Image Source: Aaron Fulkerson
Let’s get President of Valuentum Brian Nelson’s quick thoughts on the earnings reports of Alphabet, Paypal, and Intel, all very important holdings in the newsletter portfolios.
By Brian Nelson, CFA
Alphabet
The Mountain View, California-based Internet search giant continues to do a lot of things right. CFO Ruth Porat called the top-line growth in the fourth-quarter results of the company formerly called Google “exceptional.” Alphabet (GOOG, GOOGL) is the lifeblood of the Internet, and consumers every day consult Google with their innermost questions and sometimes deepest thoughts and concerns (looking for answers). It will remain a core aspect of our lives, as core as the most innate possessions of those that use it.
During the quarter, revenue advanced 24% on a constant-currency, year-over-year basis, and continued “momentum” in mobile search and YouTube led the charge. Alphabet’s earnings per share in the period leapt to $9.36 from $8.67 previously, while the operating loss in its ‘Other Bets’ fell to ~$1.09 billion from ~$1.21 billion in the year-ago quarter. The Internet search advertising giant ended 2016 with cash, cash equivalents and marketable securities of $86.3 billion, as it pulled in ~$6.3 billion in free cash flow during the last quarter of the year, up from ~$4.5 billion in the fourth quarter of 2015. What a company – what a year!
We continue to include shares of Alphabet in the Best Ideas Newsletter portfolio, valuing the company at ~$924 per share at present. We envision a scenario where shares can run past $1,100, however, on the basis of the high-end of our fair value estimate range and in the context of this “over-heating” marketplace. In case you missed it, watch: “The ABCs of Investing in Alphabet (October 2016).”
Alphabet is a holding in the Best Ideas Newsletter portfolio.
PayPal
Many have been concerned about PayPal’s (PYPL) valuation. We’re not. In some ways relative to the broader marketplace, PayPal represents a considerable relative value “play” in light of the long-term “value” of the company’s network effect—one of the strongest competitive advantages in our coverage—and the pace of growth we continue to witness across its business. One of the biggest takeaways from PayPal’s fourth-quarter report, released January 27, however, wasn’t the 19% constant-currency top-line growth in the period, but that it was in talks with Amazon (AMZN) about allowing the latter’s customers to pay using their PayPal accounts.
We’re viewing this development, if secured, as a landmark breakthrough for the payments company as PayPal continues to grow beyond its eBay (EBAY) roots, helping its brand become more and more mainstream and ubiquitous across Internet channels. We expect PayPal to continue to grow rapidly, faster than the secular trend toward e-commerce expansion, and the company remains a veritable “cash cow.” During 2016, for example, PayPal generated operating cash flow of $3.2 billion and free cash flow of $2.5 billion. Management’s guidance for full-year 2017 implies continued strong top-line performance, 17%-19% on an FX-neutral basis. Our point fair value estimate of shares is $46 at the time of this writing.
PayPal is a holding in the Best Ideas Newsletter portfolio.
Intel
Those publishers that are trying to make headlines have outlined Intel (INTC) as a short idea of late, but we’re not concerned. The chip giant reported fourth-quarter performance that came in better-than-expected on both the top and bottom lines, sending shares higher during the trading session January 27. CEO Brian Krzanich took the words out of our mouth describing Intel’s fourth quarter as “a terrific finish to a record-setting and transformative year for Intel.”
The chip giant generated record annual cash flow from operations of $21.8 billion during the year, offering substantial support to ongoing dividend growth; by comparison, cash dividends paid were $4.9 billion in 2016 and capital spending was $9.6 billion (free cash flow coverage of the dividend during 2016 was ~2.5 times). We’re excited about opportunities for Intel in the sprawling ”Internet of Things” vertical, continued growth its relationship with Apple (AAPL) in mobile against rival Qualcomm (QCOM), and the ongoing integration of cash-flow-generating powerhouse Altera.
The aging PC-market aside, Intel is setting itself up for a strong back half of this decade, particularly if troubles at Qualcomm continue to proliferate. For 2017, revenue at Intel is expected to grow in the low-single-digits, after excluding the Intel Security Group from both years, with non-GAAP earnings per share for the year expected at $2.80, plus or minus 5%, implying the company is trading at less than 14 times current-year earnings. Intel still holds a net debt position of ~$2.3 billion, but we’re expecting continued improvement (it had been ~$4.3 billion at the beginning of October). We value shares of Intel at $42 each at the time of this writing; its Dividend Cushion ratio stands at 2.7. In case you missed it, watch: “Intel’s 3Q 2016 Results (October 2016).”
Intel is a holding in both the Best Ideas Newsletter portfolio and the Dividend Growth Newsletter portfolio.