Sunday, October 30, 2016

TLH Market Review

This week we received our first estimate for Q3 GDP. According to government data the economy grew by 2.9% between July-September. That growth number is compared to the preceding 3 months, or Q2.  That's the best number we've seen since Q3 2014, but remember this number will be revised a couple more times so let's keep our fingers crossed.  Growth is nowhere near what our economy is capable of.  We have so many talented and smart individuals in this country and it seems our policies are preventing full blown utilization of this. 

We also received some damning news about HRC and her email scandal that won't go away. Apparently agents found some of the "deleted" emails during an unrelated political investigation from a congressman for underage child interactions.  This saga would make for an excellent movie. Maybe one day there will be. Considering the FBI issued it's letter to Congress means they will definitely have to back track on their previous stance regarding her mis-handling of classified information. I like to say where there is smoke there is fire, and I couldn't trust what looks like a criminal in the Oval Office. Traders didn't take to kindly to the news which made for an exciting Friday afternoon in the markets. The S&P 500 swooned 20 points, but ultimately ended down 10 points from when the news broke.

Portfolio Earnings

We received a batch of earnings this week so let's highlight the important stuff!

We started with Visa(V) which reported it's fiscal Q4 and year ending results.. For the quarter EPS came in at $0.79 and for the year $2.78. Revenue for the quarter came in at $4.3 billion, and 15.1 billion for the year. Q4 contained Visa Europe results. The company gave some metrics excluding the integration and payment volumes grew 10% over the prior year and service revenues were up 8% YoY.

That's a solid quarter and with the integration about to hit full throttle we'll start to see some cost savings come through in 2017.  We also received results from MasterCard and we'll see the payments sector is firing on all cylinders. Here is Visa's guidance for 2017.

Visa Inc. provides its financial outlook for the following GAAP metrics for fiscal full-year 2017: 

• Annual net revenue growth: 16% to 18% range on a nominal dollar basis, including 1.0 to 1.5 ppts of negative foreign currency impact; 
• Client incentives as a percent of gross revenues: 20.5% to 21.5% range; 
• Annual operating margin: Mid 60s; 
• Effective tax rate: Low 30s; and 
• Annual diluted class A common stock earnings per share growth: Low 30s on a GAAP nominal dollar basis and mid-teens on an adjusted, non-GAAP nominal dollar basis (see note below), both including 1.5 to 2.0 ppts of negative foreign currency impact.

MasterCard(MA) reported Q3 results with EPS of $1.08 up 26% on revenues up 14% to $2.9 billion.  Their worldwide purchasing volume was up 9% for the quarter. If you recall our PayPal results there is no doubt this has been a solid time for earnings with our companies. MasterCard has been quietly performing very well lately and is up around 21% since July.  Here is what the CEO had to say

“Our business continues to perform well, and we are pleased with our strong growth in revenue and earnings per share this quarter,” said Ajay Banga , Mastercard president and CEO. “We are executing on our strategy, deepening issuer relationships and delivering our customers and partners digital-first solutions. As a result, consumers benefit from seamless and secure purchase experiences everywhere and every way they shop.”

I'm expecting another solid dividend raise which I expect the company to announce in December.  I can really see another 19% raise, but I'm guessing it will be more like 12-16%.

It seems like a good time to transition to some bad news even though AB Inbev(BUD) reported later in the week.  The company announced Q3 results that were somewhat weak. EPS decreased to $0.83(USD) on revenues of $11.1 billion.  Volumes and costs both headed in the wrong direction. The company did note strength in it's 3 core brands - Budweiser, Stella Artois, and Corona. I do thoroughly enjoy each of those along with plenty of other beers I might add for an occasional drink. The company did announce it's interim dividend of $1.60 EUR. The company mentioned forward dividend growth will be modest as it looks to deleverage it's balance sheet instead for the coming years.

The company also completed it's SABMiller integration on October 10. The shares are starting to look attractive again, but I'm hesitant to add considering we also have exposure through Altria's 10% stake in the new company.

Speaking of the company they reported this week too.  Altria(MO) reported Q3 EPS of $0.56 on revenues on revenues of $6.9 billion. During the quarter the company also retired $993 million worth of high coupon debt and replaced it with $2 billion worth of debt financed at 2.625% and 3.875%. That to me shows the company is keenly aware of interest rate trends, and does a great job at managing it's' balance sheet. I'm also glad to see the company is looking to increase it's focus on reduced risk products, and working closer with PM on it's heated IQOS system.

Praxair(PX) reported mixed Q3 results with EPS of $1.18 on revenues of $2.7 billion. The company noted "persisten weakness" in it's industrial and energy business which are cyclical, but noted resilience in it's healthcare and food/beverage business which are defensive.  I'm expecting the company to make it through this rough time, and I love the fact no one ever talks about investing in this solid company that provides essential operating components to other industries.

Procter & Gamble(PG) results were really not that great, but the market loved it as the stock jumped from $84 to $87.  Considering the company has been figthing stagnant sales for awhile, it seems to be good enough to see that business is continuing along just fine with no decreases.  It is one of the few remaining blue chips with a dividend yield around 3% too.  The stock has been on a nice upward path since June as it's rallied from $79.  I think we can see shares make a run towards $95 in the next 4-6 months which would be welcome!

Wabtech(WAB) gave us earnings that really disappointed, and their guidance made it feel even worse as that helped the shares fall from $83 earlier in the week to a low of $74. The company has narrowed guidance a couple times this year, and it's never been to the upside. I hope the company can beat the numbers they gave us. The company has performed so well for so long that I think they'll come through this just fine.  Their industry is in a bit of a rough patch as rail volumes and pricing isn't blowing it out of the water right now. The company also noted they'll be selling off Faiveley's rail brake business as part of their acquisition. I'll be patient with this one as rail roads are still an essential cog in our global economy.

Now to the sweet stuff! Hershey's(HSY) reported their Q3 results with EPS of $1.18 on revenues up 2.2% to $2 billion. The shares popped over 6% on the report. I think that has to do more with the fact the company has such a stable business, and despite the increased attacks we saw on sugary drinks during the quarter it really had minimal affect on their business. With Halloween here I'll be sure to indulge in my own fair share of Reese's and Almond Joy.  Overall this is not an exciting company to say the least. I mean they sell candy and cocoa powder. Still it's a proven industry that works well for shareholders. I'm looking forward to a full year with HSY in the portfolio.

Hershey's (HSY) reported

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