Growth & Income 835

These shares are two-fers—providing price acceleration and steady cash flow.

Acme United Corporation (ACU) | Daily Alert October 19
For more than 150 years, Acme United Corporation has supplied innovative cutting, measuring, first aid, and sharpening products to the school, home, office, arts and crafts, hardware, sporting goods, fishing tools, and industrial markets. Its top brands include First Aid Only, PhysiciansCare, Pac-Kit, Spill Magic, Westcott, Clauss, Camillus, Cuda, and DMT.

The company’s diversified end markets provide exposure to both hobbyists and industrial facilities. Growing concerns about industrial health safety is driving interest in many of Acme United’s products. Its safety solutions include component kits that are often required by industrial safety regulations and can be restocked using its SafetyHub app. The kits focus on different needs, such as first aid, eye washes, or medications, and the app can deliver push messages about refills and maintain an OSHA compliance log.

The company is diversified globally, with operations in the U.S., Canada, Europe, and Asia.

Management sees several drivers for Acme United’s growth. New first aid programs being put into place at large industrial, food service, and other distributors should drive growth, along with an expanding refill business. The company’s widening product line should increase cross-selling opportunities, as well.

Acquisitions are part of the company’s growth strategy, enabled by a strong balance sheet and good cash flow. In January 2020, Acme United acquired First Aid Central, a Canadian supplier of first aid kits, refills, and safety products for a broad range of customers. This acquisition expanded the company’s distribution capabilities, product offerings, and online presence.

The COVID-19 pandemic caused an uptick in Acme United’s sales a wide array of products including fishing tools, hunting knives, craft scissors, sharpening tools, first aid, and safety products. Increasing awareness of the need for safe workplaces should benefit the company as the nation returns to work.

In the second quarter ended June 30, 2020, sales grew 9.5% and EPS grew 19.5% over Q2 2019. In the first half of 2020, EPS reached $1.28, up 27% over 2019 first half performance and closing in already on the 2019 full FY EPS of $1.60. Analysts expect EPS to reach $1.92 for the full year, a healthy increase over 2019.

We project future annual average growth of EPS and sales to be around 10% a year, plus dividends. Acme has increased dividends every year in the last decade.

Acme United’s stock is currently selling a P/E ratio of 12.0, just below our revised average P/E ratio of 12.4. We think the stock can sell for a P/E ratio of 15.7, which would take the price as high as $47.
Doug Gerlach, Smallcapinformer.com, 1-877-33-ICLUB, October 2020

Stanley Black & Decker, Inc. (SWK) | Daily Alert November 2
Stanley Black & Decker, Inc. (Conservative Growth Payer Portfolio; Dividend Sustainability Rating: Above Average) is one of the world’s largest makers of hand and power tools for consumers. In addition to Stanley and Black & Decker, you tap top-selling brands DeWalt, Craftsman and Irwin.

Tools and storage products accounted for 70% of Stanley’s 2019 sales and 77% of its profits. That’s followed by Industrial products (17% of sales, 17% of profits) and building security systems (13%, 6%). The U.S. supplies about 60% of overall sales.

Stanley has increased its dividend each year for the past 53 years and continuously for 143 years. With the September 2020 dividend, the company raised its quarterly payment by 1.4% to $0.70 a share.

That payment looks safe. In the 12 months ended June 27, 2020, Stanley generated free cash flow (regular cash flow less capital expenditures) of $970 million. That easily covers its total dividend payments of $447 million.

Since 2002, the company has spent $10.1 billion on purchases of other businesses. The biggest of those was its $4.5 billion all-stock buy of rival toolmaker Black & Decker in March 2010. In 2017, it also paid $2.8 billion for two more businesses: the Craftsman hand and power tools business of Sears Holdings Corp., and the hand-tool businesses (Lenox and Irwin) of Newell Brands (New York symbol NWL).

New businesses are primarily why the company’s overall sales rose 29.3%, from $11.17 billion in 2015 to $14.44 billion in 2019. If you exclude costs to integrate new businesses and other unusual items, Stanley’s overall earnings jumped 40.0%, from $903.8 million in 2015 to $1.27 billion in 2019. Due to fewer shares outstanding, investors saw earnings per share improve at a slightly faster 41.9%, from $5.92 to $8.40.

