Saturday, October 29, 2016

Earnings Analysis: Honeywell (HON)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

OK, before I begin on Honeywell's third quarter call, it's best that I retrace some other events I didn't have a chance to talk about.  About 3 weeks prior to their results, Honeywell released information noting that the third quarter didn't do as well as they had expected and they lowered the top end of their earnings and sales targets for the year.  The market took swift action, hacking off over 8% off of the news.  A lot of this had to do with the fact that it looked like all progress within the company was slowing and things were quickly turning for the worse.  The stock responded so strongly that a couple days later, CEO Dave Cote came back with another call to clarify some of the perspectives that were provided, sharing that the third quarter was a bit weaker than expected and the fourth quarter would be as well, but that the company was still well lined to achieve its longer term goals and that next year is still set up to be a solid year as previously described.  The clarifications helped the stock rebound a little, but it's still down 5% below when these announcements first came out - even after the earnings call.  The damage has been done and now we're going to have to see how the company can work its way through the mess.  

Now let's get down to the real conference call.  As pre-announced, the quarter didn't go as well as hoped.  It's a bit shocking when coming from a company that has executed so well for so long.  I'm not surprised the hit the stock took, though it admittedly hurt.  People won't pay up as much for the performance now unless they can prove this was a fluke that was quickly corrected.  As for the results themselves, they ended up being earnings of $1.60 from $9.8B in sales.  The estimates were earnings of $1.70 from sales of $10.17B.  Results worthy of a pre-announcement, but in the end, slightly better than analysts adjusted expectations were.  They do expect to hit EPS growth of 8% - 9% on the year, from their originally planned 10% due to 10%-13% year over year earnings growth on the fourth quarter.  Besides the weakness seen in business jets (private jets) and defense spending, Honeywell also had a whirlwind of other one-time events that impacted the results.  In particular, they had an ACS realignment, HTSI sale, and the ASIX spinoff that all had financial impacts on the quarter. That said, it's the low performance in the Aero division that was the largest portion of the impact.  That division was down 6% reported and organic out of a division that's approximately 20% of overall sales.  That's a bit of a hit and it doesn't appear it will be any better in that division for the next quarter, with an anticipated five to 7 percent drop in organic sales.  This leads the company to a flat to negative two percent core organic sales for the fourth quarter and negative one to two percent organic sales on the year.  This is on the low end of guidance provided throughout the year.

Something to note about the Aero division is how much expense is being taken out for incentives this year, which is up dramatically from 2015.  This is the worst year for those incentives, which are meant to help grow sales and customer base over the out years.  Next year, there will be less incentives, leaving room for more margin and sales improvements.  This does help paint a better picture for 2017 and beyond, despite the fact that it seems hard to swallow now.  Keep in mind, despite the impact in jets and defense spending and these incentives, they have some key industries that are growing quickly.  In the end this, along with continuous improvements in margins, continued MA&D, and restructuring, they've kept organic destruction to a minimum at their lowest points, and maintained earnings growth that should hit 8% - 9% for 2016.  Is it pretty?  Nope, but it does appear solid and reliable.  Something this management team strives to achieve and does so almost like clock work.  Yes, this quarter the clock broke.  I think the company has a handle on things and will assure everything is back to normal going forward, though.  At this time, I feel they deserve the benefit of the doubt.

With adjusted guidance and results, I'm making some adjustments of my own for the stock.  I'm expecting them to hit $6.62 in earnings for 2016.  I'm also setting a target of $7.28 for 2017 earnings.  They will present their 2017 expectations in December to see how well I'm positioned with their blatantly conservative expectations they will release.  Because of the unexpected shortfall, I am also lowering my multiple I'm willing to pay for the stock to 17.  This leaves me at a 2017 price target of $124.  I maintain my rating of a 2, given the stock's current price ($109.83).  If it pulls back a couple bucks, then I'd say jump in.

All in all, this wasn't what you'd call a pretty quarter, but it was a very busy one.  I believe the vast amount of activity combined with weaker than expected Aerospace sales were the driving impact and the company has adjusted from all of this.  Next quarter should be a strong step back into the direction desired, setting us up for what should be a prosperous 2017.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.

