Tuesday, November 1, 2016

Earnings - HCP, CMI, EMR

If you own shares of HCP you may have noticed a few things differently this morning.  For one the share price of HCP is much lower as it's been adjusted for the spinoff of Quality Care Properties. That's the new company created from the HCR Manorcare business. Shareholders of HCP received 1 share of QCP for every 5 shares of HCP held in their account.  Fore more information see here. HCP also announced they were selling 64 Brookdale properties for $1.125 billion.  The company plans on using the proceeds from both transactions to deleverage, which is a wise move given the outlook for interest rates.

Now onto their earnings.
HCP reported Q3 results with EPS of $0.32, FFO of $0.65, and total revenues of $654 million. The company also updated it's 2016 and 2017 guidance.


Full year 2016 guidance reflects the QCP spin-off completed on October 31, 2016 and the impact of $1.3 billionof dispositions expected in 2016, inclusive of the RIDEA II transaction. Our guidance does not include the impact of unannounced future transactions. For full year 2016, we expect: EPS to range between $1.49 and $1.55; FFO per share to range between $2.35 and $2.41; and FFO as adjusted per share to range between $2.69 and $2.75. Excluding QCP, we expect 2016 SPP Cash NOI to range between 2.75% and 3.75%, and SPP NOI to range between 1.7% and 2.7%. Refer to the "Projected Future Operations" and "Projected SPP Cash NOI and SPP NOI" sections of this release for additional information regarding these estimates.


Full year 2017 outlook is preliminary and subject to change. It does not include the impact from unannounced future transactions other than capital recycling activities, but does reflect the impact of the Brookdaletransactions announced today and other dispositions expected in 2017. For full year 2017, we expect: EPS to range between $1.07 and $1.13; FFO per share to range between $1.88 and $1.94; and FFO as adjusted per share to range between $1.89 and $1.95. In addition, we expect 2017 SPP Cash NOI to range between 2.5% and 3.5%, and SPP NOI to range between 1.5% and 2.5%. Refer to the "Projected Future Operations" and "Projected SPP Cash NOI and SPP NOI" sections of this release for additional information regarding these estimates.

Based on investors reactions to both companies shares this morning it appears HCP is the winner, and QCP is the early loser. At one point HCP was up 3% to $3232, and QCP was down nearly 18% to $13.40. They've both moderated their respective gains and losses since then.

I now have to decide if I'll keep the shares of QCP in the portfolio. Considering there are only 2 shares of HCP that'd be converted to 0.4 shares of QCP. And technically if that was the case you would just receive cash in lieu of shares.

Cummins Inc(CMI) reported Q3 results that were just a bit disappointing. EPS came in at $1.72 on revenues down 9% to $4.2 billion. The company lowered its' EBIT guidance to 11.3% of sales from prior guidance of 11.6-12.2%.  I think that revised margin guidance is what's causing the shares to dip today. The company continues to navigate it's way through this tough market in my opinion very well overall.  Management hasn't been shy about cutting costs and seeking efficiency to keep the company healthy, but that's no easy task. The shares are trading down over 3% today. Here is what the CEO had to say.

“Due to the slow pace of growth in the global economy, we continue to face weak demand in a number of our most important markets,” said Cummins Chairman and CEO Tom Linebarger. “The restructuring actions that we initiated in the fourth quarter of 2015, combined with strong execution on material cost reduction initiatives, productivity gains and improvements in product quality are all helping to mitigate the impact of weaker revenues. We are on track to deliver our goal of 25% decremental EBIT margin for the full year 2016, as a result of strong operational performance in very challenging economic conditions. We have returned $1.3 billion to shareholders so far this year, through a combination of dividends and share repurchases, consistent with our plans to return 75 percent of operating cash flow to shareholders in 2016."

Emerson Electric(EMR) reported Q4 and full year 2016 results on both a continuing and adjusted basis to account for recent changes at the company. I'll list the results from continuing operations. Q4 EPS came in at $0.68 and revenues were $3.9 billion. For the full year the company had EPS of $2.45 on revenues of $14.5 billion. The company also increased it's dividend for the 60th year in a row with an increase from $0.475 to $0.48. That may not be a huge increase, but the company is navigating through tough times like CMI.  I expect things to get better as the company begins to focus on it's business more, and less on transactions. The shares are up around 2% today 

Here is the CEO statement regarding 2016 results and 2017 guidance.

"Fiscal 2016 was a significantly more challenging year than expected," said Chairman and Chief Executive Officer David N. Farr. "When we determined the anticipated second half recovery in our businesses would not materialize, we took the necessary, and often difficult, actions required to bring our cost structure in line with current business conditions and trends. In 2016, we spent $112 million for restructuring which increased our two-year total restructuring spend to $333 million. By focusing on the things under our control we were able to limit the impact on operating margin to 40 basis points during this difficult year."

"We also achieved a number of significant milestones in the strategic portfolio repositioning plan," Farr continued. "Entering into agreements to sell Network Power, Leroy-Somer and Control Techniques at favorable values was an important first step, which we quickly followed with an agreement for the strategic acquisition of the Pentair Valves & Controls business. Together, these actions serve to position Emerson to deliver long-term growth, profitability, and value for our shareholders."

2017 Outlook
Fiscal 2017 will remain difficult, particularly for the automation businesses. Low growth economic conditions coupled with political uncertainty will continue to dampen both operational and capital spending across multiple end markets. Considering these factors, we expect net and underlying sales in the Automation Solutions platform to be down 4 to 7 percent. The Automation Solutions platform will include our current Process Management segment and the remaining businesses in our Industrial Automation segment. The Commercial & Residential Solutions platform is expected to have support from more favorable global HVAC and U.S. construction markets resulting in net and underlying sales growth of 2 to 4 percent. The Commercial & Residential Solutions platform will include our current Climate Technologies and Commercial & Residential Solutions segments.

Total Emerson net and underlying sales are expected to be down 1 to 3 percent. Reported earnings per share from continuing operations are expected to be $2.35 to $2.50, compared against the equivalent 2016 EPS of $2.45. This outlook excludes any impact related to the pending acquisition of the Pentair Valves & Controls business.

"We expect 2017 to be another challenging year in what has become an unprecedentedly long industrial downturn characterized by market volatility, economic uncertainty and lower industrial spending," said Farr. "Despite these conditions, our focus remains on driving premium value for our customers, employees and shareholders; and I firmly believe we have undertaken the right initiatives to position Emerson to deliver. We will accomplish this goal by balancing restructuring against required investment in core technologies, targeting increased earnings per share, driving top-line sales through organic gains and acquisitions, and delivering a consistent, dependable and growing dividend supported by strong cash flow generation."

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