Stanley continues to make acquisitions. In February 2020, it purchased Consolidated Aerospace Manufacturing. That firm supplies specialty fasteners and components to Boeing Co. (New York symbol BA) and other aircraft makers. The price was $1.46 billion, but Stanley will hold back $200 million until aviation regulators let Boeing’s 737 Max jetliner fly again. Those planes remain grounded following fatal crashes in Ethiopia and Indonesia.

In the quarter ended June 27, 2020, revenue decreased by 6.3% to $3.15 billion from $3.76 billion a year earlier. Sales were down due to lower volumes during COVID-19 lockdowns. Without one-time items, Stanley earned $247.0 million, or $1.60 a share, in the latest quarter; that’s down 38.3% from $400.3 million, or $2.66. On a per-share basis, its earnings fell 39.8% due to more shares outstanding.

Despite its acquisitions, Stanley’s balance sheet is sound. Its long-term debt as of June 27, 2020, was $4.7 billion. That’s a very manageable 19% of its market cap. The company also held cash of $859.8 million.

Stanley Black & Decker is a buy.
Patrick McKeough, Dividend Advisor, tsinetwork.ca, 888-292-0296, October 2020

Masco Corporation (MAS) | Daily Alert November 9
Founded in 1929 and headquartered in Livonia, Michigan, Masco Corporation designs, manufactures, and distributes home improvement and building products worldwide, and offers its products in three different segments: Plumbing, Decorative Architectural Products and other Specialty Products. The company offers them through home center retailers, online retailers, mass merchandisers, hardware stores, homebuilders, distributors, and other outlets to consumers and contractors, as well as directly to consumers. The company is currently ranked at 373 on the Fortune 500. Its current total market capitalization of $14.0 billion makes MAS a large capitalization stock (a large-cap stock has a market capitalization value of more than $10 billion) with a long history of consistent earnings growth and dividend payments.

It is considered a solid and well-diversified business with a wide economic moat and a sustainable competitive advantage over its rivals, which also enjoys an outstanding management and corporate culture. According to Yahoo! Finance, consensus estimates call for the company to earn about $3.02 per share this year, up from $2.25 per share last year, and to go to about $3.21 per share next year. Masco Corporation has paid dividends to investors since 1944, and has increased its payments for six consecutive years. During the past ten years has increased its dividends at an average rate of 7.6%, and its quarterly payment is $0.14 per share.

The value of dividends reinvestment: A hypothetical investment in Masco has grown cumulatively (including dividends reinvested) 3,420.04% during the past forty years. The same investment has grown only 1,446.03% in the same period of time, excluding dividends. According to the data and calculations of the financial website dqydj.com (don’t quit your day job), a periodic monthly investment of $100 in MAS for the past 40 years would has grown to $486,680, including dividends reinvested. MAS still has room for significant dividend payments and dividend increases in the coming years, since the company’s current Dividend Payout Ratio (DPR), which is its dividend payments as a percentage of its earnings, is just 19%.

Its current Price to Earnings ratio (P/E –a measure of valuation) of 18.74 is 27.3% below the US Market Index, and its Forward P/E ratio is 18.18. Its Price to Sales ratio (P/Sales) of 2.08 is 13.3% below the US Market index. And according to Morningstar, the stock is trading at a 3% discount, making it attractive for investors with a long-term investment horizon. Technically (from the chart’s perspective) MAS also looks attractive, trading 10.9% below its all-time high), while it is forming a long price consolidation pattern between $60 and $52 approximately, in which $52 is acting as a technical support level.

The index funds Vanguard Total Stock Market Index and Vanguard Mid Cap Index are major shareholders of MAS, holding 2.8% and 2.3% of its shares, respectively. Masco’s main competitors are Fortune Brands Home & Security Inc. (FBHS) and Sherwin-Williams Co. (SHW). Masco’s 5-year 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 1.51 so the stock is 51% more volatile than the Market.
Vita Nelson, www.directinvesting.com, 914-925-0022, November 2, 2020

Hasbro, Inc. (HAS) | Daily Alert November 113
Starting with Mr. Potato Head in 1952, Hasbro has grown into a global toy and game manufacturer with household names such as Transformers, Nerf, Play-Doh, Monopoly, Power Rangers, Peppa Pig, and many others. HAS also exclusively licenses Disney’s primary brands, including Marvel, Star Wars, and Disney Princesses/Frozen, and Sesame Street to develop toys and games.

