PulteGroup, Inc. (PHM) | Daily Alert April 22
Shares of PulteGroup are down over 45% from their 2020 high. The homebuilder was performing well before the COVID-19 pandemic struck. Pulte’s fourth-quarter 2019 EPS topped analysts’ estimate by 3% while the value of new orders grew 33%.
Although Pulte has to bear shocks to housing demand and its supply chain from COVID-19, it benefits from low-interest rates and falling raw material prices. Its shares interest growth-at-a-reasonable-price investors.
They yield almost 2% and trade at 6.9X-2020 EPS estimate versus prospects for 20% EPS growth in two years. (Next earnings: April 23). Nancy’s Note: Estimated EPS is $0.70 per share on revenues of $2.32 billion.
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, www.alphaprofit.com, 281-565-6963, April 2020
The Coca-Cola Company (KO) | Daily Alert May 7
Historically, periods of severe stock-market turbulence have proven to be good times for investors with a longer-term time horizon to focus on the highest-quality and financially
strongest names. We believe that Coca-Cola is one of these companies. The company has increased the dividend for 58 consecutive years.
While we do not expect Coke to meet its initial 2020 financial guidance because of disruption from COVID-19, we believe that earnings will bottom in 2Q20 and begin to improve as economies reopen. Reflecting its financial strength, the company was recently able to issue $5 billion of new bonds and CEO James Quincey told CNBC, on March 24, that the offering was ‘massively oversubscribed,’ highlighting investor confidence in the company’s long-term prospects.
Management has recognized that it needs to diversify revenue away from sugary soda and we expect it to make progress toward this goal. The company eliminated more than 600 ‘zombie,’ or unproductive, products in 2019 and worked to reposition the business through changes in core products, pack sizes and serving sizes, as well as through deals like the recent acquisition of coffee company Costa. The company’s innovation has also improved, and progress should resume after the COVID crisis subsides.
To be sure, even high quality consumer companies are not immune to disruption from COVID-19. On March 23, Procter & Gamble filed a supplement to the Risks section of its financial statements that outlines a number of risks that may also be relevant to KO. P&G noted that business may be hurt by reduced travel due to quarantines or fear of exposure to the virus; disruptions to production or the supply chain; the failure of suppliers and business partners; and restrictions that reduce employee travel or close manufacturing facilities. In addition, Coke has seen a significant decline in sales of beverages through restaurants, amusement parks, sporting events and schools. Volumes at grocery stores have risen, but not enough to make up the difference with so many ‘away-from-home’ locations closed or operating with limited take-out service.
Mr. Quincey said, in the CNBC interview, that anyone can draw up a list of all the things that can go wrong, but there are also opportunities. We agree and believe the KO shares areattractively valued at current levels.
On April 21, Coca-Cola reported 1Q20 adjusted earnings of $0.51 per share, up 8%, which topped our estimate of $0.45. Sales of $8.57 billion came in below our estimate of $8.67 billion. Organic sales were flat.
We are reducing our 2020 EPS estimate to $1.90 from $2.00 as a result of the COVID-19 pandemic. Our new estimate is for 2Q revenue to be down about 25%. We are modeling a 12% sales decline in 3Q, reflecting our expectation that away-from-home will still be down by 25% or a bit more. We are modeling a 3% sales decline in 4Q. The company has learned from its experience in Asia and that should help results in the U.S.
Before the COVID-19 and currency pressure caused the company to say that it did not expect to meet its 2020 guidance, management’s expectations were for 8% growth in comparable currency operating income. The EPS guidance before-COVID had been for a comparable (non-GAAP) profit of $2.25 versus $2.11 in 2019. Coke had planned to deliver free cash flow of $8 billion, resulting from about $10 billion of cash flow from operations offset by capital expenditures of $2 billion. We currently expect net income of a little more than $8 billion and depreciation of $1.4 billion. The company will probably spend less than $2 billion on capex. KO does not currently expect to repurchase shares. We are reducing our 2021 EPS estimate to $2.15 from $2.25 based on a lower sales forecast.
After the COVID crisis, we expect the company to grow earnings at a compound annual rate of 8% for a few years. KO’s sales goals are to enhance sales of dominant products (greater than 20% value share), boost sales of ‘challenger’ brands that are prominent but not the leader in their category (10%-20% share), and launch new ‘Explorer,’ brands. Important categories outside of ‘sparkling’ or soda, include energy drinks; juices and smoothies; water and sports drinks; and coffee and tea. Coke has an opportunity to add to its low market share in non-soda categories which are generally growing faster. KO increased the percentage sales from new products to 23% in 2019 from 17% in 2018 and 9% in 2015. The company has also been looking at mergers and acquisitions to boost sales.
The shares are trading at 24-times our 2020 EPS estimate and 21-times our 2021 estimate. We are maintaining our BUY rating and our price target of $54.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, April 30, 2020
Tootsie Roll Industries, Inc. (TR) | Daily Alert May 8
Everybody knows Tootsie Roll. But you may not know just how long and storied this company’s history is. Leo Hirschfield founded Tootsie Roll in 1896, naming it after his five-year-old daughter, who went by the nickname “Tootsie.”
Tootsie Roll Industries (TR) has grown over the years, expanding its lineup of products to include Charms Blow Pops, Andes Mints, DOTS, Junior Mints, Charleston Chew, Dubble Bubble, and many more names recognizable to the forever young. Those products are sold to roughly 3,100 customers, including supermarkets, dollar stores, drugstore chains, vending machine operators and warehouse clubs.
