Valuentum Exclusive Analysis for the Discerning Investor

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Nov 25, 2020

Dick’s Sporting Goods’ 2%+ Dividend Yield Is Solid
Dick’s Sporting Goods put up impressive third-quarter results that showed strong sales performance across both e-commerce and brick-and-mortar. E-commerce/digital/online sales continue to soar across the broader retail arena. Dick’s Sporting Goods’ gross and merchandising margins were healthy during its third quarter, and its inventory is clean as the sporting goods retailer heads into the all-important holiday season. We’re big fans of Dick’s Sporting Goods’ tremendous free cash flow generation and its balance sheet health. For dividend growth investors, Dick’s Sporting Goods offers a compelling combination of a 2%+ dividend yield and an impressive 3.2 Dividend Cushion ratio at the time of this writing.

Nov 24, 2020

Sonos Showing Signs of Life
Image Shown: Shares of Sonos Inc are showing signs of life in 2020 after its poor showing in the quarters that followed its initial public offering back in August 2018. After treading water over the past two years, shares of Sonos are showing signs of life as its long-term strategy is starting to pay off. Though we caution that Sonos does not appear to have much of a moat in any of the industries it operates in, its financials have been impressive of late and its near-term outlook is improving--two key factors that have caught our attention. Meaningful downside risks remain, but if Sonos delivers on its guidance for fiscal 2021, the company’s long-term outlook may now be significantly brighter than it was back in February 2019. On a final note, Sonos recently partnered up with Disney in an attempt to improve its marketing strategy. It will be interesting to see how that partnership plays out. We are keeping an eye on Sonos.

Nov 21, 2020

Target Reaches All-Time Highs
Image Shown: Shares of Target Corporation are now trading near their all-time highs as of this writing. Shares of Target Corp recently reached an all-time high after the company reported third quarter earnings for fiscal 2020 (period ended October 31, 2020) on November 18 that smashed past consensus estimates on both the top- and bottom-lines. During its latest earnings report, Target reported that its comparable store sales rose by 20.7% year-over-year with digital comparable sales up 155% during this period. During the first nine months of fiscal 2020, Target generated over $5.0 billion in free cash flow. The top end of our fair value estimate range sits at $182 per share, and as of this writing, shares of TGT are trading near $172, indicating Target appears fairly valued at this time. Shares of TGT yield a decent ~1.6% as of this writing, and we give Target a “GOOD” Dividend Safety rating given its impressive cash flow profile.

Nov 20, 2020

Nvidia Is a Great Company but Its Shares Appear to be Generously Valued
Image Source: Nvidia Corporation – October 2020 IR Presentation. On November 18, Nvidia Corp reported third quarter earnings for fiscal 2021 (period ended October 25, 2020) that beat both consensus top- and bottom-line estimates. The company’s GAAP revenues jumped higher by 57% year-over-year last fiscal quarter, aided by growth at its ‘Data Center’ (sales were up 190% year-over-year) and ‘Gaming’ (sales were up 37% year-over-year) business operating segments, which combined represented ~88% of its revenues last fiscal quarter. Nvidia’s ‘Professional Visualization’ and ‘Automotive’ business operating segments both posted year-over-year declines in sales. The ongoing coronavirus (‘COVID-19’) pandemic has accelerated recent trends in the digital world, such as the pivot towards offsite cloud-computing solutions to meet IT needs. In turn, this dynamic has sharply increased demand for data centers that make the transition towards cloud-computing possible, which has proven to be a boon for Nvidia. The work-from-home (‘WFH’) trend has driven up demand for PCs and laptops over the past few quarters. Additionally, rising demand for video games entertainment options is likely supporting demand for higher end PCs and laptops as well. Nvidia has so far been able to rise to the occasion and meet surging demand for data centers, laptops, and PCs during these turbulent times.

Nov 20, 2020

Home Depot and Lowe’s Post Tremendous Comparable Store Sales Growth
Image Source: Home Depot Inc – Third Quarter of Fiscal 2020 IR Earnings Infographic. Home Depot and Lowe’s Companies have experienced incredibly strong comparable store sales growth during the initial phases of the ongoing coronavirus (‘COVID-19’) pandemic. Past digital investments enabled both companies to better meet surging demand during these turbulent times, and demand growth is coming from both professional (i.e. contractors, home builders) and non-professional (i.e. more affluent households in the suburbs) consumers. The biggest thing holding both companies back is their large net debt loads and sizable operating lease liabilities, in our view, though please note that their cash flow profiles are stellar. It appears the North American home improvement and construction business is holding up quite well, all things considered, highlighting the industry’s resilience.

