Saturday, October 22, 2016

TLH Market Review 10/22/16

I decided this week to rename the weekly review to the "Market Review" to better reflect what we talk about here.  You can subscribe to receive new blog posts directly in your inbox by using the email signup tool on the right side of the web page.  I'm not going to discuss much about economics this week, and instead I'm going to focus on the portfolio holdings and earnings.


The S&P 500 continues to meander around it's all time highs. In fact the stronger dollar doesn't seem to be
affecting share prices as one would expect. The recent surge in the dollar really hasn't knocked down large caps like one would think considering a large portion of sales are made overseas and hurt by a strong currency.

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We are about to hit the big part of earnings the next two weeks and everyone will be focusing on currency issues at every company.  Truth is it seems a lot of investors and traders seemed to have already shrugged that concern off. Still I'm going to keep an eye on results no matter what. I want to see how well companies are managing their currency exposure. Regardless despite all the concerns stocks continue to defy and trade just off all time highs.

I must say it's been a wild ride for the portfolio this week.  Tobacco names were lagging, and I mentioned my disappointment last week.  I didn't expect the turnaround to happen so soon. I don't think the sector is completely out of the woods after one good day though.  After Phillip Morris and Reynolds American reported earnings this week the only thought passing through my head was the rest of the year is going to be tough. Especially with the looming rate hike which has acted as a cloud over this sector.

Reynolds(RAI) really got hit hard after earnings and fell below $44 for the first time since the shares touched $44 in November 2015.  Then in one heckuva turnaround the shares popped 20% on an unsolicited bid from British American Tobacco(BTI) with a cash/stock offer valued at $56.50/share. As part of the deal RAI holders will receive .5502 shares of BTI plus $24.13 in cash for each share of RAI.


Note that this is an unsolicited bid so Reynold's board could turn the offer down, which would send shares plummeting. I think this deal will be consummated, pending regulatory approval.  BTI already owns 42% of RAI, and the move really makes sense for BTI so I could see as worst case scenario the cash part of the offer gets upped if there's dissent among shareholders. Considering RAI is looking like it's hitting a rough patch based on recent performance I think many shareholders are up for the idea.  With the announcement of a new CEO this week, and vaping business growth still not strong enough to offset cigarette volume declines it seems like a ripe opportunity to takeover the company.


This week we received a handful of earnings reports including one from Phillip Morris(PM).  I mentioned currency and all eyes have been on this company completely prone to currency issues as virtually all sales are overseas. The company had stable revenues which were up 0.8% from the prior year. That was welcome to see. EPS came in at $1.25/share, and the company has earned $3.38 for the year and stuck by it's guidance for $4.53-$4.58 for the remainder of the year. The 10-Q wasn't released and the company didn't include a cash flow statement either in it's press release. From what it looks like no shares were repurchased.

Company volumes YTD were down -3.9%(bad), but their reduced risk heat stick product was up 133% to 2.1 billion units(good). Tax increases took a big chunk out of volumes in many key markets.  Governments claim they are raising taxes on products to reduce consumption, but in reality they are trying to raise revenues at the same time. They fail to understand though that higher taxes will actually cause revenues to fall, and push more people into black market products when they can be obtained.

International Business Machines(IBM) reported Q3 results that were met with broad selling as the shares slipped to $147 and have meandered in that area since.  EPS of $2.98 wasn't enough to impress traders, and another quarter with no revenue growth didn't help. Their strategic imperatives sectors continue to make nice gains which I'm pleased with overall.  Still I'm disappointed there isn't more revenue growth from their cognitive solutions segment.  That area only grew sales by 4.5% and quite frankly I was expecting a stronger showing.  I still wouldn't count Big Blue out.  They have shown time and time again they know how to transition. Sometimes it just takes longer than we'd like.

PayPal(PYPL) reported results that really continued to impress. Here is there slide presentation that was included with results.  Pretty much everywhere you look you'll find strong growth and user engagement. I liked to see that active users continue to become more active as they've increased use from 26.9 to 30.2 transactions. While EPS growth was a little low, revenues up 18%, and strong mobile payment processing up 56% are bright spots to me.

The company also noted they expect no material impact from customer choice in 2016. Now 2017 remains another thing, but remember this is due to their recently signed agreements with MasterCard, and Visa(both portfolio members). Guidance for the year has GAAP EPS coming in at 1.13-1.15. I think that will be beat by a few pennies. Also the company provided a three year outlook.  They expect currency neutral TPV to grow in the mid 20's, and currency neutral revenue to be up 16-17%. A lot can change in that time, but I think it shows where the trend is going for the company.

Boston Beer(SAM) reported results that honestly disappointed me. But the shares seemed to have perked up a bit. I think that's a result of the shares being so beaten down, and possibly this marking the low point for results. Their Q3 results had EPS of $2.48 on revenues of $253.4 million(down 14%). The company also narrowed it's 2016 guidance to $6.40-$6.70 from $6.30-$7.00. That narrowed guidance left me wanting more.  I don't think days of 15-20% EPS growth are coming back, but I do think 6-10% is doable for this company. Once they get a hold of competing with the smaller craft brewers encroaching their turf I expect better outcomes. They continue to sport a solid balance sheet, and have been masterful at managing capex through this rough patch. 

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