Unlike other larger food and beverage companies, Tootsie Roll is essentially controlled by the Gordon family. Ellen Gordon became CEO after her then-95-year-old husband passed away in 2015. She now controls more than 53% of the outstanding common stock. I love it when insiders have a lot of their own “skin” in the game, and there are very few stocks with that degree of insider ownership.
Another thing I like about Tootsie Roll is that management doesn’t kiss Wall Street’s feet. They don’t hold quarterly conference calls; they don’t interact much with the media and they’re largely ignored by analysts.
Management has also been adamant that Tootsie Roll isn’t for sale. But a steady stream of candy acquisitions over the past few years keeps the question alive:
Mars Inc. bought Wrigley in 2016; The Hershey Company (HSY) bought Amplify Snack Brands for $1.6 billion in 2018; and Italian candy giant Ferrero bought Nestle’s (NSRGY) U.S. candy operations (including the Baby Ruth and Butterfinger candy bars) for $2.9 billion in 2019.
I don’t know when or if controlling family members would ever sell. But IF they were to do so, it would likely be at a nice premium to where the shares are trading today.
If you’re worried that COVID-19 will drag Tootsie Roll down … don’t. Tootsie Roll has been almost immune to the stock market selloff. TR traded as high as $37.64 and hasn’t fallen below $32 this year. That’s resilient!
Recommendation: Using 5% of the funds allocated to this service, buy Tootsie Roll Industries (TR) at the market. Then place a protective stop to sell all shares at $30.70. This order is good-till-canceled.
Tony Sagami, Weiss Ultimate Portfolio, 1-877-934-7778, www.weissratings.com, May 1, 2020
Deere & Company (DE) | Daily Alert May 14
Founded in 1837 by John Deere, and headquartered in Moline, Illinois, Deere & Company is the world’s leading manufacturer of agricultural equipment, which operates through three business segments: Agriculture and turf, construction and forestry, and financial services. The company markets its products primarily through independent retail dealer networks and retail outlets. Its current total market capitalization of $45.5 billion makes DE a large capitalization stock (a large-cap stock has a market capitalization value of more than $10 billion) and its long history of consistent earnings growth and dividend payments makes it a solid company.
It is considered a well-diversified business with a wide economic moat and a sustainable competitive advantage over its rivals, which also enjoys outstanding management and corporate culture. According to Yahoo! Finance, consensus estimates call for the company to earn about $6.40 per share this year, and to go to about $8.64 per share in 2021. Deere & Company has paid dividends to investors since 1937, and during the past five years has increased its dividends at an average rate of 5.1%. Its quarterly payment of $0.76 per share currently provides a yield of 2.1%.
Technically (from the chart’s perspective) DE also looks attractive, trading 24.2% below its 52 weeks high, while it is forming a price consolidation pattern between $182 and $106 approximately, in which $106 is acting as a strong technical support level. The index funds Vanguard Total Stock Market Index and Vanguard 500 Index are major shareholders of DE, holding 2.91% and 2.04% of its shares, respectively. The stock is also one of the 63 holdings of the mutual fund managed by Moneypaper Advisors, the MP 63 Fund (DRIPX). DE’s main competitors in the world are Caterpillar Inc. (CAT) and AGCO Corp. (AGCO). DE’s Beta (a measure of the volatility, or systematic risk in comparison to the market as a whole as evidenced by the S&P 500® Index) is 1.05 so the stock is 5% more volatile than the Market.
Its Dividend Reinvestment Plan charges some fees for cash investing ($3, plus 5 cents per share), for dividend reinvestment (5% with a maximum of $3, plus 5 cents per share) and for selling ($10 plus 5 cents per share). To illustrate those fees: For example, a $100 investment at DE’s current price would cost a fee of $3.04 (or 3.04% of the investment). To minimize the effect of even such small fees, you may want to invest a larger amount but less frequently. The fee for a $300 investment, for instance, would be $3.11 (or 1.04% of the investment).
With the stock being fundamental and technically attractive, this company is an appropriate holding for investors who wish to build a holding over the long term.
Vita Nelson, www.directinvesting.com, 914-925-0022, May 4, 2020
*Texas Instruments Incorporated (TXN)
As expected, Texas Instruments Q1 revenue declined by roughly 7% from the year ago period, with Analog sales dropping by 2% and Embedded Processing by 18%. But earnings topped estimates by 14%, not including 10 cents per share in one-time benefits. And free cash flow hit $5.6 billion or 40% of revenue, which was also in line with targets. TI management struck a decidedly somber note during its Q1 earnings call, stating it’s “using the 2008 Financial Crisis” as a model to set earnings guidance. That includes a 26% sequential decline in Q4 2008 revenue, followed by an additional 16% sequential drop in Q1 2009. Nonetheless, the company will run its factories in Q2 “at about the level they ran” in Q1, in order to “support our customers during a time when they have limited ability to forecast.” Capital spending plans “are generally unchanged, because the bulk” concerns “roadmap capacity needs in the 2022 to 2025 timeframe.” Research and development spending are also “essentially unchanged,” because they’re “five and ten year time horizon decisions.” The ability to stick to a long-term plan during a worst-case short-term environment is the mark of an exceptional company. And it’s as much due to TI’s reach and seasoned management as to its A+ rated balance sheet and safe dividend. And it’s why this company will emerge more dominant than ever when the upcycle begins anew. Buy up to 120.
Elliott H. Gue, Energy Income Advisor, energyandincomeadvisor.com, 888-960-2759, April 30, 2020