Nov 19, 2020

Normalizing our Fair Value Estimates for the Money Center Banks
Image Source: Mike Cohen. During the past few weeks, positive news surrounding the Pfizer/BioNTech and Moderna vaccines means that, while times will still be tough for banks as bad loans pile up, losses and defaults perhaps won’t be as bad as we had originally predicted at the onset of the outbreak of COVID-19. The unemployment rate has steadily crept lower from the 14.7% rate it hit in April 2020 (it stands at 6.9% as of October), and businesses have been battling hard through the worst of times with help from the Paycheck Protection Program, among other stimulus efforts. There have still been many business failures, however. Several banks’ net interest margins have faced pressure, too, but 30-year rates have managed to ease a bit higher from the sub-1% mark on March 9, 2020, to 1.62% at the time of this writing (November 18). The widely-watched 10-year/3-month Treasury yield spread has also advanced to 79 basis points, representing a meaningful improvement from most of February and early March when the 10-year/3-month Treasury yield spread was negative. The probability of an adverse tail-event is also substantially reduced (if not, eliminated), given the laser-focus of the Fed/Treasury to do whatever it takes to get to the other side the COVID-19 crisis. With all of this in mind, we expect to raise our fair value estimates for the money center banks upon their next update, effective November 21. That said, we’re not changing our general views on the banking and financials sector. Banks are being used more and more these days as extensions of government fiscal intervention/policy via myriad stimulus programs (which makes them more like “utilities”), while regulatory oversight has put a limit on just how much capital they can return to shareholders. This adds a degree of unnecessary complexity for dividend growth and income investors. Returns on equity remain relatively unattractive for many banks when compared to some of the strongest Economic Castles on the market that put up ROICs north of 100%, for example, some even higher. Systemic risk remains present, too, with most lending books opaque and intertwined within a global financial system that remains far from healthy due to COVID-19.

Nov 19, 2020

Videogaming Business Becoming More and More Attractive
Image Shown: The video game industry has been placing a much greater emphasis on growing their mobile gaming operations in recent years. Part of that strategy has involved leveraging existing IP and well-known gaming titles to appeal to a wide range of users. Image Source: Electronic Arts Inc – Second Quarter of Fiscal 2021 IR Earnings Presentation. As households have largely been “cocooning” indoors to ride out the ongoing coronavirus (‘COVID-19’) pandemic, demand for digitally provided entertainment options has grown considerably. NPD Group, an industry-tracking firm, estimates that US video game sales (software and hardware combined) will reach $13.4 billion in total in across November and December of this year. That would be up 24% from year-ago levels, and note this is only looking at the US market, which is estimated to have 244 million consumers of video game content according to NPD Group. Many of those consumers are considered casual video game players, playing mobile games on their smartphones and tablets, though NPD Group noted the number of more dedicated gamers (measured by hours played per week) is on the rise in both nominal and absolute terms. Mobile gaming options generally rely on in-game transactions, called microtransactions, to generate revenue. Usually those offerings include aesthetic upgrades or the ability to progress through the video game at a faster pace. For more conventional video game offerings--those normally played on PCs or consoles--video game companies have increasingly been successful in selling add-on content via high-margin digital packages (and in some instances, microtransactions have also been successfully implemented). Longer term, the rise of e-sports offers another revenue generating opportunity for companies in the video game and digital advertising world. Though a nascent part of the video game industry, initial levels of interest have been impressive. Beyond rising demand for video streaming services, demand for video games, a (usually) cost-effective entertainment option, has also held up incredibly well during the pandemic with several big video game publishers reporting strong financial results of late, too. Furthermore, Microsoft Corporation and Sony Corporation recently launched their next-generation consoles, the Xbox Series X and PlayStation 5, respectively. In theory, the console refresh cycle combined with growing demand for indoors entertainment options should provide the video game industry with several major growth catalysts in the coming quarters. One of the key positive attributes of the the video game publishing industry, generally speaking, is that these companies have strong balance sheets and stellar cash flow profiles (meaning a relatively modest amount of capital expenditures are required to maintain a certain level of revenues, and thus putting the firm in a position to better generate free cash flows). However, the performance of these companies can swing wildly depending on how well their blockbuster properties perform. The hit-or-miss nature of their operations has been a big reason why we haven’t added any videogame stock to the newsletter portfolios in the past, but their business models have become more and more attractive as the years have gone on. In this note, let’s get into the details of Activision Blizzard Inc, Electronic Arts Inc, and Take-Two Interactive Software Inc, while we discuss broader industry trends.

