Procter & Gamble [$PG] issued a press release on its first quarter results prior to the market opening. The company raised its full year guidance. The share price jumped by 2.6% from $119.08 to a 52 week high of $122.18.
Financials
All segments except grooming displayed positive organic sales growth. The main contributors to top and bottom line growth is the beauty segment along with the fabric & home care segment.
Valuation
P&G has in 12 months gone up by more than 50% through expansion of multiples. As a consequence it is anything but cheap at current levels irrespective of having one of the best operating margins and currently displaying one of the best growth rates in the industry.
Bank OZK [$OZK] issued a press release after the closing bell on its quarterly results accompanied by the following comment from the CEO George Gleason.
“We are very pleased to have once again delivered financial metrics among the best in the industry for the quarter just ended. We continue to maintain our focus on our strong credit culture and consistent discipline, which are paramount in this interest rate and competitive environment. Our excellent team of bankers have us well positioned for continued success as we remain focused on delivering long-term value for our shareholders.”
Total interest income was down QoQ, which is unusual for Bank OZK. As a consequence the net interest income before provision for loan losses was also down QoQ and YoY.
The stock price traded lower in the after hours. Is it then time to sell Bank OZK given the recent small kinks in the armour such as the provision for loan losses in the third quarter of 2018 and the reduced net interest income in the current third quarter of 2019? Probably not.
The bank is a dwarf in terms of assets compared to other regional banks that are members of the S&P500.
But the bank has some of the best metrics in terms of key metrics such as return on assets (ROA), return on equity (ROE) and net profit margin.
And the bank has in the past grown revenue at a faster pace than other banks.
And the bank has one of the absolutely lowest efficiency ratios in the industry.
On the other hand the bank dilutes shareholders and it might be advisable, if the bank gradually shifts the free cash flow to buybacks instead of repeatedly hiking the dividend every quarter and by ever greater increments.
All taken together it’s still one of the best banks out there and it’s currently trading at a discount in terms of for example the price-to-earnings (P/E) multiple.
Netflix issued a press release on its quarterly results after the closing bell.
In Q3, we grew to $5.2 billion in revenue, up 31% over the prior year, and operating income doubled to$1.0 billion. Paid net adds totaled 6.8m compared to our 7.0m forecast and prior year Q3 of 6.1m. As we’ve improved the variety, diversity and quality of our content slate, member engagement has grown, revenue has increased, and we’re able to further fund our content investment.
Financials
The number of memberships keeps increasing.
But the net addition of paid memberships is leveling off and so are the number of free trials.
Revenue has grown faster than the number of memberships, because the revenue per membership continues to go up for especially domestic streaming.
Profits are further boosted by the fact, that marketing expenses have mostly stayed flat. This has sent profit margins to all time highs.
Valuation
The share price of Netflix has had an incredible 10 year stint. As has the revenue and profits. But the share price might possibly have gotten ahead of itself. The multiples are not low and the stock still appears grossly overpriced in absolute and relative terms.
Media coverage
Reuters – Netflix shares jump as subscribers grow ahead of Disney, Apple attack
Bloomberg – Netflix Restores Faith Just Ahead of Offensive by Disney, Apple
Bloomberg – Netflix Approaches Critical Test of Its Viability
New York Times – ‘Stranger Things’ Helps Netflix Increase Subscribers
CNBC – Netflix to competition: Welcome! Your success will be our success
Roche issued a press release on its nine month sales with the following headlines.
Group sales increase 10% at constant exchange rates and 9% in Swiss francs, due to new products
Pharmaceuticals Division sales up 12%, driven by high demand for recently launched medicines, mainly Ocrevus, Hemlibra, Tecentriq and Perjeta
Diagnostics Division sales grow 4%, primarily due to its immunodiagnostic testing portfolio
Outlook raised again: Roche now expects sales to grow in the high-single digit range, at constant exchange rates, for 2019
Growth at Roche has recently accelerated due to many new product launches in the pharmaceuticals division.
Valuation
Roche is the largest pharmaceutical company in Europe, whether measured by market capitalisation, revenue or operating income.
Roche has one of the best operating margins among the European pharmaceutical companies.
But yet it is trading at lower multiples than many of its peers despite having an impressive product portfolio and pipeline with lots of new molecular entities (NMEs) in it.
Roche appears attractively valued despite the launch of biosimilars by Amgen of Avastin® and Herceptin® due to the extensive pipeline; for example risdiplam and satralizumab. It is also worth noting that all of the ten best selling drugs are monoclonal antibodies (mABs), for which generic biosimilars are not easily introduced, which offers some moat.
