Valuentum Exclusive Analysis for the Discerning Investor

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Pfizer/BioNTech Vaccine Not a Catalyst for Portfolio Changes
Image: BioNTech. Next Generation Immunotherapy Presentation, October 2020. The world received great news this week that the days of this terrible COVID-19 pandemic may finally be numbered. On November 9, Pfizer and BioNTech announced that “their mRNA-based vaccine candidate, BNT162b2, against SARS-CoV-2 has demonstrated evidence of efficacy against COVID-19 in participants without prior evidence of SARS-CoV-2 infection.” Our thesis on the inevitable successful development of a vaccine for COVID-19 never centered on which pharma/biotech giant would be the first to develop one, but rather our thesis has always been focused on the large number of shots on goal (the large number of vaccine candidates in development, and the high probability that at least one would be effective). We’re sticking with some of the best companies out there in the newsletter portfolios, however, and we’re reiterating our fair value estimate range of 3,530-3,920 on the S&P 500 (established June 12), which we derive as 18-20x multiple on pre-pandemic 2021 earnings of $196. The S&P 500 stands within the range at ~3,560 today.

Realty Income Remains Resilient and Its Outlook is Improving
Image Shown: An overview of Realty Income Corporation’s asset base and historical financial performance. Image Source: Realty Income Corporation – Third Quarter of 2020 IR Earnings Presentation. On November 2, Realty Income Corp posted third quarter earnings for 2020 that saw the real estate investment trust’s (‘REIT’) funds from operations (‘FFO’) come in flat year-over-year at $0.82 per share, while its adjusted funds from operations (‘AFFO’) declined by 2% year-over-year, hitting $0.81 per share. Realty Income invests in single-tenant commercial properties, and its business has faced headwinds from the ongoing coronavirus (‘COVID-19’) pandemic. However, things are starting to improve, though there is ample room for additional improvement. We like the relative resilience of Realty Income’s financials and continue to include shares of O at a modest weighting in our Dividend Growth Newsletter portfolio. As of this writing, shares of Realty Income yield ~4.4% and for reference, the REIT pays out a monthly dividend.

McDonald’s: Holding Up Well During the Pandemic
McDonald’s is without a doubt a fantastic enterprise with a storied history and moaty characteristics. The firm is holding up quite well and has managed to drive innovation to overcome almost every obstacle it has faced in the past. Though there are long-term risks to the dividend payout based on the Dividend Cushion ratio, the company’s credit marks and free cash flow generation are enough for us to be confident in a growing payout for the foreseeable future. Shares are fairly valued at the moment, but dividend growth investors might want to take a hard look at this fast-food behemoth for their portfolios.

Reiterating Our $229 Fair Value Estimate for Berkshire Hathaway
Image Shown: Shares of Berkshire Hathaway Inc Class B are moving on upwards. Berkshire Hathaway reported third quarter 2020 earnings this past Saturday, November 7. The insurance and industrial conglomerate reported that its GAAP income almost doubled year-over-year as its investment portfolio reported large gains. However, that masked pressures at some of Berkshire Hathaway’s myriad businesses as the company navigated the storm created by the ongoing coronavirus (‘COVID-19’) pandemic. Berkshire Hathaway continued to generate significant free cash flows during the first nine months of 2020, and we are reiterating our fair value estimate of $229 per share of Berkshire Hathaway Class B shares.

Public Storage Continues to Shine
Image Shown: Shares of Public Storage have recovered from the depths of the COVID-19 pandemic and have been on an upward climb over the past few months. On November 4, Public Storage reported earnings for the third quarter of 2020. As expected, headwinds created by the coronavirus (‘COVID-19’) pandemic weighed on its financial performance during this period; however, that did not stop the self-storage real estate investment trust (‘REIT’) from being very free cash flow positive. The long-term outlook for the self-storage industry in metropolitan areas in the US and elsewhere remains quite promising given the desire for households to maximize living space within their housing unit at a given budget. We include shares of Public Storage in our High Yield Dividend Newsletter portfolio and shares of PSA yield 3.5% as of this writing.

CubeSmart Is One of Our Favorite REITs
Image Source: CubeSmart – October 2020 Deluxe Storage Transaction IR Presentation. We continue to be huge fans of the self-storage industry, and CubeSmart is one of our favorite REITs in the space. The ability for self-storage REITs to generate sizable free cash flows in almost any operating environment highlights the resilience of their business model. Going forward, due to CubeSmart’s apparent ability to tap capital markets at attractive rates, we view the REIT’s forward-looking payout coverage favorably.

Garbage Hauler Republic Services Doesn’t Disappoint in Third Quarter
Image: Republic Services. We love companies with strong future expected free cash flow generation, especially ones that have strong net cash positions. Republic Services doesn’t have the strongest balance sheet, with a rather large net debt position emanating from rolling up a number of independent garbage haulers in the past, including Allied Waste, but it’s not something we’re worried about, given its strong and predictable free cash flow, contractual revenue visibility in its collection operations, and pricing power at its disposal facilities. We’re reiterating the high end of our fair value estimate range of $96 per share.

Dividend Increases/Decreases for the Week November 6
Let's take a look at companies that raised/lowered their dividend this week.

Cat or Deere or Neither?
Image: Deere equipment. Deere's stock has been a high-flyer during the past several months. Both Cat and Deere are facing some difficult times as COVID-19 continues to spread around the globe. From an operational standpoint, Deere is doing relatively better, but Caterpillar may have a more conservative balance sheet in light of its greater cyclical tendencies. We have a hard time defending its big share-price run in the face of definitively weaker performance across cyclical end markets, however. Unlike secular players, a falling discount rate won’t have as great of an impact on underlying intrinsic value. Caterpillar is more reasonably priced, in our view, but then again, the stock comes with a bit more operational risk. We have a difficult time pulling the trigger on either at the moment, especially in the context of so many other net cash rich, free cash flow generating powerhouses tied to secular tailwinds on the market today. Perhaps the answer is neither. We like our best ideas.

Follow Up on Our Call on Ameresco
Image Shown: Since we highlighted Ameresco Inc back in August, shares of AMRC have continued to surge higher. We caution that recent trading activity has been quite volatile, due primarily to the ongoing election count process in the US. Back in August 2020, we published a note on Ameresco, which provides a comprehensive slate of energy services for its clients. Ameresco appears uniquely well-positioned to capitalize on rising demand from enterprises, government agencies, and other entities to appear “green” without breaking the bank. Given that the company’s core offerings involve reducing its customers' long-term operating costs (particularly O&M expenses) and improving its clients' cost structure, it appears Ameresco’s offerings should be quite appealing to a large range of customers. We will continue keeping an eye on Ameresco going forward.