Reliance Steel & Aluminum Co. (RS) | Daily Alert May 21
Reliance Steel & Aluminum was founded in 1939 and is the largest metals service center company in North America. RS provides materials management and metals processing services, and it distributes a full line of more than 100,000 metal products, including carbon, alloy, stainless and specialty steel, aluminum, brass, and copper products to more than 125,000 customers in a broad range of industries.
Due to RS’s focus on small orders, decentralized operating structure and the diversity of the markets RS serves, the company’s largest customer represented only 1.0% of net sales in 2019. In 2019, RS’s average order size was $2,090; approximately 51% of the company’s orders included value-added processing and around 40% of the orders were delivered within 24 hours from receipt of the order.
Historically, RS has expanded through both acquisitions and internal growth. Since its initial public offering in September 1994, RS has successfully purchased 67 businesses. The company’s internal growth activities during the last few years, which are supported by its capital expenditures, have been at historically high levels for RS and have included opening new facilities, adding to the company’s processing capabilities and relocating existing operations to larger, more efficient facilities.
Investments in processing equipment have increased the range of value-added services that the company provides and increased its efficiency, which has likely contributed to its recent gross profit margin improvements. RS thinks these investments also differentiate the company from its competitors and has helped RS increase its market share.
RS expects to continue to grow its business through acquisitions and internal growth initiatives, particularly those that will diversify its products, customer base and geographic locations and increase its sales of specialty products and high margin, value-added processing.
Kelley Wright, IQ Trends, iqtrends.com/, email@example.com, 866.927.5250, Mid-May 2020
Calavo Growers, Inc. (CVGW) | Daily Alert June 1
Calavo Growers operates in the farm products industry. It was founded in 1924. Today, it markets and distributes avocados and other foods. The Fresh Products segment sizes, packs, and ripens avocados for delivery to its customers. The Calavo Foods segment procures and processes avocados into guacamole, and distributes it to customers. Lastly, its Renaissance Food Group produces and distributes a variety of healthy fresh packaged food products, such as tomatoes and papayas, through retail channels.
Calavo Growers earns a place on this list because of its growth story. Avocados are a “super food”, and are growing in popularity due to their high nutrition. As such, they have great appeal to health-conscious consumers. This is an emerging trend in the United States; consumers are becoming much more aware of what they are eating. Healthier foods like avocados are seeing strong demand as a result. According to Calavo, consumption of avocados in the United States has risen at an 8% annual rate over the past 10 years.
This undeniable trend is evident in Calavo’s huge growth over the past decade. In fact, from 2009 to 2019, Calavo’s sales grew nearly 250%. Adjusted diluted earnings-per-share tripled over the same time.
In the most recent quarter, Calavo reported a 15% increase in fresh avocado unit volume over the same period last year. Revenue increased 5.8% to a record $273 million. Adjusted earnings-per-share came to $0.07 per share for the quarter. For the full year, Calavo management expects double-digit growth in adjusted earnings-per-share.
Household penetration of avocados is still below other common fruits, which means Calavo has a long runway of future growth up ahead. Calavo is an industry leader, with durable competitive advantages. It has more than 15 production and distribution facilities throughout the United States, giving the company the opportunity for continued growth in the years ahead.
Calavo pays an annual dividend. The 2019 dividend payout of $1.10 per share was a 10% increase from 2018. If Calavo continues to generate high levels of growth, it is conceivable shareholders could be in line for another strong dividend hike later in 2020.
Ben Reynolds and Bob Ciura, Sure Dividend Newsletter, suredividend.com, firstname.lastname@example.org, 800-531-0465, May 22, 2020
Booz Allen Hamilton Holding Corporation (BAH) | Daily Alert May 29
The consultant Booz Allen Hamilton has increased its dividend every year since initiating the payout in 2012. Over the last three years, the dividend has risen at an annualized rate of 17%, yet still accounts for just 40% of earnings, leaving plenty of flexibility for additional hikes. The yield based on an indicated dividend five years ahead is 3.7%. To compute the future dividend, we assumed continued growth at the same rate seen over the last three years.
Booz Allen has grown per-share profits 22% annually over the last three years, and analysts expect growth of 13% this year, 10% next year, and 13% again in 2022. The stock’s consensus profit targets have held up better than most because of the company’s reliance on the U.S. government for 96% of its revenue.
Booz Allen Hamilton is a Buy and a Long-Term Buy.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, May 11, 2020
Sysco Corporation (SYY) | Daily Alert May 26
I plan to play the restaurant resurrection similarly to how we played the airline resurrection. I plan to play it not with a front-end provider, but with a back-end supplier (like Boeing with airlines).
I recommend playing the restaurant resurrection with the leading food-service provider SYSCO Corp.
SYSCO is the distributor king. Annual revenue, driven by the restaurant business, exceeds $60 billion. The company distributes a wide array of food products: frozen foods, fully prepared entrees, fruits, vegetables, canned and dry foods, fresh meats, dairy, beverage products, and imported specialties. It also distributes paper products, tableware, cookware, restaurant and kitchen equipment and supplies, and cleaning supplies.
Size, as so often the case, confers advantages. The $300-billion U.S. food-service market is low-growth but highly fragmented. Thanks to its heft and financial resources, SYSCO moves the needle buying competitors on attractive terms. It typically completes several acquisitions each year.
Acquisitions have kept revenue growing at a 5% average annual rate over the past 10 years. Earnings per share (EPS) have grown at a 7% average annual rate over the same period. EPS growth has outpaced revenue growth on incremental efficiency gains. The annual operating margin has expanded by 50 basis points over the past five years. SYSCO aggressively repurchases shares. Earnings growth has been concentrated on fewer shares.