Wednesday, October 26, 2016

Earnings Analysis: Citigroup (C)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Catching up on earnings reports, Citigroup announced their results a couple weeks ago.  Citi delivered earnings of $1.24 on revenues of $17.76B.  The TBV rose to $64.71.  This compares to earnings expectations of $1.16 on $17.37B.  Last quarter, the TBV was $63.53.  The quarterly results were solid both in general and in comparison to other money center banks.  Not the best results, but very solid nonetheless.  Since interest rates continue to stay at their record lows, they were not a factor to this quarter's results.  The major factors resulted in gains from money market investments and gains finally being realized from the acquisition of the Costco credit card deal.  Expenses continue to be kept under control and the company leveraged its buyback program to start reducing share count, though not really significantly from what I can tell.

The one thing that provides a little caution is the overall lack of global growth we're seeing.  North American deposits and branded cards were strong, but the rest of the world was mostly flat, though Asia did provide a small revenue boost compared to a year ago.  Overall, the market conditions just aren't terribly favorable yet.  As usual, we've been waiting for a dovish Fed to start raising rates.  Everyone has been anticipating a hike in December, but overall numbers released lately have been weak, making it harder for me to believe it's going to happen as anticipated.  How can they raise as facts are going down when they didn't yet raise as facts were starting to look favorable?  

In the end, the company is doing the right things and now seems to be in favor with the government.  That is certainly a helpful thing.  However, while the global economy is still in the doldrums and rates stay low, I find it hard to see the stock price climb significantly.  With the raised TBV, I'm going to raise my price target to $51.75, noting this is based on current market conditions.  This is a multiple of 0.8 times the TBV, though when things start really improving we'll see the stock go up to TBV and higher eventually (a reduction in stock shares will also be needed to help this).  I see the downward risk to be around $45.  Currently, I will rank the stock a two because of the market conditions and the odds that we may see a pullback in price before you would want to pick more up.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.

Tuesday, October 4, 2016

Earnings Analysis: Pepsico (PEP)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Last week Pepsico kicked off the earnings season for my portfolio with the announcement of their third quarter earnings for 2016.  The results and quarter were rather impressive, with earnings of $1.37 on revenues of $16.03B.  Both numbers beat respective estimates of $1.32 and $15.83B.  In addition to these solid beats, we witnessed organic growth of 4.2% and core constant earnings growth of 7%.  Both excellent numbers given the global economic conditions we're seeing and has resulted in the company also increasing their core constant earnings growth for the year to $4.78.  

The management team continues to do an excellent job.  They're continuing to get more efficient and that leverage is turning into higher profits.  Snacks and beverages are improving world-wide and the consumer appears to be getting stronger.  CEO Indra Nooyi commented on the conference call about how just about the entire world seems to be getting better.  She called out each of the major regions, speaking to how each is either getting better, or in a few cases, how things aren't getting any worse.  Next quarter you won't see as much gross margin improvements as we have, due to commodity hedging benefits wearing off.  Additionally, while everything sounds rosy, the company is still earning less on a year over year basis, mostly due to foreign exchange impacts and the deconsolidation (their word, not mine) of the Venezuela assets.  All in all though, these are pretty impressive results and you could hear similar thoughts from analysts on the call.

I continue to believe in Pepsico's management and their ability to execute, as they continue to be one of the best packaged goods companies in the market.  It appears that their growth is starting to accelerate as the US economy, and maybe the world's, starts to show signs of stabilization and recovery.  This trend likely continues into the next year, however, there will be stock market specific headwinds to watch out for.  As rates rise (and it's a matter of when, not if), you will see pressure on a stock like this.  For now, I think we'll continue to see some support when it yields 3% when it sells off.  The 2016 earnings target is now at 4.78.  I'm predicting a 8% growth of those earnings next year which gives a 2017 target of $5.16.  I am lowering the multiple expectations from the current 22+ range down to 20 times, though.  Considering the company appears to be one of the best CPG companies, this is probably rather conservative, as they deserve a higher premium than other companies, but it factors in the market risks for higher rates and how institutions will react to that, more so than the stock's performance.  This leaves a price target of $103.25, but an upper range is realistically around $113.50, so I maintain a ranking of 2 for the stock as I believe it will continue to grow, but do expect the price appreciation to slow over the coming years.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.