Nov 19, 2020

Boeing’s Financials Are Absolutely Frightening
The reality is that Boeing’s financials are still pretty scary. During the first nine months of 2020, the company burned through an incredible $15.4 billion in free cash flow, even as it cut capital spending by a few hundred million. As of the end of the third quarter of 2020, its total consolidated debt now stands at $61 billion, with total cash and marketable securities of $27.1 billion. This compares to total consolidated debt of $24.7 billion and total cash and marketable securities of $10.9 billion, as of the end of the third quarter of 2019. The grounding of the 737 MAX and the outbreak of COVID-19 have combined to be an absolute wrecking ball to Boeing’s financials, and it may take a very, very long time before things start looking better on the books. S&P, Moody’s and Fitch still give the company investment-grade credit ratings (BBB-/Baa2/BBB-), but we’re not sure the aerospace giant deserves them. Here’s what Fitch noted October 2020: “…many of the company's quantitative rating factors will be inconsistent with the 'BBB' category for three years (2019-2021) and into 2022.” It’s probably fair to say that Boeing’s debt should be rated junk, but that would cause some severe reverberations in the credit markets, in our view.

Nov 18, 2020

Kohl’s Dead Cat Bounce May Still Have Legs
Image: Kohl's is breaking out of a month-long base on better-than-expected financial health and expectations that it will reinstate its dividend next year. The department store industry may be as poor as the airline business these days, but Kohl’s is managing to navigate the pandemic fairly well, even as it fights an uphill battle against e-commerce proliferation. The company’s annualized cash flow from operations, for example, is trending sufficiently above what we would consider normalized annual capital expenditures (~$700-$750 million). This suggests Kohl’s can be meaningfully free cash flow positive, even under a scenario where it can invest heavily in its business during “normal” times. Management even plans to start paying a dividend again during the first half of next year, and if existing trends hold and the holiday season is a success, a reinstated payout appears achievable, in our view. That said, however, in light of the poor backdrop of the department store business model and the preponderance of historical bankruptcies across the industry, we don’t view Kohl’s as a long-term investment idea by any stretch. Still, the stock’s technical breakout coupled with a better-than-expected financial position means its “dead cat bounce” could still have legs.

Nov 17, 2020

Walmart’s Digital Strategy Continues to Pay Off
Image Shown: Walmart Inc continues to distribute its free cash flows back to shareholders via dividends and share repurchases. The retailing giant’s management team has a long track record of being shareholders friendly. However, we still view shares of WMT as generously valued as of this writing, given that the top end of our fair value estimate range sits at $133 per share though WMT is currently trading closer to ~$150 per share. Image Source: Walmart Inc – Third Quarter of Fiscal 2021 IR Earnings Presentation. On November 17, Walmart reported third quarter earnings for fiscal 2021 (period ended October 31, 2020) that beat consensus estimates on both the top- and bottom-lines. As we have noted in the past, the key driver behind Walmart’s financial outperformance of late has been its e-commerce operations. Whether that be to support home delivery services or curbside pick-up options, Walmart’s past digital investments better allowed the retailing giant to meet surging demand for consumer staples and other products in the wake of the ongoing coronavirus (‘COVID-19’) pandemic. The top end of our fair value estimate range sits at $133 per share of WMT, indicating Walmart is generously valued as of this writing as its shares are currently trading near $150. However, we still view Walmart’s business model as stellar and its cash flow profile as impressive. During the first nine months of fiscal 2021, Walmart generated over $16.4 billion in free cash flow. The firm spent $4.6 billion covering its dividend obligations and another $1.2 billion buying back its stock during this period, and both of these activities were fully covered by Walmart’s free cash flows and then some. Shares of WMT yield ~1.4% as of this writing.