Media coverage
Reuters – Roche lifts 2019 sales view again as Chinese demand soars
Bloomberg – Roche Boosts Outlook for Third Time as New Drugs Surge
Johnson & Johnson [$JNJ] issued a press release before the market opened on its third quarter results with the following headlines:
Sales of $20.7 billion reflecting growth of 1.9%, operational growth of 3.2%* and adjusted operational growth of 5.2%*
EPS of $1.81 increased 25.7%; adjusted EPS of $2.12 increased 3.4%*
Company increasing Full Year Sales and EPS guidance due to strong performance
CEO Alex Gorsky issued the following statement:
“Our third-quarter results represent strong performance, driven by competitive underlying growth in Pharmaceuticals and Medical Devices, as well as continued optimization in our Consumer business. As we look ahead, we remain confident in the strength of our broad-based business model, which is fueled by our disciplined portfolio management, focus on transformational innovation and dedicated employees around the world who position us for success today and well into the future.”
Financials
The figures below summarise revenue, expenses, profits, margins and each segment. The revenue growth is driven by contact lenses (7.6%), interventional solutions (14.3%), beauty (8.1%) and the pharmaceutical segment and within it immunology (Stelara®, Tremfya®), neuroscience (Invega sustenna®) and oncology (Darzalex®, Imbruvica®).
Valuation and outlook
The share price of J&J has gone up in recent years, but the top line and bottom line have not quite followed suit. The company does not at all seem undervalued at current price levels despite the guidance being raised. Many lawsuits are looming and keeping the share price at check.
United Healthcare [$UNH] issued a press release on its quarterly results before the market opened with the following headlines:
Total Revenues of $60.4 BillionGrew by 7% or $3.8 Billion Year-over-Year
Operating Earnings Grew 9% to $5.0 Billion, Including Double-Digit Growth Rates in Each Optum Business
Net Earnings Per Share were $3.67, Adjusted Net Earnings Per Share were $3.88, Bringing Year-To-Date Growth to 17%
Cash Flows from Operations were $3.2 Billion in the Quarter, Bringing Year-To-Date Cash Flows from Operations to $12.3 Billion or 1.2x Net Income
The share price went from $220.59 to a closing price of $238.59 (+8.2%) following the earnings release and comments by the CEO David Wichmann and the CFO John Rex during the earnings call.
“Based on this year’s year-to-date performance, we have increased our outlook for full year 2019 adjusted earnings to a range of $14.90 to $15.00 per share.”
“Our strong year-to-date results lead us to raise our full year 2019 outlook for adjusted earnings to a range of $14.90 to $15.00 per share, at the mid-point an increase of $0.40 per share from the initial outlook we provided late last year.”
Financials
The figures below summarise the increasing revenue and operating income in each of the operating segments.
Sector comparison
UnitedHealth has the best margins in the industry, but the multiples are also higher as a consequence. The recent pullback provided an entry option at somewhat lower multiples, but the share price growth has mostly been fuelled by expansion of multiples in recent years.
Media coverage
Reuters – UnitedHealth sees 2020 profit above Street target; shares climb 8%
Bloomberg – Health Insurers Gain Most Since 2013 as Medical Cost Fears Ease
Costco [COST] issued a press release on their quarterly results after markets closed.
Quarterly results
Comparable store sales missed estimates and the growth is slowing down in all segments. The US segment represents three quarters of the overall revenue.
Comparison with peers
Costco has very low gross margins relative to its peers, and despite its low SG&A it has low single digit operating margins.
Gross margin for various discount storesSG&A for various discount storesOperating margin for various discount stores
The beauty of Costco however is their assets turnover of approximately 350%, which is only rivaled by Kroger [KR]
Kroger however has a much higher equity multiplier than Costco and a much lower interest coverage, which makes Costco a more attractive company than Kroger to invest in, when not taking into account valuation.
Equity multiplier for various discount storesInterest coverage for various discount stores
Valuation
The share price of Costco has over the past 10 years gone up by more than 600% along with those of Dollar General [DG] and Dollar Tree [DLTR].
During that time all three have grown revenue by 200% or more; DLTR even more as a consequence of their acquisition of Family Dollar in 2015.
At a forward P/E of 33.8 Costco is richly valued and the quarterly earnings probably do not justify such lavish multiples. Below a plot of the enterprise value over the operating income as a time series, which shows the expansion of multiples for Costco in particular over the past 10 years. Costco is a wonderful business, but it’s probably too expensive at current levels despite their recent launch in China. If it is indeed priced to perfection, then missing on comparable store sales could have negative consequences for the stock price, when the markets open.
Media coverage
Reuters – Costco quarterly sales miss estimates amid fierce competition
Bloomberg – Costco’s Profit Falls Just Short of Investors’ High Expectations
Constellations Brands issued a press release on its quarterly results before markets opened.