Growth, as you might expect, will take a holiday in fiscal-year 2020 (which ends June 30). Because of the government-mandated comatosing of the economy due to the COVID-19 virus, revenue will likely drop 8% for the year (to $54.4 billion). EPS will ease 9% (to $2.92).
It hasn’t all been downhill since March. SYSCO’s healthcare food business (8% of revenue) is up more than double digits over the past couple of months. Within its government and education segment (9% of revenue), the education side of the business has softened due to school closures but, the government business is more stable.
Management anticipated the rough patch when the lock-downs were announced. Liquidity has been bolstered by an incremental $4 billion bond offering. Management intends to use the bond proceeds to repay commercial paper outstanding and for general corporate purposes (dividend support being one).
Management indicated that even under the most draconian downturn, the company has the financial resources to weather this storm.
Most companies reflexively cut costs when business contracts. SYSCO is no different, though it has taken the process a step forward. It also has exploited the downturn to right size its expense structure. Cost cutting includes temporary furloughs as well as permanent reductions in force. Permanent route efficiency gains have also been achieved.
SYSCO is uniquely positioned among food-service providers to build market share in a post-COVID-19 world. The sales team is already working to tap new accounts while expanding existing ones. SYSCO’s scale and liquidity should yield a relatively rapid rebuild of operations and inventory.
SYSCO is the dominant player in an essential industry. It sports the strongest balance sheet in the business. It can boast of a long record of generating value for shareholders through continual share buybacks.
SYSCO has generated additional value is generated through the dividend. SYSCO has 49 years of annual dividend growth to its name. The dividend has grown at a 9% average annual rate for the past 10 year.
SYSCO shares were trading near $85 when we entered 2020. They trade near $55 today. They trade at a 35% discount to blue-sky expectations at the start of the year. The sky is clouded today. The short-term outlook is uncertain. The sell-off in SYSCO shares since the country-wide lock-down began in March has lifted the starting dividend yield to a high by historical norms.
Long-term, we know the restaurant industry will be resurrected (even if all participants won’t be). SYSCO’s fortunes will be resurrected, as well. Indeed, management this week mentioned that business is already improving.
The more the outlook improves, the higher the share price will rise. I expect SYSCO to post incremental improvement through the second half of the year as the economy continues to open to more businesses.
I have a $69 per share 12-month price target. My price target assumes SYSCO’s outlook will improve sufficiently heading into fiscal-year 2022 (July 2021) to warrant the historical average 18.9 multiple to forward earnings. I expect EPS to post at $3.10 for fiscal-year 2021 and $3.65 for fiscal-year 2022. The multiple applied to expectations for next gives us our price target and our opportunity today.
Suggested Action: Buy SYSCO Corp. shares up to $59.
Ian Wyatt and Stephen Mauzy, Personal Wealth Advisor, www.wyattresearch.com, May 6, 2020
MKS Instruments, Inc. (MKSI) | Daily Alert June 8
MKS Instruments is a 60-year-old global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for their customers. The company’s primary served markets include the semiconductor, industrial technologies, life and health sciences, research, and defense.
MKS offers the largest breadth of products and services in its market, with 2200 patents and a sales presence in 100 countries. Investors can tune in to webcasts as the CFO and CEO speak at industry conferences on May 26, May 27, and June 8.
MKSI is an undervalued, small-cap growth stock, a good choice for growth investors and traders. Analysts’ consensus estimates point toward EPS growth of 12% and 38% in 2020 and 2021. If MKSI rises past the top of its trading range near 108, there’s additional price resistance at 120. Strong Buy.
Crista Huff, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, May 27, 2020
*Elbit Systems Ltd. (ESLT)
Elbit Systems is a small, but important player in the Global Defense business, mostly in airborne, land, and naval systems; homeland security; commercial aviation products. Military and Helicopter systems; Drones; Electro-optical & night vision systems. ESLT also has a growing business in Cyber-Security, something that goes hand in hand with this business.
Elbit did cut the dividend, but I don’t think it’s a significant event as it was done more out of caution than need, and was less than 2% at the time of the cut. This is a growth stock, not a ‘dividend’ stock.
The stock made a high of $165 before the Virus/deluge, fell to as low as the $110 area and now has rallied to the $150 area with the market rally and I think it will be fine, in fact I believe it will thrive.
The virus just makes the globe more politically unstable, and ESLT is making good inroads into business outside of Israel and the USA and the backlog stands at a record— almost $11 Billion. This business is going from “soldier-intensive” to “tech-intensive” and ESLT is known in the business as a very able provider of the highest quality in their tech products with new innovations all the time. I am moving my buy suggestions up to $160. I think this will make for a very good long-term holding.
Bob Howard, Positive Patterns, P.O. Box 310, Turners, MO 65765, 417-887-4486, June 9, 2020
*Southwest Airlines Co. (LUV)
52wk H. 58.83 52wk L. 22.47
Mkt Cap: $22.68B, EPS: 4.45, P/E: 8.64
The major airline pressured by the pandemic plunging from (50-54) to the low of 9.78. A survivor with a strong balance sheet. Despite lower fees by 20%-25% expects lower revenue of 30% and a return to profitability by 2022. Technical picture has improved dramatically. Reversal has managed to break through the bottom leg of its death cross mode.
(25-28) to (28-30) to (32-35) Volatile.
BUYING RANGE: 30-39
NR TERM OBJ: 487
INTERMED OBJ: 57
STOP LOSS: 28
Joseph Parnes, Shortex Market Letter, shortex.com, 800-877-6555, June 4, 2020