cash flow is down more than 13% through three quarters in 2018. Nevertheless, free cash flow of $2.3 billion was still more than sufficient in covering cash dividends paid of $1.4 billion in the first nine months of the year. Caterpillar’s unadjusted Dividend Cushion ratio currently sits at roughly 1.3, while its adjusted Dividend Cushion ratio, which is less punitive on debt related to its financial services arm, sits at 2.3. Our fair value estimate for shares is $142.
Currency Headwinds Ding 3M’s Results and Guidance
Industrial giant 3M (MMM) reported somewhat disappointing third quarter results October 23 as reported sales were down 0.2% on a year-over-year basis due to 1.7% on currency headwinds more than offsetting organic currency-neutral sales growth of 1.3% and 0.2% of acquisition-driven growth. The company’s ‘Industrial’ segment sales came in flat from the year-ago period, and 7% sales growth in ‘Safety and Graphics’ was not enough to offset 2.8%, 3.4%, and 4.8% declines in ‘Health Care,’ ‘Consumer,’ and ‘Electronics and Energy,’ respectively. Geographically speaking, notable top-line weakness was reported in the EMEA and Latin America/Canada regions. Operating income in the quarter was roughly flat compared to the year-ago period at $2 billion, but diluted earnings per share advanced to $2.58 from $2.33 thanks to a materially lower tax bill.
Nevertheless, management lowered its full-year adjusted earnings per share guidance to a range of $9.90-$10.00 compared to $10.20-$10.45 previously due in part to expectations for a $0.05 negative impact from foreign currency exchange rates as opposed to previous expectations for a $0.10 tailwind. Organic local-currency sales growth was also lowered to ~3% from 3%-4%, and free cash flow conversion is now expected to be 90%-95% compared to 90%-100% previously. Through the first three quarters of the year, free cash flow fell nearly 10% to $3.1 billion and is expected to be in a range of $4.8-$5.2 billion for the full year (was nearly $4.9 billion in 2017). Cash dividends in the first nine months of 2018 checked in at $2.4 billion, suggesting free cash flow coverage of the payout is still solid, and the company’s Dividend Cushion ratio is currently 1.6 to go along with a ~2.9% yield. Shares are now trading roughly in line with our fair value estimate of $185 following the selling pressure that has resulted from its quarterly results.
AT&T Drops On Wireless and Entertainment Weakness
Shares of wireless and entertainment giant AT&T (T) faced notable selling pressure following the release of its third quarter results October 24. The drop was due in part to top-line weakness in its ‘Entertainment Group’ and ‘Business Wireline’ businesses as linear video subscribers and legacy wireline service revenues continued to decline, which may be casting doubt over the new-age media ‘conglomerate’ and its debt-fueled growth strategy. Consolidated revenues advanced 15.3% to $45.7 billion thanks in large part to the Time Warner acquisition, but declines in domestic video and legacy wireline services were enough to catch investors’ attention. Its ‘Entertainment Group’ EBITDA margin was hit by one-time items as the company hopes to stabilize profitability levels in the segment for 2019, and the company expects margin stability in the ‘Business Wireline’ segment to help it achieve its previously announced guidance for earnings per share of ~$3.50 and free cash flow generation guidance of ~$21 billion.
AT&T reported 16.6% year-over-year growth in free cash flow generation in the third quarter thanks in part to 14.3% growth in cash flow from operations, and free cash flow of $14.4 billion through the first three quarters of the year has been more than sufficient in covering cash dividends paid of less than $10 billion. AT&T’s Dividend Cushion ratio currently sits below parity (0.6 at last check) due to its massive net debt load, which sat at ~$175 billion as of the end of the third quarter, and management continues to make deleveraging a priority as it targets a debt-to-EBITDA ratio of 2.5x by the end of 2019. We value shares, which yield an eyebrow-raising 6.5% as of this writing, at $40 each.
Verizon Turns in Solid Third Quarter Results, Phone Subscribers Growing
While AT&T’s third quarter report was somewhat eventful, rival Verizon’s (VZ) less than exciting quarterly report, released October 23, was solid. Total consolidated operating revenue advanced 2.8% on a year-over-year basis to $32.6 billion, as growth in its ‘Wireless’ segment as able to offset weakness in its ‘Wireline’ segment. Solid phone subscriber growth helped offset concerns related to weakness in its ‘Oath’ business, its media business consisting of digital content division such as AOL and Yahoo!, and segment EBITDA in its ‘Wireless’ business continues to march higher, advancing 10% on a year-over-year basis in the third quarter. Overall adjusted EBITDA advanced ~$0.4 billion from the second quarter of 2017 to $11.8 billion, and adjusted earnings per share advanced to $1.22 from $0.98 in the year-ago period. Management expects full-year GAAP revenue growth to be in the low-to-mid single-digit range, and adjusted earnings per share growth is projected to be in the low single-digit range.
Verizon continues to be a robust cash flow generator, and through the first three quarters of 2018, its cash flow from operations exploded to $26.2 billion (was $16.5 billion in the comparable period of 2017). Such robust growth makes slightly higher capital expenditures in the period immaterial as free cash flow leapt to $14.2 billion from $5.2 billion in the year-ago period. Cash dividends paid in the period checked in at $7.3 billion, and the company was able to reduce its total debt load by $4.6 billion en route to a 2.4x net debt-to-adjusted EBITDA ratio. Nevertheless, Verizon’s massive net debt load of $110 billion as of the end of the third quarter continues to weigh on its Dividend Cushion ratio, which is currently in negative territory. Shares yield ~4.2% as of this writing, and our fair value estimate sits at $54 each.
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Kris Rosemann 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.