Canopy equity loss
All segments performed well in terms of both shipment volume, revenue and profit.
But due to continued Canopy equity losses Constellation Brands yet again reported negative earnings for the quarter. The announcement of a positively revised outlook in terms of operating earnings was overshadowed by this.
Constellation’s share of Canopy Growth’s equity losses and related activities for second quarter fiscal 2020 totaled a loss of $484.4 million, including the impact from the June 2019 warrant modification, on a reported basis and a loss of $54.7 million on a comparable basis. Constellation has recognized a $757 million unrealized net gain in reported basis results since initial Canopy investment in November 2017; $839 million decrease in the fair value of Canopy investments was recognized for second quarter fiscal 2020.
Valuation
At a forward P/E just above 20 it is not particularly attractively priced. Like distillers Brown Forman [BF-B] and Diageo [DEO] it is somewhat overpriced. An alternative investment could be AB InBev [BUD], which is somewhat more attractively valued compared to smaller brewery rivals Heineken [HEAIS.AS], Carlsberg [CARL-B.CO], Molson Coors [TAP], The Boston Beer Company [SAM] and Constellation Brands. AB InBev just like Constellation Brands have better operating margins than most competitors.
PepsiCo issued a press release regarding its quarterly results before the market opened.
CEO comments
The financial results were accompanied by the following comments by CEO Ramon Laguarta.
“We are pleased with our results for the third quarter. While adverse foreign exchange translation negatively impacted reported net revenue performance, organic revenue growth was 4.3% in the quarter. We are making good progress against our strategic priorities and our businesses are performing well as we continue to make the necessary investments in our capabilities, brands, manufacturing and go-to-market capacity to propel our future growth. Given our performance year-to-date, we now expect to meet or exceed our full-year organic revenue growth target of 4%.”
Diving into the financial results
All segments except for Frito Lay North America (FLNA) and Asia/Middle East/North Africa suffered from decreasing volume, but this was offset by an increase in price and all segments experienced organic revenue growth.
The operating margin margin for Quaker Foods North America contracted from 25.2% to 21.9%.
A question regarding the permanency of the contraction of the margins of the Quaker Foods North America segment was asked, and the decreasing margins were explained as being due to increased COGS as a consequence of an improved formulation that eliminates artificials.
A question on Quaker. Quaker’s trend seems to be getting better, second quarter in a row that — of organic growth at Quaker, something not seen since 2015, if I’m correct. So could you please give us more granularity in those results, especially, and it’s not necessarily what we are seeing in Nielsen data? And how sustainable this trend is in your view? And also, I mean, this growth seems to be coming at the expense of operating income, which seems to be a change of strategy this year versus the last few years. Should we think about operating margins to continue to compress to sustain the growth here?
Good question, Laurent. Of course, we want each one of our businesses to be a positive growth business, so Quaker, no different. We will continue to invest to make sure that business continues to grow, maybe not at the levels that we have Frito-Lay, but just good levels.
We’ve done several things with that business. One is we invested a bit more, both in CapEx and on cost of goods. Cost of goods, specifically in the area of improving the formulation of our Quaker products. So we’ve eliminated all the artificials, now it’s only natural and I think that will do well for the brand going forward. Although it’s quite an important investment in terms of cost of goods. So that’s why you’re seeing the operating — the gross margin reducing a little bit in Quaker.
2019 Expectations
PepsiCo maintains its expectations in terms of operating cash flow $9B and cash returns to shareholders of approximately $8B.
Approximately $9 billion in cash from operating activities and free cash flow of approximately $5 billion, which assumes net capital spending of approximately $4.5 billion.
Total cash returns to shareholders of approximately $8 billion, comprised of dividends of approximately $5 billion and share repurchases of approximately $3 billion.
This expectation is in line with previous years. The free cash flow in recent years have suffered a bit from increased net capital spending and in particular from a reduced operating cash flow. Given the increased share price and the reduced free cash flow it makes that share repurchases have been decreasing since 2015. As a consequence of the reduced buybacks and the increasing share price PepsiCo currently has one of the lower buyback ratios compared to other US consumer staples.
Annual time series of operating cash flow, free cash flow, capital expenditures, dividends and share repurchases.Time series of buyback ratio in 2019.Time series of dividend yield in 2019.
Valuation
PepsiCo is not cheap in absolute terms and neither relative to its peers nor its past. It’s probably not a time to buy, but given organic growth of four percent it’s probably not the time to sell either. Better consumer staples alternatives to buy might be Kraft Heinz [KHC], Unilever [UN, UNA.AS] or AB InBev [BUD, ABI.BR].