Media revenue has been a challenge this year as live action production was put on hold due to COVID-19, but we like this business for the long term. Despite a recovery since March, shares are down roughly 20% year-to-date. We like that the firm has shown ability to keep expenses under control, and we see its business as resilient to economic downturns as parents and grandparents will sacrifice to ensure there are toys and games under the Christmas tree or at the birthday party, while folks spending more time at home are looking for additional options to keep the kids entertained.

Additional opportunities for growth come from overseas markets and its historically successful acquisition strategy. We expect a sizable bounce back for HAS over the long term and our patience is supported by a handsome dividend yield.
John Buckingham, The Prudent Speculator, theprudentspeculator.com, 877-817-4394, November 4, 2020

The Procter & Gamble Company (PG) | Daily Alert November 13
Procter & Gamble was an original member of the Editor’s Portfolio when I began writing DRIP Investor in 1992. The stock was selling at a split-adjusted price of around $12 in 1992, so the stock has been a decent performer over the last 28 years, especially when you consider the compounding impact from a decent dividend stream.

But it has not always been a one-way street for P&G. As happens for many companies, the stock has experienced its share of lulls, the latest being sideways trading action from 2013 through mid-2018. The company was having trouble showing meaningful organic growth, which provided little appeal save for the decent dividend yield. However, since bottoming at around $72 per share in April 2018, the stock has been on a tear, nearly doubling and far outpacing the performance of the S&P 500 Index over that time period.

What has changed for P&G? In a word—growth. Now, nobody is confusing P&G with a tech stock. However, the company has been putting up very nice growth numbers in recent quarters. In the most recent quarter, sales rose 9% to $19.3 billion, beating the estimate of $18.4 billion. Per-share profits increased 20% to $1.63, easily outpacing the consensus earnings estimate of $1.42. Perhaps most impressive was the 9% organic sales growth for the quarter.

The company continues to get a boost from the Covid pandemic and demand for cleaning products. Organic growth was evident in every product line. Fabric & Home Care posted a 14% increase in organic sales. Dish Care, Air Care, and Surface Care products each grew 20% or more in the quarter. Health Care saw 12% organic sales growth and was fueled by Oral Care products. The slowest business was Baby, Feminine, and Family Care, although this segment still posted 4% growth in organic sales.

Procter & Gamble must expect the sales momentum to continue, as the firm raised its outlook for fiscal 2021 from a range of 1% to 3% sales growth to 3% to 4% and boosted its organic sales growth projections from 2% to 4% to a range of 4% to 5%. The company also raised guidance for core earnings per share growth to a range of 5% to 8% for the fiscal year.

To be sure, Procter & Gamble is not a cheap stock. These shares trade for 25 times the fiscal 2021 earnings estimate of $5.57 per share. Thus, the stock is vulnerable to a sell-off should future growth numbers disappoint, or investors move away from Covid plays as the virus abates over time. Still, the company’s operating momentum, not to mention the stock’s dividend yield give these shares plenty of appeal for investors. I would expect the stock to at least match the market return for the remainder of the year, and I remain positive on the stock’s long-term prospects.

Procter & Gamble offers a direct purchase plan whereby any investor may buy the initial shares directly. Minimum initial investment is $250. There is one-time enrollment fee of $15. For enrollment information call (800) 742-6253 or visit the company’s transfer agent, Equiniti, at www.shareowneronline.com.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, November 2020

Wayfair Inc. (W) | Daily Alert November 16
Wayfair delivered another quarter of impressive results in Q3 as eCommerce adoption accelerates and consumers continue to shift discretionary spend to the home goods category, with 66% y/y direct retail net revenue growth and record profitability. Higher utilization of the company’s logistics network, along with increasing uptake of seller services, led to gross margin expansion, and both new and existing customers are displaying increasing repeat purchase behavior, which is driving advertising leverage. While Wayfair did not provide guidance, QTD gross revenue has been tracking to ~50% y/y growth, and the combination of an elongated holiday selling season and more time being spent at home this winter has the company optimistic that growth will remain strong throughout Q4. We continue to find shares of Wayfair attractive even as pandemic-driven tailwinds begin to subside, with the company’s years of logistics investments paving the way for operating leverage going forward.

Wayfair added 2.8M customers in Q3, well above CGe (Canaccord’s estimate), bringing total active customers to 28.8M (+51% y/y), with customers acquired during COVID displaying similar repeat purchase behavior as prior cohorts and 72% of total orders placed by repeat customers (vs. 67% in 3Q19). Direct Retail net revenue grew 66% y/y to $3.86 in Q3 (vs. 84% in Q2), 4% ahead of CGe, as the home goods category continued to see strong eCommerce demand as a result of pandemic-fueled tailwinds. This year’s 48-hour Way Day event represented the two largest sales days in Wayfair history, with the event contributing more to Q3 growth than expected due to logistics efficiencies, although overall sales trends moderated toward the back half of the quarter when excluding the impact of WayDay. GM expanded 650bps y/y to 29.9%, well ahead of expectations, due to continued logistics efficiencies driven by higher utilization along with a mix shift to in-house brands and increased uptake of supplier services. Adj. E6ITDA of $371M was roughly double both our and consensus estimates, representing a record 9.7% margin (+16pp y/y).

Logistics investments show value, progress in Europe: Although inventory levels are at times still below pre-COVID levels, Wayfair believes they are improving and is working with suppliers to drive demand to products with the best availability. While delivery speeds have also improved, fulfillment is expected to be slower than normal during the holiday season. The company reiterated that it has significant capacity available within the ~18M square feet of its CastleGate logistics network to support robust growth over the next few years, continuing to leverage its scale to gain extra space on cargo ships and grow its ocean freight forwarding business. Wayfair continues to expand its presence in Europe, which the company sees as a significant opportunity given the ~$400B total addressable market (TAM)—(B2C & B2B) and lower eCommerce penetration relative to the US. Consumers in the UK and Germany, two markets that make up ~45% of that TAM, can now choose from more than 4.2M products (+30% y/y) offered by Wayfair’s ~400 European suppliers, with some US-based suppliers also expanding their presence into Europe to access this growing market.

Strong demand trends expected in Q4 despite recent deceleration: Wayfair did not provide formal Q4 guidance due to ongoing macroeconomic uncertainty, but QTD gross revenue has been tracking up ~50% y/y. and the company expects strong demand during an elongated holiday season despite some deceleration in late Q3, as consumers are likely to spend more time at home this winter. The company expects Q4 gross margin to be between 26-28% (vs. prior CGe of 26.4%) as it sees continued logistics efficiencies, customer service & merchant fees at ~4 of revenue, advertising normalizing around 10-11% of revenue, and SOTG&A of tv$400M.

We are raising our PT to $350 (from $340), which is based on tv2x (no change) our increased 2022 revenue estimate and supported by DCF valuation.
Maria Ripps, CFA, Michael Graham, CFA, and Jason Tilchen, CFA, Canaccord Genuity Research, canaccordgenuity.com, November 4, 2020

*News Corporation (NWS)
The election is over. And it’s been a godsend for the media sector CNN Digital had its largest audience ever—including record-breaking international attention. The New York Times had 75 million views on the day of the election, and 200 million views the day after. And Fox News dominated the cable news ratings.

Fox News—perhaps News Corp’s most famous U.S. brand—tends to do even better during Democratic administrations, when it can play the incendiary outsider role. News Corp is well-diversified. If and when politics takes a backseat, News Corp owns a vast financial news empire as well, spearheaded by The Wall Street Journal.

While a smaller market, Australian news is thoroughly dominated by News Corp holdings, which has the number one brand in a number of media sectors. News Corp owns the TV rights to sports all over the globe.

Add it all up, and it’s clear that News Corp is in great shape going forward. And it doesn’t hurt that revenue per share is actually higher than current share prices. And the book value per share is only about 20% off the share price.
Ian Wyatt and Ben Shepherd, Ian Wyatt’s Million Dollar Portfolio, wyattresearch.com, November 6, 